Apple Hospitality REIT (APLE) Q3 2021 Earnings Call Transcript

Apple Hospitality REIT (APLE 0.84%)
Q3 2021 Earnings Call
Nov 05, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Apple Hospitality REIT third quarter 2021 earnings call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Clarke. Kelly, you may begin. 

Kelly Clarke -- Vice President, Investor Relations

Thank you, and good morning. Welcome to Apple Hospitality REIT's third quarter 2021 earnings call. Today's call will be based on the earnings release and Form 10-Q, which we 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 notes thereto as well as the risk factors described in our 2020 annual report on Form 10-K and other filings with the SEC. Any forward-looking statement that Apple Hospitality makes speaks only as of today, November 5, 2021, and the company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, non-GAAP measures of performance will be discussed during this call.

Reconciliations of those measures to GAAP measures and definitions of certain items referred to in our remarks are included in yesterday's earnings release and other filings with the SEC. For a copy of the earnings release or additional information about the company, please visit applehospitalityreit.com. This morning, Justin Knight, our chief executive officer; and Liz Perkins, our chief financial officer, will provide an overview of our results for the third quarter 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. Our differentiated strategy for hotel investment developed and fine-tuned over two decades, enabled us to produce strong relative operating results through post-9/11 declines in travel and the financial crisis and to drive incremental value for our shareholders through the subsequent recoveries. While the challenges created by a global pandemic were unprecedented in their severity, our performance over the past 20 months is a tribute to the collaborative efforts of our corporate brand and management teams and a testament to the merits of our strategy of investing in a broadly diversified portfolio of high-quality rooms focused hotels with low leverage. Third quarter operations across our portfolio further improved after strong second quarter performance, driven by a mix of leisure, government, healthcare, automotive, construction, disaster recovery, insurance, athletics, education, and local and regional business-related travel.

RevPAR for our portfolio of hotels was $100 for the quarter, with occupancy of 72% and ADR of $140. Third quarter ADR for our portfolio exceeded third quarter 2019, helping to shrink the gap from 2019 RevPAR to only 10%. As top line fundamentals have strengthened, we have continued our efforts to maximize operational efficiencies by effectively managing costs across our portfolio to achieve strong bottom line results despite inflationary pressures and a challenging labor environment. For the quarter, we produced adjusted EBITDA of $92 million; modified funds from operations of $76 million; and comparable hotels adjusted hotel EBITDA margin of approximately 38%, a 30 basis point improvement over the same period in 2019.

We are pleased with the overall improvement in occupancy during the month of October, which rose back to approximately 73%. With children back in school and the transition to fall, which is generally characterized by lower leisure demand, we are encouraged by the continued strength in our weekend occupancy as well as the improvement we saw midweek relative to August and September, a further indication of improvement in business transient demand. Consistent with historical seasonality, we expect to see slightly lower occupancy for our portfolio in November and December, but we believe we will continue to see strength in leisure demand and improving business transient demand through the remainder of this year and throughout 2022. Looking forward, we have meaningful upside in our portfolio.

First, our hotels have produced industry-leading results despite historical dependence on traditional business transient, a demand segment that has lagged the more robust leisure recovery. While our ability to pivot to and benefit from existing demand shows the versatility and broad appeal of our assets, we are optimally positioned to benefit as business travel increases. Second, new supply, which represented a headwind for us in 2019 has pulled back significantly as a result of rising construction costs and a lack of available financing. Less than 50% of our hotels have competing hotel projects under construction within a five-mile radius.

This is down 22 percentage points from the first quarter of 2020 and is the lowest we have experienced since we began tracking for our portfolio. Given the lead times associated with new hotel openings, we expect the lack of new supply to be a tailwind for us for several years. Third, our portfolio has meaningful exposure to markets that are benefiting from demographic and economic shifts that have been accelerated by the COVID pandemic with multiple demand generators, business-friendly local governments, lower cost of living and popular leisure and entertainment venues. And fourth, we anticipate that the strong rate environment, combined with streamlined operations will create an opportunity to produce attractive margins despite inflationary and labor pressures.

Simply stated, a more significant portion of the incremental dollars we produce on the top line going forward will flow to the bottom line. The upside in our portfolio is further strengthened by our recent acquisitions and dispositions activity, which has lowered the average age and improved the quality of our portfolio, reduced our exposure to near-term capex and adjusted our market mix and positioning to elevate future performance. During and subsequent to the third quarter, we acquired four hotels for a combined total of approximately $186 million. In August, we acquired the existing AC Hotel and in September, we acquired the newly constructed Aloft Hotel, both ideally located in Downtown Portland, Maine, along the city's working waterfront for a combined total of approximately $118 million.

Both hotels have performed exceptionally well with the AC, which opened in 2018, performing well ahead of 2019 and the Aloft ramping quickly. We anticipate that we will benefit from synergies in both sales and G&A, which will bolster the performance of these two assets and the Residence Inn we own in market. In September, we also acquired the existing Hyatt Place in Downtown Greenville, South Carolina, which has continued to benefit from strong weekend leisure demand and consistently produces RevPAR above our portfolio average for approximately $30 million. With the acquisition of this hotel and the sale of the Residence Inn we previously owned in market, we have meaningfully enhanced our proximity to major BT and leisure demand generators and the ability to benefit from future growth in Greenville.

