Earnings Call Transcript - APLE Q1 2022

Operator, Operator

Greeting and welcome to Apple Hospitality REIT's First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kelly Clarke, Vice President of Investor Relations. Please proceed.

Kelly Clarke, Vice President of Investor Relations

Thank you and good morning. Welcome to Apple Hospitality REIT’s first quarter 2022 earnings call. Today’s call will be based on the earnings release and Form 10-Q, which we 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 our 2021 annual report on Form 10-K and other filings with the SEC. Any forward-looking statement that Apple Hospitality makes speaks only as of today, May 6, 2022 and the company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, non-GAAP measures of performance will be discussed during this call. Reconciliations of those measures to GAAP measures and definitions of certain items referred to in our remarks are included in yesterday’s earnings release and other filings with the SEC. For a copy of the earnings release or additional information about the company, please visit 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 first quarter of 2022. Following the overview, we will open the call for Q&A. At this time, it is my pleasure to turn the call over to Justin.

Justin Knight, CEO

Good morning and thank you for joining us. During the first quarter of this year, performance steadily improved across our portfolio, as the effects of the Omicron variant, which negatively impacted travel in January and February, eased. Both leisure transient and leisure group demand remained resilient. Smaller corporate and regional business travel continue to strengthen and larger corporate business made additional strides towards recovery. First quarter RevPAR for our portfolio was $92, up 67% compared to first quarter 2021 and down only 9% compared to the first quarter of 2019. Throughout this recovery, our revenue management teams have done an exceptional job, maintaining rate integrity and pushing rates beyond pre-pandemic levels on high occupancy nights. We are pleased to report ADR of $137 for the quarter, up 38% to 2021 and slightly ahead of our ADR for the first quarter of 2019. Occupancy for the quarter was 67%, up 21% to 2021 and down 9% to 2019. Occupancy, ADR and RevPAR improved sequentially through the quarter, with March RevPAR down only 1.5% to March 2019. Positive momentum has continued and preliminary results show RevPAR for the month of April ahead of April 2019. Our corporate and on-site management teams have continued to maximize profitability, despite a challenging labor environment and increasing inflationary pressures. First quarter operations were significantly ahead of the same period last year. With comparable hotels' total revenue up more than 70% relative to the first quarter of 2021, we achieved comparable hotels adjusted hotel EBITDA margin of 34% despite weaker occupancies early in the quarter, adjusted EBITDA of $78 million and modified funds from operations of $63 million or $0.28 per share. The pace of recovery has exceeded our expectations and the rapidly recovering operating environment provides meaningful momentum, as we enter the seasonally stronger summer months. We are encouraged that airlines are opening more business routes in response to rapid increases in demand and see this together with strong group bookings, adding to the robust leisure demand to fuel the recovery over the coming months. With locations in 86 markets across 36 states, we benefit from broad geographic diversification and significant exposure to a variety of business-friendly markets that offer attractive cost of living, popular leisure and entertainment venues, a wide variety of demand generators and various guest amenities. For the quarter, 33% of our hotels achieved RevPAR at or exceeding 2019 levels, even without a full recovery in business transient, which has historically represented more than half of our total revenue mix and despite reduced travel during the quarter related to the Omicron variant. As the recovery spreads to an increasing number of markets, we see meaningful upside to 2019 for our portfolio. With fewer hotel projects under construction in our markets, we anticipate the pace of new supply, which represented a meaningful headwind for us in 2019, to be less of a factor over the next several years. Relatively low supply, combined with continued improvement in demand should further accelerate and prolong this recovery. Almost 50% of our hotels do not have any exposure to new projects currently under construction within a 5-mile radius. Consistent strategic reinvestment in our hotels has ensured they remain relevant and well positioned to take advantage of continued rate and occupancy growth opportunities. We invested approximately $8 million in capital expenditures during the first quarter of 2022 and anticipate spending a total of $55 million to $65 million during the year. Through our scale, ownership of branded rooms-focused properties over more than two decades, we have significant experience in determining the most effective scope and timing of our investment to ensure minimal disruption to property operations and maximum impact for dollars spent. Our ability to maintain our assets with capital spend ranging between 5% and 6% of revenues is a meaningful differentiator for our portfolio and a contributor to total shareholder returns over time. Our acquisitions and dispositions activity since the onset of the pandemic has further optimized our portfolio for the recovery by lowering the average age of our assets, reducing near-term CapEx, and increasing our exposure to markets that we anticipate will outperform over the next cycle, all while maintaining the strength and flexibility of our balance sheet. We have been and will continue to be intentional in the build-out of our portfolio, pursuing assets that are additive to those we currently own located in strong RevPAR markets with attractive cost structures and significant growth potential and at pricing that will allow us to achieve our targeted returns. Increased interest in the type of assets we own from both private equity and public buyers continues to push prices higher in our space, increasing the value of our owned portfolio, while at the same time making accretive acquisitions more challenging. As we seek out opportunities, we are leveraging relationships developed over two decades, as well as our unparalleled experience buying, selling and owning branded upscale rooms-focused products. We currently have under contract the previously discussed Embassy Suites that is under development in Madison, Wisconsin for an anticipated purchase price of approximately $79 million. And we are actively underwriting and exploring dozens of opportunities both on and off the market and anticipate that we will be a net acquirer of assets in 2022. On our last call, we announced that our Board of Directors reinstated regular monthly cash dividends beginning with the distribution in March of $0.05 per share. Based on our closing price yesterday, the annualized distribution of $0.60 per share represents an annual yield of approximately 3.6%. Moving forward, we will continue to interact with our Board on a monthly basis and assess our payout in the context of the current operating environment, our expectations for the future, acquisitions and dispositions, and other opportunities to ensure that we are allocating capital to drive the strongest total returns for our shareholders. Our ability to provide investors with a meaningful cash yield on their investment early in the recovery, and well ahead of peers, is a testament to the merits of our investment strategy and the strength of our team. Our performance since the onset of the pandemic would not have been possible without the collaborative efforts of our corporate, brand, and management teams and the hard work and dedication of the associates at our hotels. I look forward to announcing our 2021 Apple Award recipients over the coming weeks. For these awards, we once again focus on the associates at our hotels, and we look forward to recognizing five individuals nominated by their management companies and peers for their outstanding contributions to the safety, well-being, and overall satisfaction of our guests. As we look forward to the remainder of 2022, we are confident in our ability to continue to produce industry-leading results. That confidence has been bolstered by recent operating trends, which have exceeded our expectations and created meaningful momentum, as we enter what have historically been the strongest quarters of the year. Our strategy of investing in a broadly diversified portfolio of high-quality rooms-focused hotels with low leverage has been tested and consistently yielded compelling results for our investors. With operations moving beyond pre-pandemic levels and trends pointing to strengthening demand as we move through the second and into the third quarter, we have reason to be optimistic about the future of our business. It is now my pleasure to turn the time over to Liz, who will provide additional details on our balance sheet operations and financial performance during the quarter.

