Despite a challenging second quarter and lowered full-year outlook, executives at Apple Hospitality REIT see signs that hotel performance could improve through remainder of the year.
The fundamentals for Apple REIT’s portfolio improved sequentially through the second quarter, President and CEO Justin Knight said during the real estate investment trust's earnings call. Revenue per available room declines moderated each month, and preliminary results for July show RevPAR grew year over year.
April was the most challenging month due to heightened economic uncertainty, a pullback in government travel, the Easter holiday shift and an elongated spring break period, he said. Apple REIT worked with its management partners to further optimize its business mix, and they were able to strengthen their market share broadly across the portfolio as well as specifically those hotels in markets heavily affected by less government travel.
While variable expense growth has generally moderated, higher fixed costs and lower than expected top-line growth affected the REIT's bottom-line performance during the quarter, Knight said. Even so, the company's portfolio continues to lead the hospitality industry with comparable hotel earnings before interest, taxes, depreciation and amortization margin of 37.4%.
“Our hotels operate efficiently and produce strong cash flow, while simultaneously providing guests traveling for both business and leisure with a compelling value proposition,” he said.
Demand for Apple REIT’s hotel portfolio was resilient during the quarter despite broad economic uncertainty and capital market volatility, Knight said.
“The fundamentals of our business are strong, with growth in our group business largely offsetting slightly softer performance in other segments,” he said. “Although the booking window for our hotels remains short, we are encouraged by recent airline and hotel brand commentary related to improvements they are seeing in demand, and view these comments as potentially positive indicators for performance in the back half of the year.”
Apple REIT’s portfolio of rooms-focused hotels is broadly diversified across markets and demand generators and has historically outperformed during extended periods of economic uncertainty, Knight said. It is well-positioned for an upside should there be a reacceleration of broader economic growth.
The supply/demand dynamic remains favorable across the country’s markets, he said. By the end of the quarter, almost 60% of its hotels did not have any new upper-upscale, upscale or upper-midscale hotels under construction within a 5-mile radius.
“This historically low rate of supply growth is unique to this cycle and we believe materially improves the overall risk profile of our portfolio by reducing potential downside while enhancing potential upside as lodging demand strengthens,” he said.
Apple REIT entered the quarter at a time of heightened macroeconomic uncertainty, Knight said. It’s prepared to adjust its operational and capital allocation priorities accordingly. Though there was a pullback in government travel starting in March, demand trends have stabilized and overall travel demand is strong.
“Our booking window remains short, but as we look after the second half of the year, we are encouraged by modest improvements in consumer sentiment and some easing of uncertainty related to policy changes,” he said.
Updated outlook
Apple REIT expects net income for full-year 2025 to be between $161 million and $187 million, Senior Vice President and Chief Financial Officer Liz Perkins said. Last quarter’s outlook forecast full-year net income between $167 million and $195 million.
Comparable hotel RevPAR change now ranges between down 1.5% and up 0.5%, a slight downgrade from down 1% to up 1% in the first quarter. Adjusted hotel earnings before interest, taxes, depreciation and amortization margin is between 33.5% and 34.5% as compared to 33.7% to 34.7% a quarter ago, and adjusted EBITDAre is between $428 million and $450 million, down from between $433 million and $457 million.
Apple REIT has decreased its comparable hotel RevPAR change by 50 basis points, resulting in a 20-basis-point decrease for comparable hotels adjusted hotel EBITDA margin and a decrease in adjusted EBIDTAre by $5.5 million, Perkins said.
The outlook assumes total hotel expenses will increase by about 3.3% at the midpoint, due primarily to higher growth rates for certain fixed expenses, such as real estate taxes and general liability insurance, she said. Apple REIT executives also expect about $2 million of incremental expenses related to brand conferences, which occur every 18 to 24 months.
“Looking ahead to the second half of the year, though economic uncertainty remains elevated, it is encouraging to see modest improvements in consumer sentiment and some easing of uncertainty related to policy changes,” Perkins said.
