Apple Hospitality REIT, Inc.

Greetings and welcome to the Apple Hospitality REIT first quarter 2020 earnings conference 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. 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 first quarter 2020 earnings call on this, the 19th day of May, 2020. Today's call will be based on the first quarter 2020 earnings release, Form 10Q, and COVID-19 supplements, 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 and the impact to the company's business and financial condition from and measures being taken in response to COVID-19. 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 annual report on Form 10-K for the year-ended December 31, 2019, quarterly report on Form 10-Q for the quarter-ended March 31, 2020, 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 GAAP measures as included in yesterday's earnings release and other filings with the SEC. For a copy of the earnings release, supplemental, or additional information about the company, please visit AppleHospitalityReit.com. This morning, Justin Knight, our Chief Executive Officer, and Liz Perkins, our Chief Financial Officer, will provide an overview of our results for the first quarter of 2020, 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, everyone, and thank you for joining us today. I sincerely hope that each of you and your loved ones are staying safe and healthy during these challenging times. My heart goes out to all those who have been directly affected by the coronavirus. I would like to express my sincere gratitude to all first responders, healthcare workers, and everyone on the front lines of this pandemic. With travel restrictions and stay-at-home orders in place across most of our nation since mid-March, COVID-19 has disrupted every aspect of our daily lives and has been particularly challenging for the hotel industry. The pandemic and efforts to mitigate it have dramatically reduced both business and leisure demand and required us to make meaningful changes to the way we operate. Our efforts to preserve our business and ensure our ability to thrive and prosper future years have required us to make difficult decisions that affect our corporate employees, our shareholders, and the associates at our hotels. It is incredibly difficult for us to come to terms with the number of hotel associates that have been furloughed or laid off across our portfolio and the entire hotel industry as a result of the abrupt changes in demand caused by COVID-19. While we do not yet know how long the current situation will last, We look forward to a time when we can resume more normal operations and add back staff at our hotels as the environment improves. Through February, rent for our portfolio was essentially flat, despite challenging year-over-year comps. Occupancies began to drop beginning the second week of March, and by month end had settled between 15 and 16 percent. While we began to see modest improvement in occupancies in the second half of April, We expect the current health and economic crisis to materially impact our business through the remainder of the year. Since the onset of the pandemic, our team members have been diligently working in collaboration with our brands, management companies, banking teams, and industry associations to navigate the current environment, maintain a sound liquidity position, effectively adapt our business, and safeguard long-term value for our shareholders. As the occupancy levels for our hotels began to decline in March, we moved quickly to adjust the staffing model at our hotels and reduce other operating expenses in an effort to preserve cash and minimize near-term losses. Working with our management companies, we established minimum staffing levels for our hotels, reducing staffing by 70% to 75% on average. With our brands allowing flexibility to adjust operating models in response to the crisis, we dramatically reduced food and beverage spend. eliminated housekeeping during stayovers, and worked with vendors to suspend or meaningfully reduce the cost of services. Utilizing energy management systems installed over the past several years, we were able to monitor energy usage in real time to achieve reductions in utility costs while ensuring settings that protect and preserve our assets. Together with our third-party management companies, we have enhanced our sales efforts by focusing on demand generates related to COVID-19 specific opportunities. in certain markets, and identifying other sectors that may have lodging needs, including construction, manufacturing, government, and maintenance industries. Our management teams are also working with existing customers to move business to later in the year. As local governments begin to loosen restrictions, we expect the pace and recovery across our markets to vary. Our portfolio is diversified across 87 markets, with the majority of our hotels located in drive-to locations. In line with industry expectations, we believe the leisure transient demand will be the first to return, with drive-to destinations among the first to benefit. We are already implementing enhanced sanitation protocols that will help to ensure our hotels meet evolving customer expectations. We are deeply committed to the overall health and well-being of all hotel associates and guests, and will continue to work closely with the brands and our management companies to provide the highest levels of sanitation and safety at our hotels. Our diversified portfolio of rooms-focused hotels is uniquely positioned to effectively adapt to changing market conditions. To date, only one of our hotels, our courtyard in Carolina Beach, temporarily closed following a local government mandate prohibiting short-term lodging in the area. Though we have consolidated operations in markets where we own multiple hotels in order to drive incremental cost savings. The size and efficient design of our hotels, along with employees who have been cross-trained in multiple functional areas, have enabled us to effectively serve our guests with minimal staff present at each hotel. In conjunction with our operational response, we implemented a variety of cost containment initiatives at the corporate level to preserve and bolster