Q3 2022 Apple Hospitality REIT Inc Earnings Call
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A brief question and answer session will follow the formal presentation.
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It doesn't now my pleasure to introduce your host Kelly Clarke, Vice President Investor Relations. Please.
Please go ahead.
Thank you and good morning, welcome to Apple Hospitality, REIT third quarter 2022 earnings.
Today's call will be based on the earnings release, and Form 10-Q, which we distributed and filed yesterday afternoon.
Before we begin please note that today's call may include forward looking statements as defined by federal Securities laws.
These forward looking statements are based on current views and assumption and as a result are subject to numerous risks uncertainties and the outcome of future events that could cause actual results performance or achievements to materially differ from those expressed projected or implied any such forward looking statements are qualified.
By the risk factors described in our filings with the SEC, including our 2021 annual report on Form 10-K and speak only as of today.
The company undertakes no obligation to publicly update or revise any forward looking statements, except as required by law.
In addition, non-GAAP measures of performance will be discussed during this call reconciliations of those measures to GAAP measures and definitions of certain items referred to in our remarks are included in yesterday's earnings release and other filings with the SEC.
For a copy of the earnings release or additional information about the company. Please visit Apple hospitality REIT dotcom.
This morning, Justin Knight, our Chief Executive Officer, and Liz Perkins, Our Chief Financial Officer will provide an overview of our results for the third quarter 2022. 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.
We have executed against our straightforward strategy since our inception through multiple economic cycles over two decades, while we are mindful of the potential headwinds ahead of US we remain confident in the merits of our investment strategy the strength of our portfolio of hotels.
And our ability to outperform and maximize shareholder value in any macroeconomic environment.
Demand trends for our portfolio remain positive and with the backdrop of historically low supply growth the lodging industry and our portfolio specifically are poised for a counter cyclical recovery.
Top line performance for our portfolio was our strongest since the onset of the pandemic with third quarter Revpar of approximately $120 up 19% as compared to the third quarter of 2021 and up 8% as compared to the third quarter of 2019.
With the shift in consumer spending towards experiences and more robust business travel boosted midweek demand. We continued to see occupancy rebound occupancy for the quarter was strong at 76% up 6% to 2021 and down only 5% to 2019.
Strong occupancy allowed our hotels to mixed manage them push rates ADR for our portfolio was $158 for the quarter up 13% to the third quarter of both 2021 and 2019.
Positive business and leisure demand trends continued post labor day with September Revpar up 12% to 2019.
In October occupancy of approximately 78% at rates that continue to surpass pre pandemic levels.
We are confident there is additional upside for our portfolio as corporate travel improves additional markets fully recover and occupancy across our portfolio continues to strengthen.
We continue to benefit from historically low supply growth at the end of the third quarter approximately 50% of our portfolio did not have any exposure to new hotels under construction within a five mile radius.
High construction costs supply chain disruption labor challenges in difficult debt markets continue to limit new construction starts in most markets.
Given the current environment and the typical time from start of construction to completion, we expect supply growth to be below historical averages for the foreseeable future.
Turning to the bottom line results during the quarter, we achieved adjusted EBITDA R. E F $119 million and modified funds from operations of $103 million or <unk> 45 per share in line with third quarter 2019 results.
With comparable hotels total revenue up 20% relative to the third quarter of 2021 and more than 6% compared to the third quarter of 2019, we achieved comparable hotels adjusted hotel EBITDA of $129 million.
19% to the same period of 2021 and up 4% to the same period of 2019, despite modest margin decline of 40 basis points and 80 basis points compared to the same period in 2021 and 2019, respectively.
Comparable hotels adjusted hotel EBITDA margin for the quarter was 38% actual adjusted hotel EBITDA margin for the third quarter was also 38% down slightly to the same period in 2021, but up 30 basis points to 2019.
We interact frequently with our management companies and use our unique data driven business intelligence platform to drive performance across our portfolio of hotels.
Our asset managers and in house revenue management teams continue to work closely with our management companies to balanced cost controls with efforts to maintain guest satisfaction in order to support our strong value proposition with customers and create an environment for a sustainable rate growth in.
In August we hosted leaders of each of our management companies for a two day revenue and operations summit enrichment create enough, where I'm focused on sharing best practices experiences and strategies for improving operations and addressing current and anticipated challenges at our hotels.
Given our size and scale to ownership of branded rooms focused hotels, we are uniquely positioned to utilize our unparalleled access to operational data and benchmark, both statistical metrics and best practices to identify opportunities across our portfolio and maximize the performance of our assets.
While we are still early in the budget process. We are pleased with early indications from our managers, which project continued growth in 2023.
The strength of our balance sheet further contributes to the long term stability and optionality of our platform.
The recent refinancing of our primary unsecured credit facility bolstered our already strong liquidity position extended maturities improved pricing and increased the size of both our revolving credit facility and term loans.
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.
We are 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 nine months of 2022, we invested approximately $32 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.
Between 5% and 6% of revenues, which we 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.
