This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Today's call will be based on the earnings release and Form 10-K, 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 in our 2023 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-GAP measures of performance will be discussed during this call. Reconciliations of those measures to GAP 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 applehospitalityread.com. This morning, Justin Knight, our Chief Executive Officer, and Liz Parkins, our Chief Financial Officer, will provide an overview of our results for the fourth quarter and full year 2023 and an operational outlook for 2024. 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.
spk08: Good morning, and thank you for joining us today. We are pleased to report another year of strong operating performance, portfolio growth, and total returns for our shareholders. During the year, operating fundamentals continued to strengthen, and we thoughtfully grew our portfolio with the acquisition of six hotels, enhanced the quality of our hotels through capital improvement projects, provided our shareholders with attractive distributions, and positioned our balance sheet for continued growth by raising net proceeds of $216 million through our ATM program. Our accomplishments in 2023 and our outperformance since the onset of the pandemic are a testament to the merits of our strategy of owning a diversified portfolio of rooms-focused hotels with broad consumer appeal while maintaining financial flexibility with low leverage and speak to the strength of the brands and management companies we work with and the diligent efforts of our experienced team. With resilient leisure demand and steady improvements in business travel, we are pleased to report comparable hotels' rep park growth of more than 2% for the fourth quarter and 7% for the full year 2023 as compared to the same periods of 2022, primarily driven by increases in comparable hotels' ADR of nearly 3% and 5% respectively. Comparable hotels' occupancy for the fourth quarter 2023 was essentially flat to the fourth quarter of 2022 and for the year was up approximately 2% as compared to 2022. Comparable hotels' adjusted hotel EBITDA was $104 million for the quarter and $500 million for the year, down 2% and up 5% respectively as compared to the same periods of 2022. Our portfolio continues to perform ahead of pre-pandemic levels with comparable hotels' rep park up approximately 8% relative to both the fourth quarter and full year 2019 despite continued opportunity to rebuild occupancy especially midweek. Comparable hotels' adjusted hotel EBITDA was up approximately 6% and 7% to the fourth quarter and full year 2019 respectively. Based on preliminary results, January comparable hotels' occupancy increased just over 1% year over year and ADR grew over 2%. Overall travel trends remained favorable with operating results continuing to be bolstered by limited near-term supply growth. We anticipate that we will be in a position to more meaningfully grow rate as we move through the first quarter and into seasonally stronger occupancy months. Our revenue and asset management teams continue to leverage our scale ownership of rooms-focused hotels and our unparalleled access to performance data to benchmark and share best practices across our third-party management companies to drive strong margins despite continued inflationary and wage pressures. We are fortunate to be partnered with some of the best operators in the industry who monitor real-time performance and focus on-site efforts to maximize profitability of our hotels without sacrificing service, cleanliness, maintenance, or overall guest satisfaction. Through disciplined cost controls, we achieved comparable hotels' adjusted hotel EBITDA margin of .9% for the quarter despite lower rep par growth and .4% for the full year. Supported by our strong operating performance, we continue to provide investors with strong dividend yield. We paid distribution totalling $0.24 per common share during the fourth quarter and $1.04 per common share during the year for a total of approximately $238 million. Based on Wednesday's closing price, our annualized regular monthly cash distribution of $0.96 per share represents an annual yield of approximately 6%. Together with our board of directors, we will continue to monitor our distribution rate and timing relative to the performance of our hotels and other potential uses of capital. During the fourth quarter, we sold approximately 12.8 million shares under our ATM program at a weighted average market sales price for approximately $17.05 per common share and received net proceeds of approximately $260 million. The $17.05 per share represents a 12.6 times multiple on 2023 EBITDA, just under a turn and a half spread to the combined multiple for the five hotels we acquired in the fourth quarter. The proceeds were used to fund acquisitions and to reset our balance sheet, position us to be active in the market, and to continue to pursue our creative opportunities. In 2023, we acquired a total of six hotels and an associated parking deck for a total of approximately $290 million. As previously announced, in June we acquired the Courtyard Cleveland University Circle for $31 million. In October, we acquired the Courtyard and Hyatt House Salt Lake City Downtown together with a corresponding parking garage for a combined total of $91.5 million. We also acquired the residence in Seattle South Brenton in October for $55.5 million. In November, we purchased the Embassy Suite South Jordan Salt Lake City for a total of approximately $37 million. And in December, we acquired the Spring Hill Suites Las Vegas Convention Center for $75 million. We are pleased to expand and enhance our presence within