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Apple Hospitality REIT (APLE -1.50%)
Q2 2022 Earnings Call
Aug 05, 2022, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings. Welcome to Apple Hospitality REIT second quarter 2022 earnings call. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to Kelly Clarke, president of investor relations.
Thank you. You may begin.
Kelly Clarke — Vice President, Investor Relations
Thank you, and good morning. Welcome to Apple Hospitality REIT’s second quarter 2022 earnings call. Today’s call will be based on the earnings release and Form 10-Q, which we distributed and filed yesterday afternoon. Before we begin, please note that today’s call may include forward-looking statements as defined by federal securities laws.
These forward-looking statements are based on current views and assumptions, and as a result, are subject to numerous cause actual results, performance or achievements to materially differ from those expressed, projected or implied. Any such forward-looking statements are qualified by the risk factors described in our filings with the SEC, including our 2021 annual report on Form 10-K and speak only as of today. The company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, non-GAAP measures of performance will be discussed during this call.
Reconciliations of those measures to GAAP measures and definitions of certain items referred to in our remarks are included in yesterday’s earnings release and other filings with the SEC. For a copy of the earnings release or additional information about the company, please visit applehospitalityreit.com. This morning, Justin Knight, our chief executive officer, and Liz Perkins, our chief financial officer will provide an overview of our results for the second quarter of 2022. 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. Performance across our portfolio during the second quarter continued to exceed our expectations. Second quarter RevPAR surpassed prepandemic highs, coming in at $119, up 40% compared to second quarter 2021 and up 4% compared to second quarter 2019. RevPAR was bolstered by strong rate growth.
ADR for our portfolio was $153 for the quarter, up 27% to 2021 and up 8% to 2019. Occupancy for the quarter was strong at 78%, up 10% to 2021 and down only 4% to 2019. Positive business and leisure demand trends have continued into July with occupancy of approximately 77% for the month and rate continuing to grow and exceed prepandemic levels. We are encouraged by growth in weekday occupancies, which reached 75% for the quarter, indicative of the resiliency of business travel across our markets.
Consistent with our expectations, leisure travel continues to be incredibly strong despite higher gas prices and an inflationary environment. Weekend occupancy was approximately 85% per quarter, surpassing 2019 occupancy levels by 160 basis points. With stronger weekday occupancies adding to robust weekends, we are better positioned to more meaningfully move rates throughout the week and adjust our business mix to maximize profitability. For the quarter, weekday ADR was $148, and weekend ADR was $165.
Strong recovery in rate helped to offset challenging labor and inflationary pressures. As a result, second quarter operations were significantly ahead of the same period last year with comparable hotels total revenue up more than 39% relative to the second quarter of 2021, we achieved comparable hotels adjusted hotel EBITDA of $137 million, up 46% to the same period of 2021 and up 4% for the same period of 2019. We achieved comparable hotels adjusted hotel EBITDA margin of 40% and up $100 million from operations was $111 million or $0.48 per share, in line with second quarter 2019 results. These outstanding results further validate our strategy of investing in a diversified portfolio of high-quality, branded rooms-focused hotels with low leverage and are a testament to the tremendous efforts of our corporate and on-site management teams.
Our portfolio includes 219 hotels and provides exposure to a wide variety of demand generators and industries. Our hotels are generally located in business-friendly markets that offer attractive cost of living and popular leisure and entertainment venues, which appeal to a variety of small and medium-sized businesses, as well as large corporations. Our rooms-focused hotels aligned with industry-leading brands and managed by best-in-class offering as the ability to produce robust operating margins and profitability. outlets to manage and best public space to maintain simplify operations and minimize utility, cleaning and maintenance costs.
The hotels we own appeal to a broad set of business and leisure customers operate at attractive margins are resilient during economic downturns require reasonable ongoing capital reinvestment, produce attractive cash returns, have a small relative environmental footprint are attractive on resale to both local and institutional investors and can be effectively optimized in a scaled portfolio utilizing comparative data analytics and operational benchmarking. The strength of our balance sheet further contributes to the long-term stability and optionality of our platform. In July, we refinanced our primary unsecured credit facility, further bolstering our already strong liquidity position. In addition to maturities and improved pricing, the refinancing upsized our revolving credit facility and term loans, providing the company with greater access to liquidity for strategic growth and other corporate initiatives.
We greatly appreciate the support of our lenders, their conviction in our strategy and their continued confidence in the underlying fundamentals of our business. us to be opportunistic in ways that will drive incremental value for our shareholders. Rising interest rates and disruption broadly in debt markets have impacted competition for assets and more attractive buying opportunities. Given our outperformance since the onset of the pandemic, the strength and flexibility of our balance sheet and the additional borrowing capacity under our amended credit facility, we are incredibly well positioned with just 3.7 times net debt to EBITDA, extended and staggered maturities, a relatively young portfolio and over $700 million in current total liquidity, we are able to be both patient and flexible as we work to capitalize on potential dislocations in the market.
