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Apple Hospitality REIT (NYSE:APLE)
Q2 2020 Earnings Call
Aug 07, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to Apple Hospitality REIT's second-quarter 2020 earnings conference call. [Operator instructions] Please note, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Kelly Clarke, vice president of investor relations. 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 2020 earnings call on this, the seventh day of August, 2020. Today's call will be based on the second-quarter 2020 earnings release and Form 10-Q, which were distributed and filed yesterday afternoon. As a reminder, today's call will contain forward-looking statements as defined by federal securities laws, including statements regarding future operating results and the impact of the company's business and financial condition from and measures being taken in response to COVID-19.

These statements involve known and unknown risks and other factors which may cause actual results, performance or achievements of Apple Hospitality to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Participants should carefully review our financial statements and the notes thereto, as well as the risk factors described in Apple Hospitality's annual report on Form 10-K for the year ended December 31, 2019, quarterly report on Form 10-Q for the quarter ended June 30, 2020, and other filings with the SEC. Any forward-looking statement that Apple Hospitality makes speaks only as of today, and the company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, certain non-GAAP measures of performance, such as EBITDA, EBITDAre, adjusted EBITDAre, adjusted hotel EBITDA, FFO and modified FFO will be discussed during this call.

We encourage participants to review reconciliations of those measures to GAAP measures as included in yesterday's earnings release and other filings with the SEC. For a copy of the earnings release, or additional information about the company, please visit applehospitalityreit.com. This morning, Justin Knight, our chief executive officer; and Liz Perkins, our chief financial officer, who will provide an overview of our results for the second quarter of 2020. 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

Thank you, Kelly. Good morning, everyone, and thank you for joining us today. I hope that each of you and your loved ones are staying safe and well. The current operating environment is unlike anything we've experienced during our more than 20-year history in the lodging industry.

Strength and resiliency of our portfolio and underlying strategy have been tested, the results are consistent with our expectations. Our portfolio of predominantly rooms-focused hotels that are aligned with industry-leading brands have broad consumer appeal and are diversified across 87 markets. Given the size, efficient design and location of our hotels, all of our hotels are currently open and accepting reservations with enhanced health and sanitation measures in place. From the onset of the pandemic, we have been intently focused on maintaining a sound liquidity position, safeguarding long-term value for our shareholders and ensuring our ability to thrive in future years.

Our initial efforts have been focused around reducing our cash burn and returning to cash flow positive as quickly as possible. Minimizing our cash burn in the near-term preserves the strength of our balance sheet, protects the value of our equity and positions us to take advantage of strategic opportunities in the early stages of a recovery. As the occupancy improves and markets begin to stabilize, we will look for ways to further optimize our portfolio through opportunistic dispositions and disciplined capital allocation. Major economic disruptions impact individual markets differently and thoughtful portfolio management will ensure that we are positioned appropriately.

With a flexible balance sheet, we look for accretive opportunities that leverage our industry experience and the strength of our underlying platform as operations begin to stabilize. I'm confident we are uniquely positioned to weather the current operating challenges and outperform as travel recovers. When the initial shock of the COVID-19 pandemic and efforts to mitigate its spread hit the travel industry in mid-March, we worked with our management companies and made swift operational changes to staffing and service models, consolidated operations in certain markets, minimized utility usage on unused floors, reduced or eliminated operational costs, adjusted food and beverage offerings, reduced amenities, renegotiated hotel service contracts and modified our sales strategy to focus on sectors with continuing lodging needs. At the corporate level, we postponed all nonessential capital improvements projects for 2020.

We suspended monthly distributions. We reduced board and senior executive compensation, and we terminated the written trading plan under our share repurchase program. Through our efforts, in collaboration with our property management teams, we were able to realize a cash burn during the month of April, a month when total portfolio occupancy was less than 18% that was in line with expectations we outlined during our first-quarter call. In the most challenging economic and operating environment the industry has faced, we produced positive hotel level EBITDA for the quarter and positive corporate level EBITDA for the month of June.

Based on top-line results, we estimate we achieved positive cash flow in the month of July. Performance, of course, varies by market, and there remains significant uncertainty as to when operations at our hotels will return to 2019 levels. Given the ongoing uncertainties related to the depth and duration of the COVID-19 pandemic, we are not yet in a position to provide an operational outlook for the company. We have, however, demonstrated the resilience of our portfolio and the value of our strategy in a challenging environment.