During the quarter, we sold 55 room independent boutique hotel in Richmond, Virginia for $8 $5 million, resulting.
Resulting in a gain on sale of approximately $1 $8 million.
The sale enabled us to forgo more than $4 million in planned capital expenditures and transact at a meaningful premium to our original investment.
In October we acquired the AC Hotel Louisville downtown for $51 million in the AC Hotel Pittsburgh downtown for $34 million.
Both hotels opened in 2018 and are uniquely positioned within vibrant downtown areas, where they benefit from a variety of business and leisure demand drivers.
The combined purchase price represents a six 5% cap rate on full year 2019, and a similar cap rate on trailing 12 month financials through August after an industry standard 4% <unk> reserve.
Given additional ramp and the individual assets and the robust performance of their respective markets. We anticipate that both will produce stabilized returns in excess of 8%.
Recent numbers for both properties have been strong with September revpar for the Louisville AC up 8% to 2019, and Pittsburgh AC up 36%.
These acquisitions increased our ownership of AC hotels, a brand with strong appeal for both business and leisure travelers and provide exposure to Louisville and increase our presence in Pittsburgh, both of which have seen strong post COVID-19 recovery.
As we have built and refined our portfolio over time, we are intentionally sought to create exposure to markets that benefit from a mix of business and leisure demand.
And to concentrate our ownership in markets that have been and will be beneficiaries of macroeconomic and demographic shifts.
Since the onset of pandemic, we have invested approximately $558 million in 2014 hotels.
Excluding the two Acs acquired subsequent to the end of the third quarter. These recent acquisitions exceeded our original underwriting by more than $9 billion in hotel EBITDA. During the first nine months of the year contributing meaningfully to our year to date outperformance.
On a trailing 12 month basis through September. These 12 hotels produced an 8% return on our investment after capex. Despite COVID-19 impact on first quarter numbers and with meaningful upside remaining as assets continue to ramp and markets improve.
A third of these hotels continue to produce yields in excess of 10%.
Higher interest rates and disruption probably in debt markets continue to impact the transaction market. We expect total transaction volume to be somewhat muted between now and the end of the year, but we continue to underwrite deals and engage with potential sellers.
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 as assets come to market and in conversations with ownership groups about potential off market deals.
With just three three times net debt to EBITDA extended and staggered maturities are relatively young portfolio and over $700 million in total liquidity, we are able to be both patient and flexible as we work to capitalize on dislocations in the market.
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 where we can achieve attractive pricing future.
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.
Recent market volatility has also provided us with the opportunity to purchase our own shares at a meaningful discount to their intrinsic value.
Through October we have purchased just under 200000 shares at a weighted average market purchase price of approximately $14 21 per share for an aggregate purchase price of approximately $2 $7 million.
Shares were purchased under a written trading plan as part of our share repurchase program.
As of October 31, 2022, we had approximately $342 million remaining under this program.
We will continue to be opportunistic buying shares where we see market dislocations create opportunity for value creation.
We have also led our peers and post pandemic dividend payments.
Supported by strong operating fundamentals in August our board of directors approved an increase in our regular monthly cash distribution.
From <unk>.
To seven per common share beginning with our September payment.
We were able to pay dividends of <unk> 17 per share during the third quarter for a total of approximately $39 million.
Subsequent to the quarter end, our board approved an additional increase in our monthly distribution from seven to eight cents per common share beginning with our November distribution.
Based on our closing price on Friday November 4th the annualized distribution of <unk> 96 per common share represents an annual yield of approximately five 9%.
Together with our board, we assess our payout monthly in the context of the <unk>.
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.
While we are cognizant of potential headwinds as the fed takes action to mitigate inflationary pressures, 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 exceeding pre pandemic levels additional upside remaining and business travel new supply at historically low levels recent acquisitions, adding to the strength of our existing portfolio and a strong balance sheet with significant liquidity, we are incredibly optimistic about the future of our business.
It is now my pleasure to turn the call over to Liz for additional detail on our balance sheet operations and financial performance during the quarter.
Thank you Justin and good morning topline performance for the third quarter continued to be strong with total portfolio revenues up approximately 23% to prior year and 3% to the third quarter 2019.
Revpar growth for the quarter was driven primarily by ADR, which improved 13% to the same period in both 2021 and 2019.
Occupancy was up meaningfully to 2021, but came in approximately 5% lower than the third quarter of 2019.
While the gap to 2019 occupancy widen to approximately 8% in August September occupancy was down only 2% to 2019.
Preliminary results for October show continued strength and demand with occupancy increasing to 78% and revpar growth relative to 2019 trending in line with results for the third quarter bolstered by another month of double digit ADR growth as compared to October of 2019.
We are now consistently producing topline results above pre pandemic levels with meaningful upside remaining in our portfolio.
While we expect occupancy in November and December to be lower than October consistent with historical seasonality for our portfolio looking data through the end of the year remains strong and we anticipate we will continue to produce Revpar ahead of 2019 through the remainder of the year.
