Greetings and welcome to the Apple Hospitality REIT Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Kelly Clarke. Please go ahead.

Thank you and good morning. Welcome to the Apple Hospitality REIT’s third quarter 2023 earnings call. Today’s call will be based on the earnings release and Form 10-Q, which we distributed and filed yesterday afternoon. Before we begin, please note that today’s call may include forward-looking statements as defined by federal securities laws. These forward-looking statements are based on current views and assumptions and as a result, are subject to numerous risks, uncertainties, and the outcome of future events that could cause actual results, performance or achievements to materially differ from those expressed, projected or implied. Any such forward-looking statements are qualified by the risk factors described in our filings with the SEC, including in our 2022 annual report on Form 10-K and speak only as of today. The Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, non-GAAP measures of performance will be discussed during this call. Reconciliations of those measures to GAAP measures and definitions of certain items referred to in our remarks are 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 2023 and an operational outlook for the remainder of the year. 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. We are incredibly pleased with our performance year-to-date. A steady recovery in business transient and continued strength in leisure demand drove comparable hotels third quarter RevPAR growth of more than 7% as compared to the third quarter of 2019, our highest quarterly comparable hotels RevPAR growth since the onset of the pandemic. Despite more challenging year-over-year comparisons, during the third quarter, we achieved improvements in occupancy, ADR, and RevPAR. Third quarter 2023 comparable hotels ADR increased by 1%. Occupancy was up 2%, and RevPAR improved by 3% as compared to the third quarter of 2022. Continued top line growth enabled us to achieve third quarter comparable hotels adjusted hotel EBITDA of $132 million, a 1% improvement over third quarter 2022. Positive trends have continued, and based on preliminary results, comparable hotels occupancy for the month of October was 78% with continued growth in ADR. Given the strength of our performance as we approach the end of last year, top line comparisons will become increasingly difficult as we continue through the fourth quarter. Still, overall travel trends are favorable. Leisure demand remains elevated to pre-pandemic levels, and steady improvement in business travel demand continues to bolster midweek occupancies. We have adjusted our annual guidance to reflect portfolio performance through the first nine months of the year, top line performance through October, and the recently completed and announced acquisitions. Expense growth, which was elevated as a result of general inflationary pressures and a competitive labor environment, moderated somewhat in the latter portion of the quarter as we lapped periods where we saw significant growth last year. Through continued rate growth and disciplined cost controls, we achieved a comparable hotels adjusted hotel EBITDA margin for the quarter of 37%, down 110 basis points to…

Thank you, Justin, and good morning. We are pleased to report another strong quarter for our portfolio of hotels. Comparable hotels total revenue was $356 million for the quarter and over $1 billion for the first nine months of the year, up 4% and 9% as compared to the same periods of 2022, respectively. Continued strength in leisure demand and recovery in business travel during the quarter enabled us to achieve comparable hotels RevPAR of $123, a 3% increase over third quarter 2022, with ADR of $159, up 1%, and occupancy of 77%, up 2% to third quarter 2022. Year-to-date through September, comparable hotels ADR was up 5% and occupancy was up 3% with RevPAR up 8% compared to the same period of 2022. Leisure travel continued to be strong during the quarter, with weekend occupancies of 82%, up 1% compared to the third quarter of 2022. In addition, we continue to see improvement in business demand, supporting average weekday occupancies of 75%, an increase of 2% year-over-year. While weekday occupancies are ahead of 2022 for the quarter, there still remains upside opportunity relative to pre-pandemic weekday occupancy levels. Midweek occupancies have continued to strengthen over the last three weeks in October, while shoulder night and weekend occupancies remain strong, supporting the resiliency of leisure demand. In terms of same-store room night channel mix, brand.com bookings remained constant at 40% quarter-over-quarter. OTA bookings increased slightly to 13%. Property direct bookings were steady at 25% for the quarter. And while GDS bookings decreased seasonally from 17% during the second quarter to 16% in the third quarter, GDS room night volume was up 2% quarter-over-quarter. This channel mix speaks to the powerful direct bookings our brands command, the strong property direct sales efforts our properties maintain in the field, our ability to…

[Operator Instructions] Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

So Liz, can you just help us understand what the revised guidance assumes for hotel EBITDA margin change on the comparable 220 hotels or when you kind of adjust out that the impact that the new acquisitions had to the revised range for adjusted hotel EBITDA margin?

At the midpoint, the revised guidance, if you’re just looking at the existing comp and not the new acquisitions subsequent to quarter-end, the difference is about 50 basis points. So, we get a 30 basis-point benefit on an absolute basis from the new acquisitions.

