Apple Hospitality stays in its lane to best compete on deals

When looking for an acquisition, Apple Hospitality REIT definitely has a type.

“We have an unparalleled transaction history within a subset of the hotel industry,” said Apple Hospitality CEO Justin Knight. “When you look at ownership in upscale select-service hotels within the Hilton, Marriott and Hyatt brand families, we’ve done hundreds of transactions in that space over two decades."

The Richmond, Virginia-based firm has announced a flurry of acquisitions this year and is one of the few REITs deploying capital in a relatively quiet market.

Justin Knight

In October, Apple purchased two hotels in Salt Lake City — a 175-key Courtyard by Marriott Salt Lake City Downtown for approximately $48.1 million and a 159-key Hyatt House Salt Lake City Downtown for $34.3 million. The deal also includes a parking garage for $9.1 million, which the two hotels use.

Apple also recently closed on a 146-key Residence Inn by Marriott Seattle South/Renton for approximately $55.5 million and a 192-key Embassy Suites by Hilton South Jordan Salt Lake City for approximately $36.8 million.

Those four transactions equal $183.8 million in deals, and more are coming.

So, why is Apple Hospitality so competitive in the deal space? Knight said the consistency of the type of hotel it is buying is a big reason. It’s also familiarity with the products and relationships with buyers. But it still all comes down to money.

“[Our] access to capital puts us in a great position to transact, especially around individual assets where often we have direct market experience with similar branded hotels,” Knight said.

This strategy has been fruitful for the past few years, as the REIT has made 19 transactions since COVID started.

Knight said the company came into the pandemic with a relatively strong balance sheet and grew from there. 

“Because of the makeup of our portfolio, we recovered much more quickly than our peers,” he said. “We’ve been disciplined and targeted in our acquisition strategy. Those things together have put us in a position to have the capacity to continue to acquire assets in an environment that has become less competitive as interest rates have risen.”

‘Ready access to capital’

Knight said having low leverage and, as a result, low overhead for interest payments helped Apple establish a “bit of a war chest” it utilizes when needed. This gives the REIT a lot more deal flexibility than its competitors.  

“Our ready access to capital, having the availability of our line of credit, and not having to pursue deal-specific financing has put us in a position to move quickly on transactions,” he said.

[Our] access to capital puts us in a great position to transact, especially around individual assets where often we have direct market experience with similar branded hotels.

Justin Knight

Share this quote

Knight said Apple’s relationships with bankers are also key.

“For the most part, we are dealing with a group of bankers that have been partnered with us since before the pandemic,” Knight said. “We were able, in the post-pandemic world, to expand our line of credit and to gain some additional flexibility. That was made possible by the strength of our operating performance and the speedy recovery of our portfolio.”

However, the company isn’t immune to the higher interest rates that have slowed the overall pace of transactions.

“Interest rates are impacting everybody. The line of credit is a floating-rate line of credit. That said, when we look at our average borrowing costs relative to the costs that our peers have, who are pursuing secure financing, or deal-specific secured financing, it is attractive,” Knight said.

Why select-service? 

So why is Apple Hospitality dealing in the select-service segment?

“We’ve tried a lot of different investment strategies in the hotel space, and we have consistently achieved stronger returns on our investments in high-quality upscale select-service hotels,” Knight said. “They generate meaningfully higher margins and can be maintained more efficiently, meaning the capex spend over time is meaningfully less.” 

Knight said for every deal the company closes, it has underwritten dozens of potential transactions that it ultimately nixes. The main reasons include a bid-ask spread or the magnitude of required renovations.

Apple Hospitality recently closed on 192-key Embassy Suites by Hilton South Jordan Salt Lake City for $36.8 million.

So, what makes an asset attractive for the company? Knight said Apple prefers markets with a lower cost of entry and an anticipated long-term trajectory of rates relative to the cost structure.

“We’ve been attracted to high-density suburban markets and some smaller urban markets,” he said. “When you look at where a lot of the growth in the country has happened over time, it’s been in markets that have business-friendly governments that are benefiting from strong demographic trends.”

The deal pipeline 

Will this acquisition pace continue? Knight thinks it will, at least in the near term.

“There are a significant number of potential opportunities,” he said.

Knight said over the past few months, refinancings have been a primary driver of assets coming to market, and he anticipates other factors making more assets available. “As we move into the coming year, the brand pressure around renovations will be an incremental driver.”

Other deals under contract for Apple include a 256-key Motto by Hilton in Nashville, Tennessee, for $97 million (it will open in 2025) and a 260-key Embassy Suites by Hilton in Madison, Wisconsin, for $79 million (it is scheduled to open in early 2024.) Both deals have fixed-price contracts with the same construction company (Minneapolis-based Mortenson) and will be finalized once construction is done.

“Ideally, we’re acquiring assets as they are beginning to produce cashflow,” Knight said. “The way our contracts are structured, the risk we’re taking