Recent performance reflects both continued strength in leisure and a meaningful recovery in business demand July August and September weekend, Occupancies were 80, 279, and 81% respectively.
Weekday occupancy remains stable around 74% during the quarter down less than 9% on average to 2019.
As we entered the fourth quarter October weekday occupancy, notably improved over September surpassing weekday occupancy in July and further shrinking the gap to 2019.
Weekday ADR for the quarter was $153 up nearly 6% to 2019 rate level.
As we look at demand segments and business transient trends travel patterns are beginning to normalize with Tuesday, and Wednesday occupancy regularly above 80% during the quarter.
61% of our portfolio produced revpar above pre pandemic levels during the quarter with improvement in demand impacting nearly every market.
70 of our hotels had revpar improvement of 10% or more relative to the same period in 2019.
Top performers included hotels from a variety of markets, including Portland, Maine, Downtown Atlanta, Huntsville, Phoenix, Oceanside, Greenville acreage Syracuse in San Diego and included a mix of both urban and suburban locations.
While results improved across the portfolio, we continue to see a slower recovery in a number of markets, including our assets in Northern Virginia, Philadelphia, Houston, Chicago and St. Paul These.
These high quality hotels are well located within their respective markets and we expect their performance to improve over time, providing additional upside for our portfolio.
Our hotels in markets impacted by Hurricane in did not sustain any material damage and remained open during and after the storm.
In terms of room night channel mix brand Dot com bookings increased to over 39% during the quarter Ta bookings remained stable at 13%.
Pretty direct bookings declined to 25%, but remained elevated to third 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 16% for the quarter.
100 basis point increase from the second quarter.
Eliminate revenue data shows further improvement in October as well, indicating a continuation in the trend of return of business travel.
Looking at third quarter same store segmentation bar continues to be elevated to 2019 levels and in line with the second quarter at 34% other.
Other discounts remained at 28% in the third quarter.
Negotiate it also remained stable at 18% during the quarter and group was 14% still slightly higher than the third quarter of 2019.
Turning to expenses total payroll per occupied room for our same store hotels was around $36 for the quarter slightly higher than the second quarter and up 11% to the third quarter of 2019.
Tight labor market continued to create operational challenges and third quarter results were impacted by higher wages for full and part time employees training costs and higher utilization of contract labor.
We anticipate wages will remain elevated relative to pre pandemic levels. We believe a portion of the overall increase in labor cost is temporary.
And that year over year growth rates will come down as in house staffing stabilized it and we are able to reduce training costs and reliance on contract labor.
As we have always done we will continue to balance productivity initiatives with our efforts to uphold a positive work environment conducive to attracting and retaining top talent. These efforts better position us to support the high levels of service and cleanliness necessary to sustain rate growth and maximize the long term profitability of our asset.
Our asset management and onsite teams were able to keep increases in same store rooms expenses, excluding payroll on a per occupied room basis to 3% relative to 2019, despite significant inflationary pressure.
Strong rate growth and effective cost control. Despite the challenging labor an inflationary environment enabled us to achieve third quarter comparable adjusted hotel EBITDA of approximately $129 million and comparable adjusted hotel EBITDA margin of approximately 38% down 80 basis points.
For the third quarter of 2019.
Actual adjusted Hotel EBITDA margin for the third quarter was also 38%, but up 30 basis points to 2019, highlighting the positive impact of our transactional activity.
As we have stated on past calls, we believe that long term margin expansion for the industry and for our portfolio will be largely conditioned on our ability to grow rate. While we expect a portion of our recent expense growth to be temporary driven by elevated training costs and short term increases in our use of contract labor.
We anticipate continued near term pressure on wages and other expenses offset in part by alterations to our operating model, which should create opportunity for increased efficiency as we stabilized property level operations.
M. S. F O was approximately $103 million or <unk> 45 per share for the quarter up 36% compared to the third quarter of 2021 and in line with the third quarter 2019.
Looking at our balance sheet as of September 30th 2022, we had $1 $3 billion and total outstanding debt of approximately three three times, our trailing 12 months EBITDA with a weighted average interest rate of three 7%.
Total outstanding debt, excluding unamortized debt issuance cost and fair value adjustment is comprised of approximately $332 million in property level debt secured by 19 hotels and approximately $1 billion outstanding on our unsecured credit facilities.
The company's weighted average debt maturities are almost five years at the end of the quarter, we had cash on hand of approximately $26 million availability under our revolving credit facility of approximately $650 million and term loan availability of $100 million.
87% of our total debt outstanding was fixed or hedged valuable swap agreements and low overall leverage levels mitigate the impact of the current rising interest rate environment.
As Jason highlighted in July , we amended and restated our existing $850 million credit facility, increasing the borrowing capacity to approximately $1.2 billion extending maturity dates and achieving improved pricing across the facility.
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 credit facility may be increased from approximately $1.2 billion to $1 $5 billion.
