Q2 2021 Apple Hospitality REIT Inc Earnings Call
Greetings, ladies and gentlemen, and welcome to Apple Hospitality second quarter, and 21 earnings conference call. At this time all lines are in a listen only mode. A question and answer session will follow the flow of the presentation.
I mean, 1 require operator assistance, please press star zero and the telephone keypad.
And my pleasure to introduce your host Ms. Carrie Clark. Thank you you may begin.
Thank you and good morning, we welcome you to Apple Hospitality REIT second quarter 2021 earnings call on this for the sixth day of August of 'twenty 'twenty 1.
Days of call will be based on the second quarter 2021 earnings release and form 10-Q, which were distributed and filed yesterday afternoon.
As a reminder, today's call will contain forward looking statements as defined by the federal securities laws, including statements regarding future operating results and the impact to the company's business and financial condition from and measures being taken in response to COVID-19.
These statements involve known and unknown risks and other factors, which may cause actual results performance or achievements of apple hospitality to be materially different from future results performance or achievements expressed or implied by such forward looking statements.
Participants should carefully review of our financial statements and the notes there too as well as the risk factors described and Apple hospitality and annual report on form 10-K for the year ended December 31, 2020 and other filings with the SEC.
Any forward looking statement that Apple hospitality makes speaks only as of today and the company undertakes no obligation to publicly update or revise any forward looking statements except as required by law.
In addition of certain non-GAAP measures of performance, such as EBITDA and EBITDA Ari adjusted EBITDA Ari adjusted Hotel EBITDA SFO and modified <unk> will be discussed during this call. We encourage participants to review reconciliations of those measures to GAAP measures as included in yesterday's earnings.
The release and other filings with the SEC.
For a copy of the earnings release or additional information about the company. Please visit the Apple hospitality REIT dotcom.
This morning, Justin Knight, our Chief Executive Officer, and Liz Perkins, Our Chief Financial Officer will provide an overview of our results for the second quarter of 'twenty 'twenty 1.
Following the overview, we will open the call for Q&A.
And at this time and it's my pleasure to turn the call over to Justin.
Good morning, and thank you for joining us today.
As we look back on the last year and how far we've come as an industry, we feel incredibly grateful with enhanced safety protocols in place the accelerated rollout of the vaccine and the loosening of restrictions travel confidence of significantly improved and positively impacted performance across our portfolio.
While we remain conscious of the continued impacts of COVID-19, and the new Delta Varian.
We are optimistic that the worst of the pandemic is behind us and travel will continue to strengthen.
We entered 2020 with the portfolio of hotels reflective of the ownership strategy developed to mitigate risk and volatility while producing compelling returns for our investors.
Our strategy and place for more than 2 decades and refine throughout multiple economic cycles is and has always been straightforward.
Oh, and a portfolio of geographically diversified select service hotels, the affiliated with the best brands and worked with the best management teams and the industry.
And we reinvest and our hotels to ensure they remain relevant and competitive and maintain a flexible capital structure with low leverage.
During the last year, the merits of our approach for proven and we've navigated the most difficult operating environment, our industry has ever seen and with results ahead of industry averages and our publicly traded peers.
We successfully executed on the objectives, we communicated at the onset of the pandemic and maintained a sound liquidity position safeguarded long term value for our shareholders and ensured our ability to thrive in future years and.
Initially as we indicated we prioritized a swift returned to positive cash flow by focusing on operations and keeping our hotels open and implementing the enhanced safety and cleaning protocols significantly reducing the operating expenses and capturing existing demand within our markets.
As a result, we were the first among our publicly traded peers to return to positive cash flow of both the property and corporate levels.
<unk> for permits continue to strengthen during the second quarter of the share.
With overall results for our portfolio of the strongest since the onset of the pandemic once again exceeding the industry averages and our internal expectations.
For the quarter, we achieved occupancy of 71% ADR of $121 and Revpar of $85 Hotel EBITDA was approximately $95 million for the quarter and modified funds from operations were approximately $68 million or <unk> 30 per share.
We have seen continued growth through July with improvement in both the occupancy and rate relative to the prior month I've been particularly pleased with the pace of recovery and rate, which in July was down only mid single digits. The 2019 and reached 20 and 19 levels and most recent weeks.
On the last call, we communicated our expectation that we would be among the first to be and are positioned to exited the covenant waiver period.
The positioning of our portfolio and our intense focus on property level operations enabled us to avoid taking on additional debt to cover operating shortfalls and as the industry fundamentals improved we were well positioned to benefit with net debt of roughly 4 times annualized second quarter EBITDA and July showing continued growth we elected out of our.
Covenant waiver period effective July 29th.
Through the most challenging operating environment and our industry has experienced we preserve the strength and capacity of our balance sheet and protected the value of our equity we.
We are emerging from the downturn on incredibly strong footing with the incremental flexibility to allocate capital in ways that will further drive shareholder value.
In July we successfully completed the opportunistic sale of a portfolio of 20 hotels for a total gross sales price of approximately $211 million.
The sales price represents roughly an 8.5% cap rate on 2019 numbers and just under a 5% cap rate on a pro forma of 2021 numbers inclusive of buyers anticipated capital expenditures of approximately $55 million.
The portfolio. We sold has an average effective age of 7 years, 2 years greater than our current portfolio and reported and the average 2019 revpar of approximately 18% lower and an average 2019 EBITDA margin approximately of 170 basis points lower than our remaining portfolio averages.
Half of the portfolio and the sale half of the hotels and the sale portfolio of had fewer than 100 keys.
As we contemplate potential disposition opportunities, we closely monitor of hotel positioning profitability market conditions and capital requirements and work to maximize shareholder value by disposing of properties when superior value can be provided for the sale of the property and the proceeds can be redirected into assets with stronger growth profiles.
Also in July of this year, we entered into separate contracts for the potential purchase of for hotels for a total combined purchase price of approximately $227 million the hotels under contract for purchase include the existing the 178 room AC and the 157 of them have locked on the waterfront.
