Apple Hospitality REIT Inc

NYSE:APLE

Earnings Call Transcript 2021-Q2

[Operator]

Greetings, ladies and gentlemen, and welcome to Apple Hospitality's Second Quarter 2021 Earnings Conference Call. At this time, all lines are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to introduce your host, Ms. Kelly Clarke. Thank you. You may begin.

[Kelly Clarke, Vice President of Investor Relations]

Thank you, and good morning. We welcome you to Apple Hospitality REIT's second quarter 2021 earnings call on this the 6th day of August 2021. Today's call will be based on the second 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 to 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 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 second 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.

[Justin Knight, Chief Executive Officer]

Good morning and thank you for joining us today. As we look back on the last year and how far we've come as an industry, we feel incredibly grateful. With enhanced safety protocols in place, the accelerated rollout of the vaccine and the loosening of restrictions, travel confidence has significantly improved and positively impacted performance across our portfolio.

While we remain conscious of the continued impacts of COVID-19 and the new Delta variant, we are optimistic that the worst of the pandemic is behind us and travel will continue to strengthen. We entered 2020 with a portfolio of hotels reflective of an ownership strategy developed to mitigate risk and volatility while producing compelling returns for our investors.

Our strategy in place for more than two decades and refined throughout multiple economic cycles is and has always been straightforward. Own a portfolio of geographically diversified, select service hotels affiliated with the best brands, worked 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.

During the last year, the merits of our approach were proven, and we navigated the most difficult operating environment our industry has ever seen with results ahead of industry averages and our publicly-traded peers. We successfully executed on the objectives we communicated at the onset of the pandemic and maintained a sound liquidity position, safeguarded long-term value for our shareholders and ensured our ability to thrive in future years.

Initially, as we indicated, we prioritized a swift return to positive cash flow by focusing on operations, keeping our hotels open, implementing enhanced safety and cleaning protocols, significantly reducing operating expenses and capturing existing demand within our markets. As a result, we were the first among our publicly-traded peers to return to positive cash flow at both the property and corporate levels.

Hotel performance continued to strengthen during the second quarter of this year, with overall results for our portfolio the strongest since the onset of the pandemic, once again, exceeding industry averages and our internal expectations. For the quarter, we achieved occupancy of 71%, ADR of $121 and RevPAR of $85. Hotel EBITDA was approximately $95 million for the quarter, and modified funds from operations were approximately $68 million or $0.30 per share.

We have seen continued growth through July with improvement in both occupancy and rate relative to the prior month. I've been particularly pleased with the pace of recovery and rate, which in July was down only mid-single digits to 2019 and reached 2019 levels in most recent weeks.

On our last call, we communicated our expectation that we would be among the first to be in a position to exit the covenant waiver period. The position of our portfolio and our intense focus on property level operations enabled us to avoid taking on additional debt to cover operating shortfalls. And as industry fundamentals improved, we were well positioned to benefit.

With net debt at roughly 4x annualized second quarter EBITDA and July showing continued growth, we elected out of our covenant waiver period effective July 29. Through the most challenging operating environment our industry has experienced, we preserved the strength and capacity of our balance sheet and protected the value of our equity.

We are emerging from the downturn on incredibly strong footing with incremental flexibility to allocate capital in ways that will further drive shareholder value. In July, we successfully completed the opportunistic sale of a portfolio of 20 hotels for a total gross sales price of approximately $211 million.

The sales price represents roughly an 8.5% cap rate on 2019 numbers and just under a 5% cap rate on pro forma 2021 numbers, inclusive of buyers anticipated capital expenditures of approximately $55 million. The portfolio we sold has an average effective age of seven years, two years greater than our current portfolio and reported an average 2019 RevPAR approximately 18% lower and an average 2019 EBITDA margin approximately 170 basis points lower than our remaining portfolio averages.

Half of the portfolio in the sale -- half of the hotels in the sale portfolio have fewer than 100 keys. As we contemplate potential disposition opportunities, we closely monitor hotel positioning, profitability, market conditions and capital requirements and work to maximize shareholder value by disposing of properties when superior value can be provided from the sale of the property and the proceeds can be redirected into assets with stronger growth profiles.

Also in July of this year, we entered into separate contracts for the potential purchase of four hotels for a total combined purchase price of approximately $227 million. The hotels under contract for purchase include the existing 178-room AC and the 157 room aloft on the waterfront in downtown Portland, Maine for a total combined purchase price of approximately $118 million. The lost is currently under development and is expected to open in the third quarter of this year.

The 130-room Hyatt Place in downtown Greenville, South Carolina for a total purchase price of approximately $30 million and in Embassy Suites by Hilton Hotel that will be constructed in Madison, Wisconsin with an expected 260 rooms and an anticipated total purchase price of approximately $79 million, we expect to close on the hotels in Portland and Greenville during the second half of this year and the Embassy Suites in Madison upon completion of construction, which is anticipated to occur no earlier than the fourth quarter of 2023.

All these assets are relatively young, non-prototypical hotels. With the two existing assets, the ACA in Portland and the Hyatt Place in Greenfield, each having, opened within the last three years. We expect these last three years. We expect these acquisitions to produce stabilized returns above 8% and to have long-term RevPAR margins and growth rates that exceed those of our existing portfolio.

Since the beginning of 2020, we have sold 26 hotels for a combined total of $290 million and purchased five hotels for a total of $161 million. We have the four hotels I highlighted under contract for $227 million and are in active discussions with multiple ownership groups related to incremental opportunities. As we have communicated on recent calls, we expect to be net acquirers of assets over the coming months.

