Apple Hospitality REIT, Inc. (NYSE:APLE) Q3 2023 Earnings Call Transcript

Apple Hospitality REIT, Inc. (NYSE:APLE) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Greetings and welcome to the Apple Hospitality REIT Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Kelly Clarke. Please go ahead.

Kelly Clarke: Thank you and good morning. Welcome to the Apple Hospitality REIT’s third quarter 2023 earnings call. Today’s call will be based on the earnings release and Form 10-Q, which we distributed and filed yesterday afternoon. Before we begin, please note that today’s call may include forward-looking statements as defined by federal securities laws. These forward-looking statements are based on current views and assumptions and as a result, are subject to numerous risks, uncertainties, and the outcome of future events that could cause actual results, performance or achievements to materially differ from those expressed, projected or implied. Any such forward-looking statements are qualified by the risk factors described in our filings with the SEC, including in our 2022 annual report on Form 10-K and speak only as of today.

The Company undertakes no obligation to publicly update or revise any forward-looking 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 third 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: Good morning and thank you for joining us today. We are incredibly pleased with our performance year-to-date. A steady recovery in business transient and continued strength in leisure demand drove comparable hotels third quarter RevPAR growth of more than 7% as compared to the third quarter of 2019, our highest quarterly comparable hotels RevPAR growth since the onset of the pandemic. Despite more challenging year-over-year comparisons, during the third quarter, we achieved improvements in occupancy, ADR, and RevPAR. Third quarter 2023 comparable hotels ADR increased by 1%. Occupancy was up 2%, and RevPAR improved by 3% as compared to the third quarter of 2022. Continued top line growth enabled us to achieve third quarter comparable hotels adjusted hotel EBITDA of $132 million, a 1% improvement over third quarter 2022.

Positive trends have continued, and based on preliminary results, comparable hotels occupancy for the month of October was 78% with continued growth in ADR. Given the strength of our performance as we approach the end of last year, top line comparisons will become increasingly difficult as we continue through the fourth quarter. Still, overall travel trends are favorable. Leisure demand remains elevated to pre-pandemic levels, and steady improvement in business travel demand continues to bolster midweek occupancies. We have adjusted our annual guidance to reflect portfolio performance through the first nine months of the year, top line performance through October, and the recently completed and announced acquisitions. Expense growth, which was elevated as a result of general inflationary pressures and a competitive labor environment, moderated somewhat in the latter portion of the quarter as we lapped periods where we saw significant growth last year.

Through continued rate growth and disciplined cost controls, we achieved a comparable hotels adjusted hotel EBITDA margin for the quarter of 37%, down 110 basis points to third quarter 2022. We are fortunate to be partnered with some of the best operators in the industry who, together with our experienced asset management team, work to share best practices, monitor real time performance and focus on-site efforts to maximize profitability at our hotels without sacrificing service, cleanliness, or overall guest satisfaction. Our outperformance since the onset of the pandemic is a tribute to the combined efforts of our corporate team and our managers, and it’s a testament to our strategy of investing in a broadly diversified portfolio of high quality, rooms focused hotels with low leverage, which has enabled us to maintain the strength and flexibility of our balance sheet, positioning us to be acquisitive within the current transaction environment.

We have acquired four hotels since the beginning of the year, with three additional hotels under contract for purchase and are actively underwriting additional opportunities. In October, we acquired a Courtyard, a recently renovated Hyatt House and a corresponding parking garage in downtown Salt Lake City for a combined total of $91.5 million. We are pleased to expand our presence within the business friendly downtown Salt Lake City area, which has seen significant economic growth and positive demographic trends in recent years and is poised for continued expansion. These hotels sit adjacent to one another and are located directly across the street from the Delta Center within walking distance of the Salt Palace Convention Center, and convenient to Temple Square, the Utah State Capitol, the University of Utah, Salt Lake City International Airport, numerous performing arts venues, and multiple key areas.

Salt Lake City’s diversified economy offers a wide variety of business and leisure demand generators and includes software development, hardware manufacturing, and information technology firms, as well as defense, oil and gas, transportation, tourism, healthcare, and financial service industries among others. In October, we acquired the recently built Residence Inn Seattle South, Renton for $55.5 million. Renton is well known for its proximity to downtown Seattle and Bellevue as well as its strong business environment that spans aviation, aerospace, manufacturing, technology, life science, and health care. The hotel is less than 1 mile from Boeing’s Renton production facility, known for its assembly of the Boeing 737 family of commercial airplanes.

