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

Greetings, ladies and gentlemen, and welcome to Apple Hospitality's First Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kelly Clarke, Vice President of Investor Relations. Thank you. You may begin.

Thank you, and good morning. We welcome you to Apple Hospitality REIT's First Quarter 2021 Earnings Call, on this, the 7th day of May 2021. The call will be based on the first quarter 2021 earnings release and Form 10-Q, which were distributed and filed yesterday afternoon. As a reminder, today's call will contain forward-looking statements as defined by federal securities laws, including statements regarding future operating results and the impact of the company's business and financial condition from and measures being taken in response to COVID-19. These statements involve known and unknown risks and other factors, which may cause actual results, performance or achievements of Apple Hospitality to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Participants should carefully review our financial statements and the notes thereto as well as the risk factors described in Apple Hospitality's annual report on Form 10-K for the year ended December 31, 2020, and other filings with the SEC. Any forward-looking statement that Apple Hospitality makes speaks only as of today, and the company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, certain non-GAAP measures of performance, such as EBITDA, EBITDAre, adjusted EBITDAre, adjusted hotel EBITDA, FFO and modified FFO will be discussed during this call. We encourage participants to review reconciliations of those measures to GAAP measures as included in yesterday's earnings release and other filings with the SEC. For a copy of the earnings release or additional information about the company, please visit applehospitalityreit.com. This morning, Justin Knight, our Chief Executive Officer; and Liz Perkins, our Chief Financial Officer will provide an overview of our results for the first quarter of 2021. Following the overview, we will open the call for Q&A. At this time, it is my pleasure to turn the call over to Justin.

Good morning, and thank you for joining us today. During the first quarter, we produced our strongest operating results since the beginning of the pandemic, with our portfolio occupancy exceeding the industry averages and our internal expectations. We achieved positive cash flow after all corporate level expenses, including capital expenditures. Occupancy and rate continued to improve in April and with strong leisure demand and signs of improvement in business transient, we have reason to be optimistic for the remainder of the year. Last year was the most challenging year on record for the hotel industry. Working together with our on-site management teams, we swiftly adjusted operations and significantly reduced costs to keep our hotels open and capture existing demand within our market. With low leverage, broad market diversification and efficient asset level operations, we returned to positive corporate level cash flow by early summer, and we're able to produce positive modified funds from operations for the full year. Uniquely positioned to focus on increasing profitability, not minimizing cash burn, we preserve the strength, flexibility and capacity of our balance sheet without dilutive capital raises. Having now weathered what we hope is the worst of the pandemic, we are incredibly well positioned to grow the value of our company organically as we focus on long-term operational efficiencies to drive higher margins and externally through accretive transactions. Demand for our hotels has been broad-based. Occupancy and ADR steadily improved during the quarter, resulting in RevPAR of over $68 in March. RevPAR increased 25% from January to February and 27% from February to March, and positive trends have continued since the end of the quarter. We estimate full portfolio occupancy was approximately 68% for the month of April with continued improvement in rate. It is important to note that these results include all of our hotels as we were able to remain open and operational even during periods of lower occupancy. Our portfolio of rooms-focused hotels has performed better than the overall industry as well as our chain scales as reported by STR, even without a full return of business travel. With business demand expected to meaningfully increase in the back half of the year, we are confident we are well positioned for continued outperformance. The scale ownership of upscale rooms-focused Marriott, Hilton and Hyatt branded hotels diversified across different markets and managers, we benefit from unparalleled access to detailed performance data. We utilize the information to perform extensive benchmarking analysis and work with our managers to implement the most efficient and effective practices across our portfolio. As we face the challenges of the pandemic, we closely evaluated every aspect of our business to find incremental efficiencies and to focus our efforts on what matters most to our guests. We quickly established standardized staffing and operating models for lower occupancy hotels and meaningfully reduce costs by renegotiated national contracts with vendors and service providers. We maintained efficiencies as we grew