Greetings, and welcome to the Apple Hospitality REIT Third Quarter 2024 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. Thank you. You may begin.

Thank you, and good morning. Welcome to Apple Hospitality REIT third quarter 2024 earnings call. Today's call will be based on the earnings release in 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 terms 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 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 on election day for our third quarter earnings call. Travel trends across our portfolio remained relatively stable during the quarter. This slow, but steady improvement in business transient demand and continue to strengthen leisure travel, we are pleased to report comparable hotels RevPAR growth were approximately 1% as compared to the third quarter of 2023. RevPAR growth was driven entirely by improvement in rate with increases in midweek occupancy largely offsetting a slight pullback on weekends. As we anticipated at the onset of the year, improvements in business travel continue to be the primary driver of overall growth for our portfolio. We have, however, been pleased with the resilience of leisure travel demand in many of our markets. Bolstered by recent acquisitions, top-line ADR growth, and moderating expenses, we achieved strong bottom-line performance during the quarter. Third quarter adjusted EBITDAre was $129 million and modified funds from operations was $107 million, up approximately 6% and 3% respectively compared to the third quarter of 2023. Preliminary results for October are strong and show continued growth with RevPAR up approximately 4% compared to October, 2023. Supply demand dynamics for our business continue to be favorable. At the end of the second quarter, approximately 54% of our hotels did not have any new upper upscale or upper midscale product under construction within a five mile radius. And actual rooms under construction within the same five mile radius decreased 7% year-over-year. As I have highlighted on past calls, limited supply growth in our markets materially improves the overall risk profile of our portfolio by both reducing potential downside and enhancing the upside impact from variability in lodging demand. Supported by our strong operating performance, we continue to pay an attractive dividend. Based on Friday's closing…

Thank you, Justin, and good morning. We are pleased to report another strong quarter for our portfolio of hotels, and that we were fortunate to not be adversely impacted by the recent hurricane activity and damage in the southeast. Our hotels in the path of the hurricanes had no material structural damage and remained open, serving their communities and caring for guests and associates. While our hearts go out to all those impacted, they are also warmed by the acts of service, care and hospitality that were extended by our team members and communities. For the quarter, Comparable Hotels' total revenue was $378 million for the third quarter and $1.1 billion year-to-date through September, both up approximately 2% as compared to the same periods of 2023. With continued strength and leisure demand and additional recovery in business demand, third quarter comparable hotels RevPAR was $125, up approximately 1%. ADR was $163, up more than 1%, and occupancy was 77%, essentially flat as compared to the third quarter 2023. A strong third quarter brought year-to-date through September Comparable Hotels RevPAR to $122, up more than 1%, Comparable Hotels Occupancy to 76%, up approximately 1%, and Comparable Hotels ADR to $160, up nearly 1% to the same period of 2023. Uninterrupted by holidays or calendar shift, August was our strongest month during the quarter, with year-over-year comparable hotels RevPAR growth of more than 3%. Based on preliminary results, performance in October was even stronger, with occupancy of approximately 80% and continued improvement in ADR yielding approximately 4% RevPAR growth for the month. Looking at day-over-day trends, leisure travel continues to be resilient with weekend occupancies down less than 1% during the third quarter. Weekday occupancy was down in July, driven primarily by disruption around the 4th of July holiday, but up nearly…

Thank you. [Operator Instructions] The first question is from Dori Kesten from Wells Fargo. Please go ahead.

Thanks. Good morning. You highlighted a disconnect between business transient and leisure rates from their historic trends. Can you give us an update on where that spread is now, I guess, versus history, and then where you believe that trend line is going.

The gap continues to shrink both as a combination of a slight pullback in weekend rates, as we've mentioned, but more so as we start to see weekday continue to improve. Relative to 2019, year-to-date, our weekday ADR is up about 6% and that's, shoulder nights included, but up about 6%. And then weekend, still relative to 2019, is up about 18. So you can see that there's still a meaningful gap there to capitalize on as we move forward and continue to see business transient improve.