And from a leisure perspective, the hotel is located across from the southeastern shore of Lake Washington and convenient to the Seattle Seahawks’ headquarters and training facility, Tukwila Station, and the Seattle-Tacoma International Airport. We continue to have one existing hotel under contract for purchase for a total of approximately $37 million, the Embassy Suites, South Jordan Salt Lake City, which we anticipate acquiring by year-end. This hotel is part of a transit oriented mixed use development with two Class A office buildings located just off Interstate 15 in the Silicon Slopes region of the Salt Lake City metropolitan area, just 20 minutes south of downtown Salt Lake City, with a variety of amenities nearby, including Utah Transit’s SoJo Station North and South serving an 83 mile corridor with connections to downtown Salt Lake City and the Salt Lake City International Airport, South Jordan Towne Center, and South Valley Regional Airport.

South Jordan is home to a diverse range of businesses, including technology, biotech, healthcare, education and retail, in its near several key areas. The 192 room hotel opened in 2018 and has market leading meeting space at over 8,000 square feet. The combined purchase price for the recently acquired Salt Lake City and Renton assets together with the Embassy Suites in South Jordan represent a blended 8% cap rate on trailing 12-month financials through September of this year after an industry standard 4% FF&E Reserve. We believe each of these assets has embedded upside and will be a meaningful contributor to our overall portfolio performance. We also have two hotels under contract for purchase that are currently under development, the Embassy Suites in downtown Madison, Wisconsin for a purchase price of $79 million and the Motto in downtown Nashville for $97 million.

We anticipate acquiring the Madison Embassy in mid-2024 and the Nashville Motto in 2025, both following completion of construction. Since the onset of the pandemic, we have strategically transacted in ways that have refined and grown our portfolio. We have completed approximately $253 million in hotel sales and have invested approximately $736 million in new acquisitions. On a trailing 12-month basis, the 14 hotels acquired since the pandemic and owned for at least a full year have produced an unlevered yield of approximately 9% after capital expenditures. Importantly, we have completed these acquisitions while maintaining the strength of our balance sheet with estimated post acquisitions debt levels still below 3.5 times trailing 12-month EBITDA.

We continue to underwrite numerous potential opportunities and remain intently focused on maximizing total returns for our shareholders through strong operating fundamentals and portfolio growth when conditions are optimal. With our tremendous transaction experience, our available balance sheet capacity and our deep industry relationships, we are well positioned within the current marketplace. Supported by our strong operating performance, we continue to lead our peers in post-pandemic dividend payments. During the quarter, we paid distributions totaling $0.24 per share. Based on Monday’s closing stock price, our annualized distribution of $0.96 per share represents an annual yield of approximately 5.7%. Together with our Board of Directors, we will continue to monitor our distribution rate and timing relative to the performance of our hotels and other potential uses of capital.

As we approach year-end, the fundamentals of our business remain favorable with continued strength in demand and limited near-term supply growth. As has been the case for several quarters, nearly half of our hotels do not have any new supply under construction within a 5-mile radius, providing us with the ability to meaningfully benefit from incremental demand. And we believe our recent acquisitions further enhance our portfolio and position us for continued outperformance. Our strategy was designed to create an asymmetrical risk profile, mitigating downside risk while providing significant opportunity for upside. Our portfolio of upscale rooms focused hotels is broadly diversified across a wide variety of markets and demand generators. Our hotels are franchise with industry leading brands managed by some of the best management companies in the industry and provide a strong value proposition with broad consumer appeal.

Underlying the strength of our portfolio is a balance sheet with low leverage and financial flexibility, a consistent reinvestment, an effective portfolio management strategy, and dedicated corporate team with extensive industry experience. While we have reason to be optimistic about the trajectory of our industry and our portfolio specifically, I’m confident we are well positioned to continue to outperform and maximize shareholder value in any macroeconomic environment. It is now my pleasure to turn the call over to Liz for additional details on our balance sheet, financial performance during the quarter and updated annual guidance.

Liz Perkins: Thank you, Justin, and good morning. We are pleased to report another strong quarter for our portfolio of hotels. Comparable hotels total revenue was $356 million for the quarter and over $1 billion for the first nine months of the year, up 4% and 9% as compared to the same periods of 2022, respectively. Continued strength in leisure demand and recovery in business travel during the quarter enabled us to achieve comparable hotels RevPAR of $123, a 3% increase over third quarter 2022, with ADR of $159, up 1%, and occupancy of 77%, up 2% to third quarter 2022. Year-to-date through September, comparable hotels ADR was up 5% and occupancy was up 3% with RevPAR up 8% compared to the same period of 2022. Leisure travel continued to be strong during the quarter, with weekend occupancies of 82%, up 1% compared to the third quarter of 2022.