occupancy in the first quarter, with total hotel operating expenses reduced by 41% as compared to the same period in 2019. As a result, we achieved adjusted hotel EBITDA of $35 million adjusted EBITDAre of $27 million, modified funds from operation of $9 million and comparable hotels adjusted hotel EBITDA margin of 23% during the quarter. Apart from April of last year, we have been profitable at the hotel level every month since the start of the pandemic. We have a track record of optimizing operations in order to deliver industry-leading margins throughout economic cycles. As we emerge from the current environment, we will work to ensure that a portion of the cost savings and operational efficiencies we have achieved during the pandemic continue, resulting in higher operating margins for our portfolio as we build back rate and occupancy at our hotels. We have always believed in the merits of owning income-producing real estate with low leverage and have, as a result, maintained a conservative, flexible balance sheet. In March, we entered into amendments to our unsecured credit facilities that extend the covenant waiver period, enhance our ability to exit the waiver period and provide additional flexibility to be acquisitive. Based on our continued outperformance and the terms of the recent amendment, we believe we are positioned to be among the first of our publicly traded peers to exit the covenant waiver period. Transaction volume in the hotel space remains relatively low, but we have seen an increase in deal flow and have been actively underwriting assets, both as a potential buyer and seller. As we move through the recovery, we expect opportunities and transaction volume will continue to increase. We intend to be active in the market pursuing accretive transactions to maximize long-term value for our shareholders and to further grow and enhance our existing portfolio. Relatively lower debt obligations and strong property level performance, which generated positive corporate level cash flow after G&A and debt service despite a global pandemic enabled us to acquire 5 hotels for a combined total of $161 million since the onset of the pandemic, including the Hilton Garden Inn in downtown Madison, Wisconsin, which we acquired during the first quarter for approximately $50 million. Since the beginning of the year, we have sold 3 hotels, including our Homewood Suites hotels in Charlotte, North Carolina and Memphis, Tennessee and our SpringHill Suites in Overland Park, Kansas, for a combined total of $24 million. With the current average effective age of 5 years, we entered the pandemic with a young, well-maintained portfolio. During the quarter, we invested approximately $2 million in capital expenditures, and we anticipate investing an additional $23 million to $28 million in capital improvements during the remainder of 2021. While we have prudently reduced our capital spend in the current environment, we continue to ensure that our assets are well maintained, that they remain competitive in their markets and that all systems continue to operate efficiently. As we welcome increasing numbers of guests back, our hotels are ready. Looking back over the last year and how far we have come, we are incredibly grateful for the dedicated associates at our hotels and our amazing management teams who in light of unprecedented challenges have been exceptional in caring for and serving our guests. Last year, associates at our hotels were faced with incredibly challenging circumstances as we worked to adapt to the evolving operating environment, with many taking on additional responsibilities. Next week, we plan to announce the recipients of our 2020 Apple awards. For these awards, we focus on the associates at our hotels, and we look forward to recognizing 5 individuals nominated by their management companies and peers for their outstanding contributions to the safety, well-being and overall satisfaction of our guests. I also want to take a moment to welcome our newest Board member, Howard Woolley. Howard brings with him a wealth of experience in technology, public policy and advocacy, and we look forward to his contributions over the coming years. We have developed and refined a hotel investment strategy unique in its ability to mitigate risk and volatility while producing compelling investor returns through economic cycles. Our strategy is straightforward, own a portfolio of geographically diversified select-service hotels affiliated with the best brands, work with the best management teams in the industry, consistently reinvest in our hotels to ensure they remain relevant and competitive and maintain a flexible capital structure with low leverage. Our outperformance during these unprecedented times is not only a testament to the strength of our underlying strategy, but also to the perseverance of our team. I want to take this opportunity to recognize the efforts of our Apple team members who have continued to work tirelessly to drive outstanding results for our company. We remain intently focused on maximizing long-term value for our shareholders and are confident we are well positioned as travel continues to recover. It's now my pleasure to turn the call over to Liz, who will provide additional detail on our financial results and performance across our markets.

