Q2 2022 Apple Hospitality REIT Inc Earnings Call
And entertainment venues, which appeal to a variety of small and medium sized businesses as well as large corporations.
Our rooms focused hotels aligned with industry, leading brands and managed by best in class operators offer guests a strong value proposition, while providing us the ability to produce robust operating margins and profitability.
Fewer outlets to manage and thus public space to maintain simplify operations and minimize utility cleaning and maintenance costs.
The hotels, we own appeal to a broad set of business and leisure customers operate at attractive margins are resilient during economic downturns require reasonable ongoing capital reinvestment produce attractive cash returns have a small relative environmental footprint are attractive on retail to both local and institutional investor.
And can be effectively optimized in a scaled portfolio utilizing comparative data analytics and operational benchmarking.
The strength of our balance sheet further contribute to the long term stability and optionality of our platform.
In July we refinanced our primary unsecured credit facility further bolstering our already strong liquidity position and.
In addition to extended maturities and improved pricing the refinancing upsized, our revolving credit facility and term loans, providing the company with greater access to liquidity for strategic growth and other corporate initiatives.
Greatly appreciate the support of our lenders their conviction in our strategy and our continued confidence in the underlying fundamentals of our business.
Faced with the prospect of potentially greater macroeconomic uncertainty and volatility in capital markets over the coming years, the increased liquidity positions us to be opportunistic in ways that will drive incremental value for our shareholders.
Rising interest rates and disruption broadly in that market to the impact of competition for assets in recent months, which we anticipate will result at least temporarily and more attractive buying opportunities.
Given our outperformance since the onset of the pandemic the strength and flexibility of our balance sheet and the additional borrowing capacity under our amended credit facility. We are incredibly well positioned with just three seven times net debt to EBITDA extended and staggered maturities are relatively young portfolio over 700 million.
And current total liquidity, we are able to be both patient and flexible as we work to capitalize on potential dislocations in the market.
We continue to actively underwrite and explore dozens of opportunities both on and off market and anticipate that we will be a net acquirer of assets in 2022 with transactions likely over the coming months.
The 12 hotels, we have purchased since the onset of the pandemic contributed meaningfully to our year to date outperformance exceeding our original underwriting during the first six months of the year by over $3 2 million in hotel EBITDA.
A third of these hotels produced yields in excess of 10% on a trailing 12 month basis.
We have been and will continue to be highly selective and intentional in the build out of our portfolio pursuing assets that are additive to those that we currently own or we can achieve attractive pricing.
Future acquisitions will be consistent with our strategy of investing in high quality rooms focused hotels located in strong revpar markets with attractive cost structures and meaningful growth potential.
We were fortunate to have entered the pandemic with a relatively young and well maintained portfolio and as a result, we're able to strategically reduce renovation spend to preserve capital in 2020 and 2021 during.
During the first six months of 2022, we invested approximately $17 million in capital expenditures and anticipate spending a total of $55 million to $65 million during the year.
This year's spend will more closely approximate our historical investment of between five and 6% of revenues, which we continue to feel is appropriate for our portfolio in a meaningful differentiator for us which contributes to total shareholder returns over time.
Through our scale ownership of branded rooms focused properties over more than two decades, we have significant experience in determining the most effective scope and timing of our investments to ensure minimal disruption to property operations and maximum impact for dollar spent.
As of June 32022, we had approximately $345 million remaining under our share repurchase program.
As has been the case historically, we will be opportunistic in using this program, where we see market dislocations create opportunities to buy our portfolio at a meaningful discount.
We also intend to continue to return capital to our investors through monthly dividend during the second quarter, we paid 15 per share for a total of approximately $34 million.
Based on Wednesday's closing price the annualized distribution of <unk> 60 per common share represents an annual yield of approximately three 6%.
We interact with our board on a monthly basis and assess our payout in the context of current operating environment.
Our expectations for the future and other investment opportunities to ensure that we are allocating capital to drive the strongest total returns for our shareholders.
Our strategy was designed to create an asymmetrical risk profile mitigating downside risk, while providing meaningful opportunity for upside.
We remain confident in the resiliency of travel and our ability to drive strong results and maximize shareholder value in any macroeconomic environment.
With nearly every operating metric now exceeding pre pandemic levels additional upside remaining in business travel and new supply at historically low levels. We are incredibly optimistic about the future of our business.
