APLE - NYSE

Greetings and welcome to the Apple Hospitality REIT's Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kelly Clarke, Vice President, IR. Please go ahead.

Thank you and good morning. Welcome to Apple Hospitality REIT's second quarter 2023 earnings call. Today’s call will be based on the earnings release and Form 10-Q, which we distributed and filed yesterday afternoon. Before we begin, please note that today's call may include forward-looking statements as defined by federal securities laws. These forward-looking statements are based on current views and assumptions and as a result, are subject to numerous risks, uncertainties, and the outcome of future events that could cause actual results, performance or achievements to materially differ from those expressed, projected or implied. Any such forward-looking statements are qualified by the risk factors described in our filings with the SEC, including in our 2022 annual report on Form 10-K and speak only as of today. The company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, non-GAAP measures of performance will be discussed during this call. Reconciliations of those measures to GAAP measures and definitions of certain items referred to in our remarks are included in yesterday’s earnings release and other filings with the SEC. For a copy of the earnings release or additional information about the company, please visit applehospitalityreit.com. This morning, Justin Knight, our Chief Executive Officer; and Liz Perkins, our Chief Financial Officer, will provide an overview of our results for the second quarter 2023 and an operational outlook for the remainder of the year. Following the overview, we will open the call for Q&A. At this time, it is my pleasure to turn the call over to Justin.

