Greetings. Welcome to Apple Hospitality REIT Fourth Quarter and Full-Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal 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 fourth quarter and full-year 2019 earnings call on this the 25th day of February 2020. Today's call will be based on the fourth quarter and full-year 2019 earnings release and Form 10-K, 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 2019 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; and Liz Perkins, Senior Vice President, Corporate Strategy and Reporting will provide an overview of our results for the fourth quarter and full-year 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. Before I get started, as we've discussed previously, Bryan Peery and Krissy Gathright planned to retire from their current officer roles with the Company during the first quarter. We are close to finalizing plans for the reallocation and transition of their responsibilities and anticipate making an announcement in the coming weeks. I would like to take this opportunity to recognize both of them for their significant contributions to the Apple REIT companies over the years. Krissy Gathright was the Company's first employee and has been an integral part of the development of our strategy and our team. She is one of the brightest and most talented people I know and it's been a tremendous pleasure to work with her over the past 20 years. Krissy joined our Board of Directors last year and I am grateful that she will continue to be a resource to us in that capacity. Her industry knowledge and understanding of our business are invaluable. Bryan has been with the Company for nearly as long and has been integrally involved in the shaping of our business. His dedication to the success of our Company, our shareholders and our team has been absolutely incredible over the years, and he will be missed. Upon stepping down from his current officer positions, Bryan will continue with the Company in an advisory capacity to ensure a smooth transition. I am joined on today's call by Liz Perkins. Liz began her career in Public Accounting and joined the Apple REIT companies as an Asset Manager in 2006. For the past six years, Liz has worked closely with me on Corporate Strategy and has spent a significant amount of time on the road in meetings with many of you. I am…

Thank you, Justin, and hello everyone. It's a pleasure to be with you this morning. As anticipated, the fourth quarter of 2019 proved to be our most challenging quarter of the year with tougher comparisons related to non-repeat business from the 2018 Boston area gas explosion and decreased disaster recovery business. Even with an estimated 100 basis point net impact from these headwinds in the quarter, our performance was in line with industry results for our chain scale. While our North Carolina East market was negatively impacted by Hurricane Florence comps quarter-over-quarter, Panama City benefited from an easier comp with rooms out of service last year as well as continued benefit from recovery business related to Hurricane Michael, particularly within Panama City proper and closer to Tyndall Air Force Base. San Diego's weaker convention calendar in the fourth quarter drove RevPAR declines for the market and our hotels, particularly our Downtown properties with our suburban hotels outperforming the broader San Diego market. Our Nashville hotels and the market as a whole are starting to see impact from new supply despite continued demand growth, which is putting pressure on rates. And our full-service Richmond Marriott began its significant room renovation in October, displacing revenue, some of which we captured by our Courtyard and Residence Inn. Market that produced strong topline results in the quarter included Phoenix, Austin, Orlando, Birmingham, and Washington, D.C. For the full-year, the industry continued to see outperformance outside of the top 25 markets, benefiting our geographically diverse portfolio. While demand growth continues to be strongest in the upscale and upper midscale chain scale, supply growth in these chain scales has also been elevated, resulting in slight RevPAR declines for the year. As Justin mentioned, our RevPAR results were in line with our expectations with over 50% of…

Thank you. [Operator Instructions] Our first question is from Neil Malkin with Capital One Securities. Please proceed.

Hey, guys. Good morning.

Good morning.

Good morning.

Appreciate the color on the Renaissance going independent impact. Could you give the same or what you estimate will be the impact to RevPAR due to the renovations at your two Marriott's – your two full-service Marriott's in 2020?

Good morning, Neil. This is Liz. I think for the Richmond Marriott, what we'll find is that the first quarter negative impact will be offset in large part by the Q4 comp that we experienced from the negative drag in 2019 at the Richmond Marriott.

And for the Houston Marriott we are just beginning the renovation this year. And because it's in Houston, the impact will be less meaningful there as well.

Okay, great. And then another one for me is just regarding coronavirus. Obviously, you guys aren't super concentrated to the coast, but just given the diverse nature geographically of your portfolio, have you been able or have your property manager has been able to discern any trends in terms of markets that potentially are impacted by coronavirus demand or cancellations? And what if any, kind of impact or conservatism have you baked into your guidance related to coronavirus?

I'll start with the last part of the question, and that's – our guidance includes our best guess at this point in time as to the impact from the coronavirus on our portfolio. You began your question by highlighting, and I think rightfully, that were benefited relative to our peers from lower concentration in gateway and top 25 markets, which we anticipate we'll see the bulk of the impact. That being said, we do anticipate that there will be some halo impact as impacting voluntary travel. And we will have some markets where we see specific impact. We were notified yesterday. The Dell, which is a large producer for a portion of our Austin asset, is putting a temporary freeze on inbound travel from China to their facility, which will have some impact on our portfolio. But again, at this point, on a relative basis and to some extent on an absolute basis, we anticipate that the coronavirus will be less impactful to us than our peers and potentially to the national averages.

