Apple Hospitality REIT, Inc.

Apple Hospitality REIT's second quarter 2024 earnings call. Today's call will be based on the earnings release in 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 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-GAAP measures of performance will be discussed during this call. Reconciliations of those measures to GAAP measures and definitions of certain terms 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 applehospitalityreach.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 2024 and an operational outlook for the remainder of the year. 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 for our second quarter earnings call. As we move into the back half of 2024, the fundamentals of our business remain strong. The rate of new supply growth in our markets has muted relative to historical levels, allowing us to benefit more fully than we have in past cycles from incremental demand growth. We were able to grow comparable hotels occupancy more than 2% year-over-year during the quarter and achieved overall portfolio occupancy of 80%. While we believe that our greatest opportunity for growth will come as a result of the steady improvement we are seeing in midweek business travel demand, We were able to grow occupancy on both weekdays and weekends during the quarter, demonstrating the resilience of leisure travel demand and the upside we continue to realize as corporate, small, and medium-sized business travel normalizes. Comparable hotels' REBPAR for the quarter grew 2.5%, with ADR up slightly year over year. Our revenue and asset management teams, together with our third-party operators, are intently focused on maximizing the profitability of our assets. and optimizing their performance within their respective markets. Expense growth is moderating, supporting strong bottom-line performance for our portfolio. For the quarter, we achieved a comparable hotels adjusted hotel EBITDA margin of 39%, a year-over-year decline of 50 basis points. Second quarter adjusted EBITDA RE was $141 million, and modified funds from operations was $121 million. both up 9% as compared to the second quarter of 2023. Our portfolio continued to perform ahead of pre-pandemic levels with Comparable Hotels RevPar for the quarter up 11% and Comparable Hotels Adjusted Hotel EBITDA up 12% as compared to the second quarter of 2019. Supported by our strong operating performance, we continue to provide investors with an attractive dividend yield. Modified funds from operations for the second quarter was 50 cents per share, up 2% to the second quarter of 2023. During the quarter, we paid distributions totaling 24 cents per common share. Based on Friday's closing stock price, our annualized regular monthly cash distribution of 96 cents per share represents an annual yield of approximately 6.6%. 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. Our transaction activity has further enhanced our already well-positioned portfolio, creating increased exposure to high growth markets, lifting overall portfolio performance, and driving incremental profitability. Recent acquisitions complement our existing portfolio and reflect our proven investment strategy. The seven hotels we acquired since June of last year, together with the parking garage adjacent to our downtown Salt Lake City hotels and excluding the recently opened Embassy Suites in Madison, are yielding approximately 9% after capital improvements on a trailing 12-month unlevered basis with meaningful upside from projected market growth and operational improvements. The Embassy Suites by Hilton in downtown Madison, Wisconsin, which we acquired during the quarter upon completion of construction, is ramping in line with our expectations. Through our long-standing relationship with the developer, we secured a fixed-price takeout contract prior to the start of construction, which enabled us to acquire the asset at an attractive price despite rising construction costs over the course of development. We continue to feel good about the overall strength of the Madison market and the location and positioning of this hotel. We have one additional hotel under contract for purchase, a model by Hilton, which is under construction in downtown Nashville for approximately $98 million. Similar to the Embassy in Madison, the asset is being developed under a fixed price contract, and we anticipate acquiring the hotel upon completion of construction in late 2025. We continually evaluate acquisition opportunities relative to returns that we can achieve through the purchase of our own shares and work to allocate capital in ways that maximize total returns for our shareholders. During the quarter and the month of July, with the recent pullback in our stock price, we repurchased approximately 1.6 million shares at a weighted average market purchase price of $14.29 per share for an aggregate purchase price of approximately $23 million. We are disciplined in our approach to capital allocation, seeking opportunities where we believe we can achieve the most desirable results for our shareholders given market conditions. Our recent activity highlights the strength and flexibility provided by our balance sheet and our ability to opportunistically allocate capital in the current environment. We remain focused on maximizing long-term value for our shareholders and continue to be active underwriting additional opportunities that align with our investment strategy where we believe we can achieve desirable investment returns. We also continually monitor the performance of our existing hotels and work to strategically dispose of select assets to optimize our portfolio concentration within markets we believe to have higher growth potential, manage our long-term CapEx needs, and maximize returns on individual assets. Since the beginning of 2024, we have sold three hotels for a combined gross sales price of approximately $41 million, resulting in a gain on sale of approximately $18 million, including the 82-room Spring Hill Suites by Marriott Greensboro, which we sold during the second quarter for a gross sales price of approximately $7 million. Since the onset of the pandemic, we have completed approximately $294 million in hotel sales and have invested a billion dollars 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, grown the size of our platform, and positioned us to continue to benefit from near-term economic and demographic trends. During the first six months of the year, we also invested approximately $33 million in capital expenditures, and we expect to spend between $75 and $85 million during 2024, with major renovations at approximately 20 of our hotels. These reinvestments in our portfolio are a key component of our overall strategy to ensure that our hotels remain competitive in their respective markets to further drive EBITDA growth. The fundamentals of our business remain favorable, with continued strength in demand and limited news supply. At the end of the second quarter, approximately 55% of our hotels did not have any new upper upscale, upscale, or upper mid-scale product under construction within a five-mile radius, providing us with the ability to meaningfully benefit from incremental demand and improve the overall risk profile of our portfolio by both reducing potential downside and enhancing the upside impact from variability in lodging demand. We remain focused and disciplined in the execution of our investment strategy, which has proven resilient across economic cycles. We are confident that with our portfolio of high-quality rooms-focused hotels, broadly diversified across markets and demand generators, the strength of our brands and effectiveness of our management companies, the stability and flexibility provided by our balance sheet, and the depth and experience of our corporate team, we are exceptionally well-positioned for the future. It is now my pleasure to turn the call over to Liz for additional details on our balance sheet, financial performance during the quarter, and annual guidance.

