Apple Hospitality REIT, Inc.

Greetings. Welcome to the Apple Hospitality REIT fourth quarter and full year 2020 earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Kelly Clark, Vice President of Investor Relations. You may begin.

Thank you and good morning. We welcome you to Apple Hospitality REIT's fourth quarter and full year 2020 earnings call on this, the 24th day of February, 2021. Today's call will be based on the fourth quarter and full year 2020 earnings release in form 10-K, which were distributed and filed yesterday afternoon. As a reminder, today's call will contain forward-looking statements as defined by federal securities laws, including statements regarding future operating results 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 31st, 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 fourth quarter and full year 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. Before I begin, I want to take a moment to acknowledge the recent passing of Arne Sorensen. Arne was one of the most intelligent and insightful individuals in our business and a truly good person. He aspired to make the world a better place and cared deeply for friends, family, and business associates. Merritt is fortunate to have attracted many great people over the years, and I have every confidence that the company will be in good hands, but I personally will miss him, and I know others will as well. Challenges brought by the COVID-19 pandemic meaningfully impacted travel beginning in March of last year, making 2020 the most difficult year on record for the hotel industry. We are incredibly grateful to work with the best management teams in the industry who, in light of unprecedented challenges, effectively adjusted to the new environment and continue to serve guests with care. In 2020, we were unrivaled in our ability to keep our hotels open, and that would not have been possible without their dedication and hospitality. I also want to recognize the efforts of our team members at Apple, who have worked tirelessly over the past year. Our success is in large part a direct result of their work. 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. Our strategy is straightforward. Own a portfolio of geographically diversified select service hotels affiliated with the best brands. Work with the best management teams in the industry. Consistently reinvest in our hotels to ensure they remain relevant and competitive. and maintain a flexible capital structure with low leverage. While the current environment has created more significant operating challenges than we experienced in prior cycles, this highlighted the merits of our underlying strategy. At the onset of the pandemic, we shared our expectation that we were in a position to navigate the downturn more profitably than most and would be among the first to benefit from our recovery and travel. With meaningfully lower leverage, greater market diversification, and more efficient asset-level operations, we were first among publicly traded lodging REITs to return to positive cash flow in 2020 and are pleased to report adjusted hotel EBITDA of $122 million, adjusted EBITDA of $93 million, and modified FFO of $20 million for the full year. While the booking window is short and we have less visibility into future operating performance than we have in years past, we're building off a relatively strong base. All of our hotels are open, and portfolio occupancy was approximately 45% in January and continued to improve in February. The demand for our hotels is broad-based, including a mix of leisure and business, transient and small group. We expect occupancy to continue to improve throughout 2021 with domestic leisure demand driving performance early in the year and business demand, led initially by local and regional accounts, strengthening as the year progresses. The increase in travel will be facilitated by rollout of vaccines and loosening of travel restrictions, and the pace of recovery will vary by market. Our broad geographic diversification has provided us with relative stability through multiple economic cycles. The distribution of our assets across a variety of market types and geographic regions minimizes the impact of regional demographic shifts and provides broad exposure to a myriad of industries and demand drivers. Over the past year, our limited exposure to large gateway markets and urban city centers proved a significant advantage as these markets were disproportionately impacted by travel restrictions, including limitations on large group events. Our portfolio also provided unparalleled exposure to convenient drive-to destinations and government, regional, business, and leisure demand drivers. We believe that our geographic distribution will continue to be an advantage for us in the coming year. and are seeing increased bookings from existing demand generators and encouraging increases in small group and regional business transient. The assets we own are perfectly suited to accommodate guests in the current environment. Our rooms-focused portfolio has broad appeal and is efficient by design, enabling us to operate profitably at low occupancy levels. With smaller public areas and larger, more comfortable rooms, often offering kitchens and or suite amenities, we are able to more effectively effectively implement enhanced cleaning and sanitation protocols and provide guests with the private functional space they are looking for. The value proposition for guests is further enhanced by affiliation with brands that help to create consistency in guest experience, ensure that important standards are implemented, and provide incremental benefit through powerful loyalty programs. For all of these reasons, our hotels have continued to be attractive during the past year, just as they have been during prior downturns. and we feel confident in their ability to continue to have appeal throughout the recovery. Our management companies, many of whom have been partnered with us through multiple economic cycles, have performed admirably this past year. From the onset of the pandemic, we were able to leverage their experience to effectively adjust property-level operating models and minimize losses while continuing to serve guests with warmth and hospitality. With all of our hotels open, we have retained key managerial and sales staff to continue both current and forward-looking sales efforts. Management company above property revenue support teams work closely with our internal revenue management resources to identify areas of opportunity in the current environment and to ensure we were setting ourselves up optimally for the future. Our relationship with our management companies has been built over decades, and we have worked to ensure that our efforts are complementary and additive. Averaging our scale and sophisticated data analytics, we worked from the onset to establish standardized operating models for low-occupancy hotels and to identify and share best practices, which could then be implemented across our portfolio. We drove costs down by renegotiating national contracts with vendors and service providers, while our managers ensured that we were meeting guests' needs. Our combined efforts over 2020 have allowed us to begin this year in a position of strength with momentum to build on. We entered the pandemic with a young, well-maintained portfolio and during the year invested approximately $38 million in capital expenditures. Despite prudent reductions of approximately $50 million to our originally planned 2020 capital spend, we have continued to ensure our assets remain competitive within their markets and protected during periods of lower occupancy. Our in-house project management team coordinated with regional and property-level staff to put important processes in place to ensure all systems continue to operate efficiently and our assets were well maintained. As we welcome increasing numbers of guests back, our hotels are ready. Finally, we have always maintained a flexible balance sheet with low leverage. Similar to the other elements of our strategy, this has helped to mitigate volatility in our performance and enabled us to successfully weather multiple economic downturns and act when the timing is right on accretive opportunities. Strength of our balance sheet has enabled us to avoid issuing dilutive equity and to benefit from lower capital costs. In 2020, lower debt obligations contributed to our ability to reach corporate-level break-even earlier than our peers, preserving capacity and enabling us to acquire five hotels since the onset of the pandemic. Most recently, we acquired the Hilton Garden Inn in downtown Madison, Wisconsin. The newly constructed 176-room hotel is located immediately adjacent to the university's sporting facilities, and in close proximity to government, business, and leisure demand generators. In 2020, we sold three hotels for a combined sales price of approximately $55 million, including the Hampton Inn in Tulare, California, which was sold during the fourth quarter for approximately $10 million. The company's 2020 dispositions resulted in a combined gain on sale of approximately $11 million. As we announced last quarter, our Homewood Suites in Charlotte, North Carolina, remains under contract for sale for approximately $10 million. If a closing occurs, the sale is expected to be completed in the first quarter of 2021, and we expect to recognize a gain upon completion of the sale. While transaction volume in our industry continues to be low, we expect an increasing number of opportunities as we move through the recovery and are well positioned to act in ways that will further grow and enhance our existing portfolio. Our outperformance during these unprecedented times is a testament to the strength of our underlying strategy and low-levered balance sheet, and has preserved our capacity to pursue accretive opportunities in the early stages of a recovery. We remain intently focused on maximizing long-term value for our shareholders and are confident we are well-positioned as travel continues to recover. It is now my pleasure to turn the call over to Liz, who will provide additional detail on our financial results and performance across our markets.

