Earnings Call Transcript - APLE Q1 2023

Operator, Operator

Greetings and welcome to the Apple Hospitality REIT’s Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Clarke, Vice President, Investor Relations. Please, you may begin.

Kelly Clarke, Vice President, Investor Relations

Thank you and good morning. Welcome to Apple Hospitality REIT’s first quarter 2023 earnings call. Today’s call will be based on the earnings release and Form 10-Q, which we distributed and filed yesterday afternoon. Before we begin, please note that today’s call may include forward-looking statements as defined by federal securities laws. These forward-looking statements are based on current views and assumptions and as a result, are subject to numerous risks, uncertainties, and the outcome of future events that could cause actual results, performance or achievements to materially differ from those expressed, projected or implied. Any such forward-looking statements are qualified by the risk factors described in our filings with the SEC, including in our 2021 annual report on Form 10-K and speak only as of today. The company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, non-GAAP measures of performance will be discussed during this call. Reconciliations of those measures to GAAP measures and definitions of certain items referred to in our remarks are included in yesterday’s earnings release and other filings with the SEC. For a copy of the earnings release or additional information about the company, please visit 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 2023 and an operational outlook for the remainder of the year. Following the overview, we will open the call for Q&A. At this time, it is my pleasure to turn the call over to Justin.

Justin Knight, CEO

Good morning and thank you for joining us today. 2023 is off to a strong start with continued strength in leisure demand and increased business travel. While we are mindful of the potential for macroeconomic headwinds later in the year, at this time, the fundamentals of our business remain strong. Improvements in business travel have lifted mid-week occupancies in recent weeks and new supply remains muted across the majority of our markets. First quarter 2023 comparable hotel's RevPAR improved by 19% compared to 2022 and 6% compared to 2019. Comparable hotel's ADR increased by 11% over 2022 and 9% over 2019, and comparable hotel's occupancy was up more than 7% over 2022 and down just 2% to 2019. First quarter comparable hotel's adjusted hotel EBITDA was $107 million, a 21% improvement over 2022 and a 4% improvement over 2019. Through strong rate growth and effective cost controls, we achieved a comparable hotel's adjusted hotel EBITDA margin for the quarter of 34% despite inflation and wage pressures. We have always been prudent with cost controls, leveraging our scale and diversification to operate as efficiently and cost-effectively as possible without sacrificing service, cleanliness, or overall guest satisfaction. Our investment in Select Service Hotels, a key element of our ownership strategy, provides us with an incredibly efficient operating model with limited F&B, efficient public spaces, low energy consumption, few departments to manage, and a focus on essential services and amenities. Our hotels were among the first to recover from pandemic disruption and we were early in working to re-staff to meet rapidly increasing demand in most of our markets. With guest services and amenities restored to modified brand standards, average FTEs for our portfolio have generally stabilized 5% to 10% lower relative to the same period pre-pandemic. Despite incremental operational efficiencies, higher wages and inflationary pressures on other expense line items continue to put pressure on margins. While we will continue to look for ways to drive incremental profitability at our hotels, our ability to protect and grow margins in the future will be largely dependent on our ability to grow rate. We continue to work with our management companies to foster work environments at our hotels that focus on culture, associate engagement, and training to develop and retain skilled associates in today's challenging labor environment. Strategic investments in our on-property teams position us to maintain the quality of our hotels both in terms of product and service levels necessary to support continued growth in market share, particularly through rate premiums, which we believe will be key to our long-term profitability. As our managers reduce turnover at our hotels and invest in on-site training, we expect to realize efficiencies through lower recruiting costs, less reliance on contract labor, and improved productivity, which should act as a partial offset to higher wages. We continue to look for and underwrite potential acquisitions. During the first quarter, we entered into a contract for the purchase of the newly renovated 154-room Courtyard by Marriott, Cleveland University Circle for $31 million or approximately $200,000 per key. The hotel opened in April of 2013 and recently underwent a complete renovation of its guest rooms and interior public spaces. It is located in the heart of Cleveland's University Circle District, a premier educational, medical, and social district on the East side of Cleveland. As we have indicated on prior calls, we have intentionally sought acquisitions in markets that benefit from a mix of business and leisure