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.