And in October, we acquired the existing Hilton Garden Inn in Downtown Memphis, Tennessee, which we had not previously announced, for approximately $38 million. The Hilton Garden Inn opened in January 2019 and is located in close proximity to our Downtown Hampton Inn and within walking distance of Beale Street, AutoZone Park and a variety of corporate demand generators. We were able to acquire the Hilton Garden Inn for just under a 9% cap rate on 2019 numbers. Here, too, we expect to benefit from sales and G&A synergies.

This acquisition and the earlier sale of our Homewood Suites significantly enhance our positioning within the market. In August, we acquired the fee simple interest in the land at our Residence Inn in Seattle, Washington for approximately $80 million, consisting of a $24 million cash payment and a one-year note payable to the seller for $56 million. During the quarter, we also successfully completed the portfolio sale we discussed on our last call, which included 20 hotels for a gross sales price of approximately $211 million. Since the beginning of the pandemic, we have purchased nine hotels for a combined total of $347 million and sold 24 hotels for a combined total of $245 million.

We continue to actively underwrite additional opportunities and have four hotels under contract for purchase for a combined total of approximately $205 million, including the previously announced Embassy Suites to be constructed in Madison, Wisconsin for an anticipated purchase price of approximately $79 million. Our Hilton Garden Inn and our Homewood Suites in Fort Worth, Texas, just outside of Downtown and ideally located near the area's major hospitals, TCU campus and within close proximity of the Will Rogers Coliseum. The hotels opened in 2012 and 2013 and are under contract for a combined total of approximately $51 million, just over a 7.5% cap rate on 2019 numbers after taking into consideration anticipated PIP related capex of just over $2.5 million, and an 8% cap rate after adjusting for rooms out of service for the Homewood Suites, which was under renovation. And finally, the Hampton Inn & Suites in the Pearl District of Portland, Oregon for approximately $75 million.

The Hampton Inn opened in 2017 and is ideally located to benefit from a mix of business and leisure demand with top BT accounts, including a variety of manufacturing tech and financial companies. The purchase price is approximately a 7.5% cap rate on 2019 numbers after taking into consideration anticipated PIP related capex of just under $0.25 million and is attractive relative to recent comp trades in market and replacement value. We expect to close on the hotels in Fort Worth, Texas and Portland, Oregon during the fourth quarter of this year and on the Embassy Suites in Madison upon completion of construction. We have been and will continue to be intentional in the build-out of our portfolio, pursuing assets that are additive to those that we currently own and where we feel pricing will allow us to achieve our targeted returns.

Looking at our activities since the onset of the pandemic, we have acted in ways that have improved the quality of our portfolio, enhanced our positioning, and increased our exposure to markets that we anticipate will outperform over the next cycle. As we finish 2021 and move into 2022, we are building off a strong base. Operationally, our hotels are approaching 2019 performance levels with the potential for additional upside as we begin to see a more robust recovery in business transient. Having achieved positive corporate level cash flow early in the pandemic, we preserved our balance sheet providing us with a strategic advantage as we compete for deals and evaluate other capital allocation opportunities.

Our recent transaction activity has further strengthened our position. We were the first of our peers to achieve positive hotel level cash flow, the first to achieve corporate level breakeven and the first eggs at our covenant waivers. We have been net acquirers of assets since the onset of the pandemic and have at the same time avoided dilutive capital raises or over-encumbering our balance sheet. Our strategy has been tested and consistently yielded compelling results for our investors.

We are optimistic about the future and incredibly well positioned to drive long-term value for our shareholders. It is now my pleasure to turn the time over to Liz, who will provide additional details on our balance sheet and operations during the quarter. 

Liz Perkins -- Chief Financial Officer

Thank you, Justin, and good morning. Coming off a strong second quarter, demand exceeded our expectations in July, resulting in occupancy of 76% for the month, down only 8% from July of 2019. We have been able to recover rate more quickly than in past cycles, and we achieved third quarter ADR of $140, exceeding the same period of 2019. Even with seasonality and increasing cases of the Delta variant modestly affecting occupancy in August and September, ADR remained above 2019 levels and we are pleased that the gap to 2019 RevPAR meaningfully decreased quarter over quarter from down 26% in the second quarter to down 10% in the third, again, exceeding our full quarter expectations.

We saw continued strength in October with occupancy of approximately 73% for the month, comprised of weekday occupancy of 68% and weekend occupancy of 85%. Both weekday and weekend increased relative to August and September. Strengthening midweek occupancies in particular, to over 70% in October indicate improvement in business transient demand, traditionally a primary driver for operating results at our hotels. And weekend occupancies consistently exceeded pre-pandemic levels, showing continued strength in leisure.

These positive trends, our in-house revenue team working closely with our management company revenue support and on-site sales teams to maximize top line performance, the quality of our assets, the wide distribution of vaccines and concerns related to the Delta variant beginning to taper, give us confidence that our broad market diversification will continue to drive outperformance as business transient demand continues to improve. 30% of our hotels had RevPAR for the quarter that exceeded the same period in 2019. Consistent with broader national trends, the majority of these hotels are located in Sun Belt states. A few notable exceptions included our newly acquired AC in Portland, Maine, which had RevPAR of $330, 36% higher for the quarter than the same period in 2019.

