Apple Hospitality REIT, Inc. (APLE) Q2 2020 Earnings Report, Transcript and Summary

Greetings and welcome to Apple Hospitality REIT Second Quarter 2020 Earnings Conference 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. It is now my pleasure to 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 second quarter 2020 earnings call on this the 7th day of August 2020. Today’s call will be based on the second quarter 2020 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 and the impact of the company’s business and financial conditions from and measures being taken in response to COVID-19. 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 annual report on Form 10-K for year ended December 31, 2019, quarterly report on Form 10-Q for the quarter ended June 30, 2020 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, our Chief Financial Officer will provide an overview of our results for the second quarter of 2020. Following the overview, we will open the call for Q&A. At this time, it is my pleasure to turn the call over to Justin.

Thank you, Kelly. Good morning, everyone and thank you for joining us today. I hope that each of you and your loved ones are staying safe and well. The current operating environment is unlike anything we have experienced during our more than 20-year history in the lodging industry. Strength and resiliency of our portfolio and underlying strategy have been tested. The results are consistent with our expectations. Our portfolio of predominantly rooms-focused hotels that are aligned with industry leading brands have broad consumer appeal and are diversified across 87 markets. Given the size, efficient design and location of our hotels, all of our hotels are currently open and accepting reservations with enhanced health and sanitation measures in place. From the onset of the pandemic, we have been intently focused on maintaining a sound liquidity position, safeguarding long-term value for our shareholders and ensuring our ability to thrive in future years. Our initial efforts have been focused around reducing our cash burn and returning to cash flow positive as quickly as possible. Minimizing our cash burn in the near-term preserves the strength of our balance sheet, protects the value of our equity, and positions us to take advantage of strategic opportunities in the early stages of a recovery. As occupancy improves and markets begin to stabilize, we will look for ways to further optimize our portfolio through opportunistic dispositions and disciplined capital allocation. Nature economic disruptions impact individual markets differently and thoughtful portfolio management will ensure that we are positioned appropriately. With a flexible balance sheet, we look for accretive opportunities that leverage our industry experience and the strength of our underlying platform as operations begin to stabilize. I am confident we are uniquely positioned to weather the current operating challenges and outperform as travel recovers. In the initial shock of the COVID-19 pandemic and efforts to mitigate its spread hit the travel industry in mid-March we have worked with our management companies and made swift operational changes to staffing and service models. Consolidated operations in certain markets, minimize utility usage on unused floors, reduced or eliminated operational costs, adjusted food and beverage offerings, reduced amenities, renegotiated hotel service contracts and modified our sales strategy to focus on sectors with continuing lodging needs. At the corporate level, we have postponed all non-essential capital improvements projects for 2020. We suspended monthly distributions. We reduced board and senior executive compensation and we terminated the written trading plan under our share repurchase program. For our efforts in collaboration with our property management teams, we were able to realize a cash burn during the month of April, a month when total portfolio occupancy was less than 18%. That was in line with expectations we outlined during our first quarter call. In the most challenging economic and operating environment the industry has faced, we produced positive hotel level EBITDA for the quarter and positive corporate level EBITDA for the month of June. Based on top line results, we estimate we achieved positive cash flow in the month of July. Performance of course varies by market and there remains significant uncertainty as to when operations that our hotels will return to 2019 levels. Given the ongoing uncertainties related to the depth and duration of the COVID-19 pandemic, we are not yet in a position to provide an operational outlook for the company. We have, however, demonstrated the resilience of our portfolio and the value of our strategy in a challenging environment. As the economy recovers, we are exceptionally well-positioned to benefit. Our assets, our affiliation with strong brands, our partnership with exceptional third-party managers, our data-driven benchmarking approach to asset management, our balance sheet, our broad geographic diversification and our experienced team at Apple provide us with security and uncertain times and the ability to produce strong returns for our investors during the periods of economic prosperity. In our continual effort to refine our portfolios to maximize performance over the long-term, we have strategically partnered with trusted developers to invest in new non-prototypical assets in targeted markets. In April, we closed on the dual-branded