Apple Hospitality REIT, Inc.

Greetings and welcome to the Apple Hospitality Week third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Clark. Kelly, you may begin.

Thank you and good morning. Welcome to Apple Hospitality REIT's third quarter 2021 earnings call. Today's call will be based on the earnings release and form 10-Q, which we 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 notes thereto, as well as the risk factors described in our 2020 Annual Report on Form 10-K and other filings with the SEC. Any forward-looking statement that Apple Hospitality makes speaks only as of today, November 5, 2021, and the company undertakes no obligation to publicly update or revise any forward-looking statements except as required by law. In addition, non-GAAP measures of performance will be discussed during this call. Reconciliations of those measures to GAAP measures and definitions of certain items referred to in our remarks are included in yesterday's earnings release and other filings with the SEC. For a copy of the earnings release or additional information about the company, please visit AppleHospitalityREIT.com. This morning, Justin Knight, our Chief Executive Officer, and Liz Perkins, our Chief Financial Officer, will provide an overview of our results for the third quarter of 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. Our differentiated strategy for hotel investment, developed and fine-tuned over two decades, enabled us to produce strong relative operating results through post-9-11 declines in travel and the financial crisis, and to drive incremental value for our shareholders through the subsequent recoveries. While the challenges created by a global pandemic were unprecedented in their severity, our performance over the past 20 months is a tribute to the collaborative efforts of our corporate, brand, and management teams. and a testament to the merits of our strategy of investing in a broadly diversified portfolio of high-quality, rooms-focused hotels with low leverage. Third quarter operations across our portfolio further improved after strong second quarter performance, driven by a mix of leisure, government, healthcare, automotive, construction, disaster recovery, insurance, athletics, education, and local and regional business-related travel. REVPAR for our portfolio of hotels was $100 for the quarter, with occupancy of 72% and ADR of $140. Third quarter ADR for our portfolio exceeded third quarter 2019, helping to shrink the gap from 2019 REVPAR to only 10%. As top line fundamentals have strengthened, we have continued our efforts to maximize operational efficiencies by effectively managing costs across our portfolio to achieve strong bottom line results. despite inflationary pressures and a challenging labor environment. For the quarter, we produced adjusted EBITDA of $92 million, modified funds from operations of $76 million, and comparable hotels adjusted hotel EBITDA margin of approximately 38%, a 30 basis point improvement over the same period in 2019. We are pleased with the overall improvement in occupancy during the month of October, which rose back to approximately 73%. With children back in school and the transition to fall, which is generally characterized by lower leisure demand, we are encouraged by the continued strength in our weekend occupancy as well as the improvement we saw midweek relative to August and September, a further indication of improvement in business transient demand. Consistent with historical seasonality, we expect to see slightly lower occupancy for our portfolio in November and December, but we believe we will continue to see strengthen leisure demand and improving business transient demand through the remainder of this year and throughout 2022. Looking forward, we have meaningful upside in our portfolio. First, our hotels have produced industry-leading results despite historical dependence on traditional business transient, a demand segment that has lagged the more robust leisure recovery. While our ability to pivot to and benefit from existing demand shows the versatility and broad appeal of our assets, we are optimally positioned to benefit as business travel increases. Second, new supply, which represented a headwind for us in 2019, has pulled back significantly as a result of rising construction costs and a lack of available financing. Less than 50% of our hotels have competing hotel projects under construction within a five-mile radius. This is down 22 percentage points from the first quarter of 2020, and is the lowest we have experienced since we began tracking for our portfolio. Given the lead times associated with new hotel openings, we expect the lack of new supply to be a tailwind for us for several years. Third, our portfolio has meaningful exposure to markets that are benefiting from demographic and economic shifts that have been accelerated by the COVID pandemic, with multiple demand generators, business-friendly local governments, lower cost of living, and popular leisure and entertainment venues. And fourth, we anticipate that the strong rate environment combined with streamlined operations will create an opportunity to produce attractive margins despite inflationary and labor pressures. Simply stated, a more significant portion of the incremental dollars we produce on the top line going forward will flow to the bottom line. The upside in our portfolio is further strengthened by our recent acquisitions and dispositions activity, which has lowered the average age and improved the quality of our portfolio. reduced our exposure to near-term CapEx, and adjusted our market mix and positioning to elevate future performance. During