Greetings, and welcome to Apple Hospitality REIT Third Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode, a question-and-answer session will follow the presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to 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 third quarter 2019 earnings call on this the 5th day of November 2019. Today's call will be based on the third quarter 2019 earnings release and Form 10-Q, which were distributed and filed yesterday afternoon. As a reminder, today's call will contain forward-looking statements as defined by federal securities laws, including statements regarding future operating results. 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 statements 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 EBITDAre, 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 third 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. During the third quarter of this year, performance across our portfolio of hotels was generally in line with our expectations, positively impacted by favorable calendar shifts and solid transient demand. We are pleased to report that our diversified portfolio of high-quality rooms focused hotels outperformed the industry overall as well as our chain scales during the quarter based on Star Data. For our portfolio, Comparable Hotels RevPAR increased by 1.1% for the quarter and 0.4% year-to-date. Comparable Hotels ADR increased by 0.2% for the quarter and 0.6% year-to-date and occupancy improved by 70 basis points for the quarter and declined by 20 basis points year-to-date. We remain diligently focused on maximizing profitability and are pleased to report Comparable Hotels adjusted hotel EBITDA margin of approximately 38% for the quarter and year-to-date despite ongoing cost and supply pressures. Adjusted EBITDAre was down 5.7% for the quarter and 3.1% year-to-date, due primarily to corporate incentive plan outperformance. Total adjusted hotel EBITDA was down approximately 1% for the quarter and year-to-date. As we highlighted in our second quarter call, we anticipate a decline in RevPAR during the fourth quarter as compared to the same period in 2018 primarily as a result of more challenging year-over-year comparisons and the potential for some softening in demand tied to macroeconomic and geopolitical factors. We are tightening the ranges of our full-year 2019 RevPAR guidance, slightly lower in the mid-point. In addition, we are reducing the mid-point of the Company's guidance for net income and adjusted EBITDAre to match topline guidance and to reflect higher anticipated general and administrative expenses associated with the outperformance of the Company’s relative shareholder return metrics, which are components of the Company’s incentive plans. At the end of the third…

Thank you, Justin. With the benefit of favorable calendar shifts and continued storm recovery business, we expected our comparable hotel RevPAR growth for the third quarter to be the highest of the year. While we did experience a modest negative impact from Hurricane Dorian in September, it was more than offset by recovery business from 2018 natural disasters. We estimate that the net lift from recovery business was approximately 40 basis points in the quarter. As communicated previously, we anticipate that the fourth quarter will be more challenging with tougher comparisons related to non-repeat business from the Boston area gas explosions and decreased disaster recovery business. Our estimate of the year-over-year impact from the reduced business in these markets is approximately 150 basis points in the fourth quarter. In October, our comparable hotel RevPAR declined around 2%. Consistent with industry trends, markets outside the top 25 markets are outperforming, benefiting from more favorable supply/demand dynamics. In the third quarter, RevPAR growth for our hotels in the top 25 markets representing about half of our EBITDA was essentially flat while RevPAR growth for a non-top 25 markets was approximately 2%. Group RevPAR is almost 60% of our markets. Some of our more impactful top performing markets included Boise, Dallas, Denver, Norfolk/Virginia Beach, Phoenix, Richmond, Rogers and Washington, D.C. Five of our top 20 EBITDA contribution markets experienced RevPAR declines in the quarter, including Chicago, Nashville, Oklahoma City, San Diego, and Seattle primarily as a result of supply outpacing demand. We are excited to share that in October, we started an extensive renovation of our full-service Marriott in Richmond, Virginia. The lobby area and existing food and beverage outlets will be transformed to provide expanded, enhanced dining and gathering options. In addition to a full renovation of existing rooms’ inventory, three new…

