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Operator
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.
Kelly Clark
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.
Justin Knight
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.
Hyatt Place
Thank you, Justin. Our broad market diversification and significant suburban concentration enabled us to benefit from continued strength and leisure and improving business transient demand, resulting in our portfolio's outperformance as compared to national averages during the quarter. With the acceleration of vaccine distribution, and loosening of travel restrictions, demand continued to improve more quickly than anticipated, resulting in occupancy of 74% for the month of June, only down 11% from June of 2019. With this increase in occupancy, we produced sequential improvement in rate, moving from an ADR of $110 in April to over $131 in June, a 19% improvement over the course of the quarter. We are encouraged that the gap to 2019 ADR levels decreased consistently as we moved through the quarter, with June ADR down only 9.5% to June of 2019, and the gap decreasing even further in July. Our in-house revenue team has continued to work closely with our management company revenue support and onsite sales teams to grow market share, which furthered our outperformance, enabling us to once again produce results that exceeded internal expectations. Highlighting meaningful improvement in both weekday and weekend occupancies during the quarter, weekday occupancy moved from 63% in April to 70% in June, while weekend occupancy moved from 81% to 86%. Although weekend occupancies continued to exceed weekday occupancies, we saw greater acceleration in weekday, indicating in part an improvement in more traditional business transient demand. As mentioned, stronger occupancies enabled us to move rates significantly during the quarter, and weekday ADR increased from $106 in April to $127 in June, while weekend ADR increased from $116 to $141 over the same period. In July, we saw similar trends as our portfolio finished with approximately 75% occupancy at $137 midweek and at $150 on weekends. Twenty-five of our hotels ran occupancy above 90% and more than a third had occupancy above 80% for the full quarter. Top performers within our portfolio benefited from a mix of demand generators, including leisure, government and military, manufacturing, imports, insurance, construction, and medical business. Twenty-nine hotels had REVPAR that exceeded 2019 levels for the quarter, representing many areas of the country, including Houston, Santa Clarita, California, Tucson, Miami, Provo, Suffolk, Virginia, Carolina Beach, Birmingham, and Hilton Head, among others. Our suburban hotels continued to outperform urban hotels in the quarter, with occupancy of 73 percent as compared to 62 percent for comparable hotels. Similar to trends in the first quarter, we generally experienced weaker performance from hotels located in markets with greater historic exposure to large groups and conventions. Our hotels in Northern Virginia, Chicago, St. Paul, and in a number of markets in the Northeast and Northwest were among the weakest performers relative to 2019. We also continued to see weaker performance from our full-service hotels in Richmond and Houston. Despite a slower rebound in some of these challenging markets, the strong performance of our portfolio overall during the quarter is a tribute to our broad diversification, which provides exposure to a myriad of markets and demand generators. Those markets that have been slower to recover represent additional upside for our portfolio as we realize a more widespread recovery in travel. In terms of channel mix, On a comparable basis, we saw a meaningful increase in brand.com bookings, which moved from 33% of room nights in the first quarter to nearly 38% of room nights in the second quarter. OTA bookings continued to be elevated relative to prior years, but decreased slightly from 18% of room nights in the first quarter to just over 17% of room nights in the second. With the increase in leisure and business transient demand, property direct bookings declined from 33% of room nights in the first quarter to 28% in the second quarter, but remained elevated relative to 2019 levels, a testament to our revenue management and sales teams who continue to work diligently to maximize the mix of business in our hotels based on available demand. From a segmentation perspective, as occupancy continued to strengthen in the second quarter, we saw a shift from other discounts into BAR as compared to the first quarter, which we believe is the result of an increase in business transient as a percentage of our mix. BAR increased almost three points to over 30% in the second quarter from the first quarter, offsetting declines in other discounts, which declined to just under 37% in the second quarter. negotiated government and group business remained relatively constant quarter over quarter. As we look forward, the booking window remains short, though with the data available, we have not yet seen significant impact from the recent rise in COVID cases and resulting reimplementation of mask mandates in some markets. These developments are likely to continue to weigh more heavily on urban markets and those with significant dependence on large group and convention business, where we have seen lagging results throughout the pandemic, including year to date, but where we have limited exposure. Given the likely trajectory of the continued recovery, we are optimally positioned for continued outperformance, and we remain optimistic based on recent increases in vaccination rates and the resiliency of people's desire to travel when restrictions are lifted and they feel safe to do so, as demonstrated over the last quarter. Turning to expenses, our team's relentless efforts to control costs and maximize profitability resulted in second quarter 2021 comparable adjusted hotel EBITDA of approximately $90 million and comparable adjusted hotel EBITDA margin of approximately 39%, down only 120 basis points to the second quarter of 2019, but representing an increase of more than 1,600 basis points from the first quarter of 2021. MFFO was approximately $68 million, or 30 cents per share, for the second quarter of this year. While