Okay. And then with October RevPAR up 4%, I guess what's been assumed for November and December to get to the Q4 midpoint? We're just trying to figure out the swing between your assumptions around the election versus holiday travel. When we look at November and our booking position, certainly we expect a softer week this week as people get out and vote. But as we look ahead at the rest of the month, we are seeing positive booking trends for November. So overall for November, not quite as much as we are projecting in December. But still for both November and December at this point, based on booking position and current trends, projecting some RevPAR growth.

Okay. And then just last question how would you expect How would you expect 2025 expense growth to compare to what's implied in your current '24 guidance?

We're still super early in the process of budgeting with our management companies. That said, I think absent a meaningful change in the environment, our sense is that current trends are likely to continue into the coming year.

Okay. Thank you.

Thank you.

Thanks, Dori.

The next question is from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead.

Hey, good morning, everybody. So, Justin, you highlighted it towards the end of your prepared remarks that operating performance should continue to improve. I guess, what are you most excited about turning the calendar into 2025, and what do you think changes, heading into next year that could look different, I guess, than how this year's played out?

Similar to what I said in my prepared remarks, I think we continue to be pleased with the resilience of leisure travel. I think looking across our portfolio, certainly performance varies by market, and we have seen pullback in some markets, but overall the trend has continued to be favorable. And with that as a backdrop, we continue to build occupancy midweek, which positions us to continue to grow rates. We're in a better position than we have been to begin to mix manage in ways that will more dramatically move rate midweek. And I think when we think about a bulk [ph] case for the coming year, it continues to be really business travel related with continued return to office, continued improvements in demand, matched with, as I highlighted, a really favorable supply outlook positioning us to really take advantage of incremental growth on the demand side.

You've talked a lot about the mix manage opportunity, midweek. I guess, how far away are you from an occupancy perspective to really being able to press the lever, I guess, on mix managing and really getting kind of rate growth, moving more meaningfully higher?

It's interesting as we look at blend -- blended midweek occupancy across months. Part of the challenge we've had has been around holidays and more meaningful disruption around holidays. When we control for those and work solely at weeks that are unaffected by major holidays or calendar shaft, we are getting there in terms on building to more meaningfully move rate. I think as we turn the corner [ph] into next year, assuming things continue as we've seen them as we round up this year. Our expectation is that we're in a position now from an occupancy standpoint to beget [ph] more meaningfully move the needle in that area.

And, Austin, you saw a little bit of that as we moved from sort of the occupancy ADR dynamic in Q2 to Q3. I think that our team really looked back at our mix between occupancy and rate growth in Q2 and really refocused around where we had some mix management opportunity and started to capitalize on that. And I think continuing to focus there and drive and build off of that momentum, we should be able to continue to mix manage based on occupancy levels moving forward as well.

That's helpful. And then just last one. Just -- I guess, just if we do kind of remain in this little slower RevPAR growth environment, maybe with mix directions, I guess, on the direction of the economy, is the decision to repurchase additional shares, is that just predicated on the ability to sell some of this slower growth, non-core assets at an attractive spread to where the stock's trading? Like, can you kind of just walk us through the latest thinking on buybacks and to the extent the environment remains very similar heading into next year?

Certainly. I think I highlighted in my prepared remarks, we've been very pleased with our ability to positively execute on the trade between asset sales and share acquisitions. I think looking back across the quarter, certainly we're protective of our balance sheet and are positioning there, an ability to create liquidity through asset sales and to redeploy into share repurchases, especially given how we've traded recently, continues to be attractive to us. Certainly we look to optimize the redeployment of that capital and are continually in market looking at potential acquisitions opportunities as well. And then I highlighted in my prepared remarks the really strong performance of recent acquisitions and we'll continue to look at both and deploy capital where we have confidence we can create the highest returns.

Great. Thank you.

The next question is from Tyler Batory from Oppenheimer & Company. Please go ahead.

Yes, thanks. Tyler Batory here. Good morning, everyone. So I just want to follow-up on the midweek and mix discussion. That was something that's important that a lot of investors are focused on. Can you give a little bit more numbers around how much room there is for occupancy growth midweek. I'm not sure if you can talk about kind of where you are now versus where you were pre-COVID or where you'd ideally really, really like to be. And there's definitely a mix shift here where occupancy is growing midweek. It's offsetting some weakness, it sounds like, on the weekend. Do you think that continues going forward in terms of that mix shift and what are the implications there as occupancy is moving around a little bit in terms of your ADR?