Good morning and thank you for joining us today. As we move into the back half of 2023, we are incredibly pleased with our performance here today. And though we've limited visibility into the future, we've reason to be optimistic based on recent trends. Demand across our geographically diversified portfolio of rooms focused hotels remained strong and drove year-over-year improvements in occupancy, ADR and RevPAR for the quarter. Comparable hotels ADR increased by 5%, occupancy was up nearly 1% and RevPAR improved by 5% as compared to the second quarter 2022. With occupancy still down 4% to second quarter 2019, comparable hotels ADR was 11%, higher and quarterly RevPAR was up 7%, our highest quarterly comparable hotels RevPAR growth relative to 2019 since the onset of the pandemic. Continued top line growth enabled us to achieve second quarter comparable hotels adjusted hotel EBITDA of $142 million, a 2% improvement over second quarter 2022. With a fundamental shift in consumer spending, leisure travel continues to be robust, driving strong occupancies during the quarter and allowing for continued growth and rate. Steady improvement in business travel is bolstered midweek occupancy and rates for our hotels, further lifting overall portfolio performance. Based on preliminary results for the month of July and despite weaker performance around the 4th of July holiday, occupancy for our portfolio was 77%, and we continue to see growth in ADR. Excluding the first week, preliminary portfolio RevPAR growth for July was comparable to second quarter, driven both by rate and occupancy growth year-over-year. So we will have increasingly difficult top line comparisons as we progress through the second half of the year. Forward booking trends remained favorable. Leisure demand continues to be elevated to pre-pandemic levels, and we see steady improvement in business travel demand. We have adjusted our annual guidance to reflect portfolio performance to the first half of the year and recent adjustments to consensus economic forecasts, resulting in 100 basis point increase in comparable RevPAR growth guidance at the midpoint, a 10 basis point increase in the applied midpoint of comparable hotels adjusted hotel EBITDA margin. Through continued rate growth and disciplined cost controls, we achieved a comparable hotels adjusted hotel EBITDA margin for the quarter of over 39% despite inflationary pressures and a challenging labor environment. Our corporate team works with industry leading management companies at our hotels to share best practices, monitor real time performance, and focus on side efforts to drive incremental profitability at our hotels without sacrificing cleanliness or overall guest satisfaction. As we move into the back half of the year, we expect both top line growth and expense growth moderate with year-over-year comparisons impacted by more stabilized operations in the third and fourth quarter of 2022. In order to ensure that our portfolio remains relevant and that our hotels compete effectively within their markets, we make regular strategic reinvestments, leveraging our scale and experience to maximize the value of dollars spent. During the first 6 months of the year, we invested approximately $28 million in various capital projects, and we anticipate spending a total of $70 million to $80 million during 2023. Planned [ph] capital expenditures include comprehensive renovations at 20 to 25 of our hotels. During the quarter, we transitioned hotel operations that are noncore independent hotel in New York City to a third-party through a triple net lease. As a result of the lease agreement, this property is excluded from our hotel and room counts effective May 2023, and will be considered a non-hotel property during the lease term. While not material to our overall consolidated performance, the terms of the agreement are financially beneficial to us and transfer responsibility for both day to day operations and ongoing capital expenditures to the tenant. We hold a security deposit and additional corporate level guarantee. In addition, we reserve the right to regain operational control should the third-party not fulfill obligations under the lease. Overall, the transaction market while still relatively quiet seems to be opening up, and we anticipate deal volume will increase as the year progresses. We continue to underwrite numerous potential acquisitions opportunities seeking hotels and business friendly markets with multiple demand generators where we anticipate future growth. We have tremendous transaction experience, which combined with our available balance sheet capacity and deep industry relationships positions us to drive incremental shareholder value by enhancing and growing our portfolio when conditions are optimal. In June, we acquired the previously announced, the newly renovated 154-room Courtyard Cleveland University Circle for $31 million or approximately $201,000 per key The hotel is in the heart of the University Circle district, a premier educational medical and social district on the east side of Cleveland. During the quarter, we also entered into a contract for the purchase of a to be developed Motto by Hilton in Downtown Nashville, with an estimated 256 guestrooms for approximately $97 million. The hotel will be located in the heart of Downtown, Nashville near well-known leisure attractions including the Country Music Hall of Fame and Bridgestone Arena. This will be our first hotel under the Motto flag and we believe the brand's offerings are ideal for this particular location, providing flexible guest rooms, curated bar and dining experience and an overall great landing spot for both business and leisure travelers. We currently anticipate development will be complete in 2025. Construction at the Embassy Suites in Madison, Wisconsin, which we also have under contract is on track for completion in early 2024. The hotel will be located in the heart of Downtown, Madison within walking distance of the Monona Terrace Community & Convention Center, the State Capitol and the University of Wisconsin. As we underwrite potential acquisitions opportunities, we are also mindful of our ability to drive incremental shareholder value through the repurchase of our shares when there are dislocations in the market. During the quarter, we repurchased approximately 226,000 shares at a weighted average purchase price of approximately $14.47 per share for an aggregate purchase price of approximately $3 million. The shares were repurchased in open market transactions under the share repurchase program, including pursuant to written trading plans intended to comply with Rule 10b5-1. We have approximately $335 million remaining under this program. Supported by our strong operating performance, we have led our tiers [ph] in post-pandemic dividend payments. During the quarter, we paid distributions totaling $0.24 per share. Based on Wednesday's closing stock price, our annualized distribution of $0.96 per share represents an annual yield of approximately 6.4%. Together with our Board of Directors, we will continue to monitor our distribution rate and timing relative to the performance of our hotels and other potential uses of capital. As we enter the second half of the year, the fundamentals of our business remain favorable with continued strengthen and demand and limited near-term supply growth. Nearly half of our hotels do not have any new supply under construction within a 5 mile radius, providing us with the ability to meaningfully benefit from incremental demand. And our combined acquisitions and dispositions activity has positioned us to produce better portfolio margins and to drive greater profitability over time. Our strategy was designed to create an asymmetrical risk profile, mitigating downside risk while providing significant opportunity for upside. Our portfolio of upscale rooms focused hotels is broadly diversified across a wide variety of markets and demand generators. Our hotels are franchised with industry-leading brands managed by some of the best management companies in the industry, and provide a strong value proposition with broad consumer appeal. Underlying the strength of our portfolio was a balance sheet with low leverage and financial flexibility, a consistent reinvestment in effective portfolio management strategy, and a dedicated corporate team with extensive industry experience. While we have reason to be optimistic about the trajectory of our industry and our portfolio specifically, I am confident we are well-positioned to continue to outperform and maximize shareholder value in any macroeconomic environment. It is now my pleasure to turn the call over to Liz, for additional detail on our balance sheet, operations and financial performance during the quarter.