we continue to focus on controlling expenses, our bottom line performance has been meaningfully bolstered by the significant recovery in rate, which Justin has mentioned, approached 2019 levels for our full portfolio in recent weeks. With experience owning an unparalleled number of branded select service hotels over multiple economic cycles, We have developed and fine-tuned a strategy in partnership with our third-party managers to maximize property-level profitability in any environment. Over time, this has enabled us to produce best-in-class operating results at the property level, and it positioned us to make necessary adjustments to our business as we saw occupancies deteriorate in the spring of last year. Looking back over the past five quarters, our asset management and third-party management teams have done an exceptional job managing our business, producing competitive cost savings despite entering the pandemic with meaningfully more efficient operations than most. With revenue down 27% in the second quarter relative to the second quarter of 2019, we were able to reduce total hotel expenses by 26%, an expense reduction ratio of 0.95. significantly higher than the full year estimate of 0.7 to 0.75 previously provided, driven in part by the improvement in rate declines relative to 2019 throughout the quarter. Cross-utilization of managers and hourly team members combined with adjustments to brand service models enabled us to achieve total payroll on a per occupied room basis for our comparable hotels of under $27 in the second quarter. down 16% to the second quarter of 2019. While these results are impressive and our teams have worked diligently to maximize performance, we continue to experience challenges finding and hiring employees in a number of markets. So we expect payroll costs to stabilize higher than where they are currently as we are able to reach desired staffing levels over time. Comparable hotels rooms expenses excluding labor, were down 22% per occupied room compared to 2019 for the quarter, with almost half of the savings coming from adjustments to complimentary breakfast and evening social offerings. Since the onset of the pandemic, we have spent considerable time with our brands and our management companies discussing ways to modify long-term brand standards and rethink property-level staffing models to ensure that a portion of these savings remains throughout the recovery and beyond. while ensuring that we provide an exceptional guest experience. Taking into consideration the continued recovery, historical seasonal trends, and labor pressures, we anticipate an expense reduction ratio in the 0.8 to 0.9 range during the second half of 2021. Moving to supply, while we continue to see new openings in our markets over the past 12 months, the percentage of hotels within our portfolio with one or more new hotels under construction within a five-mile radius has dropped from approximately 70% a year ago to around 50% in the most recent quarter. We anticipate that the cost of materials, labor shortages, and difficulty underwriting and financing new construction projects will continue to limit new supply in the near term. and recognizing that new construction projects typically take two to three years from start to completion, we anticipate limited pressure from new construction over the next several years. Shifting to our balance sheet, we are pleased to announce that with its strength, our track record of disciplined capital allocation, and our current operational outperformance, we successfully exited the covenant waiver period effective July 29th. As a result, we are no longer subject to the lender-imposed restrictions and limitations on investing and financing activities, including the acquisition of property, capital expenditures, payment of distributions to shareholders, and use of proceeds from the sale of property or common shares. In addition, as a result of exiting the covenant waiver period, interest rates are expected to decrease on our unsecured credit facilities. resulting in an estimated $3 million in savings for the remainder of the year and nearly $8 million annualized based on debt levels at the end of July. Consistent with the terms of the amendment, we were able to meet the financial maintenance covenants based on our annualized results for the three months ended June 30, 2021, and will test against certain modified covenant thresholds for up to five additional quarters. We are incredibly grateful for our longstanding relationships with our lenders and their continued support. Having exited the covenant waiver period, we now have additional flexibility to manage our business and pursue accretive opportunities. As of June 30th, 2021, we had $1.4 billion in total debt outstanding with a weighted average interest rate of 4%, consisting of $451 million of mortgage debt secured by 28 hotels, and $952 million outstanding on our unsecured credit facilities. At the end of the quarter, we had available cash on hand of approximately $3 million and unused borrowing capacity under our revolving credit facility of approximately $343 million, with no scheduled maturities for the remainder of 2021. As Justin mentioned, subsequent to the end of the quarter, we sold 20 hotels, increasing our total liquidity. With approximately $580 million available for acquisition, balance sheet capacity, and positive cash flow for much of 2020 and in 2021, we are confident in our ability to continue to navigate the current environment, preserve the value of our equity, and strategically take advantage of opportunities to drive incremental shareholder value. We're excited about the hotels we currently have under contract. and we are in active discussions around additional opportunities which we believe would be additive to our existing portfolio. Our talented team and investment strategy have enabled us to effectively weather the most challenging environment ever experienced by our industry. Operating results for our portfolio have exceeded even our own expectations with July top line numbers approaching 2019 levels and with the continued benefit of operating efficiencies. As we proceed through the recovery, we believe we are positioned for continued outperformance. We will now be happy to answer any questions that you have for us this morning.
