Apple REIT’s core tenet plants seeds for more growth
Apple REIT’s core tenet plants seeds for more growth
07 FEBRUARY 2017 8:34 AM

The new-and-larger Apple Hospitality REIT will continue to use a refined strategy that focuses on select-service hotels from two brand families as a way to enhance value and returns for shareholders.

LOS ANGELES—Five months after combining portfolios with sister company Apple Ten REIT, Apple Hospitality REIT continues to grow its 236-hotel portfolio through a strategy that focuses on select-service properties in the Hilton and Marriott International portfolios of brands, according to President and CEO Justin Knight.

The Richmond, Virginia-based real estate investment trust’s blueprint allows it to be risk-tolerant regardless of the overall economic and hotel industry conditions, Knight said during a break at the recent Americas Lodging Investment Summit.

Justin Knight,
Apple Hospitality

“When we built our portfolio, our core objective was to mitigate risk and volatility,” Knight said. “We look to concentrate our portfolio on segments with high margins and lower volatility. That drew us to the upscale segment.”

After that step, executives turned their attention to identifying the best and strongest brands within the category, Knight said.

“To date, we prefer to stay within the Hilton and Marriott brands,” Knight said. “We’re exclusively invested in those two brand portfolios.”

Apple’s roster of brands includes 120 hotels in the Hilton family and 116 hotels in the Marriott family. Apple works with 22 management companies to operate its portfolio, Knight said.

Market performance
The perfect portfolio for Apple Hospitality is divided across markets and market types with a broad variety of demand generators, Knight said. The company seeks properties with exposure to government, business and leisure generators located close to major airports, technology-oriented business, and the health care and financial services.

Knight said he sees the wide array of performances among the markets in Apple’s portfolio as a sign of the times.

“Industry forecasts are for a continuation of what we saw in 2016—with a mix of performances in various markets,” Knight said. “Some are doing well, others are struggling.”

Apple’s portfolio, which contains 30,299 guestrooms, is broadly diversified geographically, Knight said, with properties in 33 U.S. states.

“The markets in middle of the country continue to see strength,” Knight said. “Leisure travel continues to be strong. We’re less reliant on that (than business travel), but it’s certainly beneficial.”

Apple hotels in markets with heavy health care and related industries are performing well, while those in technology-driven markets are experiencing mixed performance.

“(The) financial services (industry) is stable but less robust from a growth standpoint,” Knight said.

Knight said Washington, D.C., “will be a great market this year” because of the change in presidential administrations.

Transactions and performance
Apple has a handful of development deals under contract, but the company’s preferred expansion method involves turn-key deals in which it acquires new-build hotels upon certificate of occupancy, Knight said. On 3 February, Apple closed on a previously announced deal that resulted in the acquisition of a 124-room Courtyard by Marriott in Fort Worth, Texas, for $18 million (approximately $145,000 per key).

“Construction costs across the country continue to be very high,” Knight said. “We look to enter markets where we can match the cost of a project with what we feel is the income potential of that particular market.”

Knight said the company doesn’t have a target for the number of hotels in its portfolio.

“We are continuously looking at our portfolio … the quality and positioning of individual assets as well as the market mix and buying and selling assets,” Knight said. “Our biggest opportunity is to continue to execute on and refine our strategy. It’s proven to be incredibly relevant, especially in a period of uncertainty. We’ve seen consumer preference continue to shift to the product type we focus on.”

Apple Hospitality’s debt is equal to approximately three times adjusted earnings before interest, taxes, depreciation and amortization, Knight said.

“It gives (us) one of the strongest balance sheets in the industry,” he said.

According to a news release outlining its third-quarter 2016 operating performance, the publicly traded REIT posted a 12.5% increase in year-over year adjusted EBITDA for the first nine months of the year. In addition, the company’s ADR for the same time period grew 4.4% to $135.88. Its occupancy rate (+0.4% to 78.9%) and revenue per available room (+4.8% to $107.18) also climbed.

The company valued its portfolio at $5.7 billion when the Apple Hospitality and Apple Ten merger was completed on 31 August 2016. Apple’s stock price closed Friday, 3 February at $19.94 per share.

The 170-suite SpringHill Suites by Marriott in Burbank, California, is one of the 236 hotels in Apple Hospitality REIT’s portfolio. It is one of three hotels in the Marriott family of brands that Apple owns in Burbank. (Photo: Apple Hospitality REIT)

The company’s performance has been a beneficiary of the recent upswing in hotel industry stocks. The R.W. Baird/STR Hotel Stock Index ended 3 February at 4,544.94—a 29.5% increase in value since Donald Trump was elected president.

Apple Hospitality's portfolio by brand
Brand # of hotels
Hilton Garden Inn 41
Courtyard by Marriott 40
Hampton by Hilton 36
Homewood Suites by Hilton 34
Residence Inn by Marriott 32
SpringHill Suites by Marriott 17
TownePlace Suites by Marriott 12
Fairfield Inn & Suites by Marriott 11
Home2 Suites by Hilton 6
Marriott Hotels 3
Embassy Suites by Hilton 2
Hilton Hotels 1
Renaissance Hotels (Marriott) 1
Source: Apple Hospitality REIT

Industry outlook
Knight said that surge in optimism throughout the hotel industry is a good thing for hotel owners.

“We have seen over the past several months an increase in share prices,” Knight said. “In large part, that increase in price reflects the general optimism for the economy and generally the economy moves off emotion. To the extent consumers and business leaders feel more optimistic some of that optimism will filter into the hotel industry.”

The optimism has led to some renewed discussion about consolidation—particularly in the REIT sector. Knight didn’t rule out consolidation, but did elaborate on the type of merger-and-acquisitions activity that could occur.

“There’s a lot of talk about consolidation … the most likely scenario is the industry will continue to consolidate as public and nonpublic REITs merge,” Knight said. “Public-to-public (deals) are difficult deals to get done.”

All of this points to a busy 2017 for Apple and its team.

“The challenge for us now and at all points in the cycle is to have enough foresight to make adjustments to our portfolio that immediately impact the performance of the portfolio,” Knight said. “Ultimately, success for Apple Hospitality means delivering on the commitments we’ve made to shareholders and stakeholders in the company. That will mean continued execution of our core strategy. At the end of the day, I’m of the belief that this strategy will continue to create strong shareholder returns with less volatility than our competitors.”

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