We continue to actively underwrite and explore dozens of opportunities for flare of assets in 2022 and with transactions likely over the coming months. The 12 hotels we have purchased since the onset of the pandemic contributed meaningfully to our year-to-date outperformance exceeding our original underwriting during the first six months of the year by over $3.2 million in hotel EBITDA. A third of these hotels produced yields in excess of 10% on a to be highly selective and intentional in the build-out of our portfolio, pursuing assets that are additive to those that we currently own where we can achieve attractive pricing. Future acquisitions will be consistent with our strategy of investing in high-quality rooms-focused hotels located in strong RevPAR markets with attractive cost structures and meaningful growth potential.
We were fortunate to have entered the pandemic with a relatively young and well maintained portfolio. And as a result, we’re able to strategically reduce renovation spend to preserve capital in 2020 and 2021. During the first six months of 2022, we invested approximately $17 million in capital expenditures and anticipate spending a total of $55 million to $65 million during the year. This year’s spend will more closely approximate our historical investment of between 5% and 6% of revenues which we continue to feel is appropriate for our portfolio and a meaningful differentiator for us, which contributes to total shareholder returns over time.
Through our scale, ownership of branded rooms-focused properties over more than two decades, we have significant experience in determining the most effective scope and timing of our investments to ensure minimal disruption to property operations and maximum impact for dollar spent. As of June 30, 2022, we had approximately $345 million remaining under our share repurchase program. As has been the case historically, we will be opportunistic in using this program where we see market dislocations that create opportunities to buy our portfolio at a meaningful discount. We also intend to continue to return capital to our investors through monthly dividends.
During the second quarter, we paid $0.15 per share for a total of approximately $34 million. Based on Wednesday’s closing price the annualized distribution of $0.60 per common share represents an annual yield on a monthly basis and assess our payout in the context of current operating environment. Our expectations for the future and other investment opportunities to ensure that we are allocating capital to drive the strongest total returns for our shareholders. Our strategy was designed to create an asymmetrical risk profile, mitigating downside risk while providing meaningful opportunity for outside.
We remain confident in the resiliency of travel and our ability to drive strong results and maximize shareholder value in any macroeconomic environment, with nearly every operating business travel, and new supply at historically low levels, we are incredibly optimistic about the future of our business. Before I turn the time over to Liz, I just want to take a moment to thank that I touched on in my earlier remarks. Liz, I’ll now turn the time over to you for additional details on our balance sheet, operations and financial performance during the quarter.
Liz Perkins — Chief Financial Officer
Thank you, Justin, and good morning. Top line performance for the second quarter grew sequentially by months with total portfolio revenues for June up approximately 28% to prior year and in line with June of 2019. RevPAR growth for the quarter was driven primarily by ADR which improved 27% and 8% to the same period in 2021 and 2019, respectively. . Occupancy was up meaningfully to 2021 but came in approximately 4% lower than the second quarter of 2019.
Preliminary results for July show continued strength in demand with occupancy of 77% and continued growth in rate. While July occupancy was down 6% to 2019, in large part the result of lower business demand on the fourth of July holiday, occupant in the final week of July. Our portfolio is now producing top line results above prepandemic levels even without a full recovery in business travel. As we look forward to in midweek occupancy driven by further recovery in business travel, will push our operating performance even higher.
Recent performance reflects both continued strength in leisure and a meaningful recovery in business demand. April, May and June weekend occupancies were 83%, 86% and 85%, respectively. Weekday occupancy improved significantly over last year and the first quarter of this year, with April and May weekday occupancy at 74% and 73%, respectively, both down less than 8% to 2019. Weekday occupancy improved further in June to 78%, only 6% down to June of 2019.
With growth in weekday occupancy, weekday ADR meaningfully improved moving from $142 in April to $155 in June, now exceeding 2019 weekday rate levels. As we look at demand segments and business transient trends, travel patterns are beginning to normalize with 56% of our portfolio produced RevPAR above prepandemic levels during the quarter with improvement in demand impacting nearly every market. Top performers included RevPAR of $134 and our ACM Portland, which ran RevPAR of $198 for the quarter. Other top producers included our hotels in Atlanta, Gainesville, our portfolio has benefited from continued strength in leisure demand with improvements in business transient and group further lifting overall results and enabling us to produce RevPAR slightly higher than 2019 for the quarter lifting performance in a growing number of markets and providing us with meaningful upside for our portfolio.
