Apple Hospitality REIT, Inc. (APLE) Q4 2020 Earnings Call Transcript

Greetings and welcome to the Apple Hospitality REIT fourth quarter and full year 2020 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Kelly Clarke, Vice President of Investor Relations. You may begin.

Thank you and good morning. We welcome you to Apple Hospitality REIT's fourth quarter and full year 2020 earnings call on this, the 24th day of February 2021. Today's call will be based on the fourth quarter and full year 2020 earnings release and Form 10-K, which were distributed and filed yesterday afternoon. As a reminder, today's call will contain forward-looking statements as defined by federal securities laws, including statements regarding future operating results and the impact to the company's business and financial condition from and measures being taken in response to COVID-19. These statements involve known and unknown risks and other factors which may cause actual results, performance or achievements of Apple Hospitality to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Participants should carefully review our financial statements and the notes thereto, as well as the risk factors described in Apple Hospitality's annual report on Form 10-K for the year ended December 31, 2020 and other filings with the SEC. Any forward-looking statement that Apple Hospitality makes speaks only as of today and the company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, certain non-GAAP measures of performance, such as EBITDA, EBITDAre, adjusted EBITDAre, adjusted hotel EBITDA, FFO and modified FFO will be discussed during this call. We encourage participants to review reconciliations of those measures to GAAP measures as 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 applehospitalityreit.com. This morning, Justin Knight, our Chief Executive Officer and Liz Perkins, our Chief Financial Officer, will provide an overview of our results for the fourth quarter and full year 2020. 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. Before I begin, I want to take a moment to acknowledge the recent passing of Arne Sorenson. Arne was one of the most intelligent and insightful individuals in our business and a truly good person. He aspired to make the world a better place and cared deeply for friends, family and business associates. Marriott is fortunate to have attracted many great people over the years and I have every confidence that the company will be in good hands. But I personally will miss him. And I know others will as well. Challenges brought by the COVID-19 pandemic meaningfully impacted travel beginning in March of last year, making 2020 the most difficult year on record for the hotel industry. We are incredibly grateful to work with the best management teams in the industry who, in light of unprecedented challenges, effectively adjusted to the new environment and continued to serve guests with care. In 2020, we were unrivaled in our ability to keep our hotels open and that would not have been possible without their dedication and hospitality. I also want to recognize the efforts of our team members at Apple who have worked tirelessly over the past year. Our success is in large part a direct result of their work. We have developed and refined a hotel investment strategy unique in its ability to mitigate risk and volatility while producing compelling investor returns throughout economic cycles. Our strategy is straightforward. Own a portfolio of geographically diversified, select service hotels affiliated with the best brands, work with the best management teams in the industry, consistently reinvest in our hotels to ensure they remain relevant and competitive, and maintain a flexible capital structure with low leverage. The current environment has created more significant operating challenges than we experienced in prior cycles. This highlighted the merits of our underlying strategy. At the onset of the pandemic, we shared our expectation that we were in a position to navigate the downturn more profitably than most and would be among the first to benefit from a recovery in travel. With meaningfully lower leverage, greater market diversification and more efficient asset level operations, we were first among publicly traded lodging REITs to return to positive cash flow in 2020 and are pleased to report adjusted hotel EBITDA of $122 million, adjusted EBITDA of $93 million, and modified FFO of $20 million for the full year. While the booking window was short and we have less visibility into future operating performance than we have in years past, we are building off a relatively strong base. All of our hotels are open and portfolio occupancy was approximately 45% in January and continued to improve in February. Demand for our hotels was broad-based, including a mix of leisure and business, transient and small groups. We expect occupancy to continue to improve throughout 2021, with domestic leisure demand driving performance early in the year and business demand, led initially by local and regional accounts, strengthening as the year progresses. The increase in travel will be facilitated by rollout of vaccines and loosening of travel restrictions and the pace of recovery will vary by market. Our broad geographic diversification has provided us with relative stability through multiple economic cycles. The distribution of our assets across a variety of market types and geographic regions minimizes the impact of regional demographic shifts and provides broad exposure to a myriad of industries and demand drivers. Over the past year, our limited exposure to large gateway markets and urban city centers proved a significant advantage as these markets were disproportionately impacted by travel