Hampton Inn & Suites and Home2 Suites in Cape Canaveral, Florida, a development project which we had contracted for in 2018. Purchase price was approximately $47 million, which was funded by $25 million of cash on hand and a note with the developers secured by the hotels for approximately $22 million that is payable in 2021. Highlighting our unique development contracts, subsequent to closing on these hotels and quarter end, we realized shared savings with the developer that resulted in an over $1 million reduction in the purchase price. We anticipate closing on the dual-branded Hyatt House and Hyatt Place in Tempe, Arizona, a development project, which we contracted for in 2018 later this month, for a total purchase price of approximately $65 million. And the Hilton Garden Inn in Madison, Wisconsin, which we contracted for in 2019 for approximately $50 million, is currently under construction. Assuming all conditions to closing are met, we anticipate acquiring the Madison Hotel in 2021. In an effort to preserve our future liquidity, we terminated the contract for the purchase of a to-be-developed Courtyard by Marriott in Denver, Colorado during the quarter. Historically, new supply has followed demand trends. And while we have not yet seen a meaningful decline in new supply across our markets, we anticipate the pandemic’s unprecedented impact on demand and the economy overall will meaningfully slow the level of new construction starts over the next several years. Continue to explore just addition opportunities and during the quarter, we entered into a contract for the sale of our Homewood Suites in Memphis, Tennessee for approximately $9 million. Though we anticipate that the total transaction volume for the industry will be down through the remainder of the year, we will continue to opportunistically pursue transactions that further refine and enhance our portfolio. We have consistently reinvested in our existing hotels to maintain their value and to ensure their market competitiveness. As a result of these investments and the quality of our onsite management teams, our portfolio has consistently outperformed on measures of guest satisfaction and benefited from strong market share. With the temporary easing of brand renovation requirements and an effort – and in an effort to preserve capital, we have postponed all non-essential capital improvement projects for the year reducing our anticipated 2020 spend by approximately $50 million. During the 6 months ended June 30, 2020, we invested approximately $30 million in capital expenditures completing renovations at 16 hotels started prior to the onset of COVID-19. July, we completed renovation work at our Hilton Garden Inn in Islip and we expect completion of our Richmond, Marriott renovation to occur late this summer. We anticipate spending an additional $5 million to $10 million during the remainder of the year. We have always maintained a conservative capital structure to provide stability for the company during periods of economic volatility, the flexibility to respond to changes in the operating environment, and the ability to act on opportunities that may arise within the marketplace. In June, we entered into amendments to each of our credit facilities to suspend the financial covenants under the credit agreements until June 30, 2021, while still allowing us to make investments in new acquisitions and in our existing hotels. We are grateful for the strong relationships we have with our lenders and for their willingness to work with us to make adjustments necessary in the current environment. Apple Hospitality was intentionally structured to weather challenging times and to produce attractive returns during periods of economic prosperity. We have strengthened and refined our ownership strategy over 20 years in the lodging industry and through multiple economic cycles. During our first quarter call, I highlighted the fact that we were uniquely positioned because of the type of assets we own, our geographic diversification, our efficient corporate structure, and our relatively low leverage to be among the first to benefit from relaxed restrictions and a reopening of the economy. Our business was and continues to be materially impacted by the COVID-19 pandemic. By May, we were producing positive hotel EBITDA and in June, we were just shy of covering all corporate level costs, including principal and interest on our loans. We anticipate that we will produce positive cash flow at the corporate level in July, well before the majority of our peers. The challenges facing the industry are complex and we do not anticipate that the path to recovery will follow a straight line. However, we have consistently articulated the strategic benefits of owning a rooms-focused portfolio diversified across locations, market types, brands and hotel operators. Current environment has provided the ultimate test of our assertion that our strategy would provide for relative stability during periods of economic difficulty. Our hotels have proven appeal with the broadest group of potential customers and the association with top brands, combined with the strong value proposition of the upscale select service model has historically led to strong performance during all phases of economic cycles. Our team has a track record of creating value during challenging economic periods. And I am confident that we will emerge from the current crisis well positioned to outperform. It’s now my pleasure to turn the call over to Liz.