Great. Thank you, guys.

Thank you.

Thank you.

Our next question is from Anthony Powell with Barclays. Please proceed.

Hi, good morning. A question on top 25 performance versus all of the markets. You mentioned before that you benefited through last year from the outperformance of all the markets. However, we've seen in recent months, top 25 markets do a bit better. So how do you expect those two segments to perform this year?

I'll start and Liz can jump in on this. But in part, the outperformance of the top 25 markets was the result of calendar shifts as we rounded out the last part of the year. As we look at business trends, which are the most impactful to our business, business transient trends, as we rounded out the last year, the last part of last year, we were relatively stable.

Business transient and overall just transient for our portfolio was stable in Q4. I think what we saw a decline in was group as we look forward. This is for the portfolio more broad-based, top 25 and outside of top 25. I think we're seeing pace for group increased, which, I think, will help us overall as we try to revenue manage and maximize the remaining inventory that we have available.

Got it. And on that topic, I did notice the sales and marketing expense increase, I guess, that was partly due to some of the group initiatives. You've seen the pace increase. But when do you expect that to really hit the RevPAR and the revenue numbers? Is it later in 2020, 2021?

No. For us, group is relatively – the booking window is relatively short-term. So we should see benefit to our group numbers actualize as we move throughout the year. I don't think that there's a long lead-time for many of our group bookings. Again, and I think while we have seen January, especially in the first couple of weeks of January, maybe a little bit softer. We say this every year, transient group business transient is hard to judge in January and February for our portfolio. It's the weakest time for business transient. We typically wait to make any sort of broad conclusions on trends until we get further in the quarter. But I think that the group pace is a positive and indicative of our ability to capitalize on that transient as it actualizes.

Got it. And maybe one more for me. How did customer acquisition cost trend in the quarter? We've heard growth in both OTA costs and loyalty costs from some of the other operators. So what have you seen in that area of the business?

We continue to see a positive shift from OTA to brand.com from a channel perspective, and brand.com is our lowest customer acquisition cost channel. So I think we continue to see that trend, where we have the ability to yield out OTA business. We're benefiting from that. Overall, I think that as we are looking to really deploy our sales expenses and our sales initiatives strategically, we will increase some of our more tactical e-commerce initiatives. So I think that you'll see that we're increasing there, but we're trying to be strategic and find ways where we can reduce sales expenses – where we can reduce sales expenses to offset that.

And in response to the loyalty portion of your question, the trends that we're seeing are not dissimilar to the trends that some of our peers are seeing, with the one exception being that our hotels tend to be hotels where loyalty members go to earn points rather than redeem points. And so to the extent our peers are speaking to redemption and things of that sort, that would have a much lower impact on us. But we have seen loyalty members increase as a percent of the total guest staying at our hotels, and there are some incremental costs associated with that over the long run because, again, our brand channels are the lowest cost channels still for our hotels, we see that as a positive and an offset in part to significant supply growth within the major chain.

Great. Thank you.

Thank you.

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

Hi. Good morning, everybody. So with the highlighted strategy, revenue management strategy of proactively layering in more group in sort of base business, I mean, what does group pace look like over the next, say, 30 to 60 days? And then I'm also curious what you underwrote for group revenue in 2020 and what that could mean for growth in out of room spend as well on a year-over-year basis?

I think that as we approach the year and we went into budgeting for 2020, we looked at each market and each hotel on a case-by-case basis. And as there was additional supply impact or as we may have seen business transient more stable and maybe there wasn't a significant amount of growth, we wanted to layer on additional base business. So that's always our approach as we go into the New Year. I think with group softening for our portfolio broadly for the full-year 2019, we wanted to put an additional focus on that. And we're seeing in our pace numbers that it's improving and we're actualizing on that strategy. To what extent, it's too early, I think, to say. But we definitely incorporated that as part of our strategy as we looked in 2020.

And as Liz highlighted, our group business books short within a few weeks often of the actual stay. And so even on the group side for us, looking 60, 90 days out, becomes a little bit less informative. In terms of additional income that we would receive from groups, again, for our hotels, excluding hotels like the Richmond Marriott, where restaurant revenues and other catering revenues are a more significant percentage of total business, our groups have some incremental F&B spend, but again not nearly as significant in terms of incremental revenue for us as it is for some of our full-service peers. The primary benefit for us really is compressing the hotel and putting us in a better position to revenue manage the remaining room.