restrictions, including limitations on large group events. Our portfolio also provided unparalleled exposure to convenient drive-to destinations and government, regional, business, and leisure demand drivers. We believe that our geographic distribution will continue to be an advantage for us in the coming year and are seeing increased bookings from existing demand generators and encouraging increases in small group and regional business transient. The assets we own are perfectly suited to accommodate guests in the current environment. Our rooms-focused portfolio has broad appeal and is efficient by design, enabling us to operate profitably at low occupancy levels. The smaller public areas and larger, more comfortable rooms, often offering kitchens and/or suite amenities, allow us to more effectively implement enhanced cleaning and sanitation protocols and provide guests with a private functional space they are looking for. The value proposition for guests is further enhanced by affiliation with brands that help to create consistency in guest experience, ensure that important standards are implemented, and provide incremental benefits through powerful loyalty programs. For all of these reasons, our hotels have continued to be attractive during the past year, just as they have been during prior downturns, and we feel confident in their ability to continue to have appeal throughout the recovery. Our management companies, many of whom have been partnered with us through multiple economic cycles, have performed admirably this past year. From the onset of the pandemic, we were able to leverage their experience to effectively adjust property level operating models and minimize losses while continuing to serve guests with warmth and hospitality. With all of our hotels open, we have retained key managerial and sales staff to continue both current and forward-looking sales efforts. Management company above-property revenue support teams work closely with our internal revenue management resources to identify areas of opportunity in the current environment and to ensure we are setting ourselves up optimally for the future. Our relationship with our management companies has been built over decades and we have worked to ensure that our efforts are complementary and additive. Leveraging our scale and sophisticated data analytics, we worked from the onset to establish standardized operating models for low occupancy hotels and to identify and share best practices which could then be implemented across our portfolio. We drove costs down by renegotiating national contracts with vendors and service providers while our managers ensured that we were meeting guest needs. Our combined efforts over 2020 have allowed us to begin this year in a position of strength with momentum to build on. We entered the pandemic with a young, well-maintained portfolio and during the year invested approximately $38 million in capital expenditures. Despite prudent reductions of approximately $50 million to our originally planned 2020 capital spend, we have continued to ensure our assets remain competitive within their markets and protected during periods of lower occupancy. Our in-house project management team coordinated with regional and property level staff to put important processes in place to ensure all systems continue to operate efficiently and that our assets were well-maintained. As we welcome increasing numbers of guests back, our hotels are ready. Finally, we have always maintained a flexible balance sheet with low leverage. Similar to the other elements of our strategy, this has helped to mitigate volatility in our performance and enabled us to successfully weather multiple economic downturns and act when the timing is right on accretive opportunities. The strength of our balance sheet has enabled us to avoid issuing dilutive equity and to benefit from lower capital costs. In 2020, lower debt obligations contributed to our ability to reach corporate level breakeven earlier than our peers, preserving capacity and enabling us to acquire five hotels since the onset of the pandemic. Most recently, we acquired the Hilton Garden Inn in Downtown Madison, Wisconsin. The newly constructed 176 room hotel is located neatly adjacent to the University sporting facilities and in close proximity to government, business, and leisure demand generators. In 2020, we sold three hotels for a combined sales price of approximately $55 million, including the Hampton Inn in Tulare, California, which was sold during the fourth quarter for approximately $10 million. The company's 2020 dispositions resulted in a combined gain on sale of approximately $11 million. As we announced last quarter, our Homewood Suites in Charlotte, North Carolina, remains under contract for sale for approximately $10 million. As the closing occurs, the sale is expected to be completed in the first quarter of 2021, and we expect to recognize a gain upon completion of the sale. The transaction volume in our industry continues to be low. We expect an increase in the number of opportunities as we move through the recovery and are well positioned to act in ways that will further grow and enhance our existing portfolio. Our outperformance during these unprecedented times is a testament to the strength of our underlying strategy and low leverage balance sheet and has preserved our capacity to pursue accretive opportunities in the early stages of a recovery. We remain intently focused on maximizing long term value for our shareholders and are confident we are well positioned as travel continues to recover. It is now my pleasure to turn the call over to Liz, who will provide additional detail on our financial results and performance across our market.