these business-friendly markets that have seen significant economic growth and positive demographic trends in recent years. These markets are home to a wide variety of business, group, and leisure demand generators from healthcare, universities, technology, and manufacturing to outdoor recreation, professional sporting events, and world-renowned entertainment. The hotels complement our existing portfolio and reflect our proven investment strategy. The combined purchase price for the recently acquired hotels represents a blended cap rate of just over 8% on 2023 year-end financials after an industry standard 4% FF&E reserve, and an 11.3 times multiple on 2023 combined hotel EBITDA. We believe each of these assets is well positioned within its respective market and has embedded upside that will enable it to be a meaningful contributor to our overall portfolio performance. We continue to have two hotels under contract for purchase that are currently under development, an Embassy Suite in downtown Madison, Wisconsin for approximately $79 million and a Motto in downtown Nashville for approximately $98 million. We anticipate acquiring the Madison Embassy in mid-2024 and the Nashville Motto in the next few years. The city of Madison has positioned us to be active in a market with limited competition where we can secure high quality assets at pricing that meets our internal underwriting criteria. Consistent with the strategy we articulated on past calls, we were able to fund a portion of our recent activity utilizing our ATM with equity issued at a spread to specific targeted acquisitions, positioning us to generate incremental value for our existing shareholders. However, when we set our balance sheet, we are exceptionally well positioned to pursue additional and creative opportunities and we continue to actively underwrite a number of potential acquisitions that can further enhance our unique and scalable platform and contribute to long-term shareholder returns. As has been the case historically, our acquisitions focus continues to be on high quality branded rooms focused hotels in urban high density suburban and developing markets supported by a broad variety of business and leisure demand drivers. Through our scale ownership of these hotels broadly diversified across markets and demand generators, we have unparalleled access to performance market and brand data which we believe enhances the underlying strength of our due diligence efforts. Combined with our tremendous transaction experience, our available balance sheet capacity, and our deep industry relationships, we believe we continue to be well positioned relative to competitors in the current market environment and are optimistic that we will continue to be net acquirers in the coming month. We also actively seek opportunities to refine our portfolio and optimize our capital reinvestment program by disposing of older assets in lower growth markets. Earlier this month, we sold a Hampton Inn and a Homewood Suites located in Rogers, Arkansas for a combined total of $33.5 million. We anticipate a portion of the proceeds from the sale of these two hotels will be used to complete a 1031 exchange which will result in the deferral of taxable gains of approximately $15 million. The sales price represents an all-in .6% cap rate on 2023 year-end financials assuming $5.4 million or approximately $22,000 per key in related capital improvements. Since the onset of the pandemic, we have strategically transacted in ways that have refined and grown our portfolio. We have completed approximately $287 million in hotel sales and have invested approximately $848 million in new acquisitions while maintaining the strength of our balance sheet. These transactions have lowered the average age of our portfolio, increased revenue per available room, and margins helped to manage near-term capex needs and positioned us to continue to benefit from near-term economic and demographic trends. We also continue to reinvest in our existing portfolio to ensure our hotels remain competitive in their respective markets and are positioned to demand premium rates. Over the past year, we invested approximately $77 million in capital expenditures and in 2024 we expect to spend between $75 and $85 million with major renovations at approximately 20 of our hotels. As we look ahead, the fundamentals of our business remain fearful with continued strength in demand and limited new supply. As of year-end, over half of our hotels did not have any new upper upscale or upper midscale product under construction within a five-mile radius, providing us with the ability to meaningfully benefit from incremental demand and positively impacting the overall risk profile of our portfolio by both reducing potential downside and enhancing the upside impact from variability in lodging demand. Over the past several years, we have demonstrated the value of a scaled investment in a broadly diversified portfolio of rooms-focused hotels with low leverage. We are confident that this same strategy will continue to enable us to drive strong performance for shareholders in the coming year and over time. Our hotels are franchised with industry-leading brands managed by some of the best management companies in the industry and provide a strong value proposition with broad consumer appeal. Underlying the strength of our portfolio is a consistent reinvestment and effective portfolio management strategy and a dedicated corporate team with extensive industry experience. As we move further into 2024, we are optimistic about the trajectory of our industry and our portfolio specifically. It is now my pleasure to turn the call over to Liz for additional detail on our balance sheet, financial performance during the quarter, and the annual guidance.