Thank you, Justin, and thank you everyone for joining us this morning. While we began the year ahead of our original expectations, the environment quickly deteriorated in March with the impact of the COVID-19 pandemic and resulting shutdowns driving industry occupancies to historic lows. April portfolio occupancy dropped to 18%, and at that time we estimated a monthly cash burn of $18 million before CapEx but after G&A and debt service. at occupancies between 15 and 20%, without visibility into how long our portfolio would remain at such depressed levels. With the swift focus and action of our corporate management company and property level teams, we were able to meaningfully reduce expenses, adjust and optimize our labor model at our lowest occupancies, make the determination to keep all hotels open after a thorough risk and financial assessment, focus on securing the remaining demand and market, and begin rebuilding occupancy to break even at the hotel level in May. By retaining key sales associates and keeping our hotels open, we maintain momentum and continue to grow occupancy through the summer and into the fall, reaching 54% in October, benefiting from the return of leisure demands, but also government, healthcare, construction, disaster recovery, insurance, athletics, education, crew, and local and regional corporate business. A continued focus on property-level cost controls, efficient corporate overhead, and relatively low interest obligations enabled us to return to positive cash flow at the corporate level by July and for the year. Together with the sustained efforts of our third-party management companies and with the support from our brands, our best-in-class asset management team continued to implement cost elimination and efficiency initiatives effectively managing labor costs, reducing and eliminating certain services and amenities, and renegotiating rates under various service contracts. These efforts enabled us to lower rooms expenses by 19% year over year on a per occupied room basis, and total property level operating expenses by 48% during the fourth quarter as compared to the same period last year, and 44% for the full year 2020 as compared to 2019. Corporate G&A was reduced by 34% for the quarter and 19% for the year, as compared to the same periods last year. Having achieved positive cash flow beginning in July and continuing through October, we further reduced borrowings on our line of credit to minimize interest expense. These efforts resulted in impressive bottom line performance for the quarter and full year. Adjusted hotel EBITDA was approximately 23 million and 122 million and adjusted hotel EBITDA margin was approximately 17% and 20% respectively. For the quarter and full year, adjusted EBITDA was approximately $16 million and $93 million, and modified FFO was negative $2.5 million for the quarter and positive $20 million for the full year. In 2020, the most challenging year ever for our industry, we were able to achieve positive adjusted hotel EBITDA in every month except for April, and positive adjusted EBITDA for the full year. Taking a closer look at demand trends after rebuilding occupancy through the summer and into the fourth quarter, we did experience typical seasonal declines in November and December relative to October. Occupancy declined to 45% in November, 40% in December, and 47% for the full fourth quarter, down 36% to the fourth quarter of 2019, which is a slight improvement to the year-over-year declines in occupancy we experienced for the third quarter, despite an increase in COVID cases and tightening of restrictions over that time. We experienced similar sequential seasonal declines in average daily rates for the third and fourth quarters relative to 2019, down approximately 25% in both quarters. While we certainly would have hoped for continued growth through the fourth quarter, we are encouraged by the increase we've seen in January and February relative to December. January's rate increased modestly from December, and occupancy rose to approximately 45%. Early trends in February are also positive. For the week immediately preceding the President's Day holiday, almost 60% of our hotels had occupancy over 50%, and portfolio occupancy, including all hotels, was 54%, similar to occupancies achieved in October, the highest occupancy month since the onset of the pandemic. Saturday of that same holiday weekend, our full portfolio occupancy reached 78%, and in high occupancy markets, we did recapture some pricing power. As we move through February and compare stabilized weeks, we continue to see occupancies increase day over day. While the environment is still unpredictable and we have limited visibility, We are encouraged by the growth we have seen following our seasonally slowest months and are optimistic that as we move into the spring and traditionally higher occupancy in REVPAR months, we will continue to see results improve. Top performing hotels benefited from a variety of demand generators. Our courtyard in Charlottesville, Virginia contracted to provide rooms to the university and ran 100% occupancy for the quarter. Government and construction business drove occupancy at our town place suites in Suffolk, Virginia, which was 93% occupied. National Guard and medical group business drove quarterly occupancies at our Hilton Garden Inn and Homewood Suites in El Paso, Texas, which both ran in the 80% range for the quarter. A number of our hotels in California and several of our markets in the southeast saw increases in demand as a result of wildfires and storm-related business. We also benefited from medical business related to COVID treatment and vaccinations in a variety of markets. Weekend occupancies for our portfolio continued to exceed weekday occupancies by approximately 12 percentage points for the quarter, though the spread was tighter in October and widened sequentially in November and December, typical with business travel trends around the holidays. Our transient and group breakdown for the quarter and full year, which includes both leisure and business demand, was approximately 87% transient and 13% group, generally in line with the same periods of 2019, trading a point and group for a point and transient this year. From a mix of business standpoint during the quarter, government and bar were fairly consistent year over year, while negotiated decreased by six percentage points, a slight improvement from the third quarter. and discount segments increased by nine percentage points, reflecting an increase in leisure as a percentage of our business year over year. We continue to see production across a number of business segments with relative strength in industrial, medical, government, and military