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

Greetings, and welcome to the Apple Hospitality Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Clarke, Vice President, Investor Relations. Thank you. You may begin.

Good morning, and welcome to Apple Hospitality REIT's Third Quarter 2026 Earnings Call. Today's call is 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 2025 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 2026 and an operational outlook for the remainder of the year. Unless otherwise stated, all changes in performance metrics refer to year-over-year changes for the comparable period. All references to year-to-date performance refer to the nine-month period ending September 30, 2026. 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 for our third quarter 2026 earnings call. Momentum continued to build during the third quarter with broad-based demand from both business and leisure travelers driving comparable hotels RevPAR growth of more than 7%, up from 5.4% in the second quarter. We shifted our mix towards higher-rated business as retail demand grew, discount business declined and our teams layered in group at attractive rates. That shift, together with active asset management and hotel level adjustments to pricing strategy enabled our hotels to gain market share, primarily through rate. We converted approximately $0.63 of each incremental revenue dollar into comparable hotels adjusted hotel EBITDA, producing approximately 210 basis points of margin expansion, adjusted EBITDA growth of more than 13% and growth in MFFO per share of more than 16%. That momentum carried into October with preliminary results indicating comparable hotels RevPAR growth of approximately 10%, well beyond the benefit of the easier comparison to last year's government shutdown. Based on our year-to-date results and October performance, we are raising the midpoint of our full year comparable hotels RevPAR growth guidance 235 basis points to 5.6% at the midpoint and our comparable hotels adjusted hotel EBITDA margin guidance 105 basis points to 35.25% at the midpoint, an increase of 115 basis points year-over-year. Transient demand, particularly midweek business travel, has exceeded our expectations and bookings for the remainder of the year support our increased outlook. Looking to 2027, business travel, a core segment for our hotels, is leading the improvement in industry demand and new supply remains limited. At quarter end, half of our hotels had no upper upscale, upscale or upper mid-scale product under construction within a five-mile radius. We will lap the benefit of World Cup in our host markets primarily in the second quarter, but we expect it to be a modest headwind, and we anticipate underlying demand and muted near-term supply to support continued growth. Since the start of the third quarter, we have entered into contracts to sell three hotels in Santa Clarita, one hotel in Davenport and one hotel in Sacramento for a combined gross sales price of approximately $72 million. We anticipate these sales will close by year-end. Together with the Rochester Hampton Inn & Suites we sold in April, these transactions totaled approximately $81 million and represent a 6.8% cap rate or 12.2x EBITDA before capital expenditures and a 5.7% cap rate or 14.6x EBITDA after taking into consideration an estimated $16 million in planned capital improvement. Including these hotels, we have sold or contracted to sell 13 hotels for approximately $154 million since the beginning of 2025, recycling capital out of older assets with lower growth prospects. We weigh each use of capital against the alternatives available to us, including reinvestment in our existing hotels, acquisitions and share repurchases and prioritize those we expect to create the most value for shareholders. Pricing for the hotels we target has moved closer to our underwriting, and we are actively evaluating both newer properties and value-add opportunities that complement our existing hotels and offer stronger long-term growth, similar to our recent acquisitions of the Motto Nashville Downtown and the Homewood Suites Tampa Brandon. We expect redeployment of these proceeds to be accretive to earnings and to further enhance the overall composition of our portfolio. With leverage of approximately 3x EBITDA, $700 million available on our revolving credit facility and a cost of capital that has improved significantly this year, we see a meaningful opportunity to grow our platform. We continue to have forward purchase contracts for two hotel developments, an AC Hotel in Anchorage, which we expect to be delivered in late 2027 and a dual-branded AC Hotel and Residence Inn adjacent to our existing SpringHill Suites in Las Vegas, which we expect to be delivered in the third quarter of 2028. Construction is underway on both. In each case, the developer funds the project under a fixed price contract and our cash outlay occurs only at completion, allowing us to secure newly built, well-located hotels at a known cost without deploying capital until delivery. Within our existing portfolio, strategic reinvestment keeps our hotels competitive in their markets and maintains a strong value proposition for our guests. Capital expenditures totaled approximately $58 million for the first nine months of the year. And for the full year, we expect to invest between $85 million and $95 million, including comprehensive renovations at 18 hotels. At the midpoint of that range, our reinvestment represents approximately 6% of revenues, which is consistent with our historical average. The efficient design of our rooms-focused hotels, our scale and our in-house project management team allow us to reinvest efficiently, leaving more cash flow available for distributions and growth. During the quarter, we paid distributions totaling approximately $57 million or $0.24 per share. Year-to-date, distributions represent approximately 65% of MFFO after capital expenditures, with the remaining cash flow available to invest in our portfolio and pursue acquisitions. Based on Tuesday's closing stock price, our annualized regular monthly distribution of $0.96 per share represents a yield of approximately 5.1%. Together with our Board of Directors, we will continue to evaluate distributions in the context of portfolio performance, capital needs and other opportunities to create long-term value for shareholders. Our results through the first nine months of the year reflect both the strength of our operating model and the efforts of our teams with MFFO per share up nearly 11% over the same period last year. We entered 2027 with improving demand, limited new supply, a well-covered distribution and the capacity to pursue accretive growth. While we cannot control the broader economic environment, we can control how well our hotels are operated, how prudently we allocate capital and the integrity with which we conduct our business. Those remain our priorities, and we believe they will continue to create lasting value for our shareholders. With that, I'll turn the call over to Liz to discuss our financial performance, balance sheet and outlook in more detail.