In addition, we continue to see improvement in business demand, supporting average weekday occupancies of 75%, an increase of 2% year-over-year. While weekday occupancies are ahead of 2022 for the quarter, there still remains upside opportunity relative to pre-pandemic weekday occupancy levels. Midweek occupancies have continued to strengthen over the last three weeks in October, while shoulder night and weekend occupancies remain strong, supporting the resiliency of leisure demand. In terms of same-store room night channel mix, brand.com bookings remained constant at 40% quarter-over-quarter. OTA bookings increased slightly to 13%. Property direct bookings were steady at 25% for the quarter. And while GDS bookings decreased seasonally from 17% during the second quarter to 16% in the third quarter, GDS room night volume was up 2% quarter-over-quarter.

This channel mix speaks to the powerful direct bookings our brands command, the strong property direct sales efforts our properties maintain in the field, our ability to leverage OTAs when beneficial, and the continued recovery of business demand. Looking at third quarter same-store segmentation as compared to the second quarter, VaR remained strong at 33%. Driven by seasonality, other discounts increased from 28% to 30%. Group decreased slightly from 15% to 14%, which is still slightly elevated to the same period in 2019. And the negotiated segment was 17% of our mix, up slightly to the same period in 2022 but remains lower than 2019, which we believe represents continued upside. Turning to expenses, total payroll per occupied room for our same-store hotels was under $38 for the quarter, up slightly to the second quarter of this year.

Year-over-year comparisons eased as we moved through the quarter with September same-store total payroll up just 4% compared to September 2022. Contributing to the improvement was an 18% reduction in same-store contract labor as a percentage of wages as compared to the third quarter of 2022. While we expect fourth quarter year-over-year growth to also moderate given the meaningful increases in the back half of 2022, we anticipate that higher wages for full and part time employees and higher utilization of contract labor will continue to result in elevated cost per occupied room relative to pre-pandemic levels. Hotel margins during the quarter were also impacted by travel and registration costs associated with brand conferences. We will continue to balance productivity and efficiency initiatives with our efforts to train and celebrate associates and to uphold a positive work environment conducive to attracting and retaining top talent.

These efforts better position us to support the high levels of service, cleanliness and maintenance necessary to sustain rate growth and maximize the long-term profitability of our assets. A focus on property level cost controls amid a challenging labor and inflationary environment enabled us to achieve comparable hotels adjusted hotel EBITDA of approximately $132 million for the quarter and $382 million for the nine months ended September 30th, up 1% and 6% to the same periods of 2022, respectively. Comparable hotels adjusted hotel EBITDA margin was strong at 37.1% for the quarter and 37.2% year-to-date through September, down 110 basis points and 90 basis points to the same periods of 2022, respectively. With expense comparisons having eased somewhat as we moved into the back half of the year as anticipated, this reflects a 50 basis-point improvement quarter-over-quarter and quarterly margin comparisons to 2022.

As we have stated on past calls, we believe that long-term margin expansion for the industry and for our portfolio will largely be conditioned on our ability to grow rates. So, with inflation figures coming down and hotels more appropriately staffed, we expect near-term growth in operating expenses to moderate relative to the significant increases we have seen in past quarters. Despite the continued inflationary environment, adjusted EBITDAre for the third quarter was $122 million and year-to-date was $346 million, up 3% and 7% to the same periods of 2022, respectively. MFFO for the quarter was $104 million and year-to-date was $294 million, up 1.5% and 6% as compared to the same periods of 2022, respectively. Looking at our balance sheet, as of September 30, 2023, we had $1.3 billion in total outstanding debt net of cash, approximately 3.1 times our trailing 12-month EBITDA with a weighted average interest rate of 4.3%.

Total outstanding debt, excluding unamortized debt issuance costs and fair value adjustments is comprised of approximately $285 million and property level debt secured by 15 hotels, and approximately $1.1 billion outstanding on our unsecured credit facilities. At the end of the quarter, our weighted average debt maturities were four years. We had cash on hand of approximately $35 million, availability under our revolving credit facility of approximately $650 million and approximately 80% of our total debt outstanding was fixed or hedged. As previously discussed, in July, we entered into an amendment of our $225 million term loan facility, which extended the maturity of the existing $50 million term loan by two years to August 2025 and align the maturity date with the other term loan in the broader $225 million facility.