So, that gets you down in the 150 basis-point range at the midpoint on that revised range for that comparable pool, just to be clear?

140.

140. Okay. And so margins are down 90 basis points year-to-date through the first three quarters. So basically, you saw some improvement in the year-over-year margin change in the third quarter. You’re expecting a little bit of a step back in the fourth quarter, but it sounds like you don’t expect some of that growth to bleed into ‘24, because I believe you said that expenses should continue -- expense growth should continue to moderate in the quarters ahead. Is that fair?

That is what we believe will happen, or that’s certainly what we’re hopeful will happen. And based on what we saw, especially in September, if we continue to see year-over-year comparisons like we saw in September, we could outperform the midpoint of our range. I think we looked at the full quarter, which included a tough comp in July, some improvement in August and then more meaningful improvement in September from a margin perspective year-over-year and an expense growth perspective year-over-year as well. And I think we saw the latter quarter trends throughout the fourth quarter and into next year. That would be more positive than the midpoint of our guidance. But considering that one month doesn’t make a trend with September and I think we opted to be more cautious, more conservative. But we’re certainly pleased with what we’ve seen most recently, both with the improvement that our team has made with the management companies and their focus and efforts around contract labor and productivity. I mentioned in my prepared remarks that we have seen some improvement there. We’re pleased with that. We’re certainly hopeful that that will continue. They’re really doing a great job and have continued to maintain higher productivity levels despite the challenges, and wages have started to moderate year-over-year as we anticipated. So, I think we’re hopeful. One of the things that impacted us in the third quarter, was, we had some favorable real estate taxes in prior quarters that was helping to offset the increase in insurance premiums, and we had some uninsured loss deductibles that hit in the third quarter that we hadn’t had. So, we’ve had some favorable experience relative -- or to offset some of the insurance premium increases and that we didn’t have that benefit in the third quarter. We carried that negative drag through the fourth quarter into the guidance. That may or may not happen.

And then just last one on the guidance, just to clarify. I mean, how much hotel EBITDA contribution do you from the acquisitions that are set to close this year?

If you look at, I think it’s page 16 on our earnings release, you can see the add back for pre-ownership EBITDA for the new properties. That would include Cleveland, which we closed on at the end of second quarter. If you annualize that, it’s probably around $16 million.

Our next question comes from Floris van Dijkum with Compass Point.

Thanks for the color on the cap rates. I’m curious, Justin, obviously, you guys have been active. I like the update on how your acquisitions have fared so far and how the yield has been pretty attractive. As you look out, do you expect your investment activity to be one-offs, or how is the market looking for larger transactions as well? And how do you think about -- are there going to be opportunities on the troubled refinancing of portfolios in your view? And would you participate in those kinds of investments?

So, I’ll start and work my way backwards. I think, to your last point, would we consider, or participate in some of the various types of investment that you highlighted. I think, certainly, we are active in the marketplace. I highlighted in my prepared remarks that we continue to be active in underwriting additional potential acquisitions, and that includes the mix of individual one-off assets and small and medium sized portfolios. Because of where the debt markets are right now, we’ve seen less activity at the large portfolio level, meaning fewer large portfolios being brought to market, but that could change. And, I think we have consistently underwrote those as well. From a preference standpoint, generally, our preference is to pursue individual assets. And we’ve found that we can be incredibly competitive in that space. Certainly, the landscape has changed slightly. And when we look at total transaction volume, that has not meaningfully increased, but our share of the total transaction volume has. And I think that’s a firm indication of our ability to transact in a market that has become more challenging for some of our -- some of the groups that we are competing with, when we look back 12 months or so. I think on a go-forward basis, we anticipate a continued steady stream of potential deals that we will have an opportunity to underwrite. I think you highlighted in your question a portion of those are likely to be brought to market, because of financing issues or overall liquidity issues with the sponsor. That is an area that we’ve been very successful recently. And as we continue to move into next year, we do anticipate the continued pressure from the brands around capital investments, should bring incremental assets to market as well. But I think incredibly pleased with the opportunity set that we’re seeing now with pricing for those assets and with our ability, based on the flexibility that we have because of the strength of our balance sheet, to be active in a market that’s become more challenging for many of the other groups that would be interested in acquiring assets.

If I can add one more follow-up or other. I know that your business is typically not viewed as being group dependents, you mentioned, I think, in your remarks or Liz did, 14% of your demand is group, it’s certainly a lot lower than some of your full service peers. But how do you think about the convention calendar. I note that your largest exposure to a market is San Diego. San Diego’s convention calendar, I believe, looks very good. How much of a benefit will flow through to your properties in your view? Maybe give a little bit of a backdrop in terms of how your exposure to group might be bigger than what people think it is.

