Greetings, and welcome to the Apple Hospitality REIT Third Quarter 2020 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Clarke, Vice President of Investor Relations. Thank you. Ms. Clarke, you may begin.

Thank you, and good morning. We welcome you to Apple Hospitality REIT's third quarter 2020 earnings call on this, the sixth day of November 2020. Today's call will be based on the third 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 condition 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 the year ended December 31, 2019, quarterly report on Form 10-Q for the quarter ended September 30, 2020, and other filings with the SEC. Any forward-looking statement that Apple Hospitality makes speaks only as of today, and the Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, certain non-GAAP measures of performance, such as EBITDA, EBITDAre, adjusted 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 third 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.

Good morning, and thank you for joining us today. The COVID-19 pandemic continues to impact our daily lives. I sincerely hope that each of you are doing well, staying healthy and managing the challenges impacting day-to-day life. I would like to take this opportunity to thank the management teams and associates at our hotels. Our outperformance during these unprecedented times would not be possible without their strength, dedication, and unwavering hospitality. We have effectively adjusted to the new work environment and continue to serve our guests with care during an especially challenging time. I also want to thank our team at Apple Hospitality. This operating environment is unlike anything we have seen during our long history in the lodging industry. The collaboration across work groups and the ongoing communication with brand representatives, lenders and our third-party management teams have been exceptional and they've laid the groundwork for maximizing performance and preserving long-term value for our shareholders throughout the recovery. Over the past two decades, through hundreds of asset-level transactions and multiple corporate level mergers and sales, we have developed and refined a hotel investment strategy unique in its ability to mitigate risk and volatility while producing compelling investor returns throughout economic cycles. While the current environment has created more specific operating – significant operating challenges than we experienced in prior cycles, it's highlighted the merits of our underlying strategy and diversified rooms-focused portfolio. On prior calls, we indicated our expectation that we would be less impacted than many of our peers and among the first to benefit from a recovery in travel. With meaningfully lower leverage, greater market diversification and more efficient asset-level operations, we were first among our publicly traded lodging REIT peers to generate positive cash flow. Our ability to keep our hotels open and operate efficiently at…

Thank you, Justin, and thank you, everyone, for joining us this morning. We began the third quarter with portfolio occupancy in the mid-40s and positive cash flow beginning in July, just four months after the impact of the COVID-19 pandemic and resulting shutdowns that drove industry occupancies to their lowest point. Occupancy continued to improve throughout the quarter though the rate of growth float, moving from 45% in July to 49% in August to 52% in September for a total of 49% for the quarter. Growth continued in October with portfolio occupancy reaching approximately 53%. By the end of October, 60% of our hotels had occupancy in excess of 50% up from 6% in April and 32% at the end of the second quarter, and just 3% of our hotels had occupancy below 15%, including hotels where we've intentionally consolidated operations. Occupancy at our extended stay hotels, which represents over a third of our total portfolio have continued to exceed our portfolio average at 60% in July, 64% in August and 65% in September. Summer leisure travel drove demand across our portfolio with our Virginia Beach hotels running approximately 80% occupancy for the quarter and our Panama City and Hilton Head hotels running just under 70%. Weekend occupancies for our portfolio exceeded weekday occupancies by approximately 12 percentage points for the quarter with the monthly spread being fairly consistent, except for the impact of a strong Labor Day weekend, which created a marginally greater differential for September. For context, last year, our weekend and weekday occupancies were similar throughout the summer with weekends being just slightly higher overall. Demand for our hotels has been broad-based and includes leisure, government, healthcare, construction, disaster recovery, insurance, athletics, education, crew, and local and regional corporate business. Eight of our hotels ran occupancies in…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Neil Malkin with Capital One Securities. Please proceed with your question.

Hey, everyone. Good morning.

Good morning.

Good morning.

Hey. First question maybe about the operating model in the expense side. A lot of talk has been going on with changes to brand standards kind of fine-tuning the operating model. You mentioned vendor services, contract services, renegotiations. So maybe Liz, could you talk about some of the brand standards or changes you're most focused on given your types of hotels trying to lower fixed costs from the system maybe – yes, any color you could give would be helpful. Thanks.

