Q4 2022 Apple Hospitality REIT Inc Earnings Call
Greetings and welcome to the Apple hospitality, REIT fourth quarter and full year 2022 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation, if anyone should require off.
Greater assistance during the conference. Please press Star zero on your telephone keypad.
As a reminder, this conference is being recorded it is that my pleasure to introduce your host Kelly Clarke. Thank you you may begin.
Thank you and good morning, welcome to Apple hospitality, REIT fourth quarter and full year 2022 earnings call today's call will be based on the earnings release and Form 10-K, 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 assumptions 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 in our 2022 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 fourth quarter and full year 2022, and an operational outlook for 2023.
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're pleased to report another year of strong operating performance and continued growth for Apple hospitality REIT <unk>.
Additionally, during 2022, we took steps to ensure that we are well positioned for the year ahead by investing in staff and training renovating and reinvesting in our hotels reinstate in monthly distributions further bolstering our balance sheet and optimizing our portfolio through the strategic acquisition of two high quality hotels.
And the disposition of one non core asset.
2022 revpar for our portfolio was $108 or 32% improvement over 2021, and a 3% improvement over 2019 Revpar.
Revpar growth was driven by meaningful improvement in rate.
<unk> for the year was $149 an improvement of 21% as compared to 'twenty, 'twenty, one and 9% as compared to 2019.
Occupancy was 73% up approximately 10% compared to try try one and down 6% compared to full year 2019.
And total portfolio of revenue for the year was up approximately 33% to 2021 down only 2% to 2019.
Strong rate growth and effective cost controls enabled us to achieve actual adjusted hotel EBITDA margin for the year of 37% up 250 basis points to 2021, and 10 basis points to 2019.
M S F O was approximately $351 million.
Or $1.53 per share up 67% compared to 20 try one and down 4% compared to try 19.
Emerging from the pandemic related business disruption, we have rebuilt portfolio occupancy and have worked with our management companies to make strategic investments in our hotel level talent to cultivate and retain associates, despite a challenging labor environment by providing necessary training and focusing on culture and associate engagement.
These important investments in developing on property teams position us to maintain the quality of our hotels and provide the service levels necessary to support continued growth in market share in particular through higher rates, which we believe will be key to our long term profitability.
As our managers stabilized staffing at our hotels and invest and onsite training, we expect to realize efficiencies, which should act as a partial offset to higher wages. Additionally.
Additionally, we see benefit to both service levels and profitability as we work to reduce dependence on contract labor, which continues to be elevated to pre pandemic levels.
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 'twenty 2020 one.
During 2022, we invested approximately $62 million in capital expenditures with significant renovations at 24 of our hotels are.
Our in house Capex team has done a tremendous job managing inflationary pressures in supply chain challenges to deliver outstanding and cost effective results that strengthen our competitive position within our respective markets.
We anticipate spending $70 million to $80 million, starting 2023 which includes comprehensive renovation projects at 20 to 25 of our hotels.
Our 2022 and anticipated 2023 capex spend more closely approximate our historical investment of between five and 6% of revenues.
Which we believe is appropriate for our player and a meaningful differentiator for us contributing 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.
To ensure minimal disruption to property operations and maximum impact for dollar spent.
Supported by our strong operating performance, we have led the industry in postpaid that make dividend payments reinstating regular monthly cash distributions beginning with the March payment and increase in our monthly distribution in August and again in October .
In December our board approved a special distribution of <unk> per share. In addition to our regular monthly distributions of eight cents per share both of which were paid in January of this year.
Based on our closing price on Friday February 17th our annualized distribution of <unk> 96 per share represents an annual yield of approximately five 6%.
Strong operating fundamentals also positioned us to further bolster our balance sheet.
During the year, we produced approximately $200 million in excess of distributions paid to shareholders, which we were able to utilize to fund capital Reinvestments and new acquisitions.
In July we amended and restated our existing $850 million credit facility, increasing the borrowing capacity extending maturities and achieving improved pricing, our low leverage and attractively structured debt were key contributors to our outperformance over the past years face now with greater macroeconomic uncertainty.
