Greetings and welcome to the Apple Hospitality REIT First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Clarke, Vice President of Investor Relations. Thank you. You may begin.

Thank you, and good morning. Welcome to Apple Hospitality REIT's first quarter 2025 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 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 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 2025 and an operational outlook for the rest 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 for our first quarter 2025 earnings call. Although a variety of factors weighed on hotel performance during the first quarter of this year, we continue to see solid demand across our portfolio, with growth in rate largely offsetting a slight pullback in occupancy. Our portfolio of rooms rooms-focused is broadly diversified across 85 different markets with exposure to a wide variety of demand generators. For the first quarter, comparable hotels RevPAR was $111, a decline of 0.5% as compared to the first quarter of 2024. Occupancy was 71%, down 1.5% to the first quarter 2024 and ADR was $157, up 1% as compared to the same period last year. In response to demand shifts in some of our markets, our corporate team, together with our third-party management companies has been working to further optimize the mix of business hotels in order to strengthen market share in the current environment. Our hotels operate efficiently and produce strong cash flow while simultaneously providing guests traveling for both business and leisure with a compelling value proposition. While variable expense growth has moderated, bottom line performance for the quarter was down slightly, driven primarily by higher fixed costs and lower than expected top-line growth. Adjusted EBITDAre was $95 million, down approximately 5% to the first quarter of 2024 and modified funds from operations was approximately $76 million, down 9% as compared to the first quarter 2024. Looking forward, we have tempered full-year guidance based on our performance during the first quarter and an expectation that current demand and expense trends could continue in the near term with some improvement in market share relative to the first quarter as we move into the back half of the year. The fundamentals of our business remain strong and our…

Thank you, Justin, and good morning. While the first quarter of this year was impacted by a variety of factors, demand for our hotels remained generally solid, driving strong absolute performance. For the quarter, comparable hotels total revenue was $324 million, down 0.4% to the first quarter of 2024, and comparable hotels adjusted hotel EBITDA was $105 million, down approximately 5% to the first quarter of 2024. First quarter comparable hotels RevPAR was $111, down 0.5%. ADR was $157, up 1%. And occupancy was 71%, down 1.5% as compared to the first quarter of 2024. In January and February, many of our markets throughout the Sunbelt region experienced extreme winter weather conditions, which negatively impacted travel demand. Our Southern California hotels, which benefited early in the quarter from wildfire-related recovery business, lifting overall portfolio results, experienced softer demand than was anticipated in the back half of the quarter. In March, the pullback in government travel became evident in a number of our markets and heightened macroeconomic uncertainty began weighing on travel demand. Despite these challenges, demand remained healthy across our portfolio, and we continue to see strength in absolute occupancy and rate. The pullback in government travel did not impact all markets equally, 32 of our markets grew government occupancy mix for the first quarter, and overall government as a percent of mix remained relatively consistent with the same period of last year despite increased cancellations as we moved through March. Government demand typically represents between 5% and 6% of our overall business mix and has stabilized over the past months closer to the lower end of that range. In many of our more affected markets, our teams have been successful in adjusting the mix of business in our hotels to compensate for the change. While it is often difficult…

Operator?

Thank you. [Operator Instructions] Our first question comes from Aryeh Klein with BMO Capital Markets. Please proceed with your question.

Thanks and good morning. I was hoping maybe you can provide a little bit more color on the RevPAR guide. It seems to imply, I think, maybe are flattish or even a little bit better the rest of the year. Just talk about what you're seeing from a demand standpoint to the extent you have some visibility over the next couple of months, what that kind of looks like. And any changes in behavior on the consumer side of things.

Happy to talk through that. So I think when we look at booking position, which really is between that and Q1 driving the changes at the midpoint of guidance, looking at our booking position in late February at the time, that booking position supported the guidance then. And Q1 expectations came down from there about 180 basis points relative to the expectations at that point. As we look at booking position today, when we think about the midpoint of our range, it's a 200 basis point drop. And the implied RevPAR expectations for Q2 through Q4 are essentially flat in the back half when you consider the impact of Q2, which will be negatively impacted by April. So when we look at bookings with April, we now expect Q2 to be our worst quarter with about 1% RevPAR growth implied for the back half of the year. Beyond bookings, as we look at the last eight days or so, we're seeing significantly stronger performance. It's certainly too soon to call that a trend, but it is encouraging. And I think in addition to that, while taking into consideration our booking position today relative to what it was late February, we believe we have additional opportunity to capitalize on some market share as well. So it's a combination of things that gives us the confidence or sort of gives us the midpoint that we provided in the revised guidance. But I do feel like based on where we performed to expectations in Q1 and what we're seeing today, the 200 basis points represents what we have visibility to.