And downtown Portland, Maine for a total combined purchase price of approximately $118 million. The aloft is currently under development and is expected to open and the third quarter of this year.
The 130 room, Hyatt place and downtown and Greenville, South Carolina for a total purchase price of approximately $30 million and and embassy suites by Hilton Hotel that will be constructed of Madison, Wisconsin, with an expected 260 rooms, and and anticipated total purchase price of approximately $79 million.
We expect to close on the hotels and Portland and Greenville.
During the second half of the day of the share and the embassy suites and Madison upon completion of construction, which is anticipated to occur and no earlier than the fourth quarter of 2020.3.
All of these assets are relatively young non prototypical hotels.
With the 2 existing assets, the ACI and Portland, and the Hyatt place and Greenville, each having opened within the last 3 years.
We expect these acquisitions to produce stabilized returns above 8% and to have long term revpar margins and growth rates that exceed those of our existing portfolio.
Since the beginning of 2020, we have sold 26 hotels for a combined total of $290 million and purchased 5 hotels for a total of $161 million.
We have the for hotels I highlighted under contract for $227 million and are in active discussions with multiple ownership groups related to incremental opportunities.
As we have communicated on recent calls we expect to be net acquirers of assets over the coming months.
Our combined acquisitions and dispositions activity will reduce the age of our portfolio and associated and near term capital all of the obligations, while increasing our exposure to markets with strong relative growth trajectories.
The transaction volume and the hotel space continues to increase and interest from a variety of public and private equity players has driven pricing higher especially for premium select service assets as we explore potential opportunities as we leverage our long standing industry relationships and addition to evaluating the brokerage opportunities and pursuit of accretive transaction.
And so we believe will maximize long term value for our shareholders and further grow and enhance our existing portfolio. The.
Core elements of our portfolio strategy remain large largely unchanged and have been further validated by our recent experience as we pursue acquisition opportunities. We will continue to look for rooms focused assets and the Marriott and Hilton and Hyatt brand families that further diversify our portfolio across markets location types and demand Gen.
Writers.
During the quarter, we entered into a contract to purchase the fee interest and the land at our residence and in Seattle, Washington, and for a total of approximately $80 million consisting of a $24 million cash payment and of 1 year note payable to the seller for $56 million.
Through this potential purchase we expect to close.
In August of this year, we will exit what we what had recently become and onerous ground lease. The hotel is ideally located off the water and within walking distance of downtown Seattle and has performed incredibly well for us over the years.
We began discussions with the landowner prior to the onset of the pandemic and have entered into a contract below the appraised value and our previously agreed to purchase price.
We are confident that Seattle will remain a strong market long term and this investment will be incrementally positive for us over time.
With clear line of sight to accretive acquisition opportunities, we accessed the equity markets during the second quarter through our ATM program issuing approximately $4.7 million common shares for gross proceeds of approximately $76 million at a weighted average market sales price of approximately $16.26 per share.
We will continue to assess the value of our stock relative to opportunities and the market and utilize the ATM only where we feel confident we can create incremental value for our shareholders.
Consistent reinvestment in our hotels has always been a key element of our strategy and we entered 2020 with the young well maintained portfolio.
While we are prudently reduced our capital spend since the start of the pandemic, we have ensured that our assets continue to be well maintained and competitive within their markets. The brands have allowed a greater degree of flexibility over the past year, and we have been and continuous dialogue with them about the timing and scope of renovations for our portfolio leveraging our strong relationships and our ski.
Within the individual brands to help find cost effective solutions the focus on core elements of the guest experience.
During the first 6 months of 2020, 1 we invested approximately $5 million and capital expenditures and we anticipate investing and added an additional $20 million to $25 million and capital improvements during the remainder of 2021, which includes scheduled renovation projects for 7 hotels.
We will continue to focus our investments on elements likely to have the greatest guest impact at assets, where we feel we will achieve the best return on our investment over the long term and to strategically schedule of major projects in order to minimize property level of disruption.
As we move through the recovery, we will continue our focus on operations working to build on our second quarter successes through strategic revenue management and and obsessive focus on expenses at the same time, we expect continued increases and hotel transaction volume and we will actively seek opportunities to grow and enhance our existing portfolio.
As with every aspect of our business, we will be thoughtful and balanced and our approach allocating capital to those opportunities, which will produce the strongest total returns for our investors over time.
With the strength of our balance sheet positive cash flow at the corporate level, the elimination of covenant waiver restrictions and significant liquidity and balance sheet capacity to pursue accretive opportunities. We are extremely well positioned for growth as we move into the back half of the year.
Throughout my career I have been incredibly fortunate to be surrounded by exceptionally talented and motivated individuals who are passionate about our business and driven to achieve exceptional results.
These individuals both of our corporate office and employed by our brands and management companies had been a constant and inspiration to me.
We have a winning strategy investing in high quality branded rooms focused hotels broadly diversified with low debt.
That strategy has been tested through multiple economic cycles and as consistently yielded compelling results for our investors that said the keeps of any successful strategy is founded and its execution.
For this and I want to express my Sincerest gratitude to my team our management companies and our brand partners and its core of the hospitality business is the people business and our experience during the pandemic has strengthened us and prepared us for future successes.
With that it's now my pleasure to turn the call over the list, who will provide additional detail on our financial results and performance across our markets.
Hey, Justin our broad market diversification and significant suburban concentration enabled us to benefit from continued strength in leisure and improving business transient demand, resulting in our portfolio's outperformance as compared to national averages during the quarter.
With the acceleration of vaccine distribution and loosening of travel restriction and demand continued to improve more quickly than anticipated, resulting in occupancy of 74% for the month of June only down 11% from June of 2019.
With this increase in occupancy, we produced sequential improvement and rate moving from an ADR of $110 and April to over 131 and June of 19% improvement over the course of the quarter.
