Greetings, and welcome to the Apple Hospitality REIT Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Clarke, Vice President, Investor Relations. Thank you. You may begin.

Thank you, and good morning. We welcome you to Apple Hospitality REIT's second quarter 2019 earnings call on this, the 6th day of August 2019. Today's call will be based on the second quarter 2019 earnings release and Form 10-Q, which were distributed 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. These statements involve known and unknown risks and other factors, which may cause actual results, performance or achievements of Apple Hospitality, to be materially different from future results, performance, or achievements expressed, or implied by such forward-looking statements. Participants should carefully review our financial statements and the notes thereto, as well as the risk factors described in Apple Hospitality's 2018 Form 10-K and other filings with the SEC. Any forward-looking statement that Apple Hospitality makes speaks only as of today, and the company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, certain non-GAAP measures of performance, such as EBITDA, EBITDAre, adjusted EBITDA, adjusted hotel EBITDA, FFO and modified FFO, will be discussed during this call. We encourage participants to review reconciliations of those measures to GAAP measures as included in yesterday's earnings release and other filings with the SEC. For a copy of the earnings release or additional information about the company, please visit applehospitalityreit.com. This morning, Justin Knight, our Chief Executive Officer; Krissy Gathright, our Chief Operating Officer; and Rachael Rothman, our Chief Financial Officer, will provide an overview of our results for the second quarter 2019, as well as an outlook for the sector and for the company. Following the overview, we will open the call for Q&A. At this time, it is my pleasure to turn the call over to our CEO, Justin Knight.

Thank you, Kelly. Good morning. And thank you for joining us today. Before we get into the results for the quarter, I would like to take a moment to introduce everyone to Rachael Rothman, who we welcomed as CFO on July 1st. We are pleased to have us join us. And we know that her extensive experience within the hotel industry and among the financial community will complement our existing team. We're incredibly proud of our entire team and their dedication to our shareholders, the industry, our community, our management teams, the associates at our hotels and our guests. We've built a dynamic organization over the past 20 years, and look forward to what we can achieve in the next 20. During the second quarter of this year, performance across our portfolio of hotels was steady. Through portfolio optimization, we were able to increase actual RevPAR 1.1%, and comparable hotels RevPAR was essentially flat at a nominal decline of 0.1%, better than our expectations communicated on our last call, which contemplated RevPAR at the lower end of the full year outlook. Comparable ADR for the quarter increased 0.5%, offset by 50 basis points of occupancy decline. Adjusted EBITDA was down 3% for the quarter and 2% year-to-date. Comparable hotels' adjusted hotel EBITDA margin was 39.6% for the quarter and 37.9% year-to-date, down 40 basis points and 30 basis points respectively. We're now more than half way through the year, and 2019 is unfolding largely as we have expected. Our relatively young geographically diverse portfolio of branded market leading rooms focused hotels, combined with our in-house expertise, flexible management contract structure and diligent collaboration with our third party managers, have enabled us to help mitigate the impact of the supply growth, as well as comp free level cost pressures in labor,…

Thank you. As Justin mentioned, our comparable RevPAR growth for the quarter and year-to-date was essentially flat. As continued moderate demand growth was balanced as moderate supply increases across our markets. As expected, due to the shift in the 4th of July holiday and an extra Sunday, our monthly RevPAR growth in June was the weakest of the quarter. Conversely, we expect that our July RevPAR growth will be the strongest month of the third quarter. Neutralizing for the calendar impact, June and July combined had a RevPAR growth of around 1%. We are pleased to see that through the last full week of July, our July RevPAR growth exceeded upscale and overall industry results. We're also pleased that our corporate negotiated segment mix increased moderately in the quarter and year-to-date. The favorable calendar shift and easier storm related comparisons, we expect a modest improvement in our third quarter revenue growth from the year-to-date trend. We anticipate that the fourth quarter will be the most challenging with tougher comparisons related to non-repeat business from the Boston area gas explosion and natural disasters in the prior year. As for individual market performance, given our broad geographically diversified portfolio, there were only two markets with an EBITDA contribution above 5% for the quarter, Los Angeles and San Diego. Excluding Santa Clarita, Hampton Inn hotel, which was under renovation during the quarter, both of those markets had approximately 3% RevPAR growth above our portfolio average. The Phoenix market continues to perform well with healthy demand, both business and leisure, exceeding increases in new supply. We're also benefiting from the ramp of the Downtown Hampton Inn suite, which opened in the second quarter of last year. The outlook for this market is expected to be positive for the foreseeable future. Our North Carolina East…