Thank you Justin and thank you everyone for joining us this morning. While we began the year ahead of our original expectations, the environment quickly deteriorated in March with the impact of the COVID-19 pandemic and resulting shutdowns driving industry occupancies to historic lows. April portfolio occupancy dropped to 18% and at that time, we estimated a monthly cash burn of $18 million before CapEx but after G&A and debt service at occupancy between 15% and 20%, without visibility and how long our portfolio would remain at such depressed levels. With the swift focus and action of our corporate management company and property level team, we were able to meaningfully reduce expenses, adjust and optimize our labor models at our lowest occupancy, make the determination to keep all hotels open after a thorough risk and financial assessment, focus on securing the remaining demand in the market and begin rebuilding occupancy to breakeven at the hotel level in May. By retaining key sales associates and keeping our hotels open, we maintained momentum and continued to grow occupancy through the summer and into the fall, reaching 54% in October, benefiting from the return of leisure demands, but also government, healthcare, construction, disaster recovery, insurance, athletics, education, crew, and local and regional corporate business. A continued focus on property level cost controls, efficient corporate overhead and relatively low interest obligations enabled us to return to positive cash flow at the corporate level by July and for the year. Together with the sustained efforts of our third-party management companies and with the support from our brands, our best-in-class asset management team continued to implement cost elimination and efficiency initiatives, effectively managing labor costs, reducing and eliminating certain services and amenities, and renegotiating rates under various service contracts. These efforts enabled us to lower rooms expenses by 19% year-over-year on a per-occupied room basis and total property level operating expenses by 48% during the fourth quarter as compared to the same period last year, and 44% for the full year 2020 as compared to 2019. Corporate G&A was reduced by 34% for the quarter and 19% for the year as compared to the same period last year. Having achieved positive cash flow beginning in July and continuing through October, we further reduced borrowings on our line of credit to minimize interest expense. These efforts resulted in impressive bottom-line performance for the quarter and full year. Adjusted hotel EBITDA was approximately $23 million and $122 million, and adjusted hotel EBITDA margin was approximately 17% and 20%, respectively. For the quarter and full year, adjusted EBITDA was approximately $16 million and $93 million. And modified FFO was negative $2.5 million for the quarter and positive $20 million for the full year. In 2020, the most challenging year ever for our industry, we were able to achieve positive adjusted hotel EBITDA in every month except for April and positive adjusted EBITDA for the full year. Taking a closer look at demand trends, after rebuilding occupancy through the summer and into the fourth quarter, we did experience typical seasonal declines in November and December relative to October. Occupancy declined to 45% in November, 40% in December, and 47% for the full fourth quarter, down 36% from the fourth quarter of 2019, which is a slight improvement to the year-over-year declines in occupancy we experienced for the third quarter despite an increase in COVID cases and tightening of restrictions over that time. We experienced similar sequential seasonal declines in average daily rates for the third and fourth quarters relative to 2019, down approximately 25% in both quarters. While we certainly would have hoped for continued growth through the fourth quarter, we are encouraged by the increase we have seen in January and February compared to December. January's rate increased modestly from December and occupancy rose to approximately 45%. Early trends in February are also positive. For the week immediately preceding the Presidents' Day holiday, almost 60% of our hotels had occupancy over 50%, and portfolio occupancy for all hotels was 54%, similar to the occupancies achieved in October, the highest occupancy month since the onset of the pandemic. Saturday of that same holiday weekend, our full portfolio occupancy reached 78%, and in high occupancy markets, we did recapture some pricing power. As we move through February and compare stabilized weeks, we continue to see occupancies increase day-over-day. While the environment is still unpredictable and we have limited visibility, we are encouraged by the growth we have seen following our seasonally slowest month and are optimistic that as we move into the spring and traditionally higher occupancy and RevPAR months, we will continue to see results improve. Top-performing hotels benefited from a variety of demand generators. Our Courtyard in Charlottesville, Virginia contracted to provide rooms to the University and ran at 100% occupancy for the quarter. Government and construction business drove occupancy at our TownePlace Suites in Suffolk, Virginia, which was 93% occupied. National Guard and medical group business drove quarterly occupancy at our Hilton Garden Inn and Homewood Suites in El Paso, Texas, which both ran in the 80% range for the quarter. A number of our hotels in California and several of our markets in the Southeast saw increases in demand due to wildfires and storm-related business. We also benefited from medical business related to COVID treatment and vaccinations in various markets. Weekend occupancies for our portfolio continued to exceed weekday occupancies by approximately 12 percentage points for the quarter, though the spread tightened in October and widened sequentially in November and December, typical with business travel trends around the holidays. Our transient and group breakdown for the quarter and full year, which includes both leisure and business demand, was approximately 87% transient and 13% group, generally in line with the same periods of 2019, trading a point in group for a point in transient this year. From a mix of business standpoint during the quarter, government and bar were fairly consistent year-over-year, while negotiated decreased by six percentage points, a slight improvement from the third quarter. Discount segments increased by nine percentage points, reflecting an increase in leisure as a percentage of our business year-over-year. We continue to see production across several business segments with relative strength in industrial, medical, government, and military business, offsetting more