Thanks for that. And then, Justin, maybe just on the transaction market. You got some deals done in the quarter, which is good to see. But curious how conversations – what conversations look like moving forward? Are there deals to be had in that market and how active do you expect to be?

I think the transaction market has remained largely unchanged. I think that continues to be available. Uncertainty has kept a lot of people who might be interested in larger transactions on the sideline. Where we've been effective from a disposition standpoint has been around smaller assets where we're generally selling to local owner operators at lower per key and lower all-in purchase prices. We continue to think that there will be opportunity to do that and to potentially redeploy proceeds into the purchase of our shares. Looking at what we intend to acquire now with the Tampa Homewood Suites that we have under contract, that's a very unique transaction. I think as demonstrated by the spread from a cap rate standpoint between where we're buying that asset and where we've been selling assets recently, in that particular instance, we had an opportunity to buy an asset that is in the parking lot for a very successful hotel that we currently own where we have an opportunity to spread management between the two properties and create incremental synergies. And where the hotel has been taken back by a lender who was in control of the property and we were able to negotiate a strong growing on yield. I think there will be less transactions like that available. And certainly, we're hopeful that we will continue to be able to execute on sale transactions as we have been year-to-date and really looking at our activity last year. In the current environment, we see tremendous value in our shares. We've been active buyers of shares. And as I highlighted in my prepared remarks, to the extent we can continue to sell assets at a meaningful spread, we see that as a way to create tremendous value for our shareholders.

Thanks. I appreciate the color.

Absolutely.

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

Thanks. Good morning, everyone.

Good morning.

On the demand front and maybe putting government aside here, where are you seeing those macro uncertainties result in RevPAR to be lower? And is it really just related at this point to booking hesitancy or are you seeing transient or group cancellations occur?

Good question. I think we can spend a little time on segmentation broadly to help frame a full picture. A portion of it does relate to government and the pullback in government, though I think we are seeing strong group, small group business. Our team is really focused on group and property direct business and mixing shift away from government, which we had leaned more into than we had historically. If you remember, going into March, we actually were over-indexed to government at 7% of our business mix. So I think when we think overall, we're not seeing a pullback in group. While we did see some onetime group cancellations with government specifically when you look at group as a whole, both with current performance and looking outward, we've got strong group position on the books. Beyond that, I mentioned Q1 segmentation in my prepared remarks, but it might be helpful to focus on March and then prelim April. In March, government room nights had declined about 15% to 5% of our occupancy mix. Remembering that full year 2024, our room night mix per government is 5.5%. So 5% still relatively good. The decline in room nights for March represented 80 basis points of occupancy mix decline. It's worth noting that going into March, our government bookings were above 7%, as I mentioned before. And negotiated, as we think about other segments, negotiated was around 17% of our mix, which is healthy in March, down just 10 basis points. So again, seeing some solid performance from the negotiated segment. In a month, that was negatively impacted by longer spring break season, some macro uncertainty, all of this negotiated held up relatively well. Shifting to April, which is certainly prelim, and I don't have the last few days of the month, but which would only improve it because we ended April much more solidly than we started it. The month was noisy with Easter in the month. Eclipse comparisons year-over-year again and spring breaks pushing into early April. But government room nights had improved to be down less than they were in March, down around 11% for the month and cancellations appeared to have leveled out. Government was still 5.3% of our occupancy mix, down only 50 basis points in April. And negotiated business was almost 18% of our mix. So, in general, it's a little bit of everything, but everything is still fairly solid as well. And we're able to fill in some gaps with group, as I mentioned, which is really strong as we look ahead.

Got it. That's very helpful. And then just my follow-up, maybe for Justin. Just on CapEx. Can you remind us sort of your philosophy there? How much you want to spend, where you want to spend it, and then any thoughts around maybe deferring projects and saving a little extra cash given the uncertainty that's out there? I know some of your peers have pulled back on CapEx, but maybe just more broadly remind us of your philosophy around CapEx spending and return expectations. Thanks.