A couple of questions there. I'll start with the opportunity, midweek or our peak travel day is Monday through Wednesday relative to 2019. Depending on the day, we still, year-to-date, looking through October, we still have anywhere from 300 to 750 basis points of opportunity or percent in opportunity. So still some room on the occupancy side. I think that there has been a mix shift and we've seen it as we have continued to rebuild business transient occupancy midweek and trading that from a higher rated leisure traveler. And I think when you look at our rolled up results, that's put some pressure on our ADR growth. That said, as I mentioned a little bit earlier in response to Austin's question, we are starting to gain some traction where we have the higher occupancy levels and really ensuring that we're pricing based business appropriately and looking at where we can drive incremental rates. So we're starting to see some benefit there. And so I think that the sort of negative mix shift impact will continue to decline over time.

Okay. Okay. Thank you. And then a market-specific question on Nashville. It's one of the software markets for you in the quarter, I think a software market year-to-date. You have the underdevelopment assets that's going to be coming online later in 2025. I know there's a decent amount of supply in Nashville. Just talk about your perspective on that market, how you're underwriting, how you're thinking about that pending acquisition as well.

We continue to be very positive on the new development for a couple of reasons. One, I think our view on Nashville continues to be positive. Certainly the market has been absorbing a bit of new supply recently. Looking at performance during the quarter, there were also -- there was also a slightly weaker event calendar that played into that performance during the quarter. Over time, the dynamics of the market continue to be favorable and beyond that as we continue to see performance of Motto as they open, we continue to feel really good about our underwriting for that asset specifically and for that brand.

And part of our year-to-date and quarter-to-date performance in Nashville is also driven by our suburb concentration in Franklin that had some group business year-over-year. So I think in the pocket where we're developing the Motto, certainly from a demand perspective, we continue to feel optimistic there. And we've had some sales turnover this year in the Nashville market. So I think there's some upside there as we sort of get our footing back from a sales representation standpoint.

Very helpful. That's all for me. Thank you.

Thank you.

The next question is from Jay Kornreich from Wedbush Securities. Please go ahead.

Hi. Thank you. Good morning. Can you talk about what you're seeing in the overall transaction marketplace, I guess, with the volatility and interest rates? Has it slowed down or are there opportunities still coming up that you're assessing? And I guess just based on where your stock is trading and funding considerations, how do you think about your current interest in acquisitions?

It's interesting. Certainly, there has been some volatility in the debt markets recently. We continue to be very active in underwriting deals. So in terms of total deals available and the volume there, there are ample opportunities for us to proceed should the fundamentals of our business and our cost of capital allow for it. That said, sellers continue to be reluctant to adjust pricing for assets. And as we've demonstrated over the past several months, that's made our shares more attractive on a relative basis. I think looking at the total transaction market, there continue to be fewer transactions than we would ordinarily anticipate in a market like this. And the bulk of the activity we've seen has been around smaller, lower total purchase price assets, where in our experience, we've been able to create more of a competitive bidding environment, especially with local owner-operators. Zooming out, there continues to be significant interest in the space, but the bid-ask spread is wide. And I think absent a meaningful shift in operating performance for the assets and/or cost to capital for the potential buyers, we'll continue to see lower transaction volume through the end of the year.

All right. Thank you for that. And then just one follow-up. [Indiscernible] wanted to ask about the group component of your business, which I recognize is only 14% demand. I'm curious if you're seeing any changes with that segment, and if you have any read into how bookings are looking for next year relative to this time last year.

It's a good question. Our group acts a little bit differently than I think the industry at large talks about it from a larger group convention standpoint. We don't typically see our group book as far out, so we don't have a clear picture as to how that looks today versus same time last year for next year. We just don't see that much booking ahead of time. It's a shorter booking window. That said, our group business has consistently performed well. Since the onset of the pandemic, our percentage of group really hasn't fluctuated much. And so I think we have no reason to believe, based on both current trends and what we've seen over the past couple years, we have no reason to believe that it wouldn't continue to be strong and tends to be a mix between both small corporate group and [indiscernible] or leisure-oriented group.

