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…

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…

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.