Thank you, Justin. We are extremely pleased with the performance of our portfolio during the first quarter. As expected, our market diversification and largely suburban concentration continued to result in our portfolio's outperformance versus national averages during the quarter. On our last call, we highlighted that the pullback in occupancy in November and December was consistent with typical seasonality, and that we anticipated sequential improvement as we move through the first quarter. With strong leisure and improving business transient, fueled by an accelerated rollout of COVID vaccines, demand improved more quickly than anticipated, especially as we entered spring, resulting in a 65% increase in occupancy from 40% in December to 66% in March. Our in-house revenue team worked closely with our management company, revenue support and on-site sales teams to grow market share during the quarter, which furthered our outperformance, enabling us to produce results that exceeded internal expectations. By February, we surpassed occupancy achieved in October of last year, which is typically a seasonally strong month and had been our strongest month since the onset of the pandemic. In April, occupancy continued to grow, reaching approximately 68%, down only 16% to April 2019, as compared to the fourth quarter, where occupancy was down 36% versus the same period in 2019. With improving occupancy, we produced sequential improvement in rate, moving from ADR of $95 in January to over $103 in March. We are encouraged that the gap to 2019 ADR levels began to shrink as we moved through April and into May. While we saw meaningful improvement in both weekday and weekend occupancies, weekend occupancy continued to exceed weekday occupancies during the quarter, indicative of the relative strength of leisure demand. Weekday occupancy moved from 42% in January to 62% in March, while weekend occupancy moved from 51% to 80%. Similarly, while we were able to increase ADR midweek and on the weekend, stronger weekend occupancy facilitated more meaningful growth. Weekday ADR increased from $95 in January to $101 in March, while weekend ADR increased from $94 to $108 over the same period. In April, we saw similar trends as our portfolio ran 63% occupancy at $106 mid-week and 81% at $116 on weekend. As we've highlighted on past calls, as our portfolio is able to consistently produce occupancies at or above 70%, we can more effectively manage the mix of business in our hotels to drive more meaningful increases in rates. Looking at Saturdays in the month of April, where we consistently ran occupancy above 75%, we grew rate from $102 at the beginning of the month to $121 in the last week. Not surprisingly, a number of our top-performing hotels in markets during the quarter were located in warmer parts of the country with strong performance in many of our California, Texas and Florida hotels. And with Burbank, San Bernardino, San Jose, Los Angeles overall, East Texas, El Paso, Fort Lauderdale, Palm Beach, Jacksonville and Tampa standout; 27 of our hotels ran occupancies in excess of 80% for the full quarter. Strong performance in these markets was driven by a wide variety of demand generators, including leisure, project business, entertainment, insurance, medical, government, military, relocations and a number of other small corporate accounts. Our suburban hotels continued to outperform urban hotels in the quarter with occupancy of 57% as compared to 49%. We also generally saw weaker performance from our hotels in the Northeast and Northwest and from our hotels located in markets with greater historic exposure to large group and convention. Detroit, Minneapolis, St. Paul, Denver and New Orleans produced lower occupancies, as did our hotels located in the Chicago suburbs. The strong performance of our portfolio overall during the quarter is a tribute to our broad diversification, which provides exposure to a myriad of market and demand generators. These markets where we're still experiencing weaker results relative to our overall portfolio, will provide greater opportunity for growth in future quarters as we see more widespread relaxing of COVID-related restrictions and continued improvement in business transient demand. In the near term, we expect to see continued outperformance from markets with fewer imposed restrictions on travel and less dependence on conventions, international travel and large corporate business. Increased vaccinations and corporations returning to more regular office work should improve occupancies in a growing number of markets as we move into the back half of the year. Given the makeup of our portfolio, we are optimally positioned to outperform throughout the recovery and anticipate continued improvement in operating results as demand becomes more robust in a growing number of markets. Our team's relentless efforts to control cost and maximize profitability resulted in first quarter 2021 comparable adjusted hotel EBITDA of approximately $36 million and comparable adjusted hotel EBITDA margin of approximately 23%, down only 410 basis points to the first quarter of 2020, but representing an increase of 530 basis points from the fourth quarter of 2020. MFFO was approximately $9 million or $0.04 per share for the first quarter. With experience owning an unparalleled number of branded select-service hotels over multiple economic cycles, we have developed and fine-tuned a strategy in partnership with our third-party managers to maximize property level profitability in any environment. Over time, this has enabled us to produce best-in-class operating results at the property level and positioned us to make necessary adjustments to our business as we saw occupancies deteriorate in the spring of last year. Looking back over the past 4 quarters, our asset management and third-party management teams have done an exceptional job managing our business, producing competitive cost savings despite entering the pandemic with meaningfully more efficient operation. Our total property level expense reduction over that 12-month period was 80% of the revenue decline. With revenue down 48% in the first quarter relative to the first quarter of 2019, we were able to reduce total hotel expenses by 37%, and expense reduction ratio of 0.8%. This is particularly impressive given increases in occupancy and over half of our RevPAR decline resulting from the decline in rate relative to 2019. Cross utilization of managers and hourly team members combined with relaxed brand standards, enabled us to achieve total payroll on a per occupied room basis of under $27, down 20% to 2019, even with seasonally lower occupancy in January and February. We expect total labor cost to increase somewhat over the coming months as we continue to build back occupancy and increase staff appropriately. Total hotel operating expenses for the quarter were down 41% to 2019 and 33% to 2020. Since the onset of the pandemic, we have spent considerable time with both our brands and our management companies to modify long-term brand standards and reaping property level staffing model to ensure that a portion of these savings remain through the recovery and beyond. With the strength of our balance sheet, our track record of disciplined capital allocation and our current operational outperformance, we secured an extension to our covenant waiver period as previously disclosed during the quarter. Enhancing flexibility without raising additional capital are further encumbering our portfolio as we continue our efforts to preserve equity value for our shareholders. Under the terms of our current amended credit facilities agreement, we successfully achieved key objectives to enhance our ability to exit the waiver period through less restrictive financial covenants for a transition period and to enhance flexibility to use up to $300 million from equity issuances and up to $300 million in proceeds from the sale of assets for acquisitions. We are incredibly grateful for our long-standing relationships with our lenders and their continued support and feel we have flexibility to manage our business and pursue accretive opportunities in the near term, while remaining focused on exiting the covenant waiver period. As of March 31, 2021, we had $1.5 billion in total outstanding debt with a weighted average interest rate of 3.9%, consisting of $510 million of mortgage debt secured by 33 hotels and $1 billion outstanding on our unsecured credit facilities. At the end of the quarter, we had available cash on hand of approximately $6 million and unused borrowing capacity under our revolving credit facility of approximately $275 million, with only $55 million of maturities in 2021. With approximately $281 million of total liquidity, only 32% total leverage, positive cash flow from much of 2020 and for the first quarter of 2021, we are confident in our ability to continue to navigate the current environment, preserve the value of our equity and strategically position ourselves to take advantage of opportunity. Our talented team and investment strategy have enabled us to effectively weather the most challenging environment ever experienced in our industry. As we proceed through the recovery, we are positioned for continued outperformance. With operations producing cash in excess of debt service, corporate costs and capital expenditures and with ample balance sheet capacity to enable us to pursue scaled acquisitions, we are confident in our ability to drive long-term value for our shareholders. We can now open the call for questions.