Operator
Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line into the question queue. You may press star 2 if you'd 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 comes from the line of Neil Malcolm with Capital One Securities. Please proceed with your question.
Neil Malcolm
Hey, everyone. Good morning. Congrats on exiting covenant waivers. Your share price performance today is boggling my mind, but yeah. Congrats, nonetheless. Thank you very much. Sure. I just want to be clear on something that you guys have both touched on, Liz, most recently in the prepared remarks. Given what you're seeing in terms of ADR and occupancies and also given that BT, which is a substantial amount of demand for you guys, is really not back to 2019 levels but should improve as the year goes on. Are you basically saying that REVPAR and EBITDA is going to be above 2019 levels, most likely in the back half. Am I understanding your commentary correctly based on what you're saying?
Hyatt Place
I think we have been pleased with how occupancies have performed in the second quarter and into the third quarter. We continue to feel that a large portion of that is related to leisure, but we've had other... other demand generators and business demand throughout the pandemic, some of it business we haven't historically taken. As we progressed through the quarter and saw weekday occupancies increase, while that may not be showing up in our negotiated segmentation mix that I've shared, or we don't have complete transparency, that weekday growth we do think is partly benefited by BT. When we think about the back half of the year, it's a volatile environment. It's unpredictable. We still haven't issued guidance. We're confident that our portfolio and what we've experienced over the past year, what it's proven is that in a range of scenarios, we're positioned to outperform and to sustain pretty significant REVPAR declines. We're optimistic based on what we've seen even quarter to date in Q3 that we'll continue to see leisure perform as well as continue to see BT pickup. When I mentioned channel mix, I was speaking specifically to Q2, but as we transitioned into Q3, I'm seeing through booking channels, GDS pickup month over month for future bookings, so that's a positive. We continue to believe in the strength of business travel. GDS is predominantly corporate negotiated, so I think that's thinking about August not being traditionally as strong as even July or the back end of September from a business standpoint. I think that that's a positive trend. But predicting the future is tough right now. There's a lot of noise out there. We're mindful in watching the Delta variant, although haven't seen that transpire in our numbers quite yet and are hopeful that it won't. I think, you know, the fact that there's been some attention given to it has increased vaccination rates, which also is encouraging. So, you know, too soon to tell what the back half of the year holds, but the second quarter was strong. We started the third quarter strong, and we're reasonably confident given the information that we have today.
Neil Malcolm
Okay. I appreciate that Apple-esque response.
Hyatt Place
I mean, remember, too, Neil, that when we're speaking about The second quarter is typically our strongest quarter. The third quarter is right alongside with it. Think about the changes relative to 2019. We saw and experienced some seasonal impact last year. We have not had the large-scale corporate BT boost that we're hopeful for post-Labor Day, so that could be a tailwind. there's some reasonable consideration that needs to be given to the fact that August is just slightly behind July normally. Labor Day impacts September, and then we pick back up in October. So continued improvement, that would be fantastic. It's not out of the realm of possibility, but if you look at seasonality in our portfolio in 2019, that's part of where your continued improvement through the back half of the year, you have to hedge there. It's just, you know, we don't know what's to come. But, you know, there was significant pent-up demand with leisure. We're hopeful we'll see that significant pent-up demand with BT as well at some point.
Neil Malcolm
Yeah, I got you. I got you. I'm just being playful. Anyways, other one for me is on the acquisition side. I don't know if you talked about the yields you anticipate or stabilize yields on your acquisitions. that you have agreements on, but can you just talk about, you know, sort of what opportunities are coming your way? Has the amount of opportunities you're underwriting or seeing coming across your desk, has that improved over the last, you know, 30 to 60 days? Are you kind of remaining focused on your, you know, broad swath of markets? Are you more looking into Sunbelt? You know, anything along those lines in terms of how you're thinking about growth going into the back half of this year?