In terms of room night channel mix, brand.com bookings increased to over 38%. Property direct bookings declined to 27%, but remained elevated to second quarter 2019, a testament to the continued efforts of our property and management company sales support in. Second quarter same-store segmentation remained elevated to 2019 levels and in line with the first quarter at 34%. Other accounts moved from 27% in the first quarter continued growth in business demand and group was 16% for the quarter, in line with the first quarter and slightly higher than the second quarter of 2019.
Turning to expenses. Total for the quarter, roughly in line with the first quarter and up 5% to the second quarter of 2019. Low unemployment and rising occupancies have continued to put pressure on labor. Second quarter results were impacted by higher wages for full and part-time employees, training costs and higher utilization of contract labor to fill short-term needs.
While we anticipate the temporary reliance on contract labor have resulted in lower productivity despite positive adjustments to brand service and amenity models. We anticipate that a portion of the elevated expenses will be temporary and that productivity improvement will help to offset some of the inflationary pressures as operations stabilize. As we have always done, we will continue to balance product and maintenance standards and support strong employee morale and low turnover in order to maximize long-term profitability. Excluding payroll, same-store rooms expenses continued to be well controlled and were down 4% per occupied room compared to 2019 for the quarter.
Strong rate growth and effective cost control despite the challenging labor and hotel EBITDA of approximately $137 million and comparable adjusted hotel EBITDA margin of approximately 40%, up 10 basis points for the second quarter of 2019. As we have highlighted on past calls, we continue to believe that growth in rate will be the primary driver of margin expansion as we move through the recovery. Following similar trends, MFFO also improved sequentially each month and was approximately $111 million or $0.48 per share for the second quarter, up 74% compared to the second quarter of 2021 and in line with the second quarter of 2019. Looking at our balance sheet.
As of June 30, 2022, we had $1.4 billion in total outstanding debt, approximately 3.7 times our trailing 12 months EBITDA with a weighted average interest rate of 3.6% and availability under our Total outstanding debt, excluding unamortized debt issuance costs and fair value adjustments is comprised of approximately $366 million in property-level debt secured by 22 hotels and approximately $1 billion outstanding on our unsecured credit facilities. At quarter end, our weighted average debt maturities were three years with approximately $96 million net of reserves maturing in 2022, including $66 million outstanding on our revolving credit facility. Within the quarter, we entered into a seven-year unsecured $75 million senior notes facility. We repaid and sold the $56 million note payable related to the purchase of the fee interest in the land at our Seattle Resonant In, and we repaid six property level secured more in July, subsequent to quarter end, we amended and restated our existing $850 million credit facility, increasing the borrowing capacity to approximately $1.2 billion, extending maturity dates and achieving improved pricing across the facility.
The $1.2 billion credit facility is comprised of a term loan of $275 million maturing in 2027, a term loan of up to $300 million maturing in 2028, including $150 million available available with a delayed draw option, and a revolving credit facility of $650 million with an initial maturity date in July 2026, which may be extended additional capacity of $150 million under the term loan and $225 million under the revolving credit facility. The agreement includes an accordion feature in which $0.2 billion to $1.5 billion. At closing, we borrowed $475 million under the term loan and used the proceeds to repay the $425 million outstanding under the term loans of the previous credit facility and $50 million outstanding under the revolving credit facility. On August 1, we repaid in full an additional three secured mortgage loans for a total of approximately $32 million, the refinance of our primary credit facility, the additional seven-year senior notes facility and the repayment of nine secured mortgages, we achieved our key balance sheet objectives of managing and continuing to stagger our debt maturity, increasing access to liquidity through upsizing our revolving credit facility and shifting a portion of our secured debt to unsecured and as a result, increasing the unencumbered pool of assets in our portfolio.
These objectives could not have been met without the support of our lenders. We are extremely grateful for their efforts to help us execute these transactions and for their continued confidence in our team, strategy and performance. As for our outlook for the remainder of 2022, we remain confident in the broader industry recovery and the performance of our portfolio specifically. Second quarter performance exceeded our internal forecast.
Preliminary results for July RevPAR are positive to 2019 and average daily booking trends continue to be elevated relative to prepandemic levels. Although macroeconomic is strong and business travel has recovered ahead of our internal forecast. As we build back mid-week occupancy, we are gaining pricing power, which should enable us to further grow RevPAR for our portfolio. With second quarter bottom line operating results in line with 2019, we expect to move earnings beyond prepandemic levels in the near term if these trends continue.
Macroeconomic environment. We have weathered the most challenging period in our industry’s history and demonstrated the resiliency of our differentiated strategy. With continued strength in leisure demand and structuring provides extended maturities and additional liquidity, which we intend to use opportunistically to pursue accretive opportunities. Our assets are in good condition with recent dispositions and planned renovations, ensuring that we maintain a competitive advantage over other products in our markets.
