Apple Hospitality REIT (APLE) Q4 2021 Earnings Call Transcript

Apple Hospitality REIT (APLE -0.65%)
Q4 2021 Earnings Call
Feb 23, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Apple Hospitality fourth quarter and full year 2021 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kelly Clarke, vice president, investor relations. Please proceed.

Kelly Clarke -- Vice President, Investor Relations

Thank you, and good morning. Welcome to Apple Hospitality REIT's fourth quarter and full year 2021 earnings call. Today's call will be based on the earnings release and Form 10-K, 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 the notes thereto as well as the risk factors described in our 2021 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, February 23, 2022, 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 fourth quarter and full year 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. I'm excited to be able to share our operating results for the fourth quarter and full year 2021 and to provide some insights into what we're seeing as we begin 2022. We ended 2021 with the strongest quarterly performance we have achieved since the onset of the pandemic, despite the emergence of new variant in November, seasonal travel trends, a challenging labor environment and increasing inflationary pressures. ADR was essentially flat as compared to the same period in 2019 with occupancy down 7%, RevPAR down 8% and adjusted hotel EBITDA down only 13%.

December results exceeded our expectations and were the strongest during the quarter with RevPAR down only 1% as compared to December 2019. While the gap to 2019 widened in January impacted by leisure seasonality and the spread of the omicron variant following the holidays, RevPAR for the month was up meaningfully to the prior year and occupancy and rate have continued to improve in February. With COVID cases declining and cities easing restrictions as we move into the spring, we continue to expect strong leisure demand and increasing business travel as we move through the remainder of the year. Full year operating results showed significant recovery relative to 2020 and continue to bridge the gap to pre-pandemic levels.

Comparable total revenue was up more than 62% relative to 2020 and comparable hotels adjusted hotel EBITDA margin was 35%, down only 3 percentage points to 2019. 2021 adjusted EBITDA was $279 million and modified funds from operations was $211 million or $0.93 per share. Our recent acquisitions and dispositions have further optimized our portfolio by lowering the average age of our assets and increasing our exposure to markets that we anticipate will outperform over the next cycle. The combined acquisitions and dispositions activity lowers our near-term capex needs and positions us to drive stronger portfolio RevPAR and margins.

Since the beginning of the COVID-19 pandemic, we have acquired a total of 12 hotels for approximately $473 million and sold a total of 24 hotels for approximately $245 million. We acquired four of these hotels during the fourth quarter for a combined total purchase price of approximately $164 million, including the Hilton Garden Inn Memphis Downtown, The Hilton Garden Inn and Homewood Suites Fort Worth Medical Center and the Hampton Inn & Suites Portland Pearl District. We currently have one hotel under contract for purchase an Embassy Suites that is under development in Madison, Wisconsin, for an anticipated purchase price of approximately $79 million. We have been and will continue to be intentional in the build-out of our portfolio, pursuing assets that are additive to those we currently own located in strong RevPAR markets with attractive cost structures and significant growth potential and at pricing that will allow us to achieve our targeted returns.

While broker transaction volume has slowed slightly in the first two months of this year, we are actively underwriting and exploring dozens of opportunities, both on and off market and anticipate that we will continue to be active in 2022. We have also continued to strategically reinvest in our existing portfolio. During 2021, we invested approximately $26 million in capital improvements, including the full renovation of eight hotels. We intend to invest an additional $55 million to $65 million in 2022, which includes major renovations at between 20 and 25 hotels.

These reinvestments ensure that our hotels remain relevant and competitive in our markets. Our scaled ownership of branded select service properties allows us to perform these renovations efficiently and our experience renovating hundreds of hotels over more than two decades informs a decision making related to the scope and timing of investment to ensure minimal disruption to the property operations and maximum impact for dollar spend. Historically, capital spend has ranged between 5% and 6% of sales, a meaningful differentiator for our portfolio and a contributor to total shareholder returns. With a relatively young and well-maintained portfolio, we anticipate future spending will continue in this range.

Looking back over the past two years, we are proud of all that we have accomplished. During the most challenging operating environment our industry has ever experienced, we were able to achieve industry-leading operating results, enhance the growth profile and long-term value of our portfolio through strategic acquisitions and dispositions and maintain the strength and flexibility of our balance sheet. Our outperformance is attributed 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. We were first among our publicly traded peers to produce positive cash flow at both the property and corporate level and first to exit our covenant waivers with continued confidence in our portfolio and the broader industry recovery, we are reinstating monthly dividends for our shareholders with a March payment of $0.05 per share.

The annualized distribution of $0.60 per share represents a 3.4% yield on our February 18 closing share price of $17.49. As we enter 2022, we are incredibly well positioned. Operationally, our hotels are closing the gap to pre-pandemic 2019 performance, even without a full recovery in business transient, which has historically represented more than half of our total bookings. As offices reopen and companies implement more flexible travel policies throughout the year, we expect to see an increase in business demand, which combined with continued strength in leisure travel should push total demand for our portfolio beyond pre-pandemic levels.