spk06: Thank you, Justin, and good morning. We are pleased to report another strong quarter for our portfolio of hotels. Comparable hotels' total revenue was $315 million for the quarter and $1.4 billion for the year, up 3% and 7% as compared to the same periods of 2022 respectively. Continued strength and leisure demand and recovery and business travel during the quarter enabled us to achieve comparable hotels' rep par of $105 and $116, up 2% and 7%, as compared to the same periods of 2022, with ADR of $151 and $157, up 3% and 5%, with occupancy of 70% and 74%, essentially flat and up 2% to fourth quarter and full year 2022 respectively. Looking day over day, leisure travel was resilient during the quarter, with weekend occupancy stable compared to the fourth quarter of 2022, with continued improvement in business travel. We anticipate leisure demand will remain stable through 2024 and that most of our growth and occupancy will come from continued improvement in weekday demand, which while elevated relative to the prior year, remains meaningfully below pre-pandemic levels. Same store room night channel mix remains relatively stable in the quarter, with brand.com bookings at 40%, OTA bookings at 13%, property direct at 25%, and GDS bookings at 16%. Our channel mix continues to power of our brands and the strength of our property direct sales efforts that our properties maintain in the field. Fourth quarter same store segmentation was largely consistent with the third quarter. Bar remained strong at 33%, other discounts remained seasonally elevated at 30%, group continued to make up 14% of our mix, almost 200 basis points higher than the same period in 2019, and the negotiated segment was 17% of our mix, in line with the same period in 2022, but still lower than 2019, which we believe represents opportunity for continued upside. Turning to expenses, total payroll per occupied room for our same store hotels was under $41 for the quarter, up slightly to the third quarter 2023, and up 7% to the fourth quarter 2022. Contract labor remained stable at roughly 10% of wages during the quarter, a 13% improvement compared to the fourth quarter of 2022. While we expect year over year growth in total payroll to moderate in 2024, given more stabilized operations in 2023, we anticipate that higher wages for full and part-time employees and higher utilization of contract labor will continue to result in elevated cost per occupied room relative to pre-pandemic levels. We achieved comparable hotels adjusted Hotel Ibiza of approximately $104 million during the quarter and $500 million for the full year, down 2% and up 5% to the same periods of 2022 respectively. Comparable hotels adjusted Hotel Ibiza margin was .9% for the quarter and .4% for the year, down 160 basis points and 90 basis points to the same periods of 2022 respectively. As we have stated on past calls, our ability to maintain and potentially grow margin will be largely conditioned on our ability to grow rates. Though with more manageable inflation numbers and hotels appropriately staffed, we expect near-term growth and operating expenses to moderate relative to the significant increases we saw over the past year. Adjusted Ibiza RE for the fourth quarter was $91 million and for the year was $437 million, up 1% and 6% to the same periods of 2022 respectively. MSFO for the quarter was $72 million and for the year was $367 million, down 3% and up 4% as compared to the same period of 2022 respectively. Looking at our balance sheet, as of December 31, 2023, we had approximately $1.4 billion in total outstanding debt net of cash, approximately 3.1 times our trailing 12-month EBITDA with a weighted average interest rate of 4.3%. Total outstanding debt excluding unamortized debt issuance costs and fair value adjustments was comprised of approximately $283 million in property-level debt secured by 15 hotels and approximately $1.1 billion outstanding on our unsecured credit facility. At year-end, our weighted average debt maturities were just under four years. We had cash on hand of approximately $10 million and availability under our revolving credit facility of approximately $650 million and approximately 89% of our total debt outstanding was fixed or hedged. As of December 31, we had approximately $105 million of debt maturing in the next 12 months, consisting of $185 million term loans and a mortgage loan of approximately $20 million. We plan to pay for these upcoming debt maturities using funds from operations, borrowing under our revolving credit facility and or new financing. Acquisitions completed during the quarter were funded using cash on hand, availability under a revolving credit facility, and net proceeds from the sale of shares under our ATM program. As Justin highlighted in his remarks, during the quarter, we sold approximately 12.8 million shares under our ATM program at a weighted average sales price of approximately $17.05 per share and received aggregate gross proceeds of $219 million and proceeds net of offering costs of approximately $216 million. As of year-end, we had approximately $5 million remaining under our ATM program and are in process with our board and agents to reauthorize and extend our ATM program. We anticipate public filings related to the program to be filed later today. With this successful capital raise during the quarter, we were able to grow our portfolio with the acquisition of five attractive, high-quality hotels while maintaining full availability on our revolving credit facility to pursue additional accretive opportunities. Turning to our outlook for 2024, provided in yesterday's press release, for the full year, we expect net income to be between $191 million and $217 million. Comparable hotels rep par change to be between 2% and 4%. Comparable hotels adjusted hotel EBITDA margin to be between .6% and 35.6%. And adjusted EBITDA RE to be between $452 million and $474 million. While our asset management and hotel teams are working diligently to mitigate cost we have assumed for purposes of guidance that hotel operating costs will increase by approximately 5% at the midpoint. This outlook is based on our current view and does not take into account any unanticipated developments in our business or changes in the operating environment. Nor does it take into account any unannounced hotel acquisitions or dispositions. The high end of our full year range reflects relatively steady macroeconomic conditions through 2024 with continued strength in leisure demand and improvement in business transient. The low end of our range reflects more modest lodging demand growth with a slight pullback in leisure demand offset by continued improvement in business transient and group. It should be noted that because of calendar shifts with the Easter holiday and more challenging year over year comparisons driven by the 2023 Super Bowl in Phoenix where we have meaningful portfolio concentration we anticipate first quarter performance for our portfolio to be below the low end of our range with performance improving as we move into higher occupancy months in the second and third quarters. As we begin 2024 we are pleased with our performance and confident we are well positioned for the year. Our recent acquisitions activity has enabled us to drive incremental value for shareholders despite challenges in the operating environment which continue to put pressure on margin. Implied modified funds from operations are up on a per share basis year over year at the midpoint and higher of our guidance range. Our differentiated strategy has proven resilient through economic cycles. Our balance sheet is strong with ample liquidity which we will continue to use opportunistically to pursue a creative transaction. Our assets are in good condition with consistent capital investments ensuring that we maintain a competitive advantage over other product in our market and we believe the fundamentals of our business are sound with favorable supply dynamics allowing us to benefit from incremental demand. Our team will continue to work to maximize the performance of our existing assets and pursue external growth where we can achieve favorable pricing. That concludes our prepared remarks. Justin and I will now be happy to answer any questions that you have for us this morning.