And as you're thinking about other income and F&B income for 2020, just take note, again, of my comments around the Richmond Marriott. We will have significant F&B displacement in the first half of the year with improvement in the latter half.

So how does that kind of balance overall, which is kind of what I'm looking at, because F&B certainly was a source of negative growth, I believe, for the full-year last year. So does that pick back up? Or do we kind of flatten out this year for the full-year again?

I think we'll still have a negative impact from the Richmond Marriott overall.

Okay, got it. Thank you. That’s helpful. And then Justin, you referenced the dividend yield at nearly 8%. Fundamentals remain challenged, and you're expecting pressure on RevPAR and margins this year. So how comfortable are you and the Board with the current level of the dividend?

We are somewhat unique among our peers and that we pay a monthly dividend. And so we're giving the opportunity on a monthly basis to assess the sustainability and viability of our dividend on a very regular basis with our Board of Directors. Given the strength of our current yield and the more challenging operating environment, it has been a topic of conversation. That said, our dividend coverage last year remained strong. We were – depending on how you calculate it, and I know there are a couple of different ways that people like to look at it. But we were in the mid-80s to low 90s. Low 90s being including actual CapEx spend for the year. Given the environment we anticipate that, that coverage percentage would go up in the coming year, and we'll continue to watch it as the year materializes. Based on where we are trading this morning, we're pushing a 9% yield, which is incredibly attractive. We're fortunate to have ownership in assets that produce a tremendous amount of cash and enable us to pay a strong dividend throughout cycles.

So is it fair to say that, again, depending on how you calculated some of the elevated CapEx is pushing up that coverage level this year.

Yes. And specifically at our full-service hotels. So I highlighted CapEx projections for this year being between $80 million and $90 million. Approximately $15 million of that is associated with renovations that have three full-service hotels. The bulk of that is being spent at Richmond Marriott, which is the largest of our hotels involved – the renovation involves a meaningful lobby renovation and renovation to the food and beverage outlets, and is an end of franchise-related renovation. So we're doing major renovations to the bathrooms and others, which, we think, will position the hotel incredibly well on a go-forward basis, but in the near-term are elevating our total CapEx spend.

Understood. Thank you for the time.

Thank you.

Our next question is from Tyler Batory with Janney Montgomery Scott. Please proceed.

Hey, good morning. Thanks for taking my questions. Wondering if you can segment out trends that you're seeing in the corporate side of things versus leisure. Curious how those segments performed in the fourth quarter, and then also if you could talk to year-to-date as well, that would be helpful.

So I alluded to this a little bit in the earlier question. I think Q4, what we saw between weekday and weekend was more stability in business transient, as we sort of triangulate our overall transient numbers and negotiated business. As we went into the first part of the year, the first couple of weeks, we did see less growth in weekday. As we move throughout January and have moved into February, that stabilized a little bit. And I think we will watch closely as we move throughout the quarter. Again, we had this trend happen in previous years, and it's just a little bit early to draw a broad conclusion. For the full-year 2019, our business transient was positive.

Okay, great. And then just a follow-up, I'm not sure if you mentioned it earlier. What are you budgeting for combined wage and benefit increases in 2020? And then are there any other areas of cost inflation that are notable that we should factor into our models?

As we look to guidance, we assumed a 4% to 5% CPOR increase for labor – total labor.

And that would be the largest of the areas of expense increase over the coming year. The bulk of the remaining expenses we assumed would increase roughly at a rate of inflation. We will see, as Liz highlighted in her remarks, potentially an increase in utility expenses, which have been low for a number of years now. That's one that we're watching, in particular. We'll continue to see pressure on insurance costs and on property taxes. But as a percent of total expenditures, those are relatively small relative to labor.

Okay, great. That’s all for me. Thank you.

Thank you.

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

Good morning, everyone.

Good morning.

Just want to go back to the dividend comment you made and clarify one thing or let you clarify one thing. I think you said it's been a topic of conversation with the Board. Can you clarify the dividend has been discussed and you discussed on a monthly basis or you've talked about cutting the dividend?

The dividend coverage is a continual portion of our review with our Board of our current operation. I highlighted in my earlier remarks that we view our dividend payout as a significant piece of the total value equation for our investors. We continue to have roughly 40% of our investors is retail and dividend for them represents a meaningful piece of the total return that they anticipate from us. We're fortunate, as I highlighted, to be in asset class or subclass that generates incredibly high margins and have been able to maintain the dividend through economic cycles in the past. We are comfortable with where we are currently, but we're monitoring. And our ability to maintain our dividend really depends on us performing as we anticipate we will for the coming year.

Got it. That's helpful. Thank you for clarifying. And then just one other follow-up on CapEx, the $80 million to $90 million range for this year. What would that look like if you weren't doing Houston and Richmond?