Our Colorado Springs Hampton Inn and Provo, Utah Residence Inn, which were up 11% and 9%, respectively. Our suburban hotels continue to outperform urban hotels in the quarter with occupancy of 74% as compared to 67% for comparable hotels. As has been the case in prior quarters, hotels located in markets with greater historical exposure to large groups and conventions and the two full-service hotels in our portfolio also underperformed. Looking forward to next year, we anticipate demand will strengthen in many of these markets, further boosting performance for our portfolio.

Hotels like our Hilton Garden Inn located in Chicago O'Hare, our Courtyard in Seattle and our SpringHill Suites in Burbank, all of which have historically been strong performers had RevPAR for the quarter down 38% or more versus 2019. With anticipated improvement in BT and group demand, hotels like these represent meaningful upside for us as we continue to move through the recovery. In terms of room night channel mix, brand.com bookings, which moved from 33% of room nights in the first quarter to nearly 38% of room nights in the second quarter came down slightly to 37% in the third quarter. OTA bookings continue to be elevated relative to prior years, but decreased slightly from just over 17% of room nights in the second quarter to under 16% in the third quarter.

Property direct bookings increased from 28% in the second quarter to 30% in the third quarter, which is almost six percentage points higher than the same period in 2019. The result of our management companies with the support of our asset management and revenue teams continuing to adjust strategies and shift focus as the environment evolves. Their collaborative and dynamic efforts are helping us capitalize on the demand available in market today. Looking at third quarter same-store segmentation, there was a notable shift from other discounts to PAR negotiated as occupancy continued to strengthen, another indication of increasing business transient demand.

PAR was up almost four points quarter over quarter to 34%, offsetting declines in other discounts, which fell from 37% in the second quarter to 31% in the third. Negotiated was up 1.6 points to almost 16%, increasing even further in October. Turning to expenses. Total payroll per occupied room for our same-store hotels was under $31 in the third quarter, down 6% to the third quarter of 2019, but up from 27% -- $27 per occupied room in the second quarter as we continue to fill vacant positions and adjust wages in a more competitive labor environment.

Same-store hotels rooms expenses, excluding payroll were down 10% per occupied room compared to 2019 for the quarter, with over half of the savings coming from adjustments to complimentary breakfast and evening social offerings. Our team's relentless efforts to control costs and maximize profitability resulted in third quarter 2021 comparable adjusted hotel EBITDA of approximately $107 million and comparable adjusted hotel EBITDA margin of approximately 38%, up 30 basis points to the third quarter of 2019. MFFO was approximately $76 million or $0.33 per share for the third quarter of this year. As we have emphasized in the past, strong bottom line performance is dependent on both top line performance and expense controls.

And while we are still shy of 2019 RevPAR levels, we exceeded pre-pandemic margins for the quarter. As we continue to focus on managing expenses, our bottom line performance has been meaningfully bolstered by the rapid recovery in rate, which, as Justin mentioned, exceeded 2019 levels for our full portfolio during the third quarter and remaining strong into October. With revenue down 16% in the third quarter relative to the same period of 2019, we were able to reduce total hotel expenses by 17%, an expense reduction ratio of more than one significantly higher than the full year estimate previously provided. Taking into consideration our performance year-to-date, inflationary and labor pressures and seasonal fourth quarter revenue trends, we continue to expect to achieve an expense reduction ratio between 0.8 and 0.9 for the full year.

As we think about capex, consistent reinvestment in our hotels has always been a key element of our strategy. During the first nine months of 2021, we invested approximately $10 million in capital expenditures, and we anticipate investing an additional $15 million to $20 million in capital improvements during the remainder of 2021, which includes scheduled renovation projects for eight hotels and a variety of capital projects. 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. Shifting to our balance sheet.

As previously announced, effective July 29, with the strength in performance and our conservative capital structure, we exited the covenant waiver period. As a result, we are no longer subject to the lender and post limitations on investing and financing activities associated with the covenant waiver restrictions. During the quarter, as a result of the early exit, we benefited from lower interest rates, which represented approximately $8 million savings on an annualized basis. As of September 30, 2021, we had $1.4 billion in total debt outstanding, with a weighted average interest rate of 3.5%, consisting of $502 million of mortgage debt secured by 28 hotels and $870 million outstanding on our unsecured credit facilities.

At the end of the quarter, we had available cash on hand of approximately $39 million and unused borrowing capacity under our revolving credit facility of $425 million, with no scheduled maturities for the remainder of 2021. Without having to further encumber our balance sheet, we have been able to opportunistically allocate capital to enhance the growth profile and quality of our portfolio through dispositions and acquisitions. As we look forward, we believe there will be additional opportunity to improve the EBITDA growth profile of our portfolio. We have a proven ability to drive strong operating results throughout economic cycles and with current trends showing continued strength in leisure and an increase in business transient demand, we are confident in both the industry recovery and the continued upside for our portfolio specifically as we move into 2022.

This completes our prepared remarks. We would now be happy to answer any questions that you may have for us this morning. 