Thank you, Krissy and good morning, everyone. Before we turn to the outlook for 2019 and an update on our balance sheet, I'd like to take a moment to thank Bryan for his mentorship; they are certainly big shoes to fill; and thank Justin, the Board and my colleagues here at Apple Hospitality, for welcoming me to the team. There are many of you on this call today that I've known in various capacities throughout my carrier in lodging or as a sell-side analyst. For those of you that I have yet to meet, I look forward to working with you. As a formal analyst for nearly 20 years, I always wondered as to perception the investment community had of a management team consistent with how they actually work day-to-day. Though it's early in my journey with Apple Hospitality, I'm pleased to say that the special balance of warmth and diligence, positivity and discipline, it always made Apple Hospitality stand-out to me as an analyst is real. It's palpable and is pervasive throughout the organization. I'm excited to be here and it is an honor to be a part of the team. As Justin mentioned, we are narrowing our full year RevPAR comparable hotel's adjusted hotel EBITDA margin percent in comparable hotel EBITDA outlook, while maintaining our midpoint as compared to the beginning of the year. We now we expect our full year 2019 comparable RevPAR growth to be in a range of plus or minus 75 basis points, narrowing of 25 basis points at both the top and the bottom end. Correspondingly, we are narrowing our comparable hotel adjusted EBITDA margin percentage by 20 basis points at both the low and high end. At the property level, the narrowing of our RevPAR and margin ranges have the effect of…

Thank you. We will now be conducting a question-and-answer session [Operator Instructions]. Our first question comes from line of Anthony Powell with Barclays. Please proceed with your question.

Good morning. Rachael welcome, good to hear from you.

Thank you, Anthony. Likewise.

So a question on, I guess, transit demand. A lot of the other REITs talked about just sharp slowing in transient demand on the corporate side in June, July, seems like you haven't seen that magnitude of a slowdown. Could you maybe go into why that would be for your portfolio?

Good morning, Anthony. Thank you. It's a great question. And actually I've talked about in my comments that throughout the year, we've seen, even with flat RevPAR growth, our growth has actually come from transient demand. The transit has been better than the growth. And for us, transient demand is up approximately 1% [Technical Difficult] group for our select service hotels is typically [Technical Difficult] type group. And while that demand is actually out there, we have to be little bit more strategic about capturing that demand with the increased new supply. So one of the initiatives that we've really been working on is working with our new direct to revenue strategy, and with our asset management team really on focusing with the management company to layer in some additional group. And as a result, in June, we actually saw our group mix was the highest level at 16% of our room nights, so we were pleased with that. And looking forward, our group looks a little bit better as we move into the third quarter. What that also allows us to do is to focus on being able to drive some additional rate on the transient side. And if you look at the industry results most recently, what we have seen in June, as well as in July month to-date is actually the transient RevPAR is up. In June, it was up about 40 basis points where group was down, or our group RevPAR was down 2%. And in the running 28, transit RevPAR was slightly down at 30 basis points on a day-over-day basis versus group RevPAR of down 2.5%. As we can -- for us, with select-service hotels, of course, our booking window, we have limited visibility. But as we look out at our transient pace in…

And just on brands, I guess going even more into the urban, suburban question here. Marriott's Moxy seems to be getting a lot of traction and Hilton Inn is launching a new, I guess upscale lifestyle brand. Will these type of brands in I guess more urban markets be appealing to you over the long run?

