Q3 2021 Apple Hospitality REIT Inc Earnings Call
Greetings and welcome to the Apple Hospitality REIT third quarter 2021 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my I'm sure. It is now my pleasure to introduce your host Kelly Clarke.
You may begin.
Thank you and good morning, welcome to Apple Hospitality REIT third quarter 2021 earnings call today's call will be based on the earnings release and Form 10-Q, which we distributed and filed yesterday afternoon as.
As a reminder, today's call will contain forward looking statements as defined by 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, our financial statements and notes there too as well as the risk factors described in our 2020 annual report on Form 10-K, and other filings with the SEC.
Any forward looking statement that Apple hospitality makes speaks only as of today November five 2021, and the company undertakes no obligation to publicly update or revise any forward looking statements except as required by law.
In addition, non-GAAP measures of performance will be discussed during this call reconciliations of those measures to GAAP measures and definitions of certain items referred to in our remarks are included in yesterday's earnings release and other filings with the SEC.
For a copy of the earnings release or additional information about the company. Please visit Apple hospitality REIT Dot com.
This morning, Justin Knight, our Chief Executive Officer, and Liz Perkins, Our Chief Financial Officer will provide an overview of our results for the third quarter of 2021.
Following the overview, we will open the call for Q&A.
At this time it is my pleasure to turn the call over to Justin.
Good morning, and thank you for joining us today are.
Our differentiated strategy for a hotel investment developed and fine tuned over two decades enabled us to produce strong relative operating result through post 911 declines in travel and the financial crisis and to drive incremental value for our shareholders through the subsequent recoveries.
Well the challenges created by a global pandemic are unprecedented in their severity our performance over the past 20 months is attribute to the collaborative efforts of our corporate brand and management teams and a testament to the merits of our strategy of investing in a broadly diversified portfolio of high quality rooms focused hotels with low leverage.
Third quarter operations across our portfolio further improved after strong second quarter performance driven by a mix of leisure government health care automotive construction disaster recovery insurance Athletics education, and local and regional business related travel rep.
Revpar for our portfolio of hotels was $100 for the quarter with occupancy of 72% in ADR of $140 third quarter ADR for our portfolio exceeded third quarter 2019, helping to shrink the gap from 2019 revpar to only 10%.
As top line fundamentals have strengthened we have continued our efforts to maximize operational efficiencies by effectively managing costs across our portfolio to achieve strong bottom line results, despite inflationary pressures and a challenging labor environment.
For the quarter, we produced adjusted EBITDA of $92 million modified funds from operations of $76 million in comparable hotels adjusted hotel EBITDA margin of approximately 38% a 30 basis point improvement over the same period in 2019.
We are pleased with the overall improvement in occupancy during the month of October which rose back to approximately 73%.
With children back in school and the transition to fall, which is generally characterized by lower leisure demand. We are encouraged by the continued strength in our weekend occupancy as well as the improvement we saw mid week relative to August and September.
Further indication of improvement in business transient demand.
Consistent with historical seasonality, we expect to see slightly lower occupancy for our portfolio in November and December.
But we believe we will continue to see strength in leisure demand and improving business transient demand through the remainder of this year and throughout 2022.
Looking forward, we have meaningful upside in our pro play out first our hotels have produced industry leading results. Despite the historical dependence on traditional business transient demand segment that has lagged the more robust leisure recovery.
While our ability to pivot to and benefit from existing demand shows the versatility and broad appeal of our assets, we are optimally positioned to benefit as business travel increases.
Second.
New supply, which represented a headwind for us in 2019 has pulled back significantly as a result of rising construction costs and a lack of available financing.
Less than 50% of our hotels have competing hotel projects under construction within a five mile radius. This is down 22 percentage points from the first quarter of 2020, and it's the lowest we have experienced since we began tracking for our portfolio.
Given the lead times associated with new hotel openings, we expect the lack of new supply to be a tailwind for us for several years.
Third our portfolio is meaningful exposure to markets that are benefiting from demographic and economic shifts that have been accelerated by the COVID-19 pandemic with multiple demand generators business friendly local governments lower cost of living and popular leisure and entertainment venues.
And fourth we anticipate that the strong rate environment combined with streamlined operations will create an opportunity to produce attractive margins, despite inflationary and labor pressures.
Simply stated a more significant portion of the incremental dollars we produce on the top line going for it will flow to the bottom line.
The upside in our portfolio is further strengthened by our recent acquisitions and dispositions activity, which has lowered the average age and improve the quality of our portfolio reduced our exposure to near term capex and adjusted our market mix and positioning to elevate future performance.
During and subsequent to the third quarter, we acquired four hotels for a combined total of approximately $186 million.
In August we acquired the existing AC hotel.
And in September we acquired the newly constructed a loft hotel both ideally located in downtown Portland, Maine, along the city's working waterfront for a combined total of approximately $118 million.
Both hotels have performed exceptionally well with the AC which opened in 2018, performing well ahead of 2019 and the aloft ramping quickly we anticipate that we will benefit from synergies in both sales and G&A, which will bolster the performance of these two assets and the residents and we have an end market.