We are encouraged that the GAAP to 2019 ADR levels decrease consistently as we move through the quarter with June ADR down only 9.5% to June of 2019, and the GAAP decreasing even further in July.
Our in House revenue team has continued to work closely with our management company revenue support and onsite sales teams to grow market share, which furthered our out performance, enabling us to once again produced the result that exceeded internal expectations.
Highlighting meaningful improvement and both weekday and weekend occupancy during the quarter weekday occupancy moved from 63% and April to 70% and June while weekend occupancy moved from 81% to 86%.
Although weekend occupancy has continued to exceed weekday occupancy, we saw greater acceleration and weekday, indicating and part and improvement and more traditional business transient demand.
As mentioned stronger Occupancies enabled us to move rates significantly during the quarter and weekday ADR increased from $106 and April 2 of $127 and June while weekend ADR increased from $116.241 over the same period.
In July we saw similar trends as our portfolio of finished with approximately 75 per cent occupancy at $137 mid week and at $150 on weekend.
25 of our hotels ran occupancy above 90% and more than a third had occupancy above 80% for the full quarter.
Top performers within our portfolio benefited from a mix of demand generators, including leisure government and military manufacturing imports insurance construction and medical business.
29 hotels had revpar that exceeded 2019 levels for the quarter, representing many areas of the country, including Houston, and Santa Clarita, California, Tucson, Miami, Provo, Suffolk, Virginia Carolina Beach, Birmingham, and Hilton had among others.
Our suburban hotels continued to outperform urban hotels, and the quarter with occupancy of 73% as compared to 62% for comparable hotel.
Similar to trends and the first quarter, we generally experienced weaker performance from hotels located in markets with greater historic exposure to large group and convention.
Our hotels, and Northern Virginia, Chicago, St Paul and and a number of markets and the northeast and northwest were among the weakest performers relative to 2019.
We also continued to see weaker performance from our full service hotels enrichment and Houston.
Despite a slower rebound and some of these challenging market and the strong performance of our portfolio overall during the quarter is a tribute to our broad diversification, which provides exposure to a myriad of market and demand generators Jos.
And those markets that have been slower to recover represent additional upside for our portfolio as we realize and more widespread recovery and travel.
In terms of channel mix on a comparable basis, we saw meaningful increase and brand dot com bookings, which moved from 33% of room nights in the first quarter to nearly 38% of room nights and the second quarter.
O T. A bookings continued to be elevated relative to prior years of decreased slightly from 18% of room nights and the first quarter to just over 17% of room nights and the second.
With the increase and leisure and business transient demand property direct bookings declined from 33% of room nights and the first quarter to 28% and the second quarter, but remained elevated relative to 2019 level of Testament to our revenue management and sales teams, who continue to work diligently to maximize the mix of business.
And our hotels based on available demand.
From a segmentation perspective at the occupancy continued to strengthen and the second quarter, we saw a shift from other discounts and to bear as compared to the first quarter, which we believe is the result of and increase in business transient as a percentage of our mix.
Our increased almost 3 points to over 30% and the second quarter from the first quarter offsetting declines and other discount which declined to just under 37% and the second quarter.
Negotiated government and group business remained relatively constant quarter over quarter.
As we look for where the booking window remains short of that with the data available we have not yet seen significant impact from the recent rise and Covid cases, and resulting re implementation of mass mandates and some market.
These developments are likely to continue to weigh more heavily on urban markets and those with significant dependence on large group and convention business, where we have seen lagging results throughout the pandemic, including year to date, but where we have limited exposure.
Given the likely trajectory at the continued recovery we are optimally positioned for continued outperformance and we remain optimistic based on recent increases and vaccination rates and the resiliency of People's desire to travel when restrictions are lifted and they feel safe to do so as demonstrated over the last quarter.
Turning to expenses, our team's relentless efforts to control costs and maximize the profitability resulted in second quarter 2021 comparable adjusted hotel EBITDA of approximately $90 million and comparable adjusted hotel EBITDA margin of approximately 39% down only 120 basis point.
For the second quarter of 2019, but representing an increase of more than 600 basis points for the first quarter of 2021.
And that's that though with approximately $68 million or <unk> 30 per share for the second quarter of this year.
While we continue to focus on controlling expenses our bottom line performance has been meaningfully bolstered by the significant recovery and rate, which Justin and has mentioned a per.
Roche and 2019 levels for our full portfolio in recent weeks.
With experienced owning an unparalleled number of branded select service hotels over multiple economic cycles, we have developed and fine tuned our strategy and partnership with our third party managers to maximize the property level profitability and any environment.
Her time this has enabled us to produce best in class operating results at the property level and it positioned us to make necessary adjustments to our business as we saw occupancy deteriorate and the spring of last year.
Looking back over the past 5 quarters, our asset management and third party management teams have done an exceptional job managing our business producing competitive cost savings despite entering the pandemic with meaningfully more efficient operations the amount with.
With revenue down, 27% and the second quarter relative to the second quarter of 2019, we were able to reduce total hotel expenses by 26% and expense reduction ratio of <unk> 95 significantly higher than the full year estimate of <unk> 7 to <unk> 75 previously provided.
Driven in part by the improvement and rate declines relative to 2019 throughout the quarter.
Cross utilization of managers and hourly team members combined with adjustments to brand service models enabled us to achieve total payroll on a per occupied room basis for our comparable hotels under $27 and the second quarter down 16% to the second quarter of 2019, while these results are impressive.
And as and our teams have worked diligently to maximize the performance. We continued to experience challenges finding and hiring employees and a number of markets. So we expect payroll costs to stabilize higher than where they are currently as we are able to reach desired staffing levels over time.
Comparable hotels rooms expenses, excluding labor were down 22% per occupied room compared to 2019 for the quarter with almost half of the savings coming from adjustments to complimentary breakfast and evening social offerings.