Definitely, we've been heavily involved with both Marriott and Hilton as they've looked at expanding their brand portfolios, especially into the lifestyle area. And we're continually looking at and underwriting new brands within that space. I think there is a bit of a difference between Moxy and some of the other lifestyle brands within Marriott brand family, and the lifestyle brands that Hilton intends to launch, making Moxy a little bit more of a niche play for particular urban markets. But that said, we think the new concept will have broad appeal, address some changes in consumer preferences and certainly, are interested in potentially adding those in the future.

Our next question comes from the line of Michael Bellisario with Robert W. Baird. Please proceed with your question.

You guys didn't buyback any stock in the quarter. Was there any particular reason for that?

I think you saw us more aggressive than a number of our peers early as we look to redeploy proceeds from sale into share repurchases. I think as we discussed in our last call, we're more apt to buy shares and/or assets at this point utilizing proceeds from sales than we are to lever our balance sheet. But I think given recent pullback in our stock price, it's reasonable to assume that we would view -- that we would see value given current pricing, and that share repurchases would be more attractive to us.

Maybe just on the same topic. Can you give us your updated view on buybacks versus acquisitions versus new development deals or takeout deals? And anything changed with your prioritization over the last 90 days or so?

That's a very good question. I think as I mentioned in my prepared remarks, pricing for existing assets by enlarge continues to be very strong. In fact, in most cases we found it to be -- to exceed pricing on a relative basis for new build assets. I think relative to existing assets, we see new builds as being a better opportunity for us at this point in time. And given the recent pull back in our shares, we view share repurchases at least on equal footing with those particular types of projects.

And then just lastly on the development deal in Madison versus your prior development deals. I know you had previously partnered with a developer. You found the site. You picked the brand. Is that how the Madison deal came about? And are you seeing any in kind of how you are sourcing those deals?

So the Madison project is with a developer that has built for us in the past. And actually, he's built for us the Phoenix asset. He's building two higher properties in Arizona and the Colorado asset for us, the Downtown Denver assets. So it's a relationship we have with a group is one where they find place for us we find place for them but a group that we found and produced quality assets for us at a price perky price that enables us to continue to underwrite deals even in an environment where we've seen construction costs rising.

Our next question comes from the line of Austin Wurschmidt with KeyBanc. Please proceed with your questions.

Good morning, everybody. Just curious, Justin, given your comments on dispositions being more attractive, I guess as you think about the best uses either share buybacks or acquisitions. How should we think about the volume of asset you're marketing or in negotiations on today?

I appreciate the question. We've highlighted in the past that we're opportunistic as we look at dispositions. I think the total volume will depend on the continued strength of that market. I highlighted in my remarks that we continue to see a significant interest. I think in large part, fueled by the available of attractive financing for existing assets, especially at the quality that we have. I think given the recent pullback in our stock and continued strength in the market for assets the type that we have, assuming that continues to hold, you should expect us to be more active in that space or expect us to continue to be active in that space but again, we're fortunate and that our portfolio is high quality and wholly consistent with our overarching strategy. And so our desire to pursue that type of transaction is wholly dependent on pricing within the marketplace, which today is very good but we all know that that dynamic can change overtime.

Should we view I guess dispositions as a leading indicator towards the volume of perhaps share buybacks to the extent that the stock stays around current levels?

I think it would be indicative. But as we showed last year in the fourth quarter when we have clear line of sight to a potential disposition, which you may or may not know about it at particular point in time. We're willing to move with share repurchases in advance of that knowing that we'll have an ability to essentially utilize in our balance sheet and then paying that down with proceeds from sale.

And then you mentioned the acquisition of the small independent hotel as a means to kind of gaining additional insights into the independent hotel business. But how should we think about your willingness I guess to jump further into the boutique hotel business, or your view toward premium branded assets today?