spk04: Thank you. If you'd like to ask a question please press star one under telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. Our first question comes from the line of Michael Belisario with Baird. Please proceed with your question.
spk10: Thanks. Good morning everyone.
spk08: Good morning.
spk10: Two questions for you but first on capital allocation. I know you mentioned it briefly in your prepared remarks but can you maybe big picture reminders of your math on kind of how and when you think about equity issuance and then also your targeted returns when underwriting acquisitions and then sort of separately on the same topic just regarding disposition. Should we view those as one-off sales or do you have more older in need of CapEx hotels in the portfolio that you might look to sell at least over the near term? Thanks.
spk08: So to answer your first question when looking to issue equity to fund acquisitions we're mindful of the spread and look to issue equity only when we have confidence that we can drive incremental value for our existing shareholders. I highlighted in my prepared remarks the spread investment specific to all of the assets that we acquired in the fourth quarter but we've also released specifics to the Vegas asset which if you remember was acquired at a 10-7 multiple on trailing eva dot through November of last year. That hotel has continued to do exceptionally well and as is the case with the majority of the assets that we acquired our expectation is that they will continue to produce growth rates in excess of our portfolio average. Importantly the acquisitions when we look at acquisitions from the beginning of the pandemic we've been looking to continue to position the portfolio for our performance and making adjustments on and this will feed into a response for your second question but on average looking at all of our acquisitions activity from the beginning of the pandemic on average the hotels that we required were 10 years younger produced $21 higher red part and drove 5 higher margin so when you look at the evolution of our portfolio over time we're continuing to keep it fresh through acquisitions and then that supplemented through dispositions activity. The two hotels that we sold were on average just over 20 years old and both in need of significant and a franchise renovations which is what drove the higher per key renovation dollars that I quoted in my prepared remarks. In terms of quantity of assets that fit that category within our portfolio we think there's a manageable amount and it's our expectation that we'll continue to be opportunistic. We're continually exploring market conditions. Conditions are such today that there's a reasonable amount of competition that we can generate around some of the smaller lower priced assets within our portfolio and we'll continue to transact where that makes sense. On the two assets we drove you know meaningful gains over our whole period. The hotels have done incredibly well but when we looked at the market and our positioning relative to significant new supply that was coming online we felt we would you know be best served by taking our chips off the table and reinvesting elsewhere and we'll continue to do that proactively where we see opportunities within our portfolio.
spk10: Got it that's very helpful and then just one quick follow-up just on the guidance thing about the high end of RevPAR 4 percent maybe what needs to happen what do you need to see in terms of pickup is it really just midweek business travel trying to understand what needs to happen to achieve that high end. Thank you.
spk06: To achieve the high end we'll need to see and really throughout the guidance range we're assuming continued recovery in BT but you know I guess more strength and continued opportunity maybe on the leisure side. I think in general our assumption is BT will grow and leisure will remain stable on you know on the high end. I think you would not have as much potential pullback in leisure you know making up you know continued strength there and some some BT recovery.
spk04: Thank you. Our next question comes from the line of Austin Horshmet with Key Bank Capital Markets. Please proceed with your question.
spk09: Thanks and good morning everybody. Justin you highlighted an ability to push rate more meaningfully into kind of the seasonally stronger months and I'm just curious you know how much pricing power do you think you have today? You know what segments going to be the primary driver sounds like midweek maybe BT but if you could confirm that that'd be helpful and then how does occupancy you know play into you know managing kind of the rate versus occupancy you know as you see things strengthen into the middle early to middle part of the year?