Since the onset of the pandemic, we have spent considerable time with our brands and our management companies discussing ways to modify and long term brand standards and rethink property level staffing models to ensure that a portion of the savings remains throughout the recovery and beyond while ensuring that we provide and exceptional guest experience.
Taking into consideration the considering the continued recovery historical seasonal trends and labor pressures, we anticipate and expense reduction ratio and that 0.8 to 0.9 range during the second half of 'twenty 'twenty 1.
Moving to supply, while we continued to see new openings and our markets over the past 12 months the percentage of hotels within our portfolio with 1 or more new hotels under construction within a 5 mile radius has dropped from approximately 70% of year ago to around 50% and the most recent quarter.
We anticipate that the cost of materials labor shortages and difficulty underwriting and financing new construction projects will continue to limit new supply and the near term and recognizing that new construction projects typically take 2 to 3 years from start to completion, we anticipate limited pressure.
And from new construction over the next several years.
Shifting to our balance sheet, we are pleased to announce debt with its strength our track record of disciplined capital allocation and our current operational outperformance, we successfully exited the covenant waiver period effective July 29th.
As a result, we are no longer subject to the lender imposed restrictions and limitations on investing and financing financing activities, including the acquisition of property capital expenditures and payment of distributions to shareholders and use of proceeds from the sale of property of common shares.
In addition, as a result of exiting the covenant waiver period interest rates are expected to decrease on our unsecured credit facilities, resulting in an estimated $3 million and savings for the remainder of the ear and the early $8 million annualized based on debt levels at the end of July.
Consistent with the terms of the amendment, we were able to meet the financial maintenance covenants based on our annualized results for the 3 months ended June 32021, and we'll test against certain modified covenant thresholds for up to 5 additional quarters.
We are incredibly grateful for our long standing relationships with our lenders and their continued support having exited the covenant waiver period, we now have additional flexibility to manage our business and pursue accretive opportunities.
As of June 30th 2021 we had $1.4 billion and total debt outstanding with a weighted average interest rate of 4% consisting of $451 million of mortgage debt secured by 28 hotels and $952 million outstanding on our unsecured credit facility at.
The ended the quarter, we had available cash on hand of approximately $3 million and unused borrowing capacity under our revolving credit facility of approximately $343 million with no scheduled maturities for the remainder of 2021.
As Justin mentioned subsequent to the end of the quarter.
We sold 20 hotels, increasing our total liquidity with approximately $580 million available for acquisitions and balance sheet capacity and positive cash flow for much of 2020 and in 2020..1 we are confident and our ability to continue to navigate the current environment preserve the value of our equity and.
Chicle take advantage of opportunities to drive incremental shareholder value. We're excited about the hotels. We currently have under contract and we are in active discussions around additional opportunities, which we believe would be additive to our existing portfolio.
Our talented team and investment strategy have enabled us to effectively weather the most challenging environment ever experienced by our industry.
Operating results for our portfolio have exceeded even our own expectations with July topline numbers approaching 2019 levels and with the continued benefit of operating efficiencies.
As we proceed through the recovery. We believe we are positioned for continued outperformance.
We will now be happy to answer any questions that you have for us This morning.
Yes.
Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask the question. Please press star 1 on your telephone keypad. The confirmation tone will indicate your line is and the question queue.
The press star 2 and she'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star Keith 1 of the appraisal we poll for questions.
Our first question comes from the line of Neil Malkin with capital 1 Securities. Please proceed with your question.
Yeah.
Hey, everyone and good morning, Congrats on the ex any covenant waivers.
Your share price performance, the boggles my mind, but yeah.
And congrats and nonetheless.
Thank you very much.
I just wanted to be clear and something that you guys of both touched on live and most recently and the prepared remarks.
You're getting and what you're seeing in terms of ADR and.
And and Occupancies and also given the you know the Chi which is a substantial amount of demand for you guys is really not back to you know our 2019 levels, but should improve as the year goes on and are you basically saying the revpar and EBITDA is going to be above 2019 levels most of them.
The in the back half of is that my understanding your commentary correctly based on what you're saying.
You know I think we have been pleased with how occupancies have performed and the second quarter and into the third quarter. We continue to feel that of a large portion of that is related to leisure, but we've had no other other demand generators and and business demand.
Throughout the pandemic some of that.
And as we haven't historically take and as we progressed through the quarter and saw week day Occupancies increased and.
While that may not be showing up and you know our negotiated segmentation mix that I've shared.
Or.
And we don't have complete transparency that week day growth. We do think it's partly contributed the R. R is partly benefited by P. T and when we think about the back half of the year you know, it's a volatile environment. It's unpredictable, we still havent issued guidance we're confident.
But our portfolio and.
And what we've experienced over the past year, what it's proven is that in a range of scenarios, where you know we're positioned to outperform and and to sustain a pretty significant revpar declines we're optimistic based on what we've seen even quarter to date and Q3 that will.
And you need to see of leisure perform as well and continue to see P. T pick up when I mentioned channel mix I was speaking for them.
And specifically to Q2, but as we transitioned into Q3 I'm seeing through booking channels G. D. S pick up month over month for future bookings. So that's a positive.
And you know, we we continue to believe and the strength of of business travel of G. D. S is predictive of predominantly corporate negotiated so I think that's you know thinking about August not being traditionally as strong as even July or the back end of September from of business standpoint, I think that that's a positive trend.
And but predicting the future is tough right now there's a lot of noise out there, we're mindful of and watching the delta variant, although havent seen that transpire and our numbers quite yet and are hopeful that it won't I think you know the fact that there's been some attention given to it and.
The increase vaccination rates, which which also has encouraging so too soon to tell what the back half of the year holds but the second quarter was strong and we started the third quarter strong and you know, we're reasonably confident and given the information that we have today.
Okay.
That happened to ask response I.