liquidity. We made the difficult decision to suspend monthly distributions beginning with our April distribution. We recognize the importance of our monthly distributions to our shareholders. While we do not yet know how long the current situation will last, we are working diligently to ensure that we will be well positioned as the economy recovers and operating environment improves. In March, our executive chairman, board of directors, and I all voluntarily reduced our compensation for the year, and Brian Peary and Chrissy Gaswright voluntarily deferred receipts of payment under their separation agreements, which would have otherwise been paid out in the second quarter. Combined with anticipated reductions in payouts under our Executive Incentive Program and other G&A costs, we anticipate a reduction of corporate expenses of approximately 25% for the year as compared to our February 2020 forecast, and approximately 30% as compared to 2019. Our brand partners have been exceptional to work with throughout this crisis. With the easing of brand renovation requirements, we were able to postpone all non-essential capital improvement projects for the year. focusing the remaining spend on asset protection projects and other needs as they arise. During the three months ended March 31, 2020, the company invested approximately $24 million in capital expenditures and anticipated spending an additional $10 million to $15 million during the remainder of 2020, approximately $50 million less than originally planned. Prior to the onset of COVID-19, our team had been focused on value creation Through thoughtful capital allocation and during the first quarter, we sold our Spring Hill Suites in Sanford, Florida and Spring Hill Suites in Boise, Idaho for a total combined gross sales price of approximately $45 million. And the company recognized a gain on sale of approximately $9 million. In April, we closed on the dual branded Hampton Inn Suites and Home 2 Suites in Cape Canaveral, Florida, a development project which we had contracted for in 2018. The purchase price was approximately $47 million, which was funded by $25 million of cash on hand and a note with the developer for approximately $22 million that is payable in 2021. Part of our strategy has been to partner with trusted developers to invest in new non-productive goal high-quality assets. And prior to 2020, we entered into contracts for the potential purchase of three additional hotels for a combined total expected purchase price of approximately $113 million. including a dual-branded Hyatt House and Hyatt Place in Tempe, Arizona, and a Hilton Garden Inn in Madison, Wisconsin. Assuming all conditions for closing are met, we anticipate acquiring the Tempe Hotel during the second half of this year and a Madison Hotel in 2021. Subsequent to the end of the first quarter, we terminated the contract for the purchase of a Courtyard by Merritt in Denver, Colorado, which had not yet begun construction. During the first three months of 2020, we purchased under our share repurchase program approximately 1.5 million common shares at a weighted average market purchase price of approximately $9.42 per share for an aggregate purchase price of approximately $14.3 million. In March, as economic conditions worsened, we terminated the written trading plan under our share repurchase program. We have always maintained a conservative capital structure to provide stability for the company during periods of economic volatility and the flexibility to respond to changes in the operating environment. In April, we began discussions with our lenders to secure a temporary waiver of certain debt covenants in anticipation that deteriorating operating performance during the second quarter could potentially result in noncompliance. While we have not yet finalized documentation, We anticipate obtaining covenant waivers with certain minimum liquidity and use of liquidity restrictions in line with those announced by our peers. We are grateful for the strong relationships that we have with our lenders and for their willingness to work with us to make adjustments necessary in the current environment. Apple Hospitality was intentionally structured to weather challenging times and produce attractive returns during periods of economic prosperity. Over our 20-year history in the lodging industry, We have strengthened and refined our ownership strategy, and we are confident we are well-positioned to successfully manage these unprecedented times and excel as our nation and our economy recover. We own rooms-focused properties with best-in-class brands that have historically produced industry-leading operating margins. We work with established regional and national operators using innovative contracts that align management and ownership interests and preserve flexibility to sell assets unencumbered. We are broadly diversified across markets to reduce volatility and provide the portfolio exposure to a variety of industries and demand generators. We have reinvested in our assets to maintain competitive position across our markets, and we have maintained a conservative approach to capital allocation and a strong balance sheet. As we begin the process of recovery, our portfolio is exceptionally well-positioned. our hotels have proven appeal with the broadest group of potential customers. The association with top brands and the strong value proposition of the upscale select service model have historically led to outperformance during periods of economic difficulty. With the majority of our portfolio located in drive-to markets outside of major urban city centers and low dependence on large group business, we believe our portfolio will be among the first to see benefit from loosening government restrictions and the early stages of an economic recovery. It is during an unprecedented time like this that I am especially grateful for the strong relationships we have fostered throughout the hotel industry and the depth of our team at Apple Hospitality. We have a track record of creating value during challenging economic periods, and I am confident that we will emerge from the current crisis well positioned to outperform. It is now my pleasure to turn the call over to Liz.