At closing, we borrowed $475 million under the term loan and used the proceeds to repay the 425 million outstanding under the term loans of the previous credit facility and $50 million outstanding under the revolving credit facility.
On August 1st 2022, we repaid in full and additional three secured mortgage loans for a total of approximately $32 million.
Through the refinance of our primary credit facility. The additional seven year senior notes facility closed in June and the recent repayment of nine secured mortgages, we achieved our key balance sheet objectives of 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.
And we're extremely grateful for our lenders and their continued support.
The strength of our balance sheet combined with robust cash flow from operations has uniquely positioned us to allocate capital in ways that we believe will drive long term value for our shareholders.
Over the past months, we have acquired assets purchased shares of our own stock and increased our monthly dividend from five cents per share to seven cents during the third quarter and then to eight cents and October effective with the November payment.
We will continue to allocate capital in ways that we believe will optimize our performance and maximize total returns for our shareholders over time.
In Yesterdays press release, we provided 2022 guidance regarding certain corporate expenses, including G&A expenses interest expense and capital expenditures, we expect total G&A expense, including all corporate level expenses, and both cash and share based compensation to be $40 million at the midpoint.
The range there.
This estimate is based on operational and shareholder return performance through September 30th 2022.
And full year capital expenditures are anticipated to be between 55 and $65 million all projects have been approved and we expect to be at the high end of our range assuming limited delay.
As we consider the outlook for the final months of 2022, we remain confident in the broader industry recovery and the performance of our company specifically, we saw strong performance from our portfolio in the third quarter preliminary results for October Revpar show continued strength relative to 2019 and average daily booking trends.
As we build back midweek occupancy, we are gaining pricing power, which should enable us to further grow revpar for our portfolio.
Our balance sheet is strong and our recent restructuring provides extended maturities and additional liquidity, which we intend to use opportunistically to pursue accretive opportunities.
Thank you.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Austin Walsh, but from Keybanc.
Hey, good morning, everybody lose with respect to expenses I guess, how much expense do you think you can take out of.
Wages and benefits as you reduce contract labor and look to hire more permanent staff and sort of limit.
You know as we look at our results and dig in with our management companies onsite as to where we have opportunity you know I think the team is doing a really good job balancing.
Both believe that we will be able to reduce that over time, but it will take time how quickly.
And then in house labor.
We did see broadly speaking wage rates moderate.
But also some improvement.
How long it will take to.
You know, we'll see we're entering slower months typically from a seasonality perspective, and you know we're gonna be really mindful of demand trends over the next coming next few months, we want to make sure that again, we retain top talent and we keep people staffed.
Staffing.
It's conducive to staff that cares about the hotel cares about our associates and really can drive a premium guest experience chip to maximize rate long term. So we're optimistic there is still opportunity to 2019 margins. So long as we can continue to grow right on the top line and I do think that some of the.
We are probably.
Over double where we have been historically from a contract labor perspective, as a percentage of wages.
So.
I think our expectations are that we can continue to see improvement in midweek occupancy costs, while maintaining a strong leisure business on weekends I think certainly.
Many of our peers, who have spoken to the fact that.
Shoulder nights, which.
Over half of our markets now are performing or our properties are performing above 2019 levels.
We still have a number of markets that were slower to begin the recovery process, where we continue to see meaningful pick up in overall occupancy both weekend and midweek occupancy.
Great. Thank you.
Yeah.
Austin is.
You talked about further upside in the portfolio in terms of occupancy as you know markets different have been a different cadences of recovery, but I think obviously, everyone knows that it's really a corporate issue that's going to it's going to probably get you over the hump. It would seem like you would need the least amount of incremental growth in.
In that travel segment to get back to.
The brands have spoken to.
Positive.
Rate growth conversations as well as our volume comp and room night contribution conversations with some of the corporate negotiated accounts with some industries.
<unk> three mm everyone understands the inflationary environment. We're in so I think from a rate perspective, we're in good shape from from those the local negotiated in corporate negotiated standpoint from the occupancy side of things you know we have started to see corporate negotiated accounts grow volume.
You know largely by by market and sector, but we have seen technology and financial services start to come back more recently still not at pre COVID-19 levels, but we've started to see their volumes increase.
Of industries and demand generators broadly and so you know as you know our individual hotel teams approach corporate negotiations there balancing high transient embar volume with.
With the benefit of you know.
But I think as Justin mentioned in his prepared comments, we so far from our management companies as part of the initial budgeting process. We believe we're going to see future growth in 2023, and when you think about.
You know our our expectation that we will continue to exceed revpar levels relative to 2019 through the end of the year if things continue the way our booking data shows it to be today, you know that.
That bodes well I think incremental corporate negotiated.
Coverage for our portfolio will only help further accelerate our growth, but I think we've shown with our performance relative to 2019 to date.
You know steadily as some of the corporate negotiated comes back but also filling in with with other accounts and you know incremental bar business as well.
Okay I appreciate all that insight is Justin.
One I have is for you.
You've been pretty vocal, especially for you guys of the opportunities that that you feel like are going to come.