In September we also acquired the existing Hyatt place in downtown Greenville, South Carolina, which has continued to benefit from strong weekend leisure demand and consistently produces revpar above our portfolio average for a for approximately $30 million.
With the acquisition of this hotel and the sale of the residence Inn. We previously owned in market, we have meaningfully enhanced our proximity to major beauty and leisure demand generators and the ability to benefit from future growth in Greenville.
And in October we acquired the existing Hilton Garden Inn in downtown Memphis, Tennessee, which we had not previously announced for approximate $38 million.
Elton Garden Inn opened in January 2019, and is located in close proximity to our downtown Hampton Inn and within walking distance of Beall Street, Autozone Park, and a variety of corporate demand generators.
We were able to acquire the Hilton Garden Inn for just under a 9% cap rate on 2019 numbers.
Here too, we expect to benefit from sales and G&A synergies this acquisition and the earlier sale of our Homewood suites Cigna.
Significantly enhance our positioning within the market.
In August we acquired the fee simple interest in the land at our residence Inn in Seattle, Washington for approximately $80 million, consisting of a $24 million cash payment and a one year note payable to the seller for $56 million.
During the quarter. We also successfully completed the portfolio sale, we discussed on our last call, which included 20 hotels for a gross sales price of approximately $211 million.
Since the beginning of the pandemic, we have purchased nine hotels for a combined total of $347 million and sold 24 hotels for a combined total of $245 million.
We continue to actively underwrite additional opportunities and have four hotels under contract for purchase for a combined total of approximately $205 million, including the previously announced embassy suites to be constructed in Madison, Wisconsin for an anticipated purchase price of approximately $79 million.
Our Hilton Garden Inn at our Homewood suites in Fort worth, Texas, just outside of downtown and ideally located near the areas major hospitals TCU campus and within close proximity of the will Rogers Coliseum.
The hotels opened in 2012, and 2013 and are under contract for a combined total of approximately $51 million just over a seven and a half cap rate on 2019 numbers after taking into consideration anticipated Pip related capex of just over $2 $5 million and an 8% cap rate after.
Adjusting for rooms out of service for the Homewood suites, which was under renovation.
And finally, the Hampton Inn and suites in the Pearl District of Portland, Oregon for approximately $75 million. The Hampton Inn opened in 2017 and is ideally located to benefit from a mix of business and leisure demand with top beauty accounts, including a variety of manufacturing tech and financial companies.
The purchase price is approximately a seven 5% cap rate on 2019 numbers after taking into consideration anticipated Pip related capex of just under a quarter of a million dollars and is attractive relative to recent comp trades in market and replacement value.
We expect to close on the hotels in Fort Worth, Texas, and Portland, Oregon during the fourth quarter of this year and on the embassy suites in Madison upon completion of construction.
We have been and will continue to be intentional in the build out of our portfolio pursuing assets that are additive to those that we currently own and where we feel pricing will allow us to achieve our targeted returns.
Looking at our activities since the onset of the pandemic. We have acted in ways that have improved the quality of our portfolio enhanced our positioning and increased our exposure to markets that we anticipate will outperform over the next cycle.
As we finish 2021 and move into 'twenty 'twenty. Two we are building off a strong base operationally our hotels are approaching 2019 performance levels with the potential for additional upside as we begin to see a more robust recovery in business transient.
Having achieved positive corporate level cash flow early in the pandemic, we preserved our balance sheet, providing us with a strategic advantage as we compete for deals and evaluate other capital allocation opportunities. Our recent transaction activity has further strengthened our position.
We were the first of our peers to achieve positive hotel level cash flow the first to achieve corporate level breakeven in the first to exit our covenant waivers.
Have been net acquirers of assets since the onset of the pandemic and have at the same time avoided dilutive capital raises or over Encumbering our balance sheet.
Our strategy has been tested and consistently yielded compelling results for our investors. We are optimistic about the future and incredibly well positioned to drive long term value for our shareholders.
It's now my pleasure to spend the time over to Liz who will provide additional details on our balance sheet and operations during the quarter.
Thank you Justin and good morning, coming off a strong second quarter demand exceeded our expectations in July resulting in occupancy of 76% for the month down only 8% from July of 2019, we have been able to recover rate more quickly than in past cycles, and we achieved third quarter ADR at 100.
$40 exceeding the same period of 2019.
Even with seasonality and increased increasing cases that the delta variant modestly affecting occupancy in August and September ADR remained about 2019 levels and we are pleased that the gap to 2019, revpar meaningfully decreased quarter over quarter from.
Down 26% in the second quarter to down 10% in the third again exceeding our full quarter expectation.
We saw continued strength in October with occupancy of approximately 73% for the mountain comprised of weekday occupancy at 68% and weekend occupancy of 85%, both weekday and weekend increase relative to August and September.
Strengthening midweek occupancy in particular to over 70% in October indicate improvement in business transient demand traditionally a primary driver for operating results at our hotels and weekend occupancy has consistently exceeded pre pandemic levels showing continued strength in leisure.
