Apple Hospitality REIT, Inc.

Greetings, ladies and gentlemen, and welcome to Apple Hospitality's second quarter 2021 earnings conference call. At this time, all lines are in a listen-only mode. A question and answer session will follow the formal presentation. Should anyone require operator assistance, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Ms. Kelly Clark. Thank you. You may begin.

Thank you, and good morning. We welcome you to Apple Hospitality REIT's second quarter 2021 earnings call, On this, the sixth day of August, 2021. Today's call will be based on the second quarter 2021 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, 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 2021. 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. As we look back on the last year and how far we've come as an industry, we feel incredibly grateful. With enhanced safety protocols in place, the accelerated rollout of the vaccine, and the loosening of restrictions, travel confidence has significantly improved and positively impacted performance across our portfolio. While we remain cautious of the continued impacts of COVID-19 and the new Delta variant, we are optimistic that the worst of the pandemic is behind us and travel will continue to strengthen. We entered 2020 with a portfolio of hotels reflective of an ownership strategy developed to mitigate risk and volatility while producing compelling returns for our investors. Our strategy, in place for more than two decades and refined throughout multiple economic cycles, is and has always been straightforward. Own a portfolio of geographically diversified select service hotels affiliated with the best brands, worked 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. During the last year, the merits of our approach were proven, and we navigated the most difficult operating environment our industry has ever seen with results ahead of industry averages and our publicly traded peers. We successfully executed on the objectives we communicated at the onset of the pandemic and maintained a sound liquidity position, safeguarded long-term value for our shareholders, and ensured our ability to thrive in future years. Initially, as we indicated, we prioritized a swift return to positive cash flow by focusing on operations, keeping our hotels open, implementing enhanced safety and cleaning protocols, significantly reducing operating expenses, and capturing existing demand within our markets. As a result, we were the first among our publicly traded peers to return to positive cash flow at both the property and corporate levels. Hotel performance continued to strengthen during the second quarter of this year, with overall results for our portfolio the strongest since the onset of the pandemic, once again exceeding industry averages and our internal expectations. For the quarter, we achieved occupancy of 71%, ADR of $121, and rev par of $85. Hotel EBITDA was approximately $95 million for the quarter and modified funds from operations were approximately $68 million or 30 cents per share. We have seen continued growth through July with improvement in both occupancy and rate relative to the prior month. I've been particularly pleased with the pace of recovery and rate, which in July was down only mid single digits to 2019 and reached 2019 levels in most recent weeks. On our last call, we communicated our expectation that we would be among the first to be in a position to exit the covenant waiver period. The positioning of our portfolio and our intense focus on property-level operations enabled us to avoid taking on additional debt to cover operating shortfalls, and as industry fundamentals improved, we were well-positioned to benefit. With net debt at roughly four times annualized second-quarter EBITDA and July showing continued growth, we elected out of our covenant waiver period effective July 29th. Through the most challenging operating environment our industry has experienced, we preserved the strength and capacity of our balance sheet and protected the value of our equity. We are emerging from the downturn on incredibly strong footing with incremental flexibility to allocate capital in ways that will further drive shareholder value. In July, we successfully completed the opportunistic sale of a portfolio of 20 hotels for a total gross sales price of approximately $211 million. The sales price represents roughly an 8.5% cap rate on 2019 numbers and just under a 5% cap rate on pro forma 2021 numbers, inclusive of buyers' anticipated capital expenditures of approximately $55 million. The portfolio we sold has an average effective age of seven years, two years greater than our current portfolio, and reported an average 2019 REVPAR approximately 18% lower and an average 2019 EBITDA margin approximately 170 basis points lower than our remaining portfolio averages. Half of the hotels in the sale portfolio have fewer than 100 keys. As we contemplate potential disposition opportunities, we closely monitor hotel positioning, profitability, market conditions, and capital requirements, and work to maximize shareholder value by disposing of properties when superior value can be provided from the sale of the property and the proceeds can be redirected into assets with stronger growth profiles. Also in July of this year, we entered into separate contracts for the potential purchase of four hotels for a total combined purchase price of approximately $227 million. The hotels under contract for purchase include the existing 178-room AC and the 157-room aloft on the waterfront in downtown Portland, Maine. for a total combined purchase price of approximately $118 million. The loft is currently under development and is expected to open in the third quarter of this year. The 130-room Hyatt Place in downtown Greenville, South Carolina for a total purchase price of approximately $30 million and an Embassy Suites by Hilton Hotel that will be constructed in Madison, Wisconsin with an expected 260 rooms and an anticipated total purchase price of approximately $79 million. We expect to close on the hotels in Portland and Greenville during the second half of this year, and the Embassy Suites in Madison upon completion of construction, which is anticipated to occur no earlier than the fourth quarter of 2023. All