Q2 2023 Apple Hospitality REIT Inc Earnings Call
Good morning, and welcome to the Apple hospitality REIT second quarter towards each what Q3 earnings call. All participants will be in listen only mode should you need assistance. Please signal a culprit.
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I would now like to turn the conference over to Kelly Clarke Vice President IR. Please go ahead.
Thank you and good morning, welcome to Apple Hospitality REIT second quarter 2023 earnings call 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 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 statement, except as required by law.
Additionally, non-GAAP measures of performance will be discussed during this call reconciliations of those measures to GAAP measures and definitions of certain items referenced 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 second quarter 2023, and an operational outlook for the remainder of the year.
Following the overview, we will open the call for Q&A at this time, it's my pleasure to turn the call over to Justin.
Good morning, and thank you for joining us today.
As we move into the back half of 2023 we are incredibly pleased with our performance year to date.
And though we have limited visibility into the future. We have reason to be optimistic based on recent trends.
Demand across our geographically diversified portfolio of rooms focused hotels remained strong and drove the year over year improvements in occupancy ADR and revpar for the quarter.
Comparable hotels ADR increased by 5% occupancy was up nearly 1% and revpar improved by 5% as compared to the second quarter 2022.
With occupancy is still down 4% to second quarter 2019, comparable hotels, ADR was 11% higher than quarterly Revpar was up 7%, our highest quarterly comparable hotels revpar growth relative to 2019 since the onset of the pandemic.
Continued top line growth enabled us to achieve second quarter comparable hotels adjusted hotel EBITDA of $142 million, a 2% improvement over second quarter trying trying to.
With a fundamental shift in consumer spending leisure travel continues to be robust driving strong occupancies during the quarter and allowing for continued growth in rate.
Steady improvement in business travel is bolstered midweek occupancy and rates for our hotels further lifting overall portfolio performance.
Based on preliminary results for the month of July and despite weaker performance around the fourth of July holiday occupancy for our portfolio was 77% and we continued to see growth in ADR.
Excluding the first week preliminary portfolio Revpar growth for July was comparable to second quarter.
Driven both by rate and occupancy growth year over year.
So it really will have increasingly difficult topline comparisons as we progressed through the second half of the year forward booking trends remained favorable leisure demand continues to be elevated to pre pandemic levels and we see steady improvement in business travel demand.
We've adjusted our annual guidance to reflect portfolio performance through the first half of the year and recent adjustments to consensus economic forecast, resulting in a 100 basis point increase in comparable revpar growth guidance at the midpoint.
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10 basis point increase in the applied mid point, our comparable hotels adjusted hotel EBITDA margin.
Through continued rate growth and disciplined cost controls, we achieved a comparable hotels adjusted hotel EBITDA margin for the quarter of over 39%, despite inflationary pressures and a challenging labor environment.
Our corporate team works with industry, leading management companies at our hotels to share best practices monitor real time performance and focus onside effort to drive incremental profitability at our hotels without sacrificing cleanliness or overall guest satisfaction.
As we move into the back half of the year, we expect the top line growth and expense growth to moderate with year over year comparisons impacted by more stabilized operations in the third and fourth quarter of 'twenty try to.
Okay.
In order to ensure that our portfolio remains relevant and that our hotels compete effectively within their markets, we make regular strategic reinvestment leveraging our scale and experience to maximize the value of dollar spent.
During the first six months of the year, we invested approximately $28 million in various capital projects and we anticipate spending a total of $70 million to $80 million during 2023.
Planned capital expenditures include comprehensive renovations at 20 to 25 of our hotels.
During the quarter, we transitioned hotel operations at our Noncore Independent Hotel in New York City to a third party through a trip on that piece.
As a result of the lease agreement. This property is excluded from our hotel and room counts effective may 2023, and will be considered non hotel property during the lease term.
While not material to our overall consolidated performance. The terms of the agreement are financially beneficial to us and transfer responsibility for both day to day operations and ongoing capital expenditures to the tenant.
We hold a security deposit and additional corporate level guarantee.
In addition, we reserve the right to regain operational control shut the third party did not fulfill obligations under the lease.