Well, I think you should continue to view us as a company heavily focused on premium branded assets. We continue to see significant value in that space. And this 55 unit of room hotel should not be viewed as the departure from our overarching strategy. We have a unique opportunity in this particular market where we own the full service Marriott, have two very high quality select service hotels. And now soon to have this small boutique hotel to really gain additional insights, which will -- we believe help us to manage our business more effectively. As you know and the brands have signalled, there are shifts in consumer preferences, which are causing brands that to look at ways they can modify the product and services that they provide consumers in ways that address, or make them more local, or appeal to changing consumer preferences. This hotel provides us with a very unique low risk opportunity to explore some of those opportunities outside of the confines of brand mandated structures, and then to take those learnings and use them as we interact with brands and as we manage our broader portfolio. Overtime, we may decide that that's something that's interesting to us on a larger scale. But in the near- term, you shouldn't expect us that to meaningfully change our strategy. And we continue to see ownership of high quality select service branded hotels as being the best use of our capital, and the way to generate the highest returns for our investors.

And then just last one around supply, you did discuss a pick up in the construction pipeline. But the fact that actual deliveries have remained fairly stable. I guess do you expect the pipeline will remain stable but could remain elevated for a longer period when you previously expected, given that recent pick up in new construction?

We anticipated that new construction starts would peak before now, but we signalled this much. And in fact what we saw was new construction starts beginning to decline with interest rates coming back down again, and continued push by the major brands or new developments. We've seen a slight uptick in new construction starts. It is and continues to take longer for those deals to be completed, which is mitigating somewhat the impact of new construction on our existing portfolio. But we don't anticipate that we will reach the peak in the near term.

Our next question comes from the line of Neil Malkin with Capital One. Please proceed with your question.

So I think just to start with the revenue, or operating optimization you talked about. Can you maybe talk about some of those initiatives new or current that are starting to bear fruit? And then I was reading about an economy operator who had dynamic pricing almost by the minute or hour based on things like flight patterns and things like that. Are you looking at those types of things? And again, just if you could speak to some of the optimization strategies you are currently looking at that'd be great.

So for the second part of your question, we are working in tandem with the brands and their revenue management teams, as well as their corporate strategy teams on looking at opportunities to continue to improve the revenue management systems that they have. As we talked about in the past, they are looking to optimize their systems even further to even maybe closer to a more personalized pricing attribute based pricing, which will give us more opportunities to up-sell and drive additional rate and to continue to preference direct channels where we have the highest profitability. So we'll continue to work with the brands on that. For our own internal team, we are really excited about some of the initiatives that we have in place. I spoke a little bit in the call and in my prepared remarks about being able to go in and really work with our management teams, and their above property revenue management revenue strategy team and drill down on where that there is areas of opportunity in a couple of areas that we're really focused on. Number one is we have improved our forecast model corporately. And really looking at the data that we get from brands on booking position and comparing that individually to the individual management companies, and have been able to help them to better optimize their model, which not only helps with revenue strategy, because they can more proactively identify opportunities but they're also helping from a labor management standpoint better forecasting or -- of occupancy. We are also, and I mentioned a little earlier, targeting with additional supply, the group business is absolutely out there. But what we saw is that some of our management companies weren't as dynamic as we would like to see. So we are helping them…

Appreciate the detail there, thank you. I guess going back to one of the first question asked about business transient trends. Would you say that or that you have the guess the reason why you are faring relatively better? Is that potentially the type of business coming to your hotels versus maybe some of the -- your peers who are more on the coast just given the nature of the demand or businesses that they care to? Or again do you think it's more of a suburban/comp issue that's driving that outperformance?