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from Neil Malkin with Capital One Securities. Please proceed with your question. 

Neil Malkin -- Capital One Securities -- Analyst

Thanks. Good morning, everyone. Morning. Great job during the quarter.

First question, maybe for Liz. Obviously, ADR got back to -- or actually surpassed prior peak or '19 levels. Can you just comment on sort of what the growth cadence or potential could be for ADR near-term just as we haven't really seen a return of BT in a meaningful or a robust return of BT, which, as you said, it drives a substantial amount of demand in your hotel? So if you can maybe kind of help us think about how that should trend or how that could trend, that would be great.

Liz Perkins -- Chief Financial Officer

Absolutely. I can try to answer your question with the information that we have available to us from a booking perspective and also just thinking back to our comments, even early on in the recovery around occupancy levels in which we can really drive ADRs. We had felt that we really would start to have pricing power around 60% to 70% occupancy. And if you can see over the third quarter that, that materialized.

So we really were able to drive rate, particularly on high occupancy nights and leisure demand being less price sensitive. I think we are optimistic based on what we're seeing in our booking trends around leisure even into the fourth quarter, both from a rate and what's on the books on the weekends going into the next couple of months. With continued leisure demand and the upside in business transient, we're optimistic about pricing power going forward. Again, we don't have a lot of visibility into future bookings.

But even with anticipated seasonality in November and December, potentially putting pressure on that occupancy level, we're pleased to see the rates that we have on the books over the next two months. Some of that driven by, again, what's being booked on the weekends. But even if I look at what's on the books for November and December from a mix perspective, or negotiated business continues to tick up from where it was during the third quarter, where it increased to in October and again increasing in November and December as well.

Neil Malkin -- Capital One Securities -- Analyst

Sure. I guess maybe another way to ask it or look at it is, can you kind of give us a flavor or a sense for what, like a mid-week or, I guess, during the week, ADRs look like of leisure versus a typical or average business rate? I guess, just to try to understand how much more ADR could be listed beyond market rates just as you get that more favorable mix into your hotel. Does that make sense, like if BT is typically $20 above leisure, or something like that, I guess, is what I'm asking?

Liz Perkins -- Chief Financial Officer

Yes. What we have seen over the past couple of quarters is leisure demand being a little less price sensitive than BT. And historically, corporate demand was higher rated for our portfolio. So there is still a gap between BT, which like as you mentioned, is lower typically -- or higher typically, it's still lower than leisure.

And so we do anticipate that there's upside from a rate potential with corporate negotiated coming back.

Justin Knight -- Chief Executive Officer

And Neil, look historically, we've run our highest occupancies midweek, Tuesday, Wednesday, and Thursday. Looking at our -- even our weekday occupancies in the summer, where we ran higher weekday occupancies, generally speaking, our highest occupancies weekday wise were shoulder nights. So it's -- the occupancies were propelled primarily by leisure travel. Looking forward, we have a strong base of business transient, but we're still running generally in the 60s or a 10-ish percent occupancy gap to our weekend occupancies.

And as we highlighted in past calls, as we get to that somewhere around 70% occupancy, we're in a position to much more meaningfully drive rate. Assuming leisure demand stays strong on the weekend, and we maintain these higher occupancies, and we begin to build mid-week occupancy on our historically peak nights, the Tuesday, Wednesday, Thursday, we would be in a position to dramatically improve rate potentially to where we were prior to the pandemic.

Neil Malkin -- Capital One Securities -- Analyst

OK. Great. Justin, maybe last one for me. If you could talk about just the acquisition environment.

Again, you've been over the last couple of quarters, I would say, the most aggressive with your verbiage on opportunities and kind of getting past COVID and putting your balance sheet to work. So with that said, you had another active quarter. Can you just talk about what that -- your active pipeline looks like? Has it picked up over the last three to six months? Is there -- what kind of opportunities are you seeing in any portfolio opportunities would be great to hear?

Justin Knight -- Chief Executive Officer

Yes, absolutely. We had highlighted that we expected the volume of transactions, the increase as we move through the recovery, and we have seen that significantly more deals coming to market now. And we're actually incredibly pleased with the quality and selection that's available to us now. You've seen us be active as we said we would be once we had our house-in order and had established ourselves on firm footing from an operational standpoint.

And I think it's safe to assume that we will continue to be active. We are in constant dialogue with a variety of sellers competing in competitive bidding processes but also having conversations directly with potential sellers around off-market deals, and both have yielded for us. Looking at the deals we currently have under contract, a portion were came through competitive bidding processes. But the two assets in Fort Worth and the Portland, Oregon asset, were negotiations that we had directly with the group that we have an existing relationship with.

And I think we have a track record of building portfolios, having acquired as many as 74 hotels individual transactions in a single year, and certainly have the capacity to continue to do that. We have a tremendous amount of experience in the space. We can underwrite quickly, and we have a reputation in the industry for doing what we say we're going to do. We have confidence in our underwriting and ability to execute.

I think it's significant that we've exited our covenant waivers now, and that puts us in a position to act very quickly, which early was a hindrance for us, especially competing with private equity players. But given our track record, our history in the space and the availability of potential acquisitions, we see ourselves as continuing to be active players throughout the recovery.