Thank you, Justin, and good morning. We are pleased to report another strong quarter for our portfolio of hotels. Comparable hotels total revenue was $361 million for the quarter and $671 million for the first half of the year, up 6% and up more than 11% as compared to the same period of 2022, respectively. Continued strength in leisure demand and recovery in business travel during the quarter enabled us to achieve comparable hotels RevPAR of $12, a 5% increase over second quarter 2022. ADR of $161, up 5% and occupancy of 78%, up nearly 1% to second quarter 2022. Year-to-date, through June, comparable hotels ADR was up 7% and occupancy was up 4% with RevPAR up 11% compared to the same period of 2022. As a reminder, comparable RevPAR for our portfolio stabilized with performance generally at or above 2019 levels during the second quarter 2022. Having moved past the first quarter where comparisons to the prior year were heavily impacted by Omicron-related travel disruptions, we believe comparisons to 2022 are in most cases more useful and relevant. As a result, we have largely transitioned away from comparisons to 2019. Leisure travel continued to be elevated during the quarter. April, May and June weekend occupancies were 82% to 84% and 83%, respectively. Increased business demand gradually improved year-over-year supporting average weekday occupancies of 75% in April, 74% in May and 79% in June. Midweek occupancies have continued to strengthen the last 3 weeks in July, indicative of improvements in business travel with continued strength and shoulder nights and weekend leisure demand. In terms of same-store room night channel mix, brand.com bookings increased slightly at 40% for the quarter. OTA bookings increased from 11% in the first quarter to 12% in the second quarter, likely driven by summer leisure travel. Property direct bookings moved from 26% in the first quarter to 25%, and GDS bookings remained in line with the first quarter at 17% during the second quarter and up a 1.5 compared to the second quarter 2022, showing continued strength in business travel demand. Looking at second quarter same-store segmentation, far remain strong at 33% in the second quarter. Other discounts increased seasonally from 27% to 28% in the quarter, and Group remained stable at 15%, which is still elevated to the same period in 2019. And the negotiated segment was 18% of our mix, up slightly to the same period in 2022, but down to 2019. Turning to expenses. Total payroll per occupied room for our same-store hotels was just under $37 for the quarter, down slightly to the first quarter, but meaningfully to the same period in 2022 when challenges rehiring associates resulted in our hotels being temporarily understaffed. While third and fourth quarter year-over-year comparisons will reflect more stable staffing levels in the back half of 2022, we anticipate that higher wages for full and part time employees and higher utilization of contract labor will continue to result in elevated cost per occupied rooms relative to pre-pandemic level. We will continue to balance productivity initiatives with our efforts to train and celebrate associates and to uphold a positive work environment conducive to attracting and retaining top talent. These efforts better position us to support the high levels of service, cleanliness and maintenance necessary to sustain rate growth and maximize the long-term profitability of our asset. Strong rate growth and a focus on cost controls in a challenging labor and inflationary environment enabled us to achieve comparable hotels adjusted hotel EBITDA of approximately $142 million for the quarter, and $249 million for the 6 months ended June 30, up 2% and 9% to the same periods of 2022, respectively. Comparable hotels adjusted hotel EBITA margin was strong at 39.3% for the quarter and 37.2% year-to-date through June, down 160 basis points and 80 basis points to the same periods in 2022, respectively. As we have stated on past calls, we believe that long-term margin expansion for the industry and our portfolio will be largely conditioned on our ability to grow rate. So with inflation figures coming down and hotels more appropriately staffed, we expect near-term growth and operating expenses to moderate relative to the significant increases we have seen in recent quarters. Adjusted EBITDAre for the second quarter was $129 million and year-to-date with $224 