Justin Knight
In my prepared remarks, I highlighted the fact that for our acquisitions, those that we have currently under contract, we expect stabilized yields to be above 8%. Recognizing, again, that the assets are all relatively new, with two of the four currently under construction, the Portland asset to be delivered in the next several months, but the Madison asset not to be delivered for some time yet. Looking at those markets individually, the two existing assets were delivered or opened in 2018, the back half of 2018. The AC in Portland opened in July, and the Greenville asset opened in December. But looking at their more recent performance, in May, the Portland AC was up 14% from a Red Par standpoint. to the same period in 2019, and then in June was up 36%. And the Greenville asset, again, up 22% and up 60% for those same time periods relative to 2019. Recognizing there were new hotels and there's some ramp in those numbers, still I think a wonderful signal that those are incredibly strong markets that will likely outperform in the near term. As we look at the market more broadly, I highlighted in my prepared remarks that we continue to see pricing pressure and we are at the same time seeing a lot more potential deals come to market. We've been active for some time now in discussions with both brokers around broker transactions and with individual ownership groups, and are in active discussions around a number of additional assets that we hope to be able to announce in the not-too-distant future. We see the opportunities that continue to increase as we move through the coming months, and as I highlighted, expect to be net acquirers through the recovery.
Neil Malcolm
Okay, thank you guys very much, and congrats again on exiting the waivers. Thank you.
Operator
Thank you. Our next question comes from the line of Austin Warschmidt with KeyBank. Please proceed with your question.
Austin Warschmidt
Great. Good morning, everybody. So given some of the comments you made on ADR trends reaching 2019 levels in recent weeks, it sounds like revenue is also getting very close. I know you gave some pieces on what you think the expense reduction ratio is to be in the back half, but could you put kind of a finer point on maybe where Hotel Libata or margins were for July and how those compare versus 2019?
Hyatt Place
We do not have bottom line financials for July yet, so I can't speak to margin. You know, I think July's, you know, touched on July's rate and strong rate in July and the fact that that was approaching towards the end of the month and even exceeding at certain points in time, 2019 levels, you know, we believe that flow through should be strong and that margins will be strong. That said, we continue to try to hire incremental labor and we ran very efficiently. I led into the second quarter talking about April in the first quarter that we were really efficient and that we were looking for people and that remains the case. We've added back some labor over the course of the quarter, but we still have open positions. I think July, we'll have to wait and see, but has the recipe for being a strong month from a margin perspective. But we face the challenges that everyone faces with labor, the cost of labor. We're starting to see some increase with wages, although when I look back at the increases in wages or the visibility that we had with the increase in 19 over 18, not significantly more than that, at least to date. But we have some things that we need to hedge for and think through. Also, again, as I mentioned with Neil, we typically pull back a little bit in rate in August and occupancy. September, if BT, if it follows normal seasonal and BT trends, The back half, from a BT perspective, is generally stronger, but leisure does pull back some, although the limited data that I have from a booking position standpoint still shows forward bookings for weekends in September to be strong, which is encouraging. I think we feel reasonably good good, but have said all along the way that the efficiency that we're – and where we're running today is not sustainable long term. At what point that catches up, we're not sure yet. There's been some talk about post-Labor Day, some of the challenges around labor, easing a bit. We'll see. We've certainly received more applicants in areas where some of the stimulus benefits have pulled back some, so we're encouraged by that. We've added back labor along the way. We're probably at 50% of all stabilized FTEs over the course of the summer last year. In April, I think we were at around 60% of stabilized FTEs. July, I think we're probably around 70%. So we still have significant savings, probably a little bit more than we'd like.
Austin Warschmidt
What is stabilized FTEs relative to pre-pandemic FTEs for your portfolio? As I know, you guys have run efficiently for quite some time, but just curious if that's still, if that's changed.
Hyatt Place
We've said all along that we're hopeful in working with the brands and have every intention to run more efficiently as standards continue to evolve and guest preferences continue to evolve. If we have longer lengths of stays at our hotels and people opt out of stay over cleans, we'll be able to be more efficient and I think we'll continue to leverage multiple managers across departments where we can. We haven't quantified or determined long-term what stabilized FTE counts are relative to pre-pandemic, other than to say, you know, we will continue to make efforts both with our management companies and our asset management team, but in combination with, you know, the brands and brand standards to be more efficient long-term. So we're certainly hopeful that we'll have fewer FTEs long-term. Okay.