So historically, we've spent between 5% and 6% of revenues, fairly consistently on CapEx. The $80 million to $90 million is roughly in that range that we anticipate spending this year and covers 20 full renovations, a portion of which are end of franchise hips [ph] and then all of the other CapEx needs for our hotels, which include equipment and parking lots and exterior facade of rooms. When we look at that and we look at our exposure to tariffs, it's a fraction of the total amount that we intend to spend. And in today's environment, Liz has highlighted, there is a tremendous amount of noise. It's important to reemphasize the fact that we're continuing to run really strong occupancies with the potential to potentially grow rate. I think relative to our peers, we have a meaningfully stronger balance sheet and feel absent a massive pullback, which we do not currently anticipate in the broader macroeconomic environment. It's prudent for us to proceed and to perform the renovations as we currently intend. We're certainly mindful of in watching tariffs and the potential impact on both the timing and delivery of goods and the overall cost and have an ability and flexibility to make adjustments to our total spend by pushing projects or pulling projects forward. But as of today, where we sit, we feel very comfortable with our expected spend for this year. And I should highlight also that to the extent we're renovating and our peers are not, we see that as putting us in a competitive advantage where we own assets in the same market.

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

Great. Thanks. Good morning, everyone. First off, Liz, I just wanted to clarify a comment earlier about implied RevPAR growth trends. Did you say you expect second quarter to be the worst quarter of the year and then the second half RevPAR growth trends to be up 1%?

Yes.

All right. Thank you. And then I guess when we think about the midpoint of the revised RevPAR growth guidance, is that more reflective of what we saw in March or more of what you're seeing in sort of this late April and into May, where things have stabilized a little bit? Not sure if that's more on the March trajectory or kind of a new normal somewhere between we started the year and March. Just any commentary you can provide around that would be helpful.

Well, I think that we certainly were looking very closely at actuals as they've been coming in, demand trends looking forward and have been pleased with the last week, but we're contemplating the revised guidance in advance of this week. I'd say we're encouraged by the last week trend but – or I shouldn't say trend, the last week, but it's too soon for us to call it a trend and necessarily work it into our revised guidance range. I believe that it helps to reinforce that we believe performance year-to-date is not necessarily indicative of what we'll see later in the year because of all the noise, whether it be calendar shifts or some of the macro commentary, some of the policy uncertainty. We believe underlying all of that, there are still some positive trends. And again, our absolute occupancy and rate are strong. So this last week, is encouraging. But I'd say quarter – first quarter performance and just general demand trends and what we've seen in segmentation is what got us to the midpoint of the guidance range.

Got it. And then if I heard you correctly, I believe you said that some of the ADR in the first quarter offset some occupancy softness, I assume, particularly in March. But after you kind of remix your business, from the weakness in certain. [Audio Gap]

Austin, you broke out for a period of time. Can you repeat that?

Yes. So I was just kind of referencing you had said earlier that ADR offset some occupancy softness early in the year. But after remixing the business now, and some weakness in certain – the weakness in certain segments, how do we think about that ADR occupancy?

We're experiencing some technical difficulties right now. [Technical Difficulty].

Operator, can you still hear us?

Now you're coming in loud and clear. Let's try one more time.

Is Austin still there?

Can you guys hear me?

I can hear you now. I think you're asking how to think about – well, it broke out at the exact same point, but I think I have the gist of your question, which is, as we think about ADR performance year-to-date and as we think about the mix shift going forward, how should we be thinking about rate? Is that it?

Correct.

Okay. I would say that we are we are leveraging more property direct business. We are actively working to continue to ensure that we have great base business. I'd say based on what we see today; it's coming on at great rates. It's good healthy rates. And where we are from an occupancy perspective, that shouldn't be generally too surprising. So I think we still anticipate that as we're able to grow occupancy, we should be able to gain rate. And we are encouraged that as some segments have pulled back, we have been able to maintain rate. So we don't have any significant change to how we view ADR optionality or ADR potential growth as we move forward and even with some mix shifts in our business.

That’s helpful. Thank you.

Thank you.

Our next question comes from Jay Kornreich with Wedbush Securities. Please proceed with your question.

Hi, good morning. Thank you. You mentioned that group is overall looking strong, and I recognize it's a smaller overall segment of your portfolio at roughly 14% of demand. But I'm just curious if you've seen any changes to booking trends there or any increased hesitancy from group counterparties to get contracts signed for travel later this year or into next year? Or is everything kind of remaining strong as you referenced before?