The supply picture is more favorable than it has been at any point in our over 20-year history in the industry. And our team has used our recent experience to enhance our internal systems and processes in ways that will enable us to further maximize the performance of our current holdings. We will now be happy to answer any questions that you may have for us this morning.
Questions & Answers:
Operator
Thank you. [Operator instructions] Our first question is from Neil Malkin with Capital One Securities. Please proceed.
Neil Malkin — Capital One Securities — Analyst
Thank you. Good morning, everyone. Congrats on getting past 2019. Yeah.
First one, can you — either of you talk about midweek or BT opportunity from here? Maybe you could start by through Q2 and then into July. And then, if I think that there is a sort of sentiment that group will recover ahead of BT just potentially somehow you see that side of the business shaking out and what the next several quarters look like in terms of BT holistically in the portfolio?
Liz Perkins — Chief Financial Officer
Sure. We had started to see more sequential and consistent improvement in business transient, looking at a couple of different points, GDS as a percentage of our mix from a channel mix perspective and then a room segmentation perspective, looking at our negotiated both local and corporate negotiated. So room segmentation standpoint for corporate and local negotiated combined in the low 20% range, 20%, 21% range. And for the quarter, we would have been where we were for the quarter in 2019 for corporate and local negotiated.
And then, for GDS, we improved to 15% in the quarter. So that’s more — your more traditional corporate negation hotels that are exceeding 2019 levels. That’s still a significant of our portfolio that still has room to grow in both on the corporate and leisure side. And so, when I think — when we think about how our portfolio is performing, with such disparity across the high and low end, there’s significant upside from — and then when you think about our overall occupancy levels and where we still have a little bit of room to grow to reach 2019 levels, it’s midweek.
It’s our mid-week occupancy. It’s the BT. And so, we still see meaningful upside as we look at some of these markets that are slower to return. But as a portfolio overall, we still anticipated.
The more and more markets midweek that start approaching and exceeding 2019 levels, we’ve had pricing power. And so, there’s opportunity on the rate side as that BT comes back.
Justin Knight — Chief Executive Officer
Yeah. And importantly, Neil, we’ve continued to see progressive improvement month-over-month on the business transient side of our business. And that’s showing up in our mid-week occupancies was highlighted in our remarks that today, looking at the quarter as a whole, Tuesday and Wednesday for the entire quarter those days were up about 80% from an occupancy. And so, while we continue to have room certainly on the business side, we are seeing continual improvement in that area and anticipate that business travel will continue to improve through the back half of the year.
Liz Perkins — Chief Financial Officer
Even if you look at July and what we’ve seen on Tuesday, Wednesday, night in July, excluding that first week, which was impacted by the 4th of July and certainly impacted business transient on Tuesday and we continuing to see good growth.
Neil Malkin — Capital One Securities — Analyst
Great. Yeah. Sounds good. And just thought you said something like, I think GDS is 15% versus 20% in 2019.
That’s around, what, like 75%. Is that like an accurate way to think about it? Like BT was 75% of ’19. Again, just trying to understand.
Liz Perkins — Chief Financial Officer
Yes.
Neil Malkin — Capital One Securities — Analyst
Yeah. OK. OK. Great.
Other thing for me, Justin, I think you touched on it briefly, but one of the things you guys have always talked about, particularly since the pandemic is the balance sheet and the differentiated nature of it and you’re able to get out of waivers early. And now that we have a more dubious financial or lending environment, maybe with some macro uncertainty sprinkled in there. Do you feel like you’re — you want to or you are going on the offense or going — being more aggressive in terms of finding deals or opportunities to acquire I think you alluded to something about being more attractive from the competitive side now. But can you just shed some light on that the acquisition environment and everything like that that would be great.
Justin Knight — Chief Executive Officer
Yeah, certainly. In my prepared remarks, I highlighted the fact that disruptions in the debt market have at least temporarily created more attractive buying opportunities for us. And I think as it is consistent with what we’ve been saying from the beginning of the year, we anticipate that we will be net acquirers this year. Certainly, advantaged by our balance sheet and lives and our teams work in getting for us additional liquidity.
I think we’ve been actively underwriting deals continuously since the onset of the pandemic and competing for deals largely with private equity players who are now meaningfully disadvantaged by increasing interest rates and lack of availability of debt, specifically in the CMBS market. As a result, we’ve seen deals that were tied up coming back to market, both individual properties and larger portfolios. Deals that we had interest in and participated in processes on. And I think the conversations we’re having today are productive around those and other assets, which we’re talking to orders about off market.
Certainly, from the beginning, we’ve signaled that we wanted to be opportunistic buying assets that we thought were additive to our portfolio at pricing that we believe would be attractive and yield for our investors long term. And we see ourselves as being in as good a position as we have been over the past several years and better in many ways.