Liz Perkins, CFO

Thank you, Justin, and good morning. Top line performance for the first quarter improved sequentially by month with the Omicron variant negatively impacting the seasonally lower occupancy months of January and February followed by a robust improvement in March. Despite the impact of the variant, first quarter ADR was $137, occupancy was 67%, and RevPAR was $92 showing growth over a strong fourth quarter RevPAR. The March rebound resulted in RevPAR down less than 2% as compared to 2019 for the month with RevPAR of $112, our highest monthly RevPAR since the onset of the pandemic. We are optimistic about the remainder of the year, especially our seasonally strong second and third quarters, as preliminary April results show continued increases in occupancy, ADR, and RevPAR pushing past 2019 RevPAR level, a meaningful milestone for our portfolio. Recent performance is both a reflection of the continued strength in leisure and the ongoing recovery in business demand. For comparable hotels, weekend occupancy and ADR exceeded 2019 each month during the quarter. January and February weekend occupancies were 63% and 78% respectively, and March weekend occupancy was 85%. Weekday occupancy improved sequentially through the quarter with January weekday occupancy of 54%, down 24% to 2019. February weekday occupancy of 65%, down 16% to 2019, and March weekday occupancy of 73%, down only 10% to 2019. With improvements in weekday occupancy, weekday ADR meaningfully improved moving from $124 in January to $142 in March, an increase of 16%. These weekday ADR levels were down 10% to 2019 for January and improved to down only 4% in March. As we look at demand segments and business transient trends, travel patterns are beginning to normalize with Tuesday and Wednesday occupancies around 78% in March and pushing to approximately 80% in April. Performance across our Sunbelt markets continues to be strong and suburban demand continues to outpace urban. However, we are pleased to see some improvement relative to 2019 as some of our hotels are located in markets that have been slower to recover. As Justin mentioned, 33% of our hotels had RevPAR for the quarter exceeding the same period in 2019, a decrease from the fourth quarter of 2021 due in part to the impact of the variant in January and February. However, in March, 41% of our hotels surpassed 2019 RevPAR, an increase from what we saw in the fourth quarter. Overall our portfolio has benefited from continued strength in leisure demand with improvements in business transient and group further bolstering portfolio results and underscoring the value of our significant market and demand diversification. With the recovery impacting a growing number of markets, we see meaningful upside for our portfolio. In terms of room night channel mix, brand.com bookings were up two percentage points to the fourth quarter at approximately 38%. OTA bookings continue to be elevated relative to prior years but declined again quarter-over-quarter to 13%. Property direct bookings dropped slightly to 29%, still up compared to the same period in 2019, a testament to the continued efforts of our property and management company sales support team. Most notably, we continue to see improvement in GDS bookings which were up a percentage point from Q4. GDS room night mix increased each month during the first quarter, reaching 13% for the quarter and moving even higher in April. Looking at total room nights booked, GDS bookings increased 36% in the first quarter over the fourth quarter, another positive data point as we review business transient trends. Looking at first quarter same-store segmentation, bar remained elevated to 2019 levels at 34%. Other discounts moved down from 30% in the fourth quarter to 27% in the first quarter. Even with the variant impact in January and February, negotiated increased a percentage point to 17%, showing continued improvement in business travel. Group was just under 16% in the quarter, up almost three percentage points from the same period in 2019. Turning to expenses. Total payroll per occupied room for our same-store hotels was around $34 for the quarter, up 1% to the first quarter of 2019. Total payroll on a per-occupied-room basis was impacted by the lower-than-anticipated occupancy levels as we started the quarter. Given the current labor environment, as we mentioned on our February call, we intentionally maintained staffing levels with the confidence that travel demand and our portfolio occupancy would return quickly. With improvement in occupancy, total payroll per occupied room was approximately $31 for March, down slightly to 2019. Our managers continue to focus on filling vacant positions as markets recover and adjust wages in a more competitive labor environment. Our teams remain intently focused on efficient labor models, to help offset wage pressures, while balancing service levels, morale, and turnover, all of which can be costly if overlooked for near-term financial benefit. Same-store room's expenses, excluding payroll, were well controlled, down 5% per occupied room compared to 2019 for the quarter. Our team's persistent efforts to control costs and maximize profitability resulted in first quarter, comparable adjusted hotel EBITDA of approximately $88 million and comparable adjusted hotel EBITDA margin of approximately 34%, down 250 basis points to the first quarter of 2019. While lower occupancy in January and February, combined with continued supply chain challenges and wage and inflationary pressures, negatively impacted margins relative to 2019 early in the quarter, hotel