Overall, the transaction market, while still relatively quiet it seems to be opening up and we anticipate deal volume will increase as the year progresses.
We continue to underwrite numerous potential acquisitions opportunities seeking hotels in business friendly markets with multiple demand generators, where we anticipate future growth.
We have tremendous transaction experience, which combined with our available balance sheet capacity and deep industry relationships positions us to drive incremental shareholder value by enhancing and growing our portfolio when conditions are optimal.
In June we acquired the previously announced the newly renovated 154 room courtyard, Cleveland University circle for $31 million or approximately $201000 per key.
Tell us in the heart of the University Circle District, a premier educational medical and social district on the east side of Cleveland.
During the quarter. We also entered into a contract for the purchase of a to be developed motto by Hilton in downtown Nashville, with an estimated 256 guestrooms for approximately $97 million.
Hotel will be located in the heart of downtown Nashville, near well known leisure attractions, including the country Music Hall of Fame and Bridgestone Arena.
This will be our first hotel under the motto flag and we believe the brands offerings are ideal for this particular location, providing flexible guestrooms curated bar and dining experiences and an overall great landing spot for both business and leisure travelers.
Currently anticipate development will be complete in 2025.
Construction at the embassy suites in Madison, Wisconsin, which we also have under contract is on track for completion in early 2020 for.
The hotel will be located in the heart of downtown Madison within walking distance of the banana terrorists community and Convention center, the state capital and the University of Wisconsin.
As we underwrite potential acquisitions opportunities. We are also mindful of our ability to drive incremental shareholder value through the repurchase of our shares when there are dislocations in the market.
During the quarter, we repurchased approximately 226000 shares at a weighted average purchase price of approximately $14 47 per share for an aggregate purchase price of approximately $3 million.
The shares were repurchased in open market transactions under the share repurchase program, including pursuant to written trading plan is intended to comply with rule <unk> five one.
We have approximately $335 million remaining under this program.
Supported by our strong operating performance, we have let our peers in post pandemic dividend payments during the quarter, we paid distributions totaling <unk> 24 per share.
Based on Wednesday's closing stock price, our annualized distribution of <unk> 96 per share represents an annual yield of approximately six 4%.
Together with our board of Directors, we will continue to monitor our distribution rate and timing relative to the performance of our hotels and other potential uses of capital.
Okay.
As we enter the second half of the year the fundamentals of our business remain favorable with continued strength in demand and limited near term supply growth.
Nearly half of our hotels do not have any new supply under construction within a five mile radius, providing us with the ability to meaningfully benefit from incremental demand.
And our combined acquisitions and dispositions activity has positioned us to produce better portfolio margins and to drive greater profitability over time.
Our strategy was designed to create an asymmetrical risk profile mitigating downside risk, while providing significant opportunity for upside.
Our portfolio of upscale rooms focused hotels is broadly diversified across a wide variety of markets and demand generators.
Our hotels are franchise with industry, leading brands managed by some of the best management companies in the industry and provide a strong value proposition with broad consumer appeal.
Underlying the strength of our portfolio was a balance sheet with low leverage and financial flexibility.
Consistent reinvestment and effective portfolio management strategy and a dedicated corporate team with extensive industry experience.
While we have reason to be optimistic about the trajectory of our industry and our portfolio specifically I am confident we are well positioned to continue to outperform and maximize shareholder value in any macroeconomic environment.
It's 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, we are pleased to report another strong quarter for our portfolio of hotel comparable hotel total revenue was $361 million for the quarter and $671 million for the first half of the year up 6% and up more than 11% as compared to the same periods of 2010.
<unk> two respectively.
Continued strength in leisure demand and recovery in business travel during the quarter enabled us to achieve comparable hotels revpar of $126, a 5% increase over second quarter 2022.
ADR at $161 up 5% and occupancy of 78% up nearly 1% to second quarter 2022.
Year to date through June comparable hotels, ADR was up 7% and occupancy was up 4% with revpar up 11% compared to the same period of 2022.
As a reminder, comparable revpar for our portfolio stabilized with performance generally at or above 2019 levels during the second quarter 2022.