All until the capital markets, our significant liquidity position staggered maturity dates and conservative secured debt exposure provides us with the flexibility to be both thoughtful and opportunistic to drive incremental value for our shareholders.
In 2022 we sold one hotel a 55 room independent boutique hotel in Richmond, Virginia for $8 $5 million, resulting in a gain on sale of approximately $1.8 million.
During the year. We also purchased two hotels, the AC hotel Louisville downtown and the AC Hotel Pittsburgh downtown for a combined total of $85 million, both of which were acquired during the fourth quarter.
As we have built and refined our portfolio over time.
We have intentionally sought to create exposure to markets that benefit from 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 the pandemic, we have invested approximately $558 million in 14 hotels piece.
These recent acquisitions have exceeded our original underwriting by more than $12 million in hotel EBITDA during the full year contributing meaningfully to our operational outperformance. The 12 hotels owned for all of 2000 and try to produce the total unlevered return for our investment after capex of over 8% despite the <unk>.
Packed the omicron variant on first quarter numbers and with meaningful upside remaining as assets continue to wrap it markets improve.
A third of these hotels produced unlevered yields in excess of 10%.
Looking forward to 2023, we have reason to be optimistic.
January topline numbers for our portfolio were strong helped by easy 2022 comps and continued strength in travel demand.
While we are mindful of the potential for macroeconomic headwinds later in the year. Our property teams have entered the year with high expectations for continued improvement in both business and leisure demand.
The supply picture is favorable with nearly half of our hotels, having no exposure to projects under construction within a five mile radius.
And many of our markets that were slow to rebound from pandemic Lowe's have shown meaningful improvement in recent months.
Our combined acquisitions and dispositions activity has positioned us to produce better portfolio margins and to drive greater profitability over time.
And while the transaction market in recent months has been relatively quiet, we expect debt maturities and brand mandated capital investment to increase the number of properties coming to market as the year progresses.
With ample liquidity and over 20 years. So transaction history, we are optimally positioned to grow our portfolio when market conditions are right.
We are incredibly proud of our accomplishments this past year and remain confident in the resiliency of travel and our ability to drive strong results and maximize shareholder value in any macroeconomic environment.
I'm now pleased to turn the call over to Liz for additional details on our balance sheet operations and financial performance during the year.
Thank you Justin and good morning.
Top line performance for the fourth quarter continued to be strong with total portfolio revenue up approximately 19% to the fourth quarter 2021, and 3% to the fourth quarter of 2019.
Continued strength in leisure demand and recovery in business travel during the quarter enabled us to achieve revpar of $103 an improvement of 16% over a strong fourth quarter in 2021, and 7% as compared to fourth quarter 2019.
ADR for the quarter was $147 approximately 12% ahead at both the fourth quarter 2021, and 2019 and occupancy was up 3% to the same period in 2021 and down only 4% to 2019.
Preliminary results for January show continued strength and demand with occupancy of approximately 64% just 4% shy of January 2019, with leisure and business demand seasonally lower ADR growth was 7% down modestly to what we saw in the fourth quarter, we have begun to see and our confidence.
At that rate growth will continue to improve as we progress through the first quarter and reach our seasonally stronger occupancy month.
Relative to seasonal expectation recent performance reflects both continued strength in leisure and a meaningful recovery in business demand.
<unk> November and December weekend, Occupancies, where 85%, 77% and 64% respectively. As we entered the fourth quarter October weekday occupancy was 75% an improvement over September and down only 5% to October 2019.
Although typical seasonality impacted weekday occupancy in November and December December weekday occupancy was up 4% to December 2019.
We say ADR for the quarter was $142 up nearly 4% to 2019 rate level.
As we look at demand segment and business transient trends travel patterns continue to normalize.
61% of our portfolio produced revpar above pre pandemic levels during the quarter with improvement in demand impacting nearly every market seven.
75 of our hotels had revpar improvement of 10% or more relative to the same period in 2019.