We continue to be grateful for our supportive and longstanding lender relationships, as further demonstrated by this recent amendment. As of September 30th, we have approximately $106 million of debt maturing in the next 12 months, consisting of one $85 million term loan and a mortgage loan of approximately $21 million. We plan to pay for these coming debt maturities using funds from operations, borrowings under our revolving credit facility and/or new financing. Acquisitions completed subsequent to the third quarter were funded using cash on hand and availability on our revolving credit facility. As Justin highlighted in his remarks, we continue to be well positioned with pro forma debt to trailing 12-month EBITDA of less than 3.5 times, including the recently acquired acquisitions and closing on the South Jordan Embassy, and we have ample liquidity on our line of credit to pursue accretive opportunities.

Shifting to our outlook. With top line performance exceeding our expectations through the third quarter and with continued strength in preliminary numbers for October, we have narrowed our RevPAR guidance range and increased the midpoint by 50 basis points. We now anticipate comparable hotels RevPAR growth to be between 5.5% and 7.5% for the year. We have made similar adjustments to our EBITDAre guidance, narrowing the range by increasing the lower end to $423 million and decreasing the high end to $440 million. Given continued inflationary pressures on expenses, we have adjusted our comparable hotels adjusted hotel EBITDA margin guidance by holding the low end at 35.4% and reducing the high end by 70 basis points to 36.3%. We expect net income to be between $167 million and $189 million.

We continue to expect capital expenditures to be between $70 million and $80 million for the year. Our updated comparable guidance includes properties acquired and announced for acquisition before year-end as if the hotels were owned as of January 1, 2022, excludes dispositions since January 1, 2022 and excludes one non-hotel property, our New York asset, Hotel 57, where hotel operations have been leased to a third-party. We are encouraged by recent trends and the strength of fundamentals for our business. And while our updated guidance reflects some ongoing macroeconomic uncertainty, October top line performance for our portfolio showed continued strength in both business and leisure demand for our hotels, and expense growth has moderated in recent months.

A continuation of current trends would position us to perform above the midpoint of our guidance. As we approach the end of 2023, we are pleased with our performance and confident we are well positioned for the coming year. Our differentiated strategy has proven resilient through economic cycles. Our balance sheet is strong with ample liquidity, which we will continue to use opportunistically to pursue accretive transactions. Our assets are in good condition, with consistent capital investments ensuring that we maintain a competitive advantage over other products in our market. And we believe the fundamentals of our business are sound, with favorable supply dynamics allowing us to benefit from incremental demand. That concludes our prepared remarks.

Justin and I will now be happy to answer any questions that you have for us this morning.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Austin Wurschmidt: So Liz, can you just help us understand what the revised guidance assumes for hotel EBITDA margin change on the comparable 220 hotels or when you kind of adjust out that the impact that the new acquisitions had to the revised range for adjusted hotel EBITDA margin?

Liz Perkins: At the midpoint, the revised guidance, if you’re just looking at the existing comp and not the new acquisitions subsequent to quarter-end, the difference is about 50 basis points. So, we get a 30 basis-point benefit on an absolute basis from the new acquisitions.

Austin Wurschmidt: So, that gets you down in the 150 basis-point range at the midpoint on that revised range for that comparable pool, just to be clear?

Liz Perkins: 140.

Austin Wurschmidt: 140. Okay. And so margins are down 90 basis points year-to-date through the first three quarters. So basically, you saw some improvement in the year-over-year margin change in the third quarter. You’re expecting a little bit of a step back in the fourth quarter, but it sounds like you don’t expect some of that growth to bleed into ‘24, because I believe you said that expenses should continue — expense growth should continue to moderate in the quarters ahead. Is that fair?

Liz Perkins: That is what we believe will happen, or that’s certainly what we’re hopeful will happen. And based on what we saw, especially in September, if we continue to see year-over-year comparisons like we saw in September, we could outperform the midpoint of our range. I think we looked at the full quarter, which included a tough comp in July, some improvement in August and then more meaningful improvement in September from a margin perspective year-over-year and an expense growth perspective year-over-year as well. And I think we saw the latter quarter trends throughout the fourth quarter and into next year. That would be more positive than the midpoint of our guidance. But considering that one month doesn’t make a trend with September and I think we opted to be more cautious, more conservative.

