Greetings, and welcome to Apple Hospitality REIT, Inc.'s Fourth Quarter and Full Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kelly Clarke. Thank you. You may begin.

Thank you, and good morning. Welcome to Apple Hospitality REIT, Inc.'s fourth quarter and full year 2024 earnings call. Today's call will be based on the earnings release and Form 10-Ks 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 2024 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 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 fourth quarter and full year 2024 and an operational outlook for 2025. 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. Thank you for joining us today for our fourth quarter and full year 2024 earnings call. I would like to begin by recognizing the courageous and dedicated teams at our hotels in Southern California and extending our thoughts and prayers to everyone impacted by the recent wildfires. We are fortunate that our hotels did not sustain any material damage and have remained open and operational. As recovery from the fires moves forward, we will continue to support the ongoing efforts of our operating teams to care for guests, associates, and their surrounding communities. As expected, travel trends across our portfolio remained strong during the quarter. Driven by steady improvement in business transient demand, continued strength in leisure travel, and muted supply growth, we achieved comparable hotels RevPAR growth of approximately 3% for the fourth quarter and more than 1% for the full year, as compared to the same periods of 2023, respectively, driven by improvements in both ADR and occupancy. While business travel continues to be the primary driver of overall growth for our portfolio, leisure travel demand has been resilient. Contributions from recent acquisitions along with continued strength in ADR and moderating expense growth enabled us to achieve strong bottom-line performance for the quarter, lifting full-year 2024 results. Fourth quarter adjusted EBITDARE was up approximately 7% and modified funds from operations was up approximately 6% as compared to the fourth quarter of 2023. In January, strong performance from our hotels in the broader LA and DC markets offset weather-related disruption elsewhere. Our LA hotels have continued to perform well in February, and we anticipate that incremental demand from insurance and reconstruction efforts will continue to bolster performance for several of these hotels at least through the first quarter. Supply-demand dynamics for our business continue to be favorable.…

Thank you, Justin, and good morning. Before I begin, I would like to echo Justin's comments acknowledging the teams at our hotels in Southern California for their acts of service and unwavering hospitality during and following the recent wildfires. They have gone above and beyond to care for our guests, their fellow team members, and their surrounding communities. Our hearts go out to everyone impacted. We are pleased to report another strong quarter and year for our portfolio of hotels. Comparable hotels total revenue was $329 million for the fourth quarter and $1.4 billion for the full year, up approximately 4% and 2.5% as compared to the same period of 2023, respectively. With continued strength in leisure demand and additional recovery in business demand, fourth quarter comparable hotels RevPAR was $109, up approximately 3%. ADR was $153, up approximately 1%, and occupancy was 71%, up 2% as compared to the fourth quarter of 2023. For the full year 2024, comparable hotels RevPAR was $119, up more than 1%. Comparable hotels occupancy was 75%, approximately 1%, and comparable hotels ADR was $159, up approximately 1% as compared to 2023. As anticipated, October was our strongest month during the quarter, with year-over-year comparable hotels RevPAR growth of 4%. During the quarter, our Seattle properties in Renton and Tukwila were negatively impacted by temporarily reduced inbound training and consulting business associated with Boeing disruption. Our Nashville, Atlanta, and Denver assets also experienced weaker year-over-year performance during the quarter due in large part to recent supply growth and less robust group and event calendars. During the quarter, we saw meaningful year-over-year growth at our recently acquired Downtown Salt Lake City hotels, which benefited from strong event and convention calendars. Our Embassy Suites in the South Jordan submarket of Salt Lake City also saw significant…

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, a confirmation tone will indicate your line is in the question queue. You may press star two if you like to remove your question from the queue. It may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Dori Kesten with Wells Fargo.

Thanks. Good morning. You've mentioned a challenging comparison for 2025 fixed costs versus 2024. If you were to normalize for that, what operating expense growth have you assumed in your 2025 guidance?