these assets are relatively young, non-prototypical hotels with the two existing assets, the ACA in Portland and the Hyatt Place in Greenville, each having opened within the last three years. We expect these acquisitions to produce stabilized returns above 8% and to have long-term REVPAR margins and growth rates that exceed those of our existing portfolio. Since the beginning of 2020, we have sold 26 hotels for a combined total of $290 million and purchased five hotels for a total of $161 million. We have the four hotels I highlighted under contract for $227 million and are in active discussions with multiple ownership groups related to incremental opportunities. As we have communicated on recent calls, we expect to be net acquirers of assets over the coming months. Our combined acquisitions and dispositions activity will reduce the age of our portfolio and associated near-term capital obligations while increasing our exposure to markets with strong relative growth trajectories. Transaction volume in the hotel space continues to increase, and interest from a variety of public and private equity players has driven pricing higher, especially for premium select service assets. As we explore potential opportunities, we leverage our longstanding industry relationships in addition to evaluating brokered opportunities in pursuit of recreative transactions that we believe will maximize long-term value for our shareholders and further grow and enhance our existing portfolio. The core elements of our portfolio strategy remain largely unchanged and have been further validated by our recent experience. As we pursue acquisition opportunities, we will continue to look for rooms focused assets in the Marriott, Hilton, and Hyatt brand families that further diversify our portfolio across markets, location types, and demand generators. During the quarter, we entered into a contract to purchase the fee interest in the land at our residence in Seattle, Washington, for a total of approximately $80 million, consisting of a $24 million cash payment and a one-year note payable to the seller for $56 million. Through this potential purchase, we expect to close in August of this year. We will exit what had recently become an onerous ground lease. The hotel is ideally located off the water and within walking distance of downtown Seattle and has performed incredibly well for us over the years. We began discussions with the landowner prior to the onset of the pandemic and have entered into a contract below the appraised value and our previously agreed to purchase price. We are confident that Seattle will remain a strong market long term, and this investment will be incrementally positive for us over time. With clear line of sight to accretive acquisition opportunities, we accessed the equity markets during the second quarter through our ATM program, issuing approximately 4.7 million common shares for gross proceeds of approximately $76 million at a weighted average market sales price of approximately $16.26 per share. We will continue to assess the value of our stock relative to opportunities in the market and utilize the ATM only where we feel confident we can create incremental value for our shareholders. Consistent reinvestment in our hotels has always been a key element of our strategy, and we entered 2020 with a young, well-maintained portfolio. While we have prudently reduced our capital spend since the start of the pandemic, we have ensured that our assets continue to be well-maintained and competitive within their markets. The brands have allowed a greater degree of flexibility over the past year, and we have been in continuous dialogue with them about the timing and scope of renovations for our portfolio, leveraging our strong relationships and our scale within individual brands to help find cost-effective solutions that focus on core elements of the guest experience. During the first six months of 2021, we invested approximately $5 million in capital expenditures and we anticipate investing an additional $20 to $25 million in capital improvements during the remainder of 2021, which includes scheduled renovation projects for seven hotels. We will continue to focus our investments on elements likely to have the greatest guest impact at assets where we feel we will achieve the best return on our investment over the long term, and to strategically schedule major projects in order to minimize property-level disruption. As we move through the recovery, we will continue our focus on operations, working to build on our second quarter successes through strategic revenue management and an obsessive focus on expenses. At the same time, we expect continued increases in hotel transaction volume and will actively seek opportunities to grow and enhance our existing portfolio. As with every aspect of our business, we will be thoughtful and balanced in our approach, allocating capital to those opportunities which will produce the strongest total returns for our investors over time. With the strength of our balance sheet, positive cash flow at the corporate level, the elimination of covenant waiver restrictions, and significant liquidity and balance sheet capacity to pursue accretive opportunities, we are extremely well positioned for growth as we move into the back half of the year. Throughout my career, I have been incredibly fortunate to be surrounded by exceptionally talented and motivated individuals who are passionate about our business and driven to achieve exceptional results. These individuals, both at our corporate office and employed by our brands and management companies, have been a constant inspiration to me. We have a winning strategy, investing in high-quality, branded, rooms-focused hotels, broadly diversified with low debt, That strategy has been tested through multiple economic cycles and has consistently yielded compelling results for our investors. That said, the key to any successful strategy is found in its execution. To this end, I want to express my sincerest gratitude to my team, our management companies, and our brand partners. At its core, the hospitality business is a people business, and our experience during the pandemic has strengthened us and prepared us for future successes. With that, 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.