New supply, which represented a meaningful headwind for us in 2019, has declined significantly with projects under construction within a 5-mile radius of our hotels near all-time lows. We have unparalleled exposure to markets that have benefited from individual and business relocations during the pandemic with business-friendly governments, attractive cost of living, popular leisure and entertainment venues and a variety of corporate and small business demand generators. Our strategic acquisitions and dispositions over the past two years have enhanced the growth profile of our portfolio without dilutive capital raises or over encumbering our balance sheet. Our strategy has been tested for more than 20 years and consistently yielded compelling results for our investors.

We remain intently focused on maximizing long-term value for our shareholders and are confident we are well positioned for additional upside as leisure travel continues to show strength and business travel steadily recovers. It is now my pleasure to turn the time over to Liz, who will provide additional detail on our balance sheet, operations and financial performance during the quarter and the full year.

Liz Perkins -- Chief Financial Officer

Thank you, Justin. Coming off a strong third quarter, demand continued to exceed our expectations through what has historically been a seasonally slower period for our portfolio. ADR for the fourth quarter was over $131, nearly equal to our ADR for the same period in 2019. Occupancy was 68%, down just over 5 percentage points and RevPAR was $88, down less than 8% as compared to the same period in 2019.

As Justin highlighted, the gap to 2019 performance narrowed as we moved through the quarter despite concerns related to the omicron variant and December RevPAR nearly equaled December 2019 with ADR over $2 higher. Led by rate, the gap to 2019 RevPAR meaningfully decreased quarter over quarter as we move throughout the year from down 26% in the second quarter to down 10% in the third quarter to less than 8% in the fourth quarter. While the omicron variant tempered positive momentum seen during the fourth quarter and the gap to 2019 RevPAR widen some in January, year-to-date numbers are up meaningfully to 2021, and we expect continued improvement as we move into the spring and summer. For the full year 2021, comparable occupancy was 66% ADR was $125 and RevPAR with $83 up to 2020 by 11%, 44% and 61%, respectively, and down 11%, 14% and 24% to 2019.

Weekend occupancy remained strong throughout the fourth quarter, showing continued strength in leisure demand. October and November weekend occupancies were 85% and 80%, respectively, with December weekend occupancy of 67%, in line with 2019. Weekday occupancy remained strong with October approaching 70% that declined to approximately 60% in November and December. These months are seasonally slower for business travel, and we were pleased to see the gap to 2019 weekday occupancy shrink to only 3 percentage points in December.

The strength of leisure demand through the fourth quarter and year-to-date through the first weeks of February, 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 loosening of restrictions on travel and gatherings and increasing number of companies returning to their offices with more flexible travel policies and concerns related to the omicron variant beginning to taper, all give us confidence that our broad market diversification will continue to drive outperformance as business demand continues to improve. 38% of our hotels had RevPAR for the quarter that exceeded the same period in 2019. While the majority are located in warmer sunbelt states, notable exceptions included our Homewood Suites in Anchorage, Alaska, which was up 27%; our Homewood Suites in Mount Laurel, New Jersey, which was up 21%; and our Hampton Inn Davenport, Iowa, which was up 17%. This further underscores the benefits of both market and demand diversification.

As the recovery spreads to an increasing number of markets, we see incremental upside for our portfolio. Demand for our suburban hotels continue to outpace demand for our urban hotels in the quarter with occupancy of 69% as compared to 62% 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. We anticipate demand will strengthen in many of these markets as we move through 2022, further boosting performance for our portfolio and adding to the strong performance in our suburban portfolio.

In terms of room night channel mix booking data, brand.com bookings were in line with third quarter at approximately 36%. OTA bookings continue to be elevated relative to prior years, but declined to 15% in the fourth quarter. Property direct bookings remained steady around 30%, still up to 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 demand environment evolves.

GDS bookings increased to 12% during the fourth quarter and have continued at that level into the first quarter of 2022, despite the impact of omicron which is a positive data point as we look at business transient trends. Looking at actual fourth quarter same-store occupancy segmentation PAR increased to 35%, offsetting a slight decline in other discounts, which fell to 30% in the quarter. Negotiated reached 16%, up slightly from the third quarter. Turning to expenses.

Total payroll per occupied room for our same-store hotels was just over $33 in the fourth quarter, down three and a half percent to the fourth quarter of 2019, but up from $31 per occupied room in the third quarter as we continue to fill vacant positions and adjust wages in a more competitive labor environment and as occupancy declined seasonally. Same-store rooms expenses, excluding payroll, were down 8% per occupied room compared to 2019 for the quarter with over half of the savings coming from adjustments to brand amenity offerings. Our team's persistent efforts to control costs and maximize profitability resulted in fourth quarter and full year 2021 comparable adjusted hotel EBITDA of approximately $85 million and $322 million, respectively, and comparable adjusted hotel EBITDA margin of approximately 34% and 35%, respectively. A continuation of our results in the third quarter, our actual adjusted hotel EBITDA margin for the fourth quarter exceeded that of the same period in 2019 by 40 basis points and December adjusted hotel EBITDA of $21 million exceeded 2019 EBITDA despite lower total revenue relative to 2019.