Thank you, Justin, and good morning. The third quarter demonstrated the operating leverage in our portfolio with earnings meaningfully outpacing revenue as top line growth accelerated. For the quarter, comparable hotels RevPAR was $134, up 7.3%, with ADR of $171, up 4.3% and occupancy of 78.3%, up 210 basis points. For the nine months ended September 30, comparable hotels RevPAR was $128, up 5.1%, with ADR of $166, up 2.8% and occupancy of 77.1%, up 170 basis points. Underlying demand remained strong throughout the quarter, with RevPAR up in every month and growth strongest in September as event and calendar timing shaped the monthly results. Comparable hotels RevPAR grew 6.2% in July, 4.6% in August and 11.2% in September. World Cup events in our host markets contributed only 12 basis points to July RevPAR growth. Following solid growth in August, September benefited from a more favorable calendar and from lapping softer demand ahead of last year's government shutdown. Comparable hotels total revenue was $394 million for the quarter and $1.1 billion year-to-date, up 8.2% and 6.4%, respectively, supported by continued growth in other revenues, which were up 8% for the quarter and 9% year-to-date. For the quarter, comparable hotels adjusted hotel EBITDA was $146 million, up 14.7% with an adjusted hotel EBITDA margin of 37.1%, up 210 basis points. Year-to-date comparable hotels adjusted hotel EBITDA was $405 million, up 9.9% with a margin of 36.1%, up 120 basis points. In January, we completed the transition of our 13 Marriott-managed hotels to franchise, consolidating management with third-party operators who, in most cases, already operated hotels for us in those markets. Third quarter results for this group were encouraging with RevPAR growth of nearly 10% and adjusted hotel EBITDA margin expansion of 260 basis points, both ahead of the portfolio overall. These hotels represent approximately 7% of our adjusted hotel EBITDA and their performance reflects the work of our asset management team and our new operators to integrate them quickly into existing platforms and market clusters. Several markets stood out. Portland, Maine, our largest market by adjusted hotel EBITDA in the third quarter, grew RevPAR 7%, driven entirely by rate with ADR up 9% at occupancy above 93%, reflecting improvements in our retail pricing strategy during the peak summer months. San Diego, another one of our largest markets, grew RevPAR 12% during the quarter on a rebound in government travel and strong summer leisure demand. Anchorage RevPAR grew 23% on strong leisure demand supplemented by military and airline crew business. Washington, D.C. grew RevPAR 16.5% as citywide events, including America 250th celebrations and the IndyCar race, along with National Guard-related business compressed the market. And Chicago grew RevPAR 16% due to leisure, convention and citywide demand, including the return of the biannual IMTS manufacturing show in September. Performance was softer in a few markets. Phoenix, our largest market by hotel count was roughly flat after declining 5% in the second quarter. However, business tied to Semiconductor Manufacturing has already begun to pick up and is expected to remain strong throughout the fourth quarter. Looking at the portfolio more broadly, same-store weekday occupancy improved 3% during the quarter, moderately outpacing weekend improvement of 2.6%, consistent with strengthening business demand and continued healthy leisure demand. Weekday occupancy grew in each month of the quarter, up 140 basis points in July, 380 basis points in August and 150 basis points in September. For the quarter, weekday ADR grew 3.9% and weekend ADR grew approximately 4.6%. Shifting to same-store booking channel trends. Brand.com remained our largest channel at 40% of room nights, up 80 basis points year-over-year. Property Direct was 25%, up 40 basis points GDS was 18%, up 20 basis points and OTA was 13%, down 100 basis points. Brand.com is our lowest cost channel and a source of some of our highest rated business and the shift away from OTA lowers our distribution costs. Improving GDS volume reflects continued growth in business transient demand. Turning to segmentation. BAR grew 210 basis points to 35% of our occupancy mix, while Negotiated declined 140 basis points to 16%. With midweek occupancy gains outpacing weekends, that shift indicates the incremental