Apple Hospitality REIT, Inc.

Greetings and welcome to the Apple Hospitality REIT Third Quarter 2022 Earnings Score. 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, Vice President, Investor Relations. Please go ahead.

Thank you and good morning. Welcome to Apple Hospitality Reads third quarter 2022 earnings call. Today's call will be based on the earnings release and form 10-Q, which we distributed and filed yesterday afternoon. Before we begin, please note that today's call may include forward-looking statements as defined by federal securities laws. These forward-looking statements are based on current views and assumptions and, as a result, are subject to numerous risks, uncertainties, and the outcome of future events that could cause actual results, performance, or achievements to materially differ from those expressed, projected, or implied. Any such forward-looking statements are qualified by the risk factors described in our filings with the SEC, including our 2021 Annual Report on Form 10-K, and speak only as of today. 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 2022. 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 approach the end of 2022 and think back over our accomplishments this year and since the onset of the pandemic, we are incredibly grateful for the quality and dedication of our corporate team and for our relationships with best-in-class brands and management companies. We have executed against a straightforward strategy since our inception through multiple economic cycles over two decades. While we are mindful of the potential headwinds ahead of us, we remain confident in the merits of our investment strategy, the strength of our portfolio of hotels, and our ability to outperform and maximize shareholder value in any macroeconomic environment. Demand trends for our portfolio remain positive, and with the backdrop of historically low supply growth, The lodging industry and our portfolio specifically are poised for a countercyclical recovery. Topline performance for our portfolio was our strongest since the onset of the pandemic, with third quarter rev par of approximately $120, up 19% as compared to the third quarter of 2021, and up 8% as compared to the third quarter of 2019. With a shift in consumer spending towards experiences and more robust business travel boosting midweek demand, We continue to see occupancy rebound. Occupancy for the quarter was strong at 76%, up 6% to 2021, and down only 5% to 2019. Strong occupancy allowed our hotels to mix manage and push rates. ADR for our portfolio was $158 for the quarter, up 13% to the third quarter of both 2021 and 2019. Positive business and leisure demand trends continued post-Labor Day, with September REVPAR up 12% to 2019, and October occupancy of approximately 78% at rates that continue to surpass pre-pandemic levels. We are confident there is additional upside for our portfolio as corporate travel improves, additional markets fully recover, and occupancy across our portfolio continues to strengthen. We continue to benefit from historically low supply growth, At the end of the third quarter, approximately 50% of our portfolio did not have any exposure to new hotels under construction within a five-mile radius. High construction costs, supply chain disruption, labor challenges, and difficult debt markets continue to limit new construction starts in most markets. Given the current environment and the typical time from start of construction to completion, we expect supply growth to be below historical averages for the foreseeable future. Turning to the bottom line results, during the quarter we achieved adjusted EBITDA RE of $119 million and modified funds from operations of $103 million or 45 cents per share in line with third quarter 2019 results. With comparable hotels total revenue of 20% relative to the third quarter of 2021 and more than 6% compared to the third quarter of 2019, We achieved comparable hotels adjusted hotel EBITDA of $129 million, up 19% to the same period of 2021, and up 4% to the same period of 2019, despite modest margin declines of 40 basis points and 80 basis points compared to the same period in 2021 and 2019, respectively. Comparable hotels adjusted hotel EBITDA margin for the quarter was 38%. Actual adjusted hotel EBITDA margin for the third quarter was also 38%, down slightly to the same period in 2021, but up 30 basis points to 2019. We interact frequently with our management companies and use our unique data-driven business intelligence platform to drive performance across our portfolio of hotels. Our asset managers and in-house revenue management teams continue to work closely with our management companies to balance cost controls with efforts to maintain guest satisfaction in order to support a strong value proposition with customers and create an environment for sustainable rate growth. In August, we hosted leaders of each of our management companies for a two-day revenue and operations summit in Richmond, creating a forum focused on sharing best practices, experiences, and strategies for improving operations and addressing current and anticipated challenges at our hotels. Given our size and scaled ownership of branded rooms-focused hotels, we are uniquely positioned to utilize our unparalleled access to operational data and benchmark both statistical metrics and best practices to identify opportunities across our portfolio and maximize the performance of our assets. While we are still early in the budget process, we are pleased with early indications from our managers, which project continued growth in 2023. The strength of our balance sheet further contributes to the long-term stability and optionality of our platform. The recent refinancing of our primary unsecured credit facility bolstered our already strong liquidity position, extended maturities, improved pricing, and increase the size of both our revolving credit facility and term loans. Faced with the prospect of potentially greater macroeconomic uncertainty and volatility in capital markets over the coming years, the increased liquidity positions us to be opportunistic in ways that will drive incremental value for our shareholders. We are fortunate to have entered the pandemic with a relatively young and well maintained portfolio. And as a result, we're able to strategically reduce renovation spend to preserve capital in 2020 and 2021. During the first nine months of 2022, we invested approximately $32 million in capital expenditures and anticipate spending a total