Thank you, Justin, and thank you, everyone, for joining us this morning. These are incredibly challenging times for our industry, I want to take this opportunity to thank our team at Apple Hospitality, the operators at our hotels and management companies, the brands, our banking teams, and our industry colleagues. Together, we have been working diligently to explore and implement initiatives to minimize costs, operate efficiently, strengthen our liquidity position, and safeguard the health and well-being of our teams and guests so that we are well-positioned both during this crisis and for a strong recovery as travel resumes. During the first two months of the year, operations were generally in line with our expectations, with comparable hotels' rev par trending around the midpoint of our recently withdrawn 2020 guidance range, despite headwinds from previously discussed year-over-year comps. As efforts to mitigate the spread of COVID-19, including travel restrictions and stay-at-home orders, were implemented across the country and our markets, average occupancy for our portfolios declined from approximately 76% for the month of February to 41% for the month of March. Occupancy levels settled at around 16% during the last week of March and stayed around that level until mid-April. Although we started to see a slight improvement in occupancy towards the end of April and into May, the improvement has been partially offset by declines in rates. largely the result of changes in the mix of business at our hotels. We believe that the modest but notable increase in occupancy we are beginning to see is a result of the ongoing sales efforts of our asset management and hotel management teams, coupled with the inherent benefits of the assets we are invested in. With broad geographic diversification and a high concentration of extended stay and suite properties, we are well positioned to provide accommodations to a variety of groups and individuals on the front lines of this pandemic, including military, traveling nurses, healthcare professionals, and first responders. Although this negotiated business has contributed to our decrease in ADR as compared to last year, it is bolstering our occupancy. For the week ended May 9th, portfolio occupancy was 24%, with daily occupancy occasionally in the upper 20s in the most recent week. The immediate impact of COVID-19 in March was broad-based, and by mid-April, 59% of our hotels were running less than 15% occupancy. Since that time, we have begun to see improvement with over 40% of our properties at 25% occupancy or greater, and 15% of our properties over 50% occupancy for the week ending May 9th. Some of our hotels where we're seeing particular strengths are located in Manassas and Suffolk, Virginia, Macon, Georgia, Miami, and Anchorage, with demand ranging from construction, military, airline crew, disaster recovery, and even some minimal demand for more traditional corporate accounts. Our portfolio of well-maintained, broadly diversified, select service hotels are not only well-suited to accommodate first responders and current travelers, but also to serve the demand that is expected to return over the next phase of the recovery. Domestic leisure demand is expected to lead to recovery, and we have begun to see early signs of this as stay-at-home orders are lifted in various states throughout the Southeast. The day after reopening, following the government-imposed closure Justin mentioned, our Carolina Beach Courtyard ran 70% occupancy at $170 average daily rate, and just this past weekend was sold out at over $200 average daily rate. With our broad footprint, low exposure to gateway cities, minimal dependence on inbound international business, and almost 80% of our rooms outside of urban locations, we expect to benefit from continued relaxing of restrictions over the coming months. Turning to the bottom line, our first quarter comparable hotels adjusted hotel EBITDA and adjusted EBITDA RE were $63 million and $54 million, respectively, and modified FFO per share was 17 cents, all meaningfully down from the first quarter of 2019, driven by the steep and abrupt rep car declines in March. Although the environment changed seemingly overnight, our team acted quickly and purposely to reduce same-store total hotel expenses by approximately 31% for the month of March, resulting in a savings of approximately 9% for the quarter compared to last year. As Justin mentioned, our low-cost operating model has allowed for the company's hotels to remain open, though we have intentionally consolidated operations and occupancy to a single building in markets where we own multiple hotels in order to gain incremental efficiency. As of May 15th, 71 of our hotels were involved in these market clusters, with occupancy consolidated from 38 hotels. Our select service rooms focus model gives us the flexibility to operate with minimal staff when necessary and positions us to quickly adapt to changing market conditions. As occupancy began to deteriorate, our asset management team worked with our management companies to quickly establish minimum staffing levels for our hotels and initiate other cost savings initiatives. We are now working with each of our managers to establish labor models appropriate for the various occupancy levels that will ensue over the recovery, benchmarking those models across our portfolio to ensure we are thoughtfully optimizing results as we move forward. In 2017, we implemented labor management systems across the majority of our portfolios to improve productivity at our hotels. These systems provide our property managers with a valuable tool and framework for managing staffing at various occupancy levels and will allow us real-time access to monitor individual property performance and benchmark labor models as demand returns. With labor being the most significant operating expense, staffing reductions are anticipated to produce approximately 65% to 70% savings in total payroll on average at low-occupancy hotels. Our team has also worked to reduce other operating expenses by renegotiating national contracts and eliminating unnecessary services. With these cost elimination and reduction strategies, as well as our ability to quickly flex staffing models to adjust to changes in demand, we have multiple levers we can pull to ensure maximum property level efficiency. In March, we withdrew 2020 guidance and respond to deteriorating market conditions and uncertainty related to the depth and duration of the current crisis. While April numbers are not final and the current operating environment and model is still evolving, with these operational adjustments, we estimate our monthly cash burn rate, including property-level expenses, corporate G&A, property taxes, insurance, and debt service, will be approximately $18 million. assuming occupancy levels of between 15% and 20%. We expect property-level break-even occupancy for our portfolio to be between 30% and 35% and to be able to cover corporate costs, including debt service, at occupancy levels between 40% and 45%, depending on average daily rate. While being immediately committed to minimizing operating losses, we also focused on our balance sheet, and in an effort to increase readily available liquidity, drew down the remaining availability under our $425 million revolving credit facility and had available cash of approximately $437 million as of March 31, 2020. As Justin mentioned, to further preserve capital, we suspended monthly distributions, postponed non-essential capital improvement projects, terminated the written trading plan under our share repurchase program, and our chairman, CEO, and board of directors voluntarily took reductions in their compensation. We have always believed that maintaining a strong balance sheet would provide us with stability during periods of economic difficulty and flexibility to act opportunistically. We entered the current downturn with net debt to EBITDA of approximately 3.1 times. As of March 31, 2020, we had approximately $1.8 billion of total debt outstanding, with a current combined weighted average interest rate of approximately 3.3%, and unrestricted cash of $437 million. Excluding unamortized debt issuance costs and fair value adjustment, the company's total outstanding indebtedness is comprised of approximately $500 million in property-level debt secured by 31 hotels and approximately $1.3 billion outstanding on our unsecured credit facilities. At March 31, 2020, the company's total debt The total capitalization net of cash was approximately 40%, and weighted average debt maturities were five years with no maturities for the remainder of 2020, and $32 million net of reserves maturing in 2021. Despite our track record of strategic commitment to a conservative capital structure, and although at March 31, 2020, we were in compliance with the covenants under our credit facilities, we began discussions with our lenders to secure temporary waivers of each of the covenants under our agreement in anticipation that the severe impact of COVID-19 on the economy, the lodging industry, and our business would potentially result in noncompliance. We anticipate entering into an amendment to each of our credit facilities that would provide relief from the covenants for a period of four quarters, beginning with the quarter ending June 30, 2020. The terms of the proposed amendments are expected to include minimum liquidity requirements and restrictions on the amount of the company's distributions, capital expenditures, share repurchases, and acquisitions, among other items, during the covenant release period. Throughout our history in the lodging industry, we have fostered strong relationships with our lenders, and we are grateful for their support. While we cannot provide assurances, we feel confident we will secure the flexibility necessary to weather the current crisis. Before opening the call for Q&A, I would like to again thank all of our colleagues and stakeholders. We have received an outpouring of support broadly and specifically from many of you, and we appreciate you greatly. While these are unprecedented and challenging times, I am proud to be part of Apple Hospitality in this wonderful industry. The commitment to our associates, guests, and the community is inspiring, and our teams have worked swiftly, tirelessly, and effectively to manage the current environment. Our well-maintained, young, geographically diversified room-focused portfolio has broad consumer appeal, and we believe we are well-positioned to benefit and outperform as travel resumes. We will now open the call to questions.