Austin Warschmidt
That's fair. And then just last one for me. Justin, you guys have, and Liz, you both have kind of highlighted the strength of your balance sheet, where leverage is, annualizing 2Q results. Things have certainly improved since then. You did a good bit of match funding as well with the portfolio sale, but do want to hit a little bit on the ATM and sort of how you weigh issuing common equity with respect to how you view your NAV and where you're trading versus private market values and then kind of how you balance that versus issuing to fund, I guess, your creative uses. What's sort of the thought process?
Justin Knight
So Liz highlighted in her prepared remarks the fact that we emerged from the pandemic with an incredibly strong balance sheet. And so we're in a unique position not to need to issue dilutive equity in order to reset our balance sheet or to reposition ourselves on that side. You know, in the recovery, I highlighted in my remarks, you know, based on annualized second quarter performance, we were four times debt to EBITDA, which is an incredibly good place to be. So with that said, our intent, as I've highlighted in the past, is to use the ATM to fund acquisitions and as one of the tools available to us to grow. Issuance on the ATM will occur only when we have clear line of sight to acquisitions where we can utilize proceeds accretively and to the benefit of our existing shareholders. And given the environment and pricing relative to the opportunities that we were exploring, we saw an opportunity to issue some equity. The calculation is one that we run often. As the environment's changing, both our share price is changing and the opportunity set is changing. but the methodology remains consistent. And so, you know, I think we will selectively use our ATM to pursue assets where it makes sense to do so. Now, having exited the covenant waiver period, we have a lot of additional, you know, sources of capital that we can utilize for acquisitions, and we will weigh those and measure those against the ATM as we look at opportunities in the market. Thank you. Thank you.
Operator
Thanks, Austin. Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Austin
Hi, good morning. Just a follow-up to Austin's question. You talked about being at four times debt to EBITDA. What's your... appetite to go higher than that in the near term given improving results, but also given uncertainty? I guess what's the max, I guess, near-term leverage you would go to as you fund your acquisitions?
Justin Knight
I mean, we've been clear, I think, since we began having conversations, that our long-term goal is to have low leverage as a portfolio. I think the merits of that strategy have proven themselves over the past year, year and a half. and certainly positioned us relative to peers to get out of our covenant waivers, to be removed from restrictions, and to not be in a position where we were beholden to the banks in ways that disadvantaged our shareholders. That said, we certainly consider leverage, especially short-term, as a funding source to pursue acquisitions and would be willing on a temporary basis to increase leverage to pursue acquisitions so long as we had clear line of sight to reducing our debt over time to somewhere around pre-pandemic levels.
Austin
Got it. On the two currently open potential acquisitions, you mentioned that your dispositions were at a five cap when accounting for CapEx on 2021. What about the acquisitions? What are they kind of yielding currently on 2021? if you have an estimate.
Justin Knight
So, again, highlighting the fact that both opened, you know, late 2018. We have 2019 numbers for them, you know, and I highlighted in response to one of the earlier questions, both are running ahead of that. The AC, which had been open the longest on 2019 numbers, would be right around the six and a half cap. It's tracking ahead of that. And so on 2021 numbers, depending on how the back half of the year shapes up, we could be very close to that 8% range on that asset. The Greenville asset was lower, right around five on 2019 numbers, remembering The hotel opened in December, and so you have first half of the year significant ramp at that asset. It's also running meaningfully better, more significantly better than 2019 than was the AC, up 60% to 2019 in the most recent month. And so I would estimate for 2021, we would be a little bit behind the AC likely, but approaching that same level, certainly with meaningful upside beyond that. And it's important to remember, Hugh, as we look at the portfolios, we're intentionally exiting assets that we felt had limited upside. And so looking at the portfolio we sold, you know, relative to the assets we're acquiring. That portfolio had regained meaningful occupancy early, but plateaued early. And so in most recent months had been lagging our broader portfolio in terms of Red Park growth, where these assets that we're acquiring are growing at a much faster pace. And so, you know, consistent with my prepared remarks, Our goal in transactions as we look to manage our portfolio is to exit assets that have more limited upside where we have significant CapEx needs and redeploy proceeds into assets that have stronger growth profiles with more limited near-term CapEx needs. And again, we'll do that around a subset of our portfolio because by and large, the assets that we own are assets that we like and assets that we think will perform incredibly well.