Having moved past the first quarter, where comparisons to the prior year were heavily impacted by omicron related travel disruption. We believe comparisons to 2022 are in most cases more useful and relevant.
As a result, we have largely transitioned away from comparisons to 2019.
Leisure travel continues to be elevated during the quarter in April may and June weekend, Occupancies were 80, 284, and 83% respectively.
Increased business demand gradually improved year over year supporting average weekday occupancy of 75% in April 74% in may and 79% in June .
Midweek Occupancies have continued to strengthen the last three weeks in July indicative of improvements in business travel with continued strength in shoulder nights and weekend leisure demand.
In terms of same store room night channel mix brand dotcom bookings increased slightly at 40% for the quarter, Oh Ta bookings increased from 11% in the first quarter to 12% in the second quarter likely driven by summer leaf leisure travel.
Property direct bookings moved from 26% in the first quarter to 25% and GDS bookings remained in line with the first quarter at 17% during the second quarter and up a point and a half compared to the second quarter 2022, showing continued strength in business travel demand.
Looking at second quarter same store segmentation <unk> remained strong at 33% in the second quarter other discounts increased seasonally from 27% to 28% in the quarter and group remained stable at 15%, which is still elevated to the same period in 2019.
And the negotiated segment was 18% of our mix up slightly to the same period in 2022, but down 2019.
Turning to expenses total payroll per occupied room for our same store hotels with just under $37 for the quarter down slightly to the first quarter, but up meaningfully to the same period in 2022 when challenges Rehiring associates resulted in our hotels being temporarily understaffed.
Third and fourth quarter year over year comparisons will reflects more stable staffing levels in the back half of 2022, we anticipate that higher wages for full and part time employees and higher utilization of contract Labor will continue to result in elevated cost per occupied room relative to pre pandemic level.
We will continue to balance productivity initiatives with our efforts to train and celebrate associates and 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 cleanliness and maintenance necessary to sustain rate growth and maximize the long term profitability of our asset.
Strong rate growth and a focus on cost controls and a challenging labor and inflationary environment enabled us to achieve comparable hotels adjusted hotel EBITDA of approximately $142 million for the quarter and $249 million for the six months ended June 30th up 2% and 9% to the same periods of 2020.
Two respectively.
Comparable hotels adjusted Hotel EBITDA margin was strong at 39, 3% for the quarter and 37, 2% year to date through June down 160 basis points, and 80 basis points to the same periods in 2022, respectively.
As we have stated on past calls, we believe that long term margin expansion for the industry and our portfolio will be largely conditioned on our ability to grow rate.
With inflation figures coming down and hotels more appropriately staffs, we expect near term growth and operating expenses to moderate relative to the significant increases we have seen in recent quarters.
Adjusted EBITDA for the second quarter was $129 million and year to date with $224 million up 2% and 10% to the same periods of 2022, respectively M.
<unk> for the quarter was $111 million and year to date with $190 million up nearly 1% and 9% as compared to the same periods of 2022, respectively.
Looking at our balance sheet as of June 32023, we had $1 $4 billion and total outstanding debt of approximately 3.2 times, our trailing 12 months EBITDA with a weighted average interest rate of four 3%.
Total outstanding debt, excluding unamortized debt issuance cost and fair value adjustments is comprised of approximately $287 million in property level debt secured by 15 hotels and approximately $1 $1 billion outstanding on our unsecured credit facility.
At the end of the quarter, our weighted average debt maturities were once were four one years.
We had cash on hand of approximately $6 million and availability under our revolving credit facility of approximately $626 million and approximately 79% of our total debt outstanding was fixed or hedged.
In July we entered into an amendment of our $225 million term loan facility, which extended the maturity of the existing $50 million term loan by two years to August 2025, and aligned to the maturity date with the other term loan and the broader $225 million facility.
We continue to be grateful for a supportive and long standing lender relationships as further demonstrated by the recent amendment.
Valuable swap agreements and most importantly, low overall leverage levels helped mitigate the impact of the current interest rate environment.
Shifting to our outlook given year to date performance for our portfolio and a slightly more favorable consensus economic view for the back half of the year. We have made the following adjustments to our annual guidance.