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star 1 on your telephone keypad. The confirmation term will indicate that 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 the line of Neil Malkin with Capital One Security. Please proceed with your question.

Hey, good morning, guys. Good morning. Thanks for taking the questions. Hey, appreciate your commentary as well. First off, you know, you guys are one of the largest owners of select service in the country, and I know you guys sit on a lot of the brand committees or boards of the, you know, largest brands as well. Wondering if you could just talk about sort of how you see the relationship between the brands and the owners evolving over the next six to 12 months. You know, some of your peers have generally commented on that. Just, you know, given your wide reach with several select service brands, you probably have some good you know, view on that. So how do you kind of see that playing out? And, you know, do you think the pendulum is kind of shifted back in favor of owners? And, you know, maybe talk about any permanent changes that you see happening to the operating model going forward.

Thanks. And I'll take a stab at it. Liz can fill in if she'd like. In addition, both of us sit on advisory boards within Hilton and Marriott. To date, Both companies, and again, we only own one Hyatt, but Hyatt has been equally good. But both Hilton and Marat have actively engaged with owners in dialogue related to how we deal with the current pandemic and the nuances associated with it and how we look at modeling our business for the future. I think There's heightened sensitivity to the need to make near-term adjustments in order to ensure the safety of our guests and associates. But there's also, I think, increased recognition of a need to look at our business model in order to ensure long-term profitability. And so in those conversations, we're looking at everything with fresh eyes, and I'd say that the conversations have been productive, that there's been a tremendous openness on their side to hear, you know, the feedback and commentary from the ownership community. And, you know, I think, you know, there was a sentiment that potentially with consolidation on the brand side and significant pipeline growth with both Hilton and Marat that the pendulum had shifted away from ownership Generally speaking, our relationship has been viewed from our perspective as collaborative always. We've seen both of our major partners working with us to achieve the common goal of long-term profitability. I'd say there are a lot of things in flux right now, but there's a lot of attention being paid to those issues that are most important, both now and as we move into an environment where guests begin returning en masse to our hotels.

And Neil, the second part of your question about what you thought might stick long-term, you know, I think that that's still yet to be determined. It's obvious in the near term that guests have different expectations and needs and, you know, how long that persists or what that looks like going forward from a long-term perspective. You know, those are the conversations that we're having with the various brands to help figure out what's the best model for today, but what does that look like going forward, too? And so those are active conversations. I think that, you know, as far as the balance of power goes there, you know, regardless of, who might have a slight advantage at any one point in time. It's mutually beneficial that we get this right for everybody. You know, we want to be relevant with guests. We want the brands to be successful. But in order to do that, we have to make money as well. So I think that, you know, getting this right will be a balance between the brands and ownership.