As the economy recovers, we are exceptionally well-positioned to benefit. Our assets, our affiliation with strong brands, our partnership with exceptional third party managers, our data-driven benchmarking approach to asset management, our balance sheet, our broad geographic diversification and our experienced team at Apple provide us with security in uncertain times and the ability to produce strong returns for our investors during periods of economic prosperity. In our continued effort to refine our portfolios to maximize performance over the long term, we have strategically partnered with trusted developers to invest in new non-prototypical assets in targeted markets. In April, we closed on the dual-branded Hampton Inn & Suites and Home2 Suites in Cape Canaveral, Florida, a development project, which we had contracted for in 2018.

Purchase price was approximately $47 million, which was funded by $25 million of cash on hand and a note with the developers secured by the hotels for approximately $22 million that is payable in 2021. Highlighting our unique development contracts, subsequent to closing on these hotels and quarter end, we realized shared savings with the developer that resulted in an over $1 million reduction in the purchase price. We anticipate closing on the dual-branded Hyatt House and Hyatt Place in Tempe, Arizona, a development project which we contracted for in 2018, later this month for a total purchase price of approximately $65 million. And the Hilton Garden Inn in Madison, Wisconsin, which we contracted for in 2019 for approximately $50 million, is currently under construction.

Assuming all conditions to closing are met, we anticipate acquiring the Madison Hotel in 2021. In an effort to preserve our future liquidity, we terminated the contract for the purchase of a to-be-developed Courtyard by Marriott in Denver, Colorado during the quarter. Historically, new supply has followed demand trends. And while we have not yet seen a meaningful decline in new supply across our markets, we anticipate the pandemic's unprecedented impact on demand and the economy overall will meaningfully slow the level of new construction starts over the next several years.

[Inaudible] continue to explore disposition opportunities. And during the quarter, we entered into a contract for the sale of our Homewood Suites in Memphis, Tennessee for approximately $9 million. Though we anticipate that total transaction volume for the industry will be down through the remainder of the year, we will continue to opportunistically pursue transactions that further refine and enhance our portfolio. We have consistently reinvested in our existing hotels to maintain their value and to ensure their market competitiveness.

As a result of these investments and the quality of our on-site management teams, our portfolio has consistently outperformed on measures of guest satisfaction and benefited from strong market share. With the temporary easing of brand renovation requirements and in an effort to preserve capital, we've postponed all nonessential capital improvement projects for the year, reducing our anticipated 2020 spend by approximately $50 million. During the six months ended June 30, 2020, we invested approximately $30 million in capital expenditures, completing renovations at 16 hotels started prior to the onset of COVID-19. July, we completed renovation work at our Hilton Garden Inn in Islip, and we expect completion of our Richmond Marriott renovation to occur late this summer.

We anticipate spending an additional $5 million to $10 million during the remainder of the year. We have always maintained a conservative capital structure to provide stability for the company during periods of economic volatility, the flexibility to respond to changes in the operating environment and the ability to act on opportunities that may arise within the marketplace. In June, we entered into amendments to each of our credit facilities to suspend the financial covenants under the credit agreement until June 30, 2021, while still allowing us to make investments in new acquisitions and in our existing hotels. We are grateful for the strong relationships we have with our lenders and for their willingness to work with us to make adjustments necessary in the current environment.

Apple Hospitality was intentionally structured to weather challenging times and to produce attractive returns during periods of economic prosperity. We have strengthened and refined our ownership strategy over 20 years in the lodging industry and through multiple economic cycles. During our first-quarter call, I highlighted the fact that we were uniquely positioned because of the type of assets we own, our geographic diversification, our efficient corporate structure and our relatively low leverage to be among the first to benefit from relaxed restrictions and a reopening of the economy. Our business was and continues to be materially impacted by the COVID-19 pandemic.

By May, we were producing positive hotel EBITDA. And in June, we were just shy of covering all corporate level costs, including principal and interest on our loans. We anticipate that we will produce positive cash flow at the corporate level in July, well before the majority of our peers. The challenges facing the industry are complex, and we do not anticipate that the path to recovery will follow a straight line.

However, we have consistently articulated the strategic benefits of owning a rooms-focused portfolio diversified across locations, market types, brands and hotel operators. The current environment has provided the ultimate test of our assertion that our strategy would provide for relative stability during periods of economic difficulty. Our hotels have proven appeal with the broadest group of potential customers. And the association with top brands, combined with the strong value proposition of the upscale select service model, have historically led to strong performance during all phases of economic cycles.

Our team has a track record of creating value during challenging economic periods, and I am confident that we will emerge from the current crisis well-positioned to outperform. It's now my pleasure to turn the call over to Liz. 