I'd say there's couple of things. First, we're seeing healthy demand across the majority of our markets. So increases in demand. We have very few markets that have declined in demand year-over-year. So the individual market performance is highly correlated to the supply relative to demand to market, so that's the first piece. So, if that gap is closing and we're doing a better job of observing a supply then we're doing a better job also of being able to layer on that corporate business. There's more opportunity to do that. I do think that there is a -- on the individual markets, we are in markets all throughout the country. And in each of these markets, there are different business demand generators. But what I can say is in looking across the markets and looking at the drivers of the market, we're seeing business increases in multiple different segments. Some segments are -- or some industries are a little bit more flat than others. But one of the areas where we are seeing decent growth year-over-year is consulting type business, accounting type business, project type business. And I will say that for select service hotels, those services when those companies are coming in and working with larger companies, they tend to like to stay in select services hotel. But I do believe that you do need to look at each individual markets with what's their international mix, whether there is supply demand drivers. There is also government and military spending that we're seeing being healthy in certain markets that we have as well that we might have a stronger concentration in relative to the national average.

And then last one for me, I know you talked a fair bit about dispositions. You had a portfolio of about 16 assets you were going to sell to someone. I think something like seven or nine were sold, so that leaves the other I guess more or less half. Is that something that's on the forefront or something that's eminent in closing, any talks on that? And then in terms of just, I guess your mix of interest for single assets risk portfolios?

So I highlighted earlier that we're very opportunistic in the way we view disposition, the original portfolio was together in response to reverse inquiries. So that wasn't particular magic around the assets that we selected for that portfolio. That said, I also highlighted that we continue to see strong interest in the types of assets that we own. And we are having conversations both with potential portfolio buyers and buyers of individual assets related to assets within our portfolio. We are fortunate in that, we have the ability to act only when we see pricing has been advantageous in both instances.

[Operator Instructions] Our next question comes from line of Bryan Maher from B. Riley FBR. Please proceed with your question.

Good morning guys and Rachael welcome aboard. I'm sure you will be a great addition to the team. A quick question on -- and most of my questions have been answered this morning. But I wanted to get a little color on this new supply, if you could share with us who is behind the development of the competitive product that you're seeing, is it one-off owners, is it private equity, is it spec? And at the end of the day, is there any opportunity for our guys to take that out, some of that product out via purchases if the product doesn't work out to the developer’s expectations?

I can speak to that and Krissy feel free to add. But really we're seeing -- and you might imagine based on the total volume of new development, we're seeing all of the groups that you have mentioned as participants in new supply growth. Interestingly, we have seen a pullback in terms of volume from groups that have been historically large developers of assets. So a pullback by owner operators who have been in the business for number of decades. We are seeing increased participation on the development side by groups who have less tenure in the space, but not exclusively. A pipeline that only reaches peak when you have participants at a variety of the places acting on new development projects.

And also just to add to that, you have strong brands using Hilton as an example, they have existing operators that have had a lot of success with Hilton’s brand and the royalty contribution they bring and they have launched new brands recently and so those are continuing in terms of brands. Although we haven't invested in Tru because it’s not in our team’s [indiscernible] another brand that’s solid and performing very well and there is opportunities to develop that in markets. So you will continue to see some of that I think.

And that's an important point. The brands have, as they’ve launched new product offerings taking into consideration rising construction costs and structured new offerings such as they can be produced at a lower costs, that’s the traditional hotels, smaller rooms, smaller common areas, things of the sort, which make them attractive even in an environment where we are seeing rising costs.

Okay. Great. And just to make sure I get this right on the boutique hotel that you’ve bought in Richmond. Did you share how much you are going to spend to renovate that property?

So a point of clarification, we have the project under contract right now, so we are currently in diligence. And we have not yet disclosed how much we intend to spend on renovation.

Okay. And to be clear, this is kind of an experiment for you in your own backyard in a market that you’re comfortable in to kind of get your hands around the whole boutique asset and kind of how it operates. Has there been any thought of adding anybody to the staff there that has a background in maybe boutique REIT work from a Pebblebrook or a LaSalle or some entity like that. Or is it still too early for that? And how long do you think it will take for you to get comfortable or not comfortable pursuing more in the boutique area?