These positive trends are in house revenue team working closely with our management company revenue support an onsite sales teams to maximize top line performance the quality of our assets the wide distribution of vaccines and concerns related to the delta variant beginning to taper.
Give us confidence that our bra are broad market diversification will continue to drive outperformance as business transient demand continues to improve.
30% of our hotels had revpar for the quarter that exceeded the same period in 2019.
Vincent with broader national trends. The majority of these hotels are located in Sunbelt States. A few notable exceptions included our newly acquired AC in Portland, Maine, which had revpar at $330, 36% higher for the quarter than the same period in 2019, and our Colorado Springs Hampton Inn.
Provo, Utah residents, and which were up 11% and 9% respectively.
Our suburban hotels continued to outperform urban hotels in the quarter with occupancy up 74% as compared to 67% for comparable hotels.
As has been the case in prior quarters hotels located in markets with greater historical exposure to large groups and conventions and the two full service hotels in our portfolio also underperformed.
Looking forward to next year, we anticipate demand will strengthen in many of these markets further boosting performance for our portfolio.
Hotels like our Hilton Garden Inn, located in Chicago, O'hare, our courtyard in Seattle, and our Springhill suites in Burbank, all of which have historically been strong performers had revpar for the quarter down, 38%, 38% or more versus 2019.
With anticipated improvement in B T in group demand hotels like these represent meaningful upside for us as we continue to move through the recovery.
In terms of room night channel mix brand Dot com bookings, which moved from 33% of room nights in the first quarter to nearly 38% of room nights in the second quarter came down slightly to 37% in the third quarter.
O T. A bookings continued to be elevated relative to prior years, but decreased slightly from just over 17% of room nights in the second quarter to under 16% in the third quarter.
Property direct bookings increased from 28% in the second quarter to 30% in the third quarter, which is almost six percentage points higher than the same period in 2019.
The result of our management companies with the support of our asset management and revenue teams continuing to adjust strategies and ship those guests as the environment evolves their collaborative and dynamic efforts are helping us capitalize on the demand available in market today.
Looking at third quarter same store segmentation. There was a notable shift from other discounts to bar and negotiated as occupancy continued to strengthen another indication of increasing business transient demand.
[noise] bar was up almost four points quarter over quarter to 34% offsetting declines in other discounts, which fell from 37% in the second quarter to 31% in the third.
Negotiated was up 1.6 points to almost 16% increasing even further in October.
Turning to expenses total payroll per occupied room for our same store hotels was under $31 in the third quarter down 6% to the third quarter of 2019, but up from 27% $27 per occupied room in the second quarter as we continue to fill vacant positions and <unk>.
Wages and a more competitive labor environment.
Same store hotels rooms expenses, excluding payroll were down 10% per occupied room compared to 2019 for the quarter.
With over half of the savings coming from adjustments to complimentary breakfast and evening social offerings.
Our team's relentless efforts to control costs and maximize profitability resulted in third quarter 2021 comparable adjusted hotel EBITDA of approximately $107 million and comparable adjusted hotel EBITDA margin of approximately 38% up 30 basis points to the third quarter of 2019.
M S F L with approximately $76 million or <unk> 33 per share for the third quarter of this year.
As we have emphasized in the past strong bottom line performance is dependent on both topline performance and expense controls and while we are still shy of 2019 revpar levels, we exceeded pre pandemic margins for the quarter.
As we continue to focus on managing expenses, our bottom line performance had been meaningfully bolstered by the rapid recovery in rate, which as Justin mentioned exceeded 2019 levels for our full portfolio during the third quarter and remaining strong into October.
With revenue down 16% in the third quarter relative to the same period of 2019, we were able to reduce total hotel expenses by 17% and expense reduction ratio of more than one significantly higher than the full year estimate previously provided.
Taking into consideration our performance year to date inflationary and labor pressures and seasonal fourth quarter revenue trends. We continue to expect to achieve an expense reduction ratio between eight and 0.9 for the full year.
As we think about Capex consistent reinvestment in our hotels has always been a key element of our strategy. During the first nine months of 2020, one we invested approximately $10 million in capital expenditures and we anticipate investing an additional $15 million to $20 million in capital improvements during the remainder of 2021.
Which includes scheduled renovation projects for eight hotels and a variety of capital projects.
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 disruption.
Shifting to our balance sheet as previously announced effective July 29th with the strength and performance in our conservative capital structure, we exited the covenant waiver period. As a result, we are no longer subject to the lender imposed limitations on investing and financing activities associated with the covenant waiver restrictions.
During the quarter as a result of the early exit we benefited from lower interest rates, which represented approximately $8 million savings on an annualized basis.
As of September 30th 2021 we had $1.4 billion in total debt outstanding with a weighted average interest rate of 3.5% consisting of $502 million of mortgage debt secured by 28 hotels and $870 million outstanding on our unsecured credit facilities.
At the end of the quarter, we had available cash on hand of approximately 39 million and unused borrowing capacity under our revolving credit facility of $425 million with no scheduled maturities for the remainder of 2021.