Thank you, Justin, and good morning. We are pleased to report another strong quarter for our portfolio of hotels. Comparable hotels total revenue was $387 million for the second quarter, 2024, and $718 million year-to-date through June, up 3% and 2% as compared to the same periods of 2023. With continued strength in leisure demand and additional recovery in business demand, second quarter comparable hotels REVPAR was $130, up 2.5 percent. ADR was $163, up slightly, and occupancy was 80 percent, up 2 percent as compared to the second quarter 2023. A strong second quarter brought year-to-date through June comparable hotels rev par to $121, up more than 1%, occupancy to 76%, up more than 1%, and ADR to $159, essentially flat to the same period of 2023. Because of calendar shifts with the Easter holiday, April was our strongest month during the quarter, with year-over-year comparable hotels rev par growth of nearly 5%. The shift of the Juneteenth holiday to midweek this year, as well as having five Sundays during the month, impacted performance for June, with year-over-year REVPAR growth of just under 1%. With a challenging start to the month with the Fourth of July holiday, preliminary results for July show essentially flat occupancy year-over-year, with continued pressure on ADR resulting in modest declines in REVPAR. Looking at day-over-day trends, Leisure travel continues to be resilient. Weekend occupancies were up 2.3% during the second quarter as compared to the same period last year. We also saw steady improvement in weekday occupancies with growth of 2.3% during the second quarter as compared to the same period of 2023. While we have been pleased to see steady improvement in overall demand, Leisure demand, which has produced the strongest rate growth post-pandemic, showed signs of increased rate sensitivity during the quarter. And midweek demand came at lower absolute rates than those achieved on weekends, with the combined effect weighing on our overall ADR growth for the quarter. Weekend ADR was up 1.1% in April, but down 1.9% and 2.3% in May and June, respectively. Weekday ADR was up 1.1% in April, and up slightly year over year in May and June. Our strongest rate growth came on Monday nights, followed by Tuesdays and Wednesdays, where we achieved 86% occupancy during the quarter. Weekend ADR was $170, and weekday ADR was $156 for the quarter. We believe that future growth will come largely from continued improvement in midweek occupancy, which will support more significant midweek rate growth both of which have lagged the leisure recovery post-pandemic. Same store room-night channel mix quarter over quarter remained relatively stable, with brand.com bookings at 40%, OTA bookings and property direct at 13% and 24% respectively, and GDS bookings representing 17% of our mix. Second quarter same store segmentation was largely consistent with the second quarter of 2023. Bar remained strong at 32%, Other discounts represented 29% of our occupancy mix. Group was 15%, and the negotiated segment represented 18% of our mix. Turning to expenses, comparable hotels' total hotel expenses increased year-over-year by 3.5% for the second quarter, decelerating from year-over-year total hotel expense growth of 4.2% in the first quarter. The deceleration was largely driven by 100 basis point improvement in year-over-year growth in operating expenses. Total expense growth on a per-occupied room basis also declined from 3.1% in the first quarter to 1.2% in the second quarter. A significant driver of operating expenses, total payroll per occupied room for our same-store hotels was $38 for the quarter, up 3.4% to the second quarter 2023, but with a rate of growth decelerating as compared to the 5.1% growth in the first quarter of 2024. We anticipate that near-term growth in payroll costs per occupied room will be more in line with the modest increases we saw during the second quarter, with labor market stabilizing and overall inflation numbers coming down. Contract labor remained relatively stable during the quarter at 8.6% of total wages and was down 230 basis points or 17% versus the same period in 2023. With lower turnover and less reliance on contract labor, we are better positioned to drive incremental property level productivity. We will continue to work with our management companies to enhance the efficiency of our operations over time. Also contributing to total hotel expense growth deceleration Property taxes, insurance, and other expense decreased year-over-year by nearly 1%, with a favorable property insurance renewal April 1st and a decline in property taxes year-over-year due to successful appeals. As a result, we achieved comparable hotels adjusted hotel EBITDA of approximately $152 million for the quarter and $263 million year-to-date. up 1.5% and down less than 1% as compared to the same periods of 2023. With REVPAR growth coming through occupancy over rate growth, we are especially pleased with our comparable hotels adjusted hotel EBITDA margin of 39.1% for the quarter and 36.6% year to date, down only 50 basis points and 110 basis points to the same periods of 2023. Adjusted EBITDA RE was $141 million for the quarter and $242 million year to