I mean, I remember too Neil remembering to nail that when we're speaking about the second quarter of the second quarter is typically our strongest quarter and the third quarter's REIT right alongside with it and you think about the changes relative to 19, we saw and experienced some seasonal impact last year, we have.
<unk> not had the had the like large scale corporate B T boost that we're hopeful for post labor day and so.
And that could be of tailwind, but you know there's there's some reasonable.
And some reasonable consideration that needs to be given to the fact that August is just slightly behind July normally low labor day impact September and then we pick back up in October. So you know continued improvement that would be fantastic. It's not out of the realm of possibility, but you know if you look at seasonality and our portfolio and 2019.
And that that's part of where you are continued improvement through the back half of the year half the hedge there. Its just you know we don't know what's to come but you know there was significant pent up demand with leisure and we're hopeful we'll see that significant pent up demand with B T as well at some point.
Yeah, I Gotcha Gotcha and just.
Playful anyways other 1 for me in on the acquisition side.
I don't know if you talked about the yield you anticipate or stabilized yields on your acquisitions.
Debt you are have agreements on but can.
Can you just talk about you know sort of what opportunities are coming your way and it has the.
The amount of.
Opportunities you're underwriting or.
Coming across your desk, because that the improved over the last.
And 30 to 60 days are you you know kind of remaining focused on your you know a.
Broad swath of markets are you more looking into the sunbelt and.
Anything along those lines in terms of how you're thinking about.
Gross going into the back half of this year.
And my prepared remarks, I highlighted the fact that for our acquisitions for those that we have currently under contract we expect stabilized yields to be above 8%.
Recognizing again the the the assets are all relatively new with 2 of the for currently under construction of the Portland asset to be delivered for the next several months.
But the the Madison and asset not to be delivered for some time yet.
Looking at those markets individually and the 2 existing assets were delivered are opened and 2018 of the back half of 2018 M. B a C and <unk>.
Portland opened and the July.
July and the Greenville asset opened in December but looking at their more recent performance in May and.
And it made the Portland D. C was up 14% from a revpar standpoint to the same period and 2019, and then and June was up 36% and the the Greenville asset again.
22% and up 60 per cent for those same time periods relative to.
Try and 19, recognizing there were new hotels and Theres, some ramped and those numbers still I think a wonderful signal those.
They are incredibly strong markets and that will likely outperform in the near term as we look at the market more broadly I highlighted in my prepared remarks that we continue to see pricing pressure and and we are at the same time seen a lot more potential deals come to market. We've been active for some time.
Now and discussion with the brokers around the broker transactions and with the individual ownership groups and are in active discussions around the number of additional assets that we hope to be able to announce for the not too distant future.
We see the opportunity set continues to increase as we move through the coming months and as I highlighted I expect to be net acquirers and through the recovery.
Okay. Thank you guys very much and congrats again and exiting the waivers.
Thank you.
Thank you. Our next question comes from the line of Austin and the War Schmidt with Keybanc. Please proceed with your question.
Great.
So given some of the the comments on you made an ADR trends.
Reaching 2019 levels in recent weeks and it sounds like revenue.
And also getting very close.
I know you gave some pieces on what you think the expense reduction ratios to be in the back half of it could you put kind of a finer point on maybe where of hotel EBITDA margins were for July and.
And how those compare versus 2019.
We do not have bottom line financials for July yet, so I can't speak to margin.
Thank you.
I realize you know.
Touched on July of right and and strong rate and July and the fact that that was approaching towards the end of the month and even exceeding at certain points in time 2019 level you know we believe that flow.
Flow through should be strong and and the margins will be strong that said you know we continue to try to hire incremental labor and we ran very efficiently and I you know I lead them into the second quarter talking about April and the first quarter that we were really efficient and that we were looking for people and.
And that remains the case, we've added back some labor over the course of the quarter, but we're still we still have open positions and so.
July.
And you know, we'll have to wait and see but it has.
Has the recipe for being a strong you know month from a margin perspective, but we face the challenges that everyone faces Wes and.
The labor the cost of labor and we're starting to see some increase with wages. Although you know when I look back to the Inc. At the increases in wages of the visibility that we had with the increase of 19 over 18.
18, not not huge you know not significantly more than that at least to date, but we you know we have some things that we need to hedge for and and think through you know also again as I mentioned with meal.
We typically pull back a little bit and rate.
The guest and occupancy and September if BT, if it follows normal seasonal and N V T trends and you know the back half from the B T perspective is generally stronger, but but leisure does pull back some although the limited data that I have from a booking position standpoint still shows for bookings for <unk>.
Weekends and September to be strong, which is which is encouraging. So you know I think.
We feel reasonably good.
But I have said all along the way, but the the efficiency that we're debt and where where we're running today is not sustainable long term hum at what point that catches up where we're not sure yet you know theres been some talk about post labor day and.
And some of the.
Challenges around labor.
The labor easing of that well, we'll see we certainly received more applicants and areas where some of the stimulus.
The stimulus benefits has pulled back some so we're encouraged by that and we've you know we've added back labor along the way you know we were probably at 50% of stabilized Ftes pad.
And over the course of the summer last year and April I think we were at around 60% of stabilized. The Ftes July I think for probably around 70%. So we still have we still have significant savings are probably a little bit more than we'd like.
But what is the stabilized ftes relative to pre pandemic ftes for your portfolio as I know you guys have run efficiently for for quite some time, but just curious if that's still and that's changed.
Yeah. We've said all along that were we're hopeful and working with the brands and and have every intention to run them more efficiently as standards continue to evolve and guest preferences continue to evolve you know if and.
We have.
The longer length of stays at our hotels and people opt out of stay of her cleans will be able to be more efficient and I think we will continue to leverage multiple managers across departments, where we can we haven't quantified or deter.
And determined long term and what stabilized FTE counts are relative to pre pandemic other than to say, we will continue to make efforts.
Both with our management companies and our asset management team, but in combination with brands you know the brands and brand standards to be more efficient long term. So we're certainly hopeful that we'll have fewer ftes long term.