business, offsetting more significant year over year declines in demand from large technology companies and financial services. We anticipate that leisure will continue to lead the recovery through the first half of the year, but are encouraged by recent increases in demand from local negotiated and other business and government accounts, as well as small group. As the recovery progresses, demand is likely to vary broadly by market. A broad geographic distribution with significant exposure outside of large urban and gateway markets positions us to be early beneficiaries as suburban markets are likely to outperform urban markets and group demand is likely to be led by small corporate leisure and youth sports. Similar to the third quarter, from a channel mix perspective, our fourth quarter bookings show Property Direct representing approximately 31% of our total room night channel mix, up seven percentage points from the prior year. Brand.com bookings are relatively consistent with last year, down two points to 35%. Voice was down approximately two points to 5%, while OTA was up approximately six percentage points to last year at approximately 17%, reflecting an increase in leisure during the quarter as compared to 2019. GDS was down significantly during the quarter, decreasing approximately nine percentage points to 10%, again, consistent with limited corporate travel. ADR for our portfolio was down approximately 25% for the quarter versus prior year, driven largely by mix of business in our hotels and competition for customers in a low occupancy environment. As has been the case in past cycles, we anticipate rate will continue to be challenged until portfolio occupancies allow for more active management of our mix of business, as well as the ability to reduce discounts and push bar rates, which further impacts ADR in all segments. This is typically as we get above 70% occupancy. We are encouraged by rate improvement over the President's Day weekend where single day occupancy of approximately 78% was accompanied by a 9% week over week improvement in ADR for the full portfolio. As we have discussed on previous calls, rate has the ability to materially impact profitability. While October results were the most favorable in the quarter, and strong occupancy enabled us to produce positive cash flow at the corporate level. November and December adjusted hotel EBITDA remained positive, but property level cash flow was insufficient to cover all corporate costs. While our original estimated breakeven occupancies before CapEx generally applied throughout the year, to account for the impact of rate, we estimate breakeven REVPAR before CapEx to be approximately $50. based on operational costs and rate and occupancy trends since March. We expect that REVPAR improvements we've begun to see in January and February will continue throughout the year and will likely accelerate as the year progresses and our industry benefits from the rollout of the COVID-19 vaccine and loosening of travel restrictions. As I highlighted earlier, we expect that many of our markets will benefit early from the recovery and we are already seeing signs of improvement in business travel bookings, particularly by mid-market local accounts, as well as continued strength in leisure demand. While we are beginning the year in a relatively good position, we continue to have limited visibility into the timing and ultimate trajectory of the recovery and are not in a position to provide full operational guidance at this time. We do, however, expect corporate G&A to be between $28 and $32 million, interest expense to be between $75 and $80 million, and capital expenditures to be between $25 and $30 million for the full year. As a reminder, the company paid distributions of approximately $67 million, or 30 cents per share, during the first quarter of 2020. In March, we suspended our monthly distributions with our last paid on March 16, 2020. The company's board of directors, in consultation with management, will continue to monitor hotel operations, compliance with debt covenants, projected taxable income, capital improvements, and investment opportunities and intends to resume distributions at a time and level determined to be prudent in relation to the company's other cash restrictions, requirements, and uses. Turning to the balance sheet, at quarter end, We had $1.5 billion in outstanding debt consisting of $513 million of mortgage debt secured by 33 hotels and $976 million outstanding on our unsecured credit facilities with a weighted average interest rate of 3.9%. As of December 31st, we had available cash on hand of approximately $6 million and an unused borrowing capacity under a revolving credit facility of approximately $319 million, and only $55 million of maturities in 2021. As Justin mentioned, our conservative capital structure has been a key element of our underlying strategy, and as a result of that discipline, we entered the downturn in a relatively strong position. Low leverage, broad geographic diversification, and our focus on efficient rooms-focused hotels has minimized our use of available liquidity to sustain operations, thus preserving our balance sheet and equity value and positioning us to capitalize on external growth opportunities early in the recovery. With the continued deployment of vaccines, warmer weather, and the trajectory of recent results, we are expecting to see stronger operating performance as we move throughout the year. However, due to continued disruption from COVID-19, fourth quarter seasonal declines, and limited visibility into future demand and results, we began discussions with our lenders in January to extend the covenant waiver period for our unsecured credit facilities. While we have not yet finalized, we continue to be extremely grateful for the ongoing support of our lending group and anticipate closing in the near future. In the coming months, our company is optimally positioned to grow value organically through improved hotel operations and externally through accretive transactions. With approximately $325 million of total liquidity at year end, only 34% total leverage, positive cash flow for much of 2020, and encouraging portfolio occupancy early in 2021, we are confident in our ability to continue to navigate the current uncertainty preserve the value of our equity, and strategically position ourselves to take advantage of opportunities. Before opening the call for questions, I want to again thank our teams who have worked tirelessly to optimize performance in the most challenging operating environment our industry has ever faced. Their efforts and experience have uniquely positioned us for outperformance. We will now open the call for questions.