Our combined acquisitions and dispositions activity will reduce the age of our portfolio and associated near-term capital obligations while increasing our exposure to markets with strong relative growth trajectories. Transaction volume in the hotel space continues to increase and interest from a variety of public and private equity players has driven pricing higher, especially for premium select service assets.

As we explore potential opportunities, we leverage our long-standing industry relationships in addition to evaluating brokered opportunities in pursuit of accretive transactions that we believe will maximize long-term value for our shareholders and further grow and enhance our existing portfolio.

The core elements of our portfolio strategy remain largely unchanged and have been further validated by our recent experience. As we pursue acquisition opportunities, we will continue to look for rooms-focused assets in the Marriott, Hilton and Hyatt brand families that further diversify our portfolio across markets, location types and demand generators.

During the quarter, we entered into a contract to purchase the fee interest in the land at our Residence Inn in Seattle, Washington for a total of approximately $80 million, consisting of a $24 million cash payment and a one-year note payable to the seller for $56 million.

Through this potential purchase, we expect to close, in August of this year, we will exit what recently become an onerous ground lease. The hotel is ideally located off the water and within walking distance of downtown Seattle and has performed incredibly well for us over the years. We began discussions with the land owner prior to the onset of the pandemic and have entered into a contract below the appraised value and our previously agreed to purchase price.

We are confident that Seattle will remain a strong market long-term, and this investment will be incrementally positive for us over time. With clear line of sight to accretive acquisition opportunities, we accessed the equity markets during the second quarter through our ATM program, issuing approximately 4.7 million common shares for gross proceeds of approximately $76 million at a weighted average market sales price of approximately $16.26 per share.

We will continue to assess the value of our stock relative to opportunities in the market and utilize the ATM only where we feel confident we can create incremental value for our shareholders. Consistent reinvestment in our hotels has always been a key element of our strategy, and we entered 2020 with a young, well-maintained portfolio.

While we have prudently reduced our capital spend since the start of the pandemic, we have ensured that our assets continue to be well maintained and competitive within their markets. The brands have allowed a greater degree of flexibility over the past year, and we have been in continuous dialogue with them about the timing and scope of renovations for our portfolio, leveraging our strong relationships and our scale within individual brands to help find cost-effective solutions to focus on core elements of the guest experience.

During the first six months of 2021, we invested approximately $5 million in capital expenditures, and we anticipate investing an additional $20 million to $25 million in capital improvements during the remainder of 2021, which includes scheduled renovation projects for seven hotels.

We will continue to focus our investments on elements likely to have the greatest guest impact at assets where we feel we will achieve the best return on our investment over the long term and to strategically schedule major projects in order to minimize property level disruption. As we move through the recovery, we will continue our focus on operations, working to build on our second quarter successes through strategic revenue management and an obsessive focus on expenses.

At the same time, we expect continued increases in hotel transaction volume, and we'll actively seek opportunities to grow and enhance our existing portfolio. As with every aspect of our business, we will be thoughtful and balanced in our approach, allocating capital to those opportunities, which will produce the strongest total returns for our investors over time.

With the strength of our balance sheet, positive cash flow at the corporate level, the elimination of covenant waiver restrictions and significant liquidity and balance sheet capacity to pursue accretive opportunities, we are extremely well positioned for growth as we move into the back half of the year.

Throughout my career, I have been incredibly fortunate to be surrounded by exceptionally talented and motivated individuals who are passionate about our business and driven to achieve exceptional results. These individuals, both at our corporate office and employed by our brands and management companies, have been a constant inspiration to me.

We have a winning strategy, investing in high-quality branded rooms-focused hotels, broadly diversified with low debt. That strategy has been tested through multiple economic cycles and has consistently yielded compelling results for our investors.

That said, the key to any successful strategy is found in its execution. To this end, I want to express my sincerest gratitude to my team, our management companies and our brand partners. At its core of the hospitality business, is a people business, and our experience during the pandemic has strengthened us and prepared us for future successes.

With that, 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.

[Liz Perkins]

Thank you, Justin. Our broad market diversification and significant suburban concentration enabled us to benefit from continued strength in leisure and improving business transient demand, resulting in our portfolio's outperformance as compared to national averages during the quarter. With the acceleration of vaccine distribution and loosening of travel restrictions, demand continued to improve more quickly than anticipated resulting in occupancy of 74% for the month of June, only down 11% from June of 2019.

With this increase in occupancy, we produced sequential improvement in rate, moving from an ADR of $110 in April to over $131 in June, a 19% improvement over the course of the quarter. We are encouraged that the gap to 2019 ADR levels decreased consistently as we move through the quarter, with June ADR down only 9.5% to June of 2019 and the gap decreasing even further in July.

Our in-house revenue team has continued to work closely with our management company revenue support and on-site sales teams to grow market share, which furthered our outperformance, enabling us to once again produce results that exceeded internal expectations. Highlighting meaningful improvement in both weekday and weekend occupancies during the quarter, weekday occupancy moved from 63% in April to 70% in June, while weekend occupancy moved from 81% to 86%.

Although weekend occupancies continue to exceed weekday occupancies, we saw greater acceleration in weekday, indicating in part an improvement in more traditional business transient demand. As mentioned, stronger occupancies enabled us to move rates significantly during the quarter, and weekday ADR increased from $106 in April to $127 in June, while weekend ADR increased from $116 to $141 over the same period.