million, up 2% and 10% to the same periods of 2022, respectively. MFFO for the quarter was $111 million and year-to-date was $190 million, up nearly 1% and 9% as compared to the same period of 2022, respectively. Looking at our balance sheet as of June 30, 2023, we had $1.4 billion in total outstanding debt, approximately 3.2x our trailing 12 months EBITDA with a weighted average interest rate of 4.3%. Total outstanding debt excluding unamortized. debt issuance costs and fair value adjustment is comprised of approximately $287 million in property level debt secured by 15 hotels, and approximately $1.1 billion outstanding on our own secured credit facility. At the end of the quarter, our weighted average debt maturities were 4.1 years. We had cash on hand of approximately $6 million and availability under our revolving credit facility of approximately $626 million. And approximately 79% of our total debt outstanding was fixed or hedged. In July, we entered into an amendment of our $225 million term loan facility, which extended the maturity of the existing $50 million term loan by 2 years to August 2, 2025, and aligned to the maturity date with the other term loan and the broader $225 million facility. We continue to be grateful for our supportive and long standing lender relationships as further demonstrated by this recent amendment. Valuable swap agreements and most importantly, low overall leverage levels help mitigate the impact of the current interest rate environment. Shifting to our outlook given year-to-date performance for our portfolio and a slightly more favorable consensus economic view for the back half of the year, we have made the following adjustments to our annual guidance. We now anticipate comparable hotels RevPAR growth to be between 4% and 8%, a 100 basis points higher on both the high and low end. Comparable hotels adjusted hotel EBITDA margin to be between 35.4% and 37%, an increase of 10 basis points on both the high and low end. Adjusted EBITDAre to be between $470 million and $452 million, a decrease of $5 million on the high-end and $3 million on the low end of our previously provided guidance range. Net income to be between $163 million and $202 million, a decrease of $7 million on the high-end and $2 million on the low end relative to our previously provided guidance, and capital expenditures to be between $70 million and $80 million. The reduction in the midpoint of our guidance for net income and adjusted EBITDAre is primarily a result of higher anticipated general and administrative expenses associated with outperformance of a relative shareholder return metrics, which are components of our incentive plan. Note that comparable hotels RevPAR change and comparable hotels adjusted hotel EBITDA margin guidance include properties acquired as if the hotels were owned as of January 1, 2022, exclude dispositions and assets held-for-sale since January 1, 2022, and exclude one non-hotel property, our New York asset Hotel 57, where hotel operations have been leased to a third-party. Our outlook continues to reflect a broader range of comparable hotels, RevPAR change, and other key metrics for 2023 due to our lack of visibility given the short-term booking window for our hotels, and some continued macroeconomic uncertainty. As a reminder, we expect top line comparisons to be more challenging in the back half of the year given the strength of our portfolio's performance over the same period in 2022. We're encouraged by recent trends and the strength of fundamentals for our business, and we'll continue to assess guidance in the context of actual performance for hotels and changing consensus views related to the broader economy. As we move through 2023, we are confident we are well-positioned for any macroeconomic environment. Our differentiated strategy has proven resilient through economic cycles. Our balance sheet is strong with ample liquidity which we intend to use opportunistically to pursue accretive transaction. Our assets are in good condition, with consistent capital investments, ensuring that we maintain a competitive advantage over other products in our market. And we believe the fundamentals of our business continue to be found with favorable supply dynamics allowing us to benefit from incremental demand. And that concludes our prepared remarks. Justin and I will now be happy to answer any questions that you may have for us this morning.