[Operator Instructions] Our first question comes from the line of Neil Malkin with Capital One Securities.

Congrats on true cash flow positive, must feel great. Congrats. Sure. First one from me. Just in terms of acquisitions, external growth, you mentioned in the call, I think, Liz, your ability to execute on your best practices from your large portfolio and long track record and your ability to asset manage properly or better than most. That being said, are you kind of more willing to or maybe thinking about getting more aggressive on acquisitions, potentially raising some capital to really kind of get some scale early on in this cycle, particularly when a lot of the valuations are being priced out of '19. And we all know, based on all these changes to the model, EBITDAs are stabilized or going to be significantly above that. Just kind of curious to how you're thinking about that side of the equation? And you've kind of been closer to pulling the trigger on any acquisitions?

As I mentioned in our remarks -- our prepared remarks, we have seen increased transaction volume in the market and have been actively underwriting deals, both as a buyer and a seller. I had highlighted in earlier calls, and it continues to be the case that there are relatively few assets currently trading on the market. That said, we are increasingly having conversations with groups that we feel are productive related to the potential acquisition of assets that would be a good fit for our portfolio and see opportunity on a selective basis as we have already this year to dispose of assets, really primarily as a way to manage long-term CapEx needs for our portfolio. Our expectation is that over the coming 12 to 18 months, we'll see a continued increase in total transaction volume with more assets coming to market, remembering, again, that in the near term, banks have been flexible, governments have provided -- or the government's provided subsidies for ownership groups and the brands have had a tremendous amount of flexibility around brand standards and renovation cycles. As some of that leniency wears off, we'll see an increased number of assets come to market, given the fact that a number of these ownership groups have depleted reserves in order to fund operating deficits in the near term. We think in the near term, there will be attractive opportunities. We think the window for acquisitions will be an extended window. And as Liz highlighted in her prepared remarks, we feel like we're uniquely positioned from a financial standpoint to pursue those deals, which are good for our portfolio and which we anticipate will enhance value for our shareholders over the long term. It's worth noting as well, we've been doing this for a very long time through multiple cycles and have a tremendous amount of experience acquiring assets. Given the lack of visibility today that exists, I think -- and our relative exposure and experience in the space, we have somewhat of a competitive advantage as we assess various opportunities. I feel really good about the deals that we've done to date since the beginning -- since the beginning of the pandemic. Each of those deals, I think, are located in markets with demand generators that are likely to outperform and to produce significant room nights at attractive pricing as we begin the recovery. And looking at our all-in per key price that we've had for those acquisitions feel incredibly good. And we feel that's just the start.

Okay. Appreciate that, Justin. And then can you maybe talk about occupancy in April. Maybe talk about sort of occupancy thus far into May and kind of what the pricing or ADR trends kind of look like for you? I guess -- and that's just relative to like the return of your local and regional business travel. I think that's when you're really going to be able to change the mix, not just from leisure, higher-rated leisure to getting in that business travel. So if you could just maybe talk about those sorts of things and the progress on the nonleisure side of the book and just kind of pricing power over the very recent past?

So as for April and as we progress through April and into May, our weekends have continued to outperform. So leisure has continued to outperform at least as you look by day of week stay pattern. That said, between January and April and into May, occupancies have also increased midweek, which is favorable and a good sign for both local regional business travel, but business travel in general. It's been fairly widespread as well that we're seeing those trends. So on average, for our portfolio, weekend and weekday improvement through the quarter and into April. Every single week, both midweek and weekend, we were able to increase rate each week over the prior week. More significantly, as I mentioned in the prepared remarks, on the weekends, due to occupancy levels and demand over that time period, but also midweek, just not as significantly. And so I think as we continue to see midweek demand improve, we'll get that pricing power at that point as well. And I think to the extent business travel comes back more meaningfully, you mentioned, and you're correct that, that will give us an ability to better mix manage. In the interim, as we look at booking position and look further out, we're encouraged by more bookings going into the month for longer stays in the future. So people are getting confident about booking in the future. We're having more bookings going into May than we had into April and the ADR on the books going into the month is higher. So we're encouraged by both the ADR and occupancy trends we're seeing in the booking information that we have, recognizing that most of our bookings still are relatively short term, although that has improved slightly as far as the mix of total bookings as we progress through this year relative to last year and in sort of the heart of the pandemic.