EBITDA margin improved with occupancy sequentially and March finished approximately 190 basis points higher than March of 2019. Though, we have been successful in managing productivity and expenses in a challenging environment, we continue to believe that growth in rate will be the primary driver of margin expansion as we move through the recovery. We continue to be encouraged and confident in the rate recovery, especially as we approach and exceed peak night occupancy levels. Following similar trends, modified funds from operations also improved sequentially each month and was approximately $63 million or $0.28 per share for the first quarter, up slightly as compared to the fourth quarter of 2021. Looking at our balance sheet, as of March 31, 2021 we had $1.4 billion in total outstanding debt approximately five times our 2021 EBITDA, with a weighted average interest rate of 3.5% and availability under our revolving credit facility of approximately $349 million. Total outstanding debt, excluding unamortized debt issuance cost and fair value adjustments is comprised of approximately $491 million in property-level debt secured by 28 hotels and approximately $947 million outstanding on our unsecured credit facility. At quarter end, our weighted average debt maturities for three years, with approximately $226 million net of reserves maturing in 2022. Our 2022 maturities include our revolving credit facility, which we have the option to extend for up to one year and $155 million of property-level debt maturing in the second half of the year. We are in the process of exploring options with our lenders and are confident in our ability to repay, refinance or extend our near-term maturity. As for our outlook for the remainder of 2022, we remain confident in the broader industry recovery and the performance of our portfolio specifically. While we are still not in a position to give specific operational guidance, first quarter performance exceeded our internal forecast. Preliminary results for April RevPAR positive to 2019 and average daily booking trends are ahead of pre-pandemic booking levels. Although external economic and pandemic-related factors continue to add a layer of uncertainty, with the ongoing strength in leisure demand and increase in business transient demand and a demonstrated ability to achieve meaningful rate growth as occupancies improve, we believe our portfolio could continue to reach and potentially exceed 2019 RevPAR levels, if current trends continue. As we move into the second quarter, we are optimistic without encumbering our balance sheet, we have transacted in ways that have optimized our portfolio for the future. We have a proven ability to drive strong operating results throughout economic cycles. And with current trends showing continued strength in leisure and improvement in business transient demand, we are confident in our ability to drive shareholder returns.

Operator, Operator

Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question comes from Neil Malkin with Capital One Securities. Please proceed.

Neil Malkin, Analyst

Hey, everyone. Good morning. Nice quarter. Good to be with you. First one for me is about sort of the recovery in BT. You gave some good color in your prepared remarks Liz. Just kind of wondering if you can talk about in terms of the larger national accounts, what kind of demand are you continuing to see in the second quarter. And are you doing that sort of variable pricing model versus a fixed negotiated model? And then, the other part of that would be, do you expect to compete just like some of the more sort of urban portfolios as the corporate demand continues to accelerate? Thanks.

Liz Perkins, CFO

Good morning, Neil. Happy to talk about business transient trends. In the prepared remarks, I mentioned how much we've improved mid-week. Weekday ADRs already have improved in the quarter from $124 to $142 from January to March throughout the quarter, which was an increase of 15%. Part of that was driven by occupancy improvement midweek, but peak nights improved as well and that was a reflection of some shift between corporate negotiated and local negotiated. That corporate negotiated historically, so going back to 2019 represented over 60% of our negotiated business. Through the pandemic it's run more in line with 50-50 between corporate negotiated and local negotiated, local tipping a little bit higher than corporate over the course of the pandemic. In the first quarter, we actually saw corporate negotiated tip over 50% to 53%, so being more dominant than local negotiated, and so starting to see that shift back with corporate negotiated business. So, I think as we move forward and as we think about the trends and the GDS trends, which really is a reflection of that corporate demand continuing to increase month-over-month and quarter-over-quarter despite the impacts of the variant earlier on in the quarter. We're optimistic. We have an ability to mix manage in a way to drive rate with that mix of corporate negotiated layered in. And as you mentioned, we did shift some of those corporate negotiated accounts over the course of the pandemic to be a percentage off of bar rates or retail rates, which really will help as we compress those peak nights with increased demand to be able to drive corporate negotiated rates in line with retail rates. Taking that even one step further, if you look back pre-pandemic, our weekday occupancies historically ran premiums over weekday occupancy. And while we are shrinking the gap slightly, there's still meaningful upside there as corporate negotiated comes back.