Thank you, Krissy and good morning everyone. As Justin mentioned, we are narrowing our full year RevPAR comparable hotel adjusted hotel EBITDA margin percent and adjusted EBITDA outlook. We now expect our full year 2019 comparable RevPAR to be in a range of positive 25 basis points to negative 50 basis points, just below flat for the year at the midpoint. The midpoint of our previous RevPAR guidance called for flat RevPAR year-over-year. Correspondingly, we are reducing our comparable hotel adjusted EBITDA margin percentage by 10 basis points at the high end for a five-basis point reduction at the midpoint. We're lowering our full year 2019 adjusted EBITDAre by $3 million at the midpoint and narrowing the full year range to $425 million to $435 million. Our prior outlook calls for $425 million to $441 million. We're reducing the midpoint of the company's guidance for net income and adjusted EBITDAre to match top line guidance and to reflect higher anticipated general and administrative expenses associated with outperformance of the company's relative shareholder return metrics, which are components of the company’s incentive plans. As we have highlighted in the past, the core underpinning of our board's approach to executive compensation with its unwavering commitment to the alignment between the goals of our shareholders and our management team. Full 50% of the executive team's incentive-based compensation is tied to absolute and relative total shareholder return. Year-to-date, our shares have outperformed our peers on a relative basis. Assuming this outperformance holds and combined with the recent leadership realignment within our organization, we anticipate our 2019 G&A will continue to outpace our prior year run rate. As we have highlighted in the past, with our efficient operating platform, our total expected G&A is roughly 70 basis points of enterprise value and 2.7% of revenue,…

Thank you. [Operator Instructions] Our first question is from Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning everyone.

Good morning.

Good morning, Anthony.

Good morning. Justin, you mentioned that you were cautious about next year. Could you maybe comment on some of the guidance that's been put out there by your two major brands, Hilton and Marriott, Hilton at 0% to 1% and Marriott at 0% to 2%. Are those numbers reasonable for the industry and how do you think you may perform relative to those guidance targets?

Thanks. I appreciate the question. It's early for us to give guidance specific to our company. We’ve just begun budgeting process and are in continuous conversations with our various management companies speaking to the dynamics of their individual markets. Hilton and Marriott have a tremendous amount of data. I think the tone in their releases is appropriate and consistent with our sense for how things might play out next year. But I think it's important to note that now as we look, going forward, and what I tried to highlight in my remarks was we're getting somewhat mixed signals as we look at the economy. There are certainly things that are going incredibly well and there are other things that are going less well. And as we look across our portfolio, Krissy highlighted that we have a number of markets where we continue to see meaningful growth. And then we have other markets where despite stable demand, we've seen some drop-in performance because of increases in new supply. So I think what you'll find as we go into the year – this next year is something very similar to what we saw this last year with kind of national numbers being generally in line with what the brands are saying right now, but individual markets performing in a broader range around those national numbers.

Got it. And is there any reason to expect the trend of the non-top 25 markets outperforming? Should that change at all in the next year or do you expect that to continue?

It will be interesting. I think absent macro changes, that's a trend that seems to have traction, I think we feel a significant reason for the outperformance in markets outside the top 25 is the impact of trade wars and a strong dollar on foreign travel, which has particularly impacted gateway markets. That could clear up, which would adjust the balance, and because of the diversity of our portfolio, we benefit in that case as well. I think on a relative basis, we've outperformed because of our exposure outside of gateway markets, but it's important to remember that we do have exposure to those markets as well. And to the extent they perform well, that benefits our portfolio.

And supply growth in the top 25 markets is projected to still be elevated relative to markets outside of the top 25 next year as well.

Got it. Thanks. And the supply growth metrics you talk about every quarter, that decelerated pretty meaningfully this quarter. What drove that change or that reduction in competitive supply pressure?

We've highlighted in the past several calls that individual construction projects were taking longer to be delivered. What appears to have happened over the past quarter is we saw delivery of a number of projects that had been in the development pipeline for some period of time, and those projects weren't replaced at the same pace that they had been earlier. So, we see that as a positive indicator. Remember we've been reporting that statistic for some period of time, and there has been some volatility in the number. It has moved up and down, but we've highlighted a number of calls now that we continue to see construction costs increasing and with a number of the markets beginning to soften in terms of – struggle with an ability to keep up with the supply that's already in the pipeline. We see new construction starts beginning to slow in the near future.

