Apple Hospitality REIT, Inc. (APLE) Earnings Call Transcript & Summary

Okay. Great. We're going to get started. Good morning, everyone. Thank you for joining us. This is Tyler Batory, I'm the lodging REIT analyst at Janney Montgomery Scott. Very happy to be here this morning with the management team from Apple Hospitality. It's ticker APLE. We have Justin Knight, the CEO; and then Liz Perkins, who's the CFO. I'm going to turn it over to Justin in a second, but I think this is a pretty compelling opportunity in terms of my lodging REIT coverage universe. I have a buy on the stock. I think they're very well positioned, given their ownership of select-service hotels and their market mix. And I think this is a management team that has a very good track record in terms of capital allocation as well. [Operator Instructions] And so with that, I'm going to turn it over to Justin, who's going to give a brief introduction here of Apple.

Thank you, Tyler, and appreciate everybody joining us this morning virtually. The past several months have been a challenging time for the hotel industry. And having been in the business for a long period of time, this is a unique challenge for us as an industry. To tell you a little bit about Apple Hospitality, we've been in the business for 20 years. We are focused on a segment of the industry -- the select service segment, which is rooms-focused product -- and broadly diversified across a large number of markets. We currently own 235 hotels, over 30,000 guest rooms, which makes us the largest hotel REIT focused on this particular segment of the hospitality industry. Our broad diversification has been an advantage during this downturn with exposure to a number of suburban as well as urban markets, and we fared better than most of our peers in the space. We were cash flow positive in July and have continued to be cash flow positive since -- which is a feat, I think an impressive feat, and Tyler can probably speak to it later -- given that the hotel industry, as a whole, has been struggling with lower occupancy as a result of reduced travel related to the COVID pandemic and a slowdown in certain segments of the U.S. economy. One of the things that's helped us to get there is that we've consistently had low leverage. And so in addition to having efficient operations that generate high margins in good times, our low leverage proved an incredible benefit to us as we entered this downturn. We had meaningfully lower debt service to cover as we saw our cash flow diminish. As I mentioned in the beginning, our company has been in business in the hotel industry for 20 years. So we've been through multiple downturns and found in each of those downturns amazing opportunities and feel we're incredibly well positioned now as we begin to emerge from this downturn and build back occupancy in our hotels to take advantage of unique opportunities to build incremental shareholder value through accretive acquisitions. And that's really, as we move forward, the second part of our focus. So first, building back operations, returning to significant profitability. And second, just seize opportunities that are created by the current challenges to grow the portfolio to further enhance value for our shareholders. So that's a big picture overview of our company, and Tyler, we'll be happy to answer any questions you might have.

Okay. Perfect. So we'll dive in a little bit. And I don't want to get too short-term-focused, but I do want to start a little bit on the short term in terms of demand and what you're seeing at your properties right now. Certainly, there's a lot of headlines, what's going on generally in the lodging industry. But I think it's helpful if you could just touch on your occupancy percentages right now and just what you're seeing generally from a demand perspective out there.

Yes, absolutely. Back on the onset of the pandemic, we dropped from sort of an annual healthy almost 88 -- or 80% occupancy, down to 18% in April. Since that point in time, we recovered to over 50% and shared that October, we believe, will be approximately 53%. So over that time period, we've certainly recovered significantly, but haven't got back to the levels we have historically. And so as Justin mentioned, with that recovery, we've been able to generate positive cash flow, beginning in July. Currently -- or taking a step back and thinking about historic trends -- typically, second quarter and third quarter are our highest RevPAR and occupancy quarters and months. And so with normal seasonality, we would expect some pullback in occupancies in November and December and then starting to rebuild in January and February. And so I think your question is very relevant, given normal seasonality would dictate you would probably see some pullback in occupancies. Thankfully, because we were able to grow back to 53% -- approximately 53% in October, we have a little room to give. And we could still maintain some cash flow on the bottom line. And so we anticipate that we might see a general pullback related to seasonality. On the flip side of that, we haven't seen anything sort of post-earnings and post- the commentary around October occupancies. Outside of election week, we did see it was a little bit softer. But since then, we're still at similar year-over-year declines as we were in the third quarter, seeing maybe some slight positivity around the holidays, but we're cautious on that. Our booking window is very short. It's very hard to give you any sort of indication as to what may happen. But given how we proceeded through the recovery, even with increases in cases along the way, our portfolio, because it's broadly diversified and really appeals to a broad set of demand generators, we've seen some compensating demand even as cases have increased. We've been able to take advantage of first responder business and medical business and have some project business in-house that's going to travel sort of regardless of what the locality restrictions are for restaurants and things of the sort. We have good -- we do have some good base business. So I think while we anticipate seeing maybe a slight pullback in occupancy related to normal seasonality, we also feel like given the types of assets we're invested in and the geographic makeup of the portfolio and the base business that we've had throughout the recovery, we should be in a good shape to sustain higher occupancies than we saw at the onset of the pandemic.

Okay. And that's very helpful. One of the things that is unique and I think a significant positive in terms of where you are as a company is the fact that you had positive adjusted EBITDA last quarter, which is not something that everybody in the industry has. So can you touch on it a little bit more in terms of how you're able to do that? Remind everyone [Technical Difficulty] that you own and some of the unique characteristics that they have. And then last, touch on some of the changes you've made at the property level as it pertains to the cost structure.