Neil Malkin, Analyst

Okay, great. I appreciate that. The last thing for me is about the acquisition front. It seems like most asset types experienced a significant slowdown in the first quarter compared to the fourth. Clearly, interest rates have played a substantial role in this. I'm curious, Justin, how you all are navigating the transaction environment in light of the rising rates, especially considering the weak stacks. Also, how does this relate to your approach to dispositions? We've observed some high price per key trades in the select service segment. I'd like to hear your thoughts on how all of this fits into your strategies for underwriting and growth in a more dynamic and uncertain environment than what we've experienced in the past several quarters. Thanks.

Justin Knight, CEO

Yeah, certainly. As I highlighted in my prepared remarks, we've continued to see significant interest in the types of assets that we own. And certainly I think there's read through to the value of our existing portfolio. I also highlighted that it's our intent over the course of the year to be net acquirers. We're in the unique position to be opportunistic. And given the current environment, we'll explore both acquisitions and dispositions activity and pursue those options, which we feel are most likely to drive returns for our shareholders. I think the rising interest rate disproportionately negatively impacts private equity players who use higher leverage levels in their acquisitions modeling. And certainly I think on a relative basis puts us in a better position to acquire assets that would meet our return thresholds. We continue to be very active underwriting a large number of deals and having on and off-market conversations so talking to both brokers and with groups that we've had relationships with for a long period of time, and anticipate we will be active as we continue to move through the year.

Neil Malkin, Analyst

And just real quick, are you seeing an impact from rising rates in terms of deals, retrades or pricing impacts versus call it beginning of the year?

Justin Knight, CEO

So we have not experienced that directly. Anecdotally there have been some who have used rising interest rates as an excuse to renegotiate pricing on deals that they are tied up, but that hasn't been the case in deals that we've been working on specifically.

Neil Malkin, Analyst

Thank you guys.

Liz Perkins, CFO

Thanks Neil.

Dori Kesten, Analyst

Thanks. Good morning.

Justin Knight, CEO

Good morning.

Dori Kesten, Analyst

Hi. Your dividend sets you apart among your lodging REIT peers. How should we view the dividend's trajectory over the next year? Should we consider historical payouts, or is it likely to be somewhat lower as you anticipate being an acquirer throughout the year?

Justin Knight, CEO

That's a fair question. As we started the year and considered reinstating a dividend with our Board of Directors, we explored various scenarios. Given the increased volatility we are currently experiencing in the market, the range of possibilities was broader than what we've encountered in the past when operating in a more stable environment. Nevertheless, we reinstated the dividend at a time when we felt very comfortable maintaining it, based on the wide range of scenarios we deemed reasonable. Since then, we have consistently performed beyond the top end of our internal projections, and if this trend continues, we will be in a position to reassess our dividend. We are also evaluating other opportunities, including acquisitions or share repurchases, with the aim of providing our investors with the highest total return.

Dori Kesten, Analyst

Okay. Thank you.

Justin Knight, CEO

Thank you.

Anthony Powell, Analyst

Hi. Good morning. Just another question on the transaction market, we've heard that we've seen more buyers look at hotels as an inflation hedge. That said rising rates are an impact here. So do you think Flex service assets have risen in value year-to-date and how even cap rates have trended for the segment year-to-date?

Justin Knight, CEO

We believe that the values for select service assets have indeed increased year-to-date. If you take a look at publicly available information on recent trades and key pricing for those transactions, it indicates that trend. There are several factors contributing to this, including a broader recognition of the value of select service hotels, especially after experiencing the pandemic and seeing how our types of assets performed compared to others in the hospitality sector. There is also heightened interest from various private equity buyers. Additionally, relative pricing compared to other real estate segments, such as multifamily, industrial, or retail, has drawn interest to this space. This is coupled with strong underlying fundamentals, a rapid recovery, and significant increases in construction costs that are driving up replacement values. All of these elements are influencing asset values and contributing to long-term value growth. Looking at transactions over the last 12 to 24 months, the quality of assets has been high and aligns with what we own. However, it's important to note that it's challenging to determine cap rates right now because some traded assets lack a pre-pandemic operating history and are being valued based on future projections, which sometimes lack transparency. From discussions within the industry, it seems that cap rates have compressed by about 100 to 150 basis points compared to pre-pandemic levels.

Anthony Powell, Analyst

Right. And that's a positive outcome even in a rising rate environment. Considering share buybacks, capital allocation has been impacted by volatility in the stock market. Some peers have indicated interest in buybacks. What is your perspective on this? I know you have the authorization, but what is your current stance?