Well, I highlighted in response to an earlier question, that the total CapEx spend for the three hotels in this calendar year is roughly $15 million. The bulk of that, so over $10 million of that is associated with the Richmond Marriott. We will be beginning the renovation in the latter part of the year in Houston, which will span over into the first part of the following year and likely doing the same at our hotel in New York. But because the Richmond Marriott is the largest of our hotels, because we're renovating in addition to the rooms a significant portion of the public areas and because it's an end of franchise tip from Marriott, that's the most substantial single property renovation that we've incurred to-date.

Got it. Thanks. I must have missed that $15 million number earlier. And then just lastly on asset sales, it doesn't sound like you're too inclined to accelerate the pace, at least maybe versus the comments you provided on last quarter's call, but kind of a two-part question. I guess, one, is that the right read of your selective comment you made in the prepared remarks? And then the second part is, what would you need to see in the fundamental environment or the transaction environment for you to move faster on that front today?

I would say – and I appreciate you asking the question to clarify. So by selective, we do not mean that we will be less aggressive in pursuing dispositions. In fact, I felt I highlighted and again, I appreciate giving me an opportunity to clarify that the environment remains strong for potential sale of assets. By selective, really, I've highlighted on past calls that investors in today's environment seem to be more interested in individual assets than they do in larger portfolios and the most likely nature of our dispositions as we roll through the year will be individual transactions for one or a small group of properties with buyers who see value in those individual assets.

Got it. Thanks and then just one last one, more housekeeping. Renaissance, New York, you mentioned about 40 basis point RevPAR impact, but in guidance, what's the imbedded number for margins and then adjusted EBITDA as well.

So for guidance, we mentioned the 40 basis points on the topline. I think for EBITDA, there's margin impact. There is probably 25 to 30 basis points impact.

Thank you.

Thank you.

[Operator Instructions] Our next question is from Matt Boone with B. Riley FBR. Please proceed.

Hey, good morning. This is Matt on for Bryan. I just had a quick one. Can you share what's your top 25 markets are currently seeing the most supply pressure and where you expect that to trend for the balance of the year?

Of our top markets, we continue to see pressure in a number of them. Nashville historically has seen the greatest year-over-year growth. We anticipate that, that will flow in. And actually, interestingly, and I didn't have an opportunity to make this comment earlier. We believe that in terms of percentage growth, many of our markets peaked this past year or the year before. And our expectation for 2020 opening is that they will be less as a percentage in the bulk of our markets than they have been in times past. The challenge for us really is that given the number of openings we had in a number of our markets in 2019, we anticipate we will experience a bit of a headwind as those assets ramp. But really, Nashville – Dallas is a market with relatively low barriers to entry. We continue to see meaningful growth there. Miami and a number of our South Florida markets have also seen a significant amount of supply growth.

Thank you.

Thank you.

We now have a follow-up question from Anthony Powell with Barclays. Please proceed.

Hi. Just a few more on the dividend. I know you mentioned that people look at payout ratios related to REIT, how do you and the Board look at payout ratios? And how do you do you look at normalized CapEx? And just what's in your view, your current payout ratio? And how do you – and are you comfortable with that over the medium term?

As I hope I highlighted earlier, we look at it in a number of different ways with the Board. We look at it on an absolute basis. So given real CapEx spend within any given year, and then we look at it on a normalized basis as well. For this year and this past year, the delta between those has been 5% to 7%. And I highlighted that this year, we have somewhat elevated CapEx because of the renovations at our three full-service hotels.

Right. And so as I look to next year, you should have less CapEx, and you also have the ramp-up of newly acquired, new build hotel. So theoretically – obviously theoretically coverage should go up, I guess without regard to same-store EBITDA, which, I guess, will probably continue to see pressure, but absent same-store EBITDA decline and your coverage should improve next year, given the ramp in hotels and lower CapEx. Is that fair?

That's fair. You included a number of caveats in your questions. So I think given those, yes, that would be fair.

Got it. Okay. And just one more, if theoretically you had to reduce your dividend, not saying that you will, but if you had to, would it be kind of a gradual decrease based on taxable income? Or would you try to set some level that you think you can maintain beyond that?

I think this probably isn't the best…

Form for that, got it.

In theorizing, but I would – but I want to be fair and answer your question, we have historically placed a premium in our analysis on maintaining consistency in our dividend and our dividend payout over time. And I think our first effort will be to manage our business in a way that we can maintain. And then should we make adjustments, it would be based on a longer-term view of our business and what we expect to be a reasonable coverage over our long-term.

All right. Thanks for that. Appreciate it.

Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Justin Knight for closing comments.

Thank you. We really appreciate everybody joining us this morning. And hope, as always, that as you travel, you'll take an opportunity to stay with us at one of our hotels.

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