significant year-over-year declines in demand for large technology companies and financial services. We anticipate that leisure will continue to lead the recovery through the first half of the year, but are encouraged by recent increases in demand from local negotiated and other business and government accounts as well as small groups. As the recovery progresses, demand is likely to vary broadly by market. Our broad geographic distribution with significant exposure outside of large urban and gateway markets positions us to be early beneficiaries as suburban markets are likely to outperform urban markets, and group demand is likely to be led by small corporate, leisure, and sports events. Similar to the third quarter, from a channel mix perspective, our fourth quarter booking shows property direct representing approximately 31% of our total room night channel mix, up seven percentage points from the prior year. Brand.com bookings are relatively consistent with last year, down two points to 35%. Choice was down approximately two points to 5%, while OTA was up approximately six percentage points to last year at approximately 17%, reflecting an increase in leisure during the quarter compared to 2019. GDS was down significantly during the quarter, decreasing approximately nine percentage points to 10%, again, consistent with limited corporate travel. ADR for our portfolio was down approximately 25% for the quarter versus prior year, driven largely by a mix of business in our hotels and competition for customers in a low occupancy environment. As has been the case in past cycles, we anticipate rate will continue to be challenged until portfolio occupancies allow for more active management of our mix of business as well as the ability to reduce discounts and push bar rates, which further impacts ADR across all segments. This typically occurs once we get above 70% occupancy. We are encouraged by rate improvement over the Presidents' Day weekend, where single-day occupancy of approximately 78% was accompanied by a 9% week-over-week improvement in ADR for the full portfolio. As we have discussed in previous calls, rates have the ability to materially impact profitability. While October results were the most favorable in the quarter and strong occupancy enabled us to produce positive cash flow at the corporate level, November and December adjusted hotel EBITDA remained positive, but property level cash flow was insufficient to cover all corporate costs. While our original estimated breakeven occupancies before CapEx generally applied throughout the year to account for the impact of rate, we estimate breakeven RevPAR before CapEx to be approximately $50 based on operational costs and rate and occupancy trends since March. We expect the RevPAR improvements we have begun to see in January and February will continue throughout the year and will likely accelerate as the year progresses and our industry benefits from the rollout of the COVID-19 vaccines and loosening of travel restrictions. As I highlighted earlier, we expect that many of our markets will benefit early from the recovery, and we are already seeing signs of improvement in business travel bookings, particularly by mid-market local accounts as well as continued strength in leisure demand. While we are beginning the year in a relatively good position, we continue to have limited visibility into the timing and ultimate trajectory of the recovery and are not in a position to provide full operational guidance at this time. We do, however, expect corporate G&A to be between $28 million and $32 million, interest expense to be between $75 million and $80 million, and capital expenditures to be between $25 million and $30 million for the full year. As a reminder, the company paid distributions of approximately $67 million or $0.30 per share during the first quarter of 2020. In March, we suspended our monthly distributions with our last paid on March 16, 2020. The company's Board of Directors, in consultation with management, will continue to monitor hotel operations, compliance with debt covenants, projected taxable income, capital improvements and investment opportunities, and intends to resume distributions at a time and level determined to be prudent in relation to the company's other cash restrictions, requirements, and uses. Turning to the balance sheet. At quarter-end, we had $1.5 billion in outstanding debt consisting of $513 million of mortgage debt secured by 33 hotels and $976 million outstanding on our unsecured credit facilities with a weighted average interest rate of 3.9%. As of December 31, we had available cash on hand of approximately $6 million and unused borrowing capacity under our revolving credit facility of approximately $319 million, with only $55 million of maturities in 2021. As Justin mentioned, our conservative capital structure has been a key element of our underlying strategy, and as a result of that discipline, we entered the downturn in a relatively strong position. Low leverage, broad geographic diversification, and our focus on efficient, rooms-focused hotels has minimized our use of available liquidity to sustain operations, thus preserving our balance sheet and equity value and positioning us to capitalize on external growth opportunities early in the recovery. With the continued deployment of the vaccine, warmer weather, and the trajectory of recent results, we are expecting to see stronger operating performance as we move throughout the year. However, due to continued disruption from COVID-19, fourth quarter seasonal declines, and limited visibility into future demand and results, we began discussions with our lenders in January to extend the covenant waiver period for our unsecured credit facilities. While we have not yet finalized, we continue to be extremely grateful for the ongoing support of our lending group and anticipate closing in the near future. In the coming months, our company is optimally positioned to grow value organically through improved hotel operations and externally through accretive transactions. With approximately $325 million of total liquidity at year-end, only 34% total leverage, positive cash flow for much of 2020, and encouraging portfolio occupancy early in 2021, we are confident in our ability to continue to navigate the current uncertainty, preserve the value of our equity, and strategically position ourselves to take advantage of opportunities. Before opening the call for questions, I want to thank our teams who have worked tirelessly to optimize performance in the most challenging operating environment our industry has ever faced. Their efforts and experience have uniquely positioned us for outperformance. We will now open the call for questions.