In July, we saw similar trends as our portfolio finished with approximately 75% occupancy at $137 midweek and at $150 on weekends. 25 of our hotels ran occupancy above 90% and more than 1/3 had occupancy above 80% for the full quarter.

Top performers within our portfolio benefited from a mix of demand generators, including leisure, government and military, manufacturing, imports, insurance, construction and medical business. 29 hotels had RevPAR that exceeded 2019 levels for the quarter, representing many areas of the country, including Houston; Santa Clarita, California; Tucson, Miami Suffolk, Virginia; Carolina Beach; Birmingham; and Hilton Head, among others.

Our suburban hotels continue to outperform urban hotels in the quarter with occupancy of 73% as compared to 62% for comparable hotels. Similar to trends in the first quarter, we generally experienced weaker performance from hotels located in markets with greater historic exposure to large groups and convention. Our hotels in Northern Virginia, Chicago, St. Paul and in a number of markets in the Northeast and Northwest were among the weakest performers relative to 2019.

We also continued to see weaker performance from our full-service hotels in Richmond and Houston. Despite a slower rebound in some of these challenging markets, 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. Those markets that have been slower to recover represent additional upside for our portfolio as we realize a more widespread recovery in travel.

In terms of channel mix, on a comparable basis, we saw a meaningful increase in brand.com bookings, which moved from 33% of room nights in the first quarter to nearly 38% of room nights in the second quarter. OTA bookings continue to be elevated relative to prior years, but decreased slightly from 18% of room nights in the first quarter to just over 17% of room nights in the second. With the increase in leisure and business transient demand, property direct bookings declined from 33% of room nights in the first quarter to 28% in the second quarter, but remained elevated relative to 2019 levels.

A testament to our revenue management and sales teams who continue to work diligently to maximize the mix of business in our hotels based on available demand. From a segmentation perspective, as occupancy continued to strengthen in the second quarter, we saw a shift from other discounts into bar as compared to the first quarter, which we believe is the result of an increase in business transient as a percentage of our mix.

Bar increased almost three points to over 30% in the second quarter from the first quarter, offsetting declines in other discounts, which declined to just under 37% in the second quarter. Negotiated government and group business remained relatively constant quarter-over-quarter. As we look forward, the booking window remains short.

So with the data available, we have not yet seen significant impact from the recent rise in COVID cases and resulting reimplementation of mass mandates in some markets. These developments are likely to continue to weigh more heavily on urban markets and those with significant dependence on large group and convention business, where we have seen lagging results throughout the pandemic, including year-to-date but where we have limited exposure.

Given the likely trajectory of the continued recovery, we are optimally positioned for continued outperformance, and we remain optimistic based on recent increases in vaccination rates and the resiliency of people's desire to travel when restrictions are lifted and they feel safe to do so, as demonstrated over the last quarter.

Turning to expenses. Our team's relentless efforts to control costs and maximize profitability resulted in second quarter 2021 comparable adjusted hotel EBITDA of approximately $90 million comparable adjusted hotel EBITDA margin of approximately 39%, down only 120 basis points to the second quarter of 2019, but representing an increase of more than 1,600 basis points from the first quarter of 2021.

MFFO was approximately $68 million or $0.30 per share for the second quarter of this year. While we continue to focus on controlling expenses, our bottom line performance has been meaningfully bolstered by the significant recovery in rate, which Justin has mentioned, approached 2019 levels for our full portfolio in recent weeks. 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 it 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 five 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 operations than most.

With revenue down 27% in the second quarter relative to the second quarter of 2019 we were able to reduce total hotel expenses by 26%, an expense reduction ratio of 0.95, significantly higher than the full year estimate of 0.7 to 0.75 previously provided, driven in part by the improvement in rate declines relative to 2019 throughout the quarter.

Cross utilization of managers and hourly team members, combined with adjustments to brand service models, enabled us to achieve total payroll on a per occupied room basis for our comparable hotels of under $27 in the second quarter, down 16% to the second quarter of 2019.

While these results are impressive and our teams have worked diligently to maximize performance, we continue to experience challenges finding and hiring employees in a number of markets. So we expect payroll costs to stabilize higher than where they are currently as we are able to reach desired staffing levels over time.

Comparable hotels rooms expenses, excluding labor, were down 22% per occupied room compared to 2019 for the quarter, with almost half of the savings coming from adjustments to complimentary breakfast and evening social offerings.

Since the onset of the pandemic, we have spent considerable time with our brands and our management companies discussing ways to modify long-term brand standards and rethink property-level staffing models to ensure that a portion of these savings remains throughout the recovery and beyond, while ensuring that we provide an exceptional guest experience.

Taking into consideration the continued recovery, historical seasonal trends and labor pressures, we anticipate an expense reduction ratio in the 0.8 to 0.9 range during the second half of 2021. Moving to supply. While we continue to see new openings in our markets over the past 12 months, the percentage of hotels within our portfolio with one or more new hotels under construction within a 5-mile radius has dropped from approximately 70% a year ago to around 50% in the most recent quarter.

We anticipate the cost of materials, labor shortages and difficulty underwriting and financing new construction projects will continue to limit new supply in the near term and recognizing that new construction projects typically take two to three years from start to completion, we anticipate limited pressure from new construction over the next several years.

Shifting to our balance sheet. We are pleased to announce that with its strength, our track record of disciplined capital allocation and our current operational outperformance, we successfully exited the covenant waiver period effective July 29. As a result, we are no longer subject to the lender imposed restrictions and limitations on investing and financing activities, including the acquisition of property, capital expenditures, payment of distributions to shareholders and use of proceeds from the sale of property or common shares.