Okay. I guess another way -- in terms of that business, I mean, have you seen a market decrease in the spread in occupancy between weekend, weekday, just as an indication that you're -- the first leg of the business travel, which is the local/regional are getting more comfortable, traveling more, et cetera?

It's a good question. However, as we go into spring, even in normalized times, our weekends tend to outperform weekday. Our Saturday becomes a peak night when leisure is typically strong. And so the differential between weekday and weekend isn't apples-to-apples as you're coming out of fourth first quarter. We do believe that we are seeing incremental weekday demand, but weekends have certainly picked up more meaningfully. As climates have gotten warmer, you had spring break and restrictions have been lifted and people have been vaccinated, I think that the first surge of occupancy here really has been led by the weekends. But we continue to see improvement midweek as well.

Our next question comes from the line of Alex Kubicek with Baird.

First, I want to start on the credit waiver period. With how well things have progressed, what needs to happen on the demand front for you to exit that restriction period ahead of year end? I think we're just trying to get a pulse and if we're on that piece today? And just understand what metrics you guys are looking at going through the summer.

I mean the metrics or the covenant to play -- pay closest attention to is the debt-to-EBITDA covenant. We negotiated as part of the extension in March, elevated financial covenants. So where historically, we had to be at 6.5x debt-to-EBITDA. We have a period of time, we can be at 8.5x, then 8x and progress back down in 2023 to be stabilized 6.5x. At 8.5x, that's probably $45 million to $50 million for the quarter annualized. That's not too far from a reasonable expectation for future quarters here. I think as we look at it, we want to ensure that we are being responsible and exiting early and believe that there's some sustainability and demands and rates and that we'll be able to consistently produce higher EBITDA quarter-over-quarter and build so that we can maintain or sustain being out of the covenant waiver period, but it is certainly a focus for us. And looking at where we finish from an EBITDA standpoint in Q1 and recognizing the demand trends going into some of the strongest quarters of the year, it certainly remains a possibility that we could exit before the end of the year.

That's helpful. And then on the small Kansas sale, can you provide any update on the process and pricing there? And then just kind of pulling back as you guys have been selling kind of these small noncore assets over the past 6 months, how have you seen buyer attitudes shift on, whether it be pricing or the type of assets they're looking for? Just looking for color there.

So the Kansas SpringHill Suites was sold to a hotelier, a local hotelier. Looking at the 3 hotels that we've sold this year, 2 were older extended state products that were sold to groups looking to convert the hotels to apartments. Kansas was sold to a group that wanted to continue to operate the hotel as a hotel. On a combined basis, the blended cap rate was around an 8 on 2019 numbers for the 3 assets. And that's excluding CapEx. I highlighted in response to Neil's earlier question that part of our thinking related to dispositions is the management of our out-year CapEx. It's worth noting that for the 3 hotels combined, our expected CapEx in the near-term was over $10 million. And so in part, the benefit of the sale was the attractive pricing that we were able to secure for the assets. But it's important as well to note that the sales help us to manage our long-term CapEx needs. And we feel that we can redeploy proceeds from those sales into newer assets that have a greater growth trajectory on a go-forward basis. Separately, the Kansas SpringHill Suites on 2019 numbers was in the 9-ish cap range, pre CapEx and mid-6s all in.

That's helpful. And then kind of just leading into the last comment you made on acquisitions. Can you just speak a little more to the composition of your active deal pipeline? Just are any markets, location, brands, screening more attractive today as you kind of put pen to paper and start underwriting deals?

I mean we continue to like the types of assets that exist within our portfolio. And so as we look at acquisitions, we continue to look for select-service assets, branded with Hilton, Marriott or with Hyatt. Generally, we're looking at newer assets, though not exclusively. And we're looking to build out our portfolio and to continue our strategy of broad geographic diversification. I think we've highlighted in past calls and certainly shown in our recent performance results that a focus on markets with multiple demand generators yields the strongest long-term results for us. And as we invest, we're looking to buy hotels in markets that benefit from a mix of leisure and business demand, recognizing that in the near term, leisure will be the stronger component in many of those markets, but ensuring that as we progress through the recovery and we see a more robust return in business transient, that we are also poised to benefit from that.

Our next question comes from the line of Austin Wurschmidt with KeyBanc.

So Liz, your comment on achieving ADR of, I think you said $120 -- $121 in late April. That was for the overall portfolio, correct? And then we've talked in the past about ADR growth becoming more, I think, exponential versus linear when you reached that 70% occupancy level. So are we there now? And does that view kind of still hold with the mix of business that you have today?