Before I turn the time over to live I, just want to take a moment to thank her for her efforts on the successful refinance of our credit facility that I touched on in my earlier remarks, Liz I'll now turn the time over to you for additional details on our balance sheet operations and financial performance during the quarter.
Thank you Justin and good morning topline performance for the second quarter improved sequentially timeline, the total portfolio revenue per ton and up approximately 28% to prior year and in line with June of 2019.
Revpar growth for the quarter was driven primarily by ADR, which improved 27% and 8% to the same period in 2021 and 2019, respectively.
Occupancy was up meaningfully to 2021 that came in approximately 4% lower in the second quarter of 2019.
Preliminary results for July showed continued strength in demand with occupancy of 77% and continued growth in rate while July occupancy was down 6% to 2019 in large part the result of lower business demand around the fourth of July holiday.
Occupancy improved sequentially each week during the month and was down only 3% in the final week of July .
Our portfolio is now producing topline results above pre pandemic levels, even without full recovery in business travel.
We look forward to the remainder of the year. We are optimistic that continued improvement and midweek occupancy driven by further recovery in business travel will push our operating performance even higher.
Recent performance reflects both continued strength in leisure and a meaningful recovery in business demand April may and June weekend, Occupancies were 83%, 86% and 85% respectively.
Weekday occupancy improved significantly over last year and the first quarter of this year with April and May weekday occupancy at 74% and 73%, respectively, both down less than 8% to 2019.
Occupancy improved further in June to 78% only 6% down to June of 2019.
With growth in weekday occupancy weekday ADR meaningfully improved moving from a $142 in April to $155 in Q now exceeding 2019 weekday rate levels.
As we look at demand segments and business transient trends travel patterns are beginning to normalize with Tuesday, and Wednesday, occupancies over 80% for the quarter.
56% of our portfolio produced Revpar about pre pandemic levels during the quarter with improvement in demand impacting nearly every market.
Top performers included hotels with ramping operations like our Hyatt place in Greenville, which Rand revpar of $134 and our AC import Lynn, which ran revpar of $198 for the quarter.
Other top producers included our hotels in Atlanta, Gainesville, San Antonio Hattiesburg, Texarkana, Phoenix, Birmingham, Miami, and Salt Lake City.
While results improved across the portfolio, we continue to see slower recovery at our hotels in Northern Virginia, Chicago, Houston, Philadelphia and St. Paul.
Our portfolio has benefited from continued strength in leisure demand with improvements in business transient and group further lifting overall results and enabling us to produce revpar slightly higher than 2019 for the quarter.
Looking forward, we expect business travel to continue to improve lifting performance and a growing number of markets and providing us with meaningful upside for our portfolio.
In terms of room night channel mix brand Dot com bookings increased to over 38% during the quarter.
Bookings remained stable at 13% property direct bookings declined to 27%, but remained elevated in the second quarter 2019, a testament to the continued efforts of our property management company sales support teams.
And GDS bookings continued to increase showing growth in corporate demand and represented 15% for the quarter, a 200 basis point increase from Q1.
Looking at second quarter same store segmentation are remained elevated to 2019 levels and in line with the first quarter at 34%.
Discounts moves from 27% in the first quarter to 28% in the second quarter.
Negotiated ticked up to 18% from 17% in the first quarter showing continued growth in business demand and group was 16% for the quarter in line with the first quarter and slightly higher than the second quarter of 2019.
Turning to expenses total payroll per occupied room for our same store hotels was around $34 for the quarter roughly in line with the first quarter and up 5% for the second quarter of 2019.
Low unemployment and rising Occupancies have continued to put pressure on labor and second quarter results were impacted by higher wages for full and part time employees training costs and higher utilization of contract labor to fill short term needs.
While we anticipate that higher wages will be permanent a large number of new hires and the temporary reliance on contract labor have resulted in lower productivity. Despite positive adjustments to brand service and amenity model.
We anticipate that a portion of the elevated expenses will be temporary and that productivity improvement will help to offset some of the inflationary pressures as operation stabilized.
As we have always done we will continue to balance productivity initiatives with our efforts to uphold service levels, and cleanliness and maintenance standards and support strong employee morale and low turnover in order to maximize long term profitability.
Excluding payroll same store grams expenses continued to be well controlled and were down 4% per occupied room compared to 2019 for the quarter.
Strong rate growth and effective cost control, despite the challenging labor inflationary environment enabled us to achieve second quarter comparable adjusted hotel EBITDA of approximately $137 million and comparable adjusted hotel EBITDA margin of approximately 40% up 10 days.