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

Thanks and good morning, everyone. I wanted to start off a little bit on the midweek travel comments. Your July commentary felt a lot like your commentary about April and that both months started out a little bit soft due to some holiday weakness around the holiday and then midweek demand kind of accelerated through each respective month in the following weeks. What are sort of the latest thoughts and optimism that there's upside and sustainable strength in midweek demand and what does that say about pricing power, because I believe this was kind of a big component of your ability to drive right?

So, you're correct. The trends that we saw after the first week in July were meaningfully different than that week. And part of it is the timing of the holiday. As you know, as operations for our portfolio become more normal, we see we have greater dependence on business travel. And with the 4th of July holiday following midweek, we were unable to push midweek occupancies. And as a result, that particular week was softer. If you peel out the first week of July, and look only at the remaining weeks, Liz highlighted in her remarks that performance for those weeks was in line with the growth that we saw in the quarter, which was significant. So with the week flat performance, essentially year-over-year and without meaningful growth in RevPAR. And I think for that reason, it would be a mistake to look at the month as a whole and draw conclusions about business travel. We've continued to see as we move into August good year-over-year growth in midweek occupancy and continue to feel good about the return of business travel.

And, Austin, related to your question on rate, we have started to see where midweek occupancies are in the high 80s and low 90s are approaching the 90s on Tuesday, Wednesday nights. We've seen a little bit incremental rate on those nights from a growth perspective from what we had been seeing. So we're continuing to see some improvement there. Similarly to what we've said about business trends, overall, it's not as quick as we'd like, but we're still seeing positive trends. So that certainly gives us optimism. As we think about the 4th of July holiday and the fact that it fell on a Tuesday, fact that it did impact our results so much that week, and we bounce back again, it's just a really positive trend for sort of normalized performance for our portfolio overall, with business transient coming back. We did feel that week for the month overall, and then rebounded nicely. As we look forward, average daily bookings for August are up, which is a positive as we look forward, and indications from our management companies to have August in the fall looking better. So I think we still remain encouraged. It's interesting, and it's -- you're looking at the results week to week, as are we, and you have 4th of July week, and then you see it bounce back, the growth rates have moderated. But we are continuing to approach high 80s, low 90 occupancies on Tuesday, Wednesday nights, which is encouraging.

So, what kind of ADR growth driving RevPAR in the second quarter, maybe softening a little bit in June, I guess, what is the RevPAR guide in the back half of the year, RevPAR and margin guide? I assume is -- is it more heavily weighted towards ADR still? Or does it become a little more balanced between occupancy and ADR? And that's all for me. Thank you.

More balanced. Yes, Austin, sorry to cut you off. Yes, more balanced. I mean, overall, when you look at how we're projecting the back half of the year, we continue to see an ability to grow rate, but certainly have some occupancy growth built in as well, where you're starting to see business travel demand come back, or continue to come back. And assuming that you're not seeing meaningful pullback in leisure.

Great. Thanks, Liz.

Certainly variations on the high and low end from that, but …

The next question comes from Dori Kesten with Wells Fargo. Please go ahead.

Thanks. Good morning. As your occupancy continues to rise in the second half, are you still comfortable with your current staffing levels?

Generally, yes. When we look across our portfolio, and obviously there are variations by market, we've been able to largely re-staff our hotels, to levels that we feel comfortable with, given the adjustments that have been made to overall brand standards. And, I think, on the margin, incremental occupancy should lead to some productivity gains as we have greater utilization of existing staff. The trick for our portfolio is it's a blend. And so certainly within that portfolio, we have some markets that have been slower to rebound that are just now beginning to see more significant increases in occupancy and obviously in those markets. We will be hiring to accommodate the incremental demand, but by and large we see our portfolios being stable. And for that reason, we've highlighted that we expect overall expense growth to begin to moderate as we move into the back half of the year.

Okay. And, I mean, you have a history of acquiring portfolios. But what's your level of interest today? And are there any of interest out there?

I think we continue to underwrite individual assets and larger portfolios, that the most significant governor for us is debt with our existing portfolio. And so as we look at larger portfolios, we're looking or narrowing our focus to those portfolios that provide product and market concentration that fits well with the portfolio that we currently owned. So I think we're most interested in a subset of the potential transactions that happen there. In the near-term, I think, we continue to assume that the bulk of the transactions that happen in the overall market and certainly the bulk of transactions that we will be involved in will be smaller transactions, either involving individual assets or smaller portfolios less than 10 hotels. But as we continue to move through the next several months, that could certainly change. Generally speaking, larger portfolios come to market when the financing environment is more supportive of them. But the challenges in the financing market could also drive some of those larger portfolios to market as groups are looking at refinancing at higher cost. So, I think our interest continues to be there. There are a number of portfolios that we feel would be reasonably good fits for our portfolio. And I think we're uniquely positioned to pursue those as they become available.

Okay. Thank you.

Thank you.

The next question comes from Tyler Batory with Oppenheimer. Please go ahead.