But we’re certainly pleased with what we’ve seen most recently, both with the improvement that our team has made with the management companies and their focus and efforts around contract labor and productivity. I mentioned in my prepared remarks that we have seen some improvement there. We’re pleased with that. We’re certainly hopeful that that will continue. They’re really doing a great job and have continued to maintain higher productivity levels despite the challenges, and wages have started to moderate year-over-year as we anticipated. So, I think we’re hopeful. One of the things that impacted us in the third quarter, was, we had some favorable real estate taxes in prior quarters that was helping to offset the increase in insurance premiums, and we had some uninsured loss deductibles that hit in the third quarter that we hadn’t had.

So, we’ve had some favorable experience relative — or to offset some of the insurance premium increases and that we didn’t have that benefit in the third quarter. We carried that negative drag through the fourth quarter into the guidance. That may or may not happen.

Austin Wurschmidt: And then just last one on the guidance, just to clarify. I mean, how much hotel EBITDA contribution do you from the acquisitions that are set to close this year?

Liz Perkins: If you look at, I think it’s page 16 on our earnings release, you can see the add back for pre-ownership EBITDA for the new properties. That would include Cleveland, which we closed on at the end of second quarter. If you annualize that, it’s probably around $16 million.

Operator: Our next question comes from Floris van Dijkum with Compass Point.

Floris van Dijkum: Thanks for the color on the cap rates. I’m curious, Justin, obviously, you guys have been active. I like the update on how your acquisitions have fared so far and how the yield has been pretty attractive. As you look out, do you expect your investment activity to be one-offs, or how is the market looking for larger transactions as well? And how do you think about — are there going to be opportunities on the troubled refinancing of portfolios in your view? And would you participate in those kinds of investments?

Justin Knight: So, I’ll start and work my way backwards. I think, to your last point, would we consider, or participate in some of the various types of investment that you highlighted. I think, certainly, we are active in the marketplace. I highlighted in my prepared remarks that we continue to be active in underwriting additional potential acquisitions, and that includes the mix of individual one-off assets and small and medium sized portfolios. Because of where the debt markets are right now, we’ve seen less activity at the large portfolio level, meaning fewer large portfolios being brought to market, but that could change. And, I think we have consistently underwrote those as well. From a preference standpoint, generally, our preference is to pursue individual assets.

And we’ve found that we can be incredibly competitive in that space. Certainly, the landscape has changed slightly. And when we look at total transaction volume, that has not meaningfully increased, but our share of the total transaction volume has. And I think that’s a firm indication of our ability to transact in a market that has become more challenging for some of our — some of the groups that we are competing with, when we look back 12 months or so. I think on a go-forward basis, we anticipate a continued steady stream of potential deals that we will have an opportunity to underwrite. I think you highlighted in your question a portion of those are likely to be brought to market, because of financing issues or overall liquidity issues with the sponsor.

That is an area that we’ve been very successful recently. And as we continue to move into next year, we do anticipate the continued pressure from the brands around capital investments, should bring incremental assets to market as well. But I think incredibly pleased with the opportunity set that we’re seeing now with pricing for those assets and with our ability, based on the flexibility that we have because of the strength of our balance sheet, to be active in a market that’s become more challenging for many of the other groups that would be interested in acquiring assets.

Floris van Dijkum: If I can add one more follow-up or other. I know that your business is typically not viewed as being group dependents, you mentioned, I think, in your remarks or Liz did, 14% of your demand is group, it’s certainly a lot lower than some of your full service peers. But how do you think about the convention calendar. I note that your largest exposure to a market is San Diego. San Diego’s convention calendar, I believe, looks very good. How much of a benefit will flow through to your properties in your view? Maybe give a little bit of a backdrop in terms of how your exposure to group might be bigger than what people think it is.

Justin Knight: I’d say — I’d need to temper that a little bit. We certainly own hotels in or adjacent to markets that benefit from large convention business. And to some extent, we obviously benefit from compression related to those events. In most cases, we’re fortunate. I’d say, in recent years, we’ve become actually less dependent on that type of business, meaning we’ve been able to attract a variety of individuals and smaller groups that are not immediately associated with larger conventions. But certainly, in a market like, San Diego or in Denver where we own assets that are readily accessible or within close proximity to major conference centers, we do benefit to the extent that the convention calendar is strong.