You think about that market.
Elevated maturities over the next 24 months.
They're mandating that they do them in short order and but can you just maybe talk about the the landscape or the transaction market.
It looked like the two assets you acquired or you know I think fairly lower cap rates than I would've thought just given the rising interest rates maybe those were.
Put under contract earlier, but maybe just talk about generally how you see your opportunity set you know again next call. It 12 to 18 months.
Just given the landscape I laid out.
I'll start with the second question first related to the cap rates for the new acquisitions.
Important to note. There is that we were highlighting trailing in 2019 cap rates. These are hotels that opened midway through 2018, So we're ramping in 19 and our expectations based on incremental ramp for those assets.
But which puts the performance of those hotels overtime in line.
With where.
Of assets.
And feel that a number of those conversations.
But I think to the point you were making more broadly speaking our expectation going into 2023 is that we will see a meaningful uptick.
In industry transaction volume.
With sellers coming to market.
As a result of refinancings and increased pressure from our brands around capital improvements.
I think acquiring assets in an environment, where sellers are motivated to sell assets is always a better place for us to be.
And we have been I think very disciplined and targeted in our acquisitions throughout the pandemic and maintained our balance sheet capacity to become more aggressive at a point in time.
When.
Deals work better priced and.
And we could acquire assets in scale in a way that would further drive that performance.
<unk> of our shares over time.
Okay. Thank you guys nice quarter congrats on the beat.
Thank you Sam.
Next question comes from the line of Florida's Van <unk> from Compass point. Please go ahead.
Okay.
Thanks for thanks for taking my question guys.
Your business is not.
Known for its room, driven it's not really known for food and beverage revenues, but I noticed your food and beverage revenues almost doubled for the quarter. Maybe if you can just talk a little bit about some of the ancillary revenue opportunities potentially that you see ahead.
Absolutely so for us food and beverage for our portfolio.
And we did see a pick up at that hotel.
During business.
A very efficient food and beverage offering that's enabled us to grow revenues, even at our select service hotels related to food and beverage and we anticipate continued opportunity both at the risk of a map and across our portfolio more broadly in that area.
We've seen continued improvement there and that has helped bolster other revenues and then outside of that.
We have worked with the brands to modify other onsite offerings to.
Our primary business and continuing to move room rates in ways that drive overall revenues for our portfolio.
Thanks, and maybe a question for for Liz.
You did give obviously some guidance in terms of G&A and interest expense for the fourth quarter.
I hope.
I think the market sort of expect you to.
Zoom earnings guidance.
For next year when you report your fourth quarter, maybe if you can comment on that and maybe also talk about the pricing and I loved the refinancing your balance sheet is in great shape.
The grid appears the same but there is another 10 basis points that the bank sort of snuck in there.
Maybe you know maybe the extra just.
Spreads that they get or whatever but maybe you can comment a little bit about on the pricing of that and.
What you see.
Happening there over the next 12 months.
Thanks, Floris I'll start with the guidance question I think.
We have certainly a desire to be in a position to feel comfortable.
We've historically given guidance.
Operations do seem to.
To be more stable.
Strong so I think as we approach 2023.
We would certainly have the intent.
Kipp you know as as we move forward we.
Certainly appreciate that the market.
I'd like some directional guidance. So we'll we'll cross that bridge as we enter 2023.
The pricing of that yes as you.
We moved from LIBOR to so far as part of the Amendment I think an industry wide approach to making.
Making that transition was that 10 basis points. So for adjustment overtime you know as.
That you know me.
<unk> away from LIBOR and it's as you know as is broadly relying on so far I think we'll see some of those.
Dissipate and they'll get priced into the grid, but today I think that that was sort of a blanket approach to adjusting from LIBOR to so far.
As far as the cost of debt.
Over the next 12 months, but you know I think the fed has indicated and you know that they.
We'll change them, how theyre looking at their December .
Announcement, maybe a more moderate increase to rates I think right now I think consensus is that they may take them up 50 basis points in December and then should we be in a position to be able to start to moderate rates over time that that that's what at least.
Signaled today, but we'll see I think you know the.
The fed also believed that.
The actions that they've taken to date would have had more of an impact I think you know, it's a very interesting environment and one that's new to all of us but at this point I think we may continue to see a little bit of an increase before we see rates pull back.
Thank you.
Our next question comes from the line of Brian My Heart from <unk> Securities. Please go ahead.
Good morning, just two questions for me.
If memory serves me those are a little bit maybe more upscale in the some of the select serve you know that you own can you talk about if there's kind of a concerted effort to move a little bit more upscale or how do you think about the AC hotels going forward and should we expect more of those in the pipeline.
Sure. So E C fits into marriott's lifestyle upscale select service.
Category.
I think.
Because the brand is new.
Because of certain design elements, we've found the brand plays incredibly well, especially in urban settings, with both leisure and business guests.
And at those particular hotels.
I think.
You've seen it we've talked about in the past our experience in Portland with RAC there.