Remaining strong for the type of group we have in our hotels. As a reminder, it is a smaller percentage of our overall mix, but it is a consistent contributor to our mix. And it generally represents smaller corporate and smaller leisure groups that book near term. And so I think the fact that we are able to secure near-term group bookings as an indication that, that segment is not hesitating. And to the extent we're able to continue to see that as we progress through the year, we'd be confident as we continue forward. No signs at least at this point, other than some group cancellations in March, specific group cancellations in March around government, have we really seen any pushback on the group side.

Okay. Thanks for that. And then just for one follow-up, I wanted to go back to being willing to opportunistically sell assets and redeploy proceeds into additional share repurchases. If you decided to do that, how quickly do you think you could sell assets to do so? And at what total size do you foresee being able to or wanting to?

We're continuously in market. And so exploring potential options. So I think it's possible that we could complete transactions in a – reasonable number of transactions within a three to six month period. The challenge we'll have in terms of total scale will not be desired, but the lack of a portfolio bidder, meaning that in today's environment, the most likely scenario will continue to be the sale of individual assets at lower total purchase prices. That's where we've seen the greatest traction with potential buyers. And as a result, the greatest opportunity to drive pricing that's attractive to us, which means in order to scale, we would need to do a large number of individual transactions, which we are up for and ready to perform. And I think given that backdrop, should we continue to trade at or around current levels and have the ability to continue to execute, there's not a real limit on our overall appetite to do transactions like that.

Okay. I appreciate the information. Thank you.

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

Hey following up on the capital allocation side. Just maybe can you talk about how many assets do you have in the market today? Presumably, this – and this has forced you to look at your – the bottom 10% of your portfolio in greater detail. Maybe talk a little bit about how many assets currently you're looking to sell? And obviously, with the share price being where it is, repurchasing that, that which is not in your essence, would also boost your FFO per share presumably going forward as well.

Absolutely. I think to clarify, we're opportunistic sellers. So we're not limited to a certain type of assets within our portfolio. Certainly, to the extent we're looking to trade in this way, we're looking to sell assets where we can optimize value relative to alternative use of capital. And we are intentionally selecting assets that we feel are marketable in today's environment. That said, we have not historically nor do we intend to speak to total volume that we're exploring opportunities around today. Only to say that I think repeating what I said in response to the last question that I got, we are – we have an appetite to pursue transactions that make sense. And that's not limited – it's limited only by our ability to execute in a way that creates value for our shareholders.

And maybe the follow-up, in terms of forward contracts, obviously, you have a big one in Nashville. Your appetite to do those kinds of things in this environment presumably is almost nonexistent. Would that be correct?

Our appetite continues to be strong for that type of transaction. Our ability to execute on it is limited. And I highlighted in my prepared remarks, 60% - roughly 60% of our portfolio has no exposure to projects under construction within a five-mile radius. And it's important to let that sink in. That's unprecedented for our portfolio and certainly speaks to the fact that new construction starts, at least in our markets with the types of hotels that we own, have pulled back dramatically. And I think as I highlighted in my prepared remarks, added uncertainty around overall pricing because of the uncertainty around tariffs has further put new construction starts on hold. That's also impacting discussions that we're having with potential sellers of newly developed deals. And I think until there's greater clarity around where overall pricing is likely to land, we'll continue to see fewer construction, new construction starts and our ability to make forward commitments for those will be limited as well.

Thanks, Justin.

Absolutely.

Our next question comes from Michael Herring, Green Street Advisors. Please proceed with your question.

Hi. Thank you. You guys have talked a little bit about the change in mix shift of demand as you guys go through the year. I was wondering if you could talk a little bit about how your operators are thinking about some cost mitigation at certain properties or various markets? And if that's been prioritized as of yet?

I'd say we're always focused on cost savings and operating as efficiently as we can, reiterating that our occupancy is still really strong and the delta that we have seen in occupancy is not – while we want it to be better, it is not material in a way that we can meaningfully adjust the labor structure of our hotels or the cost structure overall. I think again, I don't want to underestimate that the team has done an exceptional job and continues to focus on it, but within the range of occupancies that we have provided with the updated guidance range, we're really focused on what we have been focused on, which is focus – working on productivity, reducing contract labor, which we've been extremely successful with, reducing turnover, strengthening the teams and the longer that the teams that we have in-house with lower turnover, the longer that we have them, the better culture that we have and the better productivity we yield. And so we're focused on many things all the time. But I wouldn't say we're in deep cost mitigation territory yet. And again, that's not contemplated within the guidance range. To the extent things worsened, we have proven over multiple cycles that for any top line degradation, we lose less on the bottom line. So I am confident that if we have to pivot, we'll be able to do so competitively.