Our first question is from Austin Wurschmidt with KeyBanc. Please proceed with your question.

Great. Thank you everybody. I wanted to focus on the external growth side. It's something you guys have commented on quite a bit here, and I am just curious, Justin, transaction volume still remains low, but how much have you seen maybe activity pick up in the last month or two? And do you feel like you have enough visibility today to move forward with a deal? Or are you more reluctant, I guess, given still the uncertainty around maybe business travel more broadly?

It's a great question. Thanks for joining us today, Austin. We, as are others in our space, are continuing to become more confident in the trajectory of the recovery. In terms of total deals available, we are still seeing limited supply in the market. The brokers who historically this time of year would have a large number of assets available for sale have very few. We have had a number of conversations with individual owners who are contemplating selling. But I think, thinking about timing, the types of assets that we own and the types of assets that we would be interested in buying are now cash flow positive at the property level largely. And so they are in a position to be more likely to trade. I think our positioning around those improves as the year progresses. Right now, owners are still receiving or benefiting from significant flexibility from lenders and some government assistance. As those things burn off and as we move further into the year, I think we will continue to see an increased number. I think it's worth highlighting as well that we continue to see significant interest from potential buyers in the space. I think given the relative position of our publicly traded, the bulk of that is coming from private equity. There were significant funds raised in advance, and we are in a unique period where early opportunities may actually trade up just because of the imbalance of supply and demand with fewer assets in the market and more buyers who are looking for assets. As this shapes up, we think the window of opportunity will be extended. And I think I have highlighted in past conversations with you and in past calls that our expectation is that as we progress through the recovery, there will be assets that come to market for a variety of reasons, and one of those will cause, we think, continued inventory in the market available for purchase is that at some point the brands will mandate a return to their capital improvements programs, and those who have depleted FF&E reserves and utilized those funds to cover short-term shortfalls from a debt service standpoint will be more likely to bring assets to market at that time. So I think it's a long way to answer a short question. But near term, we think there will be selective opportunities, whereas in the longer term, we expect opportunities to increase as the year progresses.

That's a lot of interesting comments there. I want to kind of focus on the piece about the supply-demand imbalance in terms of number of transactions and capital on the sidelines that's waiting to be deployed. So then when you think about executing maybe on the disposition side here earlier in the year or before really volume ramps up and redeploying that, with your low leverage model, interest rates at all-time lows and presumably the financing markets for hotels improving, do you feel like you are able to compete with more levered buyers on larger transactions? Or are one-off relationship-type deals still more attractive to you?

Well, I think just from a product quality standpoint, one-off deals continue to generally be more attractive to us. I mean as we look at larger portfolios available and/or owned, there's a stark difference generally speaking between the portfolios owned by publicly traded companies and those held by private equity owners. And then you beyond that, there are smaller portfolios that are high-quality that are owned by owner-operators that would also be attractive to us. But as we look for assets that are a good fit for our portfolio, the bulk of the opportunity we think exists in individual asset trades. Though as we highlighted in the past, we continue to underwrite any and all deals that come to market. And at appropriate pricing, we would be willing to pursue portfolio transactions as well. I do not see us as being disadvantaged in the current environment relative to higher leverage private equity firms. The desired return that those groups are seeking and the availability of debt for larger portfolios to those groups creates a mismatch. We actually, as some of our peers have demonstrated, have access as a publicly traded company to relatively inexpensive financing should we see an opportunity worth pursuing.

Got it. That's very helpful. And thank you. I will hop back in the queue. Thank you.

And our next question is from Anthony Powell with Barclays. Please proceed with your question.

Hi. This is Allison, on for Anthony. You guys have done very well in generating demand related to COVID-19 in a variety of markets. So when do you think that business starts to moderate or go away? And how quickly could you replicate that business? Thanks.

We have benefited universally from COVID-related business. I think that as we progress even through 2020, where we were seeing influxes of that business in certain markets for certain hotels, when we saw that you pullback, it was a direct result of cases coming down and business and things being more open and it being safer to get out and about, and I think we were seeing compensating demand. So as we look forward, we would be hopeful that that same pattern would continue that as cases increased, like we saw in 2020, we would see increases in traveling nurses or vaccine deployments, and as numbers came down, people would be safe and feel safer to get out and travel, whether for leisure or business travel. So I don't know the exact timing, although we are encouraged by the vaccination deployments and the anticipation that a large number of Americans could be vaccinated and we could reach herd immunity mid-year. So I think that as you have heard others anticipate that in the back half of the year, we would see a pickup in both leisure and some regional and local business travel, at that time you may see COVID-related business pullback. But there would be offsetting demand.