In addition, as a result of exiting the covenant waiver period, interest rates are expected to decrease on our unsecured credit facilities resulting in an estimated $3 million in savings for the remainder of the year and nearly $8 million annualized based on debt levels at the end of July. Consistent with the terms of the amendment, we were able to meet the financial maintenance covenants based on our annualized results for the three months ended June 30, 2021, and will test against certain modified covenant thresholds for up to five additional quarters.

We are incredibly grateful for our long-standing relationships with our lenders and their continued support. Having exited the covenant waiver period, we now have additional flexibility to manage our business and pursue accretive opportunities. As of June 30, 2021, we had 1.4 billion in total debt outstanding with a weighted average interest rate of 4%, consisting of $451 million of mortgage debt secured by 28 hotels and $952 million outstanding on our unsecured credit facility.

At the end of the quarter, we had available cash on hand of approximately $3 million in unused borrowing capacity under our revolving credit facility of approximately $343 million, with no scheduled maturities for the remainder of 2021. As Justin mentioned, subsequent to the end of the quarter, we sold 20 hotels increasing our total liquidity.

With approximately $580 million available for acquisitions, balance sheet capacity and positive cash flow for much of 2020 and in 2021, we are confident in our ability to continue to navigate the current environment preserve the value of our equity and strategically take advantage of opportunities to drive incremental shareholder value.

We're excited about the hotels we currently have under contract, and we are in active discussions around additional opportunities, which we believe would be additive to our existing portfolio. Our talented team and investment strategy have enabled us to effectively weather the most challenging environment ever experienced by our industry. Operating results for our portfolio have exceeded even our own expectations, with July top line numbers approaching 2019 levels and with the continued benefit of operating efficiency.

As we proceed through the recovery, we believe we are positioned for continued outperformance. We will now be happy to answer any questions that you have for us this morning.

[Operator]

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

[Neil Malkin, Capital One Securities]

Congrats on exiting covenant waivers. Your share price performance today is boggling my mind, but yes congrats nonetheless.

[Justin Knight, Chief Executive Officer]

Thank you very much.

[Neil Malkin, Capital One Securities]

Sure. I just wanted to be clear on something that you guys have both touched most recently in the prepared remarks. You -- given what you're seeing in terms of ADR and occupancies and also given that BT, which is a substantial amount of demand for you guys is really not back to 2019 levels, but should improve as the year goes on. Are you basically saying that RevPAR and EBITDA is going to be above 2019 levels, most likely in the back half? Is that -- am I understanding your commentary correctly based on what you're saying?

[Liz Perkins]

I think we have been pleased with how occupancies have performed in the second quarter and into the third quarter. We continue to feel that a large portion of that is related to leisure, but we've had other demand generators and business demand. Throughout the pandemic, some of that business we haven't historically taken.

As we progressed through the quarter and saw weekday occupancies increase, while that may not be showing up in our negotiated segmentation mix that I've shared, or we don't have complete transparency, that weekday growth, we do think is partly contributed -- or is partly benefited by BT.

When we think about the back half of the year, it's a volatile environment. It's unpredictable. We still haven't issued guidance. We're confident that our portfolio and what we've experienced over the past year, what it's proven is that in a range of scenarios, we're positioned to outperform and to sustain pretty significant RevPAR declines. We're optimistic based on what we've seen even quarter-to-date in Q3 that we'll continue to see leisure perform as well as continuous BT pickup.

When I mentioned channel mix, I was speaking specifically to Q2. But as we transitioned into Q3, I'm seeing through booking channels, GDS pick up month-over-month for future bookings. So that's a positive. We continue to believe in the strength of business travel. GDS is predominantly corporate negotiated.

So I think that's thinking about August not being traditionally as strong as even July or the back end of September from a business standpoint. I think that, that's a positive trend. But predicting the future is tough right now. There's a lot of noise out there. We're mindful in watching the Delta variant, although I haven't seen that transpire in our numbers quite yet and are hopeful that it won't.

I think the fact that there's been some attention given to it has increased fascination rates, which also is encouraging. So too soon to tell what the back half of the year holds, but the second quarter was strong. We started the third quarter strong, and we're reasonably confident given the information that we have today.

[Neil Malkin, Capital One Securities]

Okay. I appreciate that Apple respond.

[Liz Perkins]

I mean see -- remember Neil that we're speaking about the second quarter. The second quarter is typically our strongest quarter. THE third quarter is right alongside with it. Think about the changes relative to '19, we saw and experienced some seasonal impact last year. We have not had the large-scale corporate BT boost that we're hopeful for post Labor Day.

So that could be a tailwind, but there's some reasonable consideration that needs to be given to the fact that August is just slightly behind July normally. Labor Day impact September, and then we picked back up in October. So continued improvement that would be fantastic, it's not out of the realm of possibility.

But if you look at seasonality in our portfolio in 2019, that's part of where your continued improvement through the back half of the year. I have to hedge there. It's just -- we don't know what's to come, but there was significant pent-up demand with leisure. We're hopeful we'll see that significant pent-up demand with BT as well at some point.

[Neil Malkin, Capital One Securities]

Yes. I got you. I got you. I'm just being playful. Anyways, other one for me is on the acquisition side. I don't know if you talked about the yields you anticipate or stabilized yields on your acquisitions that you have agreements on. But can you just talk about sort of what opportunities are coming your way? Has the amount of opportunities you're underwriting or seeing it coming across your desk? Has that improved over the last 30 to 60 days? Are you kind of remaining focused on our broad swath of markets? Are you more looking into Sunbelt? Anything along those lines in terms of how you're thinking about growth going into the back half of this year?