Absolutely. Good question. And I know something that most people are focused on right now just trying to understand what the long-term model looks like. Thankfully, the brands have been collaborative and recognized the opportunity that we have to evaluate all brand standards once that may or may not be typically on any of our radars, right, just going through all brand standards to try to understand where we could be more efficient long-term. Everyone is working to that end. We're in very regular conversations through our ownership advisory councils with them and everything is on the table. Some of the areas that would have more focus or more attention for us just because of the impact it could have to the bottom line or certainly around labor and housekeeping. And I think we've talked a little bit about that before, but to the extent, we could adjust the model and operate similarly to how we are today, where stay-overs are not being cleaned as often or on request versus every single day would certainly help depending on your length of stay. So that's certainly an area of focus. And then comp services around free breakfast and evening social, just making sure that we're being efficient there and providing value to the guests that they are expecting. But doing it in a cost effective way and certainly not adding back amenities and services that they may not be comfortable with long-term or may not expect as we move forward.

Okay. I guess, as a follow-up to that. Are you concerned at all about the breakfast in particular? Is that kind of goes away or is modified significantly? Are you worried that is – just given that's a big value proposition to certain travelers, small business or families, are you worried that that may impair the value proposition that you provide to your customers?

I don't think that we will get to a place where we suspend comp service breakfast to a degree that would degredate the value of the brands. I think that ownership – ownership companies broadly speaking want to ensure that we're still a value proposition that they're still relevant with the brands that we operate in. We certainly want to make sure that what brings guests to our hotels and the value proposition that exists today that that exists long-term for consumers. We just want to ensure especially around breakfast, are we doing it the most efficient way and offering sort of the sweet spot of what they expect, but not anything more or less. And there are ways to leverage the scale of the brands from a cost saving standpoint and just cost negotiation standpoint that I think will be explored as well. But we're certainly partnered with the brand to ensure long-term value. We aren’t trying to realize savings even in the near-term that would prevent our long-term value for guests.

Appreciate that. Other one for me is, Justin you talked about, you expect opportunities for acquisitions to hit the market more so starting next year and then carry on 24 months or so after that. One of the things that is, I guess maybe a disadvantage for the hotel sector compared to some other REIT sectors is just that the absolute size. I wonder if this could be an opportunity just given the impact that COVID has had on the sector for you guys to be very inquisitive from a portfolio or just very active standpoint, such that you can grow your portfolio just to be – another way to be very differentiated among some of these hotel REITs that have a lot of high G&A load, limited scale benefits, et cetera. Just wondering how you think about that as we go forward?

Really good question and certainly something we are focused on. I think we see – well, first of all, it's important to highlight that from a relative scale standpoint, we've been able to achieve significant efficiencies really at our current scale based on the fact that we've been very consistent in our approach to the business and the types of assets that we pursue, such that we're able to utilize data and benchmarking to drive operations without really layering on a significant overhead load in terms of G&A at the corporate level. We think given the type of assets that we own that we're uniquely scalable in ways that would benefit investors. And we see the potential for an opportunity to do so in the current environment over the next couple of years. That said, I think we've proven that we can be disciplined in our approach. In the near-term, we're beginning to see an increase in transactions and assets coming to market that would be – the most likely scenario for us in the near-term is that those would be funded – new acquisitions would be funded with proceeds from dispositions. And then as our share price continues to recover, we see a more consistent trend line in terms of occupancy and rates growth. We would begin next to utilize the strength of our balance sheet. And finally, at some point, hopefully, we’ll have an opportunity to issue equity. I think we would only do that at a point in time when we were assured that we could – we’re priced appropriately such that we could pursue assets in ways that would benefit our current shareholders. But following the past trends, we think there will be a window of opportunities in 2021 and possibly into 2022 to potentially grow the size of our portfolio. And I highlighted in my remarks that we have a tremendous amount of experience doing that over two decades and through a very large number of transactions, but individual asset and portfolio transactions. And we look forward to the opportunity. I think the fact that we were patient as values were peaking and preserved our balance sheet, put us in a position, I think an enviable position relative to our peers as we emerge from this combined with the fact that we have had a significantly shorter duration of cash burn. And I think we will be in a position where we can do things that enhance the value of our shareholders in the near-term.

Thank you.

Thank you.

Thank you. Our next question comes from Austin Wurschmidt with KeyBanc. Please proceed with your questions.

Hey. Good morning, everybody. Tagging on to that last question a little bit. Justin, as you think about the portfolio mix, suburban and urban as well as some of the other locations, as you look out maybe three to five years, should we expect that location mix to remain relatively consistent or have you considered or would you like to reshape the portfolio in anyway from a submarket in a location perspective?

That's a good question. I think if you look at broad categories the types of markets that we intend to be in won't change. I think a hallmark of our strategy has always been broad geographic diversification, and that diversification in part has included exposure to a variety of different types of markets both urban and suburban. The mix and the split between urban and suburban has changed over time following shifts in general economic and demographic changes over the past two decades. And I think what you can expect from us is that we will continue to fine tune ensuring that we own hotels and places that people want to visit. I think you can also be assured that we will not pursue transactions in a way that more heavily concentrates our portfolio in a single type of market or increases our reliance on a single industry. Our goal has always been to establish greater stability and that comes through broader diversification and exposure to a broad array of potential demand generators. And if you look at the way our portfolio is made up now, what you can expect from us in the future is something similar. So I think what we've shown over the past five years since we listed is that we'll make adjustments on the margin such that we have exposure to those markets that are likely to produce outsized growth in the near-term.