Thank you, Justin and thank you everyone for joining us this morning. We entered the quarter with weekly occupancy around 16% for our portfolio. By mid-April, we began to see some improvement as our team worked diligently to focus our sales efforts on COVID-19 specific opportunities to maximize performance based on available demand. In addition to first responders and other business directly related to the pandemic, we were also able to successfully market to other demand generators such as leisure, which grew stronger as we entered the summer months, construction, manufacturing, projects business and government. Occupancy steadily improved each month during the quarter. And for the month of June, our hotels achieved occupancy of 38% at an average daily rate of $105. Positive trends have generally continued and we finished the month of July at an occupancy of approximately 45%. The immediate impact of COVID-19 in March was broad-based and for the month of April, more than 50% of our hotels were running less than 15% occupancy and only 6% had occupancies above 50%. We began to see improvements in May, with 27% of our hotels running less than 15% occupancy and 18% of our hotels at occupancy levels of 50% or greater. In June, 15% of our hotels ran less than 15% occupancy and 32% of our hotels had occupancies above 50%. By the end of July, almost half of our portfolio was running at or above 50% occupancy and only 6% of our hotels had occupancy below 15%. 18 of which were intentionally consolidated in market clusters. Our asset management and hotel management teams have done a tremendous job working to identify top line opportunities across our markets and maximize operations in the current environment. Several characteristics of our portfolio have and will continue to position us for outperformance both in the current environment as well as in the recovery. Our portfolio is broadly diversified with almost 80% of our rooms located outside of urban markets, limiting our dependence on international travel and large convention business, allowing us to realize greater benefit from areas that have eased travel restriction. Extended stay and suite properties account for over 50% of our rooms, which have consistently had strong consumer appeal, but also provide ideal accommodations to those most likely to be traveling in the current environment. Our reliance on group demand, which is expected to take the longest to recover, is low, with only 14% of our traditional room night mix coming from this segment. The majority of our properties are located in drive-to market, which has allowed us to benefit from the recent relative strength of leisure demands, but will also allow us to capitalize on regional business travel expected to return before larger corporate demand. Our leisure markets in the Southeast were particularly strong in the quarter, but we also experienced higher occupancies and several others, including Suffolk, pockets of Houston, El Paso, Newark and Anchorage, with demand in those markets coming primarily from construction, military, airline crew and disaster recovery business. In addition to improvements in the top line performance, during the quarter, we grew operational efficiencies and are pleased to have achieved steady improvements in bottom line performance as we progressed through the quarter. Adjusted hotel EBITDA for the month of June was $8 million and for the quarter was $704,000. Due to the swift efforts of our team and our hotel operators to implement a variety of cost elimination and efficiency initiatives at each of our hotels, hotel operating expenses were reduced by 67% during the quarter as compared to last year, with all of our hotels open and receiving reservations. In markets where we own multiple assets, we have intentionally consolidated operations and occupancy in order to gain incremental efficiency. As of June 30, 18 of our hotels had consolidated operations, down from 38 hotels in May. We continue to reduce this number as occupancies improve. Once our asset management team established new labor and operating models appropriate to navigate the extreme low occupancies experienced at the onset of this crisis, they quickly transitioned and began working with each of our management companies to set models at various occupancy levels in an effort to prepare for the variability and recovery across markets and hotels. In establishing these labor models and operating plans, our team leveraged benchmarking across all of our management companies, sharing best practices and optimizing the plans as a result. Reestablishing labor models and operating plans based on various occupancy levels has allowed us to proactively ensure we have the appropriate framework to maximize performance as occupancies increase. We have worked diligently with our managers to ensure that our approach is well-balanced with sufficient measures and resources deployed to protect the physical