Greetings and welcome to the Apple Hospitality REIT’s 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, Investor Relations. Please, you may begin.

Thank you and good morning. Welcome to Apple Hospitality REIT’s first 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 2021 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 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. 2023 is off to a strong start with continued strength in leisure demand and increased business travel. While we are mindful of the potential for macroeconomic headwinds later in the year, at this time, the fundamentals of our business remain strong. Improvements in business travel have lifted mid-week occupancies in recent weeks and news supply remains muted across the majority of our markets. First quarter 2023 comparable hotel's RevPAR improved by 19% compared to 2022 and 6% compared to 2019. Comparable hotel's ADR increased by 11% over 2022 and 9% over 2019 and comparable hotel's occupancy was up more than 7% over 2022 and down just 2% to 2019. First quarter comparable hotel's adjusted hotel EBITDA was $107 million, a 21% improvement over 2022 and a 4% improvement over 2019. Through strong rate growth and effective cost controls, we achieved a comparable hotel's adjusted hotel EBITDA margin for the quarter of 34% despite inflation and wage pressures. We have always been prudent with cost controls, leveraging our scale and diversification to operate as efficiently and cost effectively as possible without sacrificing service, cleanliness, or overall guest satisfaction. Our investment in Select Service Hotels, a key element of our ownership strategy provides us with an incredibly efficient operating model with limited F&B, efficient public spaces, low energy consumption, few departments to manage, and a focus on essential services and amenities. Our hotels were among the first to recover from pandemic disruption and we were early in working to re-staff to meet rapidly increasing demand in most of our markets. With guest services and amenities restored to modified brand standards, average FTEs for our portfolio have generally stabilized 5% to 10% lower relative to the same period pre-pandemic. Despite incremental operational efficiencies, higher…

Thank you, Justin, and good morning. Performance across our portfolio steadily improved each month during the quarter, resulting in comparable hotels total revenue of $311 million, up approximately 19% to first quarter 2022 and 10% to first quarter 2019. Seasonally adjusted continued strength in leisure demand and recovery in business traveled during the quarter enabled us to achieve comparable hotels RevPAR of 109 dollars a 19% increase over first quarter 2022 and a 6% increase over first quarter 2019. Comparable hotel's ADR for the quarter was $152, 11% ahead of first quarter 2022 and 9% ahead of first quarter 2019. Comparable hotel's occupancy was 72%, up over 7% to 2022 and down only 2% to 2019, our strongest occupancy performance relative to 2019 since the onset of the pandemic. April started out with a softer week leading into the Easter holiday. But subsequently rebounded well with Tuesday occupancies even approaching 90% in the following weeks. For the month, preliminary comparable results for April show continued strength in demand with occupancy of approximately 77% in line with 2022 and 5% shy of April 2019. ADR growth for the month of April was up approximately 5% as compared to 2022 and 9% as compared to 2019. Occupancy and ADR grew sequentially each month during the quarter reflective of continued strength in leisure demand, a meaningful recovery of business travel, and the transition towards our seasonally stronger months. January, February, and March weekend occupancies were 67%, 78%, and 84% respectively. Weekday occupancies grew significantly from 62% in January to 71% in February and then 77% in March. Mid-week occupancies have continued to strengthen in the latter part of April further bridging the gap to 2019 with continued strength in shoulder and weekend leisure demand. In terms of room night channel mix, brand.com bookings…

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

Hey, good morning everybody. I guess, Liz or Justin, how important is the recovery in mid-week demand to sustain the ADR growth you're achieving? It feels like we've been pretty stable kind of on that relative to 2019 comp, the last couple of quarters. And I'm just wondering if it could even accelerate as well if leisure holds and you do see BT demand continue to improve?

It's a great question. Coming into the year, certainly the greatest opportunity we had for continued growth was mid-week. And we're incredibly pleased with what we've seen, especially as we rounded out March and moved into April in terms of mid-week occupancy growth. With that growth, we're better positioned to manage the mix of business in our hotels and to move rates. We've continued as well to see strength on the weekends and shoulder nights, demonstrating the resiliency of the travel demand in the markets where we have hotels. And I think as Liz commented in her prepared remarks, that puts us in a position where we're incredibly optimistic about our ability to continue to drive performance for our portfolio as we move into the coming months.

Are you seeing any signs that leisure guests or weekend demand is beginning to be priced out or starting to trade down at all?

We are not. And I mentioned in our prepared remarks that April's performance while on the face of it may look like it took a step back relative to March, it was really around the Easter holiday week and business travel even the week following Easter. But leisure bounced back quickly and dramatically and overcame the deficit that we saw that week, that Easter weekend. And so we continue to see strength on the weekends both from an occupancy perspective and rate growth perspective.