This points to the second quarter of 2019.
As we have highlighted on past calls we continue to believe that growth in rate will be the primary driver of margin expansion as we move through the recovery.
Following similar trends and <unk> also improved sequentially each month and was approximately $111 million or <unk> 48 per share for the second quarter.
Up 75% compared to the first quarter of 2022 up 64% compared to the second quarter of 2021 and in line with the second quarter 2019.
Looking at our balance sheet as of June 32022, we had $1 4 billion and total outstanding debt approximately three seven times, our trailing 12 months EBITDA with a weighted average interest rate of three 6% and availability under our revolving credit facility of approximately 359.
Yeah.
Total outstanding debt, excluding unamortized debt issuance cost and fair value adjustments is comprised of approximately $366 million in property level debt secured by 22 hotels and approximately $1 billion outstanding on our unsecured credit facilities.
At quarter end, our weighted average debt maturities with three years with approximately $96 million net of reserves maturing in 2022, including $66 million outstanding on our revolving credit facility.
Within the quarter, we entered into a seven year unsecured $75 million senior notes facility.
We repaid in full the $56 million note payable related to the purchase of the fee interest in the land at our Seattle residents and and we repaid six property level secured mortgages for a total of $67 million.
In July subsequent to quarter end, we amended and restated our existing $850 million credit facility <unk>.
Increasing the borrowing capacity to approximately $1 2 billion extending maturity dates and achieving improved pricing across the facility.
The $1 $2 billion credit facility is comprised of a term loan of $275 million maturing in 2027, a term loan of up to $300 million maturing in 2028, including a $150 million available with a delayed draw option and a revolving credit facility of six.
<unk> hundred $50 million with an initial maturity date in July 2026, which may be extended up to one year.
These updates provide for additional capacity of $150 million under the term loans and $225 million under the revolving credit facility.
The agreement includes an accordion feature in which the amount of the total facility may be increased from approximately $1 2 billion to $1 $5 billion.
At closing, we borrowed $475 million under the term loans and use the proceeds to repay the $425 million outstanding under the term loan so the previous credit facility and.
And $50 million outstanding under the revolving credit facility.
On August <unk>, we repaid in full and additional three secured mortgage loans for a total of approximately $32 million.
Through the refinancing of our primary credit facility. The additional seven year senior notes facility and the repayment of nine secured mortgages, we achieved our key balance sheet objectives.
Managing and continuing to stagger, our debt maturities, increasing access to liquidity through upsizing, our revolving credit facility and shifting a portion of our secured debt to unsecured and as a result, increasing the unencumbered pool of assets in our portfolio.
These objectives could not have been met without the support of our lenders. We are extremely grateful for their efforts to help us execute these transactions and for their continued confidence in our team strategy and performance.
As for our outlook for the remainder of 2022, we remain confident in the broader industry recovery and the performance of our portfolio specifically.
Quarter performance exceeded our internal forecast preliminary results for July Revpar are positive to 2019 and average daily booking trends continue to be elevated relative to pre pandemic levels.
Although macroeconomic and pandemic related factors continue to add a layer of complexity to the current operating environment.
Leisure demand within our portfolio of strong and business travel has recovered ahead of our internal forecast.
As we build back midweek occupancy, we are gaining pricing power, which should enable us to further grow revpar for our portfolio.
With second quarter bottom line operating results in line with 2019, we expect to move earnings beyond pre pandemic levels in the near term if these trends continue.
As we move through the back half of the year, we are well positioned for any macroeconomic environment. We have weathered the most challenging period, our industry's history and demonstrated the resiliency of our differentiated strategy.
With continued strength in leisure demand and increasing business travel our portfolio is poised to move beyond pre pandemic operating level or.
Our balance sheet is strong and our recent restructuring provides extended maturities and additional liquidity, which we intend to use opportunistically to pursue accretive opportunity.
Our assets are in good condition with recent dispositions and planned renovations ensuring that we maintain a competitive advantage over other product in our market.
The supply picture is more favorable than it has been at any point in our over 20 year history in the industry.
And our team has used our recent experience to enhance our internal systems and processes and ways that will enable us to further maximize the performance of our current holdings.
We will now be happy to answer any questions that you may have for us This morning.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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Our first question is from Neil Malkin with capital One Securities. Please proceed.
Thank you.
Good morning, everyone Congrats on getting.
2019.