Without having to further encumber, our balance sheet, we have been able to opportunistically allocate capital to enhance the growth profile and quality of our portfolio through dispositions and acquisitions as we look forward. We believe there will be additional opportunity to improve the EBITDA growth profile of our portfolio we have.
Our proven ability to drive strong operating results throughout economic cycles, and with current trends showing continued strength in leisure and an increase in business transient demand. We are confident in both the industry recovery and the continued upside for our portfolio specifically as we move into 2022.
This completes our prepared remarks, we would now be happy to answer any questions that you may have for us This morning.
Thank you well now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we poll for questions.
Okay.
Thank you. Our first question is from Neil Malkin with capital One Securities. Please proceed with your question.
Thanks.
Good morning, everyone I'm learning.
Hey, great job during the quarter.
Our first question you know maybe for Liz obviously, ADR got back to or actually surpassed prior peak or not 19 levels can you just comment on sort of what the growth cadence or potential could be for a D. R.
You know.
Near term just to.
We haven't.
I haven't really seen a return of B T. In in a meaningful for you know a robust return of of BT, which as you said it drives a substantial amount of demand in your hotels. So you can maybe kind of help us think about how that how that should trend or how that could trend that'd be great.
Absolutely I can I can try to.
Your question with the information that we have available to us from a booking perspective and also just thinking back to our comments you know even early on in their recovery around occupancy levels in which we can really drive Adr's you know we had.
I felt that we really start would start to have pricing power bounce you know, 60% to 70% occupancy and and you can see over the third quarter that that that materialized. So we really were able to drive rate, particularly on high occupancy nights and leisure demand being less.
Less price sensitive I think you know we are optimistic based on what we're seeing in our booking trends around leisure even into the fourth quarter them, both from a rate at or not you know what's on the books on the weekends going into the next couple of months I'm, you know with with continued leisure demand and the upside.
And business transient.
We're optimistic about about pricing power going forward again.
We.
We don't have a lot of visibility into future bookings, but even with anticipated seasonality in November and December potential potentially putting pressure on on that occupancy level. We're pleased to see the rates that we have on the books over the next two months and you know some of that driven by again whats being booked on the weekends.
But even if I look at what's on the books for November and December from a mix perspective Corp, or negotiated business continues to tick up from where it was during the third quarter, where it increased you in October and again, increasing in November and December as well.
Sure I guess, maybe another way to ask you to look at it is can you kind of give us a flavor or a sense for.
What like a mid week or you know.
I guess during the week E D r's looked like leisure versus a typical or average business right. I guess, you know just to try to understand how much more ADR to be you know lifted beyond market rates. Just you know as you get that more favorable mix.
And to your hotel does that makes sense I guess, if BT is typically at $20 above.
Above leisure or something like that I guess is what I'm.
Yes, you know what what we have seen over you know over the past couple of quarters is leisure.
You know leisure demand being a little less price sensitive than D. T and historically corporate demand was higher rated for our portfolio. So there is still a gap between BT, which like as you mentioned is lower typically are higher typically its still lower than leisure and so we do anticipate that there is upside from a rate potential.
With corporate negotiated coming back and Neil have historically, we've run our highest occupancies midweek Tuesday, Wednesday and Thursday.
Looking at our even our weekday occupancies in the summer, where we ran higher weekday occupancies generally speaking our highest occupancies weekday wise, we're shoulder nights. So it's you know the occupancies were propelled primarily by leisure travel look.
In Florida, we have a strong base of business transient, but we're still running generally in this in the sixties R. R.
A 10 ish percent occupancy gap to our weekend Occupancies and as we highlighted in past calls as we get to that you know somewhere around 70% occupancy we're in a position to much more meaningfully drive rate assuming.
Leisure demand stays strong on the weekend and we maintain these higher occupancies and we begin to build midweek occupancy on our historical historically peak nights, the Tuesday, Wednesday, Thursday, we would be in a position to to dramatically improve rate potentially to where we were.
Prior to the pandemic.
Yeah.
Okay great.
Great.
Just maybe last one for me you know if you could talk about just the acquisition environment you know again you've been.
For the last couple of quarters I would say the most.
Progressive with your your verbiage on on opportunities and and you know kind of getting past COVID-19 and putting your your balance sheet.
To work so you know that said.
We had another active quarter can you just talk about what that your active pipeline. It looks like you know has it hasn't picked up.
Over the last you know three to six months.
You know is there you know what kind of.
<unk> are you seeing and are any portfolios opportunities.
It would be great to hear thanks.
Yeah absolutely.
You had highlighted that we expected the volume of transactions to increase as we move through the recovery and we have seen that significantly more deals coming to market now and we're actually incredibly pleased with the quality and selection that's available to US now you've seen us be active as we said we would be a one.
We had our house in order and have established ourselves on firm footing from an operational standpoint.
And and I think it's safe to assume that we will continue to be active we are in constant dialogue with a variety of sellers competing in a competitive bidding processes, but also having conversations directly with potential sellers are round off market deals and both have yielded.
For us looking at the deals we currently have under contract a portion are.
We're you know came through competitive bidding processes, but you know that the.