That was very helpful. Thank you.

Thank you.

And our next question is from Dany Asad with Bank of America. Please proceed with your question.

Hi. Good morning, everybody. Liz, you mentioned in your prepared remarks that Apple lowered room expense by 19% on a per-occupied room basis. It was very impressive considering the limited service portfolio. Can you help us bucket the different components of that expense cut? And then how much of that will be sustainable as the recovery firms up?

That's a million dollar question, Dany. So across the rooms department, we saw decreases in expenses pretty universally. I mean, wages certainly, our teams continued to be very efficient. We had managers early on and even during the fourth quarter pick up shifts, and so hourly wages were able to be well controlled. Guest supplies, cleaning supplies, comp services, the team really has taken a look at every line item and every expense across the hotel, not just in rooms, and found ways to be more efficient. I mean we have spoken from the beginning around really looking at the value proposition of what's most important to guests right now. The brands have certainly been supportive and flexible as we offer guests what's necessary but in a safe way that meets their needs. And so we, in the fourth quarter, did see a slight increase per-occupied room in wages specifically relative to what we saw in the third quarter, although that's not too unexpected when you have holidays where people are taking paid time off, and in light of the anticipated seasonal increase in the new year following the spring and summer. We certainly didn't want to furlough or lay anyone off. We saw the declines in November and December that sort of increased our per-occupied room cost relative to the third quarter as short term, and so we didn't want to make drastic cuts.

Got it. And then my second question is just in terms of channel mix, how do the metrics that you mentioned just earlier in the prepared remarks, how do those compare to the channel mix we saw in the 2008-2009 trough? Like specifically, I am curious to know as to where OTA mix might have peaked last time around?

I would have to go back and look and see what visibility we had to channel mix for our portfolio at that time. I would anticipate that OTA business has increased between that time and now universally. I think we have started to gain some momentum and regained some of that share and redirected some of those bookings back to direct channels later on this cycle, this past cycle. But I think that we find the OTA business is a greater percentage currently than it was then.

Yes. And to that, this is a very different cycle than the last one. Looking back at the last cycle, there was still a significant amount of business transient, even during the depth of the downturn. And we ended up doing more of adjusting the mix of our business, taking specifically more government business in a number of markets and other segments that have slightly lower rates but enabled us to build base. I think what's unique here is that we have seen really outsized performance and what appears to be a significant pent-up demand on the leisure side, which is driving short-term the OTA numbers for us. But as Liz highlighted in her prepared remarks, we are beginning to see a transition and increased number of bookings from some of our more traditional business transient accounts, which we see as a good sign as we move through the year and look to continue to fill occupancy across our portfolio.

And Justin, how much control do you have like over managing those channels? So like, do you owe anything in terms of contractually to the OTAs? Are you able to shut them down as business transient recovers more? If they are going to recover more quickly, how much control do you have over that, the channel mix?

We certainly can influence channel mix. It gets easier as occupancy is increasing and the revenue management systems can preference highest rated and most profitable business. We have had significant development in the revenue management systems over the past cycle and especially in recent years. So they are set up to quickly adapt to changes in demand. So we do have control. But I think that it gets easier the more demand there is to the sort of mix management and preference. So in the current environment, we have most channels open taking the business that's available. As I mentioned in my prepared remarks, once we get to 70% occupancy or so and there is relatively strong demand in the market, then we can start really preference business.

Thank you.

And our next question is from Bryan Maher with B. Riley Securities. Please proceed with your question.

Good morning, guys. Kind of circling back to the acquisitions discussion earlier. Justin, as you sit here today and based upon what you are seeing from brokers and others, do you guys anticipate being a net acquirer or net of dispositions this year? And if so, to what level as measured in, I don't know, tens or hundreds of millions of dollars?

It's a great question. We are in a great, in an enviable position right now because we are unique in that we can be opportunistic. I think it's early in the year to determine exactly how things will play out. As we pursued the sale of assets within our portfolio, we have done so only when we saw attractive pricing. We haven't needed to sell assets to reposition our balance sheet. And I think it's fair to assume that we would look at dispositions in the same way as we move throughout the year. I highlighted the potential supply-demand imbalance, which could create motivation for us to more seriously look at potential dispositions from our portfolio. But I think as the year moves, you will see us begin to shift focus towards the back half of the year towards acquisitions, as we expect most of the opportunities will begin to materialize as the year progresses. Whether or not we are net buyers or sellers this year is difficult at this point. I think if you look at what we are likely to do over the entirety of the cycle, our expectation is that we would be net acquirers of assets over the entirety of the cycle. We really see this as a unique opportunity for us to build our portfolio and us as being uniquely positioned given the strength of our balance sheet to do that in a way that benefits our shareholders.