demand that have been and will be beneficiaries of macroeconomic and demographic shifts. The Cleveland market fits well within this criteria. It is business-friendly, with a favorable cost of living, offers a wide variety of demand generators, and is positioned well for future growth. Overall, the transaction market continues to be relatively quiet, but we anticipate deal volume will increase as the year progresses. Our team will continue to actively explore acquisitions opportunities that refine, enhance, and grow our existing portfolio, while further increasing our exposure to markets with strong growth trajectories and attractive cost structures. Since the onset of the pandemic, we have invested approximately $558 million in 14 hotels. On a trailing 12-month basis through the first quarter, these hotels produced a total unlevered return on our investment after CapEx of over 9% with meaningful upside remaining as assets continue to ramp and markets improve. With more than 20 years of transaction history and ample liquidity, we are optimally positioned to scale our acquisitions activity to take advantage of strategic opportunities as market conditions become more favorable. As we underwrite potential acquisitions opportunities, we are also mindful of our ability to drive incremental shareholder value through the repurchase of our shares. We have a share repurchase program that is intended to comply with Rule 10b5-1 and during the first quarter, we repurchased 250,000 shares at a weighted average purchase price of approximately $14.22 per share for an aggregate purchase price of $3.6 million. We have approximately $339 million remaining under our share repurchase program. During the quarter, we also had approximately $80 million in capital expenditures and we anticipate spending a total of $70 million to $80 million during 2023. The planned capital projects include comprehensive renovations at 20 to 25 of our hotels. We have invested over $1 billion in renovation and capital improvements over our 24-year history in hospitality and have significant experience in determining the most effective scope and timing of our investments to ensure minimal disruption to property operations and maximum impact for every dollar spent. Consistent with our historical investment, we anticipate 2023 CapEx spend to be between 5% and 6% of revenues, which we believe is an appropriate long-term average for our portfolio and a meaningful differentiator contributing to total shareholder returns over time. Low leverage and attractively structured capital have been key contributors to our outperformance over the years and have positioned us to allocate capital efficiently at appropriate points in the cycle to maximize shareholder returns. Our significant liquidity position, staggered maturities, and conservative secured debt exposure provide us with the flexibility to be both thoughtful and opportunistic to drive incremental value for our shareholders. As we enter our seasonally stronger months of the year, the fundamentals of our business remain favorable with continued improvement in demand and limited near-term supply growth. Preliminary comparable topline numbers for April are solid with the occupancy flat to last year and ADR up 5%. Nearly half of our hotels do not have any new supply under construction within a five-mile radius, providing us with the ability to meaningfully benefit from continued increases in demand. In many of our markets, where we saw slow rebounds from pandemic lows, we have shown improvements in recent months. Our combined acquisitions and dispositions activity has positioned us to produce better portfolio margins and to drive greater profitability over time. While we are mindful of recent headlines pointing to elevated levels of macroeconomic uncertainty, we are optimistic that current trends will continue and position us to drive strong results over the coming months. Consistent execution against our proven investment strategy has enabled us to succeed through economic cycles. Our portfolio of select service hotels is broadly diversified across high-end suburban, urban, and developing markets that are home to a wide variety of demand generators. Our hotels are franchised with industry leading brands, managed by some of the best management companies in the industry, and provide a strong value proposition with broad consumer appeal. Underlying the strength of our portfolio is a balance sheet with low leverage and financial flexibility, a consistent reinvestment and portfolio management strategy, and a corporate team with tremendous experience. Having recovered more quickly than the majority of our peers and stabilized operations with industry-leading margins, we are uniquely positioned to meaningfully benefit from incremental topline growth. We are confident we are well-positioned to continue to outperform and maximize shareholder value in any macroeconomic environment. Before I turn the call over to Liz, I would like to take this opportunity to welcome our newest Board member, Carolyn Handlon. With 35 years of leadership experience with Marriott, Carolyn brings tremendous financial acumen and hotel industry experience, and we look forward to further advancing the company's corporate governance and oversight with her insight and leadership. I will now turn the call over to Liz for additional details on our balance sheet, operations, and financial performance during the quarter.

