Apple Hospitality REIT, Inc.

Greetings and welcome to the Apple Hospitality REIT third quarter 2020 earnings call. At this time, all participants earn a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator or technical 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 of Investor Relations. Thank you, Ms. Clark. You may begin.

Thank you and good morning. We welcome you to Apple Hospitality REIT's third quarter 2020 earnings call on this, the sixth day of November 2020. Today's call will be based on the third 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 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 September 30, 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 third 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.

Good morning and thank you for joining us today. The COVID-19 pandemic continues to impact our daily lives. I sincerely hope that each of you are doing well, staying healthy, and managing the challenges impacting day-to-day life. I would like to take this opportunity to thank the management teams and associates at our hotels. Our outperformance during these unprecedented times would not be possible without their strength, dedication, and unwavering hospitality. They have effectively adjusted to the new work environment and continue to serve our guests with care during an especially challenging time. I also want to thank our team at Apple Hospitality. This operating environment is unlike anything we have seen during our long history in the lodging industry. The collaboration across work groups, and the ongoing communication with brand representatives, lenders, and our third-party management teams have been exceptional and have laid the groundwork for maximizing performance and preserving long-term value for our shareholders throughout the recovery. Over the past two decades, through hundreds of asset-level transactions and multiple corporate-level mergers and sales, we have developed and refined a hotel investment strategy unique in its ability to mitigate risk and volatility while producing compelling investor returns throughout economic cycles. While the current environment has created more specific operating, significant operating challenges than we experienced in prior cycles, it has highlighted the merits of our underlying strategy and diversified rooms-focused portfolio. On prior calls, we indicated our expectation that we would be less impacted than many of our peers and among the first to benefit from a recovery in travel. With meaningfully lower leverage, greater market diversification, and more efficient asset-level operations, we were first among our publicly traded lodging weed tiers to generate positive cash flow. Our ability to keep our hotels open and operate efficiently at low occupancy levels and our discipline in maintaining low leverage late cycle enabled us to preserve our balance sheet, protecting the value of our equity, and uniquely positioning us to pursue opportunities in the early stages of our recovery. Our rooms-focused hotels do not rely on large group business and have proven appeal with the broadest group of potential customers. Our 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. Since April, occupancy and REVPAR have sequentially improved for our portfolio, with occupancy increasing by over 20 percentage points from the second quarter to the third quarter. Average occupancy reached approximately 52% for the month of September and approximately 53% for the month of October. And we are pleased to report positive hotel level EBITDA of approximately $35 million and positive modified FFO of approximately $9 million for the quarter. By keeping our hotels open, we were able to retain key managerial and sales staff at our hotels who have worked closely with our internal revenue management resources to identify areas of opportunity in the current environment. We have strategically targeted available demand in our markets, and our growth in occupancy has been driven by a wide variety of demand generators. With growing occupancy, RevPar improved from down 75% year-over-year in the second quarter to down 54% in the third quarter. Hotel performance, of course, varies by market, and while we do not anticipate significant changes in the current demand trends, We cannot yet predict with certainty when operating metrics at our hotels will return to pre-pandemic 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 been active participants in the hotel industry for more than 20 years, with experience through multiple cycles, and over that time, we have developed strong relationships with Hilton, Marriott, Hyatt, and our hotel management teams. scale of our platform and our ability to benchmark and share best practices has enabled a highly collaborative effort to optimize property level profitability. The management teams at our hotels have been exceptional in their willingness to take on new roles within our hotels and flex staff based on market demand. In an environment where there is increased focus on cleanliness, our ownership of select service hotels has been especially beneficial given the fact that compared to full-service hotels, we have meaningfully less public space to sanitize, the flexibility to cross-utilize employees to maximize efficiencies, and fewer outlets to manage. We have been able to meaningfully scale back food and beverage offerings while continuing to provide convenient options for our guests. While we continue to discuss potential future operating models with the brands to improve long-term operating margins at our hotels, they have allowed significant flexibility in the interim. enabling us to modify services and amenities by market and occupancy level to help us maximize performance. As we work with the brands over the next several months, we will remain focused on rethinking the standard offerings, with the dual goal of enhancing our return on investment and ensuring that our hotels remain relevant with consumers and competitive within their markets. Historically, new supplies lagged demand trends by about 12 to 18 months, While we have not yet seen a meaningful decline in new supply across our markets, we are beginning to see some disruption in new construction starts and expect that trend will continue over the next several years, a trend that bodes well for our sector and should allow time to rebuild occupancy without incremental headwinds from new supply. Beginning with our first hotel in 1999, we have assembled eight hospitality portfolios, acquired 438 hotels, and sold 203 hotels, We have done hundreds of individual property transactions, closing over 70 in a single year, and have also completed scaled portfolio deals, both as buyer and seller. While industry transaction volume has been relatively low over the past several years, we anticipate that an increased number of assets will come to market in 2021, with elevated transaction levels continuing into 22 and 23. We intend to be active participants, both as buyers and sellers, while remaining disciplined in our approach and using our extensive deal and operations experience to ensure transactions enhance our portfolio and drive returns for our investors. In August, we closed on the dual-branded Hyatt House and Hyatt Place in Tempe, Arizona, a development project which we contracted for in 2018 for a total purchase price of approximately $65 million. Instruction of the Hilton Garden Inn in Madison, Wisconsin, which we contracted for in 2019 for approximately $50 million, remains on track, and we anticipate acquiring the hotel in early 2021, assuming, of course, all conditions to closing are met. We anticipate that each of these hotels will be a meaningful contributor to our overall profitability in future years. In October, we entered into a contract for the sale of our 118-room Homewood Suites by Hilton in Charlotte, North Carolina, for a gross sales price of over $10 million. We are pleased with the terms of the contract, which represents a mid-7s cap rate on 2019 numbers after a 4% FF&E reserve and excluding necessary PIP costs, or a mid-5s, assuming renovation costs, of $35,000 per key. If all conditions to closing are met, we expect the sale to be completed within the next five months and to recognize a gain upon the completion of the sale. The potential buyer for our home of Suisse in Memphis, which we discussed during our last call, terminated their contract during the quarter. Although we do not have an immediate need to sell hotels to create incremental liquidity, we are in active discussions with a number of potential buyers for this property and additional hotels in our portfolio. These buyers, who include small private equity groups, local owner-operators, and real estate investors exploring alternative uses for our properties, are a mix of both direct and brokered relationships. Our hotels are attractive to potential buyers in part because of our regular reinvestment, which maintains their relevance and ensures their long-term market competitiveness. Over the years, we have invested over half a billion dollars in our existing portfolio As a result of these investments and the quality of our onsite 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 postponed all non-essential capital improvement projects for the year, reducing our anticipated 2020 spend by approximately $50 million. During the nine months ended September 30th, 2020, We invested approximately $35 million in capital expenditures, completing renovations at 16 hotels starting prior to the onset of COVID-19. We anticipate spending an additional $5 million in capital expenditures during the remainder of this year. We are fortunate to have entered the current downturn with a relatively young, well-maintained portfolio, which allows us the necessary flexibility to manage our near-term capital expenditures to preserve current liquidity. This incredibly challenging environment has highlighted the strength and resiliency of our portfolio and underlying strategy. And as the economy recovers, we are exceptionally well positioned. Our upscale rooms-focused hotels, our broad geographic diversification, our affiliation with strong brands, our relationship with exceptional third-party managers, our data-driven approach to asset management, our strong balance sheets, 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. I am confident in our ability to weather the current environment and outperform as travel improves. It's now my pleasure to turn the call over to Liz, who will provide additional detail on our financial results and performance across our markets.