All makes sense. Thank you. And I guess kind of thinking about that, that last point there. Do you think that the hotel industry in general is better set up to do better in a recession type of scenario as well as Apple's portfolio in particular or do you think that there's still some risk there in case there is any broader drawback in demand?

As I highlighted in my prepared remarks, we are convicted around the fact that the adjustment or the lack of new supply in the majority of our markets, we believe firmly that, that meaningfully shifts the risk profile, limiting downside and meaningfully increasing upside potential for our assets. When you look at historical critiques of our strategy, they have largely been around exposure to supply. And what we have found is that in today's environment, the types of markets where we own assets and the types of assets that we own are enjoying a level of protection that is unprecedented. And I think that will position them for a meaningfully stronger performance on a go-forward basis. I think that's already manifest as we have weathered these small blips from a disrupted demand standpoint, March specifically. In that the negative impact on our portfolio of that plus year-over-year comps plus challenging weather was relatively minor. And I think in a more dramatic pullback, we would be meaningfully better positioned than we have been in times past. And if you go back and look at historical cycles, and I've had the opportunity to live through a number of them, the exacerbator for the negative impact on the hotel industry and on portfolios like ours, specifically which in spite of that performed relatively incredibly well, was driven by the fact that there was outside supply growth at the worst potential time or worst possible time in the economic cycle, that's very unlikely to happen the way we're set up today. And in fact, to the extent we continue to see a pullback in new construction starts, our expectation is that near term, well over half of our portfolio won't have any exposure to new supply for several years to come.

Understood, thank you.

Thank you.

[Operator Instructions] Our next question comes from Jack Armstrong with Wells Fargo. Please proceed with your question.

Hey, good morning. Thanks for taking my question. So quarter-to-date, we've seen some weaker RevPAR for hotels kind of at the upscale level and down the chain scale. Would you say that across your portfolio, you're seeing more pressure on all of the middle income consumer and maybe less of a trade-down effect than we would have expected at a normal macro slowdown environment?

I can't say that I see that as we look at the data. I believe that what we have seen, at least for our portfolio year-to-date has more to do with specific market concentration relative to the broader industry or peers or again, just the number of disruptors that particularly influenced our market locations. I think between the weather, the Eclipse comp, the Easter shift and the fact that Q1 is always our softest quarter, because we are both a leisure but also heavy business transient portfolio, to the extent you're in a slower business transient season, you have an extended spring break season and certainly the macro noise, I think broadly, it's more of that than chain scale driven.

Okay. Great. And just a quick follow-up. Can you compare your level of full-time employees to kind of pre-pandemic and your opposition of contracted labor? Do you have more flexibility or less flexibility now than when you were just kind of heading into the pandemic, if we get to a scenario where you need to [indiscernible]?

I'd say that our full-time FTEs are maybe just shy of pre-pandemic levels when you look at it. I mean we have been able to benefit from some of the housekeeping modifications, but our average length of stay is as such that, that materially changes our full-time associate head count materially. From a contract labor perspective, I mentioned in my prepared remarks, we're around 7% for the quarter. That's still slightly elevated to what we track pre-pandemic, but I will say that our tracking is better post pandemic than it was pre-pandemic. So we're probably still 200 basis points higher than what we were tracking in 2019. So still some opportunity on the contract labor side as we move more to in-house. But generally speaking, I think our staffing level is stable and in line with what we would expect. From a flexibility standpoint, going into some sort of other period of disruption. I'd say we have always been in a position, given the types of assets that we own, that when there are pullbacks in demand, we can efficiently operate with fewer FTEs given the fact that we have been through a more significant demand shock than we ever would have anticipated with COVID, and we were able to quickly adapt. I do feel confident that our teams and in partnership with the brands that we could make adjustments quickly as the environment changed. So I do think on a relative basis, we're in a slightly better position. But generally, the types of business, the types of assets that we invest in, it's strategic. It's because they're efficiently operated and can be more efficiently operated than other hotel types.

Okay, great. Thank you.

Thank you.

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

Thank you, and we appreciate you joining us today. As always, we hope that as you travel, you'll take the opportunity to stay with us at one of our hotels. We look forward to seeing a number of you in the coming weeks.

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