spk08: So starting with the last part of your question we see rate tied very closely to occupancy so as we compress the hotel as we fill the hotel we're able to more aggressively price incremental rooms and our teams strategically work to fill hotels with base business such that they can they can meaningfully drive rate as we continue to fill the hotels. In terms of where we think the opportunity exists I guess to the greatest extent certainly you highlighted the opportunity we have midweek and when we look at where we're running relative to pre-pandemic levels from an occupancy standpoint we're pleased with the progress we made over the past year but certainly believe we have continued opportunity both from occupancy standpoint and rate standpoint with business transient group and you know at midweek other midweek segments like government. I think we're pleased with how we progress to the fourth quarter which is one of our weaker occupancy quarters and yet we were still able to to move rate and even into January I think we highlighted which is also one of our weaker occupancy months. We were able to move rate in January as we move into February we'll have more challenging comps just given our concentration in Phoenix and the Super Bowl having been in Phoenix last year. Certainly we're happy with the performance of Vegas but we only have one asset in that market and so there will be some trade-off as we look at February but as we move into March excluding the calendar shift related to the Easter holiday and then move specifically into the second and third quarter we're optimistic based on how business is shaping up. Negotiated rates have moved and I think as we continue to build occupancy we'll be able to yield out some of our lower rated negotiated accounts and then we're pleased with movement that we've seen in government per diems and within our group segment as well and believe that as we progress through the year we'll be able to maximize performance in those segments to drive rate more meaningfully.
spk09: So is it fair to say that guidance assumes a 50-50 split between ADR growth and occupancy?
spk06: A little you know at the midpoint probably weighted more heavily to ADR but some occupancy growth. It's really as Justin mentioned to set incremental occupancy and compression midweek that should help us drive rate.
spk09: Understood and then just maybe Liz on expenses what's really holding back from driving agency utilization in a lower seems like job growth has been pretty strong. I know this is an overall industry phenomenon but what do you think you need to see to really see that next leg down in agency utilization?
spk06: That's a really good question. We're you know I think the teams are working really really hard to continue to leverage you know in-house labor where markets allow for. I think that while you know there has been some improvement sort of nationally I think it's really market dependent and there's some markets where we have higher occupancies that have always relied on contract labor and in today's environment you know unfortunately have to rely on even more. So I think you know the efforts that the teams have made to bring you know more labor in-house and to really put themselves in a position where we have flexibility and we're maximizing the use of contract labor where you know if occupancies are seasonally lower we can use less contract labor and we're not having to flex or restrict in-house labor hours. I think we're benefiting it from it standpoint on the culture side but you know I think it's going to be slow and steady. I mean we'd like to see you know more immigration reform. I don't know if we'll see that in the near term but but that would certainly be more helpful and you know I do think that anecdotally you know although it's been slower than we like we continue to hear that availability is easier and easier but it's just you know at a slower pace to normalcy than we might like.
spk09: Great that's all for me. Thanks for the time.
spk08: Absolutely.
spk04: Thank you. Our next question comes from the line of Dory Kestin with Wells Fargo. Please proceed with your question. Thanks. Good morning.
spk02: For the assets that you acquired in 23 what was the difference between the trailing quality of the multiple and what you underwrote for the floor 12?
spk08: We haven't provided that yet. We have provided guidance for the entire portfolio and on average our expectations for the newly acquired assets are at the high end or exceeding the high end of the range that we provided. You know as I highlighted in response to one of the earlier questions we're intentional in targeting hotels that we think will lift the portfolio from a growth standpoint and you know have been on average leaning into markets that have benefited from recent economic and demographic shifts. I think if you look at our activity over the past year we're pleased with how the hotels have done subsequent to our acquisition and certainly optimistic about how they'll perform near term and over the long term for us.
spk02: Okay and then you noted a one and a half turn spread to where you issued equity versus where you acquired in Q4 based on the assets you noted you're underwriting today and where you're trading today. Is that one and a half turn around the same or has it come in?
spk08: So based on where we're trading today I mean certainly that impacts the multiple for the company overall and the assets have on average performed better than they did on a trailing basis so you have kind of some shifts that would impact the math on that. But again when we look at where we issued we were able to lock in pricing at that higher multiple which puts us in a position to drive incremental value through the acquisitions and the fact that they continue to perform incredibly well we think it's advantageous to us.
spk02: No sorry I meant the assets that you're underwriting today if they're- Oh pricing today
spk08: oh sorry a mix so you know when we look at what we've acquired recently we were able in the fourth quarter to take advantage especially on larger assets of the lack of availability of financing which put us in a position to have a meaningful meaningfully competitive advantage for assets that required larger levels of financing. We think that that continues to exist and so we're optimistic about our ability to continue to acquire assets in and around that price range. Certainly pricing varies by asset and we're not at a point in the cycle where there are sufficient transactions to drive kind of a constant market clearing price. Assets are being priced individually and you know I think we'll continue to transact where we see the greatest ability to drive value. I think you can expect on a go-forward basis that from a quality standpoint we would be pursuing assets of similar quality to the extent financing continues to be a challenge for our competitors. You know you can expect us to pursue those assets which you know are most challenging for our competitors to acquire and then to pivot as the market becomes you know more fluid as we move into the year. I think generally speaking expectations are that we will see more transactions in 24 than we did in 23 and certainly when we look at refinancing that are coming due and incremental pressure from the brands around capital improvements that they're adequate catalysts to drive more motivated sellers to market and certainly continues to be significant interest on the buy side.