Sure and then just last 1 for me you know Justin Yeah, you guys of and was you know you both and kind of highlighted the strength of your balance sheet, where leverage is you know annualizing to resolve things and certainly improved since then.
You did a good bit of match funding as well with the portfolio of sale, but do you want to hit a little bit on the ATM and and sort of how you weigh issuing common equity with respect to you know how you view.
And your your N V and and where you're trading versus private market values, and then kind of how you balance that.
You know.
Versus issuing to fund I guess your creative uses what what sort of the thought process.
And so Liz highlighted in her prepared remarks.
The fact that we.
And we emerge from the pandemic with the an incredibly strong balance sheet and so we're in a unique position not to need to issue dilutive equity in order to reset our balance sheet, our or to reposition ourselves on the outside.
You know in the recovery.
Highlighted and my remarks.
You know based on annualized second quarter for.
Performance, we were 4 times debt to EBITDA, which is.
And incredibly good place to be and so but that said our intent and as I've highlighted in the past is to use the a T M.
To fund acquisitions and and.
And as I.
1 of the tools available to us to grow and issuance on the ATM will occur only when we have clear line of sight to acquisitions and.
Where we can utilize proceeds accretively and to the benefit of our existing shareholders and given the environment and pricing are relative to the opportunities that we were exploring we saw an opportunity to issue some of them some equity the.
The the calculation is 1 that we run are often as the environment is changing both our share price is changing and the opportunity set of changing.
But the methodology remains consistent and.
And so I.
I think we will selectively use our ATM to pursue assets, where it makes sense to do so now having the exited the covenant waiver period.
We have a lot of additional.
You know our sources of capital that we can utilize for acquisitions and we will weigh those and measure of those against the H M. As we look at opportunities of the market.
Thank you.
Thank you thanks Austin.
Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Hi, good morning.
Flow up to Austin's question.
You talked about being at 4 times debt to EBITDA and what's your.
Appetite to go higher than that and the near term given given improving results, but also given uncertainty Ah I guess, what's the magic of some near term leverage you would go to actually fund your acquisitions.
I mean, we've been clear I think.
Since we began having conversations that are our long term goal is to have low leverage as of portfolio.
Inc. The merits of that strategy of proven themselves over the past year year and a half.
And certainly positioned us relative.
Relative to peers.
So you get out of our covenant waivers to be removed from restrictions and not be in a position, where we were at the holding to the banks and <unk>.
Ways that the debt.
And the disadvantage of our shareholders the.
That said we.
We certainly consider leverage, especially short term as a funding source to pursue acquisitions and would.
And would be willing on a temporary basis, the increased leverage to pursue acquisitions. So long as we had clear line of sight to reducing our debt over time to 2 you know the.
Somewhere around pre pandemic levels.
Got it all of the 2 open currently open and potential acquisitions.
You mentioned that you see this business is run a 5 cap and accounting for our cash.
Capex on 2021 what about the acquisitions.
What are they kind of yield and currently on 2021 do you have and estimate.
So again, highlighting the the fact of both opened.
You know the late 2018, we have 2019 numbers for them.
And I highlighted.
In response of 1 of the earlier questions. Both of running ahead of that the AC which had been opened the longest on 2019 numbers.
And would be right around the 6 and a half Cup.
It's tracking ahead of that and so on 2021 numbers, depending on how the back half of the year shapes up.
We could be very close to that.
The 8% range on that asset and the Greenville asset was lower.
You know right around 5 on 2019 numbers remembering the hotel opened in December and so you have first half of the year significant ramp of that asset. It's also running meaningfully better.
More significantly.
And better than 2019 than was the.
The the AC.
The 60% to 2019 and the most recent month and so I would estimate for 2021, we would be.
A little bit behind the AC likely but approaching about the same level certainly with meaningful upside beyond that.
And and it's important to remember here as we look at the portfolios that.
And we're intentionally exited and assets that we felt had limited upside and so looking at the portfolio we sold them.
Relative to the assets we're acquiring.
That portfolio had regained meaningful occupancy early but plateaued early and so and most recent months had been lagging our broader portfolio in terms of revpar growth and where these assets. The we're acquiring are growing at a much faster pace and so consistent.
With my prepared remarks.
Our goal.
And transactions as we look to manage our portfolio.
Is the exit assets that have more limited upside, where we have significant capex needs and.
And redeploy proceeds into assets that have shorter growth profiles with a more limited near term capex needs and and again, we'll do that around a subset of our portfolio because by and large the assets that we own our assets could be like and assets that we think will perform incredibly well.
Got it thanks for the color and and and AC and of law for 2 new brands for you and then and they tend to skew a bit.
And more urban and I guess and then their development profile and.
Is that something would you consider more urban select service and cases, where it makes sense of are these kind of just really 1 off 1 off deals given the given the strong markets.
And we actually love select service and urban markets and we've been clear for a long time, we're incredibly bullish, especially on secondary and smaller urban markets. I think we saw them outperform through the last cycle and continue to outperform through the downturn.
And the demand drivers and markets like Greenville, and Portland are meaningfully different than they are in downtown Chicago, New York or San Francisco and.
And we've seen a demographic shift towards those markets with companies expanding and reorganizing their and the beauty of the market Mike.
And Mike Greenville for example is that a it's not wholly dependent on a single major demand generator or industry.
And there's medical there's technology, there's manufacturing and a very strong leisure component when we look at Portland.
Portland is a market, where we've had exposure and.
And the residents and the 2 assets we add there.
Zinc will complement our existing exposure and that market much more heavy on the leisure side.
A significant business component as well and that helps to smooth out the non leisure season.
And I think we will continue to explore our athletes like those.
And I've seen incredible results.
For our hold period for similar assets like the select service assets, we own and Richmond, or Boise or some of these other smaller urban markets. So certainly.
A meaningful piece of our strategy going forward got it.