Hey, good morning. Thanks for taking my questions. There's been a lot of focus on leisure travel in the past couple of days. And in the prepared comments, you mentioned that leisure travel continues to be strong. Any more details you could provide on that? What does weekend travel look like? What is pricing power look like? And then additionally, can you ballpark what percentage of your mix you would consider to be leisure transient right now? And if I could just squeeze in one more, most of your leisure demand, and I'm assuming it's partially people on vacation. But I will also assume that you may have some different drivers than peers that have larger resort hotels. So if you could just talk about what really drives your leisure mix in your leisure travel, I think that would be helpful, too. Thank you.

Maybe we'll work backwards with those questions, and certainly to the extent we be able to address any of them, feel free to raise them. And I'll start maybe, Liz, can chime in. But speaking to the types of leisure business that we have in our hotels, given the broad diversification of our portfolio that varies somewhat by market. But broadly speaking, includes people who are travelling on vacation, and certainly we have certain assets, like our Virginia Beach assets, or the hotels that we own in Portland, Maine, that see a greater percentage of leisure travelers travelling for vacations. But outside of that, we see significant leisure travel associated with major family events, like weddings, and a tremendous amount of sports team related business. And outside of that there are a number of other categories. But broadly speaking, those tend to be the biggest leisure demand drivers for our portfolio. Looking at demand across our portfolio, and I think, partly, perhaps, because we're not solely dependent on vacation goers, for leisure travel, we've seen stability in occupancies. Looking at the past 3 or 4 months, together on the weekends, and I think reflecting continued strength and demand there. Obviously, we saw meaningful improvement early in the recovery in leisure travel, which propped up our weekend occupancies and even push them beyond pre-pandemic levels. Those occupancies have held relatively stable with obvious variations from market-to-market, and it put us in a position to continue to drive rate. so looking at RevPAR specific to the weekends, in the quarter we continue to see growth and even as we push past the quarter into July. And I'm trying to remember what your first question was now that I've worked backwards to the other three.

Yes, just maybe ballpark the percentage of your transient guests that you would consider leisure versus corporate?

Yes, I think we still estimate right around 50-50 split, which skews heavier to leisure than our business was pre-pandemic. And a portion of that, I think, is a shift in the makeup of our portfolio. But more significantly, I think that mix continues to be influenced by the higher weekend occupancies that have been maintained even as we've moved into the year.

Okay, that's all for me. Appreciate that detail. Thank you.

Thanks.

The next question comes from Anthony Powell with Barclays. Please go ahead.

Hi, good morning. I guess a question on supply growth. As we know, it's going to be pretty limited in most of your markets in the next couple years. But it seems like you're able to do some developer deals like Motto in Nashville, I guess. What do you think supply growth may pick back up across your markets? Is it '24, '25 or just broadly coming to that [indiscernible] helpful.

I mean, I highlighted in my prepared remarks that we still have roughly 50% of our markets that don't have any new supply under construction within a 5 mile radius of our assets. I think given time from start to completion, that pushes the potential for new supply in those markets out a couple of years, so beyond kind of the framework that you set. And then in the other 50, roughly 50% of our markets, we'll have one or two assets generally under construction. And I think all of that meaningfully below what we saw pre-pandemic where roughly 70% of our portfolio had exposure. As we look at impediments to supply, there continue to be several. Certainly, some of the uncertainty from a cost standpoint has come out of the equation, meaning that developers and GCs are in a better position today, I think, to estimate costs, which have and we believe will continue to be higher than they were pre-pandemic. But looking back 6 to 12 months, most of those groups were hedging, just based on the significant run up that had happened over a short period of time, and some unpredictability based on availability of labor and supply chain challenges. I think today the -- that the cost of construction continues to be a limiter on new supply growth in individual markets. And a significant portion of that cost and a meaningful component of it is the increased financing costs. So to the extent financing is available, and it's still more limited than it has been at other points in the cycle, it comes at a higher cost, and that costs further inflates, what are already costs that are inflated to pre pandemic levels. And what that tends to do is limit the number of markets where you can justify construction projects. It also, and I think, importantly, makes our construction takeout more attractive, because in some cases, it puts developers in a position to obtain more reasonably priced financing. And at the very least, provides assurances of a takeout above their costs to the extent they control or manage cost effectively on the projects. And I think because of the way the outlook is shaped up, our expectations are that for the foreseeable future new construction will be muted. And I think that shouldn't be mistaken to be or be stretched to an assumption that there won't be any new supply. Obviously, we anticipate in our best markets that we will continue to see supply and for that reason, we continue to seek out assets that are incredibly well located within those markets and have the amenities that guests are looking for. But by and large, we anticipate that for the foreseeable future we'll be in a meaningfully better position than we were coming into the pandemic in terms of supply growth. And as Liz and I both highlighted in our prepared remarks, that puts us in a position to benefit in a more meaningful way from incremental demand, both leisure and business side. And I think importantly, though, we don't foresee a meaningful downturn in the near-term, should also put us in a much better position to the extent there were to be a pullback in the overall economy.