The two assets in Fort worth in the Portland, Oregon outside.
We're in negotiations that we had directly with a group that we have an existing relationship with them.
I think we have a track record.
Hum of building portfolios I'm, having acquired as many as 74 hotels individual transactions in a single year and certainly have the capacity to continue to do that we have a tremendous amount of experience in the space. We can underwrite a quickly and we have a reputation in the industry for doing.
What we say we're going to do we have confidence in our underwriting and an ability to execute I think it's significant that we've exited our covenant waivers now and that puts us in a position to act very quickly.
Which early was a hindrance for us, especially competing with private equity players.
But given our track record our history in the space and the availability of you know.
<unk> acquisitions.
We see ourselves as continuing to be active players throughout the recovery.
Okay. Thank you guys congrats again on the nice quarter.
Thank you.
Okay.
Thank you. Our next question is from Karl mentioned with B Riley Securities.
With your question.
Good morning. This is Kyle on for Brian I was hoping just on the acquisition front. If you could just provide a little more color on maybe who the sellers are and also a seller motivations.
Certainly.
I think the bulk of the deals that we've underwritten them.
I've been with sellers that are owner operators, you know I think if.
If you look at the deals we've closed since the onset of the pandemic a portion where with merchant developers, where we have made forward commitments for specific deals I'm looking at what's coming to market now the bulk of the assets coming to market.
Or coming to market are from groups that have developed our assets are either with the intent to hold for a longer period of time or to hold for a shorter period of time and to ultimately take to market I think given the number of potential buyers and recent trades.
Sellers view the market as being potentially favorable and you know I I think that's resulted in a meaningful increase in an available deals and that's consistent with what we've seen in past cycles and really.
Our expectation is that it will continue to increase and in terms of the volume of deals that will have to look at to date, we have not seen a significant number of distressed deals coming to market. The sellers that are bringing assets to market. Today generally speaking are are doing so opportunistically.
In some cases are there unique structural issues that.
The make a near term sale advantageous for the groups and that was certainly the case with the group that I mentioned selling the assets are in Fort worth and in Portland.
Our expectation is that over the coming years as we continue to see the recovery play out there'll be more forced deals coming to market, where the brand is getting more aggressive in and demanding renovations or banks lose patients with groups that are.
Then struggled to make payments and and you know I think.
A portion of those assets may be attractive to us, but but by and large we're most interested in those assets.
That are similar to those that are on the market now assets that are newly built high quality are in markets that we anticipate will meaningfully outperform from a portfolio standpoint are you know to date, even on the portfolio side those groups exploring opportunities are.
Mostly groups that are owner operators, who have built a small portfolios and you know as I highlighted before generally speaking those portfolios are would be most interesting to us, though when you look at the scale of our existing portfolio.
We're incredibly tactical as we explore potential acquisition opportunities I'm looking to ensure that what we add to our portfolio supplement what we already own them and that but were not through acquisitions overly exposing ourselves to markets and.
And you know quite frankly that were acquired assets.
We have a high degree of confidence that we can achieve our targeted returns.
In my prepared remarks, I highlighted them historical cap rates.
It's important to note that are the assets that we're acquiring have an average outperformed.
Our existing portfolio in the pace of recovery.
And our expectation will be that in the near term are those assets will yield north of an 8% return for us I wanted I in my prepared remarks to provide you with context. So you could see how close we were but as I've highlighted in the past.
These are markets that are generally speaking on the leading edge of the recovery.
And as a result have performed incredibly well relative to the passenger but also relative to prior peak.
Right great. Thanks for all that helpful color.
And then.
I think you mentioned about $8 million in annualized interest rate savings from exiting the covenant waivers. So that's about $2 million per quarter I was curious how much of that was realized in the third quarter.
It's a it's a full annualized calculation, but both based on the interest rate reduction and lower average borrowings.
Okay. Thank you.
Thank you.
Thank you. Our next question is from.
Anthony Powell.
With Barclays. Please proceed with your question.
Hi, good morning, I guess.
Maybe a basic question who's the highest rate of customer right now because it's too.
Is it a.
Leader traveler and does that continue into next year and do you think that's a permanent change or is leisure.
That's the highest rated customer tends to correlate with our highest occupancy nights and so because leisure is driving higher occupancy on weekends, that's where we're currently achieving the highest rates as I highlighted earlier, our expectation is that as we build back midweek occupancy.
We will see improvement in midweek rates as well historically our.
<unk> corporate travelers have been less price sensitive than our leisure travelers, but it you know.
If he cannot basic economics supply and demand to the extent therapy rooms available and people wanting to stay on them, we have greater pricing power and as loose as highlighted in our past calls the revenue management system through the brands have put in place have done it really in.
Admirable job assessing demand in market and making real time, helping us to make real time adjustments to rates in order to maximize on peak occupancy nights.
When we look at business transient segment specifically.
There are a lot of potential accounts, the recapture there and with lower occupancy and many markets mid week, we've shifted our focus away from what had traditionally been higher rated corporate business to some lower rated corporate business in order to build.
Occupancy.