We now anticipate comparable hotels revpar growth to be between four and 8% a 100 basis points higher on both the high and low end.
Comparable hotels adjusted hotel EBITDA margin to be between 35, 4% and 37% an increase of 10 basis points on both the high and low end.
Adjusted EBITA E to be between $417 million and $452 million, a decrease of $5 million on the high end and $3 million on the low end of our previously provided guidance range net income to be between $163 million and $202 million.
A decrease of $7 million on the high end and $2 million on the low end relative to our previously provided guidance and capital expenditures to be between 70 million and $80 million.
The reduction in the midpoint of our guidance for net income and adjusted EBITDA. Sorry is primarily a result of higher anticipated general and administrative expenses associated with outperformance of our relative shareholder return metrics, which are components of our incentive plan.
Note that comparable hotels, revpar change and comparable hotels adjusted hotel EBITDA margin guidance include properties acquired as if the hotels were owned as of January one 2020 to exclude dispositions in asset held for sale since January one 2022, and exclude one non hotel property or New York asset.
57, where hotel operations have been leased to a third party.
Our outlook continues to reflect a broader range of comparable hotels revpar change and other key metrics for 2023 due to our lack of visibility given the short term booking window for our hotels and some continued macroeconomic uncertainty.
As a reminder, we expect topline comparisons to be more challenging in the back half of the year given the strength of our portfolio performance over the same period in 2022.
We're encouraged by recent trends and the strength of fundamentals for our business and we'll continue to assess guidance in the context of actual performance for our hotels and changing consensus views related to the broader economy.
As we move through 2023, we are confident we are well positioned for any macroeconomic environment. Our differentiated strategy has proven resilient through economic cycles.
Our balance sheet is strong with ample liquidity, which we intend to use opportunistically to pursue accretive transaction. Our assets are in good condition with consistent capital investment ensuring that we maintain a competitive advantage over other products in our market.
And we believe the fundamentals of our business continue to be sound with favorable supply dynamics, allowing us to benefit from incremental demand.
And that concludes our prepared remarks, Justin and I will now be happy to answer any questions that you may have for us This morning.
We will now begin the question and answer session.
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Then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Austin, where Schmidt with Keybanc capital markets. Please go ahead.
Thanks, and good morning, everyone I wanted to start off a little bit on the midweek travel comments. Your July commentary felt a lot like your commentary about April in that both months started out a little bit soft due to some some holiday week.
Weakness around the around the holiday and then midweek demand kind of accelerated through each respective month in the following weeks what are sort of the latest thoughts and optimism that theres upside in sustainable strength in midweek demand and what does that say about pricing power because I believe this was kind of a big component of your ability to drive rate.
So you are correct in that the trends that we saw after the first week in July were meaningfully different than than that week.
And part of it is the timing of the holiday as you know as as operations for our portfolio become more normal.
We see we have greater dependence on business travel and with the fourth of July holiday falling midweek.
We were unable to push metric occupancies.
And as a result of that particular week with softer if you Peel out the first week of July and look only at the remaining weeks.
As highlighted in her remarks that performance.
For those weeks was in line with the growth that we saw.
That we saw in the quarter.
Which was significant so with the weak flat performance essentially year over year and without.
Meaningful growth in Revpar.
I think for that reason.
It would be a mistake to look at the month as a whole.
Draw conclusions about business travel we've continued to see as we move into August good year over year growth in.
And midweek occupancy and continue to feel good about the return of business travel.
And Austin related to your question on rate, we have started to see where midweek occupancies are in the high eighties and low nineties are approaching the nineties on on Tuesday, Wednesday night, we've seen a little bit incremental.
Right on those nights from a growth perspective from what we had been seeing so as you know we're continuing to see some improvement there.
Similarly to what we've said about business trends overall, it's not as quick as we'd like but we're still seeing positive trends so that that certainly gives us optimism.
You know as we think about the fourth of July holiday and the fact that it fell on a Tuesday back that it did impact our results. So much that week and we bounce back again, it's just a really positive trend for sort of normalized.