and subsequent to the third quarter, we acquired four hotels for a combined total of approximately $186 million. In August, we acquired the existing AC Hotel, and in September, we acquired the newly constructed Alof Hotel, both ideally located in downtown Portland, Maine, along the city's working waterfront. for a combined total of approximately $118 million. Both hotels have performed exceptionally well with the AC, which opened in 2018, performing well ahead of 2019, and the Aloft ramping quickly. We anticipate that we will benefit from synergies in both sales and G&A, which will bolster the performance of these two assets and the residence in we own and market. In September, we also acquired the existing Hyatt Place in downtown Greenville, South Carolina. which has continued to benefit from strong weekend leisure demand and consistently produces red power above our portfolio average for approximately $30 million. With the acquisition of this hotel and the sale of the residence in we previously owned in market, we have meaningfully enhanced our proximity to major BT and leisure demand generators and the ability to benefit from future growth in Greenville. And in October, we acquired the existing Hilton Garden Inn in downtown Memphis, Tennessee, which we had not previously announced for approximately $38 million. The Hilton Garden Inn opened in January 2019 and is located in close proximity to our downtown Hampton Inn and within walking distance of Beale Street, AutoZone Park, and a variety of corporate demand generators. We were able to acquire the Hilton Garden Inn for just under a 9% cap rate on 2019 numbers. Here, too, we expect to benefit from sales and G&A synergies. This acquisition and the earlier sale of our Homewood Suites significantly enhance our positioning within the market. In August, we acquired the fee simple interest in the land at our residence in Seattle, Washington for approximately $80 million, consisting of a $24 million cash payment and a one-year note payable to the seller for $56 million. During the quarter, we also successfully completed the portfolio sale we discussed on our last call, which included 20 hotels for a gross sales price of approximately $211 million. Since the beginning of the pandemic, we have purchased nine hotels for a combined total of $347 million and sold 24 hotels for a combined total of $245 million. We continue to actively underwrite additional opportunities, and have four hotels under contract for purchase for a combined total of approximately $205 million, including the previously announced Embassy Suites to be constructed in Madison, Wisconsin, for an anticipated purchase price of approximately $79 million, a Hilton Garden Inn and a Homewood Suites in Fort Worth, Texas, just outside of downtown and ideally located near the area's major hospitals, TCU campus, and within close proximity of the Will Rogers Coliseum. The hotels opened in 2012 and 2013 and are under contract for a combined total of approximately $51 million, just over a 7.5 cap rate on 2019 numbers after taking into consideration anticipated PIP-related CapEx of just over $2.5 million, and an 8% cap rate after adjusting for rooms out of service for the Homewood Suites, which was under renovation. And finally, the Hampton Inn Suites in the Pearl District of Portland, Oregon for approximately $75 million. The Hampton Inn opened in 2017 and is ideally located to benefit from a mix of business and leisure demand with top BT accounts including a variety of manufacturing, tech, and financial companies. The purchase price is approximately a 7.5% cap rate on 2019 numbers after taking into consideration anticipated PIP-related CapEx of just under a quarter of a million dollars and is attractive relative to recent comp trades in market and replacement value. We expect to close on the hotels in Fort Worth, Texas and Portland, Oregon during the fourth quarter of this year and on the Embassy Suites in Madison upon completion of construction. We have been and will continue to be intentional in the build-out of our portfolio. Pursuing assets that are additive to those that we currently own and where we feel pricing will allow us to achieve our targeted returns. Looking at our activities since the onset of the pandemic, we have acted in ways that have improved the quality of our portfolio, enhanced our positioning, and increased our exposure to markets that we anticipate will outperform over the next cycle. As we finish 2021 and move into 2022, we are building off a strong base. Operationally, our hotels are approaching 2019 performance levels with the potential for additional upside as we begin to see a more robust recovery in business transient. Having achieved positive corporate level cash flow early in the pandemic, we preserved our balance sheet, providing us with a strategic advantage as we compete for deals and evaluate other capital allocation opportunities. Our recent transaction activity has further strengthened our position. We were the first of our peers to achieve positive hotel-level cash flow, the first to achieve corporate-level breakeven, and the first to exit our covenant waivers. We have been net acquirers of assets since the onset of the pandemic and have at the same time avoided dilutive capital raises or over-encumbering our balance sheet. Our strategy has been tested and consistently yielded compelling results for our investors. We are optimistic about the future and incredibly well-positioned to drive long-term value for our shareholders. It is now my pleasure to turn the timer over to Liz, who will provide additional details on our balance sheet and operations during the quarter.