Liz Perkins, CFO

Thank you, Justin, and good morning. Performance across our portfolio steadily improved each month during the quarter, resulting in comparable hotels total revenue of $311 million, up approximately 19% compared to the first quarter of 2022 and 10% compared to the first quarter of 2019. Seasonally adjusted continued strength in leisure demand and recovery in business travel during the quarter enabled us to achieve comparable hotels RevPAR of $109, a 19% increase over the first quarter of 2022 and a 6% increase over the first quarter of 2019. Comparable hotel's ADR for the quarter was $152, 11% ahead of the first quarter of 2022 and 9% ahead of the first quarter of 2019. Comparable hotel's occupancy was 72%, up over 7% compared to 2022 and down only 2% compared to 2019, our strongest occupancy performance relative to 2019 since the onset of the pandemic. April started out with a softer week leading into the Easter holiday, but subsequently rebounded well with Tuesday occupancies even approaching 90% in the following weeks. For the month, preliminary comparable results for April show continued strength in demand with occupancy of approximately 77%, in line with 2022 and 5% shy of April 2019. ADR growth for the month of April was up approximately 5% as compared to 2022 and 9% as compared to 2019. Occupancy and ADR grew sequentially each month during the quarter reflective of continued strength in leisure demand, a meaningful recovery of business travel, and the transition towards our seasonally stronger months. January, February, and March weekend occupancies were 67%, 78%, and 84% respectively. Weekday occupancies grew significantly from 62% in January to 71% in February and then 77% in March. Mid-week occupancies have continued to strengthen in the latter part of April further bridging the gap to 2019 with continued strength in shoulder and weekend leisure demand. In terms of room night channel mix, brand.com bookings increased from 39% during the fourth quarter to 40% in the first quarter. OTA bookings declined from 12% in the fourth quarter to 11% in the first quarter. Property direct bookings remained strong at 26%, a testament to the continued efforts of our property and management company sales team. Lastly, GDS bookings increased from 16% for the fourth quarter to 17% in the first quarter, showing continued improvement in business travel demand. Looking at first quarter same-store segmentation, far continued to be elevated to 2019 levels at 34%. Other discounts decreased slightly to 27% in the quarter, but remained elevated to 2019. Group was up slightly to the fourth quarter at 15%, meaningfully higher than the first quarter of 2019, and the negotiated segment was 18% of our mix. Turning to expenses, total payroll per occupied room for our same-store hotels was just under $39 for the quarter, in line with the fourth quarter but up 12% and 14% compared to the first quarter of 2022 and 2019, respectively. Higher wages for full and part-time employees, training costs, and higher utilization of contract labor continued to impact comparisons to prior years and act as an offset to productivity gains resulting from adjustments and brand standards. While we anticipate wages will remain elevated relative to pre-pandemic levels, we have seen the rate of growth moderate and believe we have the opportunity to improve efficiency as turnover stabilizes and we are able to reduce recruiting and onboarding costs as well as reliance on contract labor. We will continue to balance productivity initiatives with our efforts to uphold a positive work environment conducive to attracting and retaining top talent. These efforts better position us to support the high levels of service, cleanliness, and maintenance necessary to sustain rate growth and maximize the long-term profitability of our assets. Strong rate growth and a focus on cost controls in a challenging labor and inflationary environment enabled us to achieve first quarter comparable adjusted hotel EBITDA of approximately $107 million, up 21% compared to 2022 and 4% compared to 2019. First quarter comparable adjusted hotel EBITDA margin was strong at approximately 34%, up 60 basis points compared to 2022 and down 190 basis points compared to the first quarter of 2019. As we have stated on past calls, we believe that long-term margin expansion for the industry and for our portfolio will be largely conditioned on our ability to grow rates. While we expect a portion of our recent expense growth to be temporary, driven by elevated employee recruiting and onboarding costs and short-term increases in our use of contract labor, we anticipate continued near-term pressure on wages and other operating expenses. First quarter adjusted EBITDAre was $95 million, up 22% compared to the same period in 2022 and down 5% compared to 2019. MSFO for the quarter was approximately $79 million, up 24% compared to the first quarter of 2022 and down 7% compared to the first quarter of 2019. Looking at our balance sheet, as of March 31st, 2023, we had $1.4 billion in total outstanding debt, approximately 3.3 times our trailing 12 months EBITDA, with a weighted average interest rate of 4.3%. Total outstanding debt, excluding unamortized debt issuance cost and fair value adjustment, is comprised of approximately $290 million in property level debt secured by 15 hotels and approximately $1.1 billion outstanding on our unsecured credit facilities, including the remaining $50 million term loan availability, which was drawn down in January 2023. Our weighted average debt maturities are 4.4 years. At the end of the quarter, we had cash on hand of approximately $6 million and availability under our revolving credit facility of approximately $610 million. During the quarter, we repaid in full four secured mortgage loans for a total of approximately $37 million, increasing the number of hotels in our portfolio to 205 out of 220. Also during the quarter, a $100 million swap expired and we entered into two new $50 million swaps. At the end of the quarter, 78% of total debt outstanding was fixed or hedged. Our valuable swap agreements and, more importantly, low overall leverage levels help mitigate the impact of the current interest rate environment. Shifting to our outlook, given limited visibility into future performance due to short-term booking windows and elevated macroeconomic uncertainty, we have not adjusted guidance. Though first quarter performance for our portfolio was at the higher end of our internal projection, our outlook continues to reflect a broader range of comparable hotels RevPAR change and other key metrics for 2023 and we anticipate that the lodging industry recovery will be impacted by macroeconomic headwinds in the latter portion of the year, though topline performance for April remained strong and forward bookings continue to be elevated to pre-pandemic levels. While we have limited visibility based on the current booking window, we are encouraged by recent trends and the strength of fundamentals for our business, which, if sustained, would put us in a position to perform at the high end of our guidance range. We will continue to assess guidance in context of actual performance for our hotels and changing consensus views related to the broader economy. As has been the case in the past, we expect RevPAR growth for our portfolio to generally align with actual growth rates for our brands and chain scales. As a reminder, for the full year, we expect net income to be between $165 million and $209 million. Comparable hotel's RevPAR change to be between 3% and 7%. Comparable hotel's adjusted hotel EBITDA margin to be between 35.3% and 36.9%, and adjusted EBITDAre to be between $420 million and $457 million. Our differentiated strategy has proven resilient through economic cycles. As we move through 2023, we are confident we are well-positioned for any macroeconomic environment. Our balance sheet is strong with ample liquidity, which we intend to use opportunistically to pursue accretive opportunities. Our assets are in good condition with recent dispositions and capital investments ensuring that we maintain a competitive advantage over other products in our market. And the fundamentals of our business continue to be sound with favorable supply dynamics allowing us to benefit from continued strength and improvement in demand. And that concludes our prepared remarks. Justin and I will now be happy to answer any questions that you may have for us this morning.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt, Analyst