MFFO was approximately $59 million or $0.26 per share for the fourth quarter and $211 million or $0.93 per share for the year. While we continue to focus on managing expenses, our bottom-line performance has been meaningfully bolstered by the rapid recovery in rate, which has, in recent months, approached or exceeded pre-pandemic levels and work to offset increased wages and other inflationary pressures. Shifting to the balance sheet. As previously announced, we exited our covenant waiver period in July of 2021.

As a result, we are no longer subject to the lender and post limitations on investing and financing activities associated with the covenant waiver restriction. Interest expense decreased during the quarter as a result of exiting the covenant waiver period and lower average borrowings under our unsecured credit facilities. As of December 31, 2021, we had $1.4 billion in total outstanding debt, approximately five times our 2021 EBITDA with a weighted average interest rate of 3.4%, cash on hand of approximately $3 million and availability under our revolving credit facility of approximately $349 million. Total outstanding debt, excluding unamortized debt issuance costs and fair value adjustments, is comprised of approximately $498 million in property level debt secured by 28 hotels and approximately $946 million outstanding on our unsecured credit facilities.

At year-end, our weighted average debt maturities were three years with approximately $228 million net of reserves maturing in 2022. Our 2022 maturities include our revolving credit facility, which we have the option to extend for up to one year and $156 million of property level debt maturing in the second half of 2022. We are in the process of exploring options with our lenders and are confident in our ability to repay, refinance or extend our near-term maturity. As for our 2022 outlook, though we remain confident in the broader recovery in our portfolio specifically, we are still not in a position to give specific operational guidance given the continued uncertainty and volatility related to COVID.

As mentioned, we expect continued improvement relative to 2019 and 2022 with the ongoing strength in leisure demand and increase in business demand and a demonstrated ability to achieve rate growth. We are providing the following full year 2022 outlook regarding certain corporate expenses. We anticipate G&A to be between $32 million and $38 million, interest expense to be between $58 million and $63 million and capital expenditures to be between $55 million and $65 million. As Justin highlighted, we are reinstating monthly distributions beginning in March with a payment of $0.05 per share.

While we have not yet recovered to pre-pandemic operating levels, our portfolio has been optimally positioned to benefit early in the recovery from increases in both leisure and business travel. We are optimistic that demand will continue to increase as we move through 2022 and together with our board of directors, we will continue to assess our dividend payout along with other uses of capital to drive total returns for our shareholders. As we begin 2022, we are building off a strong platform. We have weathered the worst of the pandemic without encumbering our balance sheet and have transacted in ways that optimize our portfolio for the recovery.

We have a proven ability to drive strong operating results throughout economic cycles and with current trends showing continued strength in leisure and the prospect of increased business demand in the coming year, we are optimistic about the future for our portfolio and for the broader industry. This completes our prepared remarks. We would now be happy to answer any questions that you have for us this morning.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Anthony Powell with Barclays. Please proceed with your question.

Anthony Powell -- Barclays -- Analyst

Hi. Good morning. 

Justin Knight -- Chief Executive Officer

Good morning.

Anthony Powell -- Barclays -- Analyst

Good morning. Question on the transaction environment. You said you were looking at dozens of deals. Could you just maybe talk about how pricing expectations have changed recently, given the strong performance of the segment, seller expectations and just the overall environment should be helpful.

Justin Knight -- Chief Executive Officer

Good question. It continues to be incredibly competitive now. So I think as we saw last year, a significant amount of money came into the space with interest investing in hotels, broadly speaking, but specifically in the types of hotels that we've owned, high-quality select service hotels, specifically in markets initially that benefited early from the recovery. We've seen continued demand for that type of asset.

But we've also seen a meaningful uptick as we moved through last year, and we believe as we continue into this year in terms of total product available. We've had successful conversations both around brokered transactions and as we interact with groups that we've worked with for 10-plus years in the industry and anticipate that we will be well positioned to take advantage of opportunities as we move through the year. But from a pricing standpoint, pricing remains competitive with most assets trading or asking prices related to those assets being at or above 2019 levels. For us to achieve our targeted returns, we're focused currently on markets where we anticipate outsized growth in the early phases of the recovery.

Anthony Powell -- Barclays -- Analyst

And is this still a portfolio premium for smaller portfolios or midsized portfolios or is that kind of compressed a bit?

Justin Knight -- Chief Executive Officer

We believe that still exists. Certainly, for the two larger portfolios that we saw trade last year, we saw some form of portfolio premium for those trades. There are a number of portfolios in market, and we'll have more data here shortly. But from what we're looking at in terms of pricing expectations, portfolios, both small and large, seem to be trading or at least the anticipated trading price is at a 50 to 100-basis-point spread to individual assets.

Anthony Powell -- Barclays -- Analyst

Got it. Maybe one more for me. I guess, how much of that, I guess, discounted business, longer stay or government business, nontraditional business is still in the portfolio as of now? And what's the opportunity to raise the price on that business or yield it out, I guess, here over the next few months?