Justin Knight, CEO

We look at buybacks simultaneously with potential acquisitions and acquiring our stock in the same way we view adding assets to the portfolio. We have authorization to acquire shares and a trading plan in place that allows us to trade during blackout periods. And certainly, at appropriate times would look to buy shares as we have in the past.

Anthony Powell, Analyst

Got it. Maybe more quick one. Looking at the next like 90 or so, how are your leisure hotels looking at pricing relative to last year in 2019. There's been a lot of back and forth about leisure pricing power over the near-term. So I'm curious what you're seeing in your portfolio?

Liz Perkins, CFO

We still see positive trends on the leisure front. I mean even as our mix shifted in the first quarter and OTA dropped a little bit as a mix, a mix percentage, OTA bookings were actually still up for Q1 relative to Q1 of 2019, absolute as we're night booking. As we look forward and we look at what we have on the books through the remainder of the year weekend occupancy or weekend bookings is strong rates are strong and higher than they have been in 2021. So we're still very optimistic about leisure demand and that coupled with the return of corporate negotiated and the continual recovery there we think puts us in a great position to maximize ADR both weekday and weekend.

Justin Knight, CEO

Really on that point, we see much greater potential for upside in ADR for our portfolio with business coming back than we do downside from the potential with leisure becoming less strong. In what we're looking at today based on forward bookings, we continue to see very strong leisure numbers reflected in our weekend bookings and the rates that these bookings are coming in at. What we're most excited about is the rapid improvement in business transient which has historically been the leading revenue producer of our portfolio and has historically been the most meaningful driver of rate for our portfolio. So I think as we look at markets that have been slow to recover coming online now and beginning to build back occupancy to levels where we should have similar pricing power midweek to what we've seen on the weekends. I think we're much more optimistic about where rates could go for our portfolio over the next several quarters.

Anthony Powell, Analyst

Great. Thank you.

Operator, Operator

Our next question is from Floris Van Dijkum with Compass Point. Please proceed.

Floris Van Dijkum, Analyst

Hey, guys. Thanks for taking my question. Obviously, you mentioned that you think there's a possibility that you could achieve 2019 levels of RevPAR in 2022. And maybe if you can comment on margin. And I know in the past you said that it's possible that you're – because of the various initiatives with the hotels, etc, that margin could be 100 to 200 basis points higher. Obviously, the margin in the first quarter was lower than what it was in 2019. But maybe as you look out is it possible that you would improve margins later on in 2022 relative to 2019?

Justin Knight, CEO

We're looking at each other to see who wants to take the question first. I think first, we've been reluctant to provide specific guidance around what we anticipate for margin growth. And really that's less reflective of our optimism related to the potential for margin growth and more a reflection on the complexity of the calculation. I think as Liz highlighted in her prepared remarks, we continue to believe that the primary driver of margin expansion for us and really for the industry at large will be rate growth. It's certainly we and others have done, I think a very good job managing expenses in our business in a way that have enabled us to flow more of the top-line growth we've seen, especially at higher occupancy hotels running strong rates to the bottom line. We believe we will maintain the efficiencies that we've achieved in terms of productivity. How those translate tax on margin will depend on what we see in terms of continued inflationary pressures related to cost of goods and to wages. And at this point, we continue to operate in a low unemployment environment. Wage pressure is real and certainly a factor that we're dealing with across our entire portfolio. That said, our first quarter remarks – first quarter margins were negatively impacted by lower occupancy in January and February, which is due to Omicron. And when you look at March numbers in isolation, we did very well from a margin standpoint growing margins to 2019. We had signaled coming into the first quarter that because labor was challenging even with the temporary downturn in occupancy, we would retain employees and would not make drastic cuts as we did at the onset of the pandemic and that that would potentially negatively impact margins. Given the strength of March, the negative impact to margins was not nearly as meaningful as it might have otherwise been. And in April where we're beginning to push past 2019 top-line numbers, we feel good especially in the near term about our ability to drive margins. To that point specifically that's the fact that we've gotten back to top-line numbers is consistent with where we were in 2019 faster than many will benefit us because inflation compounds. So being at a point where we can begin to drive rate beyond where we were in 2019 on a consistent basis puts us ahead of the curve from an inflationary standpoint and better positions us to achieve long-term margin expansion.

Floris Van Dijkum, Analyst

Thanks, Justin. The question I was trying to get at is whether achieving the $423 million of adjusted EBITDA is feasible. It seems possible, but I understand you might be cautious due to various factors. I also have a follow-up question regarding markets. I've observed that Dallas, Oklahoma City, Orange County, San Diego, and Seattle appear to be lagging, while Phoenix, LA, Fort Worth, and Fort Lauderdale are performing well, along with Miami. I'm curious about the Dallas-Fort Worth area, as people often view it as a single market; one part is doing well while the other is struggling. Could you explain the reasons behind this situation? Additionally, what do you foresee changing in Orange County to improve its performance, and what will drive profitability in the lagging markets?