Austin
Got it. Thanks for the color. And AC and Aloft are two new brands for you, and they tend to skew a bit more urban, I guess, in their development profile. Is that something, would you consider more urban select service in cases where it makes sense, or are these kind of really one-off deals given the strong markets?
Justin Knight
We actually love select service in urban markets, and we've been clear for a long time we're incredibly bullish, especially on secondary and smaller urban markets. I think we saw them outperform through the last cycle and continue to outperform through the downturn. The demand drivers in markets like Greenville and Portland are meaningfully different than they are in downtown Chicago, New York, or San Francisco. And we've seen a demographic shift towards those markets with companies expanding and reorganizing there. And the beauty of a market like Greenville, for example, is that it's not wholly dependent on a single major demand generator or industry. There's medical, there's technology, there's manufacturing, and a very strong leisure component. When we look at Portland, Portland is a market where we've had exposure in the residence in. The two assets we add there I think will complement our existing exposure in that market, much more heavy on the leisure side, but with a significant business component as well that helps to smooth out the non-leisure season. I think we'll continue to explore assets like those, and I've seen incredible results over our whole period for similar assets like the select service assets we have in Richmond or Boise or some of these other smaller urban markets. So certainly a meaningful piece of our strategy going forward.
Austin
Got it. One quick one. What are the lease payment savings from the Seattle deal on an annual basis?
Justin Knight
We were approaching a reset, which is why we began negotiations with the with the seller. And the reset would have been, you know, theoretically, had it occurred somewhere in the high $8 million range. Based on the calculations that was in place in the contract. So a meaningful savings there. And again, this is an asset to that has historically generated well over $9 million in free cash flow on an annual basis. So an incredibly valuable asset for us, very well located. We were able to purchase meaningfully below appraised value that the seller had and below where we had been discussing a purchase pre-pandemic.
Austin
What was the 2020 lease payment? So just for modeling purposes, sorry. What was it?
Justin Knight
I'd have to go back and check. The new would be almost double.
Hyatt Place
The new would have been almost double. We were in negotiations with them, and when the pandemic hit, they were gracious, and so 2020 wouldn't even be stabilized. But the exposure was significant.
Austin
Thank you.
Hyatt Place
Thank you.
Operator
Thank you. Our next question comes from the line of Tyler Battery with Jannie. Please proceed with your question.
Tyler Battery
Hey, good morning. Thanks for taking my questions. Add me to the list of people confused with the share price performance, but good opportunity, I guess. So I know we've covered a lot of ground here. There are other folks I know that have questions. So I'll be brief. Just in terms of some of the changes to breakfast and the social hours in the evening, Talk a little bit more about how you're thinking about potentially adding back some of those services and just also touch on some of the conversations with the brands in terms of potentially moving towards reinstituting some of those standards.
Hyatt Place
All along the way as we've recovered occupancies in certain markets, we've added back some of those services. increase even over the past three to six months has been as occupancies have increased and as leisure demand has picked up and people have felt more comfortable adding back or trying to add back F&B labor as well. So we've added back where it made sense just with modified offerings and have really taken an approach, of course our team is benchmarking what's working and what's not and sharing best practices, but really given the flexibility that the brands have afforded us, you know, been specific around offerings and markets based on occupancy levels and consumer, you know, consumer preferences and demands, but a reduced offering. We are working with the brands to think through long-term standards, and I think there's a way that we can be more efficient, especially with the comp breakfast offering, where it's a significant part of the value proposition. It's important to us. It's important to our guests. The number of things that you offer on the buffet or how it's delivered, leveraging a scale across brands to drive down pricing. All of those things are things we're talking to the brands about. I think that there's some long-term savings there. The brands certainly are working with us to try to get there as well. The evening social with Residence Inn and Homewood, ongoing conversations and ongoing testing, particularly on the Homewood side related to that, but that's been scaled back, and we have not brought that back to date. That wasn't a huge portion of the comp service cost. It's primarily around breakfast, but certainly would be a savings if that was meaningfully reduced or eliminated long term.
Tyler Battery
Okay, perfect. Appreciate all the detail. It's very helpful. That's all from me. Thank you. Thank you.