Okay. Appreciate it. That's it for me.

Thank you.

The next question is from Michael Bellisario from Baird. Please go ahead.

Thanks. Good morning, everyone.

Good morning.

I just want to go back to the topic for Liz, just on the booking window and some of your visibility. You maybe unpack all the calendar shifts in 3Q, 4Q, which way is the booking window moving? And then are you seeing any change in cancellations or rebooking activity occur?

A lot of good questions there. I'd say if you strip back some of the calendar shifts, I think average daily bookings remain positive. So, we certainly remain encouraged by that. From a booking pattern perspective, we have seen a slight shift as you've seen, some occupancy trade from leisure to business transient, come from more shorter term bookings, but even our leisure typically is shorter -- relatively shorter term, meaning most still comes in the month for the month. And so it might impact in the week -- for the week bookings with business transient, but nothing material. Beyond that, from a cancellation rate perspective, it's a little bit noisy with the storms in September. We certainly probably had some impact from short-term cancellations in September, but overall as we monitor cancellations throughout the year, no material change in cancellation rate either.

Got it. That's helpful. And then along the same lines, just with the shorter booking window today, how does that affect staffing and planning at the hotel operational level? And is that shorter booking window impacting the wage growth rate at all?

It's a good question. I think I mentioned it quickly in my prepared remarks, I do think that as we looked at payroll per occupied room for the third quarter, there was some opportunity with sort of changes in near-term bookings on a cost per occupied room basis, meaning we have to stay on top of scheduling relative to forecasting. And so, that's something our team works with the management companies closely on is evaluating booking position relative to their internal forecast to try to make sure we're flexing where appropriate and we're staffed where appropriate. And so, as things shift, there's additional dynamics that play that the teams need to adjust for. And I think having an incremental week impacted by 4th of July, maybe slightly more impact around Labor Day and then some of the shifts with potential cancellations around the hurricanes and storms, I do think that that impacted our Q3 numbers slightly.

Understood. And then just last one for me for Justin on capital allocation. Turn the clock back a year ago, you were pretty aggressive on the buy side, acquisition-wise, when the stock was higher. Maybe push you a little bit here on the flip side. Why not be more aggressive on the sell side? I know you're selling four hotels, but smaller dollars. And if you can capture a turn and a half spread, which I think is wider than the spread you captured on the buy side, maybe why not move more aggressively on the sell side with assets? Thank you.

I think that's a great question. And I'll say two things. One, we're not buying exactly the same thing. So while I've been clear about our going in cap rates on the acquisitions and our recent performance, certainly our expectations are that these acquisitions will have stronger growth rates than our portfolio average. But then on the flip side, the reality is that the market has really only recently opened in a way that has enabled us to dispose of assets in a meaningful way. And I think to the extent it stays open, as it recently has been, you'll see us be much more aggressive selling assets and redeploying capital. I think -- and we've highlighted this several times. Our intent is to maintain the strength of our balance sheet. And so we're mindful of how and when we deploy capital and the incremental risk and required returns as we increase the overall leverage in an environment where we can trade -- make a trade of assets at a spread to the investment, that's an easy trade for us to make. And I think moves the needle over time in terms of total returns we're able to provide shareholders.

And then just one follow-up there. Any portfolio premium emerging on the sell side, or is it still all ones and twos in terms of best execution?

Yes, at this point, there's still not a portfolio premium to be had. I highlighted in response to one of the earlier questions and somewhat of my prepared remarks, where we're able to create the most competitive buying environment is with local owner operators. And really that's around individual assets or a pair of assets that are co-located. I think for the foreseeable future, we anticipate that to be the case, but certainly I think have demonstrated our ability to pivot and make adjustments to our tactical strategy in response to changing market conditions.

All helpful. Thank you.

Thank you.

Thanks, Mike.

The next question is from Chris Darling from Green Street. Please go ahead.

Thanks. Good morning. Justin, is there any update you can provide on the land parcel you have out in Vegas? And to the extent you're interested in developing, is that something you would consider pursuing on balance sheet or would you more likely structure a deal maybe with a partner of some sort?