Liz Perkins -- Chief Financial Officer

Thank you, Justin, and thank you, everyone, for joining us this morning. We entered the quarter with weekly occupancy around 16% for our portfolio. By mid-April, we began to see some improvement as our team worked diligently to focus our sales efforts on COVID-19 specific opportunities to maximize performance based on available demand. In addition to first responders and other business directly related to the pandemic, we were also able to successfully market to other demand generators, such as leisure, which grew stronger as we entered the summer months; construction; manufacturing; project business and government.

Occupancy steadily improved each month during the quarter. And for the month of June, our hotels achieved occupancy of 38% at an average daily rate of $105. Positive trends have generally continued, and we finished the month of July at an occupancy of approximately 45%. The immediate impact of COVID-19 in March was broad-based.

And for the month of April, more than 50% of our hotels were running less than 15% occupancy. And only 6% had occupancies above 50%. We began to see improvements in May, with 27% of our hotels running less than 15% occupancy and 18% of our hotels at occupancy levels of 50% or greater. In June, 15% of our hotels ran less than 15% occupancy and 32% of our hotels had occupancies above 50%.

By the end of July, almost half of our portfolio was running at or above 50% occupancy and only 6% of our hotels had occupancy below 15%, 18 of which were intentionally consolidated in market clusters. Our asset management and hotel management teams have done a tremendous job working to identify top-line opportunities across our markets and maximize operations in the current environment. Several characteristics of our portfolio have and will continue to position us for outperformance, both in the current environment, as well as in the recovery. Our portfolio is broadly diversified with almost 80% of our rooms located outside of urban markets, limiting our dependence on international travel and large convention business, allowing us to realize greater benefit from areas that have eased travel restrictions.

Extended stay and suite properties account for over 50% of our rooms, which have consistently had strong consumer appeal, but also provide ideal accommodations to those most likely to be traveling in the current environment. Our reliance on group demand, which is expected to take the longest to recover, is low, with only 14% of our traditional room night mix coming from this segment. The majority of our properties are located in drive-to markets, which has allowed us to benefit from the recent relative strength of leisure demand, but will also allow us to capitalize on regional business travel expected to return before larger corporate demand. Our leisure markets in the southeast were particularly strong in the quarter, but we also experienced higher occupancies in several others, including Suffolk, pockets of Houston, El Paso, Newark and Anchorage, with demand in those markets coming primarily from construction, military, airline crew and disaster recovery business.

In addition to improvements in the top-line performance during the quarter, we grew operational efficiencies and are pleased to have achieved steady improvement in bottom-line performance as we progressed through the quarter. Adjusted hotel EBITDA for the month of June was $8 million, and for the quarter was $704,000. Due to the swift efforts of our team and our hotel operators to implement a variety of cost elimination and efficiency initiatives at each of our hotels, hotel operating expenses were reduced by 67% during the quarter as compared to last year, with all of our hotels open and receiving reservations. In markets where we own multiple assets, we have intentionally consolidated operations and occupancy in order to gain incremental efficiency.

As of June 30, 18 of our hotels had consolidated operations, down from 38 hotels in May. We continue to reduce this number as occupancies improve. Once our asset management team established new labor and operating models appropriate to navigate the extreme low occupancies experienced at the onset of this crisis, they quickly transitioned and began working with each of our management companies to set models at various occupancy levels in an effort to prepare for the variability and recovery across markets and hotels. In establishing these labor models and operating plans, our team leveraged benchmarking across all of our management companies, sharing best practices and optimizing the plans as a result.

Reestablishing labor models and operating plans based on various occupancy levels has allowed us to proactively ensure we have the appropriate framework to maximize performance as occupancies increase. We have worked diligently with our managers to ensure that our approach is well balanced with sufficient measures and resources deployed to protect the physical asset, our associates and our guests staying intently focused on setting our hotels up for success over the long term. During our last call, with these operational adjustments in mind, we estimated our monthly cash burn rate, including property level expenses, corporate G&A, property taxes, insurance and debt service would be approximately $18 million at an occupancy level -- at occupancy levels between 15% and 20%. We were able to meet these estimates while operating at the lowest occupancy levels and continue to reduce our cash burn throughout the quarter as occupancies increase, and we estimate we achieved positive cash flow in July with approximately 45% occupancy.

The current operating environment remains incredibly uncertain with growing concerns related to new COVID-19 cases in recent weeks and some cost increases, as we implement enhanced cleaning standards across our portfolio and add back staff to service higher occupancies at some of our hotels. However, we continue to believe we are well-positioned to flex as necessary as these challenges arise and mitigate the impact to our liquidity. With significant representation on brand advisory councils, we are actively involved in discussions related to increasing the efficiency of future service and staffing models in ways that will more than offset potential cost increases related to the implementation of enhanced health and safety protocols and improve long-term operating margins. We have always believed that maintaining a strong balance sheet would provide us with stability during periods of economic difficulty and flexibility to act opportunistically.