Liz Perkins -- Chief Financial Officer

Good question. As we have progressed through the recovery, especially in market in the back half of last year, where we were beginning to see occupancies improve and specifically in those markets where we mentioned we have RevPAR above 2019 levels, that's been based on being able to mix shift into higher rated business and really capitalize on rate growth where we have occupancy compression on weekends. So we've materialized some of that benefit in a subset of our markets and hotels but still have meaningful upside there as we progress into this year. And as more traditional corporate business continues to come back in some of the more urban areas, we look at our occupancies and rates on the weekends relative to weekdays and we still are seeing premiums on the weekends, giving us significant upside midweek.

Anthony Powell -- Barclays -- Analyst

OK, thank you.

Justin Knight -- Chief Executive Officer

Thank you.

Operator

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

Kyle Menges -- B. Riley Financial -- Analyst

Good morning. This is Kyle on for Bryan. I was hoping that you guys could talk a little bit about...

Justin Knight -- Chief Executive Officer

Good morning.

Kyle Menges -- B. Riley Financial -- Analyst

Good morning. I was hoping you could talk a little bit about the demand you're seeing from corporate accounts as we move through 2022? And just if you're starting to see any sort of mix shift between demand from regional versus national accounts?

Liz Perkins -- Chief Financial Officer

As we look forward and even taking into account the impact of omicron in January, we continue to see negotiated business being booked as a percentage of mix moving forward, increase relative to what we actualized in the fourth quarter, which was up to 16% for negotiated broadly. That includes local negotiated and corporate negotiated business. And even as we look at channel mix and look forward, our GDS bookings are continuing to improve. And what we have on the books is up from where we've been materializing for GDS where sort of your corporate travel agents tend to buy.

And so we're seeing progress on the business transient front, both with local negotiated and corporate negotiated. There's still outperformance on the local negotiated side, but opportunity on the corporate negotiated and have continued to see improvement despite the impact of omicron at the beginning of the year.

Kyle Menges -- B. Riley Financial -- Analyst

OK, thanks. That's helpful. And then could you talk a little bit about amenities and how you and the brands are thinking about bringing back amenities as RevPAR returns to pre-pandemic levels?

Justin Knight -- Chief Executive Officer

As we saw occupancy improve throughout, especially in the back half of last year, the brands reimplemented a significant portion of the brand standards or services and amenities that had existed prior to the pandemic. Those amenities and services have been modified in ways that we believe will drive long-term savings offset in part by continued inflationary pressures, both on the labor side and cost materials. But as we finished last year, by and large, what we anticipate to be longer-term service and amenity models were in place at the majority of our hotels.

Kyle Menges -- B. Riley Financial -- Analyst

OK, thank you. That's all for me.

Justin Knight -- Chief Executive Officer

Thank you.

Operator

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

Tyler Batory -- Janney Capital Markets -- Analyst

Thank you. Good morning. First question, just in terms of the dividend announcement, any more detail you can share in terms of what factors were contributing to that decision? Why you think this level is appropriate? And then interested in your perspective on potential payout ratio going forward as well.

Justin Knight -- Chief Executive Officer

Appreciate the question. Really thinking about the dividend, our reinstatement is a testament to both the performance of our portfolio throughout the pandemic and our outperformance there and our confidence in the recovery. As we assessed a variety of different scenarios for how things might play out moving through this year and took into consideration operating environment opportunities for the use of our capital and other capital needs of our business, we felt this was an appropriate level to start or to reinstate our dividend. We believe we're extremely well positioned to benefit from the recovery and anticipate that we'll be in a position to increase our dividend over time.

As we think about long-term payout, we've historically and anticipate we will continue to look to establish a dividend rate that's sustainable over an extended period of time and that allows flexibility to utilize capital in other ways to drive total returns for our investors. Looking at the $0.60 per year payout relative to our 2021 modified funds from operation, we're still at roughly 65%. So allows us a tremendous amount of flexibility. And as we highlighted in our prepared remarks and as we've continued to highlight in response to questions, our expectations are that we will see meaningful improvement in terms of overall operations as we move through this year, which will put us in a position to consider changes over time.

We interact with our board of directors on a monthly basis and considering the various factors that I highlighted, we'll make adjustments when appropriate.

Tyler Batory -- Janney Capital Markets -- Analyst

OK. Appreciate that. Thank you. And then just as a follow-up, in terms of what you're seeing current trends into Q1, you gave some statistics in the investor presentation.

You gave some details on occupancy in January. Certainly, the commentary on February and March does sound quite optimistic. Your understanding that the booking window for you, perhaps not super long. Just interested in any details you can give a little bit more kind of what you're seeing in February, perhaps expectations for March and a lot of discussion on the occupancy side of things.

I'm also interested what you're seeing on ADR and rates in February as well?

Liz Perkins -- Chief Financial Officer

OK. As we mentioned in the investor presentation that we shared yesterday, you can see that in the first two weeks of February, our occupancy levels have increased from January. And we expect the gap to 2019 to narrow slightly based on month-to-date results, including a strong Presidents' Day weekend, which is not reflected in the investor presentation. That Saturday -- last Saturday was 90% for our portfolio.