Thank you first one sure yes first one.
Can you.
Either of you talk about.
Midweek or BT.
Opportunity.
From here, maybe you could start by saying talking about what BT.
Either pace or demand revenues were relative to 19.
Through Q2, and then into July and then it's.
No.
I think that there was a sort of sentiment.
That group will recover ahead of BT to potentially do some <unk>.
BT impairment hybrid work environment. So the interesting interested in your comments on.
How you see that side of the business shaking out.
What the next several quarters it looks like in terms of.
BT holistically in the portfolio.
Good question and I know Theres, a lot of interest around <unk> trends for the industry as a whole, but our portfolio specifically last quarter, we had started to see more sequential and and consistent improvement in business transient.
Looking at a couple of different.
GDS as a percentage of our mix from a channel mix perspective, and then a re segmentation perspective looking at our negotiated both local and corporate negotiated so bake and sort of medium size.
Corporate business. So we've seen a steady increase but we're still shy of stabilized level in.
In 2019, we were probably from a room segmentation standpoint for corporate and local negotiated combined.
The low 20% range, 2021% range and for the quarter.
Sure.
We were short of that.
And for GBS.
We were about 18% for the quarter and probably 'twenty, one 'twenty, 2% would have been where we worked through the quarter in 2018 for corporate and local negotiated and then for GTS, we improved to 15% in the quarter. So that's more of your more traditional corporate negotiated as well from a channel mix perspective.
And we are normally around 20% there as well looking at it kind of a couple of different ways and so still have upside as more markets recover if you look at our portfolio Neil and you think about our comments around the 56.
56% of hotels that are exceeding 2019 levels that that's still.
A significant amount of our portfolio that still has room to grow in both on the corporate and leisure side and so when I think when we think about how our portfolio is performing well.
With such disparity across the high and low end theres significant upside.
From from both the Btn, Alicia perspective, and some of the recovering market.
Then when you think about our.
Our overall occupancy levels, and where we still have a little bit of room to grow to reach 2019 levels. It's mid week, it's our midweek occupancy, it's the BT and so we still see.
Meaningful upside as we look at some of these markets that are slow to return, but as the portfolio overall.
We still see some opportunity on midweek occupancy, but given these days as we anticipated the more and more markets mid week that start approaching or exceeding 2019 levels, we've had pricing power and so theres opportunity on the rate side is that BT comes back yeah.
And importantly, we've continued to see progressive improvement month over month.
On the business transient side of our business and that's showing up in our midweek Occupancies was highlighted.
Our remarks that today looking at the quarter as a whole Tuesday, and Wednesday for the entire quarter.
Phase, where we're up above the 80% occupancy.
And so while we continue to have room, certainly on the business side.
We are seeing continual improvement in that area and anticipate.
Good.
Travel will continue to improve through the back half of the year.
Do you even if you look at July and what we've seen on Tuesday Wednesday nights in July excluding that first week, which was impacted by the fourth of July is certainly impacted business shrinking on Tuesday, and Wednesday, we pushed past that 80% occupancy Mark that you saw in the second quarter in July and we're more in the mid eighties for those three weeks.
Following the fourth of July week for Tuesday, Wednesday, so continuing to see good growth.
Great that sounds good.
I'm just just saw.
Said, something like I think gds's, 15% versus 20%.
In 2019, that's around more like 75%.
And accurate way to think about it.
75%.
Of 19.
Again, just trying to understand.
Is that fair.
Good morning, sure, yes, yes, okay.
Okay. Okay, great. Other thing for me just I think you touched on it briefly but.
One of the things you guys have always talked about particularly since.
Pandemic is.
As the balance sheet and the differentiated nature of it.
You were able to get out of waivers early.
And now that we have.
UBS financial or lending environment.
Maybe there's some macro uncertainty sprinkled in there.
Do you feel like you're you want to or you are going on the offense are going being more aggressive.
Terms of finding deals or opportunities.
<unk> acquired.
I think you would see something about being more attractive from a competitive side now, but can you just shed some light on that.
The acquisition environment, and everything like that that'd be great.
Yes, certainly.
Prepared remarks, I highlighted the fact that disruptions in the debt markets have.
<unk> temporarily created more attractive buying opportunities for us.
I think as a result, consistent with what we've been saying from the beginning of the year. We anticipate that we will be net acquirers. This year, certainly advantaged by our balance sheet.
And our teams work.
Yes.
Getting for us additional liquidity.
