Contrary to its peers in the hotel-focused real estate investment trust space, Apple Hospitality REIT slightly raised its full-year revenue per available room guidance and is optimistic about its development pipeline.
With its 220-hotel portfolio of mostly midscale to upper-midscale hotel brands such as Courtyard by Marriott, Hilton Garden Inn, Hampton by Hilton and others, Apple Hospitality REIT has seemingly weathered the demand hit other public hotel companies have taken as Americans prioritize international trips this summer. Fellow REIT Host Hotels & Resorts lowered its guidance for full-year revenue per available room growth, which executives pinned on lower summer demand at its U.S. resorts.
President and CEO Justin Knight said during an earnings conference call Friday that Apple REIT's hotels still welcome vacationers on domestic trips, but leisure demand in its markets hasn't lagged significantly.
"Given the broad diversification of our portfolio, that [leisure demand] varies somewhat by market, but broadly speaking, it includes people who are traveling on vacation ... but outside of that we see significant leisure travel associated with major family events like weddings and a tremendous amount of sports-team-related [trips]," Knight said. "Those tend to be the biggest leisure demand drivers for our portfolio ... partly perhaps because we're not totally dependent on vacationgoers for leisure travel."
Apple REIT now projects comparable hotel RevPAR growth between 4% and 8% for full-year 2023, raising both the low and high ends of the range by 100 basis points from prior guidance. The company also raised its outlook for comparable hotel adjusted hotel earnings before interest, taxes, depreciation and amortization margin percentage by 10 basis points on the high and low end. Yet the REIT did lower its 2023 guidance for adjusted EBITDA for real estate by a few million dollars to between $417 million and $452 million. Full-year net income is anticipated to land between $163 million and $202 million.
Liz Perkins, senior vice president and chief financial officer, said Apple REIT is keeping its outlook conservative, but executives are optimistic about demand patterns.
"We have been slightly above the midpoint, and as we reported [in the first quarter] we were slightly ahead at that time," Perkins said. "From that point forward, we continue to see strengthening trends and no indications of a pullback, at least [not] as quickly as the macroeconomic consensus view was earlier in the year. ... Our outlook continues to reflect a broader range of comparables, hotels, restaurant changes and other key metrics for 2023 due to our lack of visibility given the short-term booking window for our hotels and some continued macroeconomic uncertainty. We expect top-line comparisons to be more challenging in the back half of the year given the strength of our portfolio's performance over the same period in 2022."
She added hotel demand in July started off slow, but that was due to the Fourth of July holiday falling on a Tuesday. Since then, leisure and business travel demand has picked back up.
Appetite for Development Deals
Apple Hospitality REIT has contracts in place to acquire two hotels under development — one in Nashville, Tennessee, and the other in Madison, Wisconsin.
The company signed a contract to acquire a Motto by Hilton in Nashville for approximately $97 million with an expected room count of 256 guestrooms. Construction on the property is scheduled to be complete in 2025.
"The hotel will be located in the heart of downtown Nashville near well-known leisure attractions including the Country Music Hall of Fame and Bridgestone Arena," Knight said in his prepared remarks. "This will be our first hotel under the Motto flag, and we believe the brand's offerings are ideal for this particular location, providing flexible guestrooms, curated bar and dining experiences, and an overall great landing spot for both business and leisure travelers."
Apple REIT's other outstanding contract is for the purchase of an Embassy Suites by Hilton coming to Madison, Wisconsin. The approximate purchase price is $79 million for the hotel, which is estimated to have 260 rooms. That hotel is slated to open in early 2024.
The extended-stay segment is hot among hotel brands in recent quarters, with Wyndham Hotels & Resorts' Echo Suites, Spark by Hilton and Marriott International's Project MidX Studios brand all garnering developer interest. For now, Apple REIT isn't looking to add any midscale or economy extended-stay brands to its portfolio, Knight said.
"Speaking specifically to the the lower-tier new brands that have been announced whether it's Spark or any of the lower-tier, extended-stay brands, we are not currently actively pursuing deals in that space," Knight said. "We have regular conversations with the brands about the positioning of that new product and how it relates to other assets within our existing portfolio. We're likely to track that.
"But generally speaking, I think our model and our strategy has been very successful for us. And it's been to invest in the product in the upscale and upper-midscale space where we feel we can achieve the best balance of rate potential with our ability to drive strong cash flow and margins."
On the whole, Apple REIT's portfolio is poised to benefit from a lower-supply environment in the next few years as fewer hotels are being built, Knight said.
"We still have roughly 50% of our markets that don't have any new supply under construction within a 5-mile radius of our assets," he said. "Given the time from start to completion, that pushes the potential for new supply in those markets out a couple of years. ... And then in the other roughly 50% of our markets, we'll have one or two assets generally under construction [nearby] and all of that is meaningfully below what we saw pre-pandemic where roughly 70% of our portfolio had exposure."
Open Dialogue With Brands
Knight was asked whether the hotel brand companies are starting to enforce brand standards such as mandating daily housekeeping, stocking certain menu items or bringing back other amenities, which put pressure on hotel owners.
"We have dialogue with the brands on an ongoing basis about how to further improve the experience for consumers at our hotels, and generally speaking as of today, those conversations are absent significant references to increases in amenities or services that that entails. ... The focus has tended to be much more around the condition of the asset," Knight said.
"In the near term, meaning in the next 12 to 18 months, it's much more likely that we'll see continued focus on those areas, which for our business puts us in a very good position, having reinvested in our portfolio consistently."
Apple REIT has communicated to its management companies to bring back daily housekeeping if guests want it, Knight added.
"By and large, the adjustments in housekeeping have really furthered a trend that had begun pre-pandemic, and we're still making accommodations for guests who would like their room cleaned every day in order to maintain guest satisfaction," he said.
While much of Apple REIT's second-quarter earnings call centered on its hotel development, the company did close on its previously announced $31 million acquisition of the 154-room Courtyard by Marriott Cleveland University Circle at the end of the quarter. Knight said the REIT continues to monitor what hotels or portfolios are put up for sale.
"While we've seen a slight movement in cap rates; in most cases that movement has been offset by improved fundamentals for the assets. So we haven't haven't seen a corresponding adjustment by and large in terms of valuations for assets. That said, we're competing with fewer people in the marketplace, at least at price points where sellers would be willing to transact, which has put us in a position to really have serious conversations with potential sellers about where a transaction might happen."
Performance in the Second Quarter
During the quarter, Apple REIT’s comparable hotels revenue per available room was $125.64, up 5.3% year over year. Comparable hotels average daily rate was $160.75, which was a 4.8% increase over second quarter of 2022. Comparable hotels occupancy was 78.2%, a 0.5% year-over-year increase.
The company’s comparable hotels adjusted earnings before interest, taxes, depreciation and amortization improved 2% over the second quarter of 2022 to $141.7 million.
As of June 30, Apple REIT’s total debt to total capitalization, net of cash and cash equivalents was approximately 29%. In mid-July, the company agreed to an amendment of its $225 million term loan facility, which extended the maturity date of its $50 million term loan to Aug. 2, 2025.
As of press time, Apple's stock was trading at $15.20 a share, down 3.7% year to date. The NASDAQ Composite Index was up 33.9% for the same period.