And then midweek as we got closer to the end of the month, Tuesday, Wednesdays pre-pandemic were some of our strongest occupancy nights. And in terms of growth we saw meaningful growth on Tuesdays and Wednesdays in the final weeks of April, which put us somewhere close to 90% for those nights from an occupancy standpoint. It was only slightly down to pre-pandemic levels. So, really April ended up being a very good month for us outside of that first week.

Was that pick been mid-week demand more prevalent in any regions? Or do you have a sense if it was more of the SMB business traveler or more or are you seeing some also improvement in the larger corporate accounts?

No notable impact to one segment versus the other. Or even regionally, we have seen urban, which had lagged some relative to suburban. We have seen that tick up for our portfolio in some of our urban markets, but small business versus corporate are still seeing similar trends, a slow recovery in corporate with continued strength from local negotiated in small business accounts.

And really to get to the 90% occupancy portfolio wide, the trend has to be widespread.

Yes, that's fair. That makes sense. Thanks for taking the questions.

Absolutely.

Thanks Austin.

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

Good morning. And maybe to ask one of Austin's questions a different way. We're seeing some ADR softening among higher end leisure, luxury hotels. Are you seeing any trade down or any evidence of trade down from that class of hotels to your class within the leisure segment?

I don't know that we could attribute the continued strength we're seeing to trade down. I don't know that we have perfect visibility in that, but I can say that we've continued to see strength both from an occupancy and rate standpoint around weekends and leisure, events like spring break and things of the sort, indicative, I think of the resiliency of particular demand for our hotels. What we've seen in past cycles is that as consumers become more price-sensitive, our hotel's benefit based on the better value proposition that they provide guests.

Okay. And kind of shifting gears to the acquisition side. And I asked this because, you know, clearly, Apple is probably one of the best positioned lodging REITs to make acquisitions later this year. But are you starting to see any portfolios being marketed? That's question one. And question two is how real is the owner or refinance issue in your segment of the market as opposed to say full-service gateway hotels, New York, San Fran, et cetera that might have real problems getting refinancing later this year?

So, to respond to the first question, we have actually for some time seen a mix of portfolio and individual assets. And while transaction volume has been muted for the industry overall, we have been continually underwriting deals looking at deal flow and what we've worked on to-date, we've underwritten almost 100 hotels since the beginning of the year and really continue to be very active pursuing and underwriting both deals that are being broadly and narrowly marketed and off market potential transactions. And the makeup of that mix has been both individual assets and smaller portfolios. The challenge that we have and I think why we're not seeing industry wide more transactions is that there continues to be a fairly significant bid/ask spread, somewhere in the 5% to 10% range on average. And with the greater uncertainty that exists in the market today, there's been an unwillingness on both sides to meaningfully work to bridge that gap at least broad scale. I think were advantaged in addition to having the liquidity that you highlighted by our track record of performing against commitments that we've made in the space. And as a result have in a number of cases secured assets below that the high bid or where we are not the most competitively priced bid in a transaction just because of surety that we will close. The second part of your question remind me, Bryan?

Refinancing stress among sellers. Do you think that that's -- how is that in your class of product versus gateway full-service assets?

It's interesting for some time now. I've been speaking on the call to sources of future transactions and highlighted the fact that we believed that refinancings and brand mandated renovations would both drive sellers to become more motivated for transactions, which would help to bridge the bid/ask gap. We have not yet interestingly seen, at least in scale, a large number of deals come to market because of brand pressure related to CapEx, though we continue to anticipate that that will become more pronounced as we move towards the end of the year. We have though on the other hand begun to see a number of deals where ownership groups are looking at challenging refinancing at some point in the not too distant future. And those challenges are a combination of things; one, a significant movement in rate beyond kind of where they are currently. And related to those rate increases, their concerns that the lenders have related to coverage, which impacts value. And in the cases where we have recently underwritten deals, the ownership groups are looking at a refinancing scenario where they would need to come up with additional capital in order to retain the asset. We're still in the early stages of that and I'd say the deals that we've seen have come to us largely over the past four to six weeks, but that is a trend that we anticipate will continue in our space.

Yeah. Thank you.

Absolutely.

Thanks, Bryan.

Our next question comes from Dori Kesten with Wells Fargo.

Thanks. Good morning. With respect to the difference in your view on the remainder of the year versus what Hilton and Marriott have provided over the last two weeks. Is it your sense the differences just a difference in opinion on the trajectory of the economy? Is it a shorter booking window in your portfolio or is there something else you'd want to point out?