Great. And so you have a track record of being the takeout buyer on some newly developed hotels. Have you seen any existing relationships or new relationships you might have come across with hotel builders currently who may be desperately looking for a takeout when the property gets its CO in the next couple of quarters?

We haven't seen desperation at this point. But certainly, and I have highlighted this in past calls, early in the cycle our takeout has greater value for developers who generally are not able to borrow as much, absent our takeout in terms of loan-to-cost on new development deals, plus given market uncertainty, I think there is increased value as they look at potential development deals and having a firm takeout price, reducing their risk related to managing construction costs. Generally, early in the cycle we are able to sign up good deals, taking advantage of lower construction costs and this incremental value that we provide developers early cycle to negotiate really good pricing for deals which then puts us in a great position as the cycle progresses to add to our portfolio at attractive pricing relative to market pricing for existing deals in later years. I think you will see us as the year progresses begin to look more seriously at those types of deals. But short term the bulk of our focus is going to be on existing deals, both looking as a potential buyer and a seller.

Great. And then just last for me. You guys put in place an ATM. I forget when exactly was it. I think maybe the third quarter. Was the thought process when you put that in place more to just have the liquidity facing that or as a more aggressive acquisition opportunity used later down the road? What was your thought process when you put that in place? And that's all for me.

Okay. And to be super clear, our safety net is our strategy. So our safety net is having assets that have lower volatility, higher margins, and having a strong balance sheet coming into this. So really our view relative to the ATM is for that to be a tool to use on offense. And I have highlighted in the past that really as we look at potential acquisition opportunities, the math is easy for us and we are able to pursue opportunities when we see an ability, based on market pricing for specific assets, to generate incremental value for our existing shareholders. I think to the extent we tap our ATM, it will be around specific opportunities that we see available to us in the market.

Okay. Thank you, Justin.

Thank you.

And our next question is from Neil Malkin with Capital One Securities. Please proceed with your question.

Hi. Good morning, guys.

Good morning.

First one, you talked about you are currently working on extending your covenant waivers. A lot of the other peers have called out the acquisition flexibility or increase thereof. I don't think I have seen them in yours, and I don't know you called it out this time or last time. Do you guys have the capacity to do acquisitions without some sort of capital event? That would be the first part. And the second part would be, because you will come out from under the waivers first, would you be willing to get more aggressive if you see more visibility in the portfolio on existing deals just kind of near-term, levering up a little bit?

Good morning, Neil. Related to your amendment question, our first amendment, we did have a carve-out for acquisitions. We utilized that. We were able to execute the forward commitments that we had. And so since the beginning of last year, we have closed on five hotels, including Madison which we recently closed on. So we had a basket. We used the basket. And so we did have the flexibility with the first amendment. Going into extending the covenant waiver period, it's a little bit early for me to give details as to what will be included. We anticipate being able to provide more information in the near term. We are close to finalizing everything with the banks. But conversations are going well and we are in a relatively good position as we have those conversations. And I think that we will reach an agreement that's helpful for everybody.

And looking at our relative positioning, to answer the second part of your question, should we see the market free up in a meaningful way, we have a tremendous amount of confidence that we could access the debt markets in advance of a recovery to pursue specific opportunities. We don't think that now is the time for that and to take on incremental leverage and store cash. Absent an open market with a ready ability to deploy it, we think would be counterproductive.

I appreciate your comments. Second one is, do you have, I guess, to quantify how much your transient demand was down from 2019 levels? Just trying to get a sense for how that sort of pent-up demand from the leisure side comes back in this year as the vaccines or vaccine proliferation continues, herd immunity, people get more comfortable and you have the ridiculous amount of stimulus pumped into people's bank accounts. It just seems like there's going to be an extremely strong amount of transient business, especially close to your what are adjacent or approximate assets. So can you just maybe frame that up in terms of, if leisure was down like 50% from 2019 levels and could it go to 75%? Or was it down like 70% from 2019? Just how do you think about that? And how do you expect that to play out?

Leisure transient. I think across the portfolio, both leisure and business transient, when you look at our occupancy, we were down for the quarter 36% year-over-year and for the full year 40%. And so from a just broad transient perspective, while we do think leisure probably outpaced business this past year, broadly the industry is significantly down and there is pent-up demand. Quantifying the leisure component, leisure has been first to travel. They have been eager to travel. We seem to have an indication, even with Presidents' Day recently that there is a desire to get out. I think your more traditional warmer summer leisure months, that's a good indicator that there's some pent-up demand there. Quantifying it is a little tricky because we don't have perfect visibility into why people travel and broadly we have a mix of demand generators in our markets. And so even looking, as we have historically at weekday versus weekend patterns, it gets a little tricky with people being able to work remotely and reasons for travel blending.