So we continue to explore the opportunity there and I've had extensive conversations with brands around opportunities as well as with a potential developer. I hope that in the near-term we'll have an announcement to make there. I think it's worth highlighting that underwriting new construction, even in an environment where we own land, can be challenging. And I think in response to the second part of your question, while we are not adamantly opposed to construction on balance sheet, we do have a strong preference to develop as we have done to date through fixed price contracts with third-party developers. And we're fortunate to have worked with a number of groups who have capacity to perform in a market like Vegas and deliver at attractive pricing quality products. So that continues to be the most likely direction for that particular development.

Okay. That's helpful. And then maybe to the latter half of your answer there, I'd be curious just on the development front in terms of some of those takeout transactions that you've structured. What does the pipeline look like today and would we potentially expect to see you enter more of those contracts over the next months and quarters?

So we are -- we continue to be active in looking at a little bit less than a handful of potential developments that would be attractive to us, potentially, the reality is, and I highlighted in my prepared remarks, and it's worth repeating, supply in our markets continues to be muted. With 54% of our markets not having any new supply under construction, and a meaningful reduction in rooms under construction across our portfolio. The primary reason for that is that it's difficult, given the meaningful increase in construction costs, to include increased construction finance costs to pencil deals. And I think that has limited our focus at higher RevPAR markets, where we can justify the higher construction costs and still achieve our return thresholds. Vegas happens to be a market where we have now first-hand experience with the Spring Hill Suites, and a market that continues to perform very well and one in which I think over time we would like to increase our exposure. There are a handful [indiscernible] markets that we feel similarly bullish about in terms of the opportunity to enter with newly constructed assets. But by and large, I think you will continue to see our focus where we have a cost of capital to justify acquisitions being around existing assets. I think we’ve demonstrated an ability to transact in ways that generate attractive returns for investors in that area. Certainly have, I believe, unparalleled capacity from a renovation standpoint, which really broadens the scope of what we can look at. I think a significant portion of our forward pipeline over the next several years will continue to be existing assets.

All right. I appreciate the time. That's all for me.

Absolutely.

[Operator Instructions] The next question is from Floris van Dijkum from CompassPoint. Please go ahead.

Hi. Good morning. It's Ken Billingsley for Floris. Just expense questions. Your CapEx is listed at $75.85 for the year, so that leaves quite a bit in the fourth quarter given where we are. My question is, A, how much is left to do, and is some of that going to get pushed into $25, and are you looking for the same type of CapEx budget for next year?

Good question. As we sit here today, we're in a similar position that we typically are in as we go into the fourth quarter from a total spend to anticipated spend perspective. Most of our renovations begin in the fourth quarter, some of which can fall over into the first quarter of the following year, so the shift [ph] for '25. But no reason and we didn't update our full year guide as we do anticipate that we will be spending quite a bit relative to our renovations that are beginning now as we finish out the year. As we look at 2025, it's still early, as Justin mentioned, related to another expense question. We're in the midst of budgeting for next year, both from a property-level perspective, but also CapEx perspective. Though, if things continue much as they are, we would anticipate our typical run rate of CapEx, barring any changes.

Okay. And then a question on the insurance, given you said it was down 20% given where those have been priced over the last year or so. Can you talk about like what may be bringing that down and it's something unique in your mixer portfolio?

Relative to the renewal that we had in April, we did restructure the program a little bit trying to drive incremental capacity and that did yield some rate reductions year-over-year, which were favorable. Also in the quarter, we had a tougher, or I guess I should say an easier comp year-over-year related to uninsured loss expense. So premiums were down meaningfully in the quarter and have been since April. That said, we also have had good loss experience this year. So it's a combination of both.

Great, thank you.

This concludes the question-and-answer session. I would like to turn the floor back over to Justin Knight for closing comments.

We appreciate you making time for us this morning. If you haven't done so already, we would encourage you to get out and vote. And as always, as you travel, please take the opportunity to stay with us at one of our hotels. We look forward to speaking with many of you at the upcoming conference in Vegas in a few weeks and hope you have a wonderful day.

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