Neil Malkin -- Capital One Securities -- Analyst

OK. Thank you, guys. Congrats again on a nice quarter. 

Operator

Thank you. Our next question is from Kyle Menges with B. Riley Securities. Please proceed with your question. 

Kyle Menges -- B. Riley Financial -- Analyst

Morning. This is Kyle on for Brian. I was hoping just on the acquisition front, if you could just provide a little more color on maybe who the sellers are and also seller motivations?

Justin Knight -- Chief Executive Officer

Certainly. I think the bulk of the deals that we've underwritten have been with sellers that are owner operators. I think if you look at the deals we've closed since the onset of the pandemic, a portion were with merchant developers where we had made forward commitments for specific deals, looking at what's coming to market now, the bulk of the assets coming to market are coming to market from groups that have developed assets, either with the intent to hold for a longer period of time or to hold for a shorter period of time and to ultimately take to market. I think given the number of potential buyers and the recent trades, sellers view the market as being potentially favorable.

And I think that's resulted in a meaningful increase in available deals. And that's consistent with what we've seen in past cycles. And really, our expectation is that it will continue to increase in terms of the volume of deals that we'll have to look at. To date, we have not seen a significant number of distressed deals coming to market, the sellers that are bringing assets to market today, generally speaking, are doing so opportunistically.

In some cases, there are unique structural issues that make near-term sale advantageous for the groups. And that was certainly the case with the group that I mentioned, selling the assets in Fort Worth and Portland. Our expectation is that over the coming years, as we continue to see the recovery play out, there will be more forced deals coming to market, where the brands get more aggressive in demanding renovations or banks lose patience with groups that have been struggled to make payments. And I think a portion of those assets may be attractive to us.

But by and large, we're most interested in those assets that are similar to those that are on the market now, assets that are newly built, high quality in the market that we anticipate will meaningfully outperform. From a portfolio standpoint, to date, even on the portfolio side, those groups exploring opportunities are mostly groups that are on our operators who have built small portfolios. And as I highlighted before, generally speaking, those portfolios are -- would be most interesting to us. Though when you look at the scale of our existing portfolio, we're incredibly tactical as we explore potential acquisition opportunities, looking to ensure that what we add to our portfolio supplements what we already own.

And that we're not through acquisitions overly exposing ourselves to markets. And quite frankly, that we're acquiring assets where we have a high degree of confidence that we can achieve our targeted returns. In my prepared remarks, I highlighted historical cap rates. It's important to note that the assets that we're acquiring have, on average, outperformed our existing portfolio in the pace of recovery.

And our expectation will be that in the near term, those assets will yield north of an 8% return for us. I wanted in my prepared remarks to provide you with context. So you could see how close we were. But as I've highlighted in the past, these are markets that, generally speaking, are on the leading edge of the recovery and as a result, have performed incredibly well relative to the past year, but also relative to prior peaks.

Kyle Menges -- B. Riley Financial -- Analyst

Great. Thanks. That's helpful color. And then I think you mentioned about $8 million in annualized interest rate savings from exiting the covenant waivers, so that's about $2 million per quarter.

I was curious how much of that was realized in the third quarter?

Liz Perkins -- Chief Financial Officer

It's a full annualized calculation, both based on the interest rate reduction and lower average borrowings.

Kyle Menges -- B. Riley Financial -- Analyst

OK. 

Operator

Thank you. Our next question is from Anthony Powell with Barclays. Please proceed with your question.

Anthony Powell -- Barclays -- Analyst

Hi. Good morning. I guess maybe a basic question. Who is the highest rate of customer right now? Is it a leisure traveler? And does that continue into next year? And do you think that's a permanent change if it is leisure?

Justin Knight -- Chief Executive Officer

The highest rated customer tends to correlate with our highest occupancy nights. And so because leisure is driving higher occupancy on weekends, that's where we're currently achieving the highest rates. As I highlighted earlier, our expectation is that as we build back mid-week occupancy, we'll see improvement in midweek rates as well. Historically, our corporate travelers have been less price sensitive than our leisure travelers.

But it's the kind of basic economics, supply and demand. To the extent there are fewer rooms available and people wanting to stay in them, we have greater pricing power. And as Liz has highlighted in our past calls, the revenue management systems that the brands have put in place have done really an admirable job assessing demand in market and making real-time -- helping us to make real-time adjustments to rates in order to maximize on peak occupancy nights. When we look at business transient segment specifically, there are a lot of potential accounts that we capture there.

And with lower occupancy in many markets midweek, we've shifted our focus away from what had traditionally been higher-rated corporate business to some lower-rated corporate business in order to build occupancy. Part of the reason that the 70% mark from an occupancy standpoint has been kind of a magic occupancy number for us historically is that above that we're in a position to begin to yield out some of the lower-rated accounts or lower-rated business and replace with higher rated accounts. So some of the movement in rate is an adjustment in the rate itself but the more exponential growth comes as we move out accounts that are lower-rated accounts and replaced with higher-rated accounts. And our expectation is that as we see increased business travel, which we and I think most in the industry anticipate over the coming year, we'll be in a position to more meaningfully drive business transient.