Thanks. Appreciate your commentary. You talked about rates being impacted in March and April. Some of your full-scale peers, it was more of an occupancy, less of a rate. I'm wondering if, you know, how do you explain or what do you think that drop is attributable to? Is it because you guys essentially put all your hotels were open whereas a lot of those full-service, more coastal-focused players, you know, shut a majority or almost all their hotels? Was it, you know, more of just taking OTAs? You think that would be less of an issue just, you know, given the brand nature? And any thoughts or commentary on that and, you know, maybe, you know, how your select service model works you know, kind of ebbs and flows with lower demand and, you know, with APEX changes, things like that?

Liz commented in her prepared remarks that the majority of the shift we saw, you know, as we rounded out the month of March, was really the result in changes in business mix. So a move away from transient, both business and leisure, towards negotiated business. You know, which is generally discounted business. You know, and given the low occupancy levels, the bulk of the business in our hotels, as we round out March and April, fit into that category with a significant amount of first responders, you know, National Guard, business of that type, in addition to, you know, other business clients. What we've seen, and this is highlighted, the Carolina peach example is in those markets where we're seeing leisure transient returns, we're seeing an ability to, again, push rates as occupancies get closer to sellout or reach higher ranges, but as we look forward In the near term, the decrease in rate has been largely attributable to the mix of business. I think our expectation is that as we begin to ramp occupancy, at least in the early stages, markets will be incredibly competitive, and we're working with our management companies to ensure that we're maximizing rates wherever possible, recognizing that we will still be competing for a smaller number of guests in many of our markets, and they need to make adjustments to rate in order to build back base occupancy. But, you know, what we've seen to date is largely mix of business related, and, you know, the other is more expectation for the future.

Got it. Last one for me, if I could. You talked about your balance sheet being very strong and leading to opportunities. Should they present themselves ostensibly to you guys being more active or looking at more things in the near term? Do you think you're going to have more success or more interest in stabilized assets or newer, more recently constructed assets?

It's a great question. And, you know, I think we have the luxury of being able to look back on two earlier cycles where we were active participants in the market as the market recovered. In both instances, we were successful in acquiring existing assets at discounts to their long-term value, but at the same time, locking in pricing on development fields, which would be delivered in future years, which enabled us to essentially ensure that as values increased, we were acquiring assets with attractive pricing. Now, this cycle is radically different than past cycles and may play out differently, but our expectation is that in the early phases of the recovery, there will be an increase in the number of opportunities that would be attractive to us. Our first preference, though, is getting back to cash positive, right? So I think it would be reasonable for us to assume that while we are eager to pursue opportunities from a capital allocation standpoint, which would drive shareholder value, our number one priority at this point is getting back to a position where we're producing positive cash flow from operations. you know, and until we get to that point, I think it's fair to say that we would be conservative in pursuing, you know, optional uses of cash.

Thank you, guys. Thank you.

Thank you. Our next question comes from Austin Worshman with KeyBank. Please proceed with your question.

Hi. Good morning, everybody. First, if you could help us understand understand the difference between, you know, a hotel suspending operations versus kind of the clustering strategy that you guys have pursued and kind of quantify what that, you know, the benefit is where you're staying open but maybe not physically accepting guests. And if that just provides another source of demand, I guess, generator, you know, you know, or marketing, I guess, benefit to some extent. Could you just help us understand that dynamic a little bit?

Absolutely. And I'll take a stab again, and Liz can correct me where necessary. But really, I think it's important to look first at the decisions we made for those assets that are in markets by themselves. So, you know, we have universally decided to keep our hotels open. We went through a very detailed analysis to come to that conclusion. And at the end of the day, the reality is one of the benefits of the select service model is that our assets can be operated with very little staff. You know, our staff is cross-trained. Our managers, our salespeople have the capacity to do laundry and, you know, clean and turn rooms. provide food service and things of the sort, which is a major differentiator and I think has proven to be a huge advantage. As we looked at what we anticipated to be the duration of at least the most challenging portion of the current pandemic, you know, we assessed each of our properties individually and decided that the The difference in cost to stay open versus closed was immaterial, given a desire on our part to maintain sufficient staff in the asset to ensure that you didn't have a water leak or a system breakdown that caused long-term damage to the asset. On average, that means having one to two people on property at any point in time. And what we found is that that was sufficient staff to essentially operate the hotel at minimal occupancy levels. So then moving beyond that, in markets where we own multiple hotels, you know, and we have some occupancy, we've been able to, you know, gain incremental benefit from a cost standpoint by concentrating the guests in a single hotel asset. And in some markets that's very easy where we own, a dual branded asset or two hotels that are immediately across the parking lot from each other. The nuance is that reservation systems are open for all hotels and they're accepting guests. We're just concentrating the guests in one hotel so that we can better service them and service them more efficiently.