I mean, we don't have perfect insight into how they structure and their guidance. Though as Liz highlighted in her prepared remarks, we have historically tracked roughly in line with our brands at least the US performance of our brands and our chain scale. So, I think as was highlighted, we continue to have limited visibility into the future. Our assumption is that the brands have greater visibility based on a broader portfolio and within that portfolio, a broader concentration of hotels that have large groups that book in advance. And so as we think about the delta, it's much more likely to be driven by macro assumption differences rather than anything that would be properly specific. And as we highlighted in our prepared remarks, we continue to see incredibly strong performance in our portfolio with April again continue to show strength in business and leisure demand. And if those trends were to continue, our expectation would be that that would meaningfully benefit our portfolio.

Okay. Thanks. Have you seen any improvement in reducing contract labor in, I guess, in any of your markets?

We remain focused on reducing contract labor. We have not seen any notable decrease in the usage of contract labor relative to how we were, you know, towards the end of the year.

Okay. And I guess some of the some of the brands have announced new brands. Bordering kind of economy and mid-scale, do you have any interest in these or would you expect to maintain your current swim lane?

I think at this point given -- and remembering that two of the brands were announced so that there are limited details related to those brands publicly available. But given what we know about the extended stay brands, likely to be started by Hyatt Hilton in Marriott. They would not be of interest to us in the short-term. We have for some time focused our efforts around upscale and upper mid-scale assets and continue to feel like that is the area where we can generate the strongest and most stable returns for our investors. That said, we do love extended stay product and we will be watching these brands and how they evolved over time.

Okay. Thank you.

Thank you.

Our next question comes from Tyler Batory with Oppenheimer.

Hey, good morning. Thanks for taking my question. Given the commentary, Justin, you made on the acquisition landscape just share repurchases make more sense here and I know you bought back a little bit in Q1. But would you like to maybe lean into that a little bit more or perhaps conserve some capital for some potential opportunities that that might be coming later this year?

As demonstrated by the fact that we were buying shares, under our written trading plan, we see tremendous value in our shares at current valuation. And really the volume of our purchases has been governed by an assumption that we've had internally that pricing would change for attractive acquisitions in the near term. If we were not to see that, as we move through the year and we were to continue to see pricing at or around levels where we've been trading recently. It's certainly reasonable to assume that we would become much aggressive in purchasing our shares.

Okay. And then just a follow-up the Marriott, Cleveland's assets, apologies if I missed this. Can you provide a little more background on how you came about that opportunity, perhaps what you're expecting in terms of yield there as well?

Absolutely. The general partner in the deal is -- and management company is the same as the two assets that we closed at the end of last year. So in part, this is an expansion on that relationship, which we've worked foster for well over a decade now and are beginning to grow now. We were not the high bidder on that particular asset. In fact, it had gone under LOI at a much higher price and had fallen out and was brought back to a small group of which we were a part. We see tremendous value in the asset its high quality was recently renovated, a full scale renovation of public spaces and guest rooms completed at the end of last year. And part of that renovation included expansion of the fitness center improvement in the bar area and the addition of one key. So, moving from 153 to 154 keys. We have a tremendous amount of confidence in the management company and feel really good about our entrance into the Cleveland market, which has, as I mentioned in my prepared remarks, the potential for outsized growth relative to the national average, with a cost structure that would position us to continue to drive strong operating margins and profitability.

Okay. Great. That's all for me. Thank you.

Thank you.

Our next question comes from Anthony Palo with Barclays.

Hi, good morning. I guess a question on the transaction environment. How's price to evolve in the past several quarters? Are you seeing cap rates increase sellers or buyers moving more?

Interestingly, as I highlighted earlier, there continues to be a bid/ask spread and it ranges by asset, but I'd say on average it's tends to be between 5% and 105 and that's fairly universal. I think demonstrated by the fact that we've seen very little transactions occurring despite the fact that there continues to be a meaningful amount of inventory that's either being marketed or being considered by a small number of potential buyers. I think our expectation is that as we move through the year that bid/ask spread will shrink. And with that, there exists the potential for greater transaction volume. And certainly, we see ourselves in an optimal position to take advantage of that I should highlight that outside of that and we've spoken to this on some of our past calls. We are beginning to get incremental traction around potential development deals, which had not been a possibility for us for some period of time based on the significant run up in construction costs and uncertainty related to those costs and supply chain issues. With some stability coming back, I'll be at higher prices than what we saw pre pandemic. The pricing related to some potential development deals has become more rational and potentially attractive to us and in an environment where construction financing continues to be restrained and limited. Our takeout is more valuable to developers than it would be in periods of time when construction financing is readily available. And so in addition to seeing -- or in addition to having an anticipation that we will see incremental deal flow for existing assets as we move through the rest of the year. We do expect to be in a position to make forward commitments for developments, which would be delivered in future years.