We were at 90% occupancy with 16% rate growth over 2019. The strong indications for continued performance related to leisure business. Looking at February booking data through the 20th of this month, average daily room nights booked in February of this year are higher than any month in 2019 or 2021, which gives us optimism as we move into the seasonally stronger months and with case counts continuing to decrease. When we think about that, where we're really starting to see bookings pick up, it's for forward -- further bookings -- further outbookings.

So a week plus out and really 30-plus days out. So really encouraged by those booking trends in February. As you can also see in the investor presentation, we're continuing to see weekends improve as well as weekday. And when I look at the bookings further out, while we see continued strength in leisure, again, with the mix of business coming in through GDS and corporate and local negotiated on the books.

We're seeing business transient positive trends as well into March and April. Specific to rate, we started consistently producing higher rates on the weekends relative to 2019 in the spring of last year. Even with the impact of omicron, our most recent weekends are still in line or above 2019 levels. Weekday rates have lagged relative to 2019, which aligns with less occupancy compression that we've seen on those nights.

But we have seen that weekday rate gap to 2019 widen slightly with the impact of omicron in January and February. But as occupancy continues to improve, we anticipate that gap to narrow, especially as business demand returns more meaningfully. And while our current rate on the books looking forward can change just relative to what books sort of in the month for the month. Right now, what we're seeing for March and April is a continuation of rate growth.

So we're optimistic both on the occupancy and the ADR side.

Tyler Batory -- Janney Capital Markets -- Analyst

OK. That's great commentary. That's all for me. Thank you.

Justin Knight -- Chief Executive Officer

Thank you.

Operator

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

Michael Bellisario -- Robert W. Baird and Company -- Analyst

Thank you. Good morning, everyone. 

Justin Knight -- Chief Executive Officer

Good morning.

Liz Perkins -- Chief Financial Officer

Good morning.

Michael Bellisario -- Robert W. Baird and Company -- Analyst

Just want to go back one more time to customer mix, maybe ask it in a different way. BT, you mentioned historically, it's been more than half of demand. Maybe help us put a number around where was that in 4Q? And then how do you see that trend progressing at least through the early part of 2022?

Liz Perkins -- Chief Financial Officer

I think we continue to see outperformance of leisure in Q3 -- I mean, Q4. November and December, December specifically really outperformed from a leisure perspective relative to historic trends for our portfolio. So still seeing -- I mean still seeing more strength out of leisure, but just a continual increase -- gradual increase in business transient trends. So we're still probably around that 50-50 mark.

But I think that, that will shift some as we progress into the first quarter of this year, just given that January and February are traditionally less strong from a leisure standpoint and business transient begins to pick up as we get to the end of February and into March.

Michael Bellisario -- Robert W. Baird and Company -- Analyst

OK, that's helpful. And then just switching gears sort of two-part question on capital allocation. You sort of answered the first one already, but I kind of want to hear your thoughts on kind of how quickly you could turn the acquisition spigot on? And then two, how you're thinking about using your currency to fund potential deals? And maybe just remind us of the math you do to figure out if a deal makes sense using some equity currency?

Justin Knight -- Chief Executive Officer

Two good questions. I highlighted in my prepared remarks that we're currently underwriting dozens of deals. To put a fine point on that, we are exploring opportunities, both as buyers and potential sellers of assets though we expect this year that we will be net acquirers looking at our transaction activity in total. As we look at potential equity issuance, we look to issue equity to acquire specific assets where we see a multiple spread that would drive value for our existing shareholders.

Given that what we're buying is largely consistent with what we currently own. The calculus there is relatively simple. And given what we're seeing in the market, today, we would need to be trading at a higher price point than we have been recently in order for that calculation to work.

Michael Bellisario -- Robert W. Baird and Company -- Analyst

Got it. And when you say multiple spread, is that next 12 months EBITDA or NOI? Is it DCF, NAV? What multiple are you looking at in particular?

Justin Knight -- Chief Executive Officer

I mean, we're looking at relative return on investment over a more extended period of time. But certainly, near-term cash flow on a relative basis from acquisition targets, near-term cash flow and a discounted cash flow model have greater value than future cash flow. And so certainly, we're looking at the ability to drive incremental earnings per share in the near term.

Michael Bellisario -- Robert W. Baird and Company -- Analyst

Got it. That's helpful. That's all for me. Thank you.

Operator

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

Dany Asad -- Bank of America Merrill Lynch -- Analyst

Hey. Good morning, everybody. Can you just give us a quick update on the current like labor and hiring environment in your markets? And then what sort of staffing levels are you operating at right now versus '19? And then where would you see those levels normalize as we start to clear 2019 levels of demand and RevPAR potentially later in the year into '23?

Liz Perkins -- Chief Financial Officer

Good morning, Dany. As we highlighted on our third quarter earnings call, going into fourth quarter, understanding that we might see seasonal occupancy declines in November and December, we indicated we would likely maintain staffing levels where we needed to hire an incremental associate we would if occupancy supported that. But through the winter months, where we're typically seasonally slower, we would maintain staffing levels, not adjust meaningfully for occupancy declines and start the year off at relatively the same levels of -- that we were -- as we were entering Q4 and wrapping up Q3, which is around 70% to 75% full-time employees relative to 2019. I think we're looking at future trends and market-by-market making decisions as to what staffing levels need to look like as occupancy continues to grow, we'll be thoughtful there.