Neil Malkin — Capital One Securities — Analyst
Thank you for the time.
Justin Knight — Chief Executive Officer
Absolutely.
Operator
Our next question is from Dori Kesten with Wells Fargo. Please proceed.
Dori Kesten — Well Fargo Securities — Analyst
Thanks. Good morning. It’s kind of a similar question. But Liz, can you just give a little bit more detail on the reasoning behind the increase in the size of the facility? Is it that it’s more appropriate given the company today? Or is this really a read through about future growth? And then just a follow-up to Justin’s comment, are there relatively large portfolios being marketed for sale today that are interest to you?
Liz Perkins — Chief Financial Officer
To answer the first part of your question, Dory, the upsizing the facility was the result of a couple of unsecured. And so, a portion of the term loan or the term loan increase was the result of of that objective. The revolver upside was strategic, both relative to the size of our company, the size of our average investment today and our desire to be nimble and be able to act quickly in any environment and grow strategically if the opportunity exists. So kind of twofold from a strategic standpoint.
Justin Knight — Chief Executive Officer
And then in terms of portfolios, there have been actually for some time, a number of attractive portfolios that have been marketed several of which we were active in the bidding process around, which are coming back to market with always having some additional flexibility around the makeup of those per players. So as we’re initially underwriting the portfolios often contained assets that we thought would be less additive to our portfolio, and that impacted the value for us and our pricing and competitiveness around the portfolio. As the portfolios are coming back to market, so those are increasingly willing to consider disposition of a subset of the larger portfolio, which puts us in a position to more effectively align the makeup of the portfolio that we’re underwriting with our existing strategy and the portfolio we currently have. So I’d say while we believe — while the most likely scenario on a go-forward basis will be continued growth in our portfolio through a series of individual asset transactions, there’s greater likelihood now than there was earlier in the year that that could include small portfolios as well.
Dori Kesten — Well Fargo Securities — Analyst
OK. And I guess, what do you — how would you describe small that, several hundred million?
Justin Knight — Chief Executive Officer
It would be several hundred million. Yes.
Dori Kesten — Well Fargo Securities — Analyst
OK. Thank you
Operator
Our next question is from Michael Bellisario with Baird. Please proceed.
Michael Bellisario — Robert W. Baird — Analyst
Thank you. Good morning, everyone.
Justin Knight — Chief Executive Officer
Good morning.
Michael Bellisario — Robert W. Baird — Analyst
Just one more follow-up there on transactions. Just maybe can you give us some more detail on you’ve seen over the last 90-plus days in terms of pricing changes, expectations and pricing changes in cap rates? And then maybe kind of how would you characterize that differential between the zero to — last point single assets versus portfolio pricing?
Justin Knight — Chief Executive Officer
So it’s certainly with a lack of available financing portfolios are impacted more significantly from a pricing standpoint because the portfolios haven’t traded today, I can give you some directional commentary. But until they trade, it will be difficult to establish exactly where the variance ends up. Today, I’d say, brokers are guiding to somewhere around a 10% discount to where values were prior to the disruption of the That’s a nonstarter and they’ll pull assets from market. For other assets, the more rapid recovery in operating performance puts them in a position where they can achieve their objectives even at a higher potential cap rate, meaning that for us as a buyer we could potentially achieve higher yields even while having the seller achieve a price point that would be attractive for the asset.
And we’re in ongoing dialogue with a number of potential sellers around individual assets at large or portfolio trade. As I highlighted in response to the earlier question, I think there’s greater flexibility based on the number of potential buyers in the market for us to customize portfolios, eliminate some of the assets that would be less additive to our portfolio and really fine-tuning our focus around assets that add to our geographic diversification and that our quality level that is immediately additive to our overall portfolio. So we’re excited about where we are now at this point that would be attractive to the trend will be acquisitive as we move through the back half of the year.
Michael Bellisario — Robert W. Baird — Analyst
Got to make sure I heard that correctly. Just for higher-quality properties that you might be interested in, prices have kind of come back to you and maybe the price is the same from your perspective, but the cap rate is higher because is six months of fundamentals have been better. Is that fair?
Justin Knight — Chief Executive Officer
That’s correct. More or less. And again, remembering that until the deals trade, we’re giving directional commentary.
Michael Bellisario — Robert W. Baird — Analyst
Speaking of directional commentary for Liz, just on July, I know you said it’s up versus 2019, but maybe can you provide some context or any added detail just around the magnitude of that increase, particularly relative to June? And then just kind of all else equal, as you look out to August, September, October, what’s kind of a normal seasonality for the portfolio for those months in terms of the cadence of absolute RevPAR and absolute margin just as we think about modeling on a go-forward basis?