But having followed the brand now for many years, we believe that our experience in Portland isn't unique in that these hotels have an ability to generate.
Meaningful rate premiums within their markets, while maintaining an incredibly efficient operating model.
Operating model that fits squarely within the select service space with limited food and beverage.
I think as is the case with many of the newer lifestyle brands.
The food and beverage concepts focused more heavily on the beverage component, which tends to be higher margin.
But again staffing models for our AC hotels are comparable to our courtyards within the same portfolio.
And so with higher rate, we're able to generate very strong and attractive margins.
The particular design elements.
Further that as I highlighted earlier.
And I think in response to the second part of your question.
Certainly based on our experience with the AC hotels that we own today.
We would be very interested in continuing to expand our ownership in that brand.
And then my second question relates to this.
For them that you talked about that you hosted with some of your managers.
How are you thinking about pushing rate further I mean, we've seen clearly.
Personally and professionally and people start to push back on rate and not take trips. Once you layer on crazy are fair prices rental car prices at a ridiculous hotel rooms, they keep moving up in F. N. B I mean, how do you think about kind of walking that fine line between trying to get what you think he can versus turning off the consumers.
Especially if we head into a weaker economy.
I think that's a fair question for the industry broadly speaking looking at our portfolio specifically, our hotels tend to have a fairly even mix of business and leisure demand.
And.
Think pricing for leisure.
All those market trends and.
In the markets, where we own assets, we have not to date seen meaningful pushback.
Hum.
On leisure pricing.
Round weekend business remembering that we never got to a point the majority of our hotels, where we're doubling and tripling historical rates.
But when we think about mid week business, which tends to be more heavily.
You know.
This client or negotiated accounts.
We are heavily focused on the mix of business in our hotels and the conversations that we're having are around.
How much base business, we should take at our hotels and how much we should allowed to float with the market in order to maximize the total rate opportunity.
Base business tends to be.
Consistent and often has longer length of stay.
But also tends to come at a lower price point and so most of the conversations.
With our managers were not.
Around specific pricing strategies, but around managing the mix of business in our hotels in order to maximize overall profitability and in part.
We're not only focused on driving the top line, we're focused on driving.
Total profitability at our hotels, so a significant portion of the conversation was also around costs associated with various types of business and ensuring that we were pricing.
Different accounts appropriate to the costs relative to those accounts.
Okay. Thank you.
Thank you.
Okay.
Thank you. Our next question comes from the line of Denny also from Bank of America. Please go ahead.
Hey, good morning, everybody.
My question is just as we.
Wrap up this year and head into next year can you give us a sense for where you're you're expecting cost inflation to run in the portfolio.
Where maybe some of the pain points can be and what can act as offsets.
And then I have a follow up question.
I think in terms of.
Expecting costs to run as Liz highlighted I think in our prepared remarks and response to an earlier question.
To date.
Because it's one of our larger expense line items.
A huge amount of focus internally, it's been around labor.
Cost increases that we had seen there our expectation on a go forward basis is that that growth rate.
Slows and that potentially through increased productivity and.
And lower training and recruiting costs.
We see those costs come in line.
Outside of that.
Yeah.
We're watching utility expenses.
Our primary focus.
Relative to labor, it's a smaller line item, but the potential for growth in utility cost is as meaningful I think in today's environment.
And then taxes.
Another line item that we're watching closely but but in terms of.
Runaway expenses.
We feel largely we're at a point in time, where operations are normalizing and stabilizing and were in a better position based.
On the staff and leadership that we currently have on site to begin to look for ways to mitigate expenses and improved productivity.
Which should.
Bind with continued growth in topline performance put us in a position to continue to generate strong margins from our properties.
Got it and then and just and we've talked about hotel margins being 100 to 200 basis points better than pre pandemic in the past.
How does this inflationary environment that we're in today and kind of make you feel about that target as we look ahead.
I think there've been a number of our peers that have thrown out various targets for long term margin improvement.
I think from the beginning we've been clear that while we will continue to focus on managing expenses as we always have.
Ultimately margin expansion.
Is at least as heavily dependent on our ability to drive rate at our hotels.
And as Liz mentioned in her earlier remarks, we're intently focused on ensuring that we maintain staffing levels such that we can provide a level of service that drives the value proposition such that we're able to maintain and continue to increase rate at our hotels I think.
Liz commented earlier.
I completely agree.
There continues to exist and opportunity for us to move margins higher.
For our portfolio, but it will be through a combination of cost controls increased productivity and intense focus on driving top line results.
Got it thank you very much.
Thank you.
Thank you.
Our next question comes from the line of China about Tory from Oppenheimer. Please go ahead.
Hi, Good morning. This is Jonathan on for Tyler, Thanks for taking our questions and all the commentary so far just one from me today.
Multi part question on the common dividend.
The board decision, but any additional details you can share in terms of what factors are contributing to the decision to raise the monthly dividend twice over the past few months.
