Greetings, and welcome to the Apple Hospitality REIT's First Quarter 2024 Earnings Call. [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. You may begin.

Thank you, and good morning. Welcome to Apple Hospitality REIT's First Quarter 2024 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 2023 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 first quarter of 2024 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. Consistent with our expectations, performance for the first quarter remained strong with adjusted EBITDAre of approximately $101 million, an increase of 6% year-over-year and modified funds from operation of $83 million, an increase of 5% year-over-year. Comparable hotels ADR of $154, occupancy of 72% and RevPAR of $111 were all in line with results for the first quarter of 2023 despite challenging year-over-year comparisons related to the Super Bowl and an unfavorable shift in timing of the Easter holiday which was consistent with the industry overall and ahead of our blended chain scales for the quarter. Our portfolio continues to perform ahead of pre-pandemic levels with comparable hotels RevPAR for the quarter up approximately 8% relative to the first quarter 2019. And we see continued upside opportunity to rebuild occupancy in many markets, especially midweek. Despite the tough comparison from a top line perspective, comparable hotels adjusted hotel EBITDA was $112 million for the quarter, down only 3% as compared to the same period of 2023, but still up approximately 4% to the first quarter of 2019, bolstered in part by the Easter holiday shift and with growth in both weekday and weekend occupancies, preliminary results for our portfolio show comparable hotels RevPAR for the month of April 2024, above the high end of our full-year guidance range. We anticipate that we will be in a position to more meaningfully grow rate as we move into our seasonally stronger occupancy months in the second and third quarters and the continued strength in leisure demand and further recovery in corporate demand combined with limited near-term supply growth will position us for stronger year-over-year performance as we progress through the year. Our revenue and asset management teams, together with our third-party operators continue…

Thank you, Justin, and good morning. We are pleased to report another strong quarter for our portfolio of hotels. Comparable hotels total revenue was $332 million for the first quarter of 2024, up 1.5% as compared to the first quarter 2023. Continued strength in leisure demand and recovery in business travel during the first quarter enabled us to achieve comparable hotels RevPAR of $111 flat as compared to the first quarter 2023, with ADR of $154 and occupancy of 72%, both consistent with the first quarter of 2023. As we anticipated, because of the calendar shifts with the Easter holiday and more challenging year-over-year comparisons driven by the 2023 Super Bowl in Phoenix, where we have meaningful portfolio concentration. Performance for our portfolio for the first quarter was below the low end of our guidance range. RevPAR for the 10 hotels that we own in the Phoenix market was down 8.5% for the quarter with a 7% decline in ADR and a 1.7% decline in occupancy. Given our significant ownership in Phoenix, we estimate that the shift in Super Bowl venues negatively impacted portfolio RevPAR by approximately 40 basis points and revenues by $1.2 million during the quarter even after taking into consideration the partially offsetting gains realized at our newly acquired SpringHill Suites in Las Vegas, which grew RevPAR 14.5% during the quarter. We saw similarly strong year-over-year results at our 2 assets in Anchorage, Alaska, which were up 22% for the quarter and the 5 assets we own in the broader D.C. market, which were up 11.5% year-over-year. Preliminary results for the month of April show RevPAR for our full portfolio above the high end of our guidance range and forward bookings show continued strength in both leisure and business demand. We expect operations to continue to strengthen…

We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets.

Liz, you highlighted some of the negative impact that the Easter holiday shift had on 1Q, but any sense how much of a benefit that shift had on April's performance and just how April is kind of compared versus budget? And then I recall last year, you're talking about some really strong midweek strength in late April. And I'm just curious, when you remove some of that holiday noise, maybe from the April performance, what did you see towards the latter half of April on a year-over-year basis?

It's a good question, trying to isolate trends between March and April, given the calendar shift. We were pleased with April overall when we look at the day-of-week trends for the full month, seeing growth in both weekday and weekend occupancies and RevPAR, it was heavily weighted, particularly from a growth rate perspective on the first 2 weeks of the month. But as we round it out towards the end and potentially had cleaner weeks to look at, we saw continued strength in midweek demand. And one of the trends, I think that we may see and may be experiencing is some normalization between a pickup in midweek, potentially offsetting some leisure on the weekend. When we look year-to-date, we're slightly positive driven by that midweek demand and some weak softening on the leisure side. But overall, the midweek growth is resulting in a positive result.