Liz Perkins — Chief Financial Officer
Good question. So for July specifically, we mentioned and had in our release, but we mentioned that July was 77% from an occupancy perspective, which compared to 2019 was down about 6%. So relative to where we were in June was a little bit of a step back, given the impact of the 4th of July week. If you look at the weeks following 4th of July, we actually — we’re shrinking that gap relative to 2019 through the month and ended that last week at down only 3% from an occupancy perspective relative to 2019, which sort of normalizes for the fact that June is or was in 2019, a peak month from a RevPAR perspective.
And so, — and was higher from an occupancy perspective than July of 2019. Looking at rate, we actually saw rate grow over where we came in, in June for July. We haven’t given specifics around how much. But typically, July ADR actually takes a step back again from June being that June is a peak month or historically has been a peak month.
And so, that rate growth into July will help offset the incremental impact of the fourth of July week on occupancy and help overall RevPAR levels relative to us. So a positive from a rate perspective and even outside of the fourth of July week a positive from an occupancy standpoint relative to 2019. That said, Q2 and Q3 are typically fairly similar from an overall sort of EBITDA contribution standpoint and RevPAR contribution standpoint, it depends some on how we can fall and holiday fall, but in 2019, June was a peak month. July takes a slight step back, but is, again, one of our strongest months in the year was in 2019.
And then, August, more typically has mirrored May which is a little bit shy of where June was. And then, September is impacted by Labor Day and BT picks up as leisure historically has pulled back some over the fourth quarter. So first and fourth quarter is more similar in second and third quarters more similar to each other, if that’s helpful.
Michael Bellisario — Robert W. Baird — Analyst
Yep. Very helpful. Thank you.
Operator
Our next question is from Chris Darling with Green Street. Please proceed.
Chris Darling — Green Street Advisors — Analyst
Thanks. Good morning. Just in thinking about future acquisitions, again, now that a larger swath of your markets are either above or to pre-COVID performance, does that at all change where you look to allocate capital going forward? And specifically, I’m thinking whether the value plays kind of putting capital to work and slower to recover markets might make more sense now than maybe a couple of quarters ago?
Justin Knight — Chief Executive Officer
We have certainly been looking in markets that have been slower to recover. And our appetite to those markets really depends on our long-term view of how the markets will perform. I think we’ve highlighted in past calls and continue to believe that, to some extent, there has been a shift, demographic and economic shift in our country over the past five to 10 years away from higher-cost markets and into more business-friendly markets with lower operating costs. And we’ve seen that with some of the larger corporate announcements that have happened over the past several years.
That will have a long-term impact on some markets that have historically been top performers. And that colors our expectation and the pricing that we would offer for assets in those markets. But I think as I highlighted in my prepared remarks, diversification is an important component of our overarching strategy, and we look to add assets to our portfolio that create exposure to demand generators where we have lower exposure today and in markets and at price points that over time will enable us to achieve the best yields for our investors. I think we have the broadest vision from an acquisition standpoint of what might fit for our portfolio based on that strategic pillar for us and continuing to look at opportunities in a broad variety of different markets.
Chris Darling — Green Street Advisors — Analyst
OK. I appreciate those thoughts. And then, shifting gears, just curious, have higher gas prices at all impacted the performance of the portfolio. And whatever the recent experience has been, I’m curious how that compares maybe with similar historical periods?
Justin Knight — Chief Executive Officer
So to date, we have not seen an impact specifically from higher gas prices. And looking back historically, gas prices alone have rarely negatively impacted hotel performance in the ways that you might anticipate they would. To the extent gas prices are part of a broader inflationary environment, and to the extent the inflationary environment negatively impacts discretionary income for individuals. Over time, that can have impact on the performance of hotels as people make choices around how they allocate the limited funds that they have available.
And to date, as we mentioned in our prepared remarks, we continue to see stronger bookings than we did prepandemic. Looking out, our expectation is that through the back half of the year, that translates into performance at or above where we were in 2019, assuming current trends continue as they currently are. And so, I’d say, for the time being, we feel good about where we are. And in fact, to some extent, the inflationary environment has created a backdrop enabling us to make adjustments to rate which have more than offset the increase in expenses in our portfolio, enabling us to achieve higher margins.
Chris Darling — Green Street Advisors — Analyst
OK. Thank you. That’s all for me. Thanks.
Operator
Our next question is from Tyler Batory with Oppenheimer & Company. Please proceed.
Jonathan Jenkins — Oppenheimer and Company — Analyst
Good morning. This is Jonathan on for Tyler. First one from me. is on the business travel discussion.
And broadly speaking, can you provide some color on what kind of business travel customers are leading the way, which are still lagging? And any expectations on the wagon segments to the group?