spk02: Okay and then one last one there is there's a pretty large difference between consensus GNA and what you're guiding for the year. Liz can you give us a little teach-in on how GNA is set at the beginning of the year and then I guess just how like relative share price performance versus guidance changes can shift that as the year goes on.
spk06: Absolutely so at the beginning of the year the way that we've historically approached it you know though because I keep getting this question you know we definitely reevaluate each time we set guidance but we typically set guidance at the target you know target compensation so at the midpoint of compensation and that aligns with the midpoint of guidance. Now because so much of both the executive team and the internal team here's compensation is tied to how our stock performs on a relative and total return basis that can fluctuate throughout the year and so you know depending on how we perform you know we will begin accruing based on how we're performing from a total and relative shareholder return perspective and you know as we rounded out last year and even updated guidance for with the Q3 release we had a run-up at the end of the year which impacted actual for for 2023 and you know resetting it for this year we're at the midpoint and you know it could increase if we perform well and it should align generally speaking with how we're performing operationally as well.
spk04: Okay thank you. Thank you our next question comes from the line of Anthony Powell with Barclays please proceed with your question.
spk07: Hi good morning I guess in terms of fly growth morning have you started to track I guess the mid-scale properties under destruction in the markets I'm asking because there's a lot of energy around a lot of the mid-scale brands that the larger brands have introduced and so I'm curious if you believe those properties may eventually creep up in price and start to compete with your properties.
spk08: We have so our internal modeling allows us to add or subtract different segments and to look at the potential impact of supply in a number of different ways while there has been a significant amount of talk about the potential for mid-scale development when we add mid-scale and look at the potential impact on our portfolio it moves the needle very slightly on the margin but keeps us right at and around 50 percent exposure so slightly higher but still not not meaningfully higher than the larger you know the way we've historically looked at it. We will continue to monitor that and make adjustments to the extent we begin to see more meaningful impact from mid-scale development but to date there's been a lot of talk but very few projects have begun construction at least in the markets where we have ownership.
spk07: Okay and maybe in acquisitions in terms of where you want to buy I mean you bought in a lot of kind of western states with high population growth business friendly areas and you also did some deals in markets like Portland Oregon that were a bit more slower to recover. Looking forward would you do more of those more urban you know property deals that markets that a bit more balanced pricing or are you going to focus mainly on kind of the high growth sunbelt kind of western state that you've been doing so well and recently?
spk08: You know I think you can expect us to to look at all markets and to invest where we think pricing is appropriate to the potential upside. Importantly the Portland Oregon asset was acquired as part of a portfolio with two worth assets and on a combined basis we got comfortable with the growth profile and had done incredibly well on that portfolio transaction overall. Certainly Portland Oregon has been slower to rebound and returns that we've gotten to date on that asset are slightly lower than what we've gotten on average but combined with the two worth assets which have performed at or near the high end of returns that we've gotten for you know all of our acquisitions together we feel really good about that transaction and about our price of entry into that market. As we begin to see more of the urban markets that have been slower to recovery begin to turn a corner I think we will look opportunistically to invest where pricing is appropriate and I think part of the beauty of our model is it's our design and intention to be broadly diversified and so we are taking a broad view underwriting assets in all markets and you know looking for opportunities where pricing we're able to achieve matches the upside potential for the assets within those markets.
spk07: Okay thank you.
spk08: Thank you.
spk04: Thank you our next question comes from the line of Flores Van Dyken with Compass Point please proceed with your question.
spk11: Hey guys thanks for taking my question. Justin maybe can you talk a little bit about the amount of CNBS maturities in the select service segments this year and what kind of opportunities that that could provide to your company?
spk08: You know I certainly we watch that closely we subscribe to a number of lists that provide us with asset level detail on maturing loans and you know I think it's important to note before I fully answer that this is a trend that has happened in the past and I think it's the industry has a tendency to over anticipate the total number of transactions that are driven by it. That said the dynamics are slightly different this time with interest rates being meaningfully higher than where most of these assets were originally financed and we already have experience with maturing loans forcing assets to market in ways that have enabled us to transact at very attractive purchase prices for us. So you know I think as I've highlighted for some time now for the foreseeable future we believe that refinancing and really that the investment required as part of those refinanciens with loan coverage and higher interest rates being primary drivers and then continued pressure from the brands around capital improvements to be meaningful drivers or motivators for potential sellers to bring assets to market and when we think about the need to bridge a bid-ask spread that's existed and suppressed total transaction volume we think that those two things will increasingly be catalysts pushing increased transaction volume and certainly we're optimistic creating you know that those two factors will create meaningfully greater opportunities for us as well.
spk11: And then maybe my thought so by the way in your view of the what's the total volume of the of the maturities in 24 and what percentage you think would would be appropriate for you guys I guess that's that's what I was trying to get at.