Liz Perkins: Of the seven assets that we own in and around the San Diego area, we have two that are downtown that will certainly benefit from incremental compression around the convention calendar. And then, as you move out beyond the downtown area, depending on the size of the convention, we can see additional compression. But certainly, our downtown assets should see the benefit of the more favorable convention calendar.

Floris van Dijkum: Maybe the 14% group exposure today, how would that compare to pre-COVID? So, you mentioned, it’s a little bit lower now. What was it like prior to 2019?

Liz Perkins: Very, very close to where it is. It’s still slightly elevated to 2019 levels, even though, year-over-year, quarter-over-quarter, it’s slightly down. But it’s still elevated, yes, to pre-COVID levels, just 1 percentage point or 2, depending on the time of the year.

Operator: Our next question comes from Tyler Batory with Oppenheimer & Co. Please go ahead.

Tyler Batory: I’m hoping you can put a finer point on October RevPAR and your expectations for Q4. What was RevPAR growth year-over-year in October? How did trends compare with September? And then, when we look at the guide and what’s implied for Q4 overall. Are you expecting a little bit of a step-down in November and December? How much of that is seasonality versus maybe a change in trends or perspectives in terms of what you’re seeing in terms of demand?

Liz Perkins: Really good questions, Tyler. So October, we don’t have final top line RevPAR numbers in for October, but it looks like it will come in, in line, maybe slightly lower than our month-over-month growth from September. So September was around 3%. It’s probably in and around that range, maybe slightly lower. So we saw ADR growth and occupancy sort of right in line with where it had been prior year. So, still good trends in October, the fact that we’re not seeing a meaningful pullback from an occupancy perspective, especially given October is typically a peak month. And, we certainly had a strong October last year and continuing to see some ADR growth as well. So, taking that and knowing that that’s the strongest month of the quarter leading into the other part of your question, guidance at the midpoint implies flattish RevPAR, for the quarter, which would mean November and December would have to take a step back in order to come in line with our midpoint RevPAR guidance range.

I think we’ve built in or continue to maintain some macro uncertainty. There’s not really a meaningful change in trends that’s pushing us to do that. I think we still remain pleased and optimistic with the trends that we’ve seen in our portfolio. I think the biggest question mark is prior to the pandemic, we didn’t historically benefit from leisure as much in November December as we have in a post-pandemic world. And November and December are lighter from a business transient perspective. And while we continue to see improvement from a BT — on the BT side, it’s kind of just waiting to see what the balance is between leisure and BT travel in just softer occupancy months for us, seasonally.

Operator: Our next question comes from Bryan Maher with B. Riley Securities. Please go ahead.

Bryan Maher: Just a couple for me. You’ve talked a lot today about acquisitions, and I’m curious what the view is from a disposition standpoint, kind of — to some degree, kind of matching up some acquisitions with dispositions such that leverage doesn’t go meaningfully higher. Maybe two parts to the question here. I think you said something along the lines of you’re buying at like an 8 cap with embedded upside. Where can you sell at a cap rate, your older stuff? Let’s just start with that for a second.

Justin Knight: A little bit of a complicated question just based on the depth of the market today and somewhat dependent on the individual asset. I’d say we have seen recent trades of older select service assets in secondary markets at very low cap rates. Those transactions are typically — or transaction pricing for those deals is typically driven by a replacement cost for those assets. And so the per key values would be lower. Generally speaking, in a healthy transaction environment, we would see as much as 100-basis-point, maybe 150-basis-point spread between kind of the more premier assets and secondary assets. But that spread can swing wildly, depending on groups, and their particular interest and activity in the market at any point in time.

I think we’re continually looking at assets within our portfolio. There are a number of older assets where we have very low basis, and even in the market as it is today. We feel we could transact at an attractive pricing that would yield or lock in meaningful profit based on our original investment. And we do have assets where we think we could transact, at a positive spread, even to the investment, where we have assets like those I described, earlier. I think you can anticipate that we will continue to explore opportunities, for disposition as we’re looking at acquisitions in an effort to ensure that our portfolio remains relevant and competitive and that we’re optimized to take advantage of the most recent economic and demographic trends.

Bryan Maher: So, let’s assume for a minute that dispositions remain somewhat muted. And we all know that you’ve carried historically pretty low leverage, 27%, 28%. Currently, if the opportunities on the acquisition side continue to open up, where would you be willing to take that number?