I think another benefit is that we We continue to have, as Justin mentioned, the reservation systems open, but we also continue to retain managers and, in most cases, a salesperson. So 80% to 90% of our hotels have retained, you know, some sort of sales effort. And so the momentum that we have as we come out of this we think will be an advantage across the portfolio, whether consolidated or not. And so in an effort to keep sort of – you know, the high-performing talent and managers that we have across our portfolio, the decision to completely close the reservation system and close the hotel versus keep it open and keep momentum going and keep the asset protected and maintained, the benefits, you know, outweighed the cost where, as Justin mentioned, given our model, you know, unless we thought that this was going to last for an extended period of time and we would make further labor cuts, really just bring in security you know and not be as focused on asset protection or on sales efforts and things of the sort the difference in cost was was fairly minimal and again the benefits far outweighed far outweighed that no that's helpful could you break out what the

you know, recent week occupancy detail is between your extended stay and sweets product, which, you know, is over half of the portfolio, and then what it is for sort of the balance of the portfolio?

I would say that extended stay, whether it's the current week or even the trend, you know, for the past four weeks, has been a 20-point occupancy premium. Now, keep in mind, where we've consolidated operations, we've consolidated into extended stay property by and large, and so that helps. That's two or three hotels' occupancy or reservations in one, but again, that type of product is definitely well-suited for the type of business that we're getting at the moment with Many retail and restaurants closed across the country with social distancing, with extended stay business being really what's in markets right now. That specific product is a huge advantage for us. The suite products and extended stay products and other select service are operating a little more similarly, although the bigger footprints and having microwaves and things like that and other sweet products certainly is benefiting, but the big differential is the extended stay property.

Got it. No, that's very helpful. And then just last one, I was curious if you guys, did you incur any sort of one-time severance or furlough cost that you don't expect, you know, on a go-forward basis that you could fly for us?

Yes. In the quarter, we incurred just over $1.5 million in one-time for a low cost, you know, related to transition, which we would not anticipate would, you know, recur.

At least at this point.

Okay. Thank you. Appreciate the time.

Thank you. Our next question comes from Brian Marr with the Riley SBR. Please proceed with your question.

Good morning, Justin and Liz. Thanks for taking my question. When it comes to the waivers that you're hoping to get completed, I think you mentioned, and maybe this is a better question for Liz, distribution restrictions, and I'm assuming that would be on the dividends. Is that kind of an all or nothing restriction, or is there going to be some formula in there that you could kick in at a later date, maybe in the first half of 2021 or at some lower level?

I'll speak broadly, but because we don't have anything officially completed, I won't be able to speak too much to it. But in general, our lenders definitely understand our REIT status and that we need to pay out 90% of our taxable income. So I think that there will be some flexibility at a point in time where we're making money and would need to pay a dividend, but I wouldn't imagine that we would be able to, during the waiver period, pay outside distributions beyond that.

Okay. And then when we think about your ability to drive rate as markets start to reopen, and I suspect as the full-service hotel competitors in your markets start to reopen their specific hotels, my guess is that rate competition is going to be pretty intense. How are you guys thinking about focusing on marketing for the next one to two quarters? Is it via the brand? Is it via the internet? Is it via your sales managers? How are you planning to address that?

I'd say yes to all of the above. Liz highlighted the fact that we've retained sales staff at the property level. Our management companies have also retained sales staff and are actively doing direct sales efforts, both looking for business in the near term, and courting potential clients for future business. I think we had signaled over the past several calls a move within our company towards more online marketing, and we'll continue those efforts as well, especially to the extent we feel we can attract leisure customers to our hotels, which Many of our locations are ideally positioned for that. But I think it's fair to assume that we will be leveraging all available sales channels as we build back occupancy. One of the advantages we've had historically as we've come out of more challenging economic periods is select service hotels have an exceptional value proposition for a variety of guests, you know, both leisure and business, and, you know, appeal to a very broad group. You know, we've signaled that our position within the select service spectrum is particularly advantageous, being kind of at a midpoint where during periods of economic prosperity, people trade up into our assets, you know, and during periods of economic difficulty. they have a tendency to trade down, which has enabled us to maintain stronger occupancy throughout cycles. You know, we anticipate that will continue and will be aided in part by, you know, what we anticipate to be a significant reduction in new supply over the next several years.

Great. And this is last for me. I think you mentioned the Carolina Beach Hotel last weekend was sold out at, I think you said, a $200 rate. You know, as we sit here kind of real-time and kind of mid-to-late, May, and people antsy to get out. What are you guys seeing coming in in the bookings for similar type assets that you might hold? Is it something that's giving you optimism as we approach June and July, or was that kind of a one-off?

I think, you know, as far as booking position goes, it's last minute, and so to stretch into June and July would be maybe a little bit premature, but We are starting to see, even if I just look at what actualized in the past week, we are starting to see, especially in the southeast, in North Carolina, South Carolina, even Atlanta and some Florida markets, where weekend occupancy is picking up. And so that's encouraging. I think across the country, as restrictions are loosened, I think that people – who are willing to travel will, and they will get out. And so I think there may be more drive-in traffic than, you know, people getting on airplanes. But by and large, weekend business, I think, into Memorial Day and beyond, particularly in the southeast, we're feeling a little bit encouraged.