We entered the current downturn with net debt-to-EBITDA of approximately 3.1 times. As of June 30, 2020, we had approximately $1.6 billion of total debt outstanding with a current combined weighted average interest rate of approximately 3.8%, cash on hand of approximately $156 million and availability under our revolving credit facility of approximately $225 million. Excluding unamortized debt issuance cost and fair value adjustments, the company's total outstanding indebtedness is comprised of approximately $519 million in property level debt secured by 33 hotels and approximately $1.1 billion outstanding on our unsecured credit facilities. In March to increase readily available liquidity, we drew down the remaining availability under our $425 million revolving credit facility.

As a result of entering into amendments to our credit facilities and the effective reduction in our monthly cash burn resulting from improved occupancies and cost containment efforts, the company repaid approximately $225 million and $100 million of borrowings under our revolving credit facility in June and July, respectively. The reduced borrowings on our line generate approximately $2 million in quarterly interest savings. To preserve capital in the current environment, we also suspended monthly distributions, beginning with the April distribution, postponed nonessential capital improvement projects, terminated the written trading plan under our share repurchase program and meaningfully reduced corporate level G&A. At June 30, 2020, the company's total debt to total capitalization net of cash and cash equivalents was approximately 40% and weighted average debt maturities were five years, with no maturities for the remainder of 2020 and $53 million net of reserves maturing in 2021.

As Justin mentioned, effective June 5, we successfully entered into amendments to each of our credit facilities that suspend the testing of financial covenants under our credit facilities through June 30, 2021, with the option for us to opt out if things improve and modify the calculations for the following year, allowing for additional flexibility following the covenant-relief period. The terms of the amendment include minimum liquidity requirements and limitations on share repurchases and cash dividend payments. However, during the waiver period, the amendment does allow for up to $50 million in discretionary capital expenditures and up to $370 million in acquisitions, including the allowance for properties currently under contract, preserving flexibility to be opportunistic. Throughout our history, we have fostered strong relationships with our lenders.

We appreciate their confidence in our ability to manage this current crisis and are grateful for their continued support during these challenging times. I also want to thank our teams who have worked tirelessly to optimize performance in the most challenging operating environment our industry has ever faced. Their efforts and experience, coupled with the strength of our platform, have put us in a position where at current occupancy levels, we expect to be cash flow positive preserving liquidity as we navigate through this crisis and giving us great ability to be opportunistic as we look to bring long-term value to our shareholders. We will now open the call to questions. 

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from Austin Wurschmidt with KeyBanc. Please proceed with your question.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Hi, good morning, everybody, and congratulations on getting back to the breakeven level. What I'd like to understand, I guess, is as you look out, could we continue to see occupancy move higher as you look into August and September or whatever visibility on bookings you have, or do you think it's possible that maybe performance is peaking out here just given the lack of corporate demand and will require kind of corporate demand coming back to see that next leg up? 

Justin Knight -- Chief Executive Officer

Thank you, Austin, and a good question, obviously. If the last six months have proven anything to us, it's that anything is possible. And I think we're fortunate now to have explored occupancy levels and operating models at those occupancy levels that we had in our 20-year experience in the industry not seen before. And I think should there be a dip, we are adequately prepared to make the adjustments necessary to ensure minimal cash burn during that period of time.

That said, we're cautiously optimistic that things continue. And I think we have reason to feel that way. I highlighted in my remarks that we don't anticipate that the path forward will follow a straight line. There will likely be bumps in the road.

But we are incredibly well-positioned. I think having a broadly diversified portfolio gives us exposure to the largest number of different regions of the country and demand generators related to those areas and gives us, I think, increased confidence that we're well-positioned, regardless of what the future brings. 

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

I appreciate the thoughts. And then, maybe another one for you, Justin. So despite achieving that breakeven level in July, the balance sheet certainly in relatively good position now being back at those levels and preserving that capacity. You're under contract to sell a small asset, which ostensibly, I think, you might think it's the worst time you'd want to be a seller right now.

So can you just help us understand the decision process, maybe give us a sense of what valuation looks like on this one deal, knowing that it's relatively small, but what the appetite is for additional sales sort of in the back half of the year? 