Thank you.

Thank you.

Thank you.

Our next question is from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed.

Hi, good morning everybody.

Good morning, Austin.

Just kind of tagging on to Anthony’s supply question there. I guess I'm curious if you have any sense what percent of your hotels are exposed to recently completed projects that are still in lease-up versus maybe a year ago because it certainly does seem that the projects under construction are at the lowest level since I think the fourth quarter you reported last year. So, to the extent that the pipeline is decreasing, as you said, it seems like we should see that moderate over time.

Well, I don't have an exact percentage for you, but what I can tell you is that, first of all in the individual markets when the supply comes into the market, depending on obviously the demand in the market, the supply in some cases it takes the market six months to absorb that supply. In some cases, it might take that market two years to absorb that supply. But what we have seen as we've moved through the course of the year is a slight favorability in terms of the gap between the supply that has the increase in supply and the increase in demand. So overall, we've seen a little bit more positivity in terms of the absorption. And as we look out at least for the near future, it seems to be fairly consistent in terms of that.

Great. Thanks. Appreciate the thoughts there. And then you guys have lined up $40 million of proceeds or so with the three dispositions you highlighted that are under contract, seemingly that's going to be used to pre-fund the over $200 million in acquisition pipeline you've got. So, I guess can – should we continue to assume additional dispositions to fund the remaining $170 million or so? And what do you really view as best execution today for portfolio deals or one-offs?

So, I'll start with the last question first. We continue to see a stronger market for individual properties than for larger portfolios. In terms of use of proceeds, remember again, the pipeline that we have currently under contract will be delivered over the next two years. And so, the specific funding source will depend somewhat on market conditions as we round out 2020 and go into 2021. Near term use of the proceeds from this particular sale are likely to be to fund assets that we currently have under contract. But we are continuing to participate in the market looking at both sale transactions and underwriting potential acquisitions. And I think in today's environment, we see the potential to do both with the balance more likely to be – for us to be net sellers, given the strength of demand for assets, like the assets that we have. But with us being mindful of a need to maintain sufficient cash flow to sustain dividend payout that's attractive to our shareholders.

So, it sounds like based on that response that share buybacks in your mind are less attractive than maybe three to six months ago. And that proceeds are more likely to be geared towards funding that pipeline or potential new acquisitions?

That's something that we monitor. And we've seen increased volatility in share prices, not only for our company, but across the hospitality space. We did buy some shares during the quarter. We continue to have a program in place, and we'll be opportunistic in purchasing our shares. I've highlighted in past calls and in our past conversations that as we look at potential acquisitions, we look and compare them from a relative – on a relative basis to purchase of our shares and look to deploy capital where we feel we can generate the highest returns for our investors.

Thanks everyone.

Thank you.

Thank you.

Our next question is from Bryan Maher with B. Riley FBR. Please proceed.

Yes. Good morning everyone. So, a little bit more on the acquisition thoughts. It seems like you guys have been more focused on the new builds and that's fine. But is it really a function of the fact that you're just not seeing anything in the existing supply that you're willing to pay for? Can you elaborate on that a little bit?

Sure. We’ve highlighted in the past couple of calls. Pricing for the types of assets that we would be interested in buying continues to be elevated. And our reason for continuing to purchase to sign up new development deals is the pricing that we have been able to get on those particular assets is meaningfully better. I've highlighted in past calls, comp trades in markets where we had recently acquired assets and that continues to be the case as we look at assets that trade in Denver for example, relative to pricing that we have for the asset that we currently have under contract or even in Cape Canaveral or some of the other markets. We're signing up new deals at a meaningful discount to comparable trades on older assets in the same market. And we see that as being long-term beneficial for our portfolio – additionally advantage as we pursue those assets and that we're active participants in the design of those products. And having the ability to adjust those designs to ensure that they will be competitive and have a competitive advantage in the marketplace, whether it's the layout of the rooms and configuration of the rooms, by room type or the amenities that the hotel offers, which as for building hotels include things like significantly larger exercise facilities and in some cases, rooftop bars and things of that sort. We feel very good about that particular type of investment. That said, we continue to underwrite deals that are consistent with our investment strategy and there exists the possibility that we find a deal that we find equally attractive based on our underwriting. But today there continues to be an incredible demand for high quality select service assets. And as I highlighted in my remarks, that demand comes from a broad range of potential buyers. And I think that's why you've seen in our portfolio and in others a propensity to explore dispositions as well as kind of these select acquisitions. The market for a long period of time, the cycle was relatively quiet. And while it's not as deep as it might've been as we approached peak of the last cycle, it's significantly more open than it has been over the past several years.