That's helpful. And then I wanted to hit one on the transaction landscape, Justin, given kind of the evolving interest rate environment or interest rate expectations, maybe -- have you seen any changes in seller expectations and sort of the volume of opportunities that are coming to the transaction market?

Really from a total transaction volume, we've seen very little change in that area. We continue -- the bulk of the deals that we're underwriting today are with groups who are exploring a potential sale either because of pending financing, either specific to the asset or their larger portfolio or, in some cases, upcoming renovations. So that has been less of a driver to date than we had anticipated it would be. We continue to feel that, that will bring additional assets to the market in the near term. But total transaction volume continues to be low across the industry. I think if you look at our performance over the past 12 months, we've taken more than our fair share of total transactions and certainly, continue to view ourselves as well positioned relative to potential competition. Those, I highlighted in my prepared remarks, I think with the pullback in our share price, and the relative valuations that we're doing, we also see value there. I think looking forward, I highlighted we continue to underwrite a number of potential transactions assets, I think, that we feel would be meaningfully additive to our portfolio. And I think we'll continue to see how that plays out as the year progresses. We're fortunate, I think, given our strategy to have a broad palette to paint with. And I think there are a lot of markets where we have interest and a lot of assets that would fit our investment criteria. So given the appropriate cost of capital, I think we could continue to be meaningfully acquisitive in the current environment.

That's helpful. And then just last one for me. On the AC/DC, can you remind us given when that was completed, where that stands relative to kind of stabilization versus a comp set of hotels in the D.C. market?

So the hotel was stabilized when we acquired it. The bulk of the growth, and I say that hesitantly only because, as you know, the D.C. market was slower to recover. And so a significant portion of the growth that we have seen year-to-date and that we expect to continue to see will come from continued growth in the market. That said, this is one of the assets where we transition management and the new management team has done an exceptional job, both in driving top line performance for the asset and flowing the top line performance to the bottom line. So I think despite the hotel haven't been open for a period of time and ramping within the market, we see incremental opportunities, both as the market continues to grow, bolstered by a strong convention calendar and increasingly a return of government workers to the city, and improvement in our share and the efficiency of our property level operations with the management transition.

Our next question comes from Anthony Powell with Barclays.

Question on the overall, I guess, state of the consumer in your eyes. We've heard a lot about kind of leisure, I guess, [indiscernible] softness from other calls. You seem to be pretty optimistic there. So what are you seeing from your leisure customers, your small groups and social groups and maybe your SMEs on their willingness to travel right now?

Generally, I would say that what the industry has seen and what we've seen doesn't immediately point to a weaker consumer, specifically around leisure, broadly whether traveling domestically or internationally, the consumer still appears to be preferencing travel, which is a positive for the industry overall. We've said on past calls and I mentioned in response to one of Austin's questions that as people begin picking up midweek corporate travel and normal travel patterns materialize, there could be a potential of partial offset to leisure on the weekends. Again, when looking year-to-date through April at our trends, that's what we're seeing broadly. We've also said on past calls that Q1 is a really tough time to draw broad conclusions about how the strongest travel quarters for our portfolio and the industry may play out, especially with our Super Bowl comp and the Easter shift. It just makes -- it makes drawing broad conclusions a little tricky. We did assume in guidance at the beginning of the year and still feel that we'll have the most opportunity to drive incremental RevPAR in our strongest occupancy quarters here in the second and third.

And Anthony, it's important to recognize too that while we can zoom out and generalize overarching trends, the trends vary pretty significantly from market to market. And so I think even with weekend occupancies for several weeks being flat to slightly down, we have a number of markets where we continue to see very strong weekend performance and year-over-year growth. And the same is true midweek, meaningful variance market-to-market. And I think adding to what Liz said earlier. For that reason, and given the overall strength in demand that we've continued to see through April, we think it's early to peg a specific trend in that area.

Okay. So following up on that, most of the other peers have talked about May and June being a lot better than April, and your April was better than most of your peers. I'm curious what you knew for the rest of the cadence -- for the rest of the quarter here.

As we look at average daily bookings and as we look at manager forecast, we'll speak to the field, I think that they remain encouraged for the quarter overall. April was promising and strong. I think we believe that there's incremental -- there's growth that we'll see both in May and June as well hopefully, similarly to what we saw in April.