Justin Knight -- Chief Executive Officer

Absolutely. I highlighted in my remarks that our expectation is and always has been that markets change over time and the relevance and appeal of our assets in those markets changes as well. We've been consistent from the beginning in our approach to our portfolio, looking for opportunities to buy and sell assets in ways that enhance the overall value. The conversation related to the Memphis asset began prior to the pandemic.

The buyer is a private equity investor, interested in investing in the hotel for an alternative use by conversion to multifamily. And this particular asset is somewhat of an outlier in our portfolio in that it's over 30 years old and is a first-generation Home2 Suites, with a combination of interior and exterior corridors. As we looked at over the next several years, the renovation needs of the property, which we viewed as being substantial in the $35,000 to $40,000 range, and the prospects for that hotel long term, it made sense for us to consider it as a potential disposition. And pricing on that particular asset was attractive.

And the buyer, I think, again, in part because the intended use was something other than hotels, has maintained pricing on it and which was attractive on a cap-rate basis, coming in well below 7% pre -- on 2019 numbers, pre-capex and in the neighborhood of a four cap, if you factor in forward renovation dollars that we anticipated. So again, something of an anomaly within our portfolio. But from a strategic standpoint, I think wholly consistent with our intent from the very beginning. And certainly, something, as I highlighted in my remarks, that we'll be even more focused on over the next several months as we see how markets emerge from the current environment, wanting to ensure that we are well-positioned from a concentration standpoint in those markets, which are most likely to outperform. 

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Got it. And that's great detail. Thank you. Thank you for the color.

Justin Knight -- Chief Executive Officer

Absolutely.

Operator

Our next question comes from Neil Malkin with Capital One Securities. Please proceed with your question.

Neil Malkin -- Capital One Securities -- Analyst

Hey, everyone, good morning.

Justin Knight -- Chief Executive Officer

Good morning.

Liz Perkins -- Chief Financial Officer

Good morning.

Neil Malkin -- Capital One Securities -- Analyst

I just wanted to first off echo Austin's comments. Great job getting back to -- and then above breakeven and on a cash-flow basis. Really a testament to your guys' strategy. So first question, just in terms of the sort of spotty business, travel business, transient customer, can you maybe talk about the differences, if any, that you're seeing in, first off, your more, I guess, your larger primary markets, like maybe in Southern California versus some of your more, I guess, secondary or tertiary markets? And then, maybe if you're -- the difference you're hearing from local versus national accounts at your hotel, just in terms of planned resumption of travel? Or the strength of the negotiating season you had with them? That would be great.

Liz Perkins -- Chief Financial Officer

As far as trends in California versus tertiary, I think broadly, still we're seeing suburban outperform urban on an absolute basis. We still are seeing higher occupancies in suburban markets. And seeing the weakest occupancies in our most urban core markets where historically, they may have benefited from citywides and convention. So our downtown Denver asset or Atlanta, right next to Mercedes.

And some of those markets are struggling more than the suburban assets and more drive-to  locations. California, interestingly, even as cases have spiked, whether it be in the Sunbelt area or California, we've seen mixed recent trends as a result of that. California over the last week, day-over-day, is still showing increases every day of the week from an occupancy standpoint. Arizona as well.

Whereas Alabama, weekday is seeing some increases in occupancy, but weekend has softened a little bit, but not dramatically. And so the trends are -- I guess, it's even challenging to call them trends. They're not all similar even where we are seeing similar, I guess, themes around common cases. So we're still seeing strength in the Sunbelt in the Southeast and California.

And by and large, suburban outperforming urban. 

Neil Malkin -- Capital One Securities -- Analyst

Got it. And then, yes, just in terms of the local versus national conversation in terms of the corporates that you do have, any additional commentary there or things to call out? 

Liz Perkins -- Chief Financial Officer

I think -- I'm sure you heard Chris yesterday. He gave some really good color on corporate negotiated accounts. I think he's hearing a variety of things from we want to capitalize from a rate perspective on your need for our business, but we're not sure that we can commit volume to some that say we will travel, but we understand the environment you're in, and we'll take a percentage off of a bar or keep rates flat in line with negotiated rates in the previous year. Again, I'm not sure committing to any significant increase in volume or even the same volume as previous year.

So I think those conversations are ongoing, both with the brands and for our hotels. I think we work to try to find a situation where we still are the preferred hotel for any corporate or local account that's traveling. But we're in the middle of sort of those corporate negotiated conversations. Locally, I'd say those are going to depend on market, but we've certainly seen property direct business increase since the pandemic hit.