At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two 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. One moment, please, while we poll for questions. Our first question is from Austin with KeyBank. Please proceed with your question.

Great. Thanks, everybody. Wanted to focus on the external growth side. It's something you guys have been commented on quite a bit here. And I'm just curious, Justin, you said transaction volume still remains low, but how much have you seen maybe activity pick up in the last month or two? And do you feel like you have enough visibility today to move forward with a deal? Or are you more reluctant, I guess, given still the uncertainty around maybe business travel more broadly?

It's a great question. Thanks for joining us today, Austin. We, as are others in our space, are continuing to become, I think, more confident in the trajectory of the recovery. In terms of total deals available, we're still seeing limited supply in the market. The brokerage who historically this time of year would have a large number of assets available for sale, have very few. We have had a number of conversations with individual owners who are contemplating selling. But I think thinking about timing, the types of assets that we own and the types of assets that we would be interested in buying are now cash flow positive at the property level largely. And so they're in a position to be more likely to trade. I think our positioning around those improves as the year progresses. Right now, owners are still receiving or benefiting from significant flexibility from lenders and some government assistance. As those things burn off and as we move further into the year, I think we'll continue to see an increased number. I think it's worth highlighting as well that we continue to see significant interest from potential buyers in this space. I think given the relative position of our publicly traded peers, the bulk of that is coming from private equity. There were significant funds raised in advance, and we're in this unique period where early opportunities may actually trade up just because of the imbalance of supply and demand with fewer assets in the market and more buyers who are looking for assets. As this shapes up, we think the window of opportunity will be extended. And I think I've highlighted in past conversations with you and in past calls that our expectation is that as we progress through the recovery, There will be assets that come to market for a variety of reasons, and one of those that will cause, we think, continued inventory in the market available for purchase is that at some point the brands will mandate a return to their capital improvements programs. and those who have depleted FF&E reserves and utilize those funds to cover short-term shortfalls from a debt service standpoint will be more likely to bring assets to market at that time. So I think a long way to answer a short question, but near-term we think there will be selective opportunities. As likely as not, the opportunity will be better to potentially sell assets short-term. with acquisition opportunities increasing as the year progresses.

That's a lot of interesting comments there. I want to kind of focus on the piece about the supply, demand, and balance in terms of number of transactions and capital on the sidelines that's waiting to be deployed. So then when you think about executing maybe on the disposition side here earlier in the year or before really volume ramps up, and redeploying that, you know, with your low leverage model, you know, interest rates near all times lows and presumably the financing markets for hotels, you know, improving, you know, do you feel like you're able to compete with more levered buyers on larger transactions or are one-off relationship type deals still more attractive to you?

Well, I think just from a product quality standpoint, one-off deals continue to generally be more attractive to us. I mean, as we look at larger portfolios available and or owned, there's a stark difference, generally speaking, between the portfolios owned by publicly traded companies and those held by private equity owners. And then beyond that, there are smaller portfolios that are high quality that are owned by owner-operators that would also be attractive to us. But But as we look for assets that are a good fit for our portfolio, the bulk of the opportunity we think exists in individual asset trades. Though, as we've highlighted in the past, we continue to underwrite any and all deals that come to market. And at appropriate pricing, we would be willing to pursue portfolio transactions as well. I do not see us as being disadvantaged in the current environment. relative to higher leverage private equity firms, the desired return that those groups are seeking and availability of debt for larger portfolios to those groups, it creates a mismatch. We actually, as some of our peers have demonstrated, have access. as a publicly traded company to relatively inexpensive financing should we see an opportunity worth pursuing.

Got it. It's very helpful, and thank you. I will hop back in the queue. Thank you.

And our next question is from Anthony Powell with Barclays. Please proceed with your question.

Hi, this is Allison on for Anthony. So you guys have done very well in generating demand related to COVID-19 in a variety of markets. So when do you think that business starts to moderate or go away? And how quickly could you replicate that business? Thanks.

We have benefited kind of universally from, you know, COVID-related business. I think that, you know, as we progressed even through 2020 where we were seeing, you influxes of that business in certain markets for certain hotels, when we saw that pull back, it was a direct result of cases coming down and things being more open and it being safer to get out and about. And I think we were seeing compensating demand. So as we look forward, we would be hopeful that that same pattern would continue, that as cases increase, Like we saw in 2020, we would see increases in traveling nurses or vaccine deployments. And as numbers came down, people would feel safer to get out and travel, whether for leisure or business travel. So I don't know the exact timing, although we are encouraged by the vaccination deployments and the anticipation that a large number of Americans could be vaccinated. and we could reach herd immunity, you know, mid-year. So, you know, I think that as you've heard others, you know, others anticipate that the back half of the year we would see a pickup in both leisure and some regional and local business travel. You know, at that time you may see COVID-related business pullback, but there'd be offsetting demand.

That was very helpful. Thank you.

Thank you.

And our next question is from Danny Assad with Bank of America. Please proceed with your question.

Hey, good morning everybody. Liz, you mentioned in your prepared remarks that Apple lowered room expense by 19% on a preoccupied room basis, which is very impressive considering it's a limited service portfolio. Can you help us bucket the different components of that expense cut and then how much of that will be sustainable as the recovery firms up?

Oh, that's the million dollar question, Danny. So across the rooms department, we saw decreases in expenses pretty universally. I mean, wages certainly, our teams continue to be very efficient. We've had managers early on and even during the fourth quarter pick up shifts, and so hourly wages were able to be well controlled. But guest supplies, cleaning supplies, comp services, the team really has taken a look at every line item and every expense across the hotel, not just in rooms, and found ways to be more efficient. I mean, we've spoken from the beginning around really looking at the value proposition, what's most important to guests right now. The brands have certainly been supportive and flexible as we offer guests what's necessary but in a safe way that meets their needs. And so we in the fourth quarter did see a slight increase per occupied room in wages specifically relative to what we saw in the third quarter. Although that's not too unexpected when you have holidays where people are taking paid time off and in light of the anticipated seasonal increase in the new year and following the spring and summer, we certainly didn't want to furlough or lay anyone off. We saw the declines in November and December that sort of increased our preoccupied room costs relative to the third quarter as short term, and so didn't want to make drastic cuts.