Top performers included a mix of urban and suburban locations, such as Tampa, Phoenix, Anchorage, Syracuse, Huntsville, San Diego, Savannah, and Fort worth well results improved across the portfolio. We continue to see slower recovery in a number of markets, including our assets in New York, San Jose and Denver.
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.
In terms of room night channel mix brand Dot com bookings remained stable at 39% during the quarter O T. A bookings moved from 13% in the third quarter to 12% in the fourth.
Property direct bookings increased to 27% a testament to the continued efforts of our property management company sales support team.
Lastly, GDS bookings continued to represent 16% for the quarter and preliminary revenue data shows improvement early in the first quarter, indicating a continuation of the positive business travel trends.
Looking at fourth quarter same store segmentation bar continue to be elevated to 2019 levels at 34% other discounts increased slightly to 29% in the quarter grew.
Group was in line with the third quarter at 14% still meaningfully higher than the fourth quarter of 2019, which illustrates the resiliency of small group demand.
The negotiated segment remains between 17 and 18% so the occupancy mix relative to 2019 improved from the third quarter, a positive indicator for business travel demand and after three years without meaningful changes in corporate negotiated pricing. Our hotels have just gone through successful 2023 rate negotiations with corporate and local.
Business accounts, and we are optimistic that not only will production continue to improve but it will also see an improvement in negotiated rate.
Turning to expenses total payroll per occupied room for our same store hotels with just under $39 for the quarter.
Slightly higher than the third quarter and up 12% to the fourth quarter of 2019.
With occupancy seasonally lower for the quarter the increase in our per occupied room cost wasn't unexpected.
Labor market continued to create operational challenges and fourth quarter results were impacted by higher wages for full and part time employees training costs and higher utilization of contract labor.
While 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 stabilizes and we are able to reduce recruiting and onboarding costs and the 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 assets.
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.
Yeah.
Strong rate growth and effective cost control. Despite the challenging labor an inflationary environment enabled us to achieve fourth quarter comparable adjusted hotel EBITDA of approximately $102 million and comparable adjusted hotel EBITDA margin of approximately 34% down only 10 basis points in the fourth quarter of <unk>.
2019.
Actual adjusted Hotel EBITDA margin for the fourth quarter was also 34%, but up 70 basis points to 2019, highlighting the positive impact of our transactional activities since the onset of the pandemic.
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 employee recruiting and onboarding costs and short term increases in our use of contract labor.
We anticipate continued near term pressure on wages and other operating expenses.
Approximately 85% of our hotels are operated under a proprietary management agreement structure, which utilizes among other things our variable rate management fee with payments based on performance against our balanced scorecard to better align owner and managers around optimizing performance of our hotels within their market over.
Over the past three years because of the meaningful disruption experienced by our industry, we have fixed payment under these contracts at 3% the midpoint of the variable range.
Beginning in 2023, we have reintroduced the variable fee structure.
Among other things management fees earned are based on performance against property budget achievement of target market share and guest satisfaction scores.
Fourth quarter, adjusted EBITDA, sorry, with $90 million up 22% to the same period in 2021 and up 4% to 2019 <unk> for the quarter with approximately $75 million up 27% compared to the fourth quarter, 2021, and 6% compared to the fourth quarter 2019.
Looking at our balance sheet as of December 31, 2022, we had $1 $4 billion and total outstanding debt approximately three three times, our trailing 12 months EBITDA, sorry, with a weighted average interest rate of three 9%.
Total outstanding debt, excluding unamortized debt issuance cost and fair value adjustments is comprised of approximately $329 million in property level debt secured by 19 hotels and approximately $1 billion outstanding on our unsecured credit facilities our.
Our weighted average debt maturities are almost five years at the end of the quarter, we had cash on hand of approximately $4 million availability under our revolving credit facility of approximately $650 million and term loan availability of $50 million.
84% of total debt outstanding was fixed or hedged subsequent to year end, we repaid in full three secured mortgage loans for a total of approximately $24 million, increasing the number of unencumbered hotels in our portfolio to 204.
Valuable swap agreement and most importantly, low overall leverage levels mitigate the impact of the current interest rate environment.