Now that's my -- my that was my next question, actually, because I would have assume given all the regional bank worries that lending for development deals would be drying up very quickly here in there would be fewer opportunities, but it sounds like you're saying that because of your ability to take out deals that at least for you, you expect to see more, more of those opportunities?

Absolutely. I think particularly because of the challenge that you highlight, we anticipate that we will see more deals. And really when you think about the risk profile for a typical construction lender, that includes refinancing risk at the completion of construction or within a year or two following construction. Our takeout at a price point above raw construction that is not contingent on financing. And is backed by our balance sheet provides significant value to that equation. And puts developers in a position where they can more readily obtain the financing that they need to complete deals. So while we expect industry supply to continue to be needed, we do see ourselves in a unique window where we could we could be much more active on signing up new development deals than we have been over the past couple of years.

And maybe one more in terms of the contract labor. What do you think has to happen for that to improve? Just in general softening labor market? I mean, we're still seeing a lot of use your job in being created or is there anything else you can do now that and get that contract labor situation under control?

I think a general softening in the labor market would be helpful and certainly would be more helpful broadly to the industry as it relates to contract labor. I think for us, the longer that we go with stable operations and stable management and training and lowering turnover, I think the more likelihood we have to bring new associates in house as we rebuild teams internally. Turnover has been higher generally to for in house labor. And so I think as things continue to stabilize for our portfolio that should improve. But I think more meaningfully will be when the labor market stabilizes, but that does not prohibit us from making track or gaining some traction beforehand. I think we're really focused on it. We see value especially from a service cleanliness and cultural standpoint to get associates in house.

It's worth noting as well that a number of our management companies have added additional HR and recruiting resources in market to begin to more aggressively recruit employees to our hotels. And I think with operations stabilizing more of their day to day focus has been on transitioning to captive labor such that they can begin to as Liz highlighted. Focus on building culture and really focus on enhancing service for our guests in a way that we were able to achieve prior to pandemic.

Alright. Thank you.

And our next question comes from Dany Asad with Bank of America.

Hi, good morning everybody. Justin and Liz, you both called out the ability to drive rate as the primary way to offset higher operating costs. And we saw kind of rates slipping to up 9% versus 2019 this quarter, that from -- down from up 12% last quarter. And it sounds like April directionally is in a similar spot. So I guess my question is can rate accelerate from here and what would be some of the segments or markets that would drive to be the drivers behind that?

I would go back to what we said generally about April trends and that really the rate step back is in part attributable to that first week in April. As we look at the back half of the month where occupancies were in line from a comparison to 2019 perspective with March are actually slightly better those weeks. Rate rebounded as well and was in lockstep with that. And so I think we remain optimistic that we can continue to drive rate at least relative to where we've been with continued trends. Now to the extent we see more consistent and continued -- more consistent and continuous growth in mid-week occupancies approaching 90% the more we'll be able to shift mix, drive rate and the revenue management systems will be able to really maximize mid-week rates as well. We started to see an improvement but not to the extent we've seen on the weekends and we certainly hope that if there's consistent mid-week occupancy gains that that we can grow right there as well. Also, where we had seen speaking to your regional question, where we have seen urban start to recover more as well. As those occupancies continue to improve, we should see subsequent rate opportunity there as well.

And it's also worth noting first and fourth quarter are lowest overall occupancy quarters for our portfolio based on seasonality. And so we're just now moving into the stronger occupancy months where we should have meaningfully better ability to drive rate than we would in the early phases of the year.

Got it. Okay. That makes a lot of sense. Thank you very much.

Thanks.

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

Thank you. Good morning, everyone. Liz just want to go back to April one more time because why not I mean Easter was in April in 2019 and 2022. So maybe just take a step back is the Easter performance maybe more indicative of the new normal travel pattern of leisure strong in business weaker and that's what we should expect around major holiday periods going forward?

I think as we look at our portfolio in the past, depending on the holiday, we have historically seen business travel leading up to and the week following depending on where the holiday landed -- impacted. And then performance rebounds, I think what's interesting is just how dramatically leisure rebounded post Easter holiday. It was quick and certainly when we looked at the calendar shift relative to 20 19, it was meaningful those holiday weekends. So I think more upside from a leisure perspective when you look at those calendarship, but some impact to business travel. I think the fact that those trends are normalizing is a positive sign around business travel that we rebound from those weeks and business travel comes back. But that some of those historical patterns remain relevant. Now I will say, we continue to see and this is a little bit outside of holiday weekends or holidays as they fall or what the new normal may be. But shoulder nights continue to be strong despite the fact that mid-week occupancies are normalizing and travel patterns are normalizing. We are continuing to see Monday and Thursday strength, which is really encouraging as we look at sort of total occupancy gains and continued improvement.