It will vary by hotel and asset and how we're operationally structured to maximize and take advantage of productivity efficiencies. We are still optimistic that we'll have some long-term FTE savings relative to 2019. But we have found that we need to continue to add associates where managers have been covering more shifts and really get to a more optimal level on average going forward. But relative to probably the industry as a whole, we thoughtfully added back associates throughout last year and feel well positioned as we enter 2022.

Dany Asad -- Bank of America Merrill Lynch -- Analyst

Got it. And then at the corporate level, I know you guys kind of had a guide for 2021 in Q3 into Q4. And that number came in a little bit higher than that in Q4. And just was there something to call out on that? And I know you also had '22 outlook out there.

So it's not about -- it's more just trying to understand kind of what happened in the quarter that kind of puts you above the range.

Liz Perkins -- Chief Financial Officer

The related G&A expense, the increase to G&A in 2021 was driven by incentive compensation related to higher operating and shareholder return performance at the end of the year. Operationally, November and December exceeded our expectations, and our shareholder return performance at year-end was higher than expected as well. Also keep in mind that almost 60% of target compensation is paid out in stock, and we do not adjust EBITDA for noncash share-based compensation expense. Turning to what we've guided for 2022, we're assuming more normalized travel and conference attendance.

And at the midpoint of that guidance range, we're representing target incentive compensation payout. We may adjust that as we progress through the year. But really, as you approach year-end, you have more visibility in-house shareholder return metrics will materialize, and that incentive compensation can swing that outside of the midpoint of your guidance range. But for now, just as you think about 2022 and how we're looking at it the midpoint of the range is based on target compensation.

Dany Asad -- Bank of America Merrill Lynch -- Analyst

Understood. Got it. Thank you very much.

Justin Knight -- Chief Executive Officer

Thanks.

Operator

Our next question is from Floris Van Dijkum with Compass Point. Please proceed with your question.

Van Dijkum -- Compass Point Research -- Analyst

Good morning, guys. Van Dijkum, of course, as you know. But I wanted to just have you maybe provide -- just a follow up on the NAV question. I know you guys don't give any Bs, but I may talk about replacement costs.

One of your competitors talked about the fact that replacement costs in the hotel industry are certainly up 20%, 25%, land costs are higher. And obviously, that also means that the potential for new supply coming online and competing with your assets is also reduced. And maybe if you can give some comments in terms of how that pertains to your replacement cost per key and how you think about that? And then also maybe your thoughts on the threat of supplier? Why you feel comfortable? Where you are right now?

Justin Knight -- Chief Executive Officer

Certainly. And I may, if it's OK, tackle those questions in reverse order. Speaking to supply specifically and I think even listening to the major brands in our recent conference calls, we've seen a significant pullback in new construction starts in our markets, driven in part by the factors that you highlighted. Increased construction costs, increased land costs, greater uncertainty from a supply chain standpoint and certainly labor availability and cost, all are factored into that equation.

There has also been a greater limitation on debt financing for new construction projects, which has created a bit of a gap in there. As we look forward, given the time that it takes from shovel in the ground to completion of new construction projects, we see ourselves having a multiyear window with below-average supply in the vast majority of our markets. And as we look at the potential that gives us, especially given continued robust leisure demand and what we anticipate to be a meaningful uptick in business transient puts us in a position to meaningfully drive top-line revenues across our portfolio. And as we've talked about in the past, that movement in top-line revenues, especially in the rate fuels margin expansion over time and yields greater profitability for our investors.

And when we talk about the optimism that we have for our portfolio, the lack of new supply is a meaningful contributor to that optimism. Speaking to NAV, we're certainly in a period of transition as we think about the value of our portfolio and there are a number of factors playing there, replacement cost is certainly one of those factors. And we've highlighted the various components that are leading to meaningful increase in cost to replace assets. Beyond that, we've seen a significant increase in interest in the types of assets that we own.

And if we think about the historic cap rate spread that existed between high-quality select service assets and upper upscale and luxury assets, we've seen that spread compress and cap rate compression acts as a multiplier for the increases in profitability that we anticipate over the next several years. And so as we think about the value of our existing portfolio, we see meaningful upside as we move through this year, proved out the strength of the markets and get back to and surpass many of those markets pre-pandemic profitability.

Van Dijkum -- Compass Point Research -- Analyst

Thanks, Justin. That's helpful. Clearly, that suggests you think that your NAV is higher than where your stock price is. But if I can have my follow-up question.

I guess the other question that we're hearing from some investors is about, well, geez, this cost savings is margin improvement. And again, margin improvement also includes the revenue part, which is, again, there's multiple facets to it. But certainly, in terms of the cost savings, the employee costs are up, certain other things are up and the previous ranges provided by the many management teams of 100 to 200 basis points of margin improvements going forward. Maybe if you can touch on some of the initiatives that you've worked on why you think there's going to be -- there should be some margin improvements that will be permanent? What that -- to what extent that's from some cost reductions and you put some information in your slide deck, but also maybe some of your strategy in terms of clustering management in certain markets and some of the other operational initiatives that are more Apple specific?