Hey, good morning everybody. I guess, Liz or Justin, how important is the recovery in mid-week demand to sustain the ADR growth you're achieving? It feels like we've been pretty stable kind of on that relative to 2019 comp, the last couple of quarters. And I'm just wondering if it could even accelerate as well if leisure holds and you do see BT demand continue to improve?

Justin Knight, CEO

It's a great question. Coming into the year, certainly the greatest opportunity we had for continued growth was mid-week. We're incredibly pleased with what we've seen, especially as we rounded out March and moved into April in terms of mid-week occupancy growth. With that growth, we're better positioned to manage the mix of business in our hotels and to move rates. We've continued as well to see strength on the weekends and shoulder nights, demonstrating the resiliency of the travel demand in the markets where we have hotels. I think, as Liz commented in her prepared remarks, that puts us in a position where we're incredibly optimistic about our ability to continue to drive performance for our portfolio as we move into the coming months.

Austin Wurschmidt, Analyst

Are you seeing any signs that leisure guests or weekend demand is beginning to be priced out or starting to trade down at all?

Liz Perkins, CFO

We are not. I mentioned in our prepared remarks that April's performance, while on the face of it, may look like it took a step back relative to March, it was really around the Easter holiday week and business travel even the week following Easter. But leisure bounced back quickly and dramatically and overcame the deficit that we saw that week, that Easter weekend. So we continue to see strength on the weekends both from an occupancy perspective and rate growth perspective.

Justin Knight, CEO

And then mid-week as we got closer to the end of the month, Tuesday and Wednesdays pre-pandemic were some of our strongest occupancy nights. In terms of growth, we saw meaningful growth on Tuesdays and Wednesdays in the final weeks of April, which put us somewhere close to 90% for those nights from an occupancy standpoint. It was only slightly down to pre-pandemic levels. So, really April ended up being a very good month for us outside of that first week.

Austin Wurschmidt, Analyst

Was that pick in mid-week demand more prevalent in any regions? Or do you have a sense if it was more of the SMB business traveler or more are you seeing some also improvement in the larger corporate accounts?

Liz Perkins, CFO

No notable impact to one segment versus the other. Or even regionally, we have seen urban, which had lagged some relative to suburban. We have seen that tick up for our portfolio in some of our urban markets, but small business versus corporate are still seeing similar trends, a slow recovery in corporate with continued strength from local negotiated and small business accounts.