spk08: You know historically we haven't given specific targets because assets coming to market can vary in quality and attractiveness to us based on price. I think when we look at total transaction volume over the past couple of years and correlate that with maturing financing we're coming to a point where we should see significant increases in both. You know they are somewhat correlated and you know we see that being a meaningful driver for transactions going forward.
spk11: And maybe my follow-up is on Vegas. I like that transaction. Maybe if you can talk about the rationale for getting into Vegas. There are not many hotel REITs anyway that are active in that market. A lot of obviously casino REITs. But if you could talk a little bit about why you think this is good for Apple and also talk about the opportunity set and how you can expand in that market.
spk08: Absolutely. So Vegas is a market that we've we've liked for some time now. Given that the majority of rooms in Vegas are associated with casinos that there are limited opportunities to invest in rooms focused hotels that fit our overall investment thesis and and you know are a good fit for the profile of our portfolio. We have historically owned assets in Vegas. We owned a full-service Marriott Hotel and a residence in hotel that we sold before the great financial crisis. And so we have a significant amount of experience in market. And Vegas is unique in that it generates its own demand. And that demand takes you know many different forms. We've found that there is significant demand for hotel rooms that are not associated with casinos. And especially given proximity of this hotel which is very similar to the hotels that we owned earlier relative to the convention center. We found we can do incredibly well in the market. We know we're incredibly excited about the Spring Hill Suite specifically. But we highlighted in our press release and haven't had an opportunity necessarily to discuss it. The hotel came with land that enables us to potentially develop up to 500 additional rooms. And we are in the process of currently exploring an opportunity to develop on that site. The purchase price for the site is included in the purchase price that we quoted. And so it's not incremental. And certainly given scarcity of land and available opportunities for development in the heart of Vegas with close proximity to the convention center, we think we have something very special there. I think it's reasonable to expect in the near future that we'll have something to we'll have more to say on that. But certainly excited to be there. Incredibly pleased with how the hotel has performed for us to date. And if you look at projections for the Vegas market, they're incredibly favorable. And I think interestingly, as we look at leisure specifically and how leisure trends have transitions, Vegas is on the winning side of those transitions right now. And certainly benefited early in the year from the Super Bowl. But even outside of the Super Bowl week has continued to produce incredibly strong numbers for us year over year. And I think we feel will be meaningfully additive to the performance of our portfolio overall.
spk11: Thanks, Justin. Thank you.
spk04: Thank you. Our next question comes from the line of Brian Marr with the I'm sorry, the Riley securities. Please proceed with your question.
spk01: Thank you. And good morning. Just two for me. Most of mine have been asked and answered. But when you're looking at trading out of properties, and I know you've discussed trading out of older properties and creating kind of a newer, younger portfolio. But what considerations do you take with respect to kind of business unfriendly states, where taxes or laws might make it increasingly difficult to do business there? Is that working into your consideration as well?
spk08: It's certainly a factor we consider. And interestingly, when we look at at our portfolio, by and large, we're indexed towards business friendly states. You know, I'd say, certainly, we're continually looking at our Chicago presence, which is mostly outside of the city. And sub markets have performed differently from each other. But but overall, that's been an area of the country that's been Florida rebound. You know, outside of that, we're generally happy with our concentration and the performance of our assets overall. And really, what we're looking to optimize around is ability to drive rate relative to potential cost increases. And, you know, I think when we underwrite markets, we underwrite them very differently, depending on the dynamics there, both as we're looking to acquire new hotels, and as we're assessing our existing portfolio for potential dispositions. And I think it's reasonable to expect that we will continue to, you know, explore opportunities and pursue opportunities to shift the mix such that we're moving the needle from an overall performance standpoint. You know, Liz and I both in our prepared remarks highlighted challenges with margins. And, you know, one of the ways, in addition to the efforts of our management companies and our asset management team to address those concerns, one of the ways that we can, you know, more holistically address those concerns is to adjust the mix of our portfolio. And I highlighted in response to one of the earlier questions, we've been purposeful in pursuing assets in markets where we can drive higher margins, which leads to greater profitability for our investors.
spk01: Thanks. That kind of segues well into my second question, which is, you know, you talk a lot about with the, you know, expense pressures and inflationary and wages in particular, but can you maybe, or maybe better for Liz, kind of address, you know, the impact of property tax increases, maybe insurance increases, which we hear about repeatedly, and how much of a pressure is that? And do you think that that will mitigate?
spk06: It's a good question. So, you know, in our guidance for 2024, we have assumed a higher growth rate around property taxes, insurance and other, so more your fixed costs than your variable cost. And, you know, we hope that, you know, we're conservative there, but, you know, we've had a decent run with property taxes, and, you know, I think prudent to assume that we could have some increases there. And the property assurance, the market's still tough, you know, hopefully not as tough as last year. We're hearing more positive things. I think the market isn't quite as challenging as last year, but still a harder market than we'd like. And so we've anticipated, you know, strong double-digit increases on fixed cost expenses in the guidance range, you know, across the scenarios. You know, we are from, you know, a variable cost standpoint, you know, laughing ourselves, 2023, you know, when you look backwards, should be a more stable comp year for 2024. That said, you know, really being able to overcome, you know, continued expense increases, you know, even more moderate will require red part growth.