As Jeff 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 provided for additional capacity of $150 million under the term loans and $225 million under the revolving credit facility.
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.
Do the refinance of our primary credit facility in July the additional seven year senior notes facility closed in June and the repayment of additional secured mortgages, we further strengthened our balance sheet.
Also in December we published our inaugural corporate responsibility report, which details our ESG performance strategies and initiatives. We have always worked to uphold high environmental social and governance standards and we believe these key areas of focus are an integral part of driving long term value for our shareholders. We will continue.
To enhance and expand our ESG related disclosures as our progress deepens and industry wide standards evolve.
Turning to our outlook for 2023 provided in yesterday's press release.
Given limited visibility into future performance due to short term booking windows and meaningful macroeconomic uncertainty our outlook reflects a broader range of comparable hotels revpar change and other key metrics for 2023.
Although forward booking data for our portfolio does not currently provide evidence of a slowdown our outlook anticipates that the lodging industry recovery will be impacted by macroeconomic headwinds in the latter portion of beer.
For the full year, we expect net income to be between 165 and $209 million.
Comparable hotels revpar change to be between three and 7%.
Comparable hotels adjusted hotel EBITDA margin to be between 35.3, and 36, 9% and adjusted EBITDA, sorry to be between $420 million and $457 million.
While our asset management and hotel teams are working diligently to mitigate cost pressures margins are anticipated to be impacted relative to 2022 by increased wages and inflationary pressures on utilities insurance and other operating costs.
Yeah.
This outlook is based on our current view and does not take into account any unanticipated developments in our business or changes in the operating environment, nor does it take into account any unannounced hotel acquisitions or dispositions.
Based on current trends results for the first quarter 2023 are expected to benefit significantly from the easier comparison to the first quarter 2022, when the omicron variant negatively impacted lodging demand.
The high end of the full year range reflects relatively steady macroeconomic conditions throughout 2023 with revpar growth slowing but continued strength in leisure demand and improvement in business transient.
Low end of the range reflects a softening in lodging demand beginning in the second quarter with comparable hotels Revpar change roughly flat compared to 2022 in the second half of the year.
Over the last three years, we have demonstrated the resiliency of our differentiated strategy and as we move into 2023, we believe we remain well positioned for any macroeconomic environment.
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.
Our assets are in good condition with recent dispositions and capital investments ensuring that we maintain a competitive advantage over other product in our market.
Overall, the supply picture continues to be favorable and should help to bolster the performance of our existing portfolio through the coming year.
And our team has used our recent experience to enhance our internal systems and processes in ways that will enable us to further maximize the performance of our hotels.
And that concludes our prepared remarks, Justin and I will now be happy to answer any questions that you may have for us.
Thank you we will now be conducting a question and answer session. 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. You May Press Star two if you would like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Your first question comes from Anthony Powell with Barclays. Please go ahead.
Hi, good morning.
Martin question. Good morning, Jonathan a question on I guess, the impact of the temp labor and higher training costs on margins.
How many basis points of the sequential margin decline from 22, driven by those two items and if we're able to kind of get those under better control how much of a tailwind could that be.
What kind of exit this year.
It's a good question interestingly, so remembering how last year played out we ramped the occupancy and staffing as the year went on as part of that we saw elevated use or.
That rapid ramp necessitated an increased use of contract labor in a number of our markets, which continued through the latter part of the year.
So it came down slightly.
In the fourth quarter relative to where we had been based we think in large part on lower occupancy, which is seasonally the case during the fourth quarter.
As we start the year.
Our expectation is that we will continue to have elevated reliance and remember contract labor costs on average.
Somewhere around 30% more than.
Then.
Our regular employees and that's.
Without taking into consideration lower productivity because of.
More rapid turnover in that group.
We haven't gone through to quantify the exact impact as we get towards the latter part of the year we.
We will have easier comps obviously.
On the contract labor part, but in the beginning of the year.
As we're comping to 'twenty to 'twenty two numbers you know that the.