Good morning, Dori. Yes. So for guidance for 2025, we do have a challenging fixed cost expense comparison. We had several one-time tax benefits as well as decreased property insurance premiums throughout 2024. If you take the one-time benefits of around, you know, $2.7 million in 2024, and you assume some benefit but not as much in 2025, plus you have an incremental addition with Madison, you're around a $3.2 million hurdle year over year. Normalizing for that, it's about a 5% assumed increase to property taxes. And so, you know, I think as you think about where that would put us overall, it would be certainly less than what we have in the full guide for this year. I mentioned in my prepared remarks with the increase baked in for fixed expenses at the midpoint you're at 4.2% for total hotel expenses. That has variable expenses outside of fixed cost around 3.5%. So certainly, you'd be less than 4% without those fixed cost hurdles.

Okay. Thanks, Liz. And then you've been selling relatively small hotels in tertiary markets with probably outsized CapEx needs versus their upside. What percentage of your portfolio would you describe in that similar way today? And then just who is the natural buyer of these assets that you found?

So to answer the first part of the question, you know, between 7% and 10% likely of our portfolio would fit in a similar category. Certainly, we have prioritized assets for both strategic and tactical reasons. Strategic, I think you highlighted, in markets where we see limited upside. And we have near-term CapEx needs, and then tactically, we have found that we're able to create a more competitive bidding process around smaller assets within our portfolio. Where the total deal size is reasonable and approachable for local owner-operators who have been the primary bidders on those. As a result, we're able to create a competitive bidding process and as I highlighted in my prepared remarks, we're able to achieve strong sales prices, you know, and dispose of assets at low cap rates. Which positions us to redeploy proceeds in an accretive fashion and grow overall value for our shareholders. You know, I think we've shown over the past several years a willingness and an ability to pivot and to adjust our acquisitions and disposition strategy according to, you know, changes in the market or, you know, to take into consideration changes in market conditions. That is the portion of the market that's most active today. But as we move through the year, that could change. And we'll adjust from a strategic standpoint accordingly.

Okay. Thanks so much.

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

Great. Thanks, and good morning, everybody. Liz, I think I've asked you this in the past, but going to ask you again. You'd referenced that midweek ADR continues to be meaningfully below, you know, weekend ADR. How close are you to reaching a level, you know, midweek where you kind of cross that threshold that gives, you know, the ability to push on rate more meaningfully?

We're certainly getting closer, and we've seen some of it. You know, I think the more we are able to, you know, drive that compression midweek, we're able to mix manage and that's preference in higher-rated negotiated business and certainly preference in bar rates that can be pushed higher by that additional compression. You know, this time of year is not our strongest from an occupancy perspective, but as we were rounding out last year, you know, we were still, you know, looking back over a more extended period of time. We probably still had, you know, 5% to go overall relative to pre-pandemic levels where we really got, you know, that compression and ability to grow rate. So still opportunity, but have continued to shrink the gap as we move through last year and certainly believe as we continue to our higher occupancy months, we'll continue to see that opportunity.

That's helpful. And then switching gears just, you know, you referenced the transaction market remains challenging, but, you know, somewhat of a bid-ask spread. Curious what you think narrows it and to the extent that it remains wide, I mean, how aggressive are you willing to get, you know, cobbling together some of the smaller portfolios and, you know, redeploying those proceeds into buying back shares of your stock. Thanks.