Right. So when we think of companies like, let's say Ashford Trust, who also has a bunch of select service hotels and they've kind of shifted gears towards going after a full-service hotels and maybe second tier cities where they're finding pricing advantages to acquire, although their balance sheet is much more stretched than yours. Is that anything that management at Apple or the board has or would considered as a vehicle to grow other than what you're doing currently?

We've been consistent in saying that, that we underwrite both individual assets and larger portfolios. I highlighted in my remarks that as we assemble our portfolio, there are certain criteria that are important to us and one of those is limiting the number of encumbrances, whether it be cross-collateralized debt or long-term management contracts in our portfolio in order to maximize flexibility. As we manage the portfolio over time, those are the things that we consider as we look at larger portfolios and take into consideration our pricing of those portfolios.

Okay. And then shifting gears to the Renaissance in New York, do you guys have like a name and kind of product type for that independent hotel, upscale or upscale where do you want to position it and is there any way to get those labor costs down in that market?

The name we will announce in the not too distant future. But in terms of operating model, I think our expectation is they'll be roughly consistent with where it has operated historically. Recognizing that one of the reasons for us transitioning to an independent, away from the brand is to gain additional flexibility. As we look at our operating model, I don't know in response to the second part of your question, related to labor – reducing labor costs is a challenge for us across the entire United States. So while there are nuances particular to New York and the fact that this is a union hotel, in some ways, it's not any more difficult to manage labor there than it is in some of our other markets where we see incredibly low unemployment and are competing heavily with new hotel supply. So, I think we are fortunate to have an operator at that hotel that has a tremendous amount of experience in the New York market. And that benefits us, I think both as we look at driving top line outside of brand channels, but it also benefits us as we look at bottom line. Highgate has a tremendous amount of experience, interacting with labor in that particular market and to-date has been very effective and helping to ensure that we have exceptional employees at the hotel. And that we manage labor effectively there.

Great. And then just last for me, you commented on how good employment is in the country, which we all know in wages heading up, what have you. Why do you think it is not just for you guys but for the industry and when we're talking about an industry running it near record occupancies that it seems like everybody's having a problem driving rate higher, is it simply the new supply or something else going on?

I’ll start – I want to answer that. There are a lot of different factors that go into that. One of the strategies that we've implemented, and we started implementing this last year as we looked at – we are consistently implementing strategies to look at the different supply/demand dynamics in individual markets and adjusting mix and strategy. But as we started to see transient slow down a little bit more in order to shift the mix to protect and make sure that we had decent base occupancy, we have worked with our operators to layer on additional group and corporate base. And that allows us to, shrink the hotel and then, to be less reliant on additional transient pickup, which may or may not happen depending on what's going on in the market. And then with that, then if we're able to, then we're allowed to – then we're able to drive higher rates on the remaining inventory. But in doing so strategically in individual markets, in some cases where sacrificing a bit of rate to build that occupancy, whether it be on the group or the negotiated side. So, on one side it is a strategic initiative. Other areas that you as our brands have continued to grow loyalty occupancy as their programs have continued to get stronger with the Marriott Starwood integration, we are seeing a pickup in – although it's not hugely material, we are seeing an increase in redemption business. And, in some cases redemption business comes in when the hotels are full and you get a higher rate, higher reimbursement. In some cases, the redemptions come in when the hotels aren't full and it's incremental. So, you're building that incremental occupancy. But when the business comes in, when it's not a peak night, then…

All right, thank you. That color is very helpful. Thanks.