Sure. I'll start, and maybe you can fill in. The -- as I highlighted in the beginning, we own select service rooms-focused hotels, predominantly branded with Marriott and Hilton, though we have a few high-end properties as well. So brands that most people are familiar with, like Hampton, Courtyard, Residence Inn, Hilton Garden Inn, those are the types of hotels that make up our portfolio. And the beauty of those hotels is, broadly speaking, they have simple operations and an efficient floor plan. And in really good times, they generate higher margins than comparable full-service hotels. In difficult times, they also allow us a tremendous amount of flexibility. Because they have a smaller footprint with smaller public areas, we're able to manage them incredibly efficiently. And as we saw declining occupancy, to make adjustments, utilizing managerial staffing in some instances and cross-utilizing employees to cover various functions in the hotels, such that we were able to operate incredibly efficiently at low occupancy levels. As we've built back occupancy, we've added back staff in proportion to the business that's come back to the hotels. And we found we've been able to manage our costs while continuing to provide services to our guests that are desirable. Specifically in this day and age, there's an increased focus on cleanliness and sanitation. And we put in place enhanced protocols around cleanliness and sanitation, which include more regular cleaning of the public areas and a special deep cleaning of the rooms between stays. In order to offset some of those increased costs, generally speaking, and to provide our guests and employees with an increased measure of safety, by and large, we have not been cleaning rooms during stay overs. So we clean before someone checks in. And then while they're in the room, we have, broadly speaking, avoided going back into the rooms, which has provided us with the cost savings, but also has allowed us to provide our employees and guests with a higher level of safety with your touch points, which has been important and valued by them in the current environment. We've also made some adjustments to the food and beverage offering. Historically, for those of you who have stayed in hotels like those that we own, we would offer a buffet breakfast. And for obvious reasons, in the current environment, and even in some areas, we've been legally restricted from delivering that. We've switched to a grab-and-go offering, which is preprepared and provided in individual packages to our guests. There have been some efficiencies that we've garnered by offering our food and beverage offering, which have also helped us to maintain reasonable margins in a more challenging operating environment. Looking forward, we're in discussions with the brands about how and when we bring services back and recognizing that consumer preferences change as a result of major events like the event we're living in now. We're being cautious and thinking about those things that are going to be most important to our guests, while at the same time, looking for ways to deliver those services and amenities more efficiently so that we're able to preserve our bottom line. So that's a big picture of how we are where we are.

Okay. Perfect. So we do have a quick question from the audience. [Operator Instructions] The question goes back to what we were talking about in terms of demand that you're seeing right now. Have you seen any lifts due to the hurricanes and the fires out West? Any benefit in your portfolio from those events?

Certainly, we have. I mean, every year, we tend to benefit from different storm-related business or disasters across the United States. We haven't disproportionately benefited from it this year more than normal. So as you sort of think about our broad demands, we have benefited from some but not disproportionate to prior year. So I don't think -- just sort of actually thinking about a comparison, we have benefited in Louisiana, Iowa and California some. In California, though, we did have some great base business outside of that. So it's been incremental. And so certainly, we've benefited from it as we always do. And again, our product just is perfect for that type of business.

Okay. And looking a little bit further out, obviously, lots of talk about a vaccine and what it can mean. Help us think about the recovery potentially in lodging generally and kind of how things may play out for you guys in terms of which segments might come back first and how you're positioned in terms of your portfolio to take advantage of a return to normal.

What we've already seen in the way of recovery is that leisure demand is particularly strong and [indiscernible] resilient. So as we saw occupancy building back from the lowest point in the spring, a significant portion of that occupancy was made up of leisure travelers. Certainly within our portfolio, we have a number of hotels that are well positioned to accommodate leisure travelers. We have beachfront properties and we have other properties in locations like Orlando, and other markets that tend to have a high level of leisure demand in a typical year. But we've also found that given the amount of time people are spending in their homes with their families, we've benefited from people just wanting a change of venue. And as we've interacted with our various management teams, most are seeing local families check in to use some of the hotel amenities and just to get away. There are a lot of people who spent a tremendous amount of time in their homes. And we anticipate that, that trend will continue, that leisure travel will be an important component of demand as we work through the recovery. In addition, we've continued to see production from our local negotiator and small business accounts. And given our location, which is largely outside of urban cores, we anticipate that, that business will continue to recover. And we'll be on the leading edge of the overall industry recovery. Following that, we anticipate that certain sectors of business transient will come back as we interact with business leaders for the various demand generators across our portfolio. It seems that certain segments of the economy are more likely to begin travel earlier than others. As we interact with universities, biotech firms, online merchants and the like, we feel that those groups are likely to be on the front end, with technology and financial services coming later. And given where those different industries tend to be focused, some of that makes sense because our sense is that some of the larger urban core markets will be late in the recovery, in part because of the industries that are focused in markets like New York or Chicago or San Francisco, but in part as well because those markets are heavily reliant on [indiscernible] business, which we anticipate will be the last piece of demand to come back, in part because once people have developed their comfort level and begun traveling, then event planners will have some lag between that point and the date that they can effectively throw a major event. And we anticipate that there could be as much as a 6- to 12- to 18-month lag between recovery of business transient and leisure and recovery of [indiscernible] too. And that would impact those markets that are more heavily reliant. As we've highlighted several times now, our portfolio is broadly diversified, and intentionally so. As we developed our portfolio, our desire was to provide the broadest exposure to the largest number of different segments of the economy and individual demand generators. We have intentionally avoided over-concentrating our portfolio in particular regions of the country. And really feel that in this environment, where the recovery will happen in stages with different industries and segments of the country coming back at different paces that there will be advantage relative to our peers in the space and continue to be from an occupancy and overall performance standpoint, now for the next several months and potentially, years.