[Justin Knight, Chief Executive Officer]

In my prepared remarks, I highlighted the fact that for our acquisitions, those that we have currently under contract, we expect stabilized yields to be above 8%. Recognizing again, the assets are all relatively new with two of the four currently under construction, the Portland asset to be delivered in the next several months, but the Madison asset not to be delivered for some time yet.

Looking at those markets individually, the two existing assets were delivered or opened in 2018, the back half of 2018, the AC in Portland opened in July and the Greenville asset opened in December, but looking at their more recent performance in May. In May, the Portland AC was up 14% from a RevPAR standpoint to the same period in 2019.

And then in June was up 36%. And the Greenville asset, again, up 22% and up 60% for those same time periods relative to 2019, recognizing they were new hotels, and there's some ramp in those numbers still I think a wonderful signal. Those are incredibly strong markets that will likely outperform in the near term.

As we look at the market more broadly, I highlighted in my prepared remarks that we continue to see pricing pressure. And we are, at the same time, seen a lot more potential deals come to market.

We've been active for some time now in discussions with both brokers around broker transactions and with individual ownership groups and are in active discussions around a number of additional assets that we hope to be able to announce in the not-too-distant future. We see the opportunity set continue to increase as we move through the coming months. And as I highlighted, I expect to be net acquirers through the recovery.

[Operator]

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

[Austin Wurschmidt, KeyBanc]

So given some of the comments that you made on ADR trends, reaching 2019 levels in recent weeks, it sounds like revenue is also getting very close. I know you gave some pieces on what you think the expense reduction ratio to be in the back half. But could you put kind of a finer point on maybe where hotel EBITDA or margins were for July? And how those compare versus 2019?

[Liz Perkins]

We do not have bottom line financials for July yet, so I can't speak to margin. I think July's -- touched on July's rate and strong rate in July and the fact that, that was approaching towards the end of the month and even exceeding at certain points in time, 2019 levels, we believe that flow-through should be strong and that margins will be strong.

That said, we continue to try to hire incremental labor, and we ran very efficiently. I led into the second quarter talking about April and the first quarter that we were really efficient and that we were looking for people, and that remains the case. We've added back some labor over the course of the quarter. But we're still -- we still have open positions.

And so I think July, we'll have to wait and see, but has the recipe for being a strong month from a margin perspective. But we face the challenges that everyone faces with labor, the cost of labor, we're starting to see some increase with wages, although when I look back at the increases in wages or the visibility that we had with the increase in '19 over '18, not significantly more than that, at least to date. But we have some things that we need to hedge for and think through.

Also, again, as I mentioned with Neil, we typically pull back a little bit in rate in August and occupancy. September, if BT -- if it follows normal seasonal and BT trends, the back half from a BT perspective is generally stronger, but leisure does pull back some, although the limited data that I have from a booking position standpoint still shows for bookings for weekends in September to be strong, which is encouraging.

So I think we feel reasonably good, but have said all along the way that the efficiency that we're running today is not sustainable long term. At what point that catches up? We're not sure yet. There's been some talk about post Labor Day, some of the challenges around labor easing a bit, we'll see.

We certainly received more applicants in areas where some of the stimulus benefits have pulled back some. So we're encouraged by that. And we've added back labor along the way. We're probably at 50% of our stabilized over the course of the summer last year in April, I think we were at around 60% of stabilized FTEs. July, I think we're probably around 70%. So we still have we saw significant savings, probably a little bit more than we'd like.

[Austin Wurschmidt, KeyBanc]

What is stabilized FTEs relative to pre-pandemic FTEs for your portfolio as I know you guys have run efficiently for quite some time, but just curious if that's still as that's changed?

[Liz Perkins]

Yes. We've said all along that we're hopeful and working with the brands and have every intention to run more efficiently as standards continue to evolve and guest preferences continue to evolve. If we have longer length of stays at our hotels and people opt out of stay over cleans, we'll be able to be more efficient. And I think we'll continue to leverage multiple managers across departments where we can. We haven't quantified or determined long term what stabilized FTE counts are relative to pre-pandemic other than to say we will continue to make efforts, both with our management companies and our asset management team, but put in combination with the brands and brand standards to be more efficient long term. So we're certainly hopeful that we'll have fewer FTEs long term.

[Austin Wurschmidt, KeyBanc]

Okay. That's fair. And then just last one for me. Justin, you guys have and Liz, you both have kind of highlighted the strength of your balance sheet, where leverage is annualizing 2Q results. Things have certainly improved since then. You did a good bit of match funding as well with the portfolio sale, but I do want to hit a little bit on the ATM and sort of how you weigh issuing common equity with respect to how you view your NAV and where you're trading versus private market values and then kind of how you balance that versus issuing to fund, I guess, accretive uses? What's sort of the thought process?

[Justin Knight, Chief Executive Officer]

So Liz highlighted in her prepared remarks, the fact that we emerge from the pandemic with an incredibly strong balance sheet. And so we're in a unique position not to need to issue dilutive equity in order to reset our balance sheet or to reposition ourselves on that side. In the recovery, I highlighted in my remarks, based on annualized second quarter performance, we were 4x debt to EBITDA, which is an incredibly good place to be.