I’d say -- I’d need to temper that a little bit. We certainly own hotels in or adjacent to markets that benefit from large convention business. And to some extent, we obviously benefit from compression related to those events. In most cases, we’re fortunate. I’d say, in recent years, we’ve become actually less dependent on that type of business, meaning we’ve been able to attract a variety of individuals and smaller groups that are not immediately associated with larger conventions. But certainly, in a market like, San Diego or in Denver where we own assets that are readily accessible or within close proximity to major conference centers, we do benefit to the extent that the convention calendar is strong.

Of the seven assets that we own in and around the San Diego area, we have two that are downtown that will certainly benefit from incremental compression around the convention calendar. And then, as you move out beyond the downtown area, depending on the size of the convention, we can see additional compression. But certainly, our downtown assets should see the benefit of the more favorable convention calendar.

Maybe the 14% group exposure today, how would that compare to pre-COVID? So, you mentioned, it’s a little bit lower now. What was it like prior to 2019?

Very, very close to where it is. It’s still slightly elevated to 2019 levels, even though, year-over-year, quarter-over-quarter, it’s slightly down. But it’s still elevated, yes, to pre-COVID levels, just 1 percentage point or 2, depending on the time of the year.

Our next question comes from Tyler Batory with Oppenheimer & Co. Please go ahead.

I’m hoping you can put a finer point on October RevPAR and your expectations for Q4. What was RevPAR growth year-over-year in October? How did trends compare with September? And then, when we look at the guide and what’s implied for Q4 overall. Are you expecting a little bit of a step-down in November and December? How much of that is seasonality versus maybe a change in trends or perspectives in terms of what you’re seeing in terms of demand?

Really good questions, Tyler. So October, we don’t have final top line RevPAR numbers in for October, but it looks like it will come in, in line, maybe slightly lower than our month-over-month growth from September. So September was around 3%. It’s probably in and around that range, maybe slightly lower. So we saw ADR growth and occupancy sort of right in line with where it had been prior year. So, still good trends in October, the fact that we’re not seeing a meaningful pullback from an occupancy perspective, especially given October is typically a peak month. And, we certainly had a strong October last year and continuing to see some ADR growth as well. So, taking that and knowing that that’s the strongest month of the quarter leading into the other part of your question, guidance at the midpoint implies flattish RevPAR, for the quarter, which would mean November and December would have to take a step back in order to come in line with our midpoint RevPAR guidance range. I think we’ve built in or continue to maintain some macro uncertainty. There’s not really a meaningful change in trends that’s pushing us to do that. I think we still remain pleased and optimistic with the trends that we’ve seen in our portfolio. I think the biggest question mark is prior to the pandemic, we didn’t historically benefit from leisure as much in November December as we have in a post-pandemic world. And November and December are lighter from a business transient perspective. And while we continue to see improvement from a BT -- on the BT side, it’s kind of just waiting to see what the balance is between leisure and BT travel in just softer occupancy months for us, seasonally.

Our next question comes from Bryan Maher with B. Riley Securities. Please go ahead.

Just a couple for me. You’ve talked a lot today about acquisitions, and I’m curious what the view is from a disposition standpoint, kind of -- to some degree, kind of matching up some acquisitions with dispositions such that leverage doesn’t go meaningfully higher. Maybe two parts to the question here. I think you said something along the lines of you’re buying at like an 8 cap with embedded upside. Where can you sell at a cap rate, your older stuff? Let’s just start with that for a second.

A little bit of a complicated question just based on the depth of the market today and somewhat dependent on the individual asset. I’d say we have seen recent trades of older select service assets in secondary markets at very low cap rates. Those transactions are typically -- or transaction pricing for those deals is typically driven by a replacement cost for those assets. And so the per key values would be lower. Generally speaking, in a healthy transaction environment, we would see as much as 100-basis-point, maybe 150-basis-point spread between kind of the more premier assets and secondary assets. But that spread can swing wildly, depending on groups, and their particular interest and activity in the market at any point in time. I think we’re continually looking at assets within our portfolio. There are a number of older assets where we have very low basis, and even in the market as it is today. We feel we could transact at an attractive pricing that would yield or lock in meaningful profit based on our original investment. And we do have assets where we think we could transact, at a positive spread, even to the investment, where we have assets like those I described, earlier. I think you can anticipate that we will continue to explore opportunities, for disposition as we’re looking at acquisitions in an effort to ensure that our portfolio remains relevant and competitive and that we’re optimized to take advantage of the most recent economic and demographic trends.