Thank you.

Our next question is from Michael Bellisario with Robert W. Baird & Co. Please proceed.

Good morning everyone.

Good morning.

Good morning.

Justin, you mentioned your development projects are still on time, but all the brands are talking about longer timetables, delayed openings. I know you touched on a little bit, but maybe why aren't you seeing that with the projects that you have in the pipeline and then what specifically might cause your timelines to get pushed out potentially?

It's a good question. To some extent we've built a cushion into the timelines that we’ve initially given. And so, given the track record of deals taking longer than they did at one point in time we have, I think more realistic expectations on timing for deliveries. We have seen a few projects over the years push past that. And we're somewhat sensitive to that. But remember, these are projects that are not being developed on our balance sheet and are specifically structured such that the developer takes risk for any costs overruns, including those associated with delays for delivery. So, we have some protection regardless of the timing of delivery. In terms of impact to us in our portfolio, we are partnered with a couple of groups. If you look at the deals that we currently have under contract that we have a good track record with and they're groups that have consistently delivered for us.

Got it. That's helpful. And then maybe just directionally, how are you guys thinking about 2020 CapEx spend maybe relative to what you guys are thinking about spending for 2019.

Interestingly, and we've highlighted this in past calls. We tend to be relatively consistent in our CapEx spend from year-to-year. There are occasions when we have larger projects, which skew that number somewhat and this year and partially in next year our total CapEx number will be impacted by our renovations on the full-service Marriott here in Richmond, Virginia. The scope of that renovation is extensive given that it's an end of franchise, relicensing PIP and involves a complete remodel and redesign of the lobby and food and beverage outlets as well as an essentially full renovation, including significant investment in bathrooms of the guest’s rooms. And so, projects like that will move our total investment higher. Historically, we've been in the 5% to 6% of sales range. And, while we may skew in some years marginally higher, we continue to feel that that side, reasonable average for a relatively young select service portfolio like ours.

Thank you.

Thank you.

Our next question is from Neil Malkin with Capital One Securities. Please proceed.

Hey, good morning guys.

Good morning.

Good morning.

Hey, just kind of, given your performance or I guess stability compared to some of the full-service rhetoric in performance. Do you feel that – I know it's hard to quantify, but your hotels have actually gained share or taken share from those, those types of hotels. Just given the focus now on businesses to cut costs or be more prudent with their T&E.

Well, we haven't seen a broad shift, so to speak of, hearing from our hotels anecdotally out in the field that they're saying that their accounts are coming back to them saying that we need to, cut cost and we need to move down from, an upscale, upper upscale hotel to an upscale hotel. And in past cycles, when the economy has had a little bit more of a pullback we have seen where there is a, in a couple of cases, and it's not necessarily the chain scale, but more the rates focused on looking at you what particular rate the hotel is charging. And in some cases, if that's an upper upscale hotel and we're charging, a little bit lower rate or we're charging the same rate or even potentially an increased rate. But then we're able to provide, because of the amenity package we offer, free parking, free breakfast, no kind of destination, or other amenities type fees. We do see that our particular product type can be more compelling in an environment where companies are starting to cut back and implement cost controls. And as we have, we're in the midst of the budget season right now. And as we're going out to, particular accounts we are definitely making sure to reiterate the value that we're able to provide in our hotels. But, for the most part, we haven't heard of any, there's some isolated circumstances here or there where hotels are saying we have to reduce the number of preferred hotels and we're going cut down to from five hotels to three hotels. But we haven't heard, we haven't heard anything systemic as of yet, but of course we obviously keep our ear to the ground for that.

Appreciate that. And then could you just give a very high-level view of what, sort of the, your segmentation has looked like in terms of pace, heading into the fourth quarter from the beginning of the year till now. And then just maybe high-level commentary on in general, any notable trends in the small group short-term group type of guests versus business versus leisure would be great.