Justin Knight -- Chief Executive Officer

Absolutely. Certainly, over the past several years, we've found ways to do things more efficiently than we imagined possible -- where possible prior to the pandemic. You know us well enough to know that we have always generated industry-leading margins at the property level from an operations standpoint. And in part, that's attributed to the types of assets that we own.

But certainly, we have employed best-in-class management companies and oversee their operations with sophisticated asset management using benchmarking data to drive operating performance to those high levels. We have been strategic in thinking about our management companies specific to individual markets and consolidated management within individual management companies to gain greater efficiencies within markets where we have concentration. Beyond that, we've looked at staffing models, questioning the way that we did things historically and ensuring that we are driving the best return on our investment in people and in assets. And I think outside of the areas that we've highlighted in the past as have our peers, related to greater efficiencies in housekeeping and potentially around food and beverage operations, we've spent a significant amount of time focused on sales operations at our properties.

Recognizing that a more meaningful percentage of our total business comes through online channels, including brand.com online channels. And looking to allocate a greater percentage of our total resources as we think about sales to those channels and to revenue management, both of which have a meaningful impact on total profitability. Thinking about long-term margin expansion, much of what we've done on the productivity side will act as an offset to inflationary pressures. And so in the environment that we're in today, we won't yield on a dollar-for-dollar basis, the total benefit in terms of margin expansion from the productivity initiatives that we put in place.

The greatest opportunity for margin expansion and our reason for optimism comes from our ability to drive rate. Liz highlighted in her earlier remarks, less than half of our hotels are currently performing at or above pre-pandemic levels from a RevPAR standpoint. As we look at the continuation of the recovery and what those hotels are already doing for our overall portfolio return, we see meaningful upside thinking about total revenues that we may be able to produce and that being a primary driver of long-term margin expansion. Looking at the third quarter and fourth quarter specifically, we've done exceptionally well getting back to or in the range of where we were from a total margin standpoint in 2019.

And that, again, is with less than half of our portfolio operating at or above pre-pandemic revenue levels. And so as we progress through this year with continued optimism around leisure travel, and that optimism being realized as we look at weekend occupancies specifically around major holidays. But adding to that a return of business transient, which, as we highlighted, has historically represented more than half of our total business. We see meaningful upside from a rate standpoint and that being a principal driver of margin expansion in '22, '23 and potentially beyond.

Van Dijkum -- Compass Point Research -- Analyst

Thanks, Justin.

Justin Knight -- Chief Executive Officer

Thank you.

Operator

[Operator instructions] Our next question is from Chris Darling with Green Street. Please proceed with your question.

Chris Darling -- Green Street Advisors -- Analyst

Thanks. Good morning. A couple of questions on my end. First, you've been fairly comprehensive in discussing the favorable supply backdrop in terms of the construction pipeline across your portfolio.

But I'm wondering about recently delivered hotels that maybe haven't fully stabilized yet. Is that a meaningful consideration at all?

Justin Knight -- Chief Executive Officer

It certainly has been as we move through the early phases of the recovery. We continue to have meaningful supply growth in 2020 and through 2021 as we look at potential deliveries in '22 and '23. As a result of fewer construction starts in recent years, those numbers are coming down. And so looking at our portfolio, broadly speaking, there are very few markets where we see that being a significant impediment to near-term results.

Chris Darling -- Green Street Advisors -- Analyst

And second, kind of switching gears. I'm curious, when you think about the idea of business and leisure travel blending together more consistently going forward. One, are you believers in that over the long term? And if so, does that play a role in how you think about where you allocate capital going forward?

Justin Knight -- Chief Executive Officer

It definitely does. And this is a trend that we've spent a decent amount of time highlighting recently, but really a trend that we began to identify prior to the pandemic. As we look at the next generation of travelers, there's a greater priority placed on having experiences with travel. And that had put us in a position where we were interacting with the brands and reimagining brand concepts to cater to individuals and to groups that were looking for a better travel experience related to business travel.

We've certainly seen with increased flexibility related to in-office work, an increase in what may call leisure travel and anticipate that's a trend that's likely to continue. As we highlighted in our prepared remarks and have discussed regularly for that very reason, we look to acquire and to own assets in markets that have a good mix of leisure and demand -- and business demand drivers. And we've seen that as a primary driver for consistent demand for room nights across our portfolio. And so when you look at our recent acquisitions, whether in Portland, Maine or Greenville Downtown or even in Fort Worth and you look at how those assets are positioned within the market.

They're ideally located in -- to benefit from strong corporate business and business transient midweek with easy access to leisure demand generators that encourage individuals to extend their space.

Chris Darling -- Green Street Advisors -- Analyst

All right. Appreciate it. Thank you.

Justin Knight -- Chief Executive Officer

Thank you.

Operator

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

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Great. Thank you and good morning, everyone. In the past, Justin, it was, we've kind of talked about that midweek ADR being an attractive upside opportunity for your portfolio. If I recall correctly, that was tracking around 20% below '19 kind of late last year.