I think we've been actively underwriting deals.
We continuously since the onset of the pandemic.
And competing for deals largely with private equity players, who are now meaningfully disadvantaged by increasing interest rates and lack of availability of that specifically in the <unk> market.
As a result, we are seeing deals.
That were tied up coming back to market, both individual properties and.
Larger portfolios.
The deals that we had interest in participating in processes on.
I think the conversations we're having today are productive around those and other assets.
We're talking to owners of all off market.
Certainly from the beginning we've signaled that we wanted to be opportunistic buying assets that we felt were additive to our portfolio our pricing that we believed would be attractive.
Field for our investors long term and we see ourselves as being in there.
As good a position as we have been over the past several years.
And better in many ways.
Thank you for the time.
Absolutely.
Our next question is from Dori Kesten with Wells Fargo. Please proceed.
Thanks, Good morning.
Kind of a similar question, but can.
Can you give a little bit more detail on the reasoning behind the increase.
The facility is it is it that it's more appropriate.
The company today or is this really a reinsurer about future growth.
And then just a follow up to Justin comment are there relatively large portfolios being marketed for sale today at all of interest to you.
To answer the first part of your question Joy.
Upsizing. The facility was the result of a couple of things.
Number one we wanted to transition some of our secured.
Debt that was maturing this year to unsecured and so a portion of the term loan or the <unk>.
Term loan increase was a result of of that objective.
The revolver upside was.
Strategic both relative to the size of our company the size of our average investment today and our desire to be nimble and be able to act quickly.
Environment and growth strategically if the opportunity exist so.
Kind of two fold from a strategic standpoint, and then in terms of portfolios. There have been actually for some time a number of attractive portfolios marketed several of which we were active in the <unk>.
Bidding process around.
Which are coming back to market.
So it is having some additional flexibility around the makeup of those portfolios.
As we were initially underwriting the portfolios often contained to assets that we felt would be less additive to our portfolio.
That impacted.
The value for us.
Our pricing and competitiveness around the portfolio as the portfolios are coming back to market sellers are increasingly.
Really to consider disposition of a subset of the larger portfolio, which puts us in a position to more effectively.
Aligned the makeup of the portfolio that were underwriting with our existing strategy.
Portfolio, we currently have.
While we believe.
While the most likely scenario on a go forward basis will be continued growth in our portfolio through a series of individual asset transactions. There is greater likelihood now than there was earlier in the year.
Could include small portfolios as well.
Okay.
I guess what.
Would you describe small that's several hundred million dollars.
It would be several hundred million dollars, yes.
Okay. Thank you.
Our next question is from Michael Bellisario with Baird. Please proceed.
Thank you and good morning, everyone.
Good morning.
Just one more follow up there on transactions, maybe can you give us some more detail on what you've seen over the last 90 plus days in terms of pricing changes expectations and pricing changes in cap rates and then maybe kind of how would you characterize that differential between the plenty of the last point single assets versus portfolio.
Thanks.
Yeah.
So certainly with the lack of available financing portfolios are.
Are impacted more significantly from a pricing standpoint.
Does the portfolios haven't traded today I can give you some directional commentary, but until they trade.
It will be difficult to establish exactly where the variance ends up.
I would say.
Brokers are guiding to somewhere around a 10% discount to where values were.
Prior to the disruption in the debt markets.
For a portion of the potential sellers.
That's a nonstarter and they'll pull assets from market.
For other assets.
Our rapid recovery in <unk>.
Operating performance puts them in a position where they can achieve their objectives even at.
Higher potential cap rate, meaning.
That.
For us as a buyer, we could potentially achieve higher yields even while having.
Having the seller achieve.
Our price point that would be attractive for the asset.
We are in ongoing dialogue with a number of potential sellers around individual assets that larger portfolio trades.
As I highlighted in response to the earlier question.
I think theres greater flexibility based on the number of potential buyers in the market.
For us too.
Customized portfolios eliminated some of the assets that would be less additive to our portfolio and really fine tuning our focus around assets.
That add to our geographic diversification.
And.
Our quality level.
That is meaningfully additive to our overall portfolio.
We're excited about where we are now and as I highlighted anticipated that we will be acquisitive as we move through the back half of the year.
Got it.
Make sure I heard that correctly.
For higher quality properties that you might be interested in prices have kind of come back to you and maybe the prices are the same from your perspective, but the cap rates are because.
Six months of fundamentals have been better is that fair.