asset, our associates and our guests staying intently focused on setting our hotels up for success over the long-term. During our last call with these operational adjustments in mind, we estimated our monthly cash burn rate, including property level expenses, corporate G&A, property taxes, insurance and debt service would be approximately $18 million at an occupancy level – at occupancy levels between 15% and 20%. We were able to meet these estimates while operating at the lowest occupancy levels and continue to reduce our cash burn throughout the quarter as occupancies increase. And we estimate we achieved positive cash flow in July with approximately 45% occupancy. The current operating environment remains incredibly uncertain, with growing concerns related to new COVID-19 cases in recent weeks and some cost increases as we implement enhanced cleaning standards across our portfolio and add back staff to service higher occupancies at some of our hotels. However, we continue to believe we are well-positioned to flex as necessary as these challenges arise and mitigate the impact to our liquidity. With significant representation on brand advisory councils, we are actively involved in discussions related to increasing the efficiency of future service and staffing models in ways that will more than offset potential cost increases related to the implementation of enhanced health and safety protocols and improve long-term operating margins. We have always believed that maintaining a strong balance sheet would provide us with stability during periods of economic difficulty and flexibility to act opportunistically. We entered the current downturn with net debt to EBITDA of approximately 3.1x. As of June 30, 2020, we had approximately $1.6 billion of total debt outstanding, with the current combined weighted average interest rate of approximately 3.8%, cash on hand of approximately $156 million and availability under our revolving credit facility of approximately $225 million. Excluding unamortized debt issuance cost and fair value adjustment, the company’s total outstanding indebtedness is comprised of approximately $519 million in property level debt secured by 33 hotels and approximately $1.1 billion outstanding on our unsecured credit facilities. In March to increase readily available liquidity, we drew down the remaining availability under our $425 million revolving credit facility. As a result of entering into amendments through our credit facilities and the effective reduction in our monthly cash burn resulting from improved occupancies and cost containment efforts, the company repaid approximately $225 million and $100 million of borrowings under our revolving credit facility in June and July respectively. The reduced borrowings on our line generate approximately $2 million in quarterly interest savings. Reserve capital in the current environment, we also suspended monthly distributions beginning with the April distribution, postponed non-essential capital improvement projects, terminated the written trading plan under our share repurchase program, and meaningfully reduced corporate level G&A. At June 30, 2020, the company’s total debt to total capitalization net of cash and cash equivalents was approximately 40% and weighted average debt maturities were 5 years, with no maturities for the remainder of 2020 and $53 million net of reserves maturing in 2021. As Justin mentioned, effective June 5, we successfully entered into amendments to each of our credit facilities that suspends the testing of financial covenants under our credit facilities through June 30, 2021 with the option for us to opt out if things improve and modify the calculations for the following year allowing for additional flexibility following the covenant release period. The terms of the amendments include minimum liquidity requirements and limitations on share repurchases and cash dividend payments. However, during the waiver period, the amendment does allow for up to $50 million in discretionary capital expenditures and up to $370 million in acquisitions, including the allowance for properties currently under contract preserving flexibility to be opportunistic. Throughout our history, we have fostered strong relationships with our lenders. We appreciate their confidence in our ability to manage this current crisis and are grateful for their continued support during these challenging times. I also want to thank our teams who have worked tirelessly to optimize performance in the most challenging operating environment our industry has ever faced. Their efforts and experience coupled with the strength of our platform have put us in a position where at current occupancy levels we expect to be cash flow positive preserving liquidity as we navigate through this crisis and giving us great ability to be opportunistic as we look to bring long-term value to our shareholders. We will now open the call to questions.