business travel we captured came largely at retail rather than contracted rates, supporting our rate growth for the quarter. Group, our second highest rated segment, grew 120 basis points to over 16% of mix, providing a base of occupancy that helped us drive rate. Government grew 20 basis points to 5.4% and discount declined 210 basis points to 27%. Moving to expenses with same-store revenue growth of 7.1% in the quarter. Operating expenses grew 4%, while fixed expenses declined, bringing total same-store hotel expenses up 3.7% for the quarter and 3.2% year-to-date or up just 0.6% per occupied room in both periods. This disciplined expense management supported revenue growing nearly twice as fast as expenses, driving our margin expansion for the quarter. Rooms wages grew 4.5% or 1.4% per occupied room, largely reflecting higher occupancy. Utilities and repairs and maintenance were our primary headwinds, growing 7.1% and 6.5%, respectively. The decline in fixed expenses reflected the favorable property insurance renewal that took effect in April and successful real estate tax appeals. Adjusted EBITDA was approximately $140 million for the quarter, up 13.3% and $385 million year-to-date, up 8%. MFFO was $118 million for the quarter or $0.50 per share, up 16% and 16.3%, respectively. Year-to-date, MFFO was approximately $322 million or $1.36 per share, up 9.5% and 10.6%, respectively. As a reminder, effective January 1, 2026, we began excluding share-based compensation expense from adjusted EBITDA and MFFO. Prior year results have been updated to conform with the current presentation. So the growth rates I have referenced are on a consistent basis. Turning to our balance sheet. As of September 30, 2026, we had approximately $1.5 billion of total debt outstanding, approximately 3x our trailing 12 months EBITDA with a weighted average interest rate of 4.9% and a weighted average maturity of approximately 4.5 years. 60% of our total debt was fixed or hedged. We had approximately $43 million of cash on hand and $700 million of availability under our revolving credit facility. After quarter end, we repaid in full one mortgage loan secured by three properties for a total of approximately $49.6 million, bringing the number of unencumbered hotels in our portfolio as of October 31, 2026, to 210. In July, we completed a series of refinancing transactions that increased the capacity of our main unsecured credit facility to approximately $1.3 billion, upsized our seven-year term loan to $160 million, extended maturities and improved pricing across our term loans. We have no outstanding revolver balance and no significant unsecured maturities until 2029. We are grateful for the partnership and the continued support of our bank group. Turning to guidance. For the full year 2026, we now expect comparable hotels RevPAR growth between 5.1% and 6.1%. Comparable hotels adjusted hotel EBITDA margin between 35% and 35.5%, adjusted EBITDA between $482 million and $493 million, and net income between $177 million and $192 million. At the midpoint, our adjusted EBITDA guidance increased $23 million from our prior outlook, with approximately $12 million reflecting third quarter results ahead of our expectations and approximately $11 million reflecting a stronger fourth quarter outlook. Our comparable guidance assumes total hotel expense growth of 4.9% at the midpoint or approximately 1.6% on a per occupied room basis. We are encouraged by the setup for the fourth quarter, given continued demand strength and easier comparisons to last year's government shutdown. Our outlook is based on our current view, which is limited and does not take into account any unanticipated developments in our business or changes in the operating environment, nor does it account for any unannounced hotel acquisitions or dispositions. Taken together, rate-led revenue growth and disciplined expense management produced earnings growth well ahead of the increase in revenue this quarter. With growing cash flow after capital expenditures, extended maturities and significant available capacity, we have considerable flexibility to pursue the accretive opportunities Justin described. We believe that combination positions us well to navigate changing market conditions and create long-term value for our shareholders. That concludes our prepared remarks, and we'll now open the call for questions.