And our expectation would be that as we build back occupancy to similar levels, we would have similar pricing power on the business transient side to what we've seen on the leisure side.

Anthony Powell -- Barclays -- Analyst

Got it. That's helpful. So looking to next year, do you expect to see core business transient have the same price in elasticity that you're seeing on the leisure side? Or do you expect maybe some more pushback if you start to push rates a bit higher on that midweek business?

Justin Knight -- Chief Executive Officer

We expect currently to have similar dynamics. Again, a lot of the pushback historically has been supply and demand based. And the corporate accounts that we've negotiated with had the advantage of being able to come to the table, committing to and promising certain volume of business. I think given that most of our BT accounts will be ramping, they won't be in the same position that they were prior to the end of the last cycle from a pricing standpoint.

On top of that, from a supply standpoint, I highlighted in my prepared remarks that we've seen a significant pullback in new construction or new construction sites within our markets, really, the less than 50%. It's right around 47% of our hotels have any competing supply under construction within a five-mile radius. That's the lowest that we've ever had since we began tracking. But important to that, and this is detail in addition to what I provided in my prepared remarks.

If we look at new construction starts since the beginning of the pandemic, nearly 40% of the projects that are currently under construction within our markets were started before March of 2020. And less than 25% of those projects were started this year. So there's been a meaningful pullback in terms of new construction starts. Given that it takes two to three years for projects to come online, we see meaningful tailwinds moving forward, which as we think about pricing power in our portfolio puts us in a radically different position than we were as we hit peak last cycle.

Anthony Powell -- Barclays -- Analyst

That's helpful. Thanks. And maybe one more. Some of the full-service REITs have talked about private equity competitors being able to get extremely attractive financing and driving up value and bidding processes.

Are you seeing that when you're looking at marketing deals? And how do you rate your ability to, I guess, compete on valuation as you look to acquire hotels?

Justin Knight -- Chief Executive Officer

I mean, I think it's clear that the debt markets are open. Looking at our incremental borrowing rate, we have adequate capacity on our line of credit. And I think given our ability to use our line of credit and what we're paying for incremental borrowing on our line of credit, we do not see ourselves as being disadvantaged. Now in terms of total leverage, that we have historically used, we -- private equity uses significantly more leverage than we do or have or will.

That said, I think we've proven that we can find assets that fit our investment criteria. And to a large extent, we've been doing this for a long time, and that matters to sellers. The fact that we're a known quantity that they know what to expect when they enter into a contract with us, I think, puts us in a position to compete very effectively with a number of groups that have come into the space recently.

Anthony Powell -- Barclays -- Analyst

Thank you. 

Operator

Thank you. Our next question is from Tyler Batory with Janney. Please proceed with your question. 

Tyler Batory -- Janney Capital Markets -- Analyst

Good morning. I appreciate all the commentary, that's all been very helpful. First question for me is on the margin side of things, very strong there. Obviously, the ADR helps.

But can you talk a little bit more about what you've been able to do on the expense side of things just to continue to move those lower as occupancy you guys continue to build back?

Liz Perkins -- Chief Financial Officer

Tyler, a good question. I mean, similar themes to what we've talked about on prior calls. We continue to work with our management companies and the brands on long-term operating models. We're delivering food and beverage offerings, more efficiently the required and recommended offerings for complimentary breakfast have been scaled down to still be compelling, but a little bit more cost-effective.

We're believing that some of that will stay long term. We are testing various housekeeping models, thinking long term that we should have potentially some savings there as well. From an FTE perspective, during the second quarter on our call, mentioned that we were probably around between 60% and 70% FTEs. We've had some success in hiring over the third quarter and probably similarly around 70% full-time employees.

There's still some efficiency there on the labor model front as well. That becomes -- that's in part by design and in part based on just the competitive environment, but we're certainly comfortable with where we're staffed and we'll selectively higher open positions to the extent over the next few months and for a sustained period of time, we believe occupancy will justify it. But continue to really push on efforts across the board, whether it's negotiating contracts, vendor contracts finding ways to more efficiently deliver similar standards, work with the brands to modify standards long term and operate our hotels from a labor model perspective as effectively and efficiently as possible, always balancing customer service and guest satisfaction as well.

Tyler Batory -- Janney Capital Markets -- Analyst

OK. Very helpful. Very helpful. And then I also wanted to follow up on the corporate travel topic, if I could.

It sounds like some improvement in that in the month of October. Can you talk more about what sort of customers are coming on the corporate travel side of things? Are you starting to see some of the larger companies get out on the road? Or is it perhaps just more kind of what has been driving things the previous few quarters where it's a lot of local businesses that are doing the bulk of the corporate travel?

Liz Perkins -- Chief Financial Officer

We continue -- I mean, undoubtedly, we continue to benefit from local negotiated and regional travel, more mid-market and smaller accounts. That's not atypical for our portfolio generally. But certainly, as we've recovered those small and midsized accounts have outperformed. As we look at the different channels that can be booked and look at our mix overall, we are starting to see some improvement on larger corporate negotiated accounts, which we also benefit from as they still continue to return.