Thank you. [Operator Instructions] Our first question comes from Austin Wurschmidt with KeyBanc. Please proceed with your question.

Hi, good morning, everybody and congratulations on getting back to the breakeven level. What I would like to understand, I guess, is as you look out, could we continue to see occupancy move higher as you look into August and September or whatever visibility on bookings you have or do you think it’s possible that maybe performance is peeking out here, just given the lack of corporate demand and will require kind of corporate demand coming back to see that next leg up?

Thank you, Austin and a good question obviously. If the last 6 months have proven anything to us, it’s that anything is possible. And I think we are fortunate now to have explored occupancy levels and operating models at those occupancy levels that we had in our 20-year experience in the industry not seen before. And I think should there be a dip, we are adequately prepared to make the adjustments necessary, to ensure minimal cash burn during that period of time. That said, we are cautiously optimistic that things continue and I think we have reason to feel that way. I highlighted in my remarks that we don’t anticipate that the path forward will be follow a straight line that there will likely be bumps in the road, but we are incredibly well positioned. I think having a broadly diversified portfolio gives us exposure to the largest number of different regions of the country and demand generators related to those areas. And it gives us I think increased confidence that we are well-positioned regardless of what the future brings.

Appreciate the thoughts. And then maybe another one for you, Justin, so despite achieving that breakeven level in July, balance sheet certainly in relatively good position now being back at those levels and preserving that capacity. You are under contract to sell a small asset which sensibly I think you might think it’s the worst time you would want to be a seller right now. So, can you just help us understand the decision process? Maybe give us a sense of what valuation looks like on this one deal with knowing that it’s relatively small, but what the appetite is for additional sales sort of in the back half of the year?

Absolutely, I highlighted in my remarks that that our expectation is and always has been that markets change over time and the relevance and appeal of our assets in those markets changes as well. We have been consistent from the beginning in our approach to our portfolio looking for opportunities to buy and sell assets in ways that enhance the overall value. The conversations related to the Memphis asset began prior to the pandemic. The buyer is a private equity investor interested in investing in the hotel for an alternative use by conversion to multifamily. And this particular asset is somewhat of an outlier in our portfolio and that it’s over 30 years old and is first generation Homewood Suites with a combination of interior and exterior corridors. As we looked at over the next several years, the renovation needs of the property, which we viewed as being substantial in that $35,000 to $40,000 range and the prospects for that hotel long-term, it made sense for us to consider as a potential disposition. And pricing on that particular asset was attractive and the buyer I think again in part, because the intended use was something other than hotels has maintained pricing on it and which was attractive on a cap rate basis, coming in well below 7% pre – on 2019 numbers, pre-CapEx in the neighborhood of a 4-cap – if you factor in full renovation dollars that we anticipated. So, again, something of an anomaly within our portfolio, but from a strategic standpoint, I think wholly consistent with our intent from the very beginning and certainly something as I highlighted in my remarks that we will be even more focused on over the next several months as we see how markets emerge from the current environment wanting to ensure that we are well-positioned from a concentration standpoint in those markets, which are most likely to outperform.

Got it. And that’s great detail. Thank you. Thank you for the color.

Absolutely.

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

Hey, everyone. Good morning.

Good morning.

Good morning.

I just wanted to ask first off echo Austin’s comments, great job getting back to an above breakeven and on a cash flow basis. I really assessed your guys’ strategy. So, first question, just in terms of the sort of spotty business, travel business, transient customer, can you maybe talk about the differences if any that you are seeing in first off your more I guess your larger primary markets like maybe in Southern California versus some of your more I guess secondary or tertiary markets? And then maybe if you are – the difference you are hearing from local versus national accounts at your hotels in terms of planned resumption of travel or the strength of the negotiating season you had with them? That would be great.

As far as trends, in California versus tertiary, I think broadly still we are seeing suburban outperform urban on an absolute basis. We still are seeing higher occupancies in suburban markets and seeing the weakest occupancies in our most urban core markets, where historically they may have benefited from citywides and convention. So our downtown Denver asset or Atlanta right next to Mercedes and some of those markets are struggling more than the suburban assets and more drive-to locations. California interestingly, even as cases have spiked, whether it be in the Sunbelt area or California, we have seen mixed recent trends as a result of that California over the last week, day-over-day is still showing increases everyday of the week from an occupancy standpoint, Arizona as well, whereas Alabama, weekday is seeing some increases in occupancy, but weekend has softened a little bit, but not dramatically. And so the trends are, I guess it’s even challenging to call them trends. They are not all similar even where we are seeing similar, I guess, themes around common cases. So, we are still seeing strength in the Sunbelt in the Southeast and California and by and large suburban outperforming urban.

Got it. And then yes just in terms of the local versus national conversation in terms of the corporates that you do have any additional commentary there or things to call out?