The reservation booking window is short, and Apple REIT executives do not believe these improvements are reflected in the current booking data, which has pulled back slightly year over year for August and September partly due to the shift of Rosh Hashanah to September from October.
“The adjustments we have made to full-year guidance reflect current booking trends and could prove conservative if improvements in the macroeconomic environment drive stronger short-term bookings,” she said.
Portfolio management
Since the start of the year, Apple REIT sold two hotels for a total combined sales price of about $21 million, Knight said. It has also entered into agreements to sell its full-service Houston Marriott Energy Corridor for approximately $16 million and its Hampton Inn and Homewood Suites properties in Clovis, California, for $20 million combined.
The REIT also bought the Homewood Suites Tampa Brandon for about $19 million, he said. It is adjacent to Apple REIT’s Embassy Suites property, and it represents an opportunity to expand the company’s ownership in a well-performing market with a strong going-in yield and operational upside at a price below replacement cost.
“We anticipate that additional upside from operational synergies as a result of clustering this hotel with our Embassy Suites and improved market positioning following our planned renovation will further enhance returns on our investment,” he said.
Apple REIT has a contract to purchase the upcoming Motto by Hilton in downtown Nashville, Knight said. It is being developed under a fixed-price contract, and the company anticipates buying it for $98 million once construction ends later this year.
Since the start of the pandemic, Apple REIT has completed about $338 million in hotel sales with an additional $36 million under contract and expected to close in the coming months, Knight said. These sales have allowed it to forego more than $100 million in capital investments.
In that same period, Apple REIT has invested more than $1 billion into acquisitions and repurchased 6.5 million of its own stock while maintaining a strong balance sheet, he said. These deals have lowered the average age of its hotel portfolio and lifted overall portfolio performance and managed near-term capital expenditure needs.
During the first six months of the year, the REIT invested about $32 million back into its portfolio, he said. For the year, its expects to reinvest between $80 million and $90 million for major renovations for about 20 of its hotels.
By the numbers
Apple REIT reported total revenue of $384.4 million during the second quarter, down from $390.1 million the year before, according to the company’s earnings release. It reported net income of $63.6 million, down from $73.9 million in 2024.
The company achieved comparable hotel RevPAR of $128.68, down 1.7% year over year. Actual RevPAR was $128.59, down 1.1%.
Adjusted EBITDAre was $133 million, a 5.6% year-over-year decrease. Comparable hotel adjusted EBITDA was $142.2 million, down 5.4% year over year, and comparable hotel adjusted EBITDA margin was 37.4%, a decrease of 200 basis points from a year ago.
As of June 30, Apple REIT reported cash on hand of approximately $8 million and $475 million of availability under its revolving credit facility.
The company had approximately $1.5 billion of total outstanding debt with a combined weighted-average interest rate of about 5%. That breaks down to about $217 million in property-level debt secured by 12 hotels about $1.3 billion of outstanding debt under its unsecured credit facilities.
During the second quarter, the company repaid in full two secured mortgage loans for a total of about $33 million.
On July 24, it entered into a new term loan facility with a principal amount of $385 million with a maturity date of July 31, 2030. The closing of this new loan facility repaid all amounts outstanding under its $225 million term loan facility with proceeds from the $385 million term loan facility, resulting in $160 million funded at closing that was used to repay a portion of its outstanding balance under its revolving credit facility.
During the second quarter, Apple REIT repurchased approximately 1.4 million of its common shares at a weighted-average price of about $11.78 per share for a total of about $16.9 million. Year to date through June 30, it has repurchased 3.4 million common shares at $12.83 per share for a total of $43.2 million. It has approximately $257.6 million remaining in its share repurchase program.
As of press time, Apple REIT’s stock was trading at $11.76 a share, down 22.3% year to date. The NYSE Composite Index was up 7.2% for the same period.