Justin Knight, CEO

And really to get to the 90% occupancy portfolio-wide, the trend has to be widespread.

Austin Wurschmidt, Analyst

Yes, that's fair. That makes sense. Thanks for taking the questions.

Justin Knight, CEO

Absolutely.

Liz Perkins, CFO

Thanks, Austin.

Operator, Operator

Our next question comes from Bryan Maher with B. Riley Securities.

Bryan Maher, Analyst

Good morning. And maybe to ask one of Austin's questions a different way. We're seeing some ADR softening among higher-end leisure, luxury hotels. Are you seeing any trade down or any evidence of trade down from that class of hotels to your class within the leisure segment?

Justin Knight, CEO

I don't know that we could attribute the continued strength we're seeing to trade down. I don't know that we have perfect visibility in that, but I can say that we've continued to see strength both from an occupancy and rate standpoint around weekends and leisure events like spring break and things of the sort, indicative, I think of the resiliency of particular demand for our hotels. What we've seen in past cycles is that as consumers become more price-sensitive, our hotels benefit based on the better value proposition that they provide guests.

Bryan Maher, Analyst

Okay. And kind of shifting gears to the acquisition side. And I asked this because, you know, clearly, Apple is probably one of the best positioned lodging REITs to make acquisitions later this year. But are you starting to see any portfolios being marketed? That's question one. And question two is how real is the owner or refinance issue in your segment of the market as opposed to say full-service gateway hotels, New York, San Fran, etc. that might have real problems getting refinancing later this year?

Justin Knight, CEO

To respond to the first question, we have actually for some time seen a mix of portfolio and individual assets. While transaction volume has been muted for the industry overall, we have been continually underwriting deals looking at deal flow. To date, we've underwritten almost 100 hotels since the beginning of the year and continue to be very active pursuing and underwriting both deals that are being broadly and narrowly marketed and off-market potential transactions. The challenge that we have and I think why we're not seeing industry-wide more transactions is that there continues to be a fairly significant bid/ask spread, somewhere in the 5% to 10% range on average. With the greater uncertainty that exists in the market today, there's been an unwillingness on both sides to meaningfully work to bridge that gap, at least on a broad scale. I think we are advantaged in addition to having the liquidity that you highlighted by our track record of performing against commitments that we've made in the space. As a result, in a number of cases, we have secured assets below the high bid or where we are not the most competitively priced bid in a transaction just because of the surety that we will close.

Bryan Maher, Analyst

Okay. And the second part of your question reminded me, Bryan? Refinancing stress among sellers. How does that compare in your type of product to gateway full-service assets?

Justin Knight, CEO

It's interesting. For some time now, I've been speaking on the call to sources of future transactions and highlighted the fact that we believed that refinancings and brand mandated renovations would both drive sellers to become more motivated for transactions, which would help to bridge the bid/ask gap. We have not yet interestingly seen, at least in scale, a large number of deals come to market because of brand pressure related to CapEx, though we continue to anticipate that that will become more pronounced as we move towards the end of the year. On the other hand, we have begun to see a number of deals where ownership groups are looking at challenging refinancing at some point in the not-too-distant future. Those challenges are a combination of things; one, significant movement in rate beyond where they are currently. Related to those rate increases, their concerns that lenders have related to coverage, which impacts value. In cases where we have recently underwritten deals, the ownership groups are looking at a refinancing scenario where they would need to come up with additional capital in order to retain the asset. We're still in the early stages of that and I'd say the deals we've seen have come to us largely over the past four to six weeks, but that is a trend that we anticipate will continue in our space.

Bryan Maher, Analyst

Yeah. Thank you.

Justin Knight, CEO

Absolutely.

Liz Perkins, CFO

Thanks, Bryan.

Operator, Operator

Our next question comes from Dori Kesten with Wells Fargo.

Dori Kesten, Analyst

Thanks. Good morning. With respect to the difference in your view on the remainder of the year versus what Hilton and Marriott have provided over the last two weeks. Is it your sense that the differences are just a difference in opinion on the trajectory of the economy? Is it a shorter booking window in your portfolio or is there something else you'd want to point out?