Justin Knight, CEO

Some of the market impact is due to our comparisons to 2019, as certain markets experienced events or unique circumstances that inflated their numbers in that year. For instance, in Atlanta, we saw a 37% decrease for the quarter, and the downtown area has been slower to bounce back, especially when looking at Super Bowl comparisons from 2019 that skewed the data. In Denver, we experienced a decline of just under 30%, influenced by market conditions and the softness in convention business, which our downtown asset relies on. Additionally, we had some rooms unavailable for renovation. Therefore, it is challenging to draw broad conclusions about individual asset performance based on a single quarter, especially since our ownership represents only a portion of the overall market. However, as we previously mentioned, leisure travel remains robust across all our markets, and we are increasingly witnessing a resurgence in business travel in specific areas. Take Syracuse as an example, which performed particularly well this quarter, thanks to a combination of drivers like the medical university and significant film-related business. This positive performance is expanding to other locations as well, including our assets in Tidewater and Savannah, where strong leisure travel is merging with improving business travel. As markets continue to open at different rates, we expect to see these positive trends in a growing number of markets as we head into summer.

Liz Perkins, CFO

Just Floris, if you look at such sort of how those markets that you mentioned performed throughout the quarter they improved as you moved from January to March really the variant impacted some of those larger markets at the beginning of the quarter. And if I look at April, for example, for Dallas that decline to 2019 looks like for preliminary numbers, looks like it's half of what it was in the first quarter, and Atlanta actually turned positive in April. So I think you're seeing a lot of shift. You're seeing corporate rebound quickly. You're seeing demand pick up. And I think we're going to see different market performance, as we move into the second quarter. Some of these markets, and I mentioned in my prepared remarks, we're really encouraged by what we're seeing in some of the markets that have been lagging, Chicago being one of them as well. And that went down almost 30% RevPAR to 2019 in the fourth quarter. And that decline is almost half of that now in March, it was in March. And Santiago seen good rebound there. So, really encouraged by recent trends. Demand broadly is coming back strongly.

Floris Van Dijkum, Analyst

Thanks, guys. That's it for me.

Justin Knight, CEO

Thank you.

Operator, Operator

Our next question is from Tyler Batory with Oppenheimer. Please proceed.

Tyler Batory, Analyst

Good morning. Thanks for taking my question. Just one for me a multipart question here. Just to put a finer point on the acquisition discussion. Can you just talk a little bit more about the pipeline how many assets you're looking at today versus a few months ago? What are you seeing in terms of the volume or number of assets that are on the market more broadly? And then as you look through the year are you expecting just given the dynamics to perhaps be doing more off-market transactions than normal and really utilizing some of your industry relationships to source future acquisitions?

Justin Knight, CEO

So to the first point or question – part of your question, we're definitely seeing more assets today than 12 months ago. So I think as we anticipated, there's been a gradual increase of assets coming to market. And certainly, the pricing that sellers have achieved on trades early in the pandemic have helped to fuel that. But those trades are also being fueled by – or supported by increased optimism in a growing number of markets and strengthening numbers, which make financing transactions significantly easier. In terms of how we might transact on a go-forward basis, I think our expectation is that we will transact similar to the way we have in the past continuing to underwrite and compete for broadly marketed deals. But certainly tapping into our long-term relationships, as well and looking to do transactions directly with sellers with whom we've had long-standing relationships. And I think having been in the business for an extended period of time and having purchased hundreds of hotels. Similar to those that, we own now, and those that we're looking to buy in the future, we have a very good reputation that enables us to be incredibly competitive in both areas.

Tyler Batory, Analyst

Okay. Great. I appreciate that details. That's all for me. Thank you.

Justin Knight, CEO

Thanks.

Operator, Operator

Our next question is from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed.

Daniel Tricarico, Analyst

Hey, good morning. It's Daniel Tricarico on for Austin. In the release yesterday, you reported ADR at your urban classified hotels had reached within 2%, roughly of comparable 2019 levels in the first quarter. Do you have what that figure is in March and or April? And then I'm curious, even though urban rate is already above portfolio average do you expect this segment to be the primary driver of continued ADR growth going forward?

Justin Knight, CEO

So I'll answer the second part, while Liz is grabbing the first part. But I think, we did not see urban being the exclusive driver recovery for the industry going forward. And that said, we have a quarter to a third of our portfolio that is urban. And certainly that portion of our portfolio has probably been slower to recover given increased restrictions related to higher density areas. And the specifics related to the markets, where we own, or have urban exposure, but our belief is that, the improvement will be broad based. And I think it's a fallacy to believe that business travel only goes to large cities. Certainly, historically, over half of our business has been business oriented. And as I highlighted in response to one of the earlier questions that, portion of our business has been higher rated, been more consistent over time, with the recent COVID pandemic being a unique instance where we saw leisure meaningfully outperforming for a period of time in business transient. Our expectation though is that, when you look at across the country and specifically across our portfolio, we will see a lift in our urban markets, but outside of our markets in high-density suburban as well.

Liz Perkins, CFO

Yes, if I look at - and then I caveat this with it being preliminary for April, we did push past 2019 ADR levels in our urban locations, but we push past across local fee hikes.