So with that said, our intent, as I've highlighted in the past, is to use the ATM to fund acquisitions, and as one of the tools available to us to grow. Issuance on the ATM will occur only when we have clear line of sight to acquisitions where we can utilize proceeds accretively and to the benefit of our existing shareholders. And given the environment and pricing relative to the opportunities that we were exploring, we saw an opportunity to issue some equity.

The calculation is one that we run often. As the environment is changing, both our share price is changing and the opportunity set is changing, but the methodology remains consistent. And so I think we will selectively use our ATMs to pursue assets where it makes sense to do so. Now having exited the covenant waiver period, we have a lot of additional sources of capital that we can utilize for acquisitions, and we will weigh those and measure those against the ATM as we look at opportunities in the market.

[Operator]

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

[Anthony Powell, Barclays]

Just a follow-up to Austin's question. You talked about being a 4x debt to EBITDA. What's your appetite to go higher than that in the near term given improving results, but also given uncertainty? I guess what's the max, I guess, near-term leverage you would go to as you fund your acquisitions?

[Justin Knight, Chief Executive Officer]

I mean we've been clear, I think since we began having conversations that our long-term goal is to have low leverage as a portfolio. I think the merits of that strategy have proven themselves over the past 1 year, 1.5 years, certainly positioned us relative to peers to get out of our covenant waivers to be removed from restrictions and to not be in a position where we were beholden to the banks in ways that disadvantage our shareholders.

That said, we certainly consider leverage, especially short term as a funding source to pursue acquisitions and would be willing on a temporary basis, the increased leverage to pursue acquisitions so long as we had a clear line of sight to reducing our debt over time to somewhere around pre-pandemic levels.

[Anthony Powell, Barclays]

Got it. On the two open currently open potential acquisitions. You mentioned that your disposition is at a 5% cap when accounting for CapEx on 2021. What about the acquisitions? What are they kind of yielding currently on 2021, if you have an estimate?

[Justin Knight, Chief Executive Officer]

So again, highlighting the fact that both opened late 2018, we have 2019 numbers for them. And I highlighted in response to one of the earlier questions, both are running ahead of that. The AC, which had been opened the longest on 2019 numbers, would be right around that 6.5% cap. It's tracking ahead of that. And so on 2021 numbers, depending on how the back half of the year shapes up, we could be very close to that at 8% range on that asset.

The Greenville asset was lower, right around five on 2019 numbers, remembering the hotel opened in December. And so you have first half of the year a significant ramp of that asset. It's also running meaningfully better, more significantly better than 2019 than was the AC up 60% to 2019 in the most recent month. And so I would estimate for 2021, we would be a little bit behind the AC likely, but approaching that same level, certainly with meaningful upside beyond that.

And it's important to remember too, as we look at the portfolios, we're intentionally exiting assets that we felt had limited upside. And so looking at the portfolio we sold relative to the assets we're acquiring, that portfolio had regained meaningful occupancy early, but plateaued early. And so in most recent months, had been lagging our broader portfolio in terms of RevPAR growth, where these assets that we're acquiring are growing at a much faster pace.

And so consistent with my prepared remarks, our goal in transactions as we look to manage our portfolio is to exit assets that have more limited upside where we have significant CapEx needs and we deploy proceeds into assets that have stronger growth profiles with more limited near-term CapEx needs. And again, we'll do that around a subset of our portfolio because, by and large, the assets that we own or assets that we like and assets that we think will perform incredibly well.

[Anthony Powell, Barclays]

Got it. And AC and Aloft are two new brands for you, and they tend to skew a bit more urban, I guess, in their development profile. Is that something -- would you consider more urban select service in cases where it makes sense? Or are these kind of really one-off deals given the strong markets?

[Justin Knight, Chief Executive Officer]

We actually love select service in urban markets. And we've been clear for a long time. We're incredibly bullish, especially secondary and smaller urban markets. I think we saw them outperform through the last cycle and continue to outperform through the downturn. The demand drivers in markets like Greenville and Portland are meaningfully different than they are in downtown Chicago, New York or San Francisco.

And we've seen a demographic shift towards those markets companies expanding and reorganizing there. And the beauty of a market like Greenville, for example, is that it's not wholly dependent on a single major demand generator or industry. There's medical, there's technology, there's manufacturing and a very strong leisure component.

When we look at Portland, Portland is a market where we've had exposure in the residents and the two assets we had there, I think will complement our existing exposure in that market, much more heavy on the leisure side, but with a significant business component as well that helps to smooth out the non-leisure season.

I think we'll continue to explore assets like those and have seen incredible results over our hold period for similar assets like the select surface assets be on in Richmond or Boise or some of these other smaller urban markets, so certainly, a meaningful piece of our strategy going forward.

[Anthony Powell, Barclays]

Got it. One quick one. What are the lease payment savings from the Seattle deal on an annual basis?

[Justin Knight, Chief Executive Officer]

We were at -- we were approaching a reset, which is why we began negotiations with the the seller and the reset would have been theoretically had it occurred somewhere in the high $8 million range.

[Liz Perkins]

Perhaps, yes.

[Justin Knight, Chief Executive Officer]

Based on the calculations, that was in place in the contract. so a meaningful savings there. And again, this is an asset that has historically generated a over $9 million in free cash flow on an annual basis. So an incredibly valuable asset for us, very well located. We were able to purchase meaningfully below appraised value that the seller had and below where we had been discussing a purchase pre-pandemic.

[Anthony Powell, Barclays]

What was the 2020 lease payment? So just sort of from a modeling purposes

[Liz Perkins]

I'd have to go back and check. It was almost -- the new would be almost double that the...