So a lot of good questions there. I think it’s important to clarify, this is a unique opportunity and one of the advantages in addition to the entry perky price and where we think we will be in terms of total investment in the product and the fact that’s in our backyard. We’re uniquely positioned to leverage an operating company that manages three other hotels for us in market in ways that we think will help this property to drive very strong bottom-line results. I highlighted in my earlier remarks, it’s a block -- it's actually a little less than a block away from our Courtyard, Residence Inn and less than 10 blocks probably from our full-service Marriott. We have an opportunity with this particular hotel to use cluster sales to potentially share laundry and other management services with those companies which will uniquely position us to ensure that this property is profitable. I think we have in this particular market gained addition insights which have helped to support our underlying investment thesis by owning the full-service Richmond Marriott. So, having real time comparisons from an operating standpoint between that and our Courtyard and Residence Inn in the market has been incredibly valuable for us and it’s been informed both our investment decisions and in large part our asset management activities. We see this as an opportunity to further enhance that understanding and our efforts related to our larger portfolio whether or not we decide to proceed with unbranded boutique hotels, that’s at this point not imminent and I’d say not even at this point highly likely. So, it’s important to understand that we’re always looking at the changing landscape of our industry and looking to ensure that we’re ahead of trend. It’s also important to understand because you highlighted the potential for hiring talent from companies that have pursued the lifestyle space in a slightly different way than our intent is around this particular asset, I highlighted in my earlier remarks, it is our intent to run from an operational standpoint this hotel similar to the way we run our rooms-focused like service product. So, you should assume as we’re running this hotel that we will look to an operating model much more similar to a Courtyard than to a Kimpton or other hotel is going to have significantly more robust food and beverage operations and things of that sort. Really what we’re wanting to experiment with here is an opportunity to uniquely position a product within a market to have appeal and to fill a gap within that market while still leveraging an operating model which had proven to produce stronger margins than any of the other operating models that we’ve explored within the hospitality space.

And as Justin mentioned, it gives us the opportunity which we are excited about to be able to test some different initiatives right in our backyard without having to sit within that confines of brand standards, so whether it be technology type initiatives or some additional product offerings, we are looking forward to doing that and then being able to walk right down the street and see the results first hand.

Our next question comes from line of Dori Kesten with Wells Fargo. Please proceed with your question.

Good morning guys. And welcome Rachael.

Thank you, Dori.

What percentage of your hotels are non-prototypical and what do you see the benefits of those being?

So, right now just under half probably depending on how you define non-prototypical of our assets. So, -- and it’s interesting. The advantages of prototype are generally construction and operating efficiencies that the brand put a lot of work and efforts into designing product based on identified consumer needs and desired operating efficiencies. And so, historically we have pursued more prototypical product, especially in markets outside of major urban areas where we may be somewhat limited to in the rate that we can generate. And we have been able to produce incredibly strong results with that type of asset. As our portfolio has become slightly more urban and as we have continued enter into a higher densities of urban market, we’ve found that by stretching away from prototype so taking what's best about the prototype by customizing to the local market, we are able in markets that will support it to garner additional rate which layered upon top of an operating model for rooms-focused like service product which is incredibly efficient and generate even stronger bottom-line results, and that has been incredibly attractive to us. I think looking long-term, non-prototypical assets allow us slightly greater flexibility as we look at future renovations and things of the sort. And we are able to in many instances leverage our understanding of the product and markets to build a product that is uniquely positioned to have a sustainable competitive advantage. So whether that’s pushing beyond prototypical specs for fitness centers in markets where we see that has been particularly important demand driver or adding roof-top bars in some of our markets where we think that we can generate incremental revenue and create a higher perceived value for the product overall. That's where we are really pushing beyond prototype and finding incremental value.

We have no further questions at this time. Mr. Knight, I would now like to turn the floor back over to you for closing comments.

Thank you. We recognize that for many of you it’s a very busy morning and we appreciate you taking time to join us. We hope as always that as you travel you’ve taken opportunity to stay with us at one of our hotels. Have a great day. We look forward to talking to you soon.

Ladies and gentlemen, this does conclude today’s teleconference you may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.