You know, an interesting question. Certainly, our preference for the types of assets we've been selling recently would be to put them together in a portfolio and to sell them as a group, certainly a much more efficient way to transact with some of the smaller assets. The reality is today, you know, we would not be able to maximize value in a transaction, a scaled transaction of that kind. Meaning, that there are fewer bidders interested in portfolios, and those who are are less aggressive in bidding for those portfolios than there are, you know, for individual assets. And as a result, you know, we've customized our strategy or our tactical strategy based on the environment as it exists. And as you've been able to see, we've executed very successfully on a portfolio of assets through individual transactions. You know, I think as we move through the year, our expectations are that things could change. I know a number of our peers have highlighted on their calls, and we also believe that the debt markets are relatively open, meaning that debt financing is fairly readily available, albeit more expensive than it has been historically. And importantly, loan-to-value is meaningfully lower than it was when we saw, you know, the last peak from a transaction volume standpoint. And so when we look at the cost of capital for various buyers and specifically the private equity buyers who tend to pursue portfolios, you know, combined with some general uncertainty about the long-term direction of the space, it's been harder to achieve premium valuations either on larger assets or on portfolios. You know, I think you ask what might change that. I think continued reductions in overall interest rates would certainly be helpful. And or a more meaningful reacceleration in terms of fundamental performance for the industry as a whole. And, you know, I think the opportunity exists for either or both of those to happen as we move through the year. And certainly, we would position ourselves accordingly in that environment.

Appreciate the thoughts.

Thank you. Our next question is from Jay Kornreich with Wedbush Securities. Please proceed with your question.

Hi, guys. Good morning. Just give us a bit of thoughts for guidance RevPAR growth of 2% in 2025. If there's any opportunity to outperform that, do you see that coming more from the midweek business transit demand picking up or the weekend demand, you know, continuing to stay elevated? And are you able to provide any kind of cadence as to how you see quarterly RevPAR shaping up throughout the year?

Good morning, Jay. It's a good question. You know, I think we have continued to, you know, articulate our belief that we have opportunity midweek from an occupancy perspective and, again, as Austin asked, you know, with that occupancy, we believe there's ADR. That's where we have, you know, the gap to pre-pandemic levels. And from a leisure perspective, continuing to outperform generally, you know, and I think while there was some normalization as the industry likes to refer to it with leisure last year, there's still an opportunity that that could outperform this year. Given that normalization last year and the fact that it's remained strong overall. So I think the opportunity to outperform comes from, you know, both business and leisure. Though as we look at tactically what we're seeing and, you know, what we're anticipating is more of the midweek growth at the midpoint of our guidance range. And then as we think about cadence, you know, it's a slow start to the year. While we do have benefit from the LA properties, we've been impacted in January in particular by weather-related events. Some of that has spilled over into February as well, but really January was a tough start for the, you know, for the portfolio outside of LA. Thankfully, we have LA to help compensate for that some. But we believe, you know, we'll continue to benefit as we move throughout the year from a RevPAR growth perspective. Also, as we progress, you know, our Madison Embassy, which we acquired and which opened in June of last year, we'll have, you know, more time to ramp as we progress through the year.

Great. Thank you. I'll hold it there.

Our next question comes from Floris Van Dijkum with Compass Point. Please proceed with your question.

Hey. Good morning. Justin, I'd love to, I mean, I sometimes think that you don't get the credit in terms of capital allocation that you perhaps deserve. You've clearly been leaning more into some of the urban markets, you've got another call. Is it 7% to 10% of your hotels that you could look to sell and accretively redeploy those? Where do you think you're going to be redeploying, you know, capital? Is it more urban? Is it more suburban? How and how has that mix shifted? Maybe if you can talk, you know, how the portfolio looked in 2020 between urban and suburban, and how do you see that trending over the next, you know, three to four years.

Absolutely. So in terms of immediate opportunity for redeployment, I think we've demonstrated that the most attractive opportunity for us recently has been share repurchases. Certainly, we monitor that. And as we underwrite any type of acquisition, whether it's existing or new development, we consider that opportunity relative to an opportunity to redeploy, you know, into our own shares, which we see as being tremendously valuable. You know, I think when you think about the overall makeup of our portfolio, from an EBITDA contribution, and some of this has shifted as we've seen continued improvement in the performance of urban markets. We're roughly 40%, just under 40% urban today. And, you know, when you look at the number of hotels, roughly 30%, remembering that a number of our urban hotels are larger, so have more keys. And certainly, when we think about overall EBITDA contribution per hotel, they're larger individual contributors. That is a mix that continues to feel comfortable for us. And while we have recently seen in some of our urban markets, strong relative performance, we continue to see strong performance in a number of our suburban markets as well. And, you know, I think it has been our long-term strategy to be broadly diversified with exposure to markets where we see the potential for outsized growth. The reality is that over an extended cycle, you know, that requires us to be present in a mix of markets. And we have found, you know, that over several decades in the industry, having a healthy mix of strong suburban markets combined with urban markets has created both the best opportunity for stability in our portfolio and the best potential for long-term growth.