So I'll answer the question relative to the $121. That was for the portfolio for weekends, for weekend ADR, for the last week in April. We are beginning to see sort of the benefits of some consistent higher occupancies. The revenue management systems do appear to have recognized the recent demand trends and the future booking demand trends. And as we progress through the first quarter, one of the positive trends that we saw in our booking data was where we had been last year going into the month with a rate on the books from future bookings as we progress real-time in the month for the month, where we were achieving most of our bookings that ADR was decreasing over the month and actualized lower than the ADR. We went into the month with the bookings that were there. As we progress through this quarter -- this year, we saw that change about February and into March, instead of decreasing, it would plateau and stay flat. And then as we moved into April, we finished the month at a higher ADR than we started with, with the bookings that were on the books for the total portfolio. And so -- and into May, as we look at booking data for May, we're going in with a higher booked rate than April with the -- and because it's higher-rated on the books now, anticipate -- and even see in future months as people are booking, that the revenue management systems are recommending higher rates. So we're beginning to see some traction. I think that the consistency of demand in our portfolio and the revenue management systems starting to price higher rates is a positive sign. I think, too, as we move throughout the spring and summer, and having those higher rates on the books, that will help conversations with our management companies about the mix of business on our books, or at what rates they're taking base business should they still feel that they need it. And so I do think we have turned or started to turn a corner. How quickly rate grows will depend in part with what occupancy does. But as we have heard from our peers broadly, and as we've seen in the industry, we certainly have seen an uptick in demand and should that continue, believe that ADR will begin to improve.

That's really good detail. Can you just share what percent corporate travel represents today is either percent of revenue or room nights versus several months ago?

Austin, it's a good question. We -- stabilized, we've always estimated that we were probably 75% business transient or business travel and 25% leisure. Over the last year, I'd say we thought we were more 50-50. Given that we still continue to see outperformance on the weekends, even though going into the second and third quarter, weekends are seasonally strong anyway relative to midweek. We're probably closer to that 50-50 still today than the 25-75, but making some progress back towards the 25-75 of our normal stabilized split, if that makes sense.

Yes. Got it. No, I didn't mean to put you on the spot. That's helpful. I know it's not a perfect science. And then, Justin, on the disposition side, given the conversations you're having, why not sell more today, given there's -- your conversations are starting to pick up it sounds like, and it seems to be like there's tremendous demand out there for assets, and so why not build your capacity ahead of what you're talking about is kind of a ramp in opportunities over the next 6, 12, 18 months. What's sort of holding you back from maybe doing something on a more larger transaction and portfolio-type deal?

I think there's an openness on our part to doing a larger transaction for the reasons that you've highlighted. That said, we don't have a need to do that. And so for us, the attractiveness of a larger-scale transaction is really wholly dependent on the pricing we're able to achieve for that. I highlighted that as we look at out years managing our CapEx spend, it's an important component as we look at our ability to generate outsized returns for our investors throughout the recovery, and the sale of assets is one way to manage that. A more scaled transaction brings with it some efficiencies that these smaller transactions do not benefit from, and so I think consistent with the discussions that we've had on past calls, we continue to entertain offers from and to actively look for opportunities with larger groups in market. And we'll pursue transactions to the extent we feel pricing is appropriate.

Our next question comes from the line of Tyler Batory with Janney Capital Markets.

This is Jonathan on for Tyler. First one for me. Wondering if you could provide some color on the labor market that's out there. What you guys are seeing in terms of hiring back additional workers as occupancy has ramped fairly meaningfully over the last few months? And any thoughts on when some of those pressures, if they're out there, may alleviate?

It's interesting. There's been a lot of talk about the labor crisis or a challenge that a number of service industries are having finding good workers in today's environment. And certainly, we are, as are most businesses in service industries impacted by that. Relative to our full-service peers, I think we're advantaged on the margin, in that we came into this year running higher occupancies and had in the -- in last year and have for some period of time been in market adding back employees as we've built back occupancy. We made the strategic decision in November and December when we saw seasonal declines in occupancy to retain workers that we had brought on as we ramp to our prior peak occupancy in October. And as we built back occupancy this year, that's worked to our benefit. The labor pressure isn't quite universal. We're feeling it more in certain markets than in others, but anticipate that it will continue to be an issue as we see a ramp-up in service businesses across the country. And I think there's been a significant discussion in prior earnings calls from our peers about other factors that are contributing to the challenges that we have now, including difficulty finding childcare for certain individuals, competitive environment and government subsidized unemployment, all of which we think, over time, stabilize and put us in a much better position overall. The trick is in the near term meeting our needs. So I think we're fortunate that our business relative -- specifically to our full-service peers, is efficient by design. And so the total number of workers that we're looking for as we build back occupancy is meaningfully less. We don't have outlets that we need to staff in addition to kind of the normal base functionality of our hotels, which we see as an advantage.