Yes. So, as we went into the beginning of the year, with our outlook, we essentially in the midpoint estimated that we're going to be flattish. And if you factor out calendar shifts and disaster recovery comps. That's essentially the environment that we're seeing. The booking window is short and continues to decrease somewhat for the most part, as we have gone into 30, 60, 90 days as we look at our forecast and our booking window. We start out a little bit – slightly declining just because of the shortening booking window, but we're usually able to pick up. And like I said, outside of the calendar shifts, we haven't seen any material degradation as we look at the pace and our booking window. In terms of different business segments, as I mentioned in the call, that we're still seeing positive growth in our corporate negotiated, which is encouraging. And we're continuing to push that with our hotels as well – as for leisure – excuse me, as for group and transient, transient spend pretty consistent all year. And then group has – on the smaller group has been slightly down year-over-year. But as we've moved throughout the year, in the third quarter, it did actually pick up a bit, and some of that was – or a majority of it was more leisure-driven smart type group that our particular hotels actually do a really good job with. But overall, fairly consistent trends, group and transient. Is there anything I missed in that?

I think that certainly covers that. I think it's important to note, going back to your earlier comment. Demand for our chain scale has been incredibly strong throughout this cycle. And while the economy continues to be relatively strong, we're not going to see trade down as much as we will in a more challenging economic environment. The fact that, and I highlighted this in my remarks that we have low unemployment, and then you have wage growth. Those are factors in increasing demand, specifically for the types of assets that we own. And we feel, to date, we've been beneficiaries of those trends.

Thanks. And then last one for me. Maybe you can just give us some more color around the Renaissance going independent. Maybe just some – you said – I think you're only going to spend $1 million, which seems kind of light. I imagine that's just maybe computer systems or signage. But how does that typically work when you have to switch to a new brand or go independent in terms of GDS codes, setting up internal systems. And then how do you sort of negotiate or correspond with existing corporate based business so you can retain at least that part of it when you switch?

It’s a good question. A significant portion of the funds that we currently have budget are related to system transitions and signage. There are some branding pieces related to items in the rooms and things of that sort, which are also captured by that number. We're fortunate, again, and I highlighted this earlier, to be working with the management group that has extensive experience in the city, both managing branded and independent hotels and has managed transitions for several hotels within the market. And we're relying heavily on their experience in this particular market to ensure as smoother transition as possible, recognizing that moving away from brand loyalty programs and replacing that type of guests with different guests is always going to be a challenge of sort. We're working with the group who has done that effectively several times now within the city.

Thanks.

Thank you.

Thank you.

[Operator Instructions] Our next question is from Dori Kesten with Wells Fargo.

Hey good morning.

Good morning Dori.

What are your expectations for increases in labor cost per occupied room in 2020 as compared to 2019?

Well, we are going through the budget process right now. And so, we're still really early there. I would say it's been pretty consistent, and the labor costs have been in line with our expectations thus far this year. We are focused on, as we've gone through with our managers, we've done a pretty good deep dive of individual markets to see where we might have potential additional risk. And while we aren't giving guidance at this point in terms of overall cost or margin, for the most part, it looks fairly consistent. We're expecting any large increases or anything like that.

Or reductions.

Or reductions at this point.

Have you seen an increase in inbound calls for portfolio sales?

That’s been relatively constant. So, I've been highlighting the fact that we have been fielding inbound for portfolios and for individual assets, for some time. I'd say the portfolio increase are still smaller than they would be or have been in prior periods. So generally, in that the $100 million to $200 million range. And the number of inquiries has remained the specific potential buyers have changed over the cycle.

Okay, thank you.

Thank you.

We have concluded our question-and-answer session. I would like to turn the call back over to Justin for closing remarks

Thank you and thanks for joining us this morning. We look forward to seeing many of you at the NAREIT conference next week, and we hope that as you travel, as always, you'll take the opportunity to stay with us at one of our hotels. Have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.