Thanks. Maybe if I have a follow-up for Liz. Liz, the $295 million of debt that matures this year, I think the ten years dropped almost 50 basis points over the last month. Would you, where would you borrow at today for five or ten-year money? And would you consider prefunding some of those maturing loans today and, you know, and use the cash to, you know, to get some nice interest?

You know, the term loans in particular that come due are at favorable pricing. I do think there could be an opportunity as we, you know, recast that. That's a majority of what you mentioned at this $225 is the total that you mentioned. You know, we're beginning those conversations now. So I think your question is reasonable. You know, we'll look at, you know, timing and, you know, interest savings as we move forward towards that maturity. The secured debt is a little trickier. Those certainly, you know, were longer-term, you know, debt placements and they had very attractive interest rates. Those will be trickier to replace, you know, at certainly a lower interest rate than where they were. We also have a few swaps maturing that we'll manage as well. And some of that interest savings is not currently baked into what is provided in the implied guidance. Just there could be some upside there.

And in terms of the term of debt that you would look to put on it, is it five years or something like that? Is that the right way to think about it?

Certainly, I would love five years. I think, you know, the market, the term loan in particular that we'll explore all options, the term loan market in particular has been a little bit tighter than five years as of late. I think things are starting to improve and so again, you know, in conversations there, but certainly would love to approach five years. But we'll, you know, we'll see as we continue to progress in our conversations with the lenders.

Thanks, Liz.

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

Good morning, everyone.

Hi, Mike.

I got a few questions for you. Just first on operating expenses and sort of looking ahead. And just help us understand, like, what are your operators doing differently or maybe better in 2025 to offset some of the above-inflationary growth that you referenced? And then sort of when you step back, how much of the P&L is actually kind of quote controllable versus non-controllable?

When I'm giving broad ranges, you know, when I say variable, I'm really speaking about everything outside of property taxes, insurance, and other. And as you're alluding to, not all of that is perfectly variable because we certainly have, you know, salaries and overheads and things like that that are included. So it's not perfectly variable. What I will say with that is that as we improve our occupancy, our cost on a per occupied basis improves. And so that's really how we're looking at our guide for 2025. You look at where we finished the year, on a cost per occupied room basis for variable expenses, we were at 2.3% growth from a comparable standpoint. And at the midpoint, we're slightly higher than that. So that would account for some general inflationary pressures, but, you know, reasonable as we think about what we're guiding, you know, relative to the top line. But where we're seeing the big meaningful increase on a per occupied room basis is really the fixed expenses.

Anything different that your operators are doing or targeting for 2025?

You know, I think we continue to leverage our extensive benchmarking that we have and are constantly looking for opportunities. I think, you know, we have seen decelerating wage pressure as we move throughout last year. I think that that has stabilized, but I think product is something our managers continue to focus on. And then beyond that, you know, all controllable expenses, you know, I think the team has done a really good job there, so it's always hard to anticipate more. You know, that's really where I think some of our, while we did outperform last year from a fixed expense perspective, the variable expense management was very strong as well. And I think, you know, we continue to look for outliers from a performance standpoint in our portfolio and learn best practices.

Our speaker's disconnected. Please stay on the line. We will be back momentarily. Please remain on the line. Our speakers will be calling back in. Thank you. Okay. Our speakers are back. Apologies.

Hi. Can you hear us now?

I gotcha. I'm here.

Okay. Where did you lose us?

I think we're good on the operating expense. I can move to my next question just for Justin. When you guys do your analysis of sort of buy versus sell and you're triangulating values, maybe give us the lay of the land. How have real estate values maybe changed over the last 90, 120 days, both from the buy and sell side from your perspective?