Part of the reason that the 70% Mark from an occupancy standpoint has been kind of a magic occupancy number for us historically is that above that we're in a position to begin to yield out some of the lower rated accounts or lower rated business.
Replace with higher rated accounts. So some some of the movement in rates is an adjustment in the rate itself.
But the more exponential growth comes as we move out accounts that are lower rated accounts are replaced with higher rated accounts and our expectation is that as we see increased business travel, which we and I think most of the industry anticipate over the coming year will be in a position to more meaningfully drive business transient.
Our expectation would be that as we build back occupancy to similar levels. We would have similar pricing power on the business transient side to what we've seen on the leisure side.
Thanks, that's helpful. So looking to next year do you expect to see core business trends that have the same pricing and elasticity that you're seeing on the leisure side or do you expect maybe some more pushback.
Hard to push rates a bit higher.
Ernest.
We expect currently to have similar dynamics that again, a lot of the the pushback historically has been supply and demand based and the corporate accounts that we've negotiated with had the advantage of.
Being able to come to the table are committing to and promising certain volume of business I think given that most of our B T accounts will be ramping they won't be in the same position that they were prior to the end of the last cycle.
You know from a pricing standpoint, as you know on top of that from a supply standpoint, I highlighted in my prepared remarks.
<unk> seen a significant pullback in new construction or.
New construction starts within our markets.
Really that the less than 50% of its right around 47% of our hotels have any competing supply under construction within a five mile radius. That's the lowest that we've ever had since we began tracking them, but important to that and this is detail. In addition to what I provided in my prepared remarks.
If we look at new construction starts since the beginning of the pandemic nearly 40% of the projects that are currently under construction within our markets were started before March of 2020.
Less than 25% of those projects were started this year. So there's been a meaningful pullback in terms of new construction starts given that it takes two to three years for projects to come online, we see meaningful tailwind moving forward, which are you know.
As we think about pricing power in our portfolio puts us in a radically different position than we were as we hit.
It peaked last cycle.
Thanks, that's helpful and maybe one more.
Some of the full service or even talked about private equity competitors being able to get truly tried to financing and in driving value in them.
Uh huh.
Are you seeing that when when you're looking at deals in and how do you rate your ability to compete on.
Evaluation I do want to acquire a hotel.
I mean, I think it's clear that the debt markets are open you know looking at our incremental borrowing rate we have adequate capacity on our line of credit and I think given our.
Our ability to use our line of credit and what we're paying for incremental borrowing on our line of credit we do not see ourselves as being disadvantaged now it you know.
In terms of total leverage.
We have historically used our we.
Private equity use significantly more leverage than we do or have or will.
That said I E. You know I think we've proven that we can find assets.
That fit our investment criteria and you know to to a large extent we've been doing this for a long time and that matters to sellers that the.
That we are a known quantity that they know what to expect when they enter into a contract with us.
You know I think puts us in a position to compete very effectively.
A number of groups that have come into the space recently.
Thank you.
Thank you.
Yeah.
Yeah.
Thank you. Our next question is from.
Tyler battery with Janney. Please proceed with your question.
Thank you good morning, I appreciate all the commentary that's been very helpful. First question for me is on the margin side of things very strong there.
We see that the ADR helps but could you talk a little bit more about what you've been able to do on the expense side of things just to continue to move those those lower as occupancy you guys continued to build back.
Hi, there good question I mean, similar themes to what we've talked about on prior calls we continue to work with our management companies and the brands on long term operating models.
We're delivering.
Food and beverage offering them more efficiently.
The required and recommended offerings for complimentary breakfast had been scaled down to still be compelling, but a little bit more cost effective believing that some of that will stay long term. We are you know.
Testing various housekeeping models I'm thinking.
You know long term that we should have potentially some savings there as well you know from an FTE perspective.
During the second quarter on our call mentioned that we were probably around between 60 and 70% Ftes. We've we've had some success in hiring over the third quarter and probably you know similarly around 70% full time in place there's still some efficiency there on the labor model front as well you know that becomes that's in part.
By design and in part based on just the competitive environment, but we're certainly.
Comfortable with where we're staffed and well selectively.
Higher open positions to the extent over the next few months and enforced a sustained period of time, we believe occupancy will justify it but you.
We'll continue to really push push on efforts across the board, whether it's negotiating contracts vendor contracts and finding ways to more efficiently deliver similar standards work with the brands to modify standards longterm and operate our hotels from our labor model perspective, as effectively and efficiently.
Certainly as possible you know always balancing customer service and guest satisfaction as well.
Okay very helpful. Very helpful. And then I also wanted to follow up on the corporate travel topic. If I could you know sounds like some improvement in that in the month of October.
You talked more about what sort of customers are coming on the corporate travel side of things or are you starting to see some of the larger companies get out on the road or is it more.
More kind of what what isn't driving things the previous few quarters for us a lot of a lot of local local businesses that are doing the bulk of the corporate travel.
We continue I mean undoubtedly we continued to benefit from local negotiated and regional travel more mid market and smaller accounts that that's not atypical for our portfolio generally, but certainly as we've recovered those small and mid size accounts of outperforms you know as we look at the different.