I think, I am sure you heard Chris yesterday. He gave some really good color on corporate, corporate negotiated accounts. I think he is hearing a variety of things from, we want to capitalize from a rate perspective on your need for our business, but we are not sure that we can commit volume to some that say we will travel and but we understand the environment you are in and we will take a percentage off of a bar or keep rates flat in line with negotiated rates in the previous year. Again, I am not sure committing to any significant increase in volume or even the same volume as previous year. So, I think those conversations are ongoing both with the brands and for our hotels, I think we work to try to find a situation, where we still are the preferred – the preferred hotel for any corporate or local account that’s traveling, but we are in the middle of sort of those corporate negotiated conversations. Locally, I would say, those are going to depend on markets, but we have certainly seen property direct business increase since the pandemic hit and some of that would be groups related to first responders or governments or some of the business that’s unique to the pandemic itself. And some it’s business that’s been in market that we just haven’t had to take historically, but it’s more local in nature. And so I do think we are seeing some strength in local negotiated accounts or local group business. I think that, that’s likely to come back before corporate negotiated I think regional drive to locations I think it’s broad broadly anticipated in the industry that will perform ahead of corporate large corporate national accounts.

Okay, great. Other one for me is I guess maybe along the same lines and you kind of mentioned this in your press release, but what are some of the things you are doing either from an asset manager or property manager level, to gain opportunistic business or additional business and creative ways particularly as leisure demand tapers off towards the end of the year?

I think I can start on this and Liz can fill in. Key to our success in this area has been keeping our hotels open. So, and as we looked at staffing models, reduced staffing models for hotels that were to remain open during the toughest periods in April, we were careful to maintain key salespeople that, where possible, such that we were well positioned to continue our efforts on the sales side. And I think it would be, it’d be wrong to underestimate the positive impact that’s had, as we have begun to see stronger recoveries, having the hotels, open taking reservations, for the entire the time period and retaining talent on the sales side, have both given us a leg up as business returns in market and put us you know, ahead of ahead of others who took more drastic measures in order to cut costs in the short term, we were able to do that, I think, in large part because of the operating model for our hotels, and our ability to run them with so few people total and beyond that, we have been incredibly targeted. And I’d like to say our management teams are even scrappy in that over the years, we have been through multiple cycles and they are accustomed to operating in a highly competitive markets and going after the business that’s available. And because of the broad appeal of our assets, sometimes that means leisure, sometimes that means property, direct, local negotiated business, sometimes that that’s managing our revenue management systems in order to optimize business that’s readily available and coming through brand channels or OTAs and, I think what we have highlighted and validated is, the strength of the individual management companies that we work with the quality of their onsite and above property staff and really, quite frankly, the ability of our asset management teams to work with those groups to get the absolute best results possible in market.

Okay, thank you guys.

Thank you.

Thank you.

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

Hi, good morning, everyone. Similar line of questioning so when you look at verticals like construction, manufacturing, project business government is there any kind of temporary nature to any of this business and is there any seasonality to the business? Would you expect this to be pretty durable, across the fall and early winter, or is there any part that may just go away in the winter?

I don’t know that we have perfect visibility like Justin mentioned at the beginning of the call, I think if the past few months have taught us anything is that the current environment is it’s not predictable. And I don’t know that, that we can accurately give you an exact answer. But some of the business that we are picking up now, whether it be construction or manufacturing, it was business that’s consistently in market, it’s just isn’t business we have historically taken given the lower rated nature of the business and being able to replace that or take higher rated, business, transit and corporate negotiated as an alternative and in better time, so I think the broad appeal of our assets affords us the opportunity to capitalize on business that is consistently or has consistently been in the market and is currently still in the market at this time and so, I don’t have perfect visibility into whether that will dissipate, as we move through the coming months, as of right now, that has been a solid and stable piece of our business, since we began recovering at the end of April and into May. So, it's not something that's wavered. It's been a consistent theme as we talk with our management companies and our hotels as to what is making up the demand it's not all leisure or improvement in occupancy and as I mentioned, earlier we are still growing some midweek and that we don't, that could be leisure, but it also could be local negotiated accounts and some of this projects business as well. And so, when we speak to our management companies and hotels, it's we have a diverse set of demand generators, even currently in our hotels. It's not only first responders or construction, and we certainly have some of that business, and it is helping us and but I expect to the extent we fear that an increase in cases will pull back on leisure, an increase in cases will also maintain first responder business in our markets. And so, there is an offset to some extent of – and I think it's some of the reason that even as pieces have increased, you have seen some stability in some of these markets where you would have expected a bigger pullback and demand.