Got it. And then my second question is just in terms of channel mix. you know, how do the metrics that you mentioned just earlier in the prepared remarks, how do those compare to the channel mix we saw in the 08, 09 trough? Like specifically, I'm curious to know as to where OTA mix might have peaked last time around.

I don't, you know, I would have to go back and look and see what visibility we had to channel mix for our portfolio at that time. I would anticipate that OTA business, you know, has increased between that time and now universally. You know, I think we had started to gain some momentum and regain some of that share and redirect some of those bookings back to direct channels later on in this cycle or this past cycle. But I think that we would find that OTA business is a greater percentage currently than it was then.

Yeah, and to that, this is a very different cycle than the last one. You know, looking back at the last cycle, there was still a significant amount of business transient, even during the depth of the downturn. And what we ended up doing more of was adjusting the mix of our business, taking specifically more government business in an upper markets and other segments that had slightly lower rates. but enabled us to build base. I think what's unique here is that we've seen really outsized performance and what appears to be a significant pent-up demand on the leisure side, which is driving short-term the OTA numbers for us. But as Liz highlighted in her prepared remarks, we're beginning to see a transition and increased number of bookings from some of our more traditional business transient accounts. which we see as a good sign as we move through the year, you know, and look to continue to build occupancy across our portfolio.

And, Justin, how much control do you have over, like, over managing those channels? So, like, are you – do you owe anything in terms of, you know, contractually to the OTAs? Are you able to shut them down as kind of business transient recovers more, you know, if it is going to recover more quickly? How much control do you have over that? the channel mix?

We certainly can influence channel mix. It gets easier as occupancies increase and the revenue management systems can preference highest rated or most profitable business. We've had significant development in the revenue management systems over the past cycle and especially in recent years. So they're set up to quickly adapt to changes in demand. So we do have control But I think that it gets easier the more demand there is to sort of mix manage and preference. So in the current environment, we have most channels open, taking the business that's available. As I mentioned in my prepared remarks, once we get to 70% occupancy or so and there's relatively strong demand and market, then we can start really preferencing business.

Thank you.

And our next question is from Brian Mayer with BeReady Securities. Please proceed with your question.

Good morning, guys. Kind of circling back to the acquisitions discussion earlier, you know, Justin, as you sit here today and based upon what you're seeing from brokers and others, Do you guys anticipate, though, being a net acquirer, net of dispositions this year? And if so, to kind of what level is measured in, I don't know, tens or hundreds of millions of dollars?

I mean, it's a great question. We're in an enviable position right now because we're unique in that we can be opportunistic. I think it's early in the year. to determine exactly how things will play out. As we pursued the sale of assets within our portfolio, we've done so only when we saw attractive pricing. We haven't needed to sell assets to reposition our balance sheet. And I think it's fair to assume that we would look at dispositions in the same way as we move throughout the year. I highlighted the potential supply-demand imbalance, which could create motivation for us to more seriously look at potential dispositions from our portfolio. But I think as the year moves, you'll see us begin to shift focus towards the back half of the year, towards acquisitions, as we expect most of the opportunities will begin to materialize as the year progresses. Whether or not we're net buyers or sellers this year is difficult at this point. I think if you look at what we're likely to do over the entirety of the cycle, our expectation is that we would be net acquirers of assets over the entirety of the cycle. We really see this as a unique opportunity for us to build our portfolio and us as being uniquely positioned, given the strength of our balance sheet, to do that in a way that benefits our shareholders.

Great. And so you have a track record of kind of being the takeout buyer on some newly developed hotels. Have you seen any existing relationships or new relationships you might have come across with hotel builders currently who may be kind of desperately looking for a takeout when the property gets its CO in the next couple of quarters?

You know, we haven't seen desperation at this point, but certainly, and I've highlighted this in past calls, early in the cycle, our takeout has greater value for developers who generally are not able to borrow as much, you know, absent our takeout. in terms of loan to cost on new development deals. Plus, given market uncertainty, I think there's increased value as they look at potential development deals and having a firm takeout price, reducing their risk to really risk related to managing construction costs. Generally, early in the cycle, we're able to sign up good deals taking advantage of lower construction costs and this incremental value that we provide developers early cycle to negotiate really good pricing for deals, which then puts us in a great position as the cycle progresses to add to our portfolio attractive pricing relative to market pricing for existing deals in later years. I think You'll see us, as the year progresses, begin to look more seriously at those types of deals. But short term, the bulk of our focus is going to be on existing deals, both looking as a potential buyer and a seller.

Great. And then just last for me, you guys put in place an ATM. I forget when exactly it was. I think it was maybe the third quarter. Was the thought process when you put that in place more to just be having it there as a liquidity safety net or as a more aggressive acquisition opportunities use later down the road? I mean, what was your thought process when you put that in place?

And that's all for me. Okay. And, you know, to be super clear, our safety net is our strategy. So, you know, our safety net is having assets that have lower volatility and higher margins and having a strong balance sheet coming into this. So really our view relative to ATM is for that to be a tool to use on offense. And I've highlighted in the past that really as we look at potential acquisition opportunities, the math is easy for us and we're able to pursue opportunities when we see you know, an ability based on market pricing for specific assets to generate incremental value for our existing shareholders. I think, you know, to the extent we tap our ATM, it will be around specific opportunities that we see, you know, available to us in the market.

Thank you, Justin.

Thank you.

And our next question is, It's from Neil Malkin with Capital One Securities. Please proceed with your question.