Operator
Thank you. Our next question comes from the line of Danny Assad, the bank of America. Please proceed with your question.
Danny Assad
Hi, good morning, everybody. Um, I know we talked about margins a lot, but I just had like one, one more for you if, if, um, if you, if you will. Um, so if, you know, we already have seen like, you know, the July industry are far broke away from Q2 trends. And, you know, margins are already running, you know, like you said, they're at like close or at 2019 levels in May and June. Relative to 19, should we expect like a sequential improvement in margins into Q3? Or do you think staffing issues can offset any of those potential gains?
Hyatt Place
We don't, you know, we don't have financials for July, so it's too soon for me to say with certainty. We still have open positions, and so I think that that will help from a flow-through perspective. And rate, obviously, sequentially increased, so rate certainly helps. But how that flows to the bottom line, I'm not quite sure. Again, I think we anticipate and part of the reason we took up for the back half of the year the expense reduction ratio expectations relative to what we gave earlier in the year is because with rate improvement we do feel like we can flow more to the bottom line and we'll have some strength there. It's just we're balancing that with the unknowns around labor, how many people we can hire, what wages may do. And there's some talk around inflation too, although some people say that's transitory. So there's just a lot of variables. It's too soon for us to really give guidance.
Danny Assad
Fair. Okay. Got it. And then just from an EBITDA perspective, the net impact on the portfolio from the dispositions and the acquisitions that were announced for July, do you have a sense, or is it still too early, but do you have a sense for kind of what the net impact will be on the portfolio? Sure.
Justin Knight
I mean, we haven't given guidance for the overall portfolio, so to give specific guidance for these assets for the back half of the year, I'm not confident would be particularly useful to you. Or even on a stabilized basis. On a stabilized basis relative to 2019, if you look at our total transaction activity, We have been or will be, upon completion of these transactions, net acquirers of assets. And so, you know, there should be positive impact relative to 19 on a stabilized basis from our transaction activity so far. And as I've highlighted a couple of times now, we're not done. We expect to have additional transactions to announce in the not-too-distant future. at all of our transaction activity combined, our expectation would be that the net impact to EBITDA would be to increase it. Got it. Thank you.
Operator
Thank you. Our next question comes from the line of Dori Keston with Wells Fargo. Please proceed with your question.
Liz
Thanks. Good morning, everyone. I apologize if this has been addressed, but based on your expectations of operating trends and now that you've exited the covenant waiver period, when do you think is the earliest you'd be required to return to paying a common dividend?
Hyatt Place
Given the fact that we haven't given guidance, you know, I don't know that we can answer that with conviction, though, or certainty. And certainly it's something that our board is, you know, our board would be involved in from a decision standpoint. But from a requirement standpoint, we have carry forward losses from last year, you know, transactions and taxable gains and impact that calculation as well. So there's a lot of variables still at play for this year to know whether we'd be in a position where we'd be required to pay a dividend or not. So I'm not sure that we can give clear direction on that at this point.
Justin Knight
Certainly, having exited the covenant waiver as a result of strong results puts us closer to that, though for the reasons Liz highlighted, we're not in a position to give specific time yet.
Liz
Okay.
Operator
Thank you.
Chris Darling
Thank you.
Operator
Thank you. Our next question comes from the line of Michael Belsario with Baird. Please proceed with your question.
Michael Belsario
Thanks. Good morning, everyone. I just want to follow up on that last question. I think I know the answer, but maybe can you just – how are you guys thinking about the capital allocation balancing acquisitions and a higher dividend payment? I know you can pay a higher dividend, but how are you thinking about the potential uses of proceeds and the relative returns, maybe at least on a six-, 12-month basis as you look out right now?
Justin Knight
I think we've been clear in past calls that we're incentivized as an executive team to drive and to maximize total return for our shareholders. Dividend has historically been an important component of that and is something that we weigh continually versus other uses of capital. In the near term, as we've demonstrated, we're more apt to utilize cash to pursue acquisition opportunities. That said, to the extent we continue to outperform as we have year to date, we'll be in a position where we have significant cash flow, which would put us in a position to increase our dividend in the not too distant future as well. I don't think we see them necessarily as either or, but as two ways that we can that we can create incremental value for our investors.
Michael Belsario
Got it. And I assume the overarching gating factor for both of those options is the annualization of your debt to EBITDA metrics and wanting to stay within the ranges that you're allowed under the covenant agreement, right? That's really the gating factor, at least over the next several quarters.