And you mentioned it recently widened due to omicron. So first, is my recollection on sort of the size of that spread accurate. And as you return to that 70% occupancy level midweek, should we expect midweek ADR to kind of quickly close the gap relative to '19?

Liz Perkins -- Chief Financial Officer

Yeah. We're optimistic as we get above -- around or above 70% any night of the week that will have rate opportunity, and we'll be able to grow rate as we've seen on the weekend. Your recollection from a rate gap standpoint was, I think, specifically referencing peak night mid-week occupancies versus full week. But when I look at full week occupancies or full week rates historically, those rate premiums over weekends, we've been averaging -- and even in recent months averaging about 1,500 to 1,600 basis points of upside relative to weekends and how we've been performing on the weekend.

So the gap where we've been outperforming on weekends, splitting that to what it was historically, we have meaningful upside weekday.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Got it. That's helpful. And then -- and just really aside from broader inflation, certainly, the strength in the consumer has helped as well, I assume. But like what else has changed that's giving management companies the confidence to push rates that wasn't there pre-pandemic?

Liz Perkins -- Chief Financial Officer

I think management companies, it was very, very clear in 2020 that rate was not going to drive demand. And so both management companies and the revenue management systems were optimized to ensure that we weren't needlessly lowering rate without gaining incremental demand. That put potentially a floor on how far we would drop. But also the brands and our management companies did a great job working with top accounts, both corporate and local to find either price points that match the demand generated or to maintain rates going into 2020 and 2021 such that we weren't negotiating because corporate accounts have had lower demand, which would warrant a rate increase versus the need for that demand, potentially putting us in a position from a negotiating standpoint.

It really just allowed everyone to take a breath and figure out as people got more comfortable traveling and travel policies eased that rates were at a reasonable level. I think that we have all evolved from a revenue management perspective, both the talent that we have on site at our hotels and with our management companies. But the incremental resources that we have here corporately too, we work together to think about broad trends and ensure that we're effectively optimizing the use of our revenue management systems, layering in base business at the right rate and capitalizing on opportunities in market. And so I think it's a collaborative effort, but the advancements in revenue management systems, the approach to corporate and local negotiated rates throughout the pandemic and then just a recent and -- more recent performance with rate growth gives management companies and revenue managers confidence.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

That's really helpful. It sounds like the tools are certainly having an impact. And then one other thing I wanted to hit on was around the booking window. It sounds like your visibility is improving a bit, maybe relative to where we were last year.

Which segments are you really seeing that booking window extend to provide a little bit of extra visibility into sort of the business?

Liz Perkins -- Chief Financial Officer

The forward booking window and seeing bookings further out, looking at it in the next couple of months and even beyond, which, again, we're talking about small volume, but it's still centered largely around leisure business and weekend from what we can see. That said, when I look at the percentage of mix, and I mentioned this earlier in my comments, we continue to see corporate and local negotiated percentage of mixed bookings increase gradually looking forward and GDS from a channel mix perspective maintain despite omicron and increase looking forward into March. And so continuing to see that mix of business transient improve as we see forward bookings for leisure. So both really good indications for both segments into the spring and summer.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

That's very helpful. And then Justin, just one for you, and sorry if I missed anything on this front. But how did the recommendation to the board as far as in the board's decision to setting the dividend? How did you kind of land on the quarterly rate of $0.15? And how do we think about the ramp from here relative to growth in cash flow?

Justin Knight -- Chief Executive Officer

We touched on this briefly earlier, but it's worth revisiting. We have always looked to establish a dividend at a payout rate that takes into consideration, other opportunities that exist and other capital needs for our business and to establish a payout rate that we anticipate will be sustainable over an extended period of time. Looking at the $0.05 per month per share payout relative to our performance last year, it represents -- depending on whether you're looking at the cash payout within the year or the $0.60 per year longer-term payout between 55% and 65% of modified funds from operations. As we move forward, we see ourselves being exceptionally well positioned to benefit from the recovery and anticipate that we'll be in a position to increase the dividend over time.

We interact with our board of directors on a monthly basis and assess our payout in the context of the operating environment and our expectations for the future along with, as I highlighted, other opportunities to ensure that we're allocating capital to drive the strongest total returns for our investors over time.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

No. I appreciate you revisiting the topic and thank you.

Liz Perkins -- Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Justin Knight for closing remarks.

Justin Knight -- Chief Executive Officer

Thank you. We really appreciate you spending time with us today and for your interest in our company. We hope, as always, that as you travel, take the opportunity to stay with us in one of our hotels. We wish you the best and look forward to talking to you again soon.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Kelly Clarke -- Vice President, Investor Relations

Justin Knight -- Chief Executive Officer

Liz Perkins -- Chief Financial Officer

Anthony Powell -- Barclays -- Analyst

Kyle Menges -- B. Riley Financial -- Analyst

Tyler Batory -- Janney Capital Markets -- Analyst

Michael Bellisario -- Robert W. Baird and Company -- Analyst

Dany Asad -- Bank of America Merrill Lynch -- Analyst

Van Dijkum -- Compass Point Research -- Analyst

Floris Van Dijkum -- Compass Point Research -- Analyst

Chris Darling -- Green Street Advisors -- Analyst

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

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