Daniel Tricarico, Analyst

That makes sense. It was really in the context of the size of urban within your portfolio and just growing off maybe a lower base, being the primary driver going forward. And then, I guess, a follow-up question, a little bit separate. You mentioned maintaining staffing levels through the short downturn in demand in January. But in terms of continuing to add back labor, where do you stand today on an FTE count per hotel and maybe how that compares to pre-COVID and then, maybe, where you see that reaching on a stabilized basis versus pre-COVID?

Liz Perkins, CFO

I think in the fourth quarter, I shared, we were probably around 75% 2019 FTE and that we would continue to look to fill positions in anticipation of a strong spring and summer season. And so, we're probably around 80% now and adding labor as occupancies in markets warrant. I think, when we think about long-term equity counts, relative to 2019, it's really going to depend on a few things, the mix between occupancy and rate, what levels of occupancy we get back to, how much hourly labor do we need and from a salaried position perspective, what do we need at each individual hotel? Where is our business coming from? Do we need incremental sales associates or not? So, I think, we're going to be opportunistic and really focus on each individual market and what's needed. The teams were really proud and I mentioned in my prepared remarks margin for March was up 190 basis points. It was over 42% in March. So it was up 190 basis points to 2019. The teams have done an exceptional job. And so to the extent we continue to see pricing power and we see more of our premium to 2019 coming through rate, I believe we'll have efficiencies from an FTE count standpoint. But as occupancies increase, we'll staff as appropriate to make sure that we provide the best experience for guests and that they'll come back and pay the rates that we're charging.

Daniel Tricarico, Analyst

No, no, that makes sense. Thank you. Appreciate the time.

Operator, Operator

Our next question is from Michael Bellisario with Baird. Please proceed.

Michael Bellisario, Analyst

Thank you. Good morning, everyone.

Justin Knight, CEO

Good morning.

Liz Perkins, CFO

Good morning.

Michael Bellisario, Analyst

Was just sort of one follow-up there, a related question first, what's the split today between fixed and variable hotel expenses? And then, as urban markets recover, I would think the wages there are higher in absolute dollar terms. So would you maybe expect that as urban occupancy recovers would that impact the cadence of margin recovery at all in your view?

Liz Perkins, CFO

I think we are experiencing wage pressure across various market types. Secondary urban locations are showing trends similar to high-density suburban areas, and this appears to be specific to the markets themselves. For instance, in Phoenix, we have been facing labor challenges and wage pressure. This trend seems to be widespread. While wages might increase slightly, they have consistently been higher in urban areas. I anticipate we will observe trends similar to those we have noted in other types of locations. Additionally, we have demonstrated that both variable and fixed expenses can fluctuate with occupancy levels. We continue to refine our operational models in terms of labor, services, and amenities. However, there are fixed costs that remain, and while utility expenses can vary somewhat with occupancy, they have generally risen. There are various factors at play. What encourages us most is the exceptional effort put forth by our hotel managers, who have been diligent in driving profitability. We have also been able to increase rates as we adjust our business mix in the hotels and improve occupancy levels, particularly during peak nights and midweek.

Michael Bellisario, Analyst

Got it. Helpful. And then just back to your comments on March I think I've heard you say 190 basis points. Anything odd in March, that maybe caused that number to be higher than it otherwise would have been perhaps demand coming back faster than expected and you weren't fully staffed yet or expenses were still held back? Just trying to think about is April, May, June also going to be somewhere in the 190 basis point range?

Liz Perkins, CFO

I would be cautious about drawing conclusions from just one month in a quarter, as there are various factors that can influence results due to accrual and timing of invoices. In March, as you pointed out, demand rebounded rapidly and exceeded our expectations. We are also working to fill open positions in areas where occupancy is rising. Therefore, while I remain optimistic about our team's potential to optimize performance, I wouldn't necessarily anticipate achieving the full 190 basis points again. A lot will depend on the balance of rates, occupancy, and ongoing cost pressures we face.

Michael Bellisario, Analyst

Got it. And then just switching gears going back to the transaction market adjustment. Are you getting outbid on deals, or is it that seller expectations broadly might be too high, so you're seeing a wider bid-ask spread today?

Justin Knight, CEO

Let's say, a combination, where we're actively bidding and not being successful. A portion of those are going to other buyers. I think it's safe to assume that we are bidding on everything that's quality that would be a fit within our portfolio. And certainly you've seen some of the trades that have happened recently where we were likely active but not behind bitter. I think there are also instances where sellers' expectations are higher than the market is willing to support at this point in time. But I think as I highlighted in my prepared remarks, we're incredibly tactical in our pursuit of transactions. What we have in terms of an existing portfolio is incredibly good. And what we want as we transact either through dispositions or acquisitions is to make it better on the margin. And I think hats off to our team who is very active in that space and by that specifically our acquisitions team. But really our assessment of transactions end up involving experts from all departments within our company for assessing and ensuring that what we pay is appropriate for the asset and that the assets we pursue in earnest or assets that will add to the portfolio that we currently own.

Michael Bellisario, Analyst

Could you share any anecdotal examples or ranges regarding the cap rate or EBITDA multiples that peers are using to price deals based on forward numbers?