<unk> performance for our portfolio overall with business transient coming back you know we did feel that week for the month overall, and then and then rebounded nicely as we look forward you know average daily bookings for August are up which is a positive as we look forward and indications from our management companies to half half.
August in the fall looking looking better so I think we still remain encouraged it it's interesting and it's.
Youre looking at the results week to week as are we and you have a fourth of July week, and then you see a bounce back.
The growth rates have mater moderated.
But we are continuing to approach high Eighty's low 90, Occupancies on Tuesday, Wednesday nights, which is encouraging.
Yes sure.
What's kind of the ADR growth.
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Driving revpar in the second quarter may be softening a little bit in June I guess, what is the Revpar guide in the back half of the year Revpar and margin guide assume is as you know is it more heavily weighted towards ADR still or does it become a little more balance between occupancy and ADR.
Thank you.
Oh, yes, sorry to cut you off yet more balanced I mean overall when you look at how we're projecting the back half of the year, we continue to see them.
You know an ability to grow rate, but certainly have some occupancy growth built in as well where you are starting to see business travel demand come back or continue to come back.
And you know assuming that youre not seeing meaningful pullback in leisure.
Great. Thanks.
Certainly variations on the high and low end from that.
The next question comes from Dori Kesten with Wells Fargo. Please go ahead.
Oh, Thanks, good morning.
Sure as your occupancy continues to rise in the second half are you are you still controlling your current staffing levels.
Generally yes.
We look.
Across our portfolio and obviously there are variations by market.
We've been able to largely re staff our hotels.
To levels that we feel comfortable with given the adjustments that have been made to overall brand standards and you know I think on.
On the margin incremental occupancy should lead to some productivity gains as we have greater utilization of existing staff.
For our portfolio, it's a blend and so certainly within that portfolio. We have some markets that have been sort of rebound that are just now beginning to see more significant increases in occupancy and obviously in those markets, we would be hiring to accommodate the incremental demand, but by and large.
We see our portfolio has been stable and for that reason.
Highlighted that we expect overall expense growth to begin to moderate as we move into the back half of the year.
Okay and.
I mean, you you have a history of acquiring portfolios, but what's your level of interest today and are there any of interest out there.
I think we continue to underwrite individual assets and larger portfolios.
The most significant governor.
For us is fit with our existing portfolio and so as we look at our larger pro players were looking or narrowing our focus to those pro players.
Provide product and market concentration that fits well with the portfolio that we currently own.
So I think we're most interested in a subset of the potential transactions that happened there in.
In the near term I think.
We continue to assume that the bulk of the transactions that happen in the overall market and certainly the bulk of transactions that we will be involved in will be smaller transactions are either involving individual assets or.
Smaller portfolio is less than 10 hotels.
But as we continue to move.
Through the next several months that that could certainly change generally speaking larger portfolios come to market when the financing environment is more supportive of them.
But you know that the challenges in the financing market could also drive some of those larger players to market as groups are looking at refinancing.
At the higher cost so.
Our interest continues to be there.
There are a number of portfolios that we feel would be a reasonably good fits for our portfolio.
And.
We're uniquely positioned to pursue those.
It became available.
Okay. Thank you.
Thank you.
The next question comes from Tyler <unk> with Oppenheimer. Please go ahead.
Hey, good morning, Thanks for taking my question. So there's been a lot of focus on leisure travel the past couple of days.
In the prepared comments, you mentioned that leisure travel continues to be strong any more details you could provide on that you know what as began travel book like you know what is.
Pricing power look like and then additionally, can you ballpark what percentage of your mix you would consider to be leisure transient right now.
I could just squeeze in one more you know most of your leisure demand I'm, assuming is partially people on vacation, but I would also mention that you maybe have some different drivers than peers.
Have your larger resort hotels. So if you could just talk about what really drives your usual Mexican your leisure travel I think that would be helpful. Too. Thank you.
Okay, maybe we'll work backwards with those questions and certainly to the extent, we felt to address any of them feel free to raise them and I'll start and maybe <unk> can chime in but speaking to the types of leisure business that we have in our hotels.