date, up 9% and 8% to the same periods of 2023, respectively. MFFO for the quarter was $121 million and year to date was $205 million, up 9% and 7.5% as compared to the same periods of 2023, respectively. Looking at our balance sheet, as of June 30, 2024, we had approximately $1.5 billion of total outstanding debt net of cash, approximately 3.4 times our trailing 12-month EBITDA, with a weighted average interest rate of 4.8%. Total outstanding debt, excluding unamortized debt issuance costs and fair value adjustments, was comprised of approximately $278 million in property-level debt secured by 15 hotels and approximately $1.3 billion outstanding on our unsecured credit facilities. At quarter end, our weighted average debt maturities were 3.1 years. We had cash on hand of approximately $7 million. Availability under our revolving credit facility of approximately $481 million, and approximately 71% of our total debt outstanding was fixed or hedged. In July, we amended our unsecured $85 million term loan facility, which increased the facility to $130 million, with the additional $45 million funded at closing. Extended the maturity date to July 25, 2026, and set the interest rate margin spread to a range of 135 to 220 basis points, depending on the company's leverage ratio. Subject to certain conditions, the maturity date of the $130 million term loan facility may be extended by the company for one year. The incremental funding was used to pay down the balance on a revolving credit facility, resulting in an increase in capacity on our line of credit. We have a mortgage loan of approximately $20 million that matures later this year that we intend to pay off using funds from operations or borrowings under our revolving credit facility. With the pullback in our stock price during the quarter, we repurchased approximately 1.1 million common shares at a weighted average market purchase price of approximately $14.35 per share for an aggregate purchase price of approximately $15.5 million. In July, we repurchased an additional 500,000 shares. bringing the total shares purchased year-to-date through July to approximately 1.6 million shares at a weighted average market purchase price of approximately $14.29 per share for an aggregate purchase price of approximately $23 million. As of the end of July, we had approximately $312 million remaining under our share repurchase program. Turning to our updated full-year outlook for 2024, as compared to the previously provided guidance, The company is, at the midpoint, decreasing net income by $6 million, decreasing comparable hotels rep part change by 150 basis points, increasing comparable hotels adjusted hotel EBITDA margin by 10 basis points, and decreasing adjusted EBITDA RE by $7 million. For the full year 2024, we anticipate the results will be in the following ranges, net income of $202 to $225 million, Comparable Hotels RevPar change of 0.5% to 2.5%. Comparable Hotels adjusted hotel EBITDA margin of 35% to 35.8%. And adjusted EBITDA RE between $456 million and $474 million. 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. While operational results for the first quarter 2024 were in line with our expectations at the previously provided midpoint, and demand continued to improve during the second quarter, rate growth during the second quarter was modest, and the updated outlook takes into account increased price sensitivity in the leisure consumer and the impact of the increase in business transient as a percent of mix. which is currently coming at lower rates than those we've seen from leisure consumers following the pandemic. The high end of the full year range reflects relatively steady macroeconomic conditions with continued strength in leisure demand and improvement in business transient, with greater ADR growth as we move past our strongest leisure-oriented months. The low end of the range reflects continued pressure on rate growth with a slight pullback in leisure demand. Despite the 150 basis point shift and REVPAR growth guidance primarily due to lower rate growth, with strong bottom line performance year to date, the updated range assumes better than originally anticipated variable and fixed expense growth, resulting in just a 1% decline in comparable hotels adjusted EBITDA. Despite some pullback in our expectations for the full year, we are confident we are well positioned for continued strong operating fundamentals and bottom line performance. 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 margins. Modified fund from operations are up on a per share basis year over year, and our balance sheet provides us with meaningful optionality to drive incremental value. Our differentiated strategy has proven resilient through economic cycles, enabling us to preserve equity value in challenging environments and be uniquely positioned to improve value through opportunistic transactions when market conditions are more constructive. Our team works diligently to maximize the performance of our existing portfolio while staying ready to take advantage of market shifts and opportunities to further enhance shareholder returns. We would now be happy to answer any questions that you have for us this morning.