[Liz Perkins]

Yes. The new been almost double. We were in negotiations with them and when the pandemic hit, they were gracious and so 2020 would even be stabilized. So -- but the exposure was significant.

[Operator]

Our next question comes from the line of Tyler Batory with Janney. Please proceed with your question.

[Tyler Batory, Janney]

Add me to the list of people confused with the share price performance, but good on opportunity, I guess. So I know we've covered a lot of ground here, and there are other folks I know that have questions. So I'll be brief. Just in terms of some of the changes to breakfast and the social hours in the evening, talk a little bit more about how you're thinking about potentially adding back some of those services? And just also touch on some of the conversations with the brands in terms of potentially moving towards reinstituting some of those standards?

[Liz Perkins]

All along the way, as we've recovered occupancies in certain markets, we've added back some of those services. And part of the increase even over the past three to six months has been as occupancies have increased and as leisure demand has picked up and people have felt more comfortable adding back or trying to add back F&B labor as well.

So we've added back where it made sense just at modified -- with modified offerings and have really taken an approach. Of course, our team is benchmarking what's working and what's not and sharing best practices, but really, given the flexibility that the brands have afforded us, been specific around offerings in markets based on occupancy levels and consumer preferences and demand, but a reduced offering.

And so we are working with the brands to think through long-term standards. And I think there is a way that we can be more efficient, especially with the comp breakfast offering where it's part of -- it's a significant part of the value proposition. It's important to us. It's important to our guests.

But the number of things that you offer on the buffet or how it's delivered, leveraging scale across brands to drive down pricing, all of those things are things we're talking to the brands about. So I think that there's some long-term savings there. The brands certainly are working with us to try to get there as well.

So the evening social with residents and Homewood ongoing conversations and ongoing testing, particularly on the Homewood side related to that. But that's been scaled back, and we have not brought that back to date. That wasn't a huge portion of the comp service cost. It's primarily around breakfast, but certainly would be a savings if that was meaningfully reduced or eliminated long term.

[Operator]

Our next question comes from the line of Dany Asad with Bank of America. Please proceed with your question.

[Dany Asad, Bank of America]

I know we talked about margins a lot, but I just had like one more for you, if you will. So if we already have seen like the July industry FR broke away from Q2 trends. And margins are already running, like you said, they're at like close or at 2019 levels in May and June. Relative to '19, should we expect like a sequential improvement in margins into Q3 or do you think staffing issues can offset any of those potential gains?

[Liz Perkins]

We don't have financials for July. So it's too soon for me to say with certainty. We still have open positions. And so I think that, that will help from a flow-through perspective, and rate obviously sequentially increased. So rates certainly helps, but how that flows to the bottom line? I'm not quite sure.

Again, I think we anticipate and part of the reason we took up for the back half of the year, the expense reduction ratio expectations relative to what we gave earlier in the year is because with rate improvement, we do feel like we can flow more to the bottom line, and we'll have some strength there.

It's just we're balancing that with the unknowns around labor, how many people we can hire, what wages may do, and there's some talk around inflation, too, although some people say that's transitory. So there's just a lot of variables. It's too soon for us to really give guidance.

[Dany Asad, Bank of America]

Fair. Okay. Got it. And then just for the net -- from an EBITDA perspective, the net impact on the portfolio, from the dispositions and the acquisitions that were announced for July. Do you have a sense -- or is it still too early, but do you have a sense for kind of what the net impact will be on the portfolio?

[Justin Knight, Chief Executive Officer]

I mean, we haven't given guidance for the overall portfolio. So to give specific guidance for these assets for the back half of the year, I'm not confident it would be particularly useful to you.

[Dany Asad, Bank of America]

Or even on a stabilized basis?

[Justin Knight, Chief Executive Officer]

On a stabilized basis, relative to '19, if you look at our total transaction activity, we have been or will be upon completion of these transactions, net acquirers of assets. And so there should be positive impact relative to '19 on a stabilized basis from our transaction activity so far. And as I've highlighted a couple of times now, we're not done. We expect to have additional transactions to announce in the not distant future. So looking at all of our transaction activity combined, our expectation would be that the net impact to EBITDA would be to increase there.

[Operator]

Thank you. Our next question comes from the line of Dori Kesten with Wells Fargo. Please proceed with your question.

[Dori Kesten, Wells Fargo]

I apologize if this has been addressed. But based on your expectations of operating trends and now that you've exited the covenant waiver period, when do you think is the earliest you'd be required to return to paying a common dividend?

[Liz Perkins]

Given the fact that we haven't given guidance, I don't know that we can answer that with conviction though or certainty. And certainly, it's something that our Board is -- our Board would be involved in from a decision standpoint. But from a requirement standpoint, we have carryforward losses from last year, transactions and taxable gains, and impact that calculation as well. So, there's a lot of variables still at play for this year to know whether we'd be in a position where we'd be required to pay a dividend or not. So I'm not sure that we can give clear direction on that at this point.

[Justin Knight, Chief Executive Officer]

Certainly, having exited the covenant waiver as a result of strong results puts us closer to that though for the reasons Liz highlighted, we're not in a position to give specific timing yet.

[Operator]

Our next question comes from the line of Michael Bellisario with Baird. Please proceed with your question.