Hey, good morning, guys. Morning. First one, you talked about you're currently working on extending your covenant waivers. A lot of the other peers have called out the acquisition flexibility or increase thereof. I don't think I've seen that in yours, and I don't think you called it out this time or last time. Do you guys have capacity to do acquisitions without some sort of capital event? That would be the first part. The second part would be because you will come out from under the waivers first, would you be willing to get more aggressive if you see more visibility in your portfolio on existing deals just kind of near-term levering up a little bit.

Good morning, Neil. Related to your amendment question, our first amendment, you know, we did have a carve-out for acquisitions. We utilized that. You know, we were able to execute the forward commitments that we had. And so, you know, since the beginning of last year, we've closed on five hotels, including Madison, which we recently closed on. So, we had a basket. We used the basket. And so, we did have the flexibility with the First Amendment. Going into extending the covenant waiver period, it's a little bit early for me to give details as to what will be included. We anticipate being able to provide more information in the near term. We're close to finalizing everything with the banks. But conversations are going well, and we are in a relatively good position as we have those conversations. And I think that we'll reach an agreement that's helpful for everybody.

Yeah, and looking at our relative positioning to answer the second part of your question, Should we see the market free up in a meaningful way, we have a tremendous amount of confidence that we could access the debt markets in advance of a recovery in the equity market to pursue specific opportunities. We don't think that now is the time for that and to take on incremental leverage and store cash absent an open market with a ready ability to deploy it we think would be counterproductive at this point in time.

Yeah, no, appreciate your comments. Second one is, do you have a, I guess, can you quantify how much your transient demand was down from 2019 levels? Just trying to get a sense for like, you know, how that sort of pent up demand from the leisure side comes back in, you know, this year as the vaccines or vaccine proliferation continues, herd immunity, people get more comfortable and you have the, ridiculous amount of stimulus pumped into people's bank accounts. It just seems like there's going to be an extremely strong amount of transient business, especially close to your, I guess, water-adjacent or proximate assets. Could you just maybe frame that up in terms of if leisure was down like 50% from 2019 levels, And, you know, could it go to 75% or was it down like 70% from 2019? You know, just how do you think about that and how do you expect that to play out?

Transient in general or leisure transient?

Leisure, sorry.

Leisure transient? I mean, I think, you know, across the portfolio, both leisure and business transient, when you look at our occupancy, you know, we're down, we were down for the quarter 36%. year over year, and for the full year, 40%. And so, you know, from a just broad transient perspective, while we do think leisure probably outpaced business this past year, you know, broadly, you know, the industry is significantly down, and there's pent-up demand. You know, quantifying the leisure component, you know, leisure has been first to travel. They've been eager to travel. We seem to get an indication, even with President's Day recently, that there's a desire to get out. I think your more traditional, warmer summer leisure month, that's a good indicator that there's some pent-up demand there. Quantifying it, it's a little tricky because we don't have perfect visibility into why people travel. And broadly, we have a mix of demand generators in our markets. And so, you know, even looking as we have historically at weekday versus weekend patterns gets a little tricky with people being able to work remotely and, you know, reasons for travel blending.

Sure. Yeah, just curious how you guys thought about that. Last one is, I know obviously it just happened, but, you know, the unfortunate passing of Arnie. Do you guys, you know, any read-throughs, anything you might be concerned about risks, opportunities in terms of how you negotiate, you know, in terms of your strategy, how you look at your brand committees you're on, brand proliferation, supply, brand standards, anything that you maybe are thinking about that would have implications, you know, vis-a-vis your relationship with Marriott, you know, going forward?

You know, as I highlighted in my earlier remarks, I think, you know, Personally, I had, and I know a number of people within our organization had good relationships with Arnie directly. We're going to miss him tremendously. That said, Marriott is an incredibly strong organization with a wealth of really talented and experienced people. We've worked with both Stephanie and Tony for many, many years now. and each of them bring kind of a unique perspective to leadership at Marriott, with Stephanie having a tremendous amount of experience on the customer-facing side, and Tony obviously having a wealth of experience on the development side. I think actually they're very well paired for leadership, and that's not mentioning even You know, the dozens, and dozens is probably a smaller number than the number actually of individuals within Marriott that we have very strong relationships with that we've developed over decades. So I think we see Marriott being in good hands, and in terms of our ability to interact with the company, I don't think we see any significant change.

Okay, thanks, guys.

Thank you. Thank you.

And our next question is from Tyler Battery with Janney Capital Markets. Please proceed with your question.

Hey, good morning. Thanks for taking my questions. And congrats to the team on successfully navigating such a difficult year. The commentary thus far has been very helpful and very positive. So just a couple of follow-up questions on my end. And I wanted to go back to some of the commentary that on February and real-time trends, if I could. Just interested if you could provide a little more color on what's driving the sequential improvement February versus January, December. How much of that is seasonality? How much of that is incremental demand or new demand versus what you saw at the tail end of 2020? And then are you starting to see the booking window extend at all as more demand is coming in?

Good morning, Tyler. You know, the change in the booking trends, you know, I think it's still a short window. We still don't have a ton of visibility. You know, the improvement in February we believe is an increase relative to previous months in seasonality. You know, we typically begin to see, you know, occupancy and rate pick up even from January and January from December in normal healthy years. And we're seeing that seasonality play out some here, still obviously at depressed levels due to COVID, but starting to see that increase. So we're happy that while we did start to see seasonality take hold coming off of October and November and December, we're starting to rebuild. The trends that might be on the margin different that we're that we're encouraged by are related to forward-looking bookings. And it's a small number because we don't have a lot on the books as we sort of move into the month. But what is, you know, picking up is small business regional sort of corporate account travel. And so we're seeing more of that on the books for the next couple of months. Again, small numbers, but an improvement specifically, which at this time of year, we would expect. Business slows down in November and December with the holidays, and then going into January and February, you start to see business transient pick up in normal times. We're starting to see a little bit of that. It's just not your large corporate accounts. It seems to be more local, regional accounts, which is what we would have expected.