Great. Thank you. That's all for me.

Thank you.

Thank you. Our next question comes from Anthony Powell with Barclays. Please proceed with your question.

Hi. Hello. Good morning, everyone. Good morning. Good morning. Following up on that question, in some of these markets where you're seeing reopening, are you seeing any weekday business return, or is it still too early to see that kind of business travel or corporate travel come back?

I think the notable difference is the uptick in the weekend. In those markets, it's not to say we don't have some base business, but it's still from the sectors we mentioned in our opening remarks. It's project business, recovery business, medical, traveling nurses, things of the sort. I wouldn't say that we're seeing really an uptick in BC at this point.

Got it. What was the occupancy as of the weekend at May 16th, if you haven't?

We have not shared that, but it is, as we mentioned in the prepared remarks, we had several days that were in, you know, higher than the week ending May 9th.

Got it. Okay.

And still trending more positively.

Got it. Okay. A different topic, to the Courtyard Denver, what drove the decision to not go forward with that acquisition? Did the developer, I guess, delay the project? And what's your kind of overall commentary on how developers are looking at the environment now? Are you seeing cancellations, you know, more owners financing? What's kind of the overall environment there?

So the Denver project specifically is, We had been working with the developer for a significant period of time. That developer is the same developer that's building the Tempe assets and the Madison assets for us. There had been complications in that project, and we were continuing to work through nuances associated with that, adjusting room count because of the amount of land available shrinking and other things. Because that project had not yet started, we had some additional flexibility to cancel. And we worked with the developer to essentially put that project on hold until the market stabilizes and we have a better sense for what costs will be long-term. I think as we interact with others in the industry, broadly speaking, financing for new development projects is as difficult as we've ever seen it to come by. And for the most part, developers are waiting right now in anticipation that the cost will eventually come down. And they're also waiting to see where markets settle to better understand, you know, what deals will make sense in the new environment. You know, I think we are seeing some slowing in projects that are already under construction, you know, depending on the specific markets and restrictions that are being put in place. relative to work crews, but also related to delivery of products from out of the country. You know, but on a go-forward basis, so I think it will take longer for deals that are under construction to be delivered, but, you know, the bigger impact for us will be that, you know, our expectation is that developers, generally speaking, will be sitting on the sidelines for a period of time until markets begin to stabilize and they're better able to underwrite both the cost and expected profitability of individual projects.

Do you expect a kind of a permanent change in how these deals are financed? Do you expect developers to have to put out more equity? Could there be kind of more of a longer-term headwind to hotel development generally as a result of this event?

We have yet, and we've been in this business for 20 years, to see anything in the way of permanent change. But we have seen extended periods of time where it's more difficult to obtain financing. Our expectation is that in the early phases of our recovery, consistent with the past two cycles that we've been through, it will be more difficult for developers, especially new hotel developers to obtain financing. You know, construction, new construction tends to be viewed by lenders as higher risk because you have market risk and development risk. And, you know, our expectation is that in the near term, lenders will be much more focused on working through nuances of deals they already have and less focused on signing up new deals.

Thank you. Thank you.

Thank you. Our next question comes from the line of Michael Bellisaro of Baird. Please proceed with your question.

Good morning, everyone. Good morning, Michael. Just on that same topic, can we drill into the Madison deal? Maybe where is that project in terms of development timeline? And then I think you mentioned a 21 delivery, but should we be thinking about it as an early 21 delivery or a late 21 delivery? Just trying to balance that potential cash absolutely might have in the near term?

That particular project was earlier in development when the pandemic hit. There were also nuances associated with the site that had pushed potential delivery towards the very end of this year, even prior to the pandemic. Our current expectations are that it would be delivered the very end of the first quarter or beginning of the second quarter. And again, Madison is one of those markets that has seen slightly tighter restrictions as well, which is adding to the potential delays there.

Got it. So fair to assume you're going to move forward with that project irrespective of the environment, mainly because you don't have the same outs like you did for the Denver deal?

That's correct. So the remaining development deals that we have under contract have specific performance language. And, you know, absent an end of the world situation where we became insolvent as a company, it's our expectation that we would close on those assets.

Got it. And then just thinking about the sources of capital, I know you have a large cash balance today, but the plan was to always sell hotels, the lower growth non-core properties to fund these deals. How are you balancing those? the sources and uses going forward, given that the transaction market is pretty much at a standstill today and probably likely to be at a standstill three, six months from now?

Well, year to date, we're perfectly balanced, or nearly perfectly balanced with the first quarter sales funding, essentially the eight project. We're continuing to receive inbound inquiries. I think There's renewed interest in the hospitality space. Pricing isn't where we need it to be, and I think it will take a while for the market to settle out. We take a long-term view towards capital allocation, and it's still, in our view, long-term that we will end up funding the development deals with disposition proceeds. So the timing of those trades may not perfectly align I think looking at what we currently have under contract and our expected burn rate on a go-forward basis, we feel very comfortable that we can manage our commitment and maintain the operations and the integrity of our company.