An interesting sign of their confidence in the sustainability of the recovery and I'm also interested in your thoughts on the perspective or a perspective on potential payout ratios going forward.
So I think to answer your first question first the increases in dividend.
Ours are a.
Direct result of continued strength in the operating performance of our hotels and an expectation.
The current trends would continue into the future.
I think.
To your second question, our payout ratios are lower.
And then they were prior to the pandemic.
And we have.
In addition to being in a position to increase dividends.
<unk> been also able.
To preserve capital to reinvest in our business.
And to to fund share repurchases and partially fund acquisitions.
And our capital improvement.
I think we.
Performed relatively well in.
In the worst.
Of the pandemic and as a result.
Lower operating losses to carry forward into this year.
And our primary focus to date has been.
Our payout ratio that puts us in a position to maintain REIT status and minimize our tax obligations.
I think you've seen our performance year to date.
And Liz commented on our expectations.
Did that performance would continue into the.
Fourth quarter.
Early indications from our management companies are that their expectations are for continued growth in the coming year.
And with all of that as a backdrop, we feel very comfortable with our current payout.
Very helpful. Thank you for all the color that's all for me.
Thank you.
Thank you. Our next question comes from the line of Chris Darling.
From Green Street. Please go ahead.
Thanks, Good morning.
Going back to labor environment.
Good morning, guys going back to the labor environment is there any appreciable difference in either the availability or cost of labor between say larger smaller markets urban suburban and any other kind of similar trends that maybe you can tease out of the portfolio.
Hum.
I wish it was that simple I think certainly we.
We have seen more pressure on wages in markets that have seen the most robust growth.
And.
That includes a mix of both urban and suburban markets.
I think we felt the pressure first in markets that were.
The earliest in the recovery and that pressure has spread as incremental markets have become a recovery, but it tends to be a function of availability of labor and individual markets.
And the pressure is most acute in markets that have seen meaningful growth.
Over the past several years.
Okay, Yeah, I understand that it's.
Not not so simple, but it's helpful in any case.
And then maybe switching gears quickly last one for me you gave some helpful thoughts around E. C brands you know in response to an earlier question, but just curious are there any other brands out there that you might like to gain exposure to over time.
We have been.
Active in dialogue with Marriott and Hilton and Hyatt about new brands.
They are proposing and some of the brands that they've launched over the past several years and I would say.
Within those families of brands.
We continue to be interested.
In the legacy branded assets to.
To include brands like Hampton Inn.
Residence Inn that had been around for decades.
And in some of the newer brands.
I think our experience with AC has been incredibly positive.
And we've seen strong performance from another a number of other brands within those brand families.
At this point, while we have explored opportunities outside of those three brand families.
We continue to feel that there's adequate opportunity for us to continue to expand our ownership.
And.
Our relationships with those three brands within the select service space. They continue to have the strongest brand reputation.
And that combined with loyalty programs that drive.
Our top line performance for the assets.
We feel is the best.
The best recipe for success in our space.
Alright fair enough. Thanks for the time.
Thank you.
Okay.
Thank you.
Next question comes from the line of Anthony Powell from Barclays. Please go ahead.
Hi, good morning.
Just a follow up to that to that comment.
We did sell the independent hotel enrichment, if I remember correctly, you took that independents and maybe learn something about independent hotels maybe.
Talk about some conclusions you drew from the experience.
Yes, we did we did sell that hotel and looking at the operating environment that we're in now.
We felt.
Our time and attention was better spent on focusing on our core business, but to the point you made earlier.
We did acquire that hotel with a hope.
That we would or with a plan and intention of learning.
About operations outside of the brand families, where we have a tremendous amount of experience.
I think high level and would be happy to engage in a more extensive conversation offline at some point, but high level.
What we have found is that.
Cost of customer acquisition berries.
And.
Did the non branded hotels have significantly higher reliance on intermediate business through Otas, which has a price associated with it.
But I think beyond that what we discovered is that.
In addition to incremental spend on sales and marketing.
There is a need to maintain.
And to position the hotels from a capital investment standpoint.
That's greater ban.
We would on average spend or need to spend and our branded select service hotels to maintain the same level of quality and and to.
To drive the same level of demand.
Thank you.
It's an opportunity we may come back to at some point in the future.
But based on the current operating environment.
And I think specifically what we're looking at in terms of near term supply and the potential impact of supply on the hotels that we own.
We see greater opportunity to drive returns for our investors by focusing on our core business and.
And ensuring that we're yielding the best possible results from our existing portfolio.
Got it and maybe one more I guess in your talks with your development partners. What are they looking for in order for them to get a bit more confident in starting and identifying new projects I know that's been a source of.
Deals for you, but also gas supply broadly so I'm curious what they're thinking about what theyre, saying is you discussed with them.
I think certainty is.
Is the primary impediment to new construction today and it's in part.
Around future performance of individual markets, but less that and more certainty around the actual final cost of construction certainly.
Interest rates and availability of debt are impacting new supply but.
But as we've talked to development partners that we've worked with in the past the.