Got it. That's helpful. And then you made a comment on group I think meaningfully improved, I think is what you said about 1Q performance versus 2019. I know it's a small part of your business, but what's the driver there? And then if group is at a slightly higher go forward rate, does that have any impact on overall RevPAR or margins for your portfolio that should consider?

Well, a couple of things, group is strategic. I mean, we had more group on the book related to a couple of things. Just an effort on our part knowing that Q1 is typically softer from an occupancy perspective ensuring that we layered on some groups. So really a benefit and then a testament to our on-site sales teams, group rate was favorable. And so I think as we continue to see strength and have the opportunity since group is short term and booked short term, to the extent we layer that on in higher demand times, we'll be able to charge higher rates. So I think that that should be helpful. And to the extent we're able to layer on group the compression in hotels and high demand times will give us the benefit of driving higher bar rates as well theoretically should. So I think all-in-all, it would be viewed as a positive if we can continue to maintain some of the small corporate and smart related group business, especially at competitive group rates. So I think we're encouraged by the activity on our buyer hotel teams. We're encouraged by the group that we had on the books in the first quarter. And I think as we progress through the year, as we carefully monitor travel patterns and occupancy on the books, we'll layer in group where we can.

Understood. And then just last one from me for Justin, just back to your comments on the 5%to 10% bid/ask spread. Maybe your best guess at this point? What breaks? Is it seller expectations come down or do you think buyers get more aggressive?

You know, my best guess is that seller expectations break first and then buyers bridge whatever of the gap remains at that point. You know, I think, certainly, internally our expectation is that the two factors that I highlighted earlier, CapEx needs and refinancing risk will create greater motivation for sellers to transact. And with that motivation, our expectation is that we would begin to see greater flexibility around pricing. And some of that when we think about total transaction volume, to the extent we were to see a meaningful disruption in the macro that could set transaction volume back again. To the extent we continue to see performance similar to what we're seeing today. So relative stability in the macro and we begin to see increased pressure from the two factors that I've highlighted. My expectation would be that we would see a fairly dramatic increase in transaction volume as we move to the end of the year.

Thanks for that.

Thank you.

Our next question comes from Chris Darling with Green Street.

Thanks. Good morning. Justin, I know you're focused on growing opportunistically, but given how your equity cost of capital has trended in recent months, what are your current thoughts around selectively monetizing the portion of the portfolio potentially as a source of capital? Is that a consideration today or would you say that's pretty unlikely given the state of the transaction market?

I think our -- when we look at our portfolio broadly speaking, we like the assets that we own. And so for strategic reasons, don't have a need to sell assets to purify the portfolio or to right-size it with our existing strategy. That said, we are constantly in market having discussions with potential buyers around potential dispositions on an individual asset basis and on a portfolio basis. And to the extent we were to see incremental strength on the buy side. We would certainly be open to selling assets and redeploying capital into share repurchases, development deals and using capital that we got from those transactions to fund CapEx. Because of the cash that our portfolio is currently generating, our expectation is that we will produce cash in excess of our dividend, which is and has been for some time industry leading. And I think current yield is somewhere around 6.5% for us. And so we will have cash to deploy either into new assets or share repurchases just from operations as well. So I think a tremendous amount of flexibility. Given debt markets today, and what I've highlighted from a bid/ask spread. That bid/ask spread impacts us as potential sellers as well. And I think based on an expectation that we will see greater and more tractably priced deal flow as we move through the year. We've been patient in pursuing other uses of capital. To the extent, we do not see changes in the environment as I highlighted in my earlier response to one of the questions. We would pivot and become more aggressive in purchasing shares and potentially selling assets to fund those purchases. We believe there's a tremendous amount of value in our shares where they are currently purchased or where they are currently priced and really our patients and pacing related to share buybacks has been largely related to what we anticipate will be incremental opportunities to drive even greater shareholder value through acquisitions in the near term.

Got it. Thank you. That's all from me.

Thank you, Chris.

We are closing our question-and-answer session. Now, I would like to turn the floor back over to Justin Knight for closing comments. Please go ahead.

We appreciate you taking time to join us for our first quarter earnings call. And as always, we hope that as you travel, you'll take the opportunity to stay with us at one of our hotels. And we look forward to seeing many of you in the -- not too distant future as we travel and meet with you on the road.

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