So, let’s assume for a minute that dispositions remain somewhat muted. And we all know that you’ve carried historically pretty low leverage, 27%, 28%. Currently, if the opportunities on the acquisition side continue to open up, where would you be willing to take that number?

We’ve highlighted that we are comfortable between 3 and 4 times, opportunistically with a desire to be long-term at the lower end of that range. And so I think, Liz and I both highlighted in our prepared remarks, taking in total the acquisitions we anticipate for this year, which include South Jordan, we’re well below on a pro form a basis, 3.5 times. We continue to have roughly $0.5 billion available on our line of credit, and so ready access to incremental financing to pursue acquisitions. But, to the point that I think was implicit in your question, ultimately, it’s not our intent, regardless of the opportunity set to move the needle, so much from a debt standpoint that we changed the risk profile of our company. And so, to the extent we were to get more active in a meaningful way or become very active from an acquisition standpoint, we would look to fund a portion of those acquisitions with proceeds from sales, and/or equity raise, to the extent pricing was appropriate.

And just staying on that for one last question. Your property tax and insurance was fairly meaningfully higher than we were expecting. You talked a little bit about acquiring assets in business friendly Salt Lake City, but you own a lot of assets in business unfriendly California and Illinois. Would you consider selling some of those assets to lessen your exposure to those two states? And that’s all for me.

Absolutely, without singling those states out as the only states where we’re seeing increased cost pressure. Certainly, we’re mindful of our exposure and interestingly, looking at California specifically, we’ve benefited from being concentrated in Southern California versus Northern, where we have to-date seen revenue increases that have more than offset expense growth in those markets, such that the profitability for the assets has continued to be beneficial for our portfolio overall. That has not necessarily been the case, widely speaking, in and around Chicago, where the market dynamics are slightly different. I think, to the point I made earlier, we are constantly looking at the makeup of our portfolio, which now is over 220 assets, and looking to adjust in ways that ensure continued outperformance, which takes into consideration, the likely trajectory of cost relative to the potential upside from a rate standpoint.

[Operator Instructions] And our next question comes from Michael Bellisario with Baird.

Justin, thank you for being diplomatic with your commentary on Chicago. Much appreciated.

You’re welcome, Mike.

Two questions. First, probably for Liz, just on -- sort of a guidance related question, but more so on revenue management and bookings. Just how much is on the books today or when you turn the calendar from October to November for the next month or the current month rather, and then 60 days out? Basically trying to understand, how much are you dependent on in the month, for the month bookings, the last two months of the year, and is that any different than some of the higher demand months, call it June, July, August, for your portfolio?

Good question, Mike. Typically, we enter the month with about 50% of our occupancy on the books. And then in the month for the month, we realize the other 50%. And that stays pretty consistent month-by-month throughout the year. So 30 days out, 50% of our occupancy on the books, 60 days out, about half of that. And so really, you only have a small portion of your bookings overview towards occupancy, as you enter 30 days out, but certainly 60 days out, it’s not very clear where we may end up, especially if there’s a change in trends. If trends continue, we can project how we may materialize for the month, and trends seem to be consistent and still remain strong. And so we’re optimistic there. But really, as you progress through the months, especially in months where you have large holidays like Thanksgiving or Christmas and New Year’s, your view as you move throughout the month can change just depending on how business and leisure perform relative to those holidays. And so, I think that’s where some of our caution comes in. At the midpoint around November, December, it’s not indicative of a change in trends in bookings that we’re seeing today. We entered the month of November very similar with average daily bookings above prior year and 2019 levels as we have been seeing. So I think overall, we’re still encouraged, but just have low visibility.

Got it. That’s helpful. That’s what I was trying to understand, if it was just seasonality driven or if it’s just business versus leisure mix at the end of the year. And it sounds like it’s that. So, helpful there. And then just switching gears for -- one for Justin. Just maybe can you big picture review your underwriting criteria more on the quantitative side than the qualitative commentary you’ve already provided. Where do cap rates need to be, where do IRRs need to be and then kind of how that all compares to where your stock is trading? Just kind of help us understand what goes in the black box and what gets spit out on the other end on your side.