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

Justin, with the additional proceeds coming from the sales you highlighted later this year, I guess, which capital allocation option is most attractive today as you kind of weigh the various alternatives?

So as has always been the case, we evaluate potential acquisitions relative to other capital allocation opportunities. In today's environment, I think the most likely deployment of that capital will be into potential acquisitions. And I highlighted in my prepared remarks that we're active on a number of potential deals. I think in addition to proceeds from those dispositions, we are currently generating meaningful cash above and beyond our needs from a CapEx and distribution standpoint. And our balance sheet is in meaningfully better shape, although it's always been good with projected debt-to-EBITDA falling below 3x by the end of the year, assuming we hit the midpoint of our guidance. So thinking about the next several months, I think assuming no change in our share price, it would be reasonable to assume and I think expected based on the opportunity set that we're looking at today that we would be meaningfully more acquisitive than we have been recently.

And when you kind of look at the active potential deals that are out there, I mean, what kind of locations are you seeing these opportunities? Are they more urban? Are they suburban? Are these recent vintage opportunities? And can you discuss the competition in the transaction market as well?

Sure. Yes. It will be a mix of all of those. I highlighted in my prepared remarks our recent acquisitions, which included the Motto, a newly constructed hotel in Downtown Nashville and the Home of Suites in Tampa Brandon, which is more of a suburban area. Those two assets are also distinct in that one is brand new and the other was a value-add opportunity where we, this year, performed a significant renovation of the hotel and we're able to change management as part of that acquisition. Over our 25-plus years in the industry, we've been successful in executing against both. And in the current environment, I think what you should anticipate is that we will be deploying capital into assets where we see meaningful long-term upside and where the strength of our platform adds significant value. Does that answer your question, Austin?

Yes. No, that covers a lot of it. And then just the last one kind of in a similar kind of theme. Where are you seeing deals versus where replacement cost is today? Just to give us a sense, and I'm sure it's a little bit all over depending on vintage, but can you give us a sense of just the magnitude of that discount for what you're seeing in the market today?

Yes. No, absolutely. I highlighted in our prepared remarks that we continue to see low supply growth. That is a result of rising construction costs outpacing growth in underlying performance in many markets. In our prepared remarks, I highlighted that we still have roughly 50% of our portfolio that doesn't have any exposure to new supply within a five-mile radius, which is a continuation of recent trends. For that reason, much of what we're looking at, we believe we can buy below replacement cost. And I think adding to that, our ability to perform renovations more efficiently than most because of the scale of our operation and the number of renovations we've done over our history. I think we have good expectations for how we'll be able to execute.

Our next question comes from Connor Peeks with Wells Fargo.

Maybe as a follow-up on the capital allocation. As some of this comes together, what's your preferred source of funds? Is it the sales proceeds, the revolver or something else? And how are you thinking about the ATM with the stock where it's at?

A good question. Our preferred source is cash from operations. And as I highlighted in response to Austin's question, given the strength in operations, we anticipate that we will have significant free cash flow above and beyond our needs for CapEx and distributions. After that, certainly looking to redeploy in an accretive fashion proceeds from sales. And then as I highlighted, our projected balance sheet strength based on our current guidance gives us tremendous flexibility to add incremental leverage without shifting the risk profile of the overall portfolio. In terms of equity issuance, we've demonstrated an ability to execute on equity raises where -- and I should be clear on this, only where we have clear line of sight to a target use of proceeds where we can deploy equity raised at a meaningful spread to the implied multiple at that point in time. And I think when you look at the deal we did in Las Vegas, for example, and the equity raise that we did around that particular transaction, that's a good example of where we would potentially use equity as an additional source. But the reality is where we are today, we don't have an immediate need to tap the equity markets in order to meaningfully ramp our acquisitions activity.

Really appreciate the color. And maybe rotating over with Alaska up 23% in the quarter, a question around Anchorage Embassy and the Lake Union rebrand. How much displacement is baked into the 4Q guide? And how should we think about the net 27 impact, first quarter disruption and kind of versus that Seattle ramp?

As we think about displacement for 2027, we'll be in a better position to speak to that when we give guidance for the full year. We're working through the budgeting process now on a property-by-property level basis and rolling displacement analysis around otherwise projected performance. And so on a net basis and thinking through what we expect once opened in acreage and with the Embassy complete, we'll be able to shed better light on that. As we think about the fourth quarter, we have factored in displacement for not only those two assets, so the Lake Union Residence Inn conversion and the embassy, but we always assume displacement from our renovated properties. And while we're renovating 18 properties this year with two that are larger, we renovated 21 properties last year. And so as we think about displacement and as we think about guidance, that is factored in. We will have a better idea with Lake Union because it is a conversion to a new brand family, the impact of that. This is our first conversion of that type. And so again, we'll get a sense for any incremental displacement that we may have and be able to factor that in as we look at 2027.

Our next question comes from Jay Kornreich with Cantor Fitzgerald.

Just going back to the comments on 2027, which you mentioned anticipating having sustained demand momentum, especially by business transient pickup along with muted new supply. Maybe can you just provide some additional thoughts as to how the setup for next year looks at this point and what the potential could be for another year of mid-single-digit RevPAR growth?