of $55 to $65 million during the year. This year's spend will more closely approximate our historical investment of between 5% and 6% of revenues. which we feel is appropriate for our portfolio and a meaningful differentiator for us which contributes to total shareholder returns over time. Through our scale ownership of branded rooms-focused properties over more than two decades, we have significant experience in determining the most effective scope and timing of our investments to ensure minimal disruption to property operations and maximum impact for dollars spent. During the quarter, we sold a 55-room independent boutique hotel in Richmond, Virginia, for $8.5 million, resulting in a gain on sale of approximately $1.8 million. The sale enabled us to forego more than $4 million in planned capital expenditures and transact at a meaningful premium to our original investment. In October, we acquired the AC Hotel Louisville Downtown for $51 million and the AC Hotel Pittsburgh Downtown for $34 million. Both hotels opened in 2018 and are uniquely positioned within vibrant downtown areas where they benefit from a variety of business and leisure demand drivers. The combined purchase price represents a 6.5% cap rate on full year 2019 and a similar cap rate on trailing 12-month financials through August after an industry standard 4% FF&E reserve. Given additional ramp in the individual assets and the robust performance of their respective markets, we anticipate that both will produce stabilized returns in excess of 8%. Recent numbers for both properties have been strong with September red bar for the Louisville AC up 8% to 2019 and the Pittsburgh AC up 36%. These acquisitions increase our ownership of AC hotels a brand with strong appeal for both business and leisure travelers, and provide exposure to Louisville and increase our presence in Pittsburgh, both of which have seen strong post-COVID recovery. As we have built and refined our portfolio over time, we have intentionally sought to create exposure to markets that benefit from a mix of business and leisure demand, and to concentrate our ownership in markets that have been and will be beneficiaries of macroeconomic and demographic shifts. Since the onset of the pandemic, we have invested approximately $558 million in 14 hotels. Excluding the two ACs acquired subsequent to the end of the third quarter, these recent acquisitions exceeded our original underwriting by more than $9 million in hotel EBITDA during the first nine months of the year, contributing meaningfully to our year-to-date outperformance. On a trailing 12-month basis through September, These 12 hotels produced an 8% return on our investment after CapEx, despite COVID impact on first quarter numbers and with meaningful upside remaining as assets continue to ramp and markets improve. A third of these hotels continue to produce yields in excess of 10%. Higher interest rates and disruption broadly in debt markets continue to impact the transaction market. We expect total transaction volume to be somewhat muted between now and the end of the year, that we continue to underwrite deals and engage with potential sellers. Given our outperformance since the onset of the pandemic, the strength and flexibility of our balance sheet, and the additional borrowing capacity under our amended credit facility, we are incredibly well positioned as assets come to market and in conversations with ownership groups about potential off-market deals. With just 3.3 times net debt to EBITDA, extended and staggered maturities, relatively young portfolio and over 700 million dollars in total liquidity we are able to be both patient and flexible as we work to capitalize on dislocations in the market we have been and will continue to be highly selective and intentional in the build out of our portfolio pursuing assets that are additive to those that we currently own where we can achieve attractive pricing Future acquisitions will be consistent with our strategy of investing in high-quality rooms-focused hotels located in strong REVPAR markets with attractive cost structures and meaningful growth potential. Recent market volatility has also provided us with the opportunity to purchase our own shares at a meaningful discount to their intrinsic value. Through October, we had purchased just under 200,000 shares at a weighted average market purchase price of approximately $14.21 per share. for an aggregate purchase price of approximately $2.7 million. Shares were purchased under a written trading plan as part of our share repurchase program. As of October 31st, 2022, we had approximately $342 million remaining under this program. We will continue to be opportunistic buying shares where we see market dislocations create opportunity for value creation. We have also let our peers impose pandemic dividend payments Supported by strong operating fundamentals in August, our board of directors approved an increase in our regular monthly cash distribution from 5 cents to 7 cents per common share, beginning with our September payment. We were able to pay dividends of 17 cents per share during the third quarter for a total of approximately $39 million. Subsequent to the quarter end, our board approved an additional increase in our monthly distribution from 7 to 8 cents per common share. beginning with our November distribution. Based on our closing price on Friday, November 4th, the annualized distribution of 96 cents per common share represents an annual yield of approximately 5.9%. Together with our board, we assess our payout monthly in the context of the current operating environment, our expectations for the future, and other investment opportunities to ensure that we are allocating capital to drive the strongest total returns for our shareholders. While we are cognizant of potential headwinds as the Fed takes action to mitigate inflationary pressures, we remain confident in the resiliency of travel and our ability to drive strong results and maximize shareholder value in any macroeconomic environment. With nearly every operating metric exceeding pre-pandemic levels, additional upside remaining in business travel, new supply at historically low levels, recent acquisitions adding to the strength of our existing portfolio, and a strong balance sheet with significant liquidity, we are incredibly optimistic about the future of our business. It is now my pleasure to turn the call over to Liz for additional detail on our balance sheet, operations, and financial performance during the quarter.