So we do believe that part of the improvement that we're seeing, for example, in GDS bookings as we moved through the second and third quarter and into the fourth is through more larger corporate negotiated accounts. So we're starting to see improvement there even in the absence of everybody being back in office.

Tyler Batory -- Janney Capital Markets -- Analyst

Great. That's all for me. 

Operator

Thank you. Our next question comes from Michael Bellisario with Baird. Please proceed with your question.

Michael Bellisario -- Baird -- Analyst

Thanks. Good morning, everyone. Justin, I want to go back to the acquisitions. I know you gave 2019 cap rates.

I'm not sure if you can maybe provide '21 estimated cap rates, if not, just looking for some commentary around how each of those either completed or pending transactions are performing this year versus 2019 levels? I assume the performance is different for Portland, for example, than what you're seeing in Fort Worth?

Justin Knight -- Chief Executive Officer

Certainly. Looking across the board, we have a variety in terms of ramp with Portland, as I highlighted, meaning Portland, Maine, being meaningfully ahead of where the assets were in 2019. The AC end market on a trailing three-month basis ran in the mid- to upper 90s from an occupancy standpoint with rate approaching $350. So I think we're incredibly pleased with how that market has recovered.

Looking at the assets that we have under contract, we have a range. The Fort Worth assets actually have performed relatively well, looking trailing 12 for both assets. The Hilton Garden Inn ran about 70% occupancy and the Homewood Suites is about 80% occupancy with rates slightly lower than they were in 2019. Our expectation looking at kind of everything that we have under contract or have purchased recently, is that those assets from a recovery standpoint, will be somewhere in the middle.

And then you have Portland, Oregon, which would be kind of on the other extreme in terms of pace of recovery. That asset has continued to do well from a rate standpoint. On a trailing three months, the hotel's run 62% occupancy at $171. So certainly, a tremendous amount of opportunity there.

If we look at how things will stack up for the entirety, so taking the group as a whole, our expectation is that the acquisitions group relative to our existing portfolio gets back to 2019 levels first. And it's early, and we have not given guidance as to when we think that will happen. But just based on the average pace of recovery for the individual assets within the acquisitions group, our expectation is that, that group as a whole will get that first with staggered arrival by market. As we look at acquisitions, we're being intentional in adding assets to our portfolio that brings something to the portfolio that we don't already have.

And that means in some instances, getting into markets before they recover. I think we were fortunate to have begun conversations in Portland, Oregon before that market really took off. And as a result, have been ahead there -- for the Maine, sorry, and in Portland, Oregon our expectations are similar. We will be getting into that market before we see the major pickup of based on the location, the mix of demand from both leisure and business transient.

Our expectation is that, that over time will be a very good investment for us as well.

Michael Bellisario -- Baird -- Analyst

Got it. That's helpful. And then just on another moving pieces post quarter, what is the pro forma balance sheet look like when those acquisitions are completed and how are you thinking about sources of capital going forward?

Liz Perkins -- Chief Financial Officer

From a balance sheet perspective, we have full capacity available on our line of credit. So in the near term, we can utilize that as we're closing on the assets. As we look forward and think about our debt profile long term, we want to maintain the relative -- or the relative strength of our balance sheet. And so we'll look at various opportunities from a capital perspective as we look to continue to grow, but also fund these acquisitions and future acquisitions.

Michael Bellisario -- Baird -- Analyst

OK. And then just in terms of the modified covenants that you're in now, where did third quarter leverage end up? And what would it be pro forma for the acquisitions?

Liz Perkins -- Chief Financial Officer

Even on a trailing 12 basis, we were within our covenants. As we incrementally raise debt, it will also depend on the EBITDA contribution from the acquisitions, which as we pro forma those out, believe that they'll be contributing EBITDA to keep us in a relatively good position from a leverage perspective.

Michael Bellisario -- Baird -- Analyst

OK. And then just lastly for me. On the G&A front, can you remind us of the formula for the incentive compensation that you guys accrued for in the third quarter?

Liz Perkins -- Chief Financial Officer

Yes, absolutely. So from a G&A guidance perspective, the adjustment really was attributable to a couple of things. The -- some of it's normalization year over year. The new executive team salaries and full comp plan were not in place for the full year of 2020.

Our Chairman, CEO and Board took salary reductions in 2020, and we did not increase compensation in 2020 corporately either. So that's a piece of it. The other piece, which you're speaking directly to our performance as of 9/30. For the total and relative shareholder return component of the incentive comp plan that represents 50% of our total compensation -- incentive compensation but needed to accrue based on our performance through 9/30 ahead of target.

Operator

Thank you. Our next question is from Chris Darling with Green Street. Please proceed with your question. 

Chris Darling -- Green Street Advisors -- Analyst

Thanks. Good morning, everyone. Thinking about the capex dollars that you plan to spend this year, which I believe is below sort of historic levels, do you anticipate having to catch up, so to speak, and spend a higher amounts over the coming years? And additionally, how does the favorable supply backdrop that you mentioned sort of influence that decision?

Justin Knight -- Chief Executive Officer

I mean, both really good questions. If you look at what we've done from a portfolio management standpoint, a significant motivating factor for the sale of the 20 assets in the portfolio that we transacted on during the quarter was the management of our long-term capex needs for the portfolio and the desire to ensure that where we reinvesting in the portfolio. We were doing so in ways that we felt would generate strong returns for us. As we look at this year relative to our expectation for next year and future years, certainly we expect to spend more in terms of total dollar amount next year and in future years than we did this year.