Justin Knight, CEO

Well, the trick there is that forward projections are fixed. And so there's not always a tremendous amount of transparency. And specifically with that comment, I was highlighting the number of deals that have traded that didn't exist in 2018 and 2019. So if you look at transactions early in the recovery, a greater percentage of them than we anticipate will be the case as we move through the recovery have been newly constructed assets without historical performance. And so as a result their pricing on futures or cap rates that are quoted are based on future projections. I think the market of the public disclosure generally puts them somewhere in that the 6% to 8% stabilized value to the extent we're that we haven't been successful, our underwriting would show lower cap rates than that. And I think as we continue to progress through the recovery, you'll see an increasing number of transactions related to assets that have trailing history and cap rates will be more of a valuable comparative metric that they happen I think recently.

Michael Bellisario, Analyst

Got it. Thanks for clarifying.

Justin Knight, CEO

Absolutely.

Operator, Operator

Our next question is from Bryan Maher with B. Riley Securities. Please proceed.

Bryan Maher, Analyst

Good morning, Justin and Liz. I don't want to bring a negative perspective, but as we conclude the lodging earnings, there seems to be a lot of reliance on higher average daily rates to boost profitability. I'm not entirely convinced that this will pan out. You mentioned a three-month outlook, but looking six to twelve months ahead, many college-educated millennials are struggling financially with housing costs, and seniors relying on fixed incomes are also affected. If companies start to worry about their profits, travel tends to be one of the first expenses that gets cut, along with employee costs. It appears that there's a strong push to increase rates, but I question how sustainable this strategy is. If you come to this realization, how quickly can you adjust your approach to ensure that it helps improve your margins?

Justin Knight, CEO

I want to highlight a couple of points. First, unlike some competitors, the rate increases we're observing are widespread across our entire portfolio. We do not rely on a small segment of our assets charging significantly higher rates to elevate our overall performance. Second, our historical experience has shown that business travel tends to be less volatile compared to leisure travel, particularly for the types of assets we own. During economic upturns, corporate travelers usually opt for the higher-quality assets we provide, while in tougher economic times, they tend to choose our assets as well. This has contributed to the stability and consistency of our portfolio through various cycles. As we assess our portfolio's performance over recent months, we are less worried about losing ground moving forward, especially with the anticipated advancements in business travel recovery. While we do consider potential margin expansion over time, if we were to see stagnant revenue per available room combined with rising expenses, we might find ourselves in a position similar to the one before the pandemic, where revenue growth slows but expenses continue to increase. However, there are several factors that distinguish this situation from before. Notably, we currently have significantly less supply under construction, so the potential incoming supply in our market will be much lower than what we saw leading into the pandemic. Demand only makes up half of the supply-demand equation, and I view the future dynamics in that area as positive. Currently, our performance has frequently reached levels comparable to those of 2019, all while business transient travel has not yet significantly recovered. Even if business travel stabilizes at lower levels than pre-pandemic, many believe it will settle above recent figures. These factors underpin our optimism for the future.

Liz Perkins, CFO

We – I'm sorry, even if we don't drive incremental rate the mix shift on corporate from local negotiated rate will provide a premium in ADR. Historically, looking back at 2019, corporate negotiated accounts typically were anywhere between 15% and 20% higher in rates relative to local negotiated. So some of this is as demand comes back will be attaining rate through mix shift and some will be through driving incremental retail rates.

Bryan Maher, Analyst

Look for sure you guys are better positioned than most. I think everyone would agree to that. But people and companies are getting poorer at a very fast pace right now between inflation and loss of stock market wealth, etc. So I just think that everybody kind of hanging their hat on ADRs are growing to the sky is kind of a mistake and maybe I think people should be ready to pivot because not so sure it's there in four, five, six months just saying and thank you for your thoughts on that.

Justin Knight, CEO

Absolutely.

Operator, Operator

Our next question is from Dany Asad with Bank of America. Please proceed.

Dany Asad, Analyst

Hi, good morning, everybody. I have a follow-up question on one of the earlier ones but just – can you help me walk through this like if RevPAR trends are up or at least at 2019 levels and if we're thinking about to list your prior comments about March being 200 basis points ahead of 2019 levels on margins. Any reason why we shouldn't have April or Q2 EBITDA ahead of 2019 reasons? Is there something that we should think about?

Liz Perkins, CFO

I would go back to the comments we made earlier in that Demand came back quickly. We did not reduce staffing anticipating that demand would return for the spring and summer. We had open positions, we're continuing to fill open positions and we're still in an inflationary environment, where cost and supply chain issues, inflationary pressures, and wage pressures will are evolving. And so we're optimistic again looking at the top line, preliminary top line for April we're optimistic. And the team has shown that we will maximize in any environment. So regardless of what may happen on the top line our team has done an exceptional job maximizing margin.

Dany Asad, Analyst

Got it. Thank you.

Justin Knight, CEO

Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes the question-and-answer session. I'd like to hand the call back to Justin Knight for any closing remarks.

Justin Knight, CEO

We really want to thank you for joining us today. I appreciate the questions and the continued interest in our company. As always to the extent you're traveling, we hope you'll take the opportunity to stay with us in one of our hotels and we look forward to meeting with many of you here in the near future.

Operator, Operator

Thank you. This concludes today's conference. You may now disconnect.