1 quick 1.1 of.
Of the lease payments savings from the from the Seattle deal on the on an annual basis.
We were at we were approaching the reset which is why we began negotiations with the.
With the seller and the reset would have been.
Yeah and theoretically.
Had it occurred somewhere and.
The high 8 million dollar of Red hat Yeah.
Based on based on the the calculations that was in place and the and the contract so a meaningful a meaningful savings there and and again. This is an asset that has historically generated.
And what well over $9 billion and free cash flow on an annual basis, so and incredibly valuable asset for us very well located.
You know, we were able to purchase meaningfully below appraised value.
The the seller had and below where we had been discussing purchase pre pandemic right.
And what was the 2020 and lease payments so just for modeling purpose and sorry.
And up to go back and check.
Almost of that the the new would be almost double the yeah, the new would've been almost double and we were in negotiations with them and and.
When the pandemic hit they were they were gracious and so 2020 wouldn't even be stabilized so.
But the exposure was significant alright.
Thank you.
Thank you.
Our next question comes from the line of Tyler Battery with Janney. Please proceed with your question.
Hey, good morning, Thanks for taking my questions.
That'd be the voice of the people are confused with the the share price performance, but good.
Good.
Yeah Justin.
And I know, we've talked for the water ground here of and I'm the wrong.
And the folks have done of questions and so I'll be brief just in terms of some.
Some of the changes to breakfast and the social hours and the ease.
And then talk a little bit more about how you're thinking about potentially adding back some of those services and just.
I'll touch on.
Some of the conversations with the with the brand and <unk>.
Arms of a potentially.
Moving towards.
Right.
All of those some of those standards.
All along the way as we've recovered occupancies and certain markets. We've added back some of those services and part of the S. T E incur.
Increase even over the past.
3 to 6 months has has been that the occupancies and have increased and as leisure demand has picked up and.
And people have felt more comfortable adding back or trying to add back and.
F N b labor as well so we've added back where it made sense just at and modified with modified offerings and.
And you know have really taken an approach of course, our team as benchmarking, what's working and what's not and sharing best practices, but really given.
And given the flexibility that the brands have afforded us.
And then specific around offerings and markets based on occupancy levels and and consumer.
You know consumer preferences and demands and.
But of reduced operating and so you know.
We are working with the brands just think through long term standards and you know I think there's a way that we can be more efficient, especially with the current breakfast offering where it's part of it's a significant part of it of the value proposition and it's important to us it's important to our guests and then you know the number of <unk>.
Things that you offer on the buffet of how it's delivered and you know.
Leveraging our scale across brands to drive down pricing all of those things are things, we're talking to the brands. It's about you know so I think that there's some long term savings there. The brand certainly are working with us to try to get there as well so the evening social and with.
And with residents and and Homewood ongoing conversations and ongoing testing, particularly on the homewood side related to that but that's been scaled back and we have not brought that back and to date that wasn't a huge portion of the comp service costs, it's primarily around breakfast, but certainly would be of savings if that with meaningfully reduced.
And are eliminated long term.
Okay perfect I appreciate all the detail.
Very helpful. That's all for me and thank you.
Thank you.
Thank you. Our next question comes from the line of Danny and saw with Bank of America. Please proceed with your question.
Hi, good morning, everybody.
I know, we talked about margins a lot, but I just had like 1.1 more for you if you if you.
If you will so if you know we already have seen like you know the July of industry are far broke away and from Q2 trends and.
And margins are already running you know like you said there are like closer at 2019 levels and in May and June.
Relative to 19 should we expect like a sequential improvement and margins into Q3 or do you think staffing issues can offset any of those potential gains.
Hum too soon and we don't have we don't have financials for July. So it's too soon for me to say with certainty and we still have open positions and so I think that that will help from from a flow through perspective.
And rate, obviously sequentially increased so the so rates certainly helps them, but how the how that flows to the bottom line and you know I'm not quite sure of.
And you know.
Again, I think we anticipate and and part of the reason we took up for.
For the back half of the ear and the expense reduction ratio expectations relative to what we gave earlier and the ear is because with rate improvement. We do feel like we can flow more to the bottom line and we'll have some strength. There. It's just we're balancing that with them.
The unknowns around labor.
How many people we can hire what wages may do them.
And you know theres some theres some talk around inflation too, although some people say that's transitory. So theres just a lot of variables. So it's too soon for us to really give guidance.
Fair, Okay got it and then just from for.
And the net from an EBITDA perspective, the net impact on the portfolio.
From the dispositions and the acquisitions that were announced and the.
For July.
Do you have a sense, there's it's still too early but do you have a sense for kind of what the net net impact will be on the portfolio.
And we haven't given guidance for the overall portfolio so to give specific guidance for these assets.
For the back half of the year I'm, not confident would be particularly useful to or even on the table.
Even on a stabilized.
On the.
On a stabilized basis relative to 19, if you look at our total transaction activity.
We have been or will be upon completion of these transactions net acquirers of assets.
And so you know.
And that there should be positive impact relative to 19.
Stabilized basis from our transaction activity so far.
And as I've highlighted a couple of times now and we're not done.
And we expect to have additional transactions to announce and the not too distant future. So looking at all of our transaction activity combined our expectation would be the the the net impact Q.
To EBITDA would be good.
The increase of it.
Got it thank you.
Yeah.
Thank you. Our next question comes from the line of.
Dori Kesten with Wells Fargo. Please proceed with your question.
Hi, Thanks, Good morning, everyone and I apologize for the day dresses.
But based on your expectations of of operating trends and now that you've exited the covenant waiver period. When do you think of the earliest you'd be required to return to paying the common dividend.
Yeah.
Given the fact that we haven't given guidance you know I I don't know that we can answer that with conviction, though for or certainty and certainly its something that our board is.
Our board would be involved and from a decision standpoint, but from a requirement standpoint, we have carryforward losses from last year.