That's correct got it okay, more or less and again remembering that until the deal is trade.
We're giving directional commentary.
Speaking of directional commentary for Les just on July I know you said, it's up versus 2019, but maybe can you provide some context or any added detail just around the magnitude of that increase particularly relative to June and then just kind of all else equal as you look out to August September October .
And have a normal seasonality for the portfolio for those months in terms of the cadence of absolute Revpar and absolute margin just as we think about modeling on a go forward basis.
Good question. So for July specifically, we mentioned.
<unk> had in our release, we mentioned that July was 70% to 7% from an occupancy perspective.
Which compared to 2019 was down about 6% so relative to where we were in June was a little bit of a step back given the the impact of the fourth of July week, if you.
Look at the weeks following fourth of July we actually were shrinking that gap relative to 2019 through the month and ended that last week at down only 3% from an occupancy perspective relative to 2019.
Which sort of normalizes for the fact that June is or was in 2019, our peak months from a revpar perspective.
So.
And with higher from an occupancy perspective in July of 2019.
Looking at rate, we actually saw rate grow over where we came in in June for July we haven't given specifics around how much but typically July ADR actually take the step back again from June being that June is the peak months historically has been a peak month.
So that rate growth into July will help offset the incremental impact of the fourth of July week on occupancy and help overall revpar levels relative to June .
A positive from a rate perspective, and even outside of the fourth of July week, a positive from an occupied occupancy standpoint relative to 2019 that said Q.
Q2, and Q3 are typically fairly similar from an overall sort.
The EBITDA contribution standpoint, and Revpar contribution standpoint, it depends some on how weekend fall and holiday fall, but in 2019.
June was the peak months.
July takes a slight step back but is again one of our strongest month in the year. It was in 2019 and then August more.
Typically high mirrored.
May which is a little bit shy of where June why.
And then September impacted by Labor day, and BT picks up as leisure historically has pulled back some over the fourth quarter. So first and for fourth quarter is more similar in second and third quarters more similar to each other if that's helpful.
Yes very helpful. Thank you.
Our next question is from Chris styling with Green Street. Please proceed.
Thanks, and good morning.
Just in thinking about future acquisitions again.
Now that a larger swath of your markets are either above or close to pre COVID-19 performance does that at all change where you look to allocate capital going forward.
Pacifically I'm thinking whether the value players kind of putting capital to work and slower to recover markets might make more sense now.
And then maybe a couple of quarters ago.
We have certainly been looking in markets that have been slower to recover.
And our appetite for those markets really depend from.
Our long term view of how the markets.
Will perform.
I think we've highlighted in past calls and continue to believe that to some extent there has been a shift.
Demographic and economic shifts in our country over the past five to 10 years away from higher cost markets.
Into more business friendly.
Markets with lower operating costs, and we've seen that with some of the larger corporate announcements that have happened over the past several years.
Hi.
That will have a long term impact on some markets that have historically been top performers.
That color is our expectation.
The pricing that we would offer for assets in those markets, but but.
As I highlighted in my prepared remarks diversification is an important component of our overarching strategy.
We look to add assets to our portfolio that create exposure to demand generators.
We have lower exposure today and end markets.
At price points that over time, we will.
Enable us to achieve the best yields for our investors I think we have the broadest vision from an acquisition standpoint of what might fit for our portfolio based on the strategic pillar for us and.
Continuing to look at opportunities in a broad variety of different markets.
Okay I appreciate those thoughts.
Shifting gears, just curious has higher gas prices at all impacted the performance of the portfolio.
Whatever the recent experience has been I'm curious how that compares maybe with similar historical periods.
So to date, we have not seen an impact specifically from higher gas prices and looking back historically.
Gas prices alone.
Rarely negatively impacted.
<unk> performance in the ways that you might anticipate they would do.
To the extent gas prices are part of.
Broader inflationary environment.
Makes them the inflationary environment negatively impacts discretionary income for individuals.
Over time that can have impact on the performance of hotels as people make choices around how they allocate the limited funds that they have available to date as we.
Mentioned in our prepared remarks, we continue to see stronger bookings than we did pre pandemic.
Looking out our expectation is that through the back half of the year that translates into performance at or above where.
Where we were.
In 2019, assuming current trends continue.
They currently are.
So.
For the time being.
We feel good about where we are and then that.
To some extent.
The inflationary environment.
Created a backdrop, enabling us to make adjustments.