spk09: Okay, thank you. Thank
spk04: you. Thank you. As a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Tyler Bertore with Oppenheimer and Company. Please proceed with your question.
spk12: Good morning. This is Jonathan. I'm for Tyler. Thanks for taking our questions and thanks for the comments so far. First one for me is just a clarification question on the guidance, probably for Liz, you know, helpful commentary on the high end of the range, but maybe conversely on the low end. Is that assuming flat BT and stable leisure or does that low range still assume some level of recovery in BT?
spk06: I still assume some continued improvement in BT. And that's what we're seeing. I mean, really, you know, even as we crossed over into January, you know, we've seen, and we gave you an indication of where January ended up, which was an improvement from a red part increased perspective to December. You know, where that really came from was, you know, leisure hanging in there, but recovery in midweek occupancies, which we believe are related to business travel recovery. And so I think, you know, throughout the range, we anticipate continued improvement midweek related to business transient.
spk12: Okay, great. Thank you for the detail there. And then switching gears, appreciate all the commentary on acquisitions, Justin, so far. In light of that outlook for this year on picking up acquisition activity, any additional color on how are you thinking about new development acquisition? And I guess with the anticipated acquisition dates of those two developments that are under contract, do more of these deals kind of make sense for you going forward?
spk08: Certainly, we continue to underwrite. And I highlighted in response to one of the earlier questions, we are currently exploring an opportunity to build on the land adjacent to the Vegas asset that we recently acquired. You know, the same challenges that keeping supply growth low for the industry overall impact our underwriting. It's expensive to build hotels. And while we feel we have partnered with developers who have a competitive advantage in that arena and are able to deliver assets at attractive pricing for us, there are very few markets where the underwriting makes sense. We're incredibly optimistic about the two projects that we have currently under contract. They're super well located in markets that we think will be very strong for us long term. And I think it's reasonable to expect that in the near term, we could add one or two more to that group. But it's challenging. And I think in the near term, while we will be active in underwriting both new development deals and existing assets, it's more likely or it's likely that the majority of the transactions we complete over the next year or so will be around existing assets.
spk12: Okay, very helpful. Thank you for all the color that's all for me. Thank you.
spk04: Thank you. Our next question comes from the line of Michael Herring with Green Street. Please proceed with your question.
spk03: Hey, thanks. Good morning. Just a quick one on the Las Vegas acquisition again. Can you just talk about whether or not the union labor agreements in the market are impacting that hotel and how that's impacting your underwriting there and in the market?
spk08: Absolutely. So in any market where there's significant union activity, that impacts pricing for labor within the market. And so I think relative to other markets, labor is more expensive in that market for us. That said, it's a market that also is positioned to drive higher rates. And so when we look at the margin profile, we feel very comfortable with that. We look at costs of labor in markets and union activity in the market is only one factor that impacts those costs. The bigger factor in most markets is availability. And I think we have effectively underwritten assets, looking at all of the assets we've acquired recently in a way that we feel very comfortable with their long-term profitability.
spk03: Thanks. And just one other on, I know you just updated us a little bit on the purchase contracts, but I'm just curious if the supply dynamics in those markets have changed at all or if that's changed at all in the last six months or so or if you're still feeling pretty good about that.
spk08: In our markets overall or in the markets we're recently acquiring?
spk03: Sorry, for the ones that are under contract in Madison and Nashville, if the supply dynamics there have changed at all?
spk08: No, they've remained relatively constant. I think Nashville is a market that's seen significant supply growth. We knew that going in and I think our selection of a site within Nashville reflected our view of potential exposure. That said, supply has been coming down in most markets and we've spent a lot of time talking about Vegas on this call. Vegas is actually a market that has very little supply coming online near term. And across the board we feel very good about supply. When we look at the overall trend for our portfolio, again looking at a five mile radius to the assets that we own, the supply picture has become increasingly favorable over time, not less so. And that's even taken into consideration the new acquisitions which in some cases have been in markets that have performed incredibly well and that as a result more attractive for new development.
spk03: John, that's awful. Thank you.
spk08: Thank you.
spk04: Thank you. That concludes our question and answer session. I'll turn the floor back to Mr. Knight for any final comments.
spk08: Thank you. And thanks for spending time with us this morning. We appreciate your questions and your continued interest in our company. As always, as you have the opportunity to travel, we hope you'll take the opportunity to stay with us in one of our hotels. And we look forward to meeting with many of you here in the near future at conferences or in individual meetings.
spk04: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer