Q3 2020 Apple Hospitality REIT Inc Earnings Call
Our income tax purposes.
At the end of the quarter, we had $1.5 billion and total outstanding debt consisting of $516 million of mortgage debt secured by 33 hotels and $1 billion outstanding on our unsecured credit facility with a weighted average interest rate of 3.8%.
As of September Thirtyth, we had available corporate cash on hand of approximately $27 million and unused borrowing capacity under our revolving credit facility of approximately $295 million.
We have no maturities for the remainder of 2020 and $51 million net of reserves maturing in 2021.
With over $300 million of total liquidity and positive cash flow. We are confident in our ability to navigate the current uncertainty preserve the value of our equity and strategically position ourselves to take advantage of opportunities.
Before opening the call for Q in a I want to thank our teams who have worked tirelessly to optimize performance in the most challenging operating environment our industry has ever faced.
Their efforts and experience coupled with the strength of our platform have uniquely positioned us for outperformance and given us great ability to be opportunistic as we look to bring long term value to our shareholders.
While significant uncertainty remains as we continue to navigate these unprecedented and challenging times. The current environment has underscored the strength and resiliency of our hotel portfolio and underlying strategy and we remain confident in our ability to maximize performance and enhance long term value for our shareholders.
We will now open the call for questions.
Thank you.
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One moment, please while we now poll for questions.
Our first question comes from Neil Malkin with capital One Securities. Please proceed with your question.
Hi, everyone. Good morning, good morning, good morning.
Hey.
First question, maybe about the operating model on the expense side.
A lot of talk has been going on with.
And the brand standards can fine tuning the operating model.
You mentioned.
Vendor services contract services renegotiation.
Could you maybe lay there could you talk about some of the brand standards or changes you're most focused on given your types of hotels.
You know trying to lower fixed costs from the system.
You know maybe.
Yes, any color you could give would be would be helpful. Thanks.
Absolutely good question and I know something that most people are focused on right now just trying to understand what the long term model looks like thankfully.
The brands have been.
Let me elaborate if and and recognize the opportunity that we have to.
Evaluate all brand standards I'm curious why that may or may not be typically on any of our radars right just going through all brand standards to try to understand where we could be more efficient long term.
Everyone is working to that end, we're we're in very regular conversations through our ownership advisory councils with them.
And everything's on the table.
Some of the areas that would have more more focus or more attention for us just because of the impact it could have to the bottom line or certainly around labor and housekeeping.
I think we've we've talked a little bit about that before but you know to the extent we could adjust.
Adjust the model and and operate similarly to how we are today, where stayovers are not being cleaned as often or on request versus every single day would would certainly help depending on your length of stay so.
So thats certainly an area of focus and then comp services around free breakfast and evening, social just making sure that we're being efficient bear in providing.
Value to the guests that that they fit.
They are expecting but doing it in a cost effective way and certainly not adding back amenities and services that they may not they may not be comfortable with long term or.
May not expect as we move forward.
Okay, I guess as a follow up to that are you concerned at all about the the breakfast in particular that kind of goes away or modified and significantly are you worried that that is.
Given that the big value proposition to to certain travelers small business or families are you worried that that may.
Impair the value proposition that you provide to a to your customers.
I don't think that we will get to a place where we.
Suspend comp service breakfast to a degree that would do.
Degradation the value of the brands I think that ownership.
You know ownership companies broadly speaking I want to ensure that we're still we're still a value proposition that theres still relevant with the brands that we operate in we certainly want to make sure.
That's what brings guests to our hotels.
And the value proposition that exists today that fit that exists long term for consumers. We just want to ensure especially around breakfast are we doing it the most efficient way and offering.
Sort of the sweet spot of what they expect button, but not any.
Anything more or less.
And there are ways to leverage the scale of the brands from a cost savings standpoint, and just cost negotiation standpoint that I think will be explored as well, but we're certainly partnered with the brands to ensure long term value. We are trying to realize savings.
Even in the near term that would that would prevent our long term value for guests.
I appreciate that other one for me.
Jeff when you talked about.
Opportunities for.
Acquisition.
Hit the market more so starting next year and then carry on 24 months or so after that.
One of the things that is yeah.
I guess, maybe a disadvantage for the hotel sector continues from other sectors is just that the absolute.
Hi, I Wonder if you know this could be an opportunity just given the impact that cobalt has had on the sector for you guys to be very.
Very acquisitive from a portfolio standpoint.
You know such that you can grow your.
Your portfolio I'm just to be another way to be very differentiated among some of these hotel Reits that have a lot of hygiene a load limited scale benefits et cetera, just wondering how you think about that.
As we as we go forward.
I'm a really good question and certainly something we're focused on I think.
I think we see.
Well first of all it's important to highlight that the promos relative scale standpoint, we've been able to achieve significant efficiencies really at our current scale based on the fact that we've been very consistent in our approach to this business and the types of assets that we pursue such that we're able to utilize data.
And benchmarking to drive operations without really layering on a significant.
Overhead, though in terms of DNA at the corporate level.
We think given the type of assets that we own that we're uniquely scale scalable and ways that would benefit investors and we see the potential for an opportunity to do so in the current environment and over the next couple of years that said I think we've proven that we can be disciplined.
And our approach.
In the near term, we're beginning to see an increase in transactions.
And assets coming to market that would.
[laughter] the most likely scenario for us in the near term is that those would be funded.
You know it new acquisitions will be funded with proceeds from dispositions.
And then as our share price continues to recover and we see a more consistent trend line in terms of occupancy and rate growth.
We will begin next to utilize the strength of our balance sheet and finally it at some point hopefully we would have an opportunity to issue equity I think we would only do that at a point in time, when we were assured that we could.
We were priced appropriately and such.
Such that we could pursue.
Pursue assets in ways that would benefit our current shareholders.
But following past trends, we think there will be a window of opportunity and 21 and possibly into tried to.
Essentially grow the size of our portfolio and I highlighted in my remarks that we have a tremendous amount of experience doing that over two decades and through a very large number of transactions, both individual asset and portfolio transactions and we look forward to the opportunity I think the fact is that we were paid.
Patient.
As values were peaking and preserved our balance sheet put us in a position.
I think an enviable position relative to our peers as we emerge from this combined with the fact that we have.
I've had a significantly.
Shorter duration of cash burn.
And I think we will be.
Well, we will be in a position, where we can do things that I enhanced the value of our shareholders in the near term.
Thank you.
Thank you.
Thank you.
Our next question comes from Austin Wurschmidt with Keybanc. Please proceed with your question.
Hey, good morning, everybody I'm tagging on to that last question, a little bit Justin as you think about the portfolio mix suburban and urban as well as some of the other locations as you look out maybe three to five years should we expect that location makes to remain relatively consistent or you know how.
Do you consider it or would you like to reshape the portfolio.
In any way from a sub market in a location perspective.
That's a good question I think if you look at broad categories that the types of markets that we intend to be in wont change I I think a hallmark of our strategy has always been broad geographic diversification and that diversification. In part has has included exposure to a variety of different.
Types of markets, both urban and suburban.
The mix the mix and the split between urban and suburban has changed over time following.
You know shifts and.
General economic and demographic changes over the past two decades and I think what you can expect from US is that we will continue to fine tune insured.
Ensuring that we own hotels and places that people want to visit <unk>.
I think you can also be assured that we are.
We will not pursue.
Transactions in a way that you know.
More heavily concentrates our portfolio in a single type of market or increases our reliance on a single industry I. Our our goal has always been to establish greater stability.
And that comes through broader diversification and exposure.
To a broad array of potential demand generators and if you look at the way our portfolio is made up now.
A what you can expect from us in the future. It's something similar so I think what we've shown over the past.
Five years since we listed.
Is that we'll make adjustments on the margin HM such that we have exposure to those markets that are likely to produce outsized growth in the near term.
Yes, so maybe along similar lines given the outperformance in stability.
Greater stability in your suburban markets is there any reason to believe that supply could return to suburban submarkets sooner than urban.
Well I mean supply is always follow up demand and so you know.
I think.
Certainly to the extent they are significantly greater demand and suburban markets and that demand excess or excess demand is sustained for any period of time, we would expect to see an increase in supply in those markets.
In the same way over the past cycles that we saw supply follow demand into urban markets I think because there's a lag in that line tends to be two to three years for new supply to catch up with demand growth in particular markets, we tend to disassociate that too but.
But the reality is that the.
The supply growth overtime tends to be rational and follow demand trends, which is why we've seen supply growth in our particular sector or segment of the industry also exceeds supply.
Supply growth and others.
It follows the demand.
I highlighted in my earlier remarks.
In the near term we expect.
The fundamentals and increased cautiousness on the part of lenders to to reduce the number of new construction starts we've already seen that in our portfolio with the the number of hotels that we have with new supply under construction within a five mile radius coming down five percentage points from.
The beginning of the year, our expectation is that that will continue.
And that we will have a window of opportunity to grow occupancy and to build back rate before we see supply begin to come into our markets again.
Thanks helpful detail there and then just last one for me Liz you mentioned the potential for seasonality to to take hold in November and December and I know visibility is very low today, but I was curious if as you look around the holidays.
In the next couple of months, how booking maybe booking trends in demand is shaping up specific to those times of year anything you can share there.
Hi, which often that I could give you more detail around the holidays, there are still a little bit far out to to really draw any major conclusions from what we're seeing as a point of reference.
Backs back when cobot hadn't even as things are starting to improve for our portfolio. So back in July and you know.
60% nearly 60% of our business was booked within three days [laughter] that has and compared to last year being around 30% being within three days that is marginally gotten better month to month and it is better in October still but it's still roughly 50% within.
Three days and so I.
I can't I can't really with any certainty say, what we think will happen over the holidays, but I am encouraged with how how things have progressed, you know coming through the third quarter and even into October with continued occupancy growth. We've been pleased as we sort of shifted from.
Season to season, and each time, there's been sort of an expected potential pull back in demand and compensating demands that has on that has materialized and so with with people being able to work remotely and educate remotely.
There there is the possibility that Thanksgiving and Christmas and the holidays could produce more leisure demand than historically and and so I.
I anticipate some seasonality will take shape to the degree you know, we'll let Mary typical seasonality and be as as significant.
Too soon to tell but we are certainly encouraged by October's results and you feel like there is there is a chance that there would be some more leisure travel around the holidays.
Thank you appreciate the thoughts.
Hugh.
Thank you.
Our next question comes from Tyler inventory with Janney Capital markets. Please proceed with your question.
Hey, good morning, Thanks for taking my questions.
A couple for me first trust and in your prepared remarks, you talked about.
Capital out there looking at our Youre your hotels is a profit.
Talk a little bit about what.
What you're seeing out there in terms of asset sales and how would you gauge that interesting if you could elaborate a little bit more in terms of what sort of.
Hard to use remote sort of end user booking.
Typically some of your properties.
Happy to and I. Appreciate the question, we I highlighted in my remarks that that the.
The groups that were talking to now fit into generally into one of three categories I'm small private equity firms.
A significant portion of those.
Our opportunistic more I guess vulture funds looking for deals.
Weve entertain conversations with those groups, but but to date.
Yeah.
Because their pricing expectations have not aligned with ours.
Adam.
Haven't been in a position to pursue transactions from a scale standpoint, they're generally looking for smaller portfolios.
You know in the $100 million to $200 million.
Value range. We've also had a number of conversations with groups looking.
As a subset of our assets for potential repositioning.
Into other real estate classes spin.
Specifically more multifamily as a use for some of our earlier generation extended stay hotels.
Group that we were talking to.
Or that had our Memphis project under contract with a group like that and the groups that we continue to to have conversations with around that.
That project are similar.
The Charlotte profit.
Property. That's currently under contract is under contract with a group that intends to utilize the property and the additional land associated with it.
For multifamily as well.
And then we continue to see interest from.
Local owner operators list highlighted in her remarks, the fact that we have.
A range of of results in terms of local market performance for individual assets and we continue to have a number of assets in our portfolio that are putting up very strong occupancy and revenue numbers. Despite the current challenges of the current environment.
Those assets continue to be very attractive for local owner operators and and we've had a number of conversations with groups.
Price points that are comparable to where we would have been looking.
To potentially sales in 2019, so I think those are the groups that are most active right now our expectation is that as we see an increase in the number of deals come to market that.
The groups on the buy side will also increase.
Increase and what we've seen historically is that as transaction volume increases the bid ask spread narrows.
And and.
Our transaction volume tends to accelerate in the early phases of a recovery.
Just over the past several weeks.
You know I have seen.
Dozens of deals that would fit.
From a product type and quality standpoint, our investment criteria.
To market and our expectation is that this is really just the beginning that as we get into 21 and potentially into 22 and 23 as I highlighted that.
We'll see many more deals come to market a portion of them obviously distressed deal.
Deals that were either capitalize in a way that that didnt.
Didnt position that well to survive the pandemic or.
In some cases deals where there are extenuating circumstances that would drive ownership to bring them to market.
But but as the.
As the market becomes more profit we anticipate there will be people, who are opportunistic bringing assets to market.
In order to create liquidity events to potentially fund.
Other investment opportunities.
And I think to some extent, we fit into that latter category I highlighted.
The fact that it's our intent to be active in the market both as a buyer.
And seller of assets and that really it's our intent in the near term in the early phases.
A recovery to fund.
All are material materially all of our new acquisitions with proceeds from dispositions waiting to use that.
Capacity that we have on our balance sheet.
Until via that the market has stabilized a little bit more and we have greater security that.
We'll have sufficient liquidity.
On a go forward basis.
Yes, that's great color I appreciate that and I also wanted to follow up on the labor and the expense topic of discussion you're up 49% occupancy in the third quarter, we can make some assumptions in terms of the fourth quarter and what do you book into next year and beyond there are good occupancy threshold to think.
About in terms of when you might add Stephen mental labor or when you Mark might start because in some of the some of the amenity after properties that you put on hold on for pandemic started.
So weve you know as we moved throughout the third quarter in.
In markets, where we had increased demands we have added back.
Some level of amenities and services and and staffing.
We at the onset.
Retained mostly managerial positions in sales positions.
And so we have been able to add back by and large hourly associates as needed and can flex at different occupancy levels and so Adam as a portfolio, we are still probably and at half of the FTC that we were.
I had a more stabilized level, maybe a 2019 level, but we have the opportunity to flex hourly wages as occupancy very both up and down.
Okay.
That's all for me I appreciate the detail very helpful. Thank you. Thank you.
Thank you.
Next question comes from Bryan Maher with B. Riley Securities. Please proceed with your question.
Great. Thanks, and good morning, and lots of great color there so far.
Couple of questions from me, yes, Justin when you look out there at what there might be to buy are you seeing any product similar to what you've done in the past with new developers and Apple being the takeout of them. All I think you may have subsequently.
Subsequently walked away from from one of those that are there any of those type assets, where product is about to be completed where the developer is kind of desperate to catch that in and their their takeout has subsequently disappeared because it kind of it.
The short answer to that and it's a good question is yes, and we anticipate we'll see more of it as as we continue through the cycle us, especially.
[music].
You know in the earlier part so as we continue through the end of this year and into the first part of next year.
We're seeing a mix of.
Appeals and new development.
It certainly.
Isn't attractive.
Source of potential deals for us as the assets coming.
Coming online have often been built in markets where.
You know the demand justifies the new construction.
Especially over this past cycle, where lenders for a more disciplined and where that would land for new development.
And there are advantages to having new assets within our portfolio, especially as we look at Capex.
Capex needs on an on a go forward basis.
And so I think.
Portion of the transactions that you'll see us participate in especially in the early phases of the cycle will be.
Moving out of some of our older assets.
Like Charlotte and and Memphis and into some of these newer deals where there is.
Any distress related predominantly to the financing and the availability of a takeout and not associated with them, but the potential for the actual deal.
Great and then kind of taken that to the next step what is your appetite.
Maybe in dollar terms of acquisitions versus reinstating the dividend maybe not at its you know pat level, but at some level.
To return some capital to shareholders what are your thoughts on the two of those.
We've always been focused on total return for our shareholders.
And you know there there are two components of that.
Because the assets that we own generate a tremendous amount of cash.
There is a legal requirement that we've paid dividends as a read and.
We're in a position because of the assets that we own to pay a relatively strong dividend relative to our peers.
The industry and certainly relative.
Two other real estate investment trust outside of our industry.
Yeah I think.
Because of the unique opportunities in the.
Potentially available in the early phases of a recovery Youll see us.
Be extremely balanced in our approach allocating capital.
To those opportunities, which will produce the chagas returns for our investors over time.
And you know there.
There will be a mix of both.
New acquisitions, which will.
Propel the value of our stock.
And then.
Dividend payout, which again will be legally required of us.
And because again, we've we've gotten to cash flow positive sooner than our peers and our expectation is that based on.
Based on the pattern.
I don't know, which.
We anticipate demand to come back across the industry.
We anticipate will be among the first to be in a position, where we were prior to reinstate our dividend as well.
Great. Thanks, that's all for me.
Thank you.
Thank you.
Our next question comes from Michael Bellisario with Baird. Please proceed with your question.
Hi, good morning, everyone.
Okay.
Could you first question Rick could you provide some color on your Revpar index trend where debt today and and.
And how its tracked over the last few months.
We've certainly seen strong index and where.
Where we have a particular.
[noise] particular types of assets for instance that extended stay properties have outperformed from an index standpoint and we've.
Performs most well there we have yes.
As a portfolio, we we have consistent.
Market index, probably by and large when you take into account.
The hotels that we intentionally consolidated.
Some of our more urban locations and things like that but but where there has been on demands.
Demands, we have outperformed from an index standpoint.
Got it. Thank you and then just on the Madison development deal, but I think I know the answer there, but how do you plan on funding that acquisition early next year and then.
How does that affect the credit metrics.
You think about them lunch here.
Medic credit agreement test and then also maybe in the context of potentially needing additional modifications or flexibility at some point early next year.
Well when we.
Renegotiated the waivers that we have in place with the banks we anticipated.
Each of the development deals.
We had under contract at that point in time.
You know that the.
Technically that the source of funds will be our line of credit, though we anticipate.
We anticipate between now and then that we will have incremental sales, which will be the true source.
Funds for them, but the transaction so I think.
Our early negotiations contemplated the closing of the assets.
Two assets, which.
We closed in Cape Canaveral.
The two that we close recently and.
In Tempe, and then the upcoming asset in Madison we.
We had sales transactions early in the year that roughly offset the cave.
Asset from a value standpoint, and based on the interest that we're seeing in other assets in our portfolio. Our expectation is that we'll be able to find with proceeds from sales.
Got it thank you thank.
Thank you.
Thank you.
Our next question comes from Anthony Powell Barclays. Please proceed with your question.
Hi, good morning.
One of your peers sold the hotel to a jurisdiction for an alternate use had a pretty pretty good cap rate. So.
Have you looked at your portfolio to see if there are opportunities to sell hotels for alternative uses and recycle that capital into.
And to new acquisitions.
Absolutely.
And yes, absolutely and we've had conversations in California.
With local.
Specialties for for around similar potential use for our assets.
I highlighted in my remarks that.
We were selling the property in Charlotte at an all in cap rate in the mid fives.
You know we are taken into consideration renovation requirements and mid sevens.
Pre rent a renovation.
You know thats, an asset in a much smaller market.
But we're seeing.
Specially for our older extended stay assets significant demand from groups intending.
To purchase the assets for an alternative views and.
Our thinking on that is that we will.
We'll be able to transact on number of assets within our portfolio with groups.
That at the same profile.
Yes.
How big that opportunity I guess in a number of hotels or total proceeds.
[laughter] I'm reluctant to give you an exact number I would say if you look at our portfolio. The interest is predominantly around extended stay assets and more often in suburban locations.
And you can get a general sense for the scale of the potential opportunity that way.
The reality is multifamily demand has continued to be strong.
Through out this.
Economic downturn and pandemic.
And developers view conversion of extended stay properties into multifamily as as a significant value add.
And there are a number of groups larger groups that are well funded that are pursuing that that type of potential transaction.
All right. Thank you.
Yes.
Thank you.
Our next question comes from Danny Assad with Bank of America. Please proceed with your question.
Hi, good morning, everybody.
Good morning, Hi, my questions a little bit more on reach if it's been really like encouraging to see that your occupancy has been improving through October but.
Can you just give us a sense for how rates been behaving since quarter end and then my follow up is how much of the rate decline we've been seeing so far is.
Just a change of mix I know that was kind of mentioned in the prepared remarks, but if you could just kind of elaborate on that a little bit.
Sure I definitely think that rate is impacted by mix of business, but every.
Every segment is impacted by competition in the level of demand in the market. So you know.
Okay great.
In different segments. Each segment is impacted from a rate perspective, just relative to the demand that's in the market. When there is enough demand to typically when we get to around 70%, we're able to have a preference different segments of business to drive overall hbr, but within the segments, they're impacted by budget.
The environment that we're in as well from an 80, our perspective and so.
No part of it is that we're not in a position where were preference being higher rated business over others.
And that corporate demand, which tends to be.
The the highest rated a and drive peak demand over certain nights helps us drive rate and manage mix on those nights as you since quarter end, we've seen similar trends to what.
So what we were seeing in the third quarter and you.
Still is still no not meaningful moves one way or the other but but certainly certainly still in a competitive environment.
At these occupancy levels.
Got it thank you.
Thank you.
Thank you.
As a reminder to our audience if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Floris Van Dyk, Jim with pending and Scattergood. Please proceed with your question.
Hi.
Actually compass point.
Good question I know it's a.
The you have 70 million repay mortgage debt coming due next year. How are you thinking about you know.
Mortgage debt that comes due.
Wendy the difficulty of refinancing or or getting.
Hotel financing right now and would you move that to your to your line of credit.
We have a.
It's roughly 51 million net of reserves coming due in 2021, and so we will at the time that that becomes you know, we'll evaluate all options.
To your point and refinancing might might be a challenge, but and we still have some time between now and then and we'll evaluate what makes the most sense yeah, certainly if were able to continue.
Rebuild occupancy and and state you know stay in a positive cash flow position. We we would hope that we would have liquidity to fund that as well.
Thanks was maybe not quite do you expect to be.
Having to pay additional dividends this year based on your taxable income I know, it's it's tricky there still quarter go but.
You did pay.
You know.
Dividends in the end. They you know the first part of the year do you expect there to be a catch up dividend or do you think you will reinstate likely in the.
Perhaps in the first quarter of next year.
We do not anticipate that we would be in a position to pay a dividend on through the end of 2020 and.
Beyond that.
The board and management will continue to monitor operations and well evaluate reinstating a dividend while balancing the other cash needs and priorities for the company you know always with the intent of as Justin had previously mentioned.
Total return for our shareholders about maximizing total shareholder returns over the long term and to end doing what's best in the near term to that end.
Great. Thanks, that's it for me.
Thank you.
Thank you.
There are no further questions at this time I'd like to turn the floor back over to Justin Knight for any closing remarks.
Thank you and again I'd like to express our appreciation for all that have joined us today I.
I want to recognize the fact that that some of you may have had technical difficulties accessing our web links through our website, we apologize for that.
It was.
If it sticks midway through the quarter and certainly the transcripts of this call will be available afterwards.
We appreciate that these continued to be challenging times I want to again to give a special thank you.
Two our team here at Apple and.
To our management companies and our teams are actively working in the field.
It's what what everyone has been doing in our industry right now to ensure that we continue to be successful. Despite the current challenges has been remarkable and inspiring.
I hope.
But as you get back out and start traveling again, you will take the opportunity to stay with us in one of our hotels have a great weekend I hope to talk to you soon.
Ladies and gentlemen. This concludes today's webcast you may now disconnect. Your lines at this time. Thank you for your participation and have a great day.
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