Given the broad diversification of our portfolio that that varies somewhat by market, but broadly speaking.
Includes people, who are traveling on vacation and suddenly we have certain assets like our Virginia beach assets or the hotels that we unemployment name.
That see a greater percentage of leisure travelers traveling for vacations, but outside of that we see significant leisure travel associated with major family events like weddings.
And a tremendous amount of sports team related business.
And outside of that there are a number of other categories.
But broadly speaking those tend to be the biggest leisure demand drivers for our portfolio.
Looking at demand across our portfolio.
Partly perhaps because we're not solely dependent on.
Vacation goers toward leisure travel we've seen stability.
In Occupancies.
Looking at the past three or four months.
Together.
On the weekends.
And I think reflecting continued strength and demand there obviously, we saw meaningful improvement early in a recovery and leisure travel, which propped up are we cannot capacities.
And even pushed them beyond pre pandemic levels those.
Those occupancies have held relatively stable.
With obvious variations from market to market.
It put us in a position to continue to drive rate. So looking at Revpar specific to the weekend.
In the quarter, we continued to see growth.
And even as we pushed past the quarter into July .
And I'm trying to remember what your first question was now that I've I've worked backwards two or.
Yes.
Just maybe ballpark the percentage of your of your trim deal. That's what you would consider leisure versus versus corporate.
Yeah, I think we still estimate right around 50, 50 split, which skews heavier to leisure them them our business was pre pandemic.
A portion of that I think is a shift in the makeup of our portfolio, but more significantly I think that mix continues to be influenced by the higher weekend occupancies that.
Have been maintained even as we've moved into the year.
Okay.
I appreciate that detail. Thank you.
Thanks.
The next question comes from Anthony Powell with Barclays. Please go ahead.
Hi, good morning.
A question on supply growth.
Because we know it's going to be pretty limited and most of your markets and a couple of years, but it.
It seems like Youre able to do some developer deals like like model in Nashville, I guess, what do you think supply growth may tick back up.
Across your markets as a 'twenty four 'twenty five or just broadly.
No that would be super helpful.
I mean I highlighted in my prepared remarks that we still have roughly 50% of our markets that don't have any new supply.
Under construction within a five mile radius of our assets.
I think given time from start to completion.
That pushes the potential for new supply in those markets out a couple of years, so beyond kind of.
But the framework that you set and then in the other 50, roughly 50% of our markets.
We'll have one or two assets generally under construction.
And.
All of that meaningfully below what we saw pre pandemic were rough.
Roughly 70% of our portfolio had exposure.
As we look at impediments to supply there continue to be several suddenly some of the uncertainty from a cost standpoint has come out of the equation, meaning that developers and gcs are in a better position today, I think to estimate cost which have and.
We believe we'll continue to be higher than they were pre pandemic.
But looking back six to 12 months most of those groups were hedging just based on the significant run up that had happened over a short period of time and some unpredictability based on availability of labor and supply chain challenges.
I think today.
The you know the cost of construction continues to be a limiter on new supply growth.
In individual markets and a significant portion of that cost in a meaningful component of it is the increased financing cost so to the extent financing is available and it's still more limited than it has been.
At other points.
And the cycle.
It comes at a higher cost and that cost further in place what are already.
<unk> costs that are implanted to pre pandemic levels and what that tends to do is limit the number of markets.
Where you can justify a construction of projects.
Also.
Importantly makes our construction take out more attractive because in some cases it puts developers in our position.
To obtain a more reasonably priced financing.
And at the very least provides assurances of a takeout.
Above their cost.
To the extent that they control and manage cost effectively on the projects.
And I think.
Because of the way the outlook has shaped up.
Our expectations are that for the foreseeable future.
New construction will be muted.
I think that shouldn't be mistaken to.
To be or be stretched to an assumption that there won't be any new supply obviously, we anticipate it.
Our best markets. So that we will continue to see supply and for that reason, we continue to seek out assets that are incredibly well located within those markets and have been.
The amenities that guests are looking for.
But by and large we anticipate that for the foreseeable future we will be at a meaningfully better position than we were coming into the pandemic in terms of the supply growth.