And you know transactions and and taxable gains and impact that calculation as well so theres a lot of variables and still at play for this year to know whether we'd be in a position where we'd be required to pay a dividend or not so and I'm not sure that we can give clear direction on that at this point.
Certainly having exited the covenant waiver as the result of strong results puts us closer to that though for the reasons the has highlighted.
And not in a position to give a specific time of yeah.
Okay.
And you.
Thank you.
Thank you. Our next question comes from the line of Michael Bellisario with Baird. Please proceed with your question.
Thanks, Good morning, everyone.
Good morning, and a fault just wanted to follow up on that last question.
And I think I know the answer but maybe can you just how are you guys thinking about the capital allocation and balancing acquisitions and a higher dividend payment I know you can pay a higher dividend, but how are you thinking about the the potential uses of proceeds and the the relative returns maybe at least on a 6 to 12 month basis as you look out right now.
And I think we've been clear in past calls that the weird incentivize and executive team to drive and to maximize the total return for our shareholders dividend.
Dividend has historically been an important component of that and is something that we weigh them continually as the you know versus other uses of capital.
In the near term as we've demonstrated we're more apt to utilize our cash.
Cash to pursue our acquisition acquisition opportunities that said to the extent, we continue to outperform as we have.
Year to date.
We will be in a position, where we have significant cash flow, which would put us in the position.
And to.
The increase our dividend and then not too distant future as well.
And I don't think we see them necessarily as either or.
But as the 2 ways that we can and we can create incremental value for our investors.
Got it and I assume the overarching gating factor for both of those options and see the annualized <unk> of your debt.
Debt to EBITDA.
The metrics and wanting to stay with them and the ranges.
And you are allowed under the Covenant agreement right. That's really the the gating factor at least over the next couple of quarters.
And certainly I mean with any capital allocation decision and we're monitoring how that would impact how we would test covenants relative to the modified metrics and historic metrics. So certainly we'll be balancing all of that as we as we think about our capital allocation decision.
Got it and then just switching gears back to July and Nathan.
And just it but could you just provided of July revpar percentage change versus 19, I don't I don't think you've actually given that yet.
We have not given that yet.
And you know I think if you look at where we were from.
And occupancy perspective, and where we shared relative to 2019 and.
If you look at the breakdown from weekday.
The weekend, we don't have final numbers, but you can get close to where we would be.
Yeah.
Sure.
81, 7% occupancy that you guys reported and.
In July of 2019, you pointed out from last year's press release, 1 of the portfolio has changed a little bit of is that still fair.
Yes percentage, okay. So yeah, my my math is right.
And I guess, you gave the right down mid single digit occupancy down 8%. We're still talking July Revpar was down 10, plus percent plus or minus REIT, we're not talking.
July is a couple of percentage points off of I think there's lots of corrosion of range.
Yeah, Okay, Yes, correct and then yes, and then with the.
With the primary driver being the occupancy still not getting back to prior levels yes.
Right right and then just on margins I know nothing for July to provide but for June can you maybe provide some specifics on what EBITDA margin was and how June specifically compared to 2019 on a year over year basis.
I don't have it right in front of me I can follow up with you Mike on that.
Okay that that'd be helpful. Thank you.
Thank you. Our next question comes from the line of credit styling with Green Street. Please proceed with your question.
Thanks. Good morning, just a couple of quick questions for me and regarding July of asset sales first is there any difference and the price you can achieve by selling a cluster of hotels versus the same selling individually.
But a lot of that depends on the market.
We had for really proceeding and the pandemic.
Uh huh.
And more individual asset trades, and we had a portfolio trades.
But in prior periods, so looking back a decade or so per.
The players had tended to trade at premium pricing.
There is increasingly a pool of buyers who are interested in a massive scale and select service assets, which has created an environment, which we anticipate will persist where portfolios trade on par or at premiums to individual asset sales.
I think that would be consistent with what we've seen in the past and.
Okay.
I think while our portfolio of sale was early.
And the buyer.
For for the pool.
Was a group that had historically done more individual asset transactions, there are and increasing number of private equity groups and other investors who are interested and in March of portfolios and and financing is available for those at this point and time.
Got it yeah, thanks for those thoughts.
And then secondly, you mentioned and.
The prepared remarks tilting the portfolio more towards markets with stronger growth outlooks, you know sort of of the rationale for the portfolio sale I'm. Just wondering should we take that comment more as tilting around stronger Submarkets. You know I was just thinking about those 20 different properties seem to be a pretty wide mix of markets and regions across the country.
Absolutely I mean, if you look at our broader transactions over time.
We sold an asset and Greenville and.
And right now have another asset.
And Greenville under contract I think in some instances the repositioning will be within markets.
Exiting at 1 particular suburb.
Move into a new suburb of or downtown area, where we anticipate greater growth.
Broad strategy continues to be.
The diversification and really the.
Given our portfolio's outperformance.
We're not looking to radically shift our strategy just the fine tuned around the edges and order to maximize the growth rate throughout the recovery and to adapt to changing trends within individual markets and across the country as a whole.
Makes sense. Thank you.
Thank you.
And in mind going back to you.
And Mike going back to your question for June whether you look at it on a comparable basis, which was slightly better or and absolute basis for June we were right on top of 2019 margin Hotel EBITDA margin.
Thank you, ladies and gentlemen at this time and there are no further questions I would like to turn the floor back to Justin Knight for closing comments.
Thank you.
We really appreciate everybody joining us today this was an incredibly busy quarter for us and.
And 1 the the we're incredibly proud of a again a huge thank you to our team here at our corporate office and.
And the many individuals we work with the brands and with our management companies and this has been a challenging time, we've all learned a lot of new things, but are incredibly proud about our performance. We hope that you are traveling and that as you travel you'll take an opportunity to stay with us and 1 of our hotels and we look forward to talking to all of you.
Here in the not too distant future.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Okay.