Two rate, which are more than offset increase in expenses in our portfolio, enabling us to achieve higher margins.
Okay. Thank you that's all for me.
Thanks.
Our next question is from Tyler Detore with Oppenheimer and company. Please proceed.
Hi, Good morning. This is Jonathan on for Tyler. Thanks for taking my questions first one for me.
Business travel discussion.
Speaking can you provide some color on what kind of business travel customers are leading the way which are still lagging.
And your expectation one is lagging.
The group.
Sure I think we continue to see strong performance from small and medium sized accounts, we continue to see those regional.
Accounts.
Reform make been performing sort of throughout and started coming back really in 2021 meaningfully.
From a sector perspective, as we think about both small and large corporate accounts.
No.
Technology companies have been slower although in Q2, we did see them.
New sort of ahead from a mix of where our sectors were coming from move ahead slightly so we're starting to see them improve some.
But you know we've done well with.
Anniversary business health care business manufacturing, we've continued to see.
Strong performance there they certainly outperformed technology, but technology has improved some it continues to probably be relative to pre pandemic levels for our portfolio, which continues to lack them, but we have seen some recent positive trends.
Okay, great. Thank you for the detail and then switching gears to margin you gave some helpful commentary on the cost side in the prepared remarks, but can you provide some maybe high level color on the sustainability of these higher margin levels, given if I understand it correctly the assumption right.
And costs will remain elevated in the back half of the year.
Yes.
Going in just a reminder, that we do think that margin expansion.
Predominantly be driven by our continued ability to drive rate relative to 2019, given the overall inflationary environment in the labor environment that we're in.
We continue to manage costs as effectively as we can.
The labor environment continues to be challenging.
With increases in occupancy and leisure demand in particular, having more occupants per room as we peaked occupancy since the onset of the pandemic in June the incremental.
The incremental labor.
Yes.
What's built in part by either new associates that needed to be trained or contract labor and so our contract labor as a percentage of our total wages has increased over the past quarter, which.
Impacted margins, particularly in June but throughout the quarter.
I think we see that as opportunity long term as the environment stabilizes and we.
Hain associates that have been trained and transition more from contract labor.
Full time associates.
That said there continues to be some wage pressures pressure so theres some theres some puts and takes.
Outside of labor.
Rooms controllable as I mentioned are continuing to perform on a CPR basis below pre pandemic levels, which is.
As a testament to the team and some of the <unk>.
Brands adjustments that were made.
The inflationary environment, we're certainly focused on continuing.
Continuing with that as long as we can balancing again that cost cost have been increasing but we've been.
Managing what we can well we're hopeful that utilities will continue to probably be what you've seen there theyre higher year over year and repairs and maintenance.
In the quarter were up slightly.
Inc.
We're mindful of maintaining our portfolio I think you you don't want it be shortsighted bearing so while particularly in June that was higher for the quarter.
On a long term basis, I think we'll continue to see that slightly elevated too.
Prior levels over the past year or two but.
And maybe slightly elevated into 2019, but but we'll make every effort to keep that wall controls. So I think we're still optimistic as we look at margins for the back half of the year just with.
With the caveat that in the current labor environment, there may be some temporary increases as we.
Train new associates and transition contract labor to full time full time associates and just hoped.
That we're able to offset some of the wage increases that are real and throughout the industry.
Very helpful. Thank you for all the color that's all for me.
Our next question is from Anthony Powell with Barclays. Please proceed.
Hi, Good morning, one more question on July so.
Given what you said about occupancy improving to down 3% versus 19 by the end of July and your comments is it safe to assume that by the.
Ended July Youre, seeing revpar growth versus 90 that was.
Highest the Covid era.
[laughter] yeah.
I think directionally, you're I think Directionally, we continue to see improvement relative to 2019, particularly if youre not looking at the fourth of July week.
Okay got it thanks.
Maybe on the dividend I know, it's a board decision but.
Free trial, where you're paying a very healthy dividend about twice of what you're paying now.
Now your <unk> EBITDA trending above 19 levels I'm just curious.
As you look at your dividend outlook going forward is there anything that would prevent you from getting back to that level of payout.
Taxable income maybe a bit lower than had been applied pre told me I'm just curious how we should think about.
The trajectory of the dividend over the next several quarters.
Certainly taxable income is one consideration as we think about dividend payout when we reinstated the dividend the monthly dividend earlier this year, we established a payout.
First we were confident we could maintain given the range of potential scenarios that we were anticipating.