And as always I have both highlighted in our prepared remarks that puts us in a position to benefit in a more meaningful way for incremental demand.
Both leisure.
Business side.
And I think importantly, though we don't foresee a meaningful downturn in the near term.
It should also.
Put us in a much better position to the extent there were to be a pullback in the overall economy.
Okay. Thanks.
People want a revpar. So you took up your revpar guidance by one percentage point.
What was better than your original outlook was at business travel leisure travel market.
Maybe go through the guidance increases so we can understand what's kind of like driving kind of the upside here.
We have been slightly above the mid point.
You know as we.
As we.
Our reported Q1, we were slightly ahead at that time.
From that point forward.
We continue to see them.
Strength in trends and not indications of a pullback at least as quickly as the macro economic consents.
Consensus view was earlier in the year and I think coupled.
Our year to date performance plus sort of consensus slowing.
<unk> outcome gave us incremental confidence to increase at the mid point and again given the trends we continue even to see in July .
July 4th Holiday week, I think are encouraging so we're optimistic that that will continue to see strong performance.
Alright, thank you.
Thank you.
The next question comes from Michael Bellisario with Baird. Please go ahead.
Thank you good morning, everyone.
Good morning.
Just one of the Big picture focus on 24, but really focus on brand standards and what might come back as you look out to 'twenty four.
Not that you can maybe quantify it at this point, but directionally it would be interesting to hear your color, but how many more stay over rooms do you think we'll need to need to be cleaned next year are the brands pushing for.
Yeah, the the happy hours to come back and just maybe how much of a headwind do you think all the extra on the brand side will be as we flip the calendar into 'twenty four.
Interesting question certainly.
We have dialogue with the brands on an ongoing basis about.
How to further improve the experience for consumers at our hotels.
Generally speaking as of today at those conversations.
Or absent.
Significant references to increases and amenities or services at the hotels I think by and large.
The majority of that the conversations that we're having today with brands.
And as you know we sit on a number of brand Advisory report so.
These conversations extend beyond.
Specifics related to our the owned portfolio.
But the focus has tended to be much more around the condition of the assets.
I think the need for as an industry a reinvestment in our hotels and.
Greater emphasis and attention paid to.
Repairs and maintenance.
I think in the near term, meaning in the next 12 to 18 months much more likely that we'll see.
<unk> focus on those areas.
Which for our business put us in a very good position, having reinvested in our portfolio.
Suddenly we have.
Assets that are in very good condition, but as an industry I think a more significant amount of attention will be going to that then.
Expanding dinner offerings R. R.
Returning to pre pandemic housekeeping models buyer.
By and large.
The adjustments in housekeeping.
Have have really furthered a trend that had begun pre pandemic.
And we're still making accommodations for guests who would like their room claims every day.
In order to maintain guest satisfaction, so I think.
I see very little movement on that part impacting our ability to drive profit.
And because of the position of our hotels I think we will give.
Given how brand pressure is likely to be focused.
The near term, we're in a very good position.
Okay helpful. There. Thank you and then just second question just on the development deals more broadly can you remind us of the math you do on a development deal like Nashville.
What type of excess return you're targeting over buying.
Stabilized asset light Cleveland, and then secondarily kind of how big are you willing to take your development commitment dollars at this point.
So.
The answer to the first part of your question is a little bit complicated technically we target a return that's equal to the return that we could achieve on existing assets functionally.
Because we tend to be more conservative in underwriting them.
Market growth in out years.
<unk> tend to be more conservative overall in our underwriting on new development deals and the result has been that when we look at.
Our acquisitions in total by and large.
Our acquisitions of new development deals have outperformed.
The properties that we acquired were stable and operating prior to acquisition.
That's more of a function of conservatism.
Our underwriting for a market.
Then a specific target, but the result ends up being about the same certainly taken into consideration.
Incremental market risk <unk>.
Radical increments of market risk, we are taking but remembering in every case, we do not take any risk related to cost overruns on the project those are born 100% by the developer.
And then remind me what your other question was.
Oh total total.
Yeah, Doug how big jump.
Generally speaking.
We would given the size of our portfolio like to have a pipeline of three to five.