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

Just one more on the leisure commentary. The softer trend, did that come on the demand side? Or was it really related to some pricing sensitivity? And then I know, Justin, you said big variances across markets, but any particular markets that you can point to that were surprisingly weak?

I don't think the variances are within a fairly narrow band. And I would say the occupancy and rate dynamic is somewhat related. I think we've commented for some time that pre-pandemic, leisure was our most rate-sensitive segment. And we've been incredibly pleased, and I think the entire industry has benefited from that segment being less price sensitive. It has always been our thought that over time, we would revert towards more normal behavior with a greater ability to drive rate with our corporate customers as we achieved stronger occupancies midweek, and ability to drive rate with leisure customers around compression nights in markets where demand was strong. I think we are assessing what we're seeing right now. And as I highlighted, there is some variance from market to market. What we've seen overall is to the extent there has been a pullback in some markets on weekends from an occupancy standpoint. It's been largely offset or more than wholly offset by a pickup in midweek business. And that's a trend we feel very comfortable with. When we look at overall profitability of our business and how we historically split business between business travelers and leisure, reversion to more normal behavior with stronger performance midweek would, from an overall profitability standpoint, be a favorable shift for us.

Yes, Mike, as Justin mentioned, when we look year-to-date at sort of the split between occupancy and rate, they're closely aligned directionally.

And then just switching gears on the DC transaction. Could you quantify how much of the $10 million of trailing EBITDA comes from that rooftop retail space and the billboard. And then also just any more color on the transaction process, the background, other bidders and selling motivation would be helpful.

Well, we look at AC/DC on a trailing basis, the rooftop and retail income is significantly more than our average portfolio. It's closer to 20% of total revenue with close to 80% coming from rooms.

And then from a background standpoint, this was a group -- a strong developer, multi-market developer that has investments across segments of real estate. And I think we're struggling a bit in an unrelated office portfolio, and I think I saw an opportunity to gain some incremental liquidity through the sale of this asset. This is an asset that was built by the group to be held long term. And I think if you have an opportunity to visit it, you'll recognize that the quality of construction and the premier location. And I think we were fortunate as we have been in several instances, to be the right group at the right time and purchase the asset at a price that we believe we will feel -- we already feel very good about, but we feel we'll look even better as we move into the future.

Got it. And just one clarification was just 20% of total revenues, presumably that's 100% margin. So a much higher percentage of EBITDA. Is that a correct assumption?

It's not a 100% margin. The restaurant is managed. So it would be near 100% margin for the other outlets, but the restaurant is managed by a third party. And so there are expenses associated with that.

[Operator Instructions] Our next question comes from Tyler Batory from Oppenheimer.

This is Jonathan on for Tyler. First one for me, just a follow-up on that leisure demand discussion, more clarification question. Can you remind us how you define leisure demand? Is that commentary interchangeable with weekend occupancy?

There is close alignment when we look at it to weekend occupancy, not exclusively. We also look at negotiated accounts separate apart from that. But when you look at our hotels outside of a few markets where the majority of our business regardless of when it occurs during the week tends to be leisure. Most of our hotels skewed towards -- heavily towards leisure on the weekends and towards business travel midweek.

Helpful. And then Liz, helpful commentary on the labor side. Can you talk about the other cost inflation in the business and what areas of the expenses are seeing kind of the greatest year-over-year growth outside of labor?

We were pleased with the first quarter overall. If you look at comparable results, the team did a reasonably good job with costs outside of labor and including labor. We saw a deceleration in labor expenses or total cost per occupied room from a payroll perspective in Q1 relative to Q4. And really, as we looked at guidance at the midpoint, we were right in line on the top line, slightly ahead on the bottom line, and took that into account, to some extent, about $1 million with the change in the guidance range. It was really broad-based where we saw some deceleration. Utilities were down. A lot of the overhead departments decelerated their increases relative to Q4. And so it was really broad-based. We were pleased to see overall the impact of the efforts that our teams have put in place and some stabilization in the cost environment.

Great. Appreciate the color there, Liz. And then last one for me, if I could. Justin, on the acquisition in D.C., you talked about the favorable market dynamics and how you wanted to have a presence in that market for some time I think the release said? Are there any other markets that you still like to expand to? And maybe can you rank over the criteria you look for in new markets?