We’re continually looking at market trends and assessing those relative to the pricing for our stock and the implied multiples there. I think, share prices for the space, broadly speaking, have been more volatile, really since the onset of the pandemic than they had been in periods prior. And so, generally, we’re looking at a moving average -- a daily pricing, as we think about our share price. And then from a property standpoint, we have seen some movement in cap rates, at least in terms of where we’re able to transact. And that’s been a positive for us. As we think about investments we have as a result of those shifts, really driven largely by a meaningful cost of capital change for private equity groups who had been very active in the space. That puts us in a position to pursue high quality institutional assets in more challenging to enter markets at price points that meet our minimum hurdles from an investment standpoint. And outside of those harder to replace assets, moves the needle even further, such that we’re able to transact as we build out portfolios in ways that drive overall returns from the total acquisition activity. I think, generally speaking, we’re looking to acquire assets, either at measly higher implied returns on the day of acquisition than our current portfolio or at similar implied multiples, but with meaningfully different profiles from our growth standpoint and from our capital needs standpoint on a go-forward basis. And we’re open really to adding assets that fit into either of those two categories. And I highlighted in response to several of the earlier questions, but it’s worth reiterating. We are continually looking at our existing portfolio as well, and looking to add and subtract from the portfolio in ways that that moved the value of the total portfolio in a positive direction. And from time to time, that will mean pruning from our portfolio. And as we’re adding to the portfolio, we’re looking to complement the holdings that we already have and shift or expand our exposure beyond the set of current demand generators and into markets where we have lower exposure.

Our next question comes from Anthony Powell with Barclays. Please go ahead.

So I guess on the acquisitions and financing the acquisitions, I think you used the line, which is pricing at about 7% I think currently. What’s your view on permanent financing, fixed versus floating, and how you’re looking at, and where could you finance assets like this in the market right now?

Generally speaking, we’ve looked to balance fixed versus floating rate. Historically, when rates were extremely low and the risk to higher rates in the future was higher. We were near 100% fixed. As we progress through the changing rate environment and seeing the potential for future rate decreases, we pulled back slightly, but still predominantly fixed rate, largely through hedges on our unsecured line and/or -- I mean, term loan.

Yea. We’re about 20% variable as of quarter end. I think as we look forward and certainly have some swaps that are maturing over the next couple of years, we’ll look at the curve closely and be in close contact with the banks and sort of evaluate our overall structure from a swap versus fixed or variable versus fixed perspective and try to manage that effectively given the current environment and the way the forward curve looks. But I think at one point, we felt like we were over-hedged, and I think 80-20 isn’t a bad place to be, but certainly, as these incremental hedges, mature over the next year, we’ll continue to look at it.

And in terms of permanent financing for individual assets, and the pricing of that, some of it depends, and it was unclear from your question whether you’re talking about what we might be able to do versus what others in the marketplace might be able to do. But important to note that on the margin, our borrowing costs are lower on average than those we’re competing with, which is part of what that and the ready access to the capital has put us in an advantageous position from an acquisition standpoint. Then actual pricing will depend largely on the borrower at this point and the assets specifically, and the amount of leverage relative to value. But relative to our incremental borrowing costs, that would put others probably 100 to 200 basis points higher.

And maybe one more on some of your leisure focused market, maybe Virginia Beach and maybe Melbourne, Florida, those are down in the quarter like other leisure markets across the industry. Do you see that stabilizing as we get into 2024, or is there a bit more, I guess, normalization there assumed?

When we look at overall leisure trends, they vary by market. And certainly, you’ve highlighted a couple of markets where we saw meaningful increases in performance relative to where those markets that performed pre-pandemic. As they pulled back from a portfolio standpoint, they’ve largely been offset by improvement in leisure and/or business travel elsewhere, such that we’ve been able to maintain growth in our overall portfolio numbers. Having been in markets like Virginia Beach for an extended period of time, that market has and we anticipate will continue to vary from an absolute performance standpoint year-over-year, based on things that are as unpredictable as weather on weekends. And I think, overall, based on what we’re seeing from a new supply standpoint, we continue to be bullish about the long-term prospects for those markets, and I think see them, nearly without exception, stabilizing and growing from a starting point well above where they were prior to the pandemic. But the actual level will vary a little bit from market to market.

And for context, we dropped the 2019 comparisons in the release, but they’re still up meaningfully to 2019. For the quarter, Virginia Beach was up over 12%, it was 13% and Melbourne was up 7% to 2019 for the quarter.

There are no further questions at this time. I would like to turn the floor back over to Justin Knight for closing comments. Please go ahead.

I’d like to thank you for joining us today. It’s always a pleasure having the opportunity to speak with you. We hope that as you travel, you’ll take an opportunity to stay with us at one of our hotels, and we look forward to talking to many of you next week, out in California.

This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation, and have a great day.