Yes, Thanks. And maybe one on RevPAR. So you took up your RevPAR gains by 1 percentage point. What was better than your original outlook? Was it business travel, leisure travel in certain markets, and maybe go through the guidance preset, so we can understand what kind of like driving kind of the upside here?

We have been slightly above the midpoint. You know, as we reported Q1, we were slightly ahead at that time. I think from that point forward, we continue to see strength in trends and not indications of a pullback, at least as quickly as the macroeconomic consensus view was earlier in the year. And I think coupled our year-to-date performance plus consensus slowing, pushing out some gave us incremental confidence to increase at the midpoint. And again, given the trends we continue to see in July, post, July 4th holiday week, I think are encouraging. So we're optimistic that we'll continue to see strong performance.

All right. Thank you.

Thank you.

The next question comes from Michael Bellisario with Baird. Please go ahead.

Thank you. Good morning, everyone.

Good morning.

Just want the big picture focus on '24, but really focused on brand standards and what might come back as you look out to '24. It's not that you can maybe quantified at this point, but directionally, it would be interesting to hear your color. But how many more stay over rooms do you think we'll need to be cleaned next year? Are the brands pushing for the happy hours to come back? Or just maybe how much [indiscernible] when you think all the extras on the brand side will be as we flip the calendar into '24?

Interesting question. Certainly, we have dialogue with the brands on an ongoing basis about how to further improve the experience for consumers at our hotels. Generally speaking, as of today, those conversations are absent significant references to increases in amenities or services with the hotels. I think, by and large, the majority of the conversations that we're having today with brands, and as you know, we sit on a number of brand advisory boards. So these conversations extend beyond specifics related to our own portfolio. The focus has tended to be much more around the condition of the assets. And I think the need for as an industry reinvestment in the hotels, and greater emphasis and attention paid to repairs and maintenance. So I think in the near-term, meaning in the next 12 to 18 months, much more likely that we'll see continued focus on those areas, which for our business, put us in a very good position having reinvested in our portfolio consistently. We have assets that are in very good condition, but as an industry, I think, a more significant amount of attention will be going to that than expanding dinner offerings, or returning to pre-pandemic housekeeping models. By and large, that -- the adjustments in housekeeping have really furthered a trend that had begun pre-pandemic. And we're still making accommodations for guests who would like their room cleaned every day in order to maintain guest satisfaction. So, I think I see very little movement on that part impacting our ability to drive profits. And because of the position of our hotels, I think we will, given how brand pressure is likely to be focused, or for the near-term we're in a very good position.

Okay. Helpful there. Thank you. And then just a second question just on the development deals. More broadly, can you remind us of the math you do on a development deal like Nashville? And what type of excess return you're targeting over buying a stabilized asset like Cleveland? And then secondarily, kind of how big are you willing to take your development commitment dollars at this point?