Deals I think given the scale of the current deals that we're doing that would be an appropriate level with delivery over a two to three year period.
To the extent we were to pursue development deals are smaller than the two week currently have under contract.
We could scale in terms of number of deals slightly higher than that.
And again remembering that as we think about funding development deals on a go forward basis.
We certainly have at least for the deals we have under contract ample.
Ample capacity on our line of credit.
But the bulk of those acquisitions, we intend to fund them.
Utilizing <unk>.
Excess cash from operations.
<unk>.
Disposition proceeds.
Hopefully.
At some point with with potential equity raises.
Though obviously given today's valuation.
That would not be attractive to us.
Got it and then just one follow up on Nashville, where do you think your basis is going to be relative to.
Where select service hotels are trading today in the market.
Meaningfully lower I mean, we've disclosed and again remember that the properties still.
Still under development, meaning we're still finalizing our actual key count and some of the melodies, but we've given.
We anticipate to be.
The highest potential purchase price and a good approximation for where we think the number of keys will lineup that puts us well.
Well over 100000 a key.
Less than.
I mean, our comparably marketed select service hotels in the same area. So I think we feel very good about our basis in the market.
And incredibly good about the location.
<unk> is really in the heart.
Tom Nashville, with within very close proximity to major demand generators.
All helpful. Thank you very much.
Thank you.
Again, if you have a question please press star.
And then one on your Touchtone phone.
The next question comes from Chris Darling with Green Street.
Please go ahead.
Thanks, Good morning.
Just and going back to the transaction market, you've previously talked about a call it 5% to 10% bid ask spread your comments make it sound like that spread is beginning to close so is that accurate in any way for you to quantify the changes you might be seeing.
It is I I think and has been driving our increased interest in specific transactions.
Firstly.
While we've seen a slight movement in cap rates.
In most cases that that movement has been offset by improved fundamentals for the assets. So we haven't I haven't seen a corresponding adjustment by and large.
In terms of valuations for assets.
That said.
We're competing with fewer people in the marketplace at least at price points, where sellers would be willing to transact, which has put us in a position to.
To really Hum.
Have serious conversations with potential sellers about where a transaction might happen.
I think.
As has always been the case.
As we look at it.
And underwrite potential acquisitions, we're looking.
To achieve near term yields comparable to the yields we have achieved on recent transactions.
But.
As importantly, pursuing assets, where we anticipate future growth to be in excess of our our larger portfolio or the.
The anticipated growth rate for our larger portfolio and generally where we anticipate.
The hotel to need less in the way of near term Capex.
Looking at the two projects we have under contract I think there are great. Examples.
The asset we recently closed on in Cleveland.
Just come out of a full renovation and so.
Think near term capex needs for that hotel will be close to zero and its been effectively repositioned in a way that we think will enable it to increase market share in a market, where we see meaningful growth on a go forward basis.
Got it that's all very helpful.
And then maybe switching gears just thinking about some of the new brand concepts that Marriott and Hilton have introduced recently can you speak to your level of interest in gaining some exposure there.
Are you in discussions with any of your development partners to pursue.
Are those newer concepts.
So well our motto is I guess technically a new concept for a hilton meaning that there are very few of them that exist and certainly we've demonstrated interest there speaking specifically to the.
The lower.
<unk> here.
In our new brands that have been announced whether it's spark or any of the.
Lower tier extended stay brand.
We are not currently actively pursuing deals in that space, though.
We have regular conversations with the brands about the positioning of that new product and how it relates to other assets within our existing portfolio.
Think we're likely to track that space, but generally speaking.
I think our model.
And our strategy has been very successful for us.
It's been to invest.
In the product and the.
<unk> scale and upper mid scale space, where we feel we can achieve the best balance.
Great potential.
Now with <unk>.
Ability to drive strong cash flow and margins.
Alright, that's all from me thank you.
Thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Justin Knight for any closing remarks.
We appreciate you joining us today.
As is always the case, we hope that as you travel you will take the opportunity to stay with us or one of our hotels have a great day and we look forward to meeting with many of you are in the <unk>.
Near term on the road.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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