Justin Knight: We’ve highlighted that we are comfortable between 3 and 4 times, opportunistically with a desire to be long-term at the lower end of that range. And so I think, Liz and I both highlighted in our prepared remarks, taking in total the acquisitions we anticipate for this year, which include South Jordan, we’re well below on a pro form a basis, 3.5 times. We continue to have roughly $0.5 billion available on our line of credit, and so ready access to incremental financing to pursue acquisitions. But, to the point that I think was implicit in your question, ultimately, it’s not our intent, regardless of the opportunity set to move the needle, so much from a debt standpoint that we changed the risk profile of our company.

And so, to the extent we were to get more active in a meaningful way or become very active from an acquisition standpoint, we would look to fund a portion of those acquisitions with proceeds from sales, and/or equity raise, to the extent pricing was appropriate.

Bryan Maher: And just staying on that for one last question. Your property tax and insurance was fairly meaningfully higher than we were expecting. You talked a little bit about acquiring assets in business friendly Salt Lake City, but you own a lot of assets in business unfriendly California and Illinois. Would you consider selling some of those assets to lessen your exposure to those two states? And that’s all for me.

Justin Knight: Absolutely, without singling those states out as the only states where we’re seeing increased cost pressure. Certainly, we’re mindful of our exposure and interestingly, looking at California specifically, we’ve benefited from being concentrated in Southern California versus Northern, where we have to-date seen revenue increases that have more than offset expense growth in those markets, such that the profitability for the assets has continued to be beneficial for our portfolio overall. That has not necessarily been the case, widely speaking, in and around Chicago, where the market dynamics are slightly different. I think, to the point I made earlier, we are constantly looking at the makeup of our portfolio, which now is over 220 assets, and looking to adjust in ways that ensure continued outperformance, which takes into consideration, the likely trajectory of cost relative to the potential upside from a rate standpoint.

Operator: [Operator Instructions] And our next question comes from Michael Bellisario with Baird.

Michael Bellisario: Justin, thank you for being diplomatic with your commentary on Chicago. Much appreciated.

Justin Knight: You’re welcome, Mike.

Michael Bellisario: Two questions. First, probably for Liz, just on — sort of a guidance related question, but more so on revenue management and bookings. Just how much is on the books today or when you turn the calendar from October to November for the next month or the current month rather, and then 60 days out? Basically trying to understand, how much are you dependent on in the month, for the month bookings, the last two months of the year, and is that any different than some of the higher demand months, call it June, July, August, for your portfolio?

Liz Perkins: Good question, Mike. Typically, we enter the month with about 50% of our occupancy on the books. And then in the month for the month, we realize the other 50%. And that stays pretty consistent month-by-month throughout the year. So 30 days out, 50% of our occupancy on the books, 60 days out, about half of that. And so really, you only have a small portion of your bookings overview towards occupancy, as you enter 30 days out, but certainly 60 days out, it’s not very clear where we may end up, especially if there’s a change in trends. If trends continue, we can project how we may materialize for the month, and trends seem to be consistent and still remain strong. And so we’re optimistic there. But really, as you progress through the months, especially in months where you have large holidays like Thanksgiving or Christmas and New Year’s, your view as you move throughout the month can change just depending on how business and leisure perform relative to those holidays.

And so, I think that’s where some of our caution comes in. At the midpoint around November, December, it’s not indicative of a change in trends in bookings that we’re seeing today. We entered the month of November very similar with average daily bookings above prior year and 2019 levels as we have been seeing. So I think overall, we’re still encouraged, but just have low visibility.

Michael Bellisario: Got it. That’s helpful. That’s what I was trying to understand, if it was just seasonality driven or if it’s just business versus leisure mix at the end of the year. And it sounds like it’s that. So, helpful there. And then just switching gears for — one for Justin. Just maybe can you big picture review your underwriting criteria more on the quantitative side than the qualitative commentary you’ve already provided. Where do cap rates need to be, where do IRRs need to be and then kind of how that all compares to where your stock is trading? Just kind of help us understand what goes in the black box and what gets spit out on the other end on your side.

Justin Knight: We’re continually looking at market trends and assessing those relative to the pricing for our stock and the implied multiples there. I think, share prices for the space, broadly speaking, have been more volatile, really since the onset of the pandemic than they had been in periods prior. And so, generally, we’re looking at a moving average — a daily pricing, as we think about our share price. And then from a property standpoint, we have seen some movement in cap rates, at least in terms of where we’re able to transact. And that’s been a positive for us. As we think about investments we have as a result of those shifts, really driven largely by a meaningful cost of capital change for private equity groups who had been very active in the space.