Liz Perkins — Chief Financial Officer
Sure. I think we continue to see a strong performance from small- and medium-sized accounts. We continue to see those regional accounts perform. They’ve been performing sort of throughout and started coming back really in 2021 meaningfully.
From a sector perspective, as we think about both small and large corporate accounts, technology companies have been slower. Although in Q2, we did see them move sort of ahead from a mix of where our sectors were coming from move ahead slightly. So we’re starting to see them improve some. But we’ve done well with university business, healthcare business, manufacturing, we’ve continued to see strong performance there.
They’ve certainly outperformed technology, but technology has improved some. It continues to probably be relative to prepandemic levels for our portfolio will continue to lack the most. So we have seen some recent positive trends.
Jonathan Jenkins — Oppenheimer and Company — Analyst
OK. Great. And then, switching gears to margin. You gave some helpful commentary on the cost side in the prepared remarks, but can you provide some maybe high-level color on the sustainability of the higher margin levels given if I understand it correctly, the assumption that rates and costs will remain elevated in the back half of the year?
Liz Perkins — Chief Financial Officer
Yeah. I mean, going in, just a reminder that we do think that margin expansion will predominantly be driven by a continued ability to drive rate relative to 2019, given the overall inflationary environment and the labor environment that we’re in. We continue to manage costs as effectively as we can. The labor environment continues to be challenging with increases in occupancy and leisure demand, in particular, having more occupants per room as we peak occupancy since the onset of the pandemic in June.
The incremental labor was billed in part by either new associates that needed to be trained or contract labor. And so, our contract labor as a percentage of our total wages has increased over the past quarter, which impacted margins, particularly in June but throughout the quarter. I think we see that as opportunity long term as the environment stabilizes and we’ve retained associates that have been trained and transition more from contract labor to full-time associates. That said, there continues to be some wage pressure.
So there are some puts and takes. Outside of labor, rooms controllables, as I mentioned, are continuing to perform on a CPOR basis below prepandemic levels, which is a testament to the team and some of the brand adjustments that were made given the inflationary environment, we’re certainly focused on continuing with that as long as we can, balancing again that costs have been increasing. But we’ve been managing what we can well, we’re hopeful in that. Utilities will continue to probably be what you’ve seen.
They’re higher year-over-year and repairs and maintenance in the quarter were up slightly. I think we’re mindful of maintaining our portfolio. I think you don’t want to be shortsighted there. And so, while particularly in June, that was higher for the quarter, on a long-term basis, I think we’ll continue to see that slightly elevated to prior levels over the past year or two, and maybe slightly elevated to 2019, but we’ll make every effort to keep that well controlled.
So I think we’re still optimistic as we look at margins through the back half of the year just with the caveat that in the current labor environment, there may be some temporary increases as we train new associates and transition contract labor to full-time associates and just hope that we’re able to offset some of the wage increases that are real and throughout the industry.
Jonathan Jenkins — Oppenheimer and Company — Analyst
Very helpful. Thank you for all the color. That’s all for me.
Operator
Our next question is from Anthony Powell with Barclays. Please proceed.
Anthony Powell — Barclays — Analyst
Hi. Good morning. One more question on July. So give me what you said about occupancy improving to down, I think, roughly 3% versus ’19 by the end of July and your comment, is it safe to assume that by the end of July, you’re seeing RevPAR growth versus ’19 that was the highest COVID era for you?
Liz Perkins — Chief Financial Officer
We have — I think directionally, you’re — I think directionally, we continue to see improvement relative to 2019, particularly if you’re not looking at the four of July week.
Anthony Powell — Barclays — Analyst
OK. Got it. And maybe on the dividend. I know it’s a board decision, but pre COVID, you’re paying, I think, a very healthy dividend, about twice of what you’re paying now, now your FFO and EBITDA is trending to above ’19 levels.
I’m just curious, as you look at your dividend outlook going forward, is there anything that would prevent you from getting back to that level of payout? Was your taxable income maybe a bit lower than implied pre COVID. I’m just curious how we should think about the trajectory of the dividend over the next several quarters?
Justin Knight — Chief Executive Officer
Certainly, taxable income is one consideration as we think dividend payout. When we reinstated the dividend, the monthly dividend earlier this year, we established a payout that first, we were confident we could maintain given the range of potential scenarios that we were anticipating. And two, restructure a level that would allow us to grow it over time. While we’re currently paying out below prepandemic levels.
It’s important to note that we’re still paying the highest dividend in the industry. And certainly, as the year has played out, we performed above the high end of the scenarios we were considering at the beginning of the year. I think we’re incredibly encouraged by the performance of our portfolio and anticipate that assuming current trends continue, we would be in a position to increase the dividend in the future. I think for us and for our shareholders, dividend has always represented a meaningful component of total shareholder return.