And it's important to remember we are in over 80 markets. And so the specific demand drivers for each market are distinct, and each markets more heavily rely on a different industry. And the seasonality for our markets varies. So for example, leisure demand in Phoenix and in some of our Florida markets, actually improves as we get into the winter months. And so I think, if it would be wrong to assume that as we get into the winter months, we would see a dramatic reduction in leisure across our entire portfolio given the fact that we haven't even gotten into peak season yet for Phoenix, and again, some of our Florida markets.

Thanks for that. And it seems that obviously, you have gained some share in some markets that you take this as a new business that may have launched to other hotels. As those competitors either reopen or re staff, do you think they may try to get a business back through discounting? Is that a risk? Or given kind of the quality of real calling your brand, do you expect to retain that business as competitors try to win it back?

I think that if competitors reopen it will be because of they are reopening as demand is improving. And so that will be hopefully an offset to what would be more competitive. I think it's a real risk that as things open, things would be more competitive. However, as Justin mentioned staying open and taking care of people when others couldn't or wouldn't and doing it well, and having them be in house and feel safe and have the increased sanitation protocols in place and just having been there, I think we will afford some stability as things reopen in certain markets. But competition is competition and it may put pressure on rates or but we have heard from others in the industry that they are tending not to open until they see some stability and demand in market. And so, I think, hopefully that will be an offset to some of the competition as things reopen.

And remember, because of the locations that we are in, we didn't see closings from an order of magnitude similar to our peers who are more heavily concentrated in urban markets where closures were significantly more pronounced.

Okay, thank you.

Thank you.

Thanks, Anthony.

Our next question comes from Tyler Batory with Janney Capital Markets. Please proceed with your question.

Good morning. This is Jonathan on for Tyler. Thanks for taking our questions. First one for me, can you just talk broadly about some of the trends you're seeing in regards to the extended-stay portion of your business and kind of how that compares to your select service assets?

Absolutely from similar to what we discussed on our Q1 call, we certainly are seeing our extended state properties perform the strongest across our portfolio in France and some of that is consistent even pre pandemic I mean our extended-stay properties have historically done well, they tend to be able to maximize RevPAR by building good long-term based business and maximizing rate potential on the remaining rooms. And so historically we have seen strength there and now it’s no different. And I think there is particularly – particular appeal to them in an environment where restaurants have been closed and people need additional space and they have kitchens. We have run as much as a 20 point or $20 RevPAR premium in our higher end extended stay brands. So, we have certainly seen outperformance there.

Okay, great. That’s very helpful. And then switching to the operations side in regards to the cost savings, how much of those savings do you think are permanent in nature and how much do you expect them to creep back up as hotels ramp on hierarchy levels?

Well, certainly a portion of the expenses are variable and vary with occupancy. So, our 67% year-over-year savings is unrealistic as we begin to see meaningfully higher occupancies in our hotels. That said and we highlighted – Liz highlighted in her prepared remarks and Chris highlighted in his remarks yesterday, we are working with the brands and our capacity as representatives on various advisory boards. And just given the long standing relationship that we have with senior executives at those brands to establish a model coming out of this that’s more profitable for us as investors I think and still, importantly still preserves the strong value proposition for our brands with consumers and those conversations have been fruitful. And our expectation – we have made meaningful adjustments to service levels and other aspects of our business as a result of the current environment that we are in, which is abnormal hopefully on a go forward basis, but there have been learnings as part of that process. And our expectation is that we will take those learnings coming out of this to run better margins than we have historically.