There are a number of other markets where we would like to have our presence. It's interesting, our strategy has always been to focus on rooms-focused hotels, predominantly in the upscale and upper mid-scale segment and to broadly diversify our portfolio across a variety of markets and market types. In order to achieve that objective, we need to be in both urban -- large urban, small urban and as well as high-density suburban markets. Pricing in large urban markets has made it challenging for us to find an appropriate entry point. The cost dynamics in urban markets are different. And historically, a market like D.C. and an asset of this quality would have traded at 150 basis points lower cap rate, which given the dynamics of the market would have put it outside of kind of the return threshold that we target. I think over -- and I talked about this a little bit on our last call. But over the past several months, with a meaningful increase in interest rates and the pullback from many lenders, we found ourselves in a position to be very competitive around larger assets in some of these urban markets where ordinarily, we would have seen very stiff competition predominantly from private equity, but from a variety of potential buyers and given our ready access to capital and our ability to bid on assets without financing contingencies, we've been more successful. And when you look at the D.C. acquisition or the Vegas acquisition, which was another market where we've wanted to -- where we've looked for an appropriate entry point for some period of time. Those are great examples of that. Importantly, though, we're not exclusively focused on large urban markets. That's a piece of our strategy, but not the entirety of it. And so we're equally attracted to high-density suburban markets with the primary criteria that we're looking for being relative growth trajectory relative to the national average. And I think positioning vis-a-vis demand generators with a view towards having a broad base of demand generators, such that we're not subject to fluctuations within a single source of demand. And I think if you look at the entirety of the acquisitions that we completed last year, starting with Cleveland and moving through towards Vegas at the end of the year and then D.C. following that, you get a good sense for the range of assets that we're looking for and the types of markets that we're looking to buy assets in.

Our next question comes from Chris Darling with Green Street.

Justin, going back to the last question, actually, you mentioned just higher interest rates in the past couple of months and that putting Apple really in a competitive position to have a competitive advantage in terms of acquiring properties. On the flip side, how does that impact your ability or willingness, perhaps to bring incremental assets to market for disposition, perhaps as a source of funds in the near term?

Actually, a great question. And I think we have a super example in looking at we've done recently as well. Where we have seen meaningful competition and continued strong appetite is around smaller assets where the total purchase price is lower. And in today's environment and again, the market shifts quickly, and we adjust our strategy accordingly to be opportunistic, but in today's market, we see ourselves in a position to sell quality assets in smaller markets, potentially assets where we have near-term CapEx needs and to redeploy into assets that are larger where we have less competition. Like I said, we continue to monitor markets and we'll adjust our strategy appropriately as kind of the market dynamics shift. But looking at the 2 assets we sold recently and the asset we bought, I think you can get a sense for where we feel the opportunities are.

Got it. That's all helpful comments. And then just 1 more, maybe following up with Liz on some of the operating expense comments. How are you thinking about expense growth over a longer-term time frame over the next few years? Is 3% to 4% still a decent betting line to be thinking about? Or how would you characterize the setup?

We were pleased with -- especially on the payroll side, what we saw total expenses came in on a comparable basis up 4%. That's down from 5% that we saw in Q4. So I think we are starting to see some normalization. I think in part, it depends on the broader economy and sort of how inflation evolves. And certainly, we're starting to see some benefit from lapping the tougher comps. Historically, 3% to 4% has been reasonable, in guidance, we anticipated, especially on the payroll side between 4% and 5% with some continued cost pressures around some of the other line items like insurance and taxes. But I think over the long term, if we continue to see the trends that we're seeing now, the 3% to 4% over an extended period of time wouldn't be unreasonable.

And I would add to that, over an extended period of time, our expenses tend to track reasonably closely with inflation. The trick is in an environment like the environment we've been in recently where inflation numbers move more erratically and more significantly, there tends to be a lag around those. But zooming out, I think depending on where we end up from an overall inflation standpoint, we would expect to be in the range that Liz highlighted or to the extent that's successful in reining in inflation, and that were to come down more significantly, we could even see expense growth below that.

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

We appreciate your continued interest and for you taking the time to spend with us this morning. As I always say, as you have an opportunity to travel, we hope you'll take the opportunity to visit and to stay with us in some of our hotels. We're incredibly pleased with the quality of our portfolio and the recent additions to it through new acquisitions. And we look forward to meeting with many of you here in the coming weeks as we get out on the road.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.