Apple Hospitality returns to buying in Q3
Apple Hospitality returns to buying in Q3
08 NOVEMBER 2017 8:30 AM

Executives at Apple Hospitality REIT shared details of the company’s recent acquisitions and sale in pursuit of the company’s focus on select-service hotels.

RICHMOND, Virginia—Apple Hospitality REIT has returned as a buyer in the hotel marketplace, picking up a dual-branded property during the third quarter and two additional properties in the fourth.*

The company purchased the newly constructed dual-branded Hilton Garden Inn and Home2 Suites by Hilton property in Birmingham, Alabama, in September for $38 million; the Residence Inn by Marriott in Portland, Maine, for $56 million; and the Residence Inn by Marriott in the Murray suburb of Salt Lake City for $26 million, both in October.

President and CEO Justin Knight said the hotels are consistent with the company’s corporate strategy of owning high-quality select-service hotels in strong markets that have diverse demand generators. The markets have trailing and projected revenue-per-available-room growth exceeding national averages, he said. Each hotel is well-located in its own market, and they benefit from a variety of business and leisure demand generators.

“These acquisitions expand our reach into new markets, and in doing so, expand our geographic footprint and further diversify demand generators for our portfolio,” he said.

Apple Hospitality also completed the sale of its full-service Marriott in Fairfax, Virginia, for a gross sales price of $42 million.

“We will continue to seek opportunities to sell our remaining three full-service assets when we feel pricing is appropriate and proceeds can be redeployed into assets which better fit our long-term strategy,” he said.

The company reported a 1.3% year-over-year increase in comparable hotel RevPAR to $109.77, driven by a 1.5% increase in average daily rate to $136.83, according to the company’s earnings release. Occupancy remained relatively flat, dropping 0.2% to 80.2%. The company’s adjusted hotel earnings before interest, taxes, depreciation and amortization grew 1.4% year over year to $125.1 million. Its adjusted hotel EBTIDA margin came to 38.9%.

As of press time, Apple Hospitality’s stock price has dropped 4.7% year to date to $19.06 per share. The Baird/STR Hotel Index was up 31.6% for the same time period.

Transaction strategy
The real estate investment trust’s pipeline includes deals with groups the company has worked with before or in markets executives have wanted to have a presence in and made cold calls to existing owners, Knight said.

Given the continued optimism among the ownership and management communities as well as the availability of debt financing for deals, Knight said he doesn’t expect there to be much change in strategy. Using Apple’s recent deals as an example, he said his company took advantage of the opportunity and it being a seller’s market to reposition its portfolio by selling off full-service assets and then acquiring hotels in markets that can build value.

The two Residence Inns the company acquired could improve both in terms of market yield and cost, he said.

“We feel the Birmingham assets were incredibly attractive from a per-key standpoint and really highlights, as I mentioned before, the advantages to doing contracts for development deals with trusted partners,” he said, referring to the dual-branded Hilton Garden Inn and Home2 Suites property.

These deals take a lot of work, he said, noting the company underwrites dozens of deals for every one that closes. There are several transactions the company is working on that might come to fruition, he said, but it will continue to look for opportunities like the aforementioned ones that add value to the portfolio.

When looking at demand generators, Knight said, his team has found an overreliance on a single industry can add to increased volatility in the portfolio. The company targets markets with a potential for outsized growth, he said.

EVP and COO Kristian Gathright said leisure demand has led to a boost in performance to the company’s upper-midscale properties.

“So we are very pleased that these assets in Portland and Salt Lake City are going to provide some additional leisure exposure,” she said. “So we could expect that those would outperform consistently with what we’ve seen in that upper-midscale segment.”

When an analyst asked whether the REIT would be interested in taking on a non-Marriott- or non-Hilton-branded property, referencing LaQuinta Holdings’ plans to spin off a hotel REIT, Knight said the consistency of the product and delivery across Hilton and Marriott’s select-service brands are what attract his company.

“What we've found is that translates into larger brand-level contribution, greater RevPAR penetration in markets and ultimately greater profitability for us,” he said. “I think we continue to explore options with other brands and have found over and over again as we underwrite … brands outside of the Hilton and Marriott brand families, that is incredibly difficult to replicate the success that we have with the type of product that we currently own.”

*Correction, 8 November 2017: This story was updated in the afternoon to correct the number of properties Apple Hospitality REIT acquired during the third quarter of 2017. At 5:32 p.m. EST the story and headline were updated further to better clarify that the company purchased a dual-branded hotel property in the third quarter and two additional properties in the fourth quarter. 

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