And some of that would be groups related to the first responders or government or some of the business that's unique to the pandemic itself. And some is business that's been in market that we just haven't had to take historically, but is more local in nature. And so I do think we're seeing some strength in local negotiated accounts or local group business. I think that that's likely to come back before corporate negotiated.

I think regional drive-to locations, I think it's broadly anticipated in the industry that that will perform ahead of large corporate national accounts.

Neil Malkin -- Capital One Securities -- Analyst

OK, great. And then, another one for me is, you, I guess, maybe along the same lines, you kind of mentioned this in your press release, but what are some of the things you're doing either from an asset manager, property manager level to gain opportunistic business or just additional business in creative ways, particularly as leisure demand tapers off toward the end of the year? 

Justin Knight -- Chief Executive Officer

I think I can start on this, and Liz can fill in. Key to our success in this area has been keeping our hotels open. And as we looked at staffing models, reduced staffing models for hotels, there were two remained open during the toughest periods in April. We were careful to maintain key salespeople where possible, such that we were well-positioned to continue our efforts on the sales side.

And I think it would be -- it'd be wrong to underestimate the positive impact that's had as we've begun to see stronger recoveries, having the hotel open, taking reservations for the entirety of the time period and retaining talent on the sales side, have both given us a leg up as business returns in market, and put us ahead of ahead of others who took more drastic measures in order to cut costs in the short term. We were able to do that, I think, in large part, because of the operating model for our hotels and our ability to run them with so few people total. And beyond that, we've been incredibly targeted. And I'd like to say our management teams are even scrappy in that over the years, we've been through multiple cycles.

And they are accustomed to operate in highly competitive markets and going after the business that's available. And because of the broad appeal of our assets, sometimes that means leisure, sometimes that means property direct, local negotiated business. Sometimes that's managing our revenue management systems in order to optimize business that's readily available and coming through brand channels or OTAs. And I think what we've highlighted and validated is the strength of the individual management companies that we work with, the quality of their on-site and above property staff and really, quite frankly, the ability of our asset management teams to work with those groups to get the absolute best results possible in market. 

Neil Malkin -- Capital One Securities -- Analyst

OK, thank you, guys.

Justin Knight -- Chief Executive Officer

Thank you.

Liz Perkins -- Chief Financial Officer

Thank you.

Operator

Next question is from Anthony Powell with Barclays. Please proceed with your question.

Anthony Powell -- Barclays -- Analyst

Hi, good morning, everyone. Similar line of questioning. So when you look at verticals like construction, manufacturing, project business, government. Is there any kind of temporary nature to any of this business? And is there any seasonality to the business? Would you expect this to be pretty durable across the fall and early winter? Or is there any part that may just go away in the winter?

Liz Perkins -- Chief Financial Officer

I don't know that we have perfect visibility. Like Justin mentioned at the beginning of the call, I think if the past few months have taught us anything it's that the current environment is not predictable. And I don't know that we can accurately give you an exact answer. But some of the business that we are picking up now, whether it be construction or manufacturing, it's business that's consistently in market, it just isn't business we have historically taken given the lower-rated nature of the business and being able to replace that or take higher-rated business transient and corporate negotiated as an alternative in better times.

So I think the broad appeal of our assets affords us the opportunity to capitalize on business that is consistently or has consistently been in the market and is currently still in the market at this time. And so I don't have perfect visibility into whether that will dissipate as we move through the coming months. As of right now, that has been a solid and stable piece of our business since we began recovering at the end of April and into May. So it's not something that's wavered.

It's been a consistent theme as we talk with our management companies and our hotels as to what is making up the demand. It's not all leisure, our improvement in occupancy. As I mentioned, earlier, we're still growing some midweek. And in fact, we don't -- that could be leisure, but it also could be local negotiated accounts in some of this project business as well.

And so when we speak to our management companies and hotels, we have a diverse set of demand generators even currently in our hotels. It's not only first responders or construction. And we certainly have some of that business, and it is helping us. But I expect to the extent we fear that an increase in cases will pull back on leisure, an increase in cases will also maintain first responder business in our markets.

And so there's an offset, to some extent, and I think it's some of the reason that even as cases have increased, you've seen some stability in some of these markets where you would have expected a bigger pullback in demand. 

Justin Knight -- Chief Executive Officer

And it's important to remember, we're in over 80 markets. And so the specific demand drivers for each market are distinct. And each market's more heavily reliant on a different industry. And the seasonality for our markets varies.

So for example, leisure demand in Phoenix and in some of our Florida markets actually improves as we get into the winter months. And so I think it would be wrong to assume that as we get into the winter months, we would see a dramatic reduction in leisure across our entire portfolio, given the fact that we haven't even gotten into peak season yet for Phoenix and again, some of our Florida markets.