Two.
The assumption at a level that would allow us to grow it over time.
While we're currently paying out below pre pandemic levels. Its important to note that we're still paying the highest dividend in the industry and certainly as.
As the year has played out.
We performed above the high end of the scenarios, we were considering at the beginning of the year I think we're incredibly encouraged by the performance of our portfolio and anticipate.
Debt.
Assuming current trends continue.
We'd be in a position to increase the dividend.
In the future.
Thank you.
For us and for our shareholders dividend has.
Always represented a meaningful component of total shareholder return.
And as we think about how we allocate capital.
We look at dividend payout.
A meaningful way for us to drive value for our shareholders.
Okay. Thanks, a follow up so it sounds like for you dividends and then buying hotels rent.
Maybe if he higher than buybacks at this point is that fair.
Suddenly, we're not ruling out buybacks given the volatility in the stock market.
This represents an opportunity for us, but I think looking at what we see today.
I think.
Those two represents a higher priorities.
For us at least given the environment, we're looking out at the moment.
Thank you.
Thanks.
As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question comes from Austin, where Schmidt with Keybanc capital markets. Please proceed.
Great. Thanks, and good morning, guys, just I'm just going back to a prior question a bit on acquisitions diversification certainly has been a pillar of your strategy for a long time and when Youre looking at acquisitions I'm. Just curious if I know you mentioned youre looking broadly but are there still any markets your specifics.
Really focused on adding to further that diversification and even just more specific to locations within markets.
Further balance the urban and suburban exposure as the recovery in urban picks up a bit of momentum.
I think because.
Because it takes time to move portfolios.
We have never been a group to chase short term trends and so.
I think.
Given the recent strength of leisure.
<unk> benefited in markets, where we have exposure.
Leisure and given the expectation.
For stronger improvement in urban markets. Our expectation is that we will benefit in those markets as well I think you've seen in our recent acquisitions.
US investing in smaller urban markets, where we anticipate growth will be strong over an extended period of time.
Markets like Portland, Maine.
Greenville has been great examples of the types of markets.
Urban markets that would be most attractive to us, but we continue to look at it.
Potential acquisitions and larger gateway markets.
The potential opportunity to enter those markets.
Price points.
And expect that high density suburban will continue to represent a meaningful component of our.
Overall acquisition activity as well.
As I highlighted in response to the earlier question.
As we look at acquisitions.
Looking to balance the exposure of our portfolio.
Great.
Asymmetric risk profile that I highlighted in my prepared remarks were.
Looking at the portfolio as a whole we've effectively limited the downside risk, which we I think have demonstrated over the past several years, while creating exposure that enables us to outperform during periods of economic prosperity.
I think that requires us to look forward trends and ensure that we're investing ahead of those trends.
Ensure that were achieving the highest returns possible for our shareholders.
Alright, thanks for the thoughts there and then.
You've also historically look to the pre purchase type deals on development I'm just curious while I know construction has certainly slowed but if you've got any opportunities you're evaluating on that front as well.
We have been active in discussions with groups around potential developments and typically at this point in the cycle.
We would be.
Signing up a large number of those deals for closing.
Later points in the recovery.
The same challenges that are negatively impacting the supply numbers for the industry as a whole.
Creating.
Challenges for us as we underwrite development deals for addition to our portfolio.
Really.
As we underwrite today, but we're looking at meaningfully higher construction costs.
We have historically developed.
Through forward commitments are.
Forward commitments for turnkey development.
Rising interest rates impact costs for those developers as well.
And then uncertainty around supply chain and availability of labor all contribute to higher costs for projects, making it more difficult really at this point to underwrite new development deals than it ever has been for us.
In our over two decades.
Experienced within the industry.
Overtime, we continue to anticipate that new development deals will represent roughly a quarter of our total acquisition.
But in the near term, we're much more likely to be active on existing deals, especially in an environment, where there are fewer buyers competing with us for those assets.
Yeah. That's helpful. Thanks for the time.
Absolutely yes.
We have reached the end of our question and answer session I would like to turn the conference back over to Justin for closing comments.
Thank you for joining us today.
Incredibly pleased with the performance of our portfolio over the past quarter and Super optimistic.
Mystic about how things are likely to shape up through the back half of the year.
As always as you travel we encourage you to stay with us at one of our hotels and we look forward to speaking with you in the near term as we.
Get out on the road.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Yeah.
Okay.
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