The the comfortably more challenging for us and the impact will be more significant not just on the contract labor front, but if you remember first and second quarter of last year.
We weren't yet fully staffed.
Do you have to the levels that were necessary to provide services to the increased number of guests that were staying at our hotels and as a result, we had somewhat inflated.
Sure.
Productivity in those quarters.
Okay. Thanks, and then maybe on the current trends I think you said you gave the January numbers and you said that you're starting to see some pick up anything as pricing and just demand trends maybe get into what you're seeing.
You know in February and what you expect to kind of see.
See for the rest of the quarter and maybe some more detail on that improvement you talked about.
We gave January numbers, and you know as as I.
<unk> shared in my prepared remarks, it did illustrate a slight pullback in rate growth relative to 2019 in January .
And I think relative to seasonality that's not unexpected we begin to ramp back from an occupancy perspective in February and then even more so in March and as we look both in February and at on the books rates.
You know as you would expect with occupancy increasing we're beginning to see rate increase as well.
And it's important to note.
That said, we did have some storm related disruption and increased number of properties under renovation.
The first well in January as well.
Alright, thank you.
Next question.
Tyler battery with Oppenheimer. Please go ahead.
Good morning, Thanks for taking my questions.
First one for me Justin on the acquisition topic, you talked about being opportunistic sounds like you think maybe some more deals coming to market. Later. This year you obviously, you're in a really strong liquidity position right now to take advantage of that just kind of walk us through what youre seeing out there right now interested what.
Your pipeline looks like I'm interested where where cap rates and valuations are as well.
Absolutely so.
We've been in market and active.
Since the beginning of the pandemic and have made significant acquisitions, but.
But we've been selective in that process.
And allowed.
Our core portfolio to build back from an operational standpoint, such.
That we have.
Acquired assets that are additive.
<unk> been able to maintain the strength of our balance sheet.
Highlighted in my prepared remarks that the acquisitions market continues to be relatively quiet.
We are underwriting a number of deals today.
Many of them are deals that we looked at last year and that have come back to market.
And our expectation continues to be at that higher interest rates.
Combined with greater pressure from the finance around Capex.
Cause more assets to come to market as we move through the year that said.
We're not seeing a lot of new deals today, most of what we're underwriting Rd.
Our deals that again, we've looked at last year and have continued to be marketed.
And.
To date, we haven't seen a meaningful adjustment in pricing for those assets.
We will continue to monitor and be active in the market.
And then as you highlighted in your question, we have significant capacity on our balance sheet to be acquisitive, when the market's right and.
And really anticipate that there will be an opportunity for that as we move into the back half of the year.
Okay.
Importantly, higher.
Higher interest rates have made private equity participants in the market meaningfully less competitive.
A number of those players.
Unable to complete transactions that they had signed up in the latter part of last year.
As a result, I'm looking at the two deals that we closed last year, we were able to acquire those assets.
Without being the high bid because.
Because we did not have a financing contingency and as we think.
About our ability to underwrite assets based on our experience in the space in our existing portfolio and our ability to act quickly to close without financing contingencies as the market opens up we have a meaningful competitive advantage.
Okay, Great I appreciate that and then a quick follow up on wages in terms of your guidance. What are you expecting for overall wage inflation or overall labor cost increase year over year in 2023.
Significant difference between some of the more urban and resort markets and the suburban locations in terms of what you're expecting with the wage increases.
I'll start with the latter part of your question it really depends on what suburban and urban location. Its very market specific it's not necessarily location specific we certainly have urban locations that are.
Very business friendly that have ramped really wow them that don't have sort of.
You know more onerous challenges around them that would allow for their wage rates to be more in line with the average and then their urban locations where.
Wage rates may be more.
More challenging.
And on the suburban side, you know I think in general you know, we have markets, whether it's a suburban or urban location, even within that same broader market, where we've had to rely on contract labor more and wages have been more challenged so it's really market specific.
As we look at guidance and as we think about wage rates.
We really took into account how we ramped through last year and how we finished the year relative especially to 2019, but also year over ear.
I'm anticipating that we would continue to have that pressure into this year, Jeff mentioned.