Great, great. And then just as a follow-up, can you talk a little bit about CapEx spending in 2021, your expectations in terms of how much you're going to spend and what exactly you're going to be spending the money on?

Yeah. And that's a good question. We or Liz provided guidance in her remarks that that would be in and around 30 million or less is our expectation for this year. Roughly half of that would be spent on specific projects, general maintenance and or technology or brand initiatives, and then the other half, the expectation would be spent on full cycle renovations. We've had an opportunity over the past year to do a deep dive on our entire portfolio and I think to really meaningfully assess the needs of our individual assets and to develop what I think is a very robust plan around renovations and renovation cycles on a go-forward basis. And I think what you can expect over the next several years is consistent with what we've been doing in the past and that's focusing Our spend around, you know, assets where we – prioritizing assets where we feel we can get the best return on our investment, you know, improving our market positioning through the renovations. And then, you know, I think consistent with past practice, ensuring that the money that we spend on individual assets is focused around those elements of the asset that are likely to have the greatest guest impact.

Very helpful. That's all from me. Thank you.

Thank you.

And as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad. And our next question is from Floris Van Decom with CompassPoint. Please proceed with your question.

Hey, guys. Thanks for taking the question. Justin, I might want to ask you a little bit more on capital allocation. I mean, it's one of the key ways how you create value for your shareholders. And as you think about deploying capital, maybe walk us through your thinking on whether to go for resort hotels versus your small metro versus your suburban, which is the bulk of your portfolio today, and also how you think about some of the government initiatives, such as the minimum wage or the increased minimum wage, how that impacts your thinking on certain locales?

Two very good questions. So to clarify for those who might be listening, who might think differently, I'm assuming that you, when you speak of resort, you're speaking of resort markets, recognizing that our investment thesis around investing in select service hotels remains unchanged. That being said, I think our broad thinking has remained unchanged, and that's that our expectation is as we pursue acquisition opportunities, we will continue to look to diversify the portfolio, providing exposure to a number of different demand generators and ensuring that we have exposure to a variety of different market types. What you've seen over the past several years is that we've specifically targeted markets where there's strong leisure demand, certainly not exclusively, but that's led to acquisitions like the acquisition of the hotel that we now own in Portland, Maine, where a significant driver for total operating performance of that hotel is summer leisure travel. You'll continue to see us do that selectively, but not exclusively. And I think it's fair to assume that we will look for opportunities in high-density suburban markets, expanding our exposure there, and that at the appropriate time, we will look for opportunities in urban markets again as well. My thinking is, that urban markets will underperform and lag in the recovery, broadly speaking, especially some of the large urban markets, and that pricing may take a little bit of time to adjust to the discrepancy. But we certainly haven't changed our thinking around wanting exposure to those markets as well. In terms of minimum wage, When we assess acquisitions opportunities, we're always looking at the long-term potential for cash flow production from those assets. I think there's a tendency sometimes from an investor perspective to think more of top line and rep part performance than that in combination with potential margins from those markets. What we've done incredibly well historically as matching the top line and bottom line profile of markets in order to maximize margins for our hotels, ultimately generating stronger cash flows for our investors. I think looking across our markets, we were seeing pressure on wages before the downturn. And in most cases, we're paying at or above the minimum wage that's being proposed at $15. Certainly, our hope would be that as an increase in minimum wage gets rolled out, there would be some regional consideration for how that might occur. But we're not banking on it at this point and taking into consideration wages at their current, where they currently are and where they might be as we look at potential acquisitions.

Thanks. Maybe if I can have one follow-up on that as well. As you think about, you know, deploying, you know, obviously you have a number of different brands, largely in the upscale and upper mid-scale segment. As you think about, you know, putting more capital to work, are there specific brands that you're targeting? Are you targeting the brands that you already, you know, have exposure to? Or are you thinking about, you know, maybe, you know, adding on to maybe some of your embassy suite exposure as, you know, because of the increased ability to generate EBITDA per hotel relative to some of your other brands in your portfolio?

A good question. I think broadly speaking, we continue to be exclusively focused on Hilton, Marriott, and Hyatt branded select service hotels. We consider Embassy a select service hotel, though technically it's categorized as upper upscale. And we do that just based on the operating model being similar to the operating model at our other select service hotels. I think we love Embassy as a brand. We don't love it more than we love the other select service brands within those larger brand portfolios. And I think we will look in market to own the best asset within the broader brand family. So I think while the individual brand is obviously important, so too is the quality of the individual product, and the location within market. And we'll take all of those into consideration as we look at future acquisitions.

Thanks, Justin.

Thank you.

And our next question is from Lucas Hartwich with Green Street. Please proceed with your question.

Thanks. Just one left for me. asset values seem to be holding up better than initially feared just a few months ago, which makes me think that supply could come back quicker than we previously thought as well. So I was just hoping you could provide an update of what you think the replacement cost is for the current portfolio on a per-key basis, and then just maybe talk about the potential re-ramp of supply growth.

A good question. Ultimately, and I think sometimes we forget this, but investors invest in real estate, generally speaking, to get a cash return on their investment. And so while it's true that we haven't seen material shifts in pricing for existing assets, I'm not confident that that alone is sufficient to alter the thinking of individual developers. Most developers develop with the expectation that they may need to hold for some period of time, and absent a compelling IRR for investments, there will still be a governor on development, if only a governor provided by lenders who will be specifically looking at the cash flow potential for individual investments. As we look at construction costs, the information we have is a little bit noisy on that front. We do think that there's likely to be an adjustment to construction costs over time, though that too has been less material than what we expected coming into this. And part of it, there's noise in the system right now. I highlighted the fact that There's an imbalance in terms of fewer assets on the market and a lot of interested buyers impacting pricing, but equally relevant is the fact that there has been significant government aid provided to a large number of owner-operators in the space, and that banks have been reasonably flexible in the near term. A shift in any of those things could change the dynamics, and as I highlighted earlier, in response to one of the earlier questions that I received, we intend to be opportunistic and act in ways that take advantage of the changing market dynamics.