Justin Knight, CEO

I mean, we don't have perfect insight into how they structure and their guidance. Though as Liz highlighted in her prepared remarks, we have historically tracked roughly in line with our brands, at least the US performance of our brands and our chain scale. So, I think as was highlighted, we continue to have limited visibility into the future. Our assumption is that the brands have greater visibility based on a broader portfolio and within that portfolio, a broader concentration of hotels that have large groups that book in advance. As we think about the delta, it's much more likely to be driven by macro assumption differences rather than anything that would be property specific. As we highlighted in our prepared remarks, we continue to see incredibly strong performance in our portfolio, with April again continuing to show strength in business and leisure demand. If those trends were to continue, our expectation would be that that would meaningfully benefit our portfolio.

Dori Kesten, Analyst

Okay. Thanks. Have you seen any improvement in reducing contract labor in, I guess, in any of your markets?

Liz Perkins, CFO

We remain focused on reducing contract labor. We have not seen any notable decrease in the usage of contract labor relative to how we were, you know, towards the end of the year.

Dori Kesten, Analyst

Okay. And I guess some of the brands have announced new brands bordering economy and mid-scale; do you have any interest in these or would you expect to maintain your current swim lane?

Justin Knight, CEO

I think at this point, and considering that two of the brands were mentioned, there are limited publicly available details about them. However, based on what we know about the extended stay brands that are likely to be launched by Hyatt, Hilton, and Marriott, we do not see them as a priority in the short term. For a while, we have concentrated our efforts on upscale and upper mid-scale assets and continue to believe this is where we can achieve the strongest and most consistent returns for our investors. That said, we do appreciate extended stay products and will be monitoring how these brands develop over time.

Dori Kesten, Analyst

Okay. Thank you.

Justin Knight, CEO

Thank you.

Operator, Operator

Our next question comes from Tyler Batory with Oppenheimer.

Tyler Batory, Analyst

Hey, good morning. Thanks for taking my question. Given the commentary, Justin, you made on the acquisition landscape, does share repurchases make more sense here? I know you bought back a little bit in Q1. But would you like to maybe lean into that a little bit more or perhaps conserve some capital for some potential opportunities that might be coming later this year?

Justin Knight, CEO

As demonstrated by the fact that we were buying shares under our written trading plan, we see tremendous value in our shares at the current valuation. The volume of our purchases has been governed by an assumption that we've had internally that pricing would change for attractive acquisitions in the near term. If we were to not see that, as we move through the year and we continued to see pricing at or around levels where we've been trading recently, it's certainly reasonable to assume that we would become more aggressive in purchasing our shares.

Tyler Batory, Analyst

Okay. And then just a follow-up on the Marriott, Cleveland's asset. Apologies if I missed this. Can you provide a little more background on how you came about that opportunity, perhaps what you're expecting in terms of yield there as well?

Justin Knight, CEO

Absolutely. The general partner in the deal and the management company are the same as the two assets we closed on at the end of last year. This is an expansion of that relationship, which we have worked to develop for over a decade and are now starting to grow. We were not the highest bidder on this particular asset. It had an agreement at a much higher price but fell through and was brought back to a small group of which we were a part. We see significant value in the asset; it's of high quality and was recently renovated, with a complete renovation of public spaces and guest rooms finished at the end of last year. This renovation included expanding the fitness center, enhancing the bar area, and adding one room, increasing the total from 153 to 154 keys. We have a great deal of confidence in the management company and are optimistic about entering the Cleveland market, which, as I mentioned in my remarks, has the potential for exceptional growth compared to the national average, with a cost structure that will allow us to maintain strong operating margins and profitability.

Tyler Batory, Analyst

Okay. Great. That's all for me. Thank you.

Justin Knight, CEO

Thank you.

Operator, Operator

Our next question comes from Anthony Palo with Barclays.

Anthony Palo, Analyst

Hi, good morning. I guess a question on the transaction environment. How's price to evolve in the past several quarters? Are you seeing cap rates increase sellers or buyers moving more?

Justin Knight, CEO

Interestingly, as I mentioned earlier, there continues to be a bid/ask spread that varies by asset, but on average, it tends to be between 5% and 10%. This is quite common. This is evident from the fact that very few transactions are taking place despite a significant amount of inventory either being marketed or considered by a limited number of potential buyers. We expect that as the year progresses, this bid/ask spread will decrease, creating opportunities for greater transaction volume. We believe we are well-positioned to take advantage of this situation. Additionally, we are starting to gain some traction with potential development deals, which had not been feasible for us for a while due to the sharp increase in construction costs and the uncertainty surrounding those costs and supply chain issues. As stability returns, albeit at higher prices than before the pandemic, the pricing for some potential development deals has become more rational and possibly attractive to us, especially in a context where construction financing remains constrained. Our offering is more appealing to developers now than during times when construction financing was easily accessible. Therefore, in addition to our expectation of seeing an increase in deal flow for existing assets as the year progresses, we anticipate being able to make forward commitments for developments that will be completed in future years.