Hyatt Place
Certainly, I mean, with any capital allocation decision, we're monitoring how that would impact how we would test covenants relative to the modified metrics and historic metrics. So certainly we'll be balancing all of that as we think about our capital allocation decisions.
Michael Belsario
Got it. And then just switching gears, just back to July, I may have missed it, but could you guys provide a July rev par percentage change versus 19? I don't think you've actually given that yet.
Hyatt Place
We have not given that yet. I think if you look at where we were from an occupancy perspective and where we shared relative to 2019, and if you look at the breakdown from weekday to weekend, we don't have final numbers, but you can get close to where we would be.
Michael Belsario
Fair to assume the 81.7% occupancy that you guys reported in July of 2019, pulling that from last year's press release, some of the portfolios changed a little bit. Is that still a fair percentage? Okay. So my math is, I guess you gave rate down mid-single digit occupancy down 8%. We're still talking July REVPAR is down 10 plus percent, plus or minus, right? We're not talking July is a couple percentage points off. I think there's lots of confusion around, yeah, okay.
Hyatt Place
Yes, correct.
Justin Knight
And then with the primary driver being occupancy, still not getting back to prior levels, yeah.
Michael Belsario
Right, right. And then just on margins, I know nothing for July to provide, but for June, can you maybe provide some specifics on what EBITDA margin was and how June specifically compared to 2019 on a year-over-year basis?
Hyatt Place
I don't have it right in front of me. I could follow up with you, Mike, on that.
Michael Belsario
Okay. That would be helpful. Thank you.
Operator
Thank you. Our next question comes from the line of Chris Darling with Green Street. Please proceed with your question.
Chris Darling
Thanks. Good morning. Just a couple quick questions for me regarding July's asset sales. First, is there any difference in the price you can achieve by selling a cluster of hotels versus, say, selling individually?
Justin Knight
A lot of that depends on the market. We had for really preceding the pandemic seen more individual asset trades than we had portfolio trades. But in prior periods, so looking back a decade or so, portfolios had tended to trade at premium pricing. I think there's increasingly a pool of buyers who are interested in amassing scale in select service assets, which has created an environment which we anticipate will persist where portfolios trade on par or at premiums to individual asset sales. I think that would be consistent with what we've seen in the past, and I think while Our portfolio sale was early, and the buyer for the pool was a group that had historically done more individual asset transactions. There are an increasing number of private equity groups and other investors who are interested in larger portfolios, and financing is available for those at this point in time.
Chris Darling
Got it. Yeah, thanks for those thoughts. And then secondly, you mentioned in your prepared remarks tilting the portfolio more towards markets with stronger growth outlooks, you know, sort of the rationale for the portfolio sale. I'm just wondering, you know, should we take that comment more as tilting around stronger submarkets? You know, I was just thinking about those 20 different properties seem to be a pretty wide mix of markets and regions across the country.
Justin Knight
Absolutely. I mean, if you look at our broader transactions over time, we sold an asset in Greenville and now have another asset in Greenville under contract. I think in some instances, the repositioning will be within markets, exiting one particular suburb to move into a new suburb or a downtown area where we anticipate greater growth. The broad strategy continues to be diversification. And really, given our portfolio's outperformance, we're not looking to radically shift our strategy, just to fine-tune around the edges in order to maximize the growth rate throughout the recovery and to adapt to changing trends within individual markets and across the country as a whole.
Chris Darling
Makes sense.
Justin Knight
Thank you.
Hyatt Place
Thank you. And, Mike, going back to your question for June, whether you look at it on a comparable basis, which was slightly better, or an absolute basis for June, we were right on top of 2019 margins, hotel EBITDA margins.
Operator
Thank you. Ladies and gentlemen, at this time, there are no further questions. I would like to turn the floor back to Justin Knight for closing comments.
Justin Knight
Thank you. We really appreciate everybody joining us today. This was an incredibly busy quarter for us and one that we're incredibly proud of. Again, a huge thank you to our team here at our corporate office and the many individuals we work with at the brands and with our management companies. This has been a challenging time. We've all learned a lot of new things but are incredibly proud about our performance. We hope that you're traveling and that as you travel, you'll take an opportunity to stay with us at one of our hotels, and we look forward to talking to all of you here in the not-too-distant future.
Operator
Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participations.
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