Yeah. You know, it's interesting to try to identify broad-reaching trends in an environment where there are so few transactions happening. You know, as highlighted in response to one of the earlier questions, where we have seen the greatest activity around smaller hotel assets. And, you know, the most interested buyers of those assets are local owner-operators. And part of that, I think, is an ability to create stories around those. I highlighted in my prepared remarks that we've been able to dispose of assets at very low cap rates. Applying those cap rates to our entire portfolio would produce a very strong value. The challenge is that in today's market, as I highlighted in response to an earlier question, is that there isn't really a large portfolio bid today. And so extrapolating from individual transactions to large-scale value is a little bit tricky. And in fact, when we've been trading in higher values and have been more aggressive on the acquisition side, I've highlighted that we've been able to acquire larger assets at discounts to where we feel their long-term value is. Our expectation is that as we move through the year, the market is likely to open and we're, you know, in that type of environment, in a better position to peg an industry clearing price for assets. But absent that, you know, my sense is that values for real estate have remained stable in the hospitality space. And for particular assets, whether driven by a lack of desire on the seller's part to sell those assets or, you know, recent strong performance from those assets, you know, assets in many markets have grown in value. Now, you know, I think that is a belief, currently unsupported by transaction volume that would be sufficient to assure that that would always and in every instance be the case. But, certainly, I think evidenced by the fact that those with assets that are performing well are unwilling to sell for, generally, for prices that are below where we would have anticipated trading on those assets, you know, several years ago. And in most cases, seller expectations have increased.

That's fair enough. And then just sort of one follow-up there. It looks like age and CapEx are sort of the main drivers of what you're selling. Any other major factors that you're considering? And then maybe also, when is the more broadly challenging fundamental outlook become a bigger driver of an asset sales plan?

You know, I think there are strategic and tactical elements to our disposition strategy. And from a strategic standpoint, as we look at our portfolio, the primary driver really is the trajectory of the individual market with the secondary driver being our positioning within that market, either, you know, location or asset within that market. You know, I think from a tactical standpoint, what you've seen recently is us focus on smaller assets in more tertiary markets. That's because we can transact those assets and achieve what we see as favorable pricing in today's environment. To the extent the market broadens, you'll see more colors of that same strategy as we look more broadly at the portfolio, you know, and potentially to take chips off the table in some markets that have performed well but may have lower expected growth trajectories on a go-forward basis. And as I highlighted earlier, you know, I think while we will always pursue transactions in a way that we feel optimizes the value of those transactions, you know, ideally, long-term, we're in a position to pool assets and to maximize value through portfolio trades. You know, that is where we have seen the greatest success historically and certainly opens us up to move the portfolio more meaningfully, meaning our own portfolio more meaningfully through scale transactions.

Understood. Thank you.

Our next question comes from Ari Klein with BMO Capital Markets. Please proceed with your question.

Thanks, and good morning. Maybe just following up on the transaction discussion. If you weren't perhaps constrained by deal sizes for transactions, what percentage of the portfolio would you consider non-core versus that 7% to 10% you highlighted earlier, or is that 7% to 10% inclusive of all the assets you might view as non-core?

I'd say that is inclusive of the assets that we would consider non-core today.

Okay. Got it. And then maybe just on the RevPAR guide. Just curious, as it relates to the mix of occupancy and ADR growth that is embedded in that guide.

Alrighty. Could you repeat the question?

Just as it relates to the RevPAR guidance, curious on the mix of occupancy growth versus ADR growth that's embedded in that RevPAR guidance for 2025.

It is a mix between the two. I mean, it is, you know, some occupancy growth where we're able to capitalize and drive additional ADR. So it's truly a mix between the two.

Alright. Great. Thank you.

Thank you. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Our next question comes from Chris Darling with Green Street. Please proceed with your question.

Thank you. Good morning. Liz, just a quick one. I may have missed it earlier, but what's your outlook for wage benefit growth this year?