Anthony Palo, Analyst

And maybe one more in terms of the contract labor. What do you think has to happen for that to improve? Just in general softening labor market? I mean, we're still seeing a lot of use your job in being created or is there anything else you can do now that get that contract labor situation under control?

Liz Perkins, CFO

I think a general softening in the labor market would be helpful and certainly would be more helpful broadly to the industry as it relates to contract labor. For us, the longer that we go with stable operations and stable management and training and lowering turnover, I think the more likelihood we have to bring new associates in-house as we rebuild teams internally. Turnover has been higher generally for in-house labor. As things continue to stabilize for our portfolio, that should improve. More meaningfully will be when the labor market stabilizes, but that does not prohibit us from gaining some traction beforehand. I think we're really focused on it. We see value, especially from a service cleanliness and cultural standpoint, to get associates in-house.

Justin Knight, CEO

It's worth noting as well that a number of our management companies have added additional HR and recruiting resources in market to begin to more aggressively recruit employees to our hotels. With operations stabilizing, more of their day-to-day focus has been on transitioning to captive labor such that they can begin to, as Liz highlighted, focus on building culture and really focus on enhancing service for our guests in a way that we were able to achieve prior to the pandemic.

Anthony Palo, Analyst

Alright. Thank you.

Operator, Operator

And our next question comes from Dany Asad with Bank of America.

Dany Asad, Analyst

Hi, good morning everybody. Justin and Liz, you both called out the ability to drive rate as the primary way to offset higher operating costs. We saw rates slipping to up 9% versus 2019 this quarter, down from up 12% last quarter. It sounds like April directionally is in a similar spot. My question is, can rate accelerate from here and what would be some of the segments or markets that would drive to be the drivers behind that?

Liz Perkins, CFO

I would go back to what we said generally about April trends and that really the rate step back is in part attributable to that first week in April. As we look at the back half of the month where occupancies were in line from a comparison to 2019 perspective with March or actually slightly better those weeks, rate rebounded as well and was in lockstep with that. I think we remain optimistic that we can continue to drive rate at least relative to where we've been with continued trends. Now, to the extent we see more consistent and continued growth in mid-week occupancies approaching 90%, the more we'll be able to shift mix, drive rate, and the revenue management systems will be able to really maximize mid-week rates as well. We've started to see an improvement but not to the extent we've seen on the weekends, and we certainly hope that if there's consistent mid-week occupancy gains that we can grow rates there as well. Also, where we had seen, speaking to your regional question, where we have seen urban start to recover more as well. As those occupancies continue to improve, we should see subsequent rate opportunity there as well.

Justin Knight, CEO

It's also worth noting that first and fourth quarter are the lowest overall occupancy quarters for our portfolio based on seasonality. We're just now moving into the stronger occupancy months where we should have a meaningful better ability to drive rate than we would in the early phases of the year.

Dany Asad, Analyst

Got it. Okay. That makes a lot of sense. Thank you very much.

Justin Knight, CEO

Thanks.

Operator, Operator

And our next question comes from Michael Bellisario with Baird.

Michael Bellisario, Analyst

Thank you. Good morning, everyone. Liz, just want to go back to April one more time. Easter was in April in 2019 and 2022. So, maybe just take a step back, is the Easter performance maybe more indicative of the new normal travel pattern of leisure being strong in business, weaker? Is that what we should expect around major holiday periods going forward?

Liz Perkins, CFO

As we evaluate our portfolio over time, we've noticed that business travel tends to peak before and shortly after holiday periods, which can vary depending on the calendar. Recently, leisure travel saw a significant rebound following the Easter holiday, and the changes in the calendar compared to 2019 highlighted the importance of those holiday weekends. There appears to be potential for further growth in leisure travel due to these calendar shifts, although business travel has experienced some impact. The normalization of these trends signals a positive direction for business travel, showing that we can recover from those slower weeks. Many historical patterns still hold true. Additionally, while mid-week occupancy rates are returning to normal, we've observed that shoulder nights are performing well. The strong performance on Mondays and Thursdays is encouraging as we analyze total occupancy increases and ongoing improvements.