And as we think about how we allocate capital, we look at dividend payout as a meaningful way for us to drive value for our shareholders.
Anthony Powell — Barclays — Analyst
So it sounds like for you, dividends and then buying hotels at meaningfully higher than buybacks at this point. Is that fair?
Justin Knight — Chief Executive Officer
Certainly, we’re not ruling out buybacks given the volatility in the stock market, that always represents an opportunity for us. But I think looking at what we see today, I think those two represent higher priorities for us, at least given the environment we’re looking at, at the moment.
Anthony Powell — Barclays — Analyst
Thank you.
Operator
[Operator instructions] Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed.
Austin Wurschmidt — KeyBanc Capital Markets — Analyst
Great. Thanks and good morning, guys. Justin, just going back to a prior question a bit on acquisitions. Diversification certainly has been a pillar of your strategy for a long time.
And when you’re looking at acquisitions, I’m just curious if — I know you mentioned you’re looking broadly, but are there still any markets you’re specifically focused on adding to further that diversification? And even just more specific to locations within markets to further balance the urban and suburban exposure as the recovery in urban picks up a bit of momentum?
Justin Knight — Chief Executive Officer
I think because it takes time to move portfolios, we have never been a group to chase short-term trends. And so, I think given the recent strength of leisure, we’ve benefited in markets where we have exposure to leisure. And given the expectation for stronger improvement in urban markets, our expectation is that the we will benefit in those markets as well. I think you’ve seen in our recent acquisitions, us investing in smaller urban markets, where we anticipate growth will be strong over an extended period of time.
Markets like and Greenville, have been great big examples of the types of markets — urban markets that would be most attractive to us. But we continue to look at potential acquisitions in larger gateway markets and the potential opportunity to enter those markets at attractive price points and expect that high-density suburban will continue to represent a meaningful component of our overall acquisition activity as well. As I highlighted in response to the earlier question, as we look at acquisitions, we’re looking to balance the exposure of our portfolio to create the asymmetric risk profile that I highlighted in my prepared remarks, where looking at the portfolio as a whole, we’ve effectively limited the downside risk, which we, I think, have demonstrated over the past several years while creating an exposure that enables us to outperform during periods of economic prosperity. And I think that requires us to look forward at trends and ensure that we’re investing ahead of those trends to ensure that we’re achieving the highest returns possible for our shareholders.
Austin Wurschmidt — KeyBanc Capital Markets — Analyst
And then you’ve also historically looked to the prepurchase-type deals on development. I’m just curious, while I know construction has certainly slowed, but if you’ve got any opportunities you’re evaluating on that front as well.
Justin Knight — Chief Executive Officer
We have been active in discussions with groups around potential developments. And typically, at this point in the cycle, we would be signing up a large number of those deals for closing at later points in the recovery. The same challenges that are negatively impacting the supply numbers for the industry as a whole are creating challenges for us as we underwrite development deals for addition to our portfolio. And really, as we underwrite today, we’re looking at meaningfully higher construction costs because we have historically developed through forward commitments or forward commitments for turnkey development.
Rising interest rates impact costs for those developers as well and then uncertainty around supply chain and availability of labor, all contribute to higher costs for projects, making it more difficult, really, at this point, to underwrite new development deals than it ever has been for us in our over two decades experience within the industry. Over time, we continue to anticipate that new development deals will represent roughly a quarter of our total acquisitions. But in the near term, we’re much more likely to be active on existing deals, especially in an environment where there are fewer buyers competing with us for those assets, if that’s helpful.
Austin Wurschmidt — KeyBanc Capital Markets — Analyst
Yeah. That’s helpful. Thanks for the time.
Operator
We have reached the end of our question-and-answer session. I would like to turn the conference back over to Justin for closing comments.
Justin Knight — Chief Executive Officer
Thank you for joining us today. We are incredibly pleased with the performance of our portfolio over the past quarter and super optimistic about how things are likely to shape up through the back half of the year. As always, as you travel, we encourage you to stay with us at one of our hotels, and we look forward to speaking with you in the near term as we get out on the road.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Kelly Clarke — Vice President, Investor Relations
Justin Knight — Chief Executive Officer
Liz Perkins — Chief Financial Officer
Neil Malkin — Capital One Securities — Analyst
Dori Kesten — Well Fargo Securities — Analyst
Michael Bellisario — Robert W. Baird — Analyst
Chris Darling — Green Street Advisors — Analyst
Jonathan Jenkins — Oppenheimer and Company — Analyst
Anthony Powell — Barclays — Analyst
Austin Wurschmidt — KeyBanc Capital Markets — Analyst