The bigger deterrents or availability of labor supply chain disruption.
And really uncertainty around total cost.
With an unwillingness.
Most subs in market to sign fixed price contracts.
That really is keeping people from building.
A faster pace than they are today.
Over time, I think to the extent, we're able to stabilize.
The environment that we're operating in.
We could see.
An increase in construction starts and certainly.
There is no lack of interest and I think the brands have highlighted that they continued to sign a significant number of new deals.
But in terms of those deals actually get in the ground. The biggest impediment today is a lack of certainty around construction costs driven by the factors that I highlighted.
Got it maybe one more just in terms of brands, requiring new cost be reintroduced into the model.
More kind of housekeeping your breakfast.
Done with that or is there any thing else needs to be added that could be a headwind for cost next year.
Two based on the conversations that we've had to date with the brands. Our expectation is that the current operating model, we will be the operating model going forward and it is.
A more efficient operating model.
In terms of services amenities than the model that we came into the pandemic with so.
Thank.
To the point made earlier related to labor our expectation is that as we stabilize.
The employee base at our hotels, there is opportunity to gain incremental efficiency from an operation standpoint based on current standards.
Alright, thank you.
Thank you.
Thank you, ladies and gentlemen, if you wish to ask a question. Please press star one.
Our next question comes from the line of Michael Bellisario from Robert W. Baird. Please go ahead.
Thanks, Good morning, everyone.
Good morning.
Thanks for sneaking me in.
Actually a couple of questions just first on the <unk>.
Revpar in the comments around October .
That's all referring to actual growth versus the actual portfolio at the time three years ago right not same store comparable I just want to clarify that.
Yes.
Got it.
Assuming that trend holds.
The last couple of quarters.
Comparable same store has been several hundred basis points lower than that actual just wanted to confirm that.
Yeah.
Just back to your comment just on the maybe get having less base business. When you look out to 2023 conceptually does that make.
Revenues and profits, maybe more volatile or harder to predict next year. If you are taking less space business.
I think theoretically there would be a potential for that but when you look practically at how our hotels tend to operate.
We only reduce base business.
And if.
Environment, where we anticipate and have strong confidence in our ability to replace that.
With various forms of transient and I think more often we will be replacing the existing base business with multiple.
Accounts.
At higher price points. So I think there is not our view.
We would radically change the way we're doing business.
At individual properties, but an assessment of the accounts that we currently have in house.
And our need for lower rated accounts moving into the future.
Yes.
Okay understood and then you mentioned.
Seller motivations.
And one of the earlier questions can you just talk about the seller motivation for D. C deals that you just did and then just broadly the acquisition process and timeline for those deals and how they came about.
So that the two AC deals were motivated by a desire for liquidity by the partners and the deals they were marketed as part of a broader package. There was broken up ultimately and we selected from the broader package the assets that were the best fit for us in our portfolio.
Oh.
The deals were brokered.
But we were able to secure the assets below the highest bid.
With the primary determining factor being.
Surety around closing.
Hi, Mike.
The higher bidders did not have financing contingencies in our offer and in today's environment.
That's proven to be a competitive advantage for us.
I think looking more broadly at conversations we're having we continue to explore opportunities.
Through broker transactions, but are also having conversations.
With individuals and groups.
Outside of the brokerage environment around potential transactions I think.
I think most will decide to hold and go slow between now and the end of the year, but.
But as I highlighted in my earlier remarks, our expectation is that we'll see a meaningful pickup in transaction volume moving into next year I think importantly, we feel incredibly good about the transactions that we've completed to date.
We still have a tremendous amount of capacity.
And we have preserved that capacity for an environment, where we can.
Acquire attractively priced assets in scale.
Okay.
Got it that's helpful. There and then just one more on those two deals could you maybe talk about the supply outlook in both Pittsburgh and Louisville, and what's on the horizon. There in terms of new hotels potentially opening up.
Mhm, yes relative to other markets that we've explored or even where we own assets. The supply picture is favorable in both markets and certainly.
I highlighted in my prepared remarks recent performance of the assets has been incredibly strong with them.
The ACM Pittsburgh up 36% to 2019 numbers in September in the Louisville AC up 8%.
Our expectation is that in addition.
Two individual asset level ramp.
The remains in these assets that opened.
Shortly before the beginning of the pandemic.
Those markets will continue to improve over time, both have a mix of demand generators.
Uh huh.
And.
On both the business and leisure side.
And we feel really good about the potential overtime.
Thank you that's all for me.
Thanks, Mike.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session.
And now I would like to turn the conference over to Mr. Justin Knight, President and CEO for closing comments.
We appreciate you joining us today, recognizing it's election day, we'd encourage you to get out then vote.
And as always to the extent you're traveling.
We hope you'll take an opportunity to stay with us at one of our hotels have a great day, we look forward to talking to you soon.
Thank you <expletive>.
Conference of Apple Hospitality REIT has now concluded. Thank you for your participation you may now disconnect your lines.
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