That puts us in a position to pursue high quality institutional assets in more challenging to enter markets at price points that meet our minimum hurdles from an investment standpoint. And outside of those harder to replace assets, moves the needle even further, such that we’re able to transact as we build out portfolios in ways that drive overall returns from the total acquisition activity. I think, generally speaking, we’re looking to acquire assets, either at measly higher implied returns on the day of acquisition than our current portfolio or at similar implied multiples, but with meaningfully different profiles from our growth standpoint and from our capital needs standpoint on a go-forward basis. And we’re open really to adding assets that fit into either of those two categories.

And I highlighted in response to several of the earlier questions, but it’s worth reiterating. We are continually looking at our existing portfolio as well, and looking to add and subtract from the portfolio in ways that that moved the value of the total portfolio in a positive direction. And from time to time, that will mean pruning from our portfolio. And as we’re adding to the portfolio, we’re looking to complement the holdings that we already have and shift or expand our exposure beyond the set of current demand generators and into markets where we have lower exposure.

Operator: Our next question comes from Anthony Powell with Barclays. Please go ahead.

Anthony Powell: So I guess on the acquisitions and financing the acquisitions, I think you used the line, which is pricing at about 7% I think currently. What’s your view on permanent financing, fixed versus floating, and how you’re looking at, and where could you finance assets like this in the market right now?

Justin Knight: Generally speaking, we’ve looked to balance fixed versus floating rate. Historically, when rates were extremely low and the risk to higher rates in the future was higher. We were near 100% fixed. As we progress through the changing rate environment and seeing the potential for future rate decreases, we pulled back slightly, but still predominantly fixed rate, largely through hedges on our unsecured line and/or — I mean, term loan.

Liz Perkins: Yea. We’re about 20% variable as of quarter end. I think as we look forward and certainly have some swaps that are maturing over the next couple of years, we’ll look at the curve closely and be in close contact with the banks and sort of evaluate our overall structure from a swap versus fixed or variable versus fixed perspective and try to manage that effectively given the current environment and the way the forward curve looks. But I think at one point, we felt like we were over-hedged, and I think 80-20 isn’t a bad place to be, but certainly, as these incremental hedges, mature over the next year, we’ll continue to look at it.

Justin Knight: And in terms of permanent financing for individual assets, and the pricing of that, some of it depends, and it was unclear from your question whether you’re talking about what we might be able to do versus what others in the marketplace might be able to do. But important to note that on the margin, our borrowing costs are lower on average than those we’re competing with, which is part of what that and the ready access to the capital has put us in an advantageous position from an acquisition standpoint. Then actual pricing will depend largely on the borrower at this point and the assets specifically, and the amount of leverage relative to value. But relative to our incremental borrowing costs, that would put others probably 100 to 200 basis points higher.

Anthony Powell: And maybe one more on some of your leisure focused market, maybe Virginia Beach and maybe Melbourne, Florida, those are down in the quarter like other leisure markets across the industry. Do you see that stabilizing as we get into 2024, or is there a bit more, I guess, normalization there assumed?

Justin Knight: When we look at overall leisure trends, they vary by market. And certainly, you’ve highlighted a couple of markets where we saw meaningful increases in performance relative to where those markets that performed pre-pandemic. As they pulled back from a portfolio standpoint, they’ve largely been offset by improvement in leisure and/or business travel elsewhere, such that we’ve been able to maintain growth in our overall portfolio numbers. Having been in markets like Virginia Beach for an extended period of time, that market has and we anticipate will continue to vary from an absolute performance standpoint year-over-year, based on things that are as unpredictable as weather on weekends. And I think, overall, based on what we’re seeing from a new supply standpoint, we continue to be bullish about the long-term prospects for those markets, and I think see them, nearly without exception, stabilizing and growing from a starting point well above where they were prior to the pandemic.

But the actual level will vary a little bit from market to market.

Liz Perkins: And for context, we dropped the 2019 comparisons in the release, but they’re still up meaningfully to 2019. For the quarter, Virginia Beach was up over 12%, it was 13% and Melbourne was up 7% to 2019 for the quarter.

Operator: There are no further questions at this time. I would like to turn the floor back over to Justin Knight for closing comments. Please go ahead.

Justin Knight: I’d like to thank you for joining us today. It’s always a pleasure having the opportunity to speak with you. We hope that as you travel, you’ll take an opportunity to stay with us at one of our hotels, and we look forward to talking to many of you next week, out in California.

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.