Channels that can be booked and look at our mix overall, we are starting to see some improvement on larger corporate negotiated accounts.
<unk>, which we also benefit from as they continue to return.
Do you believe that you know part of the improvement that we're seeing for example in GDS bookings as we moved through the second and third quarter and into the four mm is through more larger corporate negotiated accounts. So we're starting to see improvement there even in the absence of everybody being back in office.
Okay, Great. That's all for me. Thank you.
Yeah.
Thank you. Our next question comes from Michael Bellisario with Baird. Please proceed with your question.
Thanks, Good morning, everyone.
Good morning.
Just if I go back to the.
Acquisitions in 2019 and cap rates.
Not sure. If you can maybe provide 21 estimated cap rate did not just looking for some commentary around how each of those.
Either completed or end.
Our transactions are performing this year versus 2019 levels I assume.
Performance is different for Portland for example than what you're seeing in forth worth Fort worth.
Certainly looking across the board, we have a variety I in terms of ramp with Portland, as I highlighted meeting Portland, Maine.
Be meaningfully ahead of where the assets were in 2019.
The AC and market them on a trailing three month basis ran right.
The mid to upper Ninety's from an occupancy standpoint with rates approaching $350. So.
I think we're.
We're incredibly pleased with how that market has recovered I'm looking at the assets that we have under contract.
We have a range and the Fort worth assets actually have performed relatively well.
Looking at trailing 12 for both assets are the Hilton Garden Inn ran about 70% occupancy and Homewood suites about 80% occupancy with rate slightly lower than they were in 'twenty.
19.
So our expectation looking at kind of everything that we have under contract or have purchased recently is that those assets from a recovery standpoint will be somewhere in the middle and then you have Portland, Oregon.
Which would be kind of on the other extreme in terms of pace of recovery.
That asset has continued to do well from a rate standpoint on a trailing three month, the hotel's run 62% occupancy at $171. So.
You know certainly a tremendous amount of opportunity there.
But if we look at how things will stack up for the entirety. So taking the group as a whole our expectation is that the acquisitions group relative to our existing portfolio gets back to 2019 levels first.
And it's.
It's early and we have not given guidance as to when we think.
That will happen.
But just based on the average pace of recovery for the individual assets within the acquisitions a group our expectation is that that that group as a whole will get there first with staggered arrival.
By market as we look at acquisitions.
We're being intentional in.
In adding assets to our portfolio.
Something to the portfolio that we don't already have and that means in some instances are getting into markets before they recover.
I think we were we were fortunate to have begun conversations are in Portland, Oregon before that market really took off and as a result.
Ben ahead, there in Portland, Maine, Sorry, and then Portland, Oregon, and our expectations are similar but you know we will be getting into that market before we see that the major pick up based on the location and the mix of demand from both leisure and business transient our expectation is that.
Overtime will be a very good investment for us as well.
Okay.
Got it that's helpful. And then just on all the moving pieces post quarter, what what is the pro forma balance sheet look like when those acquisitions are completed and how are you thinking about sources of capital going forward.
From a balance sheet perspective, we have full capacity available on our line of credit. So in the near term we can utilize that as were closing on the asset.
As we look forward and think about them are you know.
No.
That profile long term, we want to maintain their relative or or.
The relative strength of our of our balance sheet and so we'll look at various opportunities.
From a capital perspective, you know as we look to continue to grow but also.
Fund you know.
These acquisitions.
In future.
And future acquisitions.
Okay, and then just in terms of the modified covenants that you're in now where did third quarter leverage end up and what would it be pro forma for the acquisitions.
Even on a trailing 12 basis, we were within our our covenant.
You know as we incrementally raise debt it won't it will also depend on the EBITDA contribution.
From the acquisitions, which adds we pro forma that those out belief that there'll be contributing EBITDA to keep us in a relatively good position and from a leverage perspective.
Okay.
Okay and then just last thing for me on the G&A front can you remind us of that.
The formula for the incentive compensation that you guys accrued for in the third quarter.
Yeah, absolutely so from a G&A guidance perspective, the adjustment really was attributable to a couple of things you know b some of its normalization year over year, the new executive team salaries and full comp plan or not in place for the full year of 2020, our chairman and CEO.
And board took salary reductions in 2020, and we did not increase compensation in 2020 corporately either so so that's a piece of it the other piece, which youre speaking directly to you with our outperformance as of 930 for the total or relative shareholder return component of incentive.
Comp plan that represents 50% of our total you know our total compensation incentive compensation, but needed to accrue based on our performance through 930, you know ahead of target.
Thank you.
Thank you.
Thank you. Our next question is from Christopher <unk> with Green Street. Please proceed with your question.
Oh, Thanks, good morning good.
Good morning, thinking about the hey, good morning, just in thinking about the Capex dollars that you plan to spend this year, which I believe is below sort of historic levels do you anticipate having to.
Catch up so to speak and spend to higher amounts over the coming years and Additionally, how does the favorable supply backdrop that you mentioned sort of influenced that decision.