Michael Bellisario, Analyst

Got it. That's helpful. And then you made a comment on group I think meaningfully improved, I think is what you said about 1Q performance versus 2019. I know it's a small part of your business, but what's the driver there? If group is at a slightly higher go-forward rate, does that have any impact on overall RevPAR or margins for your portfolio that should consider?

Liz Perkins, CFO

Well, a couple of things, group is strategic. We had more group on the book related to a couple of things. Just an effort on our part knowing that Q1 is typically softer from an occupancy perspective ensuring that we layered on some groups. It was really a benefit and then a testament to our on-site sales teams; group rate was favorable. As we continue to see strength and have the opportunity since group is short term and booked short term, to the extent we layer that on in higher demand times, we'll be able to charge higher rates. I think that that should be helpful. To the extent we're able to layer on group, the compression in hotels and high-demand times will give us the benefit of driving higher RevPAR as well. So I think all-in-all, it would be viewed as a positive if we can continue to maintain some of the small corporate and smart-related group business, especially at competitive group rates. So I'm encouraged by the activity on our buyer hotel teams, and I think as we progress through the year, as we carefully monitor travel patterns and occupancy on the books, we'll layer in group where we can.

Michael Bellisario, Analyst

Understood. And then just last one from me for Justin, just back to your comments on the 5% to 10% bid/ask spread. What's your best guess at this point? What breaks? Is it seller expectations come down or do you think buyers get more aggressive?

Justin Knight, CEO

You know, my best guess is that seller expectations break first and then buyers bridge whatever of the gap remains at that point. Our expectation is that the two factors that I highlighted earlier, CapEx needs and refinancing risk, will create greater motivation for sellers to transact. With that motivation, our expectation is that we would begin to see greater flexibility around pricing. Some of that, when we think about total transaction volume, to the extent we were to see a meaningful disruption in the macro, that could set transaction volume back again. To the extent we continue to see performance similar to what we're seeing today, relative stability in the macro, and we begin to see increased pressure from the two factors that I've highlighted, my expectation would be that we would see a fairly dramatic increase in transaction volume as we move to the end of the year.

Michael Bellisario, Analyst

Thanks for that.

Justin Knight, CEO

Thank you.

Operator, Operator

Our next question comes from Chris Darling with Green Street.

Chris Darling, Analyst

Thanks. Good morning. Justin, I know you're focused on growing opportunistically, but given how your equity cost of capital has trended in recent months, what are your current thoughts around selectively monetizing a portion of the portfolio potentially as a source of capital? Is that a consideration today or would you say that's pretty unlikely given the state of the transaction market?

Justin Knight, CEO

I believe that overall, we are pleased with the assets in our portfolio. We do not feel the need to sell assets to refine or adjust the portfolio in line with our current strategy. However, we are continuously engaging with potential buyers regarding the sale of individual assets or entire portfolios. If we observe more robust buying interest, we would be open to selling assets and reinvesting that capital into share repurchases, development projects, or funding capital expenditures. Our portfolio is currently generating enough cash that we expect to produce cash above our dividend, which has been leading in the industry for some time with a current yield of about 6.5%. We will have cash available for new assets or share repurchases through operational cash flow. We have a lot of flexibility in our approach. Given the current debt market conditions and the bid/ask spread, this spread affects us as potential sellers. We anticipate that as the year progresses, we will see an increase in reasonably priced deal flow. We have been patient in exploring other capital uses, and if we do not see favorable changes in the market, I mentioned earlier that we could shift towards a more aggressive stance in buying back shares and possibly selling assets to support those purchases. We believe there is significant value in our shares at their current prices, and our approach to share buybacks has mainly been influenced by what we expect will be more opportunities to enhance shareholder value through acquisitions in the near future.

Chris Darling, Analyst

Got it. Thank you. That's all from me.

Liz Perkins, CFO

Thank you, Chris.

Operator, Operator

We are closing our question-and-answer session. Now, I would like to turn the floor back over to Justin Knight for closing comments. Please go ahead.

Justin Knight, CEO

We appreciate you taking time to join us for our first quarter earnings call. As always, we hope that as you travel, you'll take the opportunity to stay with us at one of our hotels. We look forward to seeing many of you in the not too distant future as we travel and meet with you on the road.

Operator, Operator

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation, and have a great day.