So maybe along similar lines given the outperformance and greater stability in your suburban markets, is there any reason to believe that supply could return to suburban sub-markets sooner than urban?

Well, I mean, supply has always follow-up demand and so I think certainly to the extent, there's significantly greater demand in suburban markets and that demand excess or excess demand is sustained for any period of time. We would expect to see an increase in supply in those markets in the same way over the past cycles that we saw a supply follow demand into urban markets. I think because there's a lag and that lag tends to be two to three years for new supply to catch up with demand growth in particular markets, we tend to disassociate the two. But the reality is that the supply growth over time tends to be rational and follow demand trends, which is why we've seen supply growth in our particular sector or segment of the industry also exceeds supply growth in others. It follows the demand. I highlighted in my earlier remarks, in the near-term, we expect the fundamentals and increased cautiousness on the part of lenders to reduce the number of new construction starts. We've already seen that in our portfolio with the number of hotels that we have with new supply under construction within a five mile radius coming down to 5 percentage points from the beginning of the year. Our expectation is that that will continue and that we will have a window of opportunity to grow occupancy and to build back rates before we see supply begin to come into our markets again.

Thanks. Helpful detail there. And then just last one for me. Liz, you mentioned the potential for seasonality to take hold in November and December. And I know visibility is very low today. But I was curious, as you look around the holidays in the next couple of months, how booking – maybe booking trends in demand is shaping up specific to those times of year and anything you can share there?

I wish Austin that I could give you more detail around the holidays. They're still a little bit far out to really draw any major conclusions from what we're seeing. As a point of reference, back when COVID hit and even as things were starting to improve for our portfolios. So back in July, nearly 60% of our business was booked within three days that has – and compared to last year being around 30% being within three days, that is marginally gotten better month-to-month and it’s better in October still, but it's still roughly 50% within three days. And so I can't really with any certainty say what we think will happen over the holidays. But I am encouraged with how things have progressed coming through the third quarter and even into October with continued occupancy growth. We've been pleased as we've sort of shifted from season-to-season and each time there's been sort of an expected potential pullback in demand, some compensating demand that has materialized. And so with people being able to work remotely and educate remotely, there is the possibility that Thanksgiving and Christmas and the holidays could produce more leisure demand than historically. And so I anticipate some seasonality will take shape to the degree will it marry typical seasonality and be as significant, too soon to tell. But we're certainly encouraged by October's results and feel like there is the chance that there would be some more leisure travel around the holidays.

Thank you. Appreciate the thoughts.

Thank you.

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

Hey, good morning. Thanks for taking my questions. Just a couple for me. And first, Justin in your prepared remarks you talked your capital out there looking at your hotels. Just talk a little bit about what you're seeing out there in terms of assets. How would you gauge that interest and if you could elaborate a little bit more in terms of what sort of parties and what sort of entities are looking specifically at some of your properties?

Happy to, and I appreciate the question. I highlighted in my remarks that the groups that we're talking to you now fit into – generally into one of three categories, small private equity firms. A significant portion of those are opportunistic, I guess, vulture funds, looking for deals. We've entertained conversations with those groups, but to date because their pricing expectations have not aligned with ours have been in a position to pursue transactions. From a scale standpoint, they're generally looking for smaller portfolios in a $100 million to $200 million value range. We've also had a number of conversations with groups looking at a subset of our assets for potential repositioning into other real estate classes, specifically multifamily as a use for some of our earlier generation extended stay hotels. The group that we were talking to or that had our Memphis project under contract was a group like that and the groups that we continue to have conversations with around that project are similar. The Charlotte property that's currently under contract is under contract with a group that intends to utilize the property and the additional land associated with it for multifamily as well. And then we continue to see interest from local owner operators. Liz highlighted in her remarks the fact that we have a range of results in terms of local market performance for individual assets. And we continue to have a number of assets in our portfolio that are putting up very strong occupancy and revenue numbers despite the challenges of the current environment. Those assets continue to be very attractive for local owner operators and we've had a number of conversations with groups at price points that are comparable to where we would have been looking to potentially sell in 2019. So I think…

That's great color. I appreciate that. And I also wanted to follow-up on the labor and the expense topic and discussion. You're at 49% occupancy in the third quarter where you can make some assumptions in terms of the fourth quarter. And when look into next year and beyond, is there a good occupancy threshold to think about in terms of when you might add some incremental labor or when you might start to phase in some of the amenities at your properties that you had put on hold as the pandemic started?