Okay, great. Appreciate the detail. That’s all for me. Thanks, guys.

Thank you.

Thank you.

Our next question is from Kyle Menges with B. Riley. Please proceed with your question.

Good Morning. This is Kyle on for Bryan Maher.

Good morning.

I was just hoping – good morning. I was hoping if you could talk a little more on your thoughts around continuing to bring back hotel staff and then I was curious what wage levels you are seeing as you bring people back relative to levels pre-COVID?

So, as I highlighted earlier, we are ramping employment at our hotels as we see occupancy improve and a portion of – more significant portion of the employees that are coming back are hourly workers and the use of their time varies with occupancy at the hotel. So, the match is good there. With unemployment being significantly higher, wage pressure in individual markets is less than it was pre-pandemic with the caveat that, that’s partially offset by the fact that there are very meaningful unemployment benefits available to people now. And so in some markets, where those are extremely high, there is pressure from a wage standpoint as we are looking to bring people back, but by and large, our expectation is that the primary pressure on wages for us historically was a result of low unemployment and availability of people to fill jobs. Unfortunately, we are not in that position now. And unemployment numbers are significantly higher, which puts us in a position to be selective, bring back the best talent in an environment that’s much more competitive on their side.

Great, thanks. That’s all for me.

Thank you.

[Operator Instructions] Our next question is from Michael Bellisario with Baird. Please proceed with your question.

Good morning, everyone.

Good morning.

Good morning.

Just first question on the July trends, you gave a 45% occupancy level, but could you give us some more metrics around that what was that versus last year and what was the RevPAR percentage change for the portfolio in July

RevPAR percentage change has slowed relative to the increases that we saw June over may in May over April. So, it has RevPAR has slowed slightly, you can see that in the occupancy trend to ADR is very similar to what we saw in June, but has moderated, so similar trends.

And, but what about on a year over year basis, that the percentage change?

The percentage change has moderated, but the absolute numbers are, are similar from an ADR perspective.

Got it. And then just maybe back to some of your comments earlier on in the prepared remarks just relative to your internal expectations that you had 60 or 90 days ago. And aside from the fact that occupancy was a little bit better and picked up throughout the quarter, where were the positive surprises for you on the fundamental side?

I think the most positive surprise was that things ended up playing out very much as we anticipated they would. I think, in our last call, we highlighted the fact that our expectation was that we would be profitable at the hotel level between 30% and 35% occupancy and at the corporate level between 40% and 45% occupancy. As business came back, we had a perfect opportunity to prove out those assumptions during the quarter. And then those assumptions were our expectations were met. I think we continue to be impressed. Not surprised but impressed with the ability of our management companies and our on site teams to adjust and to operate incredibly efficiently and effectively in the current environment. These are, as I highlighted in my prepared remarks, unprecedented times, and we have been in the business for several decades now and our management companies and our on site teams have performed admirably, I think, aided, obviously, by an asset management team who has been all over this working with our management teams to identify best practices and to establish norms, such that we achieve optimal results on our properties.

Great. Thank you.

Thank you.

We have reached the end of the question-and-answer session. I will now turn the call over to Justin Knight for closing comments.

Thank you. And we really appreciate you taking the time to join us this morning on our call. These are unprecedented times incredibly challenging, as I highlighted earlier, I am incredibly pleased with the way our portfolio and our team has performed. We had going into this three priorities first, to get back to a level where we could establish cash flow positive operation second to look at our portfolio and to begin to explore opportunities to fine tune in response to changing demand profiles of individual markets and third, to leverage the strength of our portfolio to pursue opportunities in the future. I think we are executing incredibly well against that strategy. And I am excited about what the future has in store for us at Apple. Appreciate your interest in the company and I hope that as you travel and I hope that you travel that you will take opportunity to visit us and to stay in our hotels. Have a great one and we look forward to talking to you soon.

This concludes today’s conference. You may disconnect your lines at this time. We thank you for your participation and your interest in Apple Hospitality REIT. Thank you.