Got it. That's helpful. And then just lastly, maybe a high-level commentary on your management companies. You have a a handful of more regional, local-focused operators. Can you give us an update on the health of your third-party managers and then just if there are any weaker ones, any conversations you've had about maybe transition and impact that might have on property performance near-term or intermediate-term?

Absolutely. And really, first, you know, we've, as you might imagine, been in nearly constant dialogue with our various management company partners. We have 20 management companies we work with. A portion of them are national, a portion of them are regional. We've been incredibly impressed with their ability to react quickly to the changes in the current environment and to effectively reduced costs dramatically across the board both in terms of property level expenditures and corporate allocations that we get for various services from them. As we've interacted with them, they're in amazingly good spirits and generally our conversations around longevity and financial status have been very positive. Internally, we've developed contingency plans in the unlikely event that any of them, you know, became solvent because of the duration of the current crisis. But the reality is we have more of our management companies coming to us and telling us they would love an opportunity to take on additional management contracts to the extent we had a need than we have management companies coming to us. and telling us that they're in a bad position. Where we were not, as a company, able to take advantage of government aid in the form of PPP loans, a number of our management companies were able to take advantage of the government programs, which has also helped to stabilize them in the current environment and enabled them at the corporate level to retain employees that they might have otherwise had to furlough.

Got it. That's helpful. Thank you.

Thank you.

Thank you. Our next question comes from Tyler Battery with Janney Capital Markets. Please proceed with your question.

Thank you. Good morning.

Good morning.

Good morning. I hope everyone's doing well. I appreciate all the commentary thus far. You know, a question just, you know, in terms of capex spending right now, I mean, you know, you're pretty minimal levels and I imagine the competition in your markets are doing the same. Can you remind us the average age of your portfolio, and is it possible that the quality of your properties compared to the competition is a little bit higher heading into this crisis, and maybe it's an opportunity for you to take some market share?

So the easy answer is the first, and that's the average age is approximately 14 years. We monitor effective age as well, and coming into the crisis, effective age meaning time since built or last renovated, which is four years for our portfolio. As you highlighted, we've significantly reduced the number of major renovations that we anticipate completing this year, you know, cutting essentially 20 major renovations, which we're anticipating to happen in the summer and towards the back half of the year. That said, we also, in many markets, are running very low occupancy, and so in the near term, the wear and tear on those assets is not what it would ordinarily be, which will help from a preservation standpoint, but not in a way that we want to continue long-term, obviously. We've been very strategic in acquiring assets that are well-positioned within their individual markets, that have advantages either from a location standpoint or a build out in terms of actual amenities and in most cases have both advantages. We've continued to refine our portfolio through selective acquisitions and dispositions and feel really that we're exceptionally well positioned both because of the properties we have but as I highlighted in response to an earlier question because of the management teams that we have on property to gain market share as we recover. The fact that we've remained open and servicing guests provides a great signal to local accounts especially that we are a long-term partner willing to work with them, and we think will provide us with meaningful advantages as we begin a more robust recovery.

Okay, perfect. And what percentage of your mix – or your room count are located in markets that you think should appeal to the leisure, transient, drive-to guests, or markets that you would consider to be more vacation-oriented, similar to the Carolina Beach Courtyard, for example?

It's an interesting question. I think from a drive-to standpoint, you know, we – in thinking about – I mean, most of our markets have a component of local negotiated business or, you know, inbound, you know, somewhat leisure weekend business. So I think many of our markets will appeal just from a drive-to and leisure standpoint. Now, to what degree will depend on the leisure attractions? I think, you know, we certainly don't have a large percentage of our portfolio that – has direct access to beaches, but we do have some. And we have a lot of Florida markets and a lot of California markets and, you know, access to beaches here in Virginia, South Carolina, and North Carolina. So I think, you know, I think we do have a strong presence. I think, you know, one of the things to think through, too, is just the urban versus suburban mix of our portfolio. We have seen strong outperformance on a relative basis, I guess, with our suburban versus urban portfolio. And the industry is seeing the same thing, suburban having the highest absolute occupancy for both the industry and us. So I think that's a big differentiator as well as the makeup of extended stay.

Okay. That's all for me. Thank you.

Thank you.

Thank you. There are no further questions at this time, so I'd like to pass the floor back over to Mr. Knight for any additional closing comments.

Thank you. We really appreciate everybody joining us this morning. I've highlighted in the past, but I'll do it again today. To the extent you are traveling, and we hope that you are or will shortly, we hope you take the opportunity to stay with us at one of our hotels. Be safe, be well. We look forward to talking to you again shortly.

Ladies and gentlemen, this does conclude today's public conference. We thank you for your participation, and you may disconnect your lines at this time.