In response to Anthony's question, just that we have easier comps in the first half of this year due to the fact that we ramped very quickly and well, but did not ramped staffing at that same level and through the first half of last year, we're indicating that we werent at stabilized label.
Labour model levels.
That said you know I.
We've significantly increased wages over the past few years and we are.
I think on a year over year basis, we're hopeful and have to some extent modeled some stabilization to more normalized or inflationary wage rates year over year as opposed to last year feeling more of our compounds from 2019 compound increase from 2019.
Okay.
That's all from me and she would detail.
Thank you.
Next question, Danny Assad with Bank of America. Please go ahead.
Hi, good morning, everybody.
Question is how.
How much revpar growth would you need in 2023 to get operating leverage or margins to improve from here.
When you're underwriting your you know your cost base.
Increase relative to what you know at the high end of our range at 7% on a comparable basis.
We're in line with margins slightly up.
So I think the more rate that we get and the more revpar growth that comes through a rate from that point forward. The more the more growth we would have on the bottom line.
Got it Okay and then for when we think about you know since we are largely recovered here when we think of the EBITDA contribution by quarter for 2023 is there any reason why this.
The seasonality would be any different than what we've seen kind of in 2019.
No generally our seasonality I mean, it has has really performs the way.
You know that it that it did on a stabilized basis.
Back in 2019, even with the portfolio mix changes that we've had with acquisitions, we bought more leisure based properties in Portland, Maine is coming to mind, specifically that season is sort of.
Anti seasonal to our historical portfolio, but still overall the overall portfolio.
Portfolio, well performed strongest in the second and third quarter and first and fourth will.
We'll be slightly behind the second and third.
Got it thank you very much.
It's important to note too that when you look we provided comp guidance when you look at actual performance year over year.
Especially as Youre looking at actual performance for our portfolio relative to 2019.
Our transaction activity will have meaningful impact on actual margins.
And overall productivity for the portfolio.
Got it thank you.
Okay.
Next question, Michael Bellisario with Baird. Please go ahead.
Thanks, Good morning, everyone.
Good morning, Ryan.
Just a first clarification question just on the renovation disruption zero net year over year impact that you could provide or that's embedded in the 'twenty three guidance that you provided.
Okay.
We have not you know I think.
Year over year, we were renovating throughout 2022, and so when you look at the comp guidance relative to 2022.
Think we overall it should be fairly similar.
Though the distribution of renovations will be a little bit different last year as we entered the year, we were slower to release our capital budget. We had more summer projects. Then we will have this year and we had more Q4 projects.
That spilled over into January of this year, and we did not have that at the beginning of 2022.
Given how we were managing capex coming out of Covid. So.
From an overall rooms out of service perspective, the distribution throughout the year might look a little bit different but overall should be fairly similar we had some significant renovations last year.
Got it but it's fair to assume of rooms out of service or similar but occupancies up there might be some incremental earnings and backfill in 'twenty three right thinking about that conceptually yeah, yeah, yeah, yeah predominantly predominantly in the first quarter.
Got it okay.
And then just also on the topic of Hum.
Kind of renovations and supply trying to kind of understand the backdrop here and I'll get back to your capital allocation decision with low supply growth and a lot of your markets does that maybe make you more.
More willing to renovate a hotel instead of selling it today or maybe push out or renovation.
Year or two because the supply growth outlook, there has that or any insight into kind of all the supply growth outlook is impacting your capital decisions would be helpful.
Uh huh.
I think that.
For the most part it's putting us in a position to.
Have greater discretion around allocating capital towards those projects, where we anticipate.
Getting a better return on our investment.
I think certainly in an environment, where we have less.
And the way of new hotels opening.
We can remain competitive by maintaining our assets.
Yeah.
In many of those markets.
And as we prioritize capex spend coming out of the pandemic, we've been able to direct the map.
Vast majority of that spend towards markets, where we anticipate we will be able to more meaningfully move rate and increased profitability.
Profitability.
I think as we move through our portfolio or as we move through the next several years, we'll continue to do.