[Michael Bellisario, Baird]

Just want to follow up on that last question. I think I know the answer, but maybe can you just -- how are you guys thinking about the capital allocation, balancing acquisitions and a higher dividend payments. I know you can pay a higher dividend, but how are you thinking about the potential uses of proceeds and the relative returns, maybe at least on a 6-, 12-month basis as you look out right now?

[Justin Knight, Chief Executive Officer]

I think we've been clear in past calls that we're incentivized as an executive team to drive and to maximize total return for our shareholders. Dividend has historically been an important component of that is something that we weigh continually versus other uses of capital. In the near term, as we've demonstrated, we're more apt to utilize cash to pursue acquisition opportunities.

That said, to the extent we continue to outperform as we have year-to-date, we'll be in a position where we have significant cash flow, which would put us in a position to increase our dividend in the not-too-distant future as well. I don't think we see them necessarily as either/or, but as two ways that we can create incremental value for our investors.

[Michael Bellisario, Baird]

Got it. And I assume the overarching gating factor for both of those options is the annualization of your debt to metrics and wanting to stay within the ranges that you're allowed under the covenant agreement, right? That's really the gating factor, at least over the next couple of quarters?

[Liz Perkins]

Certainly, I mean, with any capital allocation decision, we're monitoring how that would impact, how we would test covenants relative to the modified metrics and historic metrics. So certainly, we'll be balancing all of that as we think about our capital allocation decisions.

[Michael Bellisario, Baird]

Got it. And then just switching gears, just back to July, I may have missed it, but could you guys provide a July RevPAR percentage change versus '19? I don't think you've actually given that yet.

[Liz Perkins]

We have not given that yet. And I think if you look at where we were from an occupancy perspective and where we shared relative to 2019. And if you look at the breakdown from weekend, we don't have final numbers, but you can get close to where we would be which would...

[Michael Bellisario, Baird]

Fair to assume the 81.7% occupancy that you guys reported in July of 2019, pulling out from last year's press release and other portfolio has changed a little bit. Is that still a fair percentage?

[Liz Perkins]

Yes.

[Michael Bellisario, Baird]

So my math is, I guess, you gave rate down mid-single-digit occupancy, down 8%. We're still talking July RevPAR is down 10-plus percent, plus or minus, right? We're not talking July is a couple of percentage points off. I think there's lots of confusion around.

[Liz Perkins]

Correct, correct.

[Michael Bellisario, Baird]

Yes. Okay.

[Liz Perkins]

Yes, correct.

[Michael Bellisario, Baird]

And then, I know...

[Justin Knight, Chief Executive Officer]

With the primary driver being occupancy still not getting back to prior levels. Yes.

[Michael Bellisario, Baird]

Yes. Right, right. And then just on margins, I know nothing for July to provide. But for June, can you maybe provide some specifics on what EBITDA margin was? And how June specifically compared to 2019 on a year-over-year basis?

[Liz Perkins]

I don't have it right in front of me. I could follow up with you, Mike, on that.

[Operator]

Our next question comes from the line of Chris Darling with Green Street.

[Chris Darling, Green Street]

Just a couple of quick questions from me, regarding July's asset sales; first, is there any difference in the price you can achieve by selling a cluster of hotels versus, say, selling individually?

[Justin Knight, Chief Executive Officer]

A lot of that depends on the market. We had for really preceding the pandemic, seen more individual asset trades than we had portfolio trades. But in prior periods, so looking back a decade or so, portfolios had tended to trade at premium pricing. I think there's increasingly a pool of buyers who are interested in a massing scale in select service assets, which has created an environment, which we anticipate will persist where portfolios trade on par or at premiums to individual asset sales.

I think that would be consistent with what we've seen in the past. And I think while our portfolio sale was early and the buyer for the pool was a group that had historically done more individual asset transactions. There are an increasing number of private equity groups and other investors who are interested in larger portfolios and financing is available for those at this point in time.

[Chris Darling, Green Street]

Got it. And then secondly, you mentioned in your prepared remarks, tilting the portfolio more towards markets with stronger growth outlooks, sort of the rationale for the portfolio sale. I'm just wondering, should we take that comment more as tilting around stronger submarkets? I was just thinking about those 20 different properties seem to be a pretty wide mix of markets and regions across the country.

[Justin Knight, Chief Executive Officer]

Absolutely, I mean if you look at our broader transactions over time, we sold an asset in greenfield and now have another asset in Greenville under contract. I think in some instances, the repositioning will be within markets. Exiting one particular suburb to move into a new suburb or a downtown area where we anticipate greater growth.

The broad strategy continues to be diversification. And really given our portfolio's outperformance, we're not looking to radically shift our strategy just to fine-tune around the edges in order to maximize the growth rate throughout the recovery and to adapt to changing trends within individual markets and across the country as a whole.

[Liz Perkins]

And Mike, going back to your question for June, whether you look at it on a comparable basis, which was slightly better or an absolute basis, for June, we were right on top of 2019 margins, hotel EBITDA margins.

[Operator]

Thank you. Ladies and gentlemen, at this time, there are no further questions. I would like to turn the floor back Justin Knight for closing comments.

[Justin Knight, Chief Executive Officer]

Thank you. We really appreciate everybody joining us today. This was an incredibly busy quarter for us and one that we're incredibly proud of. Again, a huge thank you to our team here at our corporate office and the many individuals we work with at the brands and with our management companies. This has been a challenging time. We've all learned a lot of new things, but are incredibly proud about our performance. We hope that you're traveling, and that as you travel, you'll take an opportunity to stay with us at one of our hotels. And we look to talking to all of you here in the not-too-distant future.

[Operator]

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