Okay. Great. I appreciate all that detail. And then turning to the CapEx side, and Liz, you provided the CapEx guidance, which I believe was consistent from the last time you reported. But I'm curious if the recent strength and demand changes, the way you think about the CapEx spend for the remainder of the year?

We're continually assessing and we meet regularly to look at our CapEx plan for this year and quite frankly, for the next several years. We feel comfortable with what we currently have budgeted for this year and are in the process of beginning a number of renovations, focused on those assets where we see the greatest potential for incremental investment. Should operating performance dramatically exceed our expectations, we have the flexibility to add to our current project list. That said, I think we feel comfortable given the current condition of our assets and the plan that we have for the remainder of the year with what we currently anticipate.

Our next question comes from the line of Anthony Powell with Barclays.

Just a question about the market for select-service assets. I mean, how the investor demand and evaluations for the type of hotels that you own trended in recent, I guess, quarters? We've seen, I guess, on the resort side that pricing seems to be above pre-COVID levels and demand is very high as well. Given your performance, I would expect to see that similar dynamic for your type of assets. Have you seen that in the market? And if so -- and if not, why don't you think -- why not?

We definitely have seen the same. And to some extent, it's a function of supply and demand. Coming into the downturn, there was a lot of money raised to invest in what was anticipated to be a large number of distressed assets. The level of distressed at least from a valuation standpoint has not yet manifest. And part of that is for the reasons that I highlighted earlier, the flexibility that the brands and banks have extended as well as government subsidies for private owners. I think that there exists the possibility that as we move through this cycle, we might see better pricing for select assets. But in the near term, there continues to be very strong demand for assets, and that's keeping pricing relatively stable to pre-pandemic levels.

Got it. And I guess, could you give us your view on supply growth for limited service properties, obviously, coming into the downturn, there was less supply. But given higher labor cost, construction cost and the brands seeming to shift to more international development, could you see supply growth remaining lower during this early part of the cycle than maybe in prior recovery cycles?

Supply growth always lags demand trends. And I think as a result, last year, we continued to see an increase in supply in a number of our markets. As we move through this year, that becomes less of a factor. And certainly, as we look at '22, '23 and even beyond, our expectation is that we'll see meaningfully less supply growth in the majority of our markets. Construction costs continue to be relatively high, and the labor shortage is impacting developers' ability to get deals done in the current environment. We've also found that early cycle lenders tend to be more conservative in their underwriting of development deals and availability of capital is the most meaningful constraint on supply over the long run. The benefit we'll have coming out of this cycle is our expectation is that the rebound will be more dramatic than it was over the last cycle where demand recovered slowly over a more extended period of time. And because of the lag in new supply coming online, that should create a number of years where we could see meaningful outsized performance relative to prior year.

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

Just 2 for me. When we look at the portfolio and what seems to have performed best lately, it seems to skew towards more of the upscale suite extended stay-type product, whether that's the TownPlace, Home2s, Residence Inn, even the Embassy. Is that going to skew what you look at when you go to make acquisitions? Or was their performance or I should say, outperformance recently, more of an anomaly?

That's a good question. So when I look at 2019 sort of stabilized occupancy premiums for extended stay versus the rest of our portfolio, it had a 5-point occupancy premium. Through last year, that gap was significant. I think at one point it was as much as 25 percentage points of occupancy premium and it has steadily decreased from there. We actually are pleased with the share growth on our -- whether it be suite or more traditional select-service products over the last 28 days and through the first quarter and have started to see that occupancy premium shrink most recently, which we think is encouraging on multiple levels. The fact that your more transient in nature hotels with shorter lengths of stay are picking up as a positive sign for business travel, but it also means that more aspects or more demand generators are getting back to more normalized patterns. And so still a significant gap in occupancies between extended stay and select-service products, but not the 25 points we saw sort of in Q2 at onset of the pandemic. We're probably in -- over the past 4 weeks, we're probably more in the 15-point premium range. And again, stabilized, they were -- 2019, they were 5 points in occupancy premium.

And from an acquisition standpoint, certainly, that is something that we take into consideration as we look at potential acquisitions. I think having owned a broad variety of select-service and extended stay brands over an extended period of time, we have a good understanding of the relative merits of each of the operating models. And as we look at total ROI over an extended period of time, we take into consideration operating efficiencies, which benefit these extended stay properties, but we also take into consideration the long-term CapEx spend against the hotels. And that is a factor that plays to the detriment of extended stay and suite product in certain markets where the room footprint is meaningfully larger and there are associated costs with that. And so as we build out our portfolio, I think it's safe to assume that we will mix product looking at the total return potential over a more extended period of time.