Be mindful of the upside potential for individual markets based on renovations and continue to look at.
Dispositions as an important.
A piece of our overall capital strip.
Strategy.
Got it and then just one more for me on an expenses, maybe can you help us understand what's what's sort of baked at this point and included in your guidance and what's still an estimate or a placeholder that could maybe surprised to the upside or downside.
Throughout the full year.
Any commentary would be helpful. Maybe.
From the contract labor.
Topic that you've already touched on.
So.
We.
We have not gone through our property insurance renewal, yet, but do you have.
Uh huh.
Significant increase modeled into the guidance.
So that could go better or worse than what we have modeled but feel like we've been.
Feel like we have conservatively budgeted there.
Hmm.
Property taxes.
Have been fairly favorable the past couple of years I think in our guidance.
We have assumed an increase.
Weather.
To what degree that materializes, we will see so that's the portion.
That could go either way as well we have utilities continuing to go up you.
You know and we modeled that off of what we were seeing in the fourth quarter in particular in the back half of the year and same with labor and I think as we looked at modeling hotel expenses generally.
We modeled consistency, where we've seen consistency in performance.
So our team has done an exceptional job.
Maintaining sort of outside of payroll costs.
Controllable cost at 3% or lower for a majority of the year I think there's continued.
Anticipation that that.
We will you know.
Manage those well and you know on the labor side, we really took a look at how we ramped in the back half of the year.
We are hopeful and certainly at the higher end of the range. There is maybe more.
You know theres more assumption that that we may be able to wean off of contract labor, a little bit more and gain some.
Productivity.
<unk>, but you know at the midpoint I think we've tried to model labor expenses. The way we were experiencing them in the back half of the year recognizing the first half as Justin mentioned, we have a tough comp.
That's it for me thank you.
Once again, if you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from Bryan Maher with B Riley Securities. Please go ahead.
Thanks, Dan lives I hope your insurers and tax assessors aren't listening to this call.
We budgeted plenty of increase.
Yes, but don't tell them that.
[laughter].
Anyway couple questions on the acquisition front, you know kind of following on some earlier questioning.
But I know you said it seems a little quiet out there now.
<unk> got off to a fast start in 2021 with some acquisitions slowed in 2022 I get the sense that you're you're willing to ramp in 2023 does that look more like onesie Twosies does that look like.
Portfolio acquisitions, and kind of how long do you wait to see if theres real refinance stress out there, which could create better opportunities than you know kind of a steady pace early work throughout the year.
I think we've been very purposeful and strategic and pursuing acquisitions.
I really could say for the past 20 years, but specifically since the onset of the pandemic and as I highlighted earlier.
Results, we have a balance sheet, that's intact with significant capacity to acquire hotels.
When pricing is appropriate for those hotels were constantly in the market underwriting individual assets and larger portfolios.
Then.
We will transact.
When we're able to pencil and the primary driver for us is.
The per share earnings accretion and I.
I think looking at the deals we've done since the onset of the pandemic I highlighted the fact that debt.
You know that.
They're yielding in excess of 8%.
Unlevered after Capex and that's.
Even.
Utilizing a year, where there was massive disruption in the first quarter as a result of the omicron. So.
Anticipate meaningful upside in those we want to make sure on a go forward basis that we do good deals.
While we have the capacity to do.
A significant number of deals.
We want to make sure that every deal we do is additive to the portfolio that we currently have.
I think as we think about the opportunities that may materialize as we move into the latter part of the year.
We certainly anticipate that there will be a meaningful increase in individual assets coming to market.
But there will likely be smaller portfolios that will come to market as well and as has been the case in the past we will be active in underwriting those in and we'll transact when they meet our underwriting criteria.
Thanks, and then you mentioned in your prepared comments something about brand standards and we always know.
There's a risk that Marriott Hilton and others you know raise those are put out pips.
Is there something that compelled you to talk about that.
That we should be thinking 2023 2024.
Could be years in which brand standards are raised how might that impact cost and use into that could just be one other lever that could push existing owners into the marketplace to sell.