So the answer to the first part of your question is a little bit complicated. Technically, we target a return that's equal to the return we could achieve on existing assets functionally, because we tend to be more conservative in underwriting market growth in out years. We tend to be more conservative overall in our underwriting and new development deals. And the result has been that when we look at our acquisitions in total, by and large, our acquisitions of new development deals have outperformed, that the properties that we acquired that were stable and operating prior to acquisition, That's more of a function of conservatism in our underwriting for markets, than a specific target yield. But the result ends up being about the same, certainly taking into consideration the incremental market risk, or theoretical incremental market risk we're taking. But remember in every case, we do not take any risk related to cost overruns on the project. Those are borne 100% by the developer. And then remind me what your other question was? Oh, total [indiscernible]. Generally speaking, we were given the size of our portfolio. Like to have a pipeline of three to five deals, I think, given the scale of the current deals that we're doing, that would be an appropriate level with delivery over a 2 to 3-year period. To the extent we were to pursue development deals smaller than the 2 week currently have under contract, we could scale in terms of number of deals slightly higher than that. And again, remembering that as we think about funding development deals on a go-forward basis, we certainly have, at least for the deals, we have under contract, ample capacity on our line of credit. But the bulk of those acquisitions, we intend to fund utilizing excess cash from operations and or disposition proceeds, and hopefully, at some point with potential equity raise. Though, obviously, given today's valuation, that would not be attractive to us.

Got it. And then just one follow-up on Nashville. Where do you think your basis is going to be relative to where select service hotels are trading today in the market?

Meaningfully lower. I mean, we've disclosed, and again, remembering that the property is still under development, meaning we're still finalizing actual key count and some of the [indiscernible]. But we've given what we anticipate to be the highest potential purchase price, and a good approximation for where we think the number of keys will line up. That puts us well over 100,000 key less than comparably marketed select service hotels in the same area. So I think we feel very good about our bases in the market, and incredibly good about the location, which is really in the heart of Downtown, Nashville with -- within very close proximity to major demand generators.

Helpful. Thank you very much.

Thank you.

[Operator Instructions] The next question comes from Chris Darling with Green Street. Please go ahead.

Thanks. Good morning. Justin, going back to the transaction market, you previously talked about a, call it, 5% to 10% bid ask spread. Your comments make it sound like that spread is beginning to close. So is that accurate in any way for you to quantify the changes you might be seeing?

It is. I think and it has been driving our increased interest in specific transactions. Interestingly, while we've seen a slight movement in cap rates, in most cases that movement has been offset by improved fundamentals for the assets. So we haven't seen a corresponding adjustment by and large in terms of valuations for assets. That said, we're competing with fewer people in the marketplace, at least, at price points where sellers would be willing to transact, which is put us in a position to really have serious conversations with potential sellers about where a transaction might happen. I think as has always been the case, as we look at an underwrite potential acquisitions, we're looking to achieve near-term yields, comparable to the yields we've achieved on recent transactions. But as importantly pursuing assets, where we anticipate future growth to be in excess of our larger portfolio, or the anticipated growth rate for our larger portfolio. And generally, where we anticipate the hotel to need less in the way of near-term CapEx. Looking at the two projects we have under contract, I think they're great examples, and that the asset we recently closed on in Cleveland had just come out of a full renovation. And so, I think near-term CapEx needs for that hotel will be close to zero. And it's been effectively repositioned in a way that we think will enable it to increase market share in a market where we see meaningful growth on a go-forward basis.

Got it. That's all very helpful. And then maybe switching gears just thinking about some of the new brand concepts that Marriott and Hilton have introduced recently. Can you speak to your level of interest in gaining some exposure there? And are you in discussions with any of your development partners to pursue some of those newer concepts?

So, well, Motto is, I guess, technically a new concept for Hilton, meaning that there are very few of them that exist. And certainly we've demonstrated interest there. Speaking specifically to the -- that the lower tier, new brands that have been announced, whether it's Spark or any of the lower tier extended stay brands, we are not currently actively pursuing deals in that space, though. We have regular conversations with the brands about the positioning of that new product and how it relates to other assets within our existing portfolio. I think we're likely to track that space. But generally speaking, I think our model and our strategy has been very successful for us. And it's been to invest in the product in the upscale and upper midscale space where we feel we can achieve the best balance rate potential, while with ability to drive strong cash flow and margins.

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

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Justin Knight for any closing remarks.

We appreciate you joining us today. And as is always the case, we hope that as you travel, you will take the opportunity to stay with us at one of our hotels. Have a great day, and we look forward to meeting with many of you in the near-term on the road.