That said, we don't anticipate having a major bump or a catch-up year, and instead would expect to see our capex spend normalize in a range similar to what we were spending pre-pandemic, 5% to 6% of revenues. I think we've been incredibly thoughtful in how we manage the process utilizing dispositions as well as intentional spend against those properties where we feel we can generate the highest return. 

Chris Darling -- Green Street Advisors -- Analyst

Makes sense. That's all for me. Thank you.

Operator

Our next question is from Austin Wurschmidt with KeyBanc.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Thanks. Good morning. First one, just around ADR again. So with that midweek occupancy you're mentioning reaching the 70% level in October, I mean, is there enough depth in midweek demand today to begin yielding out lower-rated business? Or does that become more of a 2022 event? And then can you provide us what ADR was in October and how it compared to the same period in '19?

Liz Perkins -- Chief Financial Officer

Sure. I think that we're approaching levels midweek where we'll have more pricing power. But the more sustained those 70%-plus nights are midweek, the more we'll begin to start and driving rates incrementally and yielding out some business. Now certainly, as those occupancies continue to increase, we'll also work with our management team on the level of base business on those nights, which are typically -- which would typically be lower-rated and start yielding out.

So we're getting to a point certainly where we'll be able to start mixing and driving rate more incrementally on Tuesday and Wednesday nights and starting to see a little bit of that in October. Speaking specifically to October rate, we don't have final numbers yet, but we believe that we will end up very similar to what we were in September relative to 2019. And again, looking forward with what we have on the books in November and December are encouraged that those trends are going to continue.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Thanks for that. And then as far as the recent acquisitions, Justin was most struck by the Portland, Oregon, Hampton Inn acquisition. I know you've discussed in the past wanting to add exposure within the Pacific Northwest. Several factors seem to have held you back maybe versus other geographies.

So what drove your decision to move forward here more recently? And then can you also shed some light on the recent focus on the acquisitions heretofore being largely in urban downtown locations?

Justin Knight -- Chief Executive Officer

Yes. I'll actually start with the second question and work back to the first question because I think it will make more sense in that context. In terms of a total acquisition strategy, that for us remains unchanged. We continue to believe that investment in high-quality branded rooms-focused hotels in small urban and high-density suburban markets will yield the strongest results for our shareholders.

And if you look at our total acquisitions activity since the beginning of the pandemic last year and this year, roughly 50% -- actually, exactly 50% of the hotel that we purchased have been high-density suburban and 50% have been in these smaller urban markets, generally speaking. Looking at Portland, Oregon specifically, I had highlighted in some of our earlier calls, the fact that pricing had consistently been against 2019 numbers. And as a result, we hadn't seen an opportune entry point to get into some of these markets that we think long term will be good market. I think because of the way the market was pricing assets, we prioritized markets that we felt would be on the leading edge of the recovery.

Given the nature of this particular seller and a long-term relationship that we have with them, we were able to negotiate an entry point into Portland, Oregon that relative to comp trades in the market. And what would have been seen pre-pandemic as a fair and reasonable price on the assets we felt was a good entry point for us. And I think we have confidence in that asset and our ability to meet our return thresholds over time. I think if you look at the way we're building out our portfolio, the bulk of our acquisitions are going to be in these short bet markets like Portland, Maine and Fort Worth and Memphis, where we have -- in Greenville, where we have kind of existing experience, have a good sense for what the market is going to be near term.

In order to maximize returns for our investors, we will on the margin, make calculated assessments of markets that we think have yet to realize their full potential and invest selectively there as well. Thinking back, we were early in our entry into the Phoenix market when that market was meaningfully underperforming. We were able as a result of our timing in that market to acquire assets at very reasonable per key prices below replacement value. And we've benefited significantly from the recovery of that market over the past decade.

I think if you watch what we do in markets like Poland, Oregon, we will be -- our expectation is that, that's a strong market and our entry point was a good one. And as I highlighted, looking at recent performance, the numbers are good. And that's in advance of meaningful removal of restrictions that have been in place that had hampered occupancies in that market during the course of pandemic.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

That's great. Thank you. 

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Justin Knight for any closing comments.

Justin Knight -- Chief Executive Officer

Thank you, and thanks again for joining us today. We appreciate your interest in our company and hope that as you travel, and we hope that you're doing more of that than you have over the past couple of years that you'll take the opportunity to stay with us in one of our hotels. We look forward to meeting with many of you here next week at NAREIT and I hope to see you soon.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Kelly Clarke -- Vice President, Investor Relations

Justin Knight -- Chief Executive Officer

Liz Perkins -- Chief Financial Officer

Neil Malkin -- Capital One Securities -- Analyst

Kyle Menges -- B. Riley Financial -- Analyst

Anthony Powell -- Barclays -- Analyst

Tyler Batory -- Janney Capital Markets -- Analyst

Michael Bellisario -- Baird -- Analyst

Chris Darling -- Green Street Advisors -- Analyst

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

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