Really I was speaking specifically to capital requirements. When we look at overall brand standards, we're still.
And as as our peers and other owners in the hospital space and a more favorable position than we were coming into the pandemic.
Meaning that the brands have made meaningful adjustments to brand standards, which have acted as an offset to inflationary pressures at the operating level.
What we're seeing and the anticipated we would see is more significant emphasis.
Round.
Needed capital improvements and generally hotels follow a regular cycle of improvement many ownership groups put on hold major renovations in order to reallocate capital towards funding operating deficit through the pandemic.
And they have been in the process of rebuilding reserves to fund future renovations, but what we've found historically is that.
Motivated sellers bring assets to market.
Either on refinancings, where there's a need to make capital calls to fund shortfalls.
Or.
Around major renovations were.
They are required to go back to investors and ask for a capital to reinvest in the hotels and.
I think as we think about how things will play out in the current environment where lenders.
Have adjusted Ltvs.
And where interest rates are significantly higher and as we think about pressure that the brands will increasingly put on ownership groups.
To move forward with deferred renovation, we see both of those factors driving them.
You know it groups to explore potential sale opportunities for their assets.
And that would be consistent with what we've seen in the past.
As we look at our own portfolio.
We're meaningfully advantaged.
By having a relatively young portfolio that we have continued to invest in and as I highlighted in my prepared remarks, our expectation is that we will continue to be able to fund.
Our capital needs.
Utilizing between five and 6% of revenues, which is consistent with our historical average and our portfolio continues to generate significant cash in <unk>.
Fortunately this past year, even after distributions, we had more than enough capital from operations to fund all of our Capex and our acquisitions activity and we anticipate having an ability to continue to do that on a go forward basis.
Great. Thank you.
Thank you.
Next question, Chris Darling with Green Street.
Thank you.
Just and going back to some of your earlier comments you mentioned some deals that have come back to the market, but with limited pricing adjustments. So I take that to mean that there's still a sizable bid ask spread at play are wondering if you could comment on that dynamic and maybe even quantify it if possible.
Absolutely.
So highlighted earlier.
I think in my prepared remarks and in response to questions that that we are.
Anticipating greater deal flow as we move.
Through the back half of the year.
That will be deals that were marketed I think openly.
This past year end.
Some of those deals were at some point.
Tied up either under contract or LOI, and then fill it out as a result of the buyers' inability to obtain financing <unk> obtain financing at pricing consistent with our underwriting.
I think because buyers in many cases had firm contracts.
At elevated prices, they've been reluctant to meaningfully adjust pricing.
To take into consideration.
The.
Variances are meaningful increases in our financing costs, which ordinarily would impact the market, but the other factor.
That's.
Continued to support the bid ask spread is the fact that operating fundamentals continued to be strong and improved year over year.
<unk>.
And I think sellers in today's environment.
Anticipate that.
Should things go well this year.
Even with adjustments in cap rates they might be in a position.
To get similar pricing for the assets.
If they hold.
Now that said.
Going back to.
The responses I gave to Brian's question, we do feel that there will be increased pressure on a number of sellers as we move through the year.
Many of them have floating rate debt, which will increase.
Well increase that their costs.
And then some will have refinancings.
And the brands will put additional pressure on groups to reinvest in our assets and.
I think with that incremental pressure and without a change in the debt markets, we could see.
Some pricing adjustment as we move into the back half of the year.
Okay.
Okay. That's helpful. And then last one for me I might've missed it in the prepared comments, but just hoping you could discuss the impairment charges that were taken this quarter.
Sure.
The impairment charges were on two assets. It was just a result of our normal analysis that we do throughout and at the end of the year and.
Really.
The bulk of it was one asset and it was market marketing performance driven.
Alright fair enough. Thank you.
Thank you.
Thank you I will now turn the call over to Justin Knight for closing remarks.
Thank you. We appreciate you taking time.
To participate in our call today and hope as always that as you travel you will take the opportunity to stay with us at one of our hotels have a great day, and we look forward to meeting with a number of you very shortly.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Yeah.
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