As we’ve moved throughout the third quarter in markets where we had increased demand, we have added back some level of amenities, services and staffing. We at the onset retained mostly managerial positions and sales positions. And so we have been able to add back by and large hourly associates as needed and can flex at different occupancy levels. And so as a portfolio we are still probably at half of the FTEs that we were at a more stabilized level, maybe a 2019 level. But we have the opportunity to flex hourly wages as occupancies vary both up and down.

Okay. That's all for me. Appreciate the detail. Very helpful. Thank you

Thank you.

Thank you. Our next question comes from Bryan Maher with B. Riley Securities. Please proceed with your question.

Great. Thanks and good morning. And lots of great color there so far. A couple of questions for me. Justin, when you look out there at what there might be to buy, are you seeing any products similar to what you've done in the past with new developers and Apple being the takeout of them? I think you may have subsequently walked away from one of those, but are there any of those types of assets where product is about to be completed where the developer is kind of desperate to catch that in and their takeout has subsequently disappeared because of COVID?

The short answer to that and it's a good question, is yes. And we anticipate we'll see more of it as we continue through the cycles especially in the earlier part. So as we continue through the end of this year and into the first part of next year, we're seeing a mix of deals and new development. Certainly, it’s an attractive source of potential deals for us as the assets coming online have often been built in markets where the demand justified the new construction, especially over this past cycle where lenders were more disciplined in where they would lend for new development and their advantages to having new assets within our portfolio especially as we look at CapEx needs on a go-forward basis. And so I think a portion of the transactions that you'll see us participate in especially in the early phases of the cycle will be moving out of some of our older assets like Charlotte and Memphis and into some of these newer deals where there's a unique distress related predominantly to the financing and the availability of takeout and not associated with the potential for the actual deal.

Great. And then kind of taking that to the next step, what is your appetite maybe in dollar terms of acquisitions versus reinstating the dividend maybe not at its past level, but at some level to return some capital to shareholders. What are your thoughts on the two of those?

We've always been focused on total return for our shareholders. There are two components to that because the assets that we own generate a tremendous amount of cash. There's a legal requirement that we've paid dividends as a REIT, and we're in a position because of the assets that we own to pay a relatively strong dividend relative to our peers in the industry and certainly relative to other real estate investment trusts outside of our industry. I think because of the unique opportunities in the – potentially available in the early phases of a recovery, you'll see us be extremely balanced in our approach, allocating capital to those opportunities, which will produce the strongest returns for our investors over time. And there'll be a mix of new acquisitions, which will propel the value of our stock and then dividend payouts, which again will be legally required of us. And because – again, we've gotten to cash flow positive sooner than our peers and our expectation is that based on the pattern of which we anticipate demand to come back across the industry. We anticipate we'll be among the first to be in a position where we’re required to reinstate our dividend as well.

Great. Thanks. That's all for me.

Thank you.

Thank you. Our next question comes from Michael Bellisario with Baird. Please proceed with your question.

Hi. Good morning, everyone.

Good morning.

Good morning.

First question for you, could you provide some color on your RevPAR index trend? Kind of where is that today? And how it's tracked over the last few months?

We’ve certainly seen strong index in where we have a particular types of assets. For instance, the extended stay properties have outperformed from an index standpoint and we've performed most well there. We have – as a portfolio, we have consistent market index probably by and large when you take into account the hotels that we intentionally consolidated some of our more urban locations and things like that, but where there has been demand, we have outperformed from an index standpoint.

Got it. Thank you. And then just on the Madison development deal, I think I know the answer there. But how do you plan on funding that acquisition early next year? And then, how does that affect the credit metrics as you think about them under your amended credit agreement tests? And then also maybe in the context of potentially needing additional modifications or flexibility at some point early next year?

When we renegotiated the waivers that we haven't placed with the banks, we anticipated each of the development deals that we have under contract at that point in time. [Indiscernible] that source of funds will be our line of credit though we anticipate between now and then that we will have incremental sales, which will be the true source of funds for them for the transaction. So I think our early negotiations contemplated the closing of the assets with two assets, which we closed in Cape Canaveral. The two that we closed recently in Tempe and then the upcoming asset in Madison. We had sales transactions early in the year that roughly offset the Cape asset from a value standpoint. And based on the interest that we're seeing in other assets in our portfolio, our expectation is that we'll be able to fund with proceeds from sale.

Got it. Thank you.