Sure. And Liz highlighted that it's still early. We are deep in the process of finalizing budgets with our managers. But encouraged, I think, by the setup that you referenced and that we talked about in our prepared remarks. And beyond that, I'm confident you've listened to or read transcripts from the major brand families within which they provided some high-level guidance for how things might lay out next year. Our experience has been that travel tends to be a momentum play. And we're encouraged by the continued strength in leisure consumers and the meaningful rebound that we saw this year in terms of business travel. Our expectation is that those trends will continue. And while we won't necessarily have some of the tailwinds that fueled the higher growth rates this year, that the underlying fundamentals should continue to produce growth as we move into next year. Remembering again that at these levels, we're also producing higher margins than we were before and have demonstrated an ability to flow a lot of the incremental top line revenues to the bottom line.

And as we think about 2027, the only thing that I'll add is we communicated in the second quarter that we thought that the World Cup had about a 50 basis point impact to the quarter. There was less of an impact in the third quarter for the July matches. As I said in the prepared remarks, it was about a 12 basis point impact to July. And so for the quarter, single digits. Overall, for the full year, if you sort of apply the same methodology for sort of backing into an impact estimate, you're around 15 basis points. of RevPAR impact. So while it did help this year, it's not necessarily a direct meaningful headwind to next year.

Got it. That's helpful. And then just moving to the fourth quarter, October RevPAR up very strong 10% with some of the benefit from the easier government comps from last year. Are you able to somewhat parse out how much upside there was in October without the government benefit? And I guess, what that could mean for how the rest of the fourth quarter shapes up?

So as we talked about the government impact last year, we talked about it in the context of both direct government business, but also government adjacent business. I think that on the conservative side, if you assume that where we performed in both September leading up to the shutdown and October, where we've seen continued outsized growth, if you assume last year, the impact where we were down roughly 3% looking at it on a same-store basis, and where we performed this year, your underlying strength or performance is between 7% and 8% still. And that's if you assume everything was government related. And so conservatively, I'd say -- and this is factored in at the high end of our guidance range that the fourth quarter would continue to see that strength. But certainly encouraging and the comps were beneficial during September and October, but the broad-based fundamental demand remains strong outside of government-specific business.

Our next question comes from Aryeh Klein with BMO Capital Markets.

Hoping you could elaborate a little bit on just what you're seeing from BT, maybe the diversity of the strength there and how you see that continuing to trend?

Business Transient has been interesting to track from a data standpoint and a segmentation standpoint this year because of the overall strength in occupancy and the ability to really revenue manage in a way where we are shifting out of lower-rated contracted business, so your corporate and local negotiated where they don't have classroom availability into retail rates, meaning it's harder to track because it's not booking through the discounts discount provided we're not available on compression nights. And so really, we're triangulating a few things, while our segmentation shows a decline in corporate negotiated when we look at GBS from a channel perspective, that's up and ADRs are strong there. Our Tuesday, Wednesday night occupancy growth is the highest across the week, and we're seeing increases in ADR there. And for the makeup of our portfolio, we attribute most of that to business transient. As we look at market drivers across our portfolio, we're seeing improvements in citywide events, groups were both leisure and corporate driven, but we're also seeing local accounts producing, government coming back in some markets, and we're able to see some larger corporate negotiated improvements. So it's really broad-based, which is what we find most encouraging and what continues to give us optimism as we move past some of the comps year-over-year.

Appreciate that. And then maybe just on the OTA shift you saw in the quarter. What do you think drove that? And how should we think about the cost differential between the different channels and what it might mean for margins if that continues?

I think seeing -- going back to the last question around seeing good growth overall coming through BAR rates and Brand.com direct business and that being corporate driven and that tending not to book through OTA channels, I think, is what is providing the opportunity for -- as a mix of business, OTA declining. Those tend to be our lowest cost channels. The margin between that and OTA is not as significant as it once was, but still our lowest channel. So there is, on the margin, some benefit. I would say, in general, we have seen the rates negotiated with the OTAs put us in a position where, in some cases, the margin differs or the commission differs based on need and based on occupancy level. And so in general, we feel like the commissions the conditions are reasonable, but we do prefer direct business where overall distribution costs are the lowest.

Our next question comes from Michael Bellisario with Baird.

Justin, just first a clarification question. You referenced newer deals in terms of what you're looking at. Are you referring to more development takeouts or just newer vintage existing properties?

I appreciate the question. newer vintage properties. At this point, anything that we would look at from a new development standpoint would be delivery in three years, which given the fact we have capital immediately available, would not be a priority for us.