Did you have an estimate for the replacement cost of the current portfolio?

It's clever, Lucas, because you know we haven't published one of those before. I think at this point, to leverage my earlier response, we don't see a change in replacement value for our portfolio as a result of the current pandemic. That may change over time, but as we look at transactions that we're contemplating or that we've executed against as a seller and underwriting new asset acquisition opportunities, Cap rates on 2019 numbers are relatively close to where they were before. And obviously, there are discrepancies depending on the quality of the portfolio. But for portfolios or individual assets of similar quality to the quality that we own, you know, that there's pricing is in the neighborhood to where it would have been pre-pandemic today.

Got it. Thank you.

Thank you. And our next question is from Dori Keston with Wells Fargo. Please proceed with your question.

Thanks. Good morning, everyone. Good morning, Dori. I apologize. Hey, I apologize that this is an address. Can you talk about how green costs may be reduced the next few years versus prior levels, if anything's been kind of semi-permanently put in writing, and just how these savings are bucketed?

Sure. I think as we look at brand costs overall, certainly franchise and or management fees paid to the brands have come down materially year over year, but proportionate to the decline in rate and occupancy, which they're tied to. I think our expectation is that the percentage of that we had coming in in terms of the fee as a percentage of revenue that we had coming into this is likely to stay constant coming out of it. And where we see greater savings on the brand side is around allocations, given that all of the major brands that we operate with have reduced their corporate overhead. and certain services that they provided in the past that they charged for. And in most cases, we've replaced those services either with in-house services or outsourced services at lower price points. So I think, you know, between that and the adjustments that we've seen in the near term and are likely to see over the longer term in terms of brand-mandated services and amenities, and potentially even the cost of renovations over time, those are the areas where we anticipate seeing the greatest savings.

Okay, thank you. Thank you. And our next question is from Michael Belisario with Baird. Please proceed with your question. Good morning, everyone.

Good morning.

Good morning.

Two questions for you. First, on the asset sale that you guys completed in December in California, can you provide some details around that process and pricing metrics and then also any shift in your view that maybe or the likelihood that a smaller portfolio sale or sales could occur versus your continued one-off disposition strategy?

Sure. You know, the Tulare asset, was one that we had contemplated selling pre-onset of the pandemic and had explored the opportunity with a variety of brokers and even begun having conversations with some potential buyers. In terms of pricing, on 2019 numbers, the pricing equates to a sub-9 cap on 2019 numbers pre-PIP just above an eight cap on 2019 numbers, rather, including the PIP. So in line with what we would have expected for that particular asset and had contemplated as we interacted with brokers before, the buyer for that asset is a local owner-operator. And so distinct from You know, the Charlotte asset that we have under contract at an even lower cap rate, but where the buyer intends to repurpose the building for multifamily. You know, remind me, the second part of the question? In terms of portfolio, as we look now, we're seeing greater interest in portfolios. Really, quite frankly, private equity who raised, you know, a number of the private equity groups who raised a tremendous amount of money early anticipating that there would be a large number of distressed assets that would come to market are looking now to deploy those funds. And, you know, I think we're having more interesting conversations with groups that would be interested in small portfolios than we were, you know, three, six months ago. And I think that their interest paired with some loosening in the debt markets, I think bodes well for smaller portfolio sales as we move through the year. And I should highlight the fact that, again, looking across our portfolio, the bulk of our assets individually are cash flow positive at the asset level, which as these groups are looking to invest, simplifies somewhat the math that they have to work through in order to pursue an acquisition.

Right, understood. And then just back to a prior question on CapEx, the $25 to $30 million range. I guess maybe why are you spending so little CapEx, and maybe what does that do to your relative market share on a go-forward basis? And I guess really the question is, why aren't you spending more when disruption would be lower and your competitors might not be as well capitalized and might not be spending the money?

That's a super good question. I mean, I think I highlighted earlier in my remarks that the primary reason is that we don't need to right now. And I think what you've seen from us is, throughout the cycle is that we've been cautious and prudent in the deployment of capital to ensure that we do so in a way that creates a clear trajectory towards our ultimate profitability. I think in the near term, while we're focused on a lot of things, the bulk of our focus is on improving operations in ways that enable us to exit the waiver period and gain even greater flexibility around how we allocate capital. Because we came into the pandemic with a very well-maintained, relatively young portfolio, and because some of our assets have run lower occupancies during the pandemic, we're in a position to manage our capital expenditures in ways that we think preserve capital and put us in a better position near term to gain greater flexibility. Over time, I think it's reasonable to expect that we would get back to more normal levels. And if we were to see a more significant increase or improvement in performance, we may revisit that as we move through the year. But I highlighted we've been intently focused around ensuring that our hotels are well maintained, which we think will lower the long-term capital expenditures that we'll have. And we've had constructive conversations with the brands around scope of future renovations, which I think will put us in a position to do more with less, focusing really our attention around those items within the hotel that have the greatest guest impact.

And it's worth noting that when we renovate hotels, we typically keep our hotels open and can do them with relatively little displacement, timing them with seasonality. And so I think we will continue to be able to optimally time them. And I don't know that we're going to miss a window to minimize displacement or disruption.

Got it. Understood. Thank you.

Thank you.

And we have reached the end of our question and answer session, and I'll now turn the call over to President and CEO Justin Knight for closing remarks.

Thank you. I really appreciate you being with us on this call today. I know a lot of you have a busy day. There are a number of companies reporting. We look forward to talking to all of you again in the not-too-distant future. And as always, I hope that as you have an opportunity to travel, you'll take the opportunity to stay with us at one of our hotels. Have a great one.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.