You know, somewhere between 3.5% and 4%. You know, specifically around wages, understanding that when we look at total variable cost and we look at what we're implying there at the midpoint from a growth rate perspective, you know, we're assuming, you know, some additional benefit from, you know, reduction in contract labor as well.

Okay. Helpful. And then, Justin, going back to maybe the supply backdrop across your markets, just digging a little bit deeper, understand there's really little in the way that's under construction broadly, but what about projects in the planning process, anything that might come out of the ground, you know, in the near term. Just wondering, you know, if you're seeing any changes sort of holistically one way or the other.

We have not seen any indicators that there would be near-term shifts. Certainly, as we look at pipelines and we're in continual communication with the brands about potential deals in markets where we have ownership. You know, the fact that fewer deals are beginning construction means that even with fewer new deals being signed up, you know, the pipeline has the potential to grow relative to what would naturally occur, you know, or would have occurred in past cycles where we saw more natural flow from planning to construction starts. You know, obviously, that varies by market. And we have seen outsized new construction in some markets. Being broadly diversified, the majority of our markets still don't have any new projects under construction within a five-mile radius. And given time from construction start to completion being at a minimum 18 months, but very often two to three years, that gives us a lot of runway in most of our markets without any exposure to new supply. You know, it'll be interesting to see how those numbers develop over time. Certainly, as the brands have announced new brand offerings, we see a flurry of signings, and you'll see a number of deals enter the pipeline in early planning or planning stages. But we have not seen a material increase in construction starts as a result. And I think the primary impediments continue to be, you know, costs relative to, you know, income potential from the target development site. I think Green Street maybe over a decade ago, put out a piece that argued there were no such thing as high barrier to entry market only high-cost markets. And, you know, I think what we see today is that in many markets that would historically have been viewed as low barrier to entry, you know, the fact that construction costs have universally increased and very often at a pace faster than potential profitability of the developments has increased has created a natural impediment to supply growth. That I think gives us room in many markets to continue to benefit from incremental demand growth in ways that we would not have in past cycles. And for that reason, really, in my prepared remarks, you know, I highlighted that we feel the risk profile especially for the types of assets that we own, has shifted dramatically. Meaning that as we continue to see improvement in demand, we will see outsized benefit from that relative to what we would have seen in past cycles. And on the flip side, to the extent there were to be a pullback, you know, in demand, the negative impact would be muted relative to what we've seen in past cycles where historically, we saw a lot of new supply come online at the least opportune time in the cycle.

Okay. Makes sense. I guess transitioning to a market where maybe that, you know, income relative or potential income relative to cost formula might actually make sense, Las Vegas. Anything new you can share in regards to the development parcel there? And I think maybe more importantly, given where your cost of capital is today, how would you think about, you know, potentially starting on balance sheet a project like that in today's environment?

So two things. One, we continue to work with a potential developer for, you know, the asset development there. We are working through various plans and cost structures and continue to underwrite. I think as has been the case historically, it would not be our intention to build on balance sheet. And so as we're thinking about cost of capital, relative to a Vegas development, we're forecasting essentially, cost of capital at the time of acquisition, which would be, you know, two to three years in the future. We're still a ways from starting. But I think advantage in that case from an overall cost structure by the fact that we own the land. And so, you know, and the 10.5% return that I highlighted earlier includes, you know, the value that we paid for the land. And so as we think about, you know, total development costs, we're advantaged relative to those who might be getting into the market fresh. And even with that, it's not an easy decision, and we're, you know, getting into a lot of detail with the developer on ways we can make sure we maximize on the opportunity, while doing so at a price point that ensures will achieve the strongest return in our hall.

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

Appreciate it.

Okay. We have reached the end of the question and answer session. I'd now like to turn the call back over to Justin Knight for closing comments.

Appreciate you joining us today, and thanks for your patience while we dealt with some technical difficulties on our end. As is always the case, 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 meeting with many of you here in the not too distant future.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.