I mean, both really good questions.
If you look at what we've done from a portfolio management standpoint, a significant motivating factor for the sale of the the 20 assets in the portfolio that we transacted on during the quarter.
Was you know the management of our long term capex needs for the portfolio.
And a desire to ensure that where we were reinvesting in our portfolio. We are we were doing so in ways that we felt would generate strong returns for us.
As we look at this year relative to our expectation for next year and future years, you know certainly.
We expect to spend more in terms of total dollar amount next year and in future years than we did this year that said we.
We don't anticipate having a major bump or a catch up year.
And instead would expect to see our capex spend normalize a in a range similar to what we were spending pre pandemic.
5% to 6% of revenues.
I think we've been incredibly.
Incredibly thoughtful in how we manage the process utilizing dispositions as well as our intentional spend against those properties, where we feel we can generate the highest return.
Got it that makes sense, that's all for me.
Thank you.
Yeah.
Thank you. Our next question is from Austin <unk> with Keybanc. Please proceed with your question.
Great. Thanks first one just around the ETR again, so that midweek occupancy you mentioning reaching the 70% level of October I mean is there enough steps in midweek demand today to begin yielding out lower rated business or or does that become more of a 'twenty 'twenty. Two event and then can you provide us what edr was in October and how it can.
Paired to the same period in 19.
Sure you know I think that we're approaching levels mid week, where we'll have more pricing power.
And I just.
But the more.
Our sustained those 70% plus nights, our mid week, the more we'll be and to start I'm driving rate incrementally and yielding out some business now certainly as those occupancies consider continue to increase we'll also work with our management team on the level of base business on those nights, which are typically what would typically be lower rated and start.
Adding out so we're getting to a point, certainly where we'll be able to start mixing and driving rate more incrementally on Tuesday, and Wednesday nights and starting to see a little bit of that in October speaking specifically to October rate, we don't have final numbers, yet, but but you know what.
We believe that it will end up very similar to what we were in September relative to 2019 and again looking forward with what we have on the books in November and December are encouraged that those trends are going to continue.
Got it thanks for that and then you know as far as the recent acquisitions Justin was most struck by the Portland, Oregon Hampton Inn acquisition I know you've discussed in the past wanting that exposure within the Pacific Northwest you know several factors and it seem to have held you back maybe versus other geographies.
So what drove your decision to move forward here more.
More recently and then can you also shed some light on the recent focus on you know the acquisitions year to four be a largely in urban downtown locations.
Yeah, I'll actually start with the second question and work back to that the the first question because I think it will make more sense in that context in terms of a total acquisition strategy.
You know that for US remains unchanged, we continue to believe that investment in high quality branded rooms focused hotels in small urban and high density suburban markets will yield the strongest.
Results for our shareholders and if you look at our total acquisitions activity.
Since the beginning of the pandemic, so last year and this year, roughly 50% actually exactly 50% of that hotel could be repurchased have been high density suburban and 50 have been.
And these are smaller urban markets generally speaking.
Looking at Portland, Oregon, specifically.
I had highlighted.
And some of our earlier calls the fact that pricing had consistently been against 2019 numbers and as a result, we hadn't seen a an opportune entry point to get into some of these markets that we think long term will be good markets.
I think because of the way the market was pricing a assets, we prioritized markets that we felt would be on the leading edge of the recovery.
Given the nature of this particular seller and.
But long term relationship that we have with them.
We were able to negotiate an entry point into Portland, Oregon, but relative to comp trades in the market and.
It would've been seen pre pandemic as a fair and reasonable price on the assets we felt.
You know what.
It was a good entry point for us.
And I think we have confidence in that asset and our ability to meet our return thresholds over time I think if you look at the way we're building out our portfolio.
The bulk of our acquisitions are going to be.
In these sure bet markets like.
Portland in Portland, Maine, and Fort worth and Memphis.
And that this where we have in Greenville, where we have kind of our existing experience have a a good sense for what the market is going to be near term in order to maximize returns for our investors we will on the margin.
Make calculated.
Testaments of markets that we think have yet to realize their full potential.
And and invest selectively there as well that you know thinking back.
We were.
Our early and our entry into the Phoenix market, where that market was meaningfully underperforming.
We were able as a result of our time in that market to acquire assets at very reasonable per key prices below replacement value and we've benefited significantly from the recovery of that market over the past decade.
Pink.
If you watch what we do.
In markets like Portland, Oregon.
We will be.
Our expectation is that that's a strong market and our entry point was a good one and as I highlighted you know looking at recent.
Performance the the numbers are good.
And that's an advance of.
A meaningful a removal of restrictions that are put in place that has hampered our occupancies in that market during the course of the pandemic.
That's great. Thank you.
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 comments.
Thank you and thanks again for joining US today, we appreciate your interest in our company and hope that as you travel and we hope that you're doing more of that then you have a you know over the past couple of years that you'll take the opportunity to stay with us in one of our hotels, we look forward to meeting with many of you here next week at NAREIT.
And I hope to see you soon.
Yes.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Sure.
Yeah.
Yeah.
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