Apple Hospitality REIT, Inc.

Greetings and welcome to Apple Hospitality REIT second quarter 2020 earnings conference call. At this time, all participants are on 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. It is now my pleasure to 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 second quarter 2020 earnings call on this, the seventh day of August, 2020. Today's call will be based on the second quarter 2020 earnings release and Form 10-Q, 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 of 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 31st, 2019, quarterly report on Form 10-Q for the quarter ended June 30th, 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 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 second quarter of 2020. Following the overview, we will open the call for Q&A. At this time, it is my pleasure to turn the call over to Justin.

Thank you, Kelly. Good morning, everyone, and thank you for joining us today. I hope that each of you and your loved ones are staying safe and well. The current operating environment is unlike anything we've experienced during our more than 20-year history in the lodging industry. The strength and resiliency of our portfolio and underlying strategy have been tested. The results are consistent with our expectations. Our portfolio of predominantly rooms-focused hotels that are aligned with industry-leading brands have broad consumer appeal and are diversified across 87 markets. Given the size, efficient design, and location of our hotels, all of our hotels are currently open and accepting reservations with enhanced health and sanitation measures in place. From the onset of the pandemic, we have been intently focused on maintaining a sound liquidity position, safeguarding long-term value for our shareholders, and ensuring our ability to thrive in future years. Our initial efforts have been focused around reducing our cash burn and returning to cash flow positive as quickly as possible. Minimizing our cash burn in the near term preserves the strength of our balance sheet, protects the value of our equity, and positions us to take advantage of strategic opportunities in the early stages of our recovery. As the occupancy improves and markets begin to stabilize, we will look for ways to further optimize our portfolio through opportunistic dispositions and disciplined capital allocation. Major economic disruptions impact individual markets differently, and thoughtful portfolio management will ensure that we are positioned appropriately. With a flexible balance sheet, we look for creative opportunities that leverage our industry experience and the strength of our underlying platform as operations begin to stabilize. I'm confident we are uniquely positioned to weather the current operating challenges and outperform as travel recovers. When the initial shock of the COVID-19 pandemic and efforts to mitigate its spread hit the travel industry in mid-March, We worked with our management companies and made swift operational changes to staffing and service models, consolidated operations in certain markets, minimized utility usage on unused floors, reduced or eliminated operational costs, adjusted food and beverage offerings, reduced amenities, renegotiated hotel service contracts, and modified our sales strategy to focus on sectors with continuing lodging needs. At the corporate level, we postponed all non-essential capital improvements projects for 2020. We suspended monthly distributions, we reduced board and senior executive compensation, and we terminated the written trading plan under our share repurchase program. Through our efforts, in collaboration with our property management teams, we were able to realize a cash burn during the month of April, a month when total portfolio occupancy was less than 18%, that was in line with expectations we outlined during our first quarter call. In the most challenging economic and operating environment the industry has faced, we produced positive hotel-level EBITDA for the quarter and positive corporate-level EBITDA for the month of June. Based on top line results, we estimate we achieved positive cash flow in the month of July. Performance, of course, varies by market. and there remains significant uncertainty as to when operations at our hotels will return to 2019 levels. Given the ongoing uncertainties related to the depth and duration of the COVID-19 pandemic, we are not yet in a position to provide an operational outlook for the company. We have, however, demonstrated the resilience of our portfolio and the value of our strategy in a challenging environment. As the economy recovers, we are exceptionally well positioned to benefit. Our assets, our affiliation with strong brands, our partnership with exceptional third-party managers, our data-driven benchmarking approach to asset management, our balance sheet, our broad geographic diversification, and our experienced team at Apple provide us with security in uncertain times and the ability to produce strong returns for our investors during periods of economic prosperity. In our continual effort to refine our portfolio to maximize performance over the long term, we have strategically partnered with trusted developers to invest in new non-prototypical assets in targeted markets. 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. Purchase price was approximately $47 million, which was funded by $25 million of cash on hand and a note with the developers secured by the hotels for approximately $22 million, that is payable in 2021. Highlighting our unique development contracts, subsequent to closing on these hotels and quarter end, we realized shared savings with the developer that resulted in an over $1 million reduction in the purchase price. We anticipate closing on the dual-branded Hyatt House and Hyatt Place in Tempe, Arizona, a development project which we contracted for in 2018, later this month. for a total purchase price of approximately $65 million. And the Hilton Garden Inn in Madison, Wisconsin, which we contracted for in 2019 for approximately $50 million, is currently under construction. Assuming all conditions to closing are met, we anticipate acquiring the Madison Hotel in 2021. In an effort to preserve our future liquidity, we terminated the contract for the purchase of a to-be-developed courtyard by Marriott in Denver, Colorado during the quarter. Historically, new supply has followed demand trends, and while we have not yet seen a meaningful decline in new supply across our markets, we anticipate the pandemic's unprecedented impact on demand and the economy overall will meaningfully slow the level of new construction starts over the next several years. Continue to explore disposition opportunities, and during the quarter, we entered into a contract for the sale of our Homewood Suites in Memphis, Tennessee for approximately $9 million. though we anticipate that the total transaction volume for the industry will be down through the remainder of the year, we will continue to opportunistically pursue transactions that further refine and enhance our portfolio. We have consistently reinvested in our existing hotels to maintain their value and to ensure their market competitiveness. As a result of these investments and the quality of our on-site management teams, Our portfolio has consistently outperformed on measures of guest satisfaction and benefited from strong market share. With the temporary easing of brand renovation requirements and in an effort to preserve capital, we've postponed all non-essential capital improvement projects for the year, reducing our anticipated 2020 spend by approximately $50 million. During the six months ended June 30th, 2020, We invested approximately $30 million in capital expenditures, completing renovations at 16 hotels started prior to the onset of COVID-19. July, we completed renovation work at our Hilton Garden Inn in Islip, and we expect completion of our Richmond Marriott renovation to occur late this summer. We anticipate spending an additional $5 to $10 million during the remainder of the year. We've always maintained a conservative capital structure to provide stability for the company during periods of economic volatility, the flexibility to respond to changes in the operating environment, and the ability to act on opportunities that may arise within the marketplace. In June, we entered into amendments to each of our credit facilities to suspend the financial covenants under the credit agreements until June 30th, 2021. while still allowing us to make investments in new acquisitions and in our existing hotels. We are grateful for the strong relationships 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 to produce attractive returns during periods of economic prosperity. We have strengthened and refined our ownership strategy over 20 years in the lodging industry and through multiple economic cycles. During our first quarter call, I highlighted the fact that we were uniquely positioned because of the type of assets we own, our geographic diversification, our efficient corporate structure, and our relatively low leverage to be among the first to benefit from relaxed restrictions and a reopening of the economy. While our business was and continues to be materially impacted by the COVID-19 pandemic, by May we were producing positive hotel EBITDA, and in June we were just shy of covering all corporate-level costs, including principal and interest on our loans. We anticipate that we will produce positive cash flow at the corporate level in July, well before the majority of our peers. The challenges facing the industry are complex, and we do not anticipate that the path to recovery will follow a straight line. However, we have consistently articulated the strategic benefits of owning a rooms-focused portfolio diversified across locations, market types, brands, and hotel operators. The current environment has provided the ultimate test of our assertion that our strategy would provide for relative stability during periods of economic difficulty. Our hotels have proven appeal with the broadest group of potential customers. And the association with top brands, combined with the strong value proposition of the upscale select service model, have historically led to strong performance during all phases of economic cycles. Our team has 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's now my pleasure to turn the call over to Liz.