Got it. That's helpful. And then you touched upon the likelihood of permanent margin expansion coming out of this COVID era and cutting costs. Offsetting that clearly is going to be, labor cost, and it's really hard to kind of retrace labor costs downward once you've kind of elevated them. How much does increased labor cost cut into that permanent margin expansion from other areas? So for instance, maybe you thought margins might expand 200 or 300 bps. Does it cut into half of that? I mean, just a big picture?

I mean, interestingly, there are 2 things, Bryan, right? One is the continued and expected increase in the cost per hour of labor in markets across the country. On the opposite side of that is what we anticipate to be increased productivity in part because of learnings that we've had during the pandemic, but also as a result of conversations that we're having now with the brands related to long-term brand standards and service and amenity models. Our expectation is that we will have fewer full-time employees coming out of the pandemic than we had going into it. And we've always expected that there would be pressure on wages. Looking more broadly and holistically, the upside to that is that as people earn more, they tend to travel more. And there is a piece of that, that generates incremental demand, especially for the types of hotels that we own. But I think for the reasons that you've highlighted, we've been reluctant to throw out a specific number when it comes to anticipated margin expansion and instead try to help investors to understand the component parts that we're working with and how things might play out as we look forward.

Our next question comes from the line of Dori Kesten with Wells Fargo.

I apologize if you've addressed this, but how should we think about the timing around Apple reinstating its common quarterly dividend and how that may ramp, if you may be exiting -- or if you may be able to exit the waiver period at some point this year?

In terms of reinstating, we did pay a first quarter dividend of $0.01 per share. And under our current waiver agreements, we have the flexibility to continue to pay $0.01 per share per quarter through the entire -- that period of time. Beyond that, we're limited to what's legally required of us in order to maintain our REIT status. Looking forward, we have losses that we're carrying forward from last year. And so we do not anticipate in the near term there being an obligation for us to pay a significantly higher dividend than what we've currently reinstated. That said, looking longer term, we understand the value of the dividend to our investors. And anticipate based on the lead we have on our peers in terms of cash production and our expected trajectory this year and next, that we would be in a position to reinstate a more meaningful dividend as operations continue to improve. In the near term, our focus is on other ways to further drive value for our shareholders. And as I've highlighted in response to some of the earlier questions, we're intently focused on managing our portfolio, selling and buying assets in ways that drive incremental value, which should translate into a stronger share price.

Our next question comes from the line of Floris Van Dijkum, Compass Point.

Justin, maybe I know you don't want to quantify the savings, but can you highlight to people maybe the -- your peak to peak margin improvements. If you look -- if we look past the past 2 quarters -- or past 2 cycles and what you've experienced in your portfolio?

So we do not have the same portfolio today that we had during the past 2 cycles. We were able to look back, and we have 14 assets that we owned from peak to peak during the last cycle. So owned them in 2007 and own them today. And including each of those assets, so in total, we were able to grow margin on 2007 and through the last peak, over 270 basis points. And so we certainly have always been focused on efficiency and maximizing performance. And so given that track record, given our experience and given the fact that at that time these plans that we've invested in, were continuing to evolve and elevate offerings and product, and so some of the brand standards and amenities had gotten more expensive over that same time period, but yet we were still able to drive margins from peak to peak. I think in an environment like we're in today, given that the brands are so constructive about looking at the operating model, each standard, each offering and finding ways to be more efficient, that we're confident with that paralleled with our benchmarking and our deep experience with the brands and our constant commitment to maximize and be as efficient as possible. That we should be able to grow margins long term as the operating model stabilizes.

And Floris, we highlighted in past conversations and in past calls that our primary areas of focus with the brands are around the service model, specifically housekeeping and the food and beverage offering. Looking at our total expenditures, historically, 40% of our total cost structure has been labor related. And while we anticipate individually, we will be paying employees more. We're working with the brands on ways that we can adjust our service model and have a need for fewer people, which should yield a meaningful benefit to us on outside. Looking more broadly speaking, I think assessing where we might be at the end of this when we get back to a more stabilized level, in some ways, it's easier to look at our company than some of our peers. We have, since the beginning of the pandemic, the net acquirers of assets. So we have not sold assets to pay down debt and really have been able to fund our operations with cash flow from our assets, which has kept us from needing to take on additional debt or have other dilutive equity raises, which would also impact the value of our equity. So coming out of this, getting back to 2019 levels, we feel good about the value of our equity and how we compare to some of our peers who have been forced to take more drastic measures in managing their business. And then for the reasons that Liz highlighted, we feel really confident in our ability to further drive margins and create incremental value in that way.

Ladies and gentlemen, at this time, I would like to turn the floor back to Justin Knight for closing comments.

I'd like to thank all of you for joining us today. We recognize that many of you are busy and have other calls to join, but we hope that as you travel, and we hope that you will travel, you take an opportunity to stay with us at one of our hotels. Have a great day, and we look forward to talking to you soon.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.