Sure. Yes. Just curious how you guys think about that. Last one is, I know obviously it just happened, but the unfortunate passing of Arne. Any reads or is there anything you might be concerned about risks or opportunities in terms of how you negotiate in terms of your strategy, how you look at your brand committees you are on, brand proliferation supply, brand standards, anything that you maybe are thinking about that would have implications vis-à-vis your relationship with Marriott going forward?

As I highlighted in my earlier remarks, I think personally I had and I know a number of people within our organization had good relationships with Arne directly. We are going to miss him tremendously. That said, Marriott is an incredibly strong organization with a wealth of really talented and experienced people. We have worked with both Stephanie and Tony for many, many years now, and each of them brings kind of a unique perspective to leadership at Marriott, with Stephanie having a tremendous amount of experience on the customer-facing side and Tony, obviously, having a wealth of experience on the development side. I think, actually, they are very well paired for leadership. And that's not mentioning even the dozens and dozens—it’s probably a smaller number than the number actually of individuals within Marriott that we have very strong relationships with that we have developed over a decade. So I think we see Marriott being in good hands. And in terms of our ability to interact with the company, I don't think we see any significant change.

Okay. Thanks, guys.

Thank you.

And our next question is from Tyler Batory with Janney Capital Markets. Please proceed with your question.

Hi. Good morning. Thanks for taking my questions and congrats to the team on successfully navigating such a difficult year. The commentary thus far has been very helpful and very positive. So just a couple of follow-up questions on my end. And I wanted to go back to some of the commentary on February and real-time trends, if I could. Just interested if you could provide a little more color on what's driving the sequential improvement February versus January, December? How much of that is seasonality? How much of that is incremental demand or new demand versus what you saw at the tail end of 2020? And then are you starting to see the booking window extend at all as more demand is coming in?

Good morning, Tyler. The change in the booking trend, I think it's still a short window. We still don't have a ton of visibility. The improvement in February, we believe is an increase relative to previous month's seasonality. We typically begin to see occupancy and rate pickup even from January and January from December in normal healthy years. And we are seeing that seasonality play out some here. Still obviously at depressed levels due to COVID but starting to see that increase. So we are happy that while we did start to see seasonality take hold coming off of October and November and December, we are starting to rebuild. The trends that might be on the margin different that we are encouraged by are related to forward-looking bookings. And it's a small number because we don't have a lot on the books as we sort of move into the month. But what is picking up is small business, regional sort of corporate account travel. And so we are seeing more of that on the books for the next couple of months. Again, small numbers, but an improvement specifically, which at this time of the year we would expect. Business slows down in November and December with the holidays, and then going into January and February, you start to see business transient pick up in normal times. We are starting to see a little bit of that. It's just not your large corporate accounts. It seems to be more local, regional accounts, which is what we would have expected.

Great. And then just as a follow-up, can you talk a little bit about CapEx spending in 2021? Your expectations in terms of how much you are going to spend? And what exactly you are going to be spending the money on?

Yes. And that's a good question. Liz provided guidance in her remarks that it would be in and around, well, $30 million or less is our expectation for this year. But roughly half of that would be spent on specific projects, general maintenance, and/or technology or brand initiatives. And then the other half, the expectation would be spent on full cycle renovations. We have had an opportunity over the past year to do a deep dive on our entire portfolio and I think to really meaningfully assess the needs of our individual assets and to develop what I think is a very robust plan around renovations and renovation cycles on a go-forward basis. And I think what you can expect over the next several years is consistent with what we have been doing in the past. And that's focusing our spend around prioritizing assets where we feel we can get the best return on our investment, improving our market positioning through the renovations, and then I think consistent with past practice, ensuring that the money that we spend on individual assets is focused around those elements of the assets that are likely to have the greatest guest impact.

Okay. Very helpful. That's all for me. Thank you.

Thank you.

And we have reached the end of our question-and-answer session, and I will now turn the call over to our President and CEO, Justin Knight, for closing remarks.

Thank you. I really appreciate you being with us on this call today. I know a lot of you have a busy day. There are a number of companies reporting. We look forward to talking to all of you again in the not-too-distant future. And as always, I hope that as you have an opportunity to travel, you will take the opportunity to stay with us at one of our hotels. Have a great one.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.