Thank you.

Thank you. Our next question comes from Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning. One of your peers sold a hotel to a jurisdiction for an alternate use at a pretty good cap rate. Have you looked at your portfolio to see if there are opportunities to sell hotels for alternative uses and recycle that capital into new acquisitions?

Absolutely. Yes, absolutely. And we've had conversations in California with local municipalities around similar potentially for our assets. I highlighted in my remarks that we were selling the property in Charlotte. And all-in cap rate in the mid-5s, taking into consideration renovation requirements and mid-7s pre-renovations, that's an asset in a much smaller market. But we're seeing especially for our older extended stay assets, significant demand from groups intending to purchase the assets for an alternative use. And our thinking on that is that we will be able to transact on a number of assets within our portfolio with groups that fit that same profile.

How big is that opportunity I guess in either number of hotels or total proceeds?

I'm reluctant to give you an exact number. I would say if you look at our portfolio, the interest is predominantly around extended stay assets and more often in suburban locations, and you can get a general sense for the scale of the potential opportunity that way. The reality is multifamily demand has continued to be strong throughout this economic downturn and pandemic, and developers view conversion of extended stay properties into multifamily as a significant value add. And there are a number of groups – larger groups that are well-funded, that are pursuing that type of potential transaction.

All right. Thank you.

Thank you.

Thank you. Our next question comes from Dany Asad with Bank of America. Please proceed with your question.

Hi. Good morning, everybody.

Good morning.

My question is a little bit more on rates. It's been really like encouraging to see you’re your occupancy has been improving through October. But can you just give us a sense for how rates been behaving since quarter-end? And then my follow-up is how much of the rate decline we've been seeing so far is just the change of mix? I know that was kind of mentioned in the prepared remarks, but if you could just kind of elaborate on that a little bit?

Right. I definitely think that rate is impacted by mix of business. But every segment is impacted by competition and the level of demand in the market. So in different segments, each segment is impacted from a rate perspective just relative to the demand that's in the market. When there's enough demand, typically when we get to around 70%, we're able to preference the different segments of business to drive overall ADR. But within the segments, they're impacted by just the environment that we're in as well from an ADR perspective. And so part of it is that we're not in a position where we're preferencing higher rated business over others. And that corporate demand which tends to be the highest rated and drive peak demand over certain nights helps us drive rate and manage mix on those nights. Since quarter end, we've seen similar trends to what we were seeing in the third quarter. Still not meaningful moves one way or the other, but certainly still in a competitive environment at these occupancy levels.

Got it. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Floris van Dijkum with Boenning & Scattergood. Please proceed with your question.

Hi. It’s actually Compass Point. Quick question. I know it’s – you have $70 million, I believe of mortgage debt coming due next year. How are you thinking about mortgage debt that comes due even the difficulty of refinancing or getting hotel financing right now, and would you move that to your line of credit?

We have – it’s roughly $51 million net of reserves coming due in 2021. And so we will – at the time that that becomes due, we'll evaluate all options to your point, refinancing might be a challenge. But we still have some time between now and then and we'll evaluate what makes the most sense. Certainly, if we're able to continue to rebuild occupancy and stay in a positive cash flow position, we would hope that we would have liquidity to fund that as well.

Thanks Liz. Do you expect to be – having to pay an additional dividend this year based on your taxable income? I know it's tricky. There's still a quarter to go. But you did pay dividends in the first part of the year. Do you expect there should be a catch-up dividend? Or do you think you will reinstate likely in the – perhaps in the first quarter of next year?

We do not anticipate that we would be in a position to pay a dividend through the end of 2020. Beyond that, the Board and management will continue to monitor operations and will evaluate reinstating a dividend, while balancing the other cash needs and priorities of the company, all with the intent of – as Justin had previously mentioned, total return for our shareholders, but maximizing total shareholder returns over the long-term and doing what's best in the near-term to that end.

Great. Thanks. That's it for me.

Thank you.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Justin Knight for any closing remarks.

Thank you. And again, I'd like to express our appreciation for all that have joined us today. I want to recognize the fact that some of you may have had technical difficulties accessing our web link through our website. We apologize for that. It was fixed midway through the call, and certainly the transcript for this call will be available afterwards. We appreciate that these continue to be challenging times. I want again, to give a special thank you to our team here at Apple and to our management companies and our teams who are actively working in the field. It's what everyone has been doing in our industry right now to ensure that we continue to be successful despite the current challenges, has been remarkable and inspiring. And I hope that as you get back out and start traveling again, you will take the opportunity to stay with us in one of our hotels. Have a great weekend. Hope to talk to you soon.

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation and have a great day.