Anthony Powell -- Barclays -- Analyst

Thanks for that. And it seems that, obviously, you've gained some share in some markets that you have taken some of this business that may have gone to other hotels. As those competitors either reopen or restaffed, do you think they may try to get the business back through discounting? And is that a risk? Or given kind of the quality of your hotels and your brands, do you expect to retain that business as competitors try to win it back? 

Liz Perkins -- Chief Financial Officer

I think that if competitors reopen, it will be because of -- they're reopening as demand is improving. And so that will be hopefully an offset to what will be more competitive. I think it's a real risk that as things open, things would be more competitive. However, as Justin mentioned, staying open and taking care of people when others couldn't or wouldn't and doing it well and having them be in-house and feel safe and have the increased sanitation protocols in place and just having been there, I think will afford us some stability as things reopen in certain markets.

But competition is competition, and it may put pressure on rates or -- but we've heard from others in the industry that they're tending not to open until they see some stability in demand in market. And so I think hopefully, that will be an offset to some of the competition as things reopen. 

Justin Knight -- Chief Executive Officer

And remember, because of the locations that we're in, we didn't see closings from -- in order of magnitude, similar to our peers who are more heavily concentrated in urban markets where closures were significantly more pronounced. 

Anthony Powell -- Barclays -- Analyst

OK, thank you. 

Justin Knight -- Chief Executive Officer

Thank you.

Liz Perkins -- Chief Financial Officer

Thanks, Anthony.

Operator

Our next question comes from Tyler Batory with Janney Capital Markets. Please proceed with your question.

Jonathan Jenkins -- Janney Capital Markets -- Analyst

Good morning. This is Jonathan on for Tyler. First one for me. Can you just talk broadly about some of the trends you're seeing in regards to the extended-stay portion of your business and kind of how that compares to your select service assets? 

Liz Perkins -- Chief Financial Officer

Absolutely. For us, similar to what we discussed on our Q1 call, we certainly are seeing our extended stay properties perform the strongest across our portfolio and brands. Some of that is consistent, even pre pandemic. I mean, our extended stay properties have historically done well.

They tend to be able to maximize RevPAR by building good long-term base business and maximizing rate potential on the remaining rooms. And so historically, we've seen strength there and now it's no different. And I think there's particularly -- particular appeal to them in an environment where restaurants have been closed and people need additional space and they have kitchens. We've run as much as a 20-point or $20 RevPAR premium in our higher-end extended stay brands.

So we've certainly seen outperformance there. 

Jonathan Jenkins -- Janney Capital Markets -- Analyst

OK, great. That's very helpful. And then, switching to the operations side in regards to the cost savings. How much of those savings do you think are permanent in nature? And how much do you expect them to creep back up as the hotels ramp on higher occupancy levels? 

Justin Knight -- Chief Executive Officer

Well, certainly, a portion of the expenses are variable and vary with occupancy. So a 67% year-over-year savings is unrealistic as we begin to see meaningfully higher occupancies in our hotels. That said, and we highlighted or Liz highlighted in her prepared remarks and Chris highlighted in his remarks yesterday, we are working with the brands in our capacity as representatives on various advisory boards and just given the long-standing relationship that we have within our executives at those brands to establish a model coming out of this, that's more profitable for us as investors. I think, and still, importantly, still preserves the strong value proposition for our brands with consumers.

And those conversations have been fruitful. And our expectation -- we've made meaningful adjustments to service levels and other aspects of our business as a result of the current environment that we are in, which is abnormal, hopefully, on a go-forward basis. But there have been learnings as part of that process. And our expectation is that we will take those learnings coming out of this to run better margins than we have historically.

Jonathan Jenkins -- Janney Capital Markets -- Analyst

OK, great. Appreciate the detail. That's all for me. Thanks, guys.

Justin Knight -- Chief Executive Officer

Thank you.

Liz Perkins -- Chief Financial Officer

Thank you.

Operator

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

Kyle Menges -- B. Riley FBR -- Analyst

Good morning. This is Kyle on for Bryan Maher.

Justin Knight -- Chief Executive Officer

Good morning.

Kyle Menges -- B. Riley FBR -- Analyst

I was just hoping -- good morning. I was hoping if you could talk a little more on your thoughts around continuing to bring back hotel staff? And then, was curious what wage levels you're seeing as you bring people back relative to levels pre-COVID? 

Justin Knight -- Chief Executive Officer

So as I highlighted earlier, we're ramping employment at our hotels as we see occupancy improve. And a portion of a more significant portion of the employees that are coming back are hourly workers. And the use of their time varies with occupancy at the hotel. So the match is good there.

With unemployment being significantly higher, wage pressure in individual markets is less than it was pre-pandemic with the caveat that that's partially offset by the fact that there are very meaningful unemployment benefits available to people now. And so in some markets, where those are extremely high, there is pressure from a wage standpoint as we're looking to bring people back. But by and large, our expectation is that the primary pressure on wages for us historically was a result of low unemployment and availability of people to fill jobs. Unfortunately, we are not in that position now.

And unemployment numbers are significantly higher and -- which puts us in a position to be selective, bring back the best talent, an environment that's much more competitive on their side. 

Kyle Menges -- B. Riley FBR -- Analyst

Great, thanks. That's all for me.

Justin Knight -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question is from Michael Bellisario with Baird. Please proceed with your question.

Michael Bellisario -- Robert W. Baird -- Analyst

Good morning, everyone.

Justin Knight -- Chief Executive Officer

Good morning.

Michael Bellisario -- Robert W. Baird -- Analyst

Just the first question on the July trends. You gave a 45% occupancy level. But could you give us some more metrics around that? What was that versus last year? And what was the RevPAR percentage change for the portfolio in July? 

Liz Perkins -- Chief Financial Officer

RevPAR percentage change has slowed relative to the increases that we saw June over May and May over April. So it has -- RevPAR has slowed slightly. You can see that in the occupancy trend, too. ADR is very similar to what we saw in June, but has moderated.

So similar trends. 

Michael Bellisario -- Robert W. Baird -- Analyst

But what about on a year-over-year basis, the percentage change? 

Liz Perkins -- Chief Financial Officer

The percentage change has moderated, but the absolute numbers are similar from an ADR perspective. 

Michael Bellisario -- Robert W. Baird -- Analyst

Got it. And then, just maybe back to some of your comments earlier on in the prepared remarks, just relative to your internal expectations that you had 60 or 90 days ago, and aside from the fact that occupancy was a little bit better and ticked up throughout the quarter, where were the positive surprises for you on the fundamental side? 

Justin Knight -- Chief Executive Officer

I think the most positive surprise was that things ended up playing out very much as we anticipated they would. I think in our last call, we highlighted the fact that our expectation was that we would be profitable at the hotel level between 30% and 35% occupancy and at the corporate level between 40% and 45% occupancy. As business came back, we had a perfect opportunity to prove out those assumptions during the quarter. And those assumptions were -- or our expectations were met.

I think we continue to be impressed, not surprised, but impressed with the ability of our management companies and our on-site teams to adjust and to operate incredibly efficiently and effectively in the current environment. These are, as I highlighted in my prepared remarks, unprecedented times, and we've been in the business for several decades now. And our management companies and our on-site teams have performed admirably. I think aided, obviously, by an asset management team who's been all over this, working with our management team to identify best practices and to establish norms such that we achieve optimal results on our properties. 

Michael Bellisario -- Robert W. Baird -- Analyst

Great. Thank you.

Justin Knight -- Chief Executive Officer

Thank you.

Operator

We have reached the end of the question-and-answer session. I will now turn the call over to Justin Knight for closing comments. 

Justin Knight -- Chief Executive Officer

Thank you, and we really appreciate you taking the time to join us this morning on our call. These are unprecedented times, incredibly challenging. As I highlighted earlier, I'm incredibly pleased with the way our portfolio and our team has performed. We had going into these three priorities.

First, to get back to a level where we could establish cash flow positive operation. Second, to look at our portfolio and to begin to explore opportunities to fine-tune in response to changing demand profiles of individual markets. And third, to leverage the strength of our portfolio to pursue opportunities in the future. I think we're executing incredibly well against that strategy, and I'm excited about what the future has in store for us at Apple.

Appreciate your interest in the company. And I hope that as you travel, and I hope that you travel, that you'll take opportunity to visit us and to stay in our hotels. Have a great one, and we look forward to talking to you soon.

Operator

[Operator signoff]?

Duration: 58 minutes

Call participants:

Kelly Clarke -- Vice President of Investor Relations

Justin Knight -- Chief Executive Officer

Liz Perkins -- Chief Financial Officer

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Neil Malkin -- Capital One Securities -- Analyst

Anthony Powell -- Barclays -- Analyst

Jonathan Jenkins -- Janney Capital Markets -- Analyst

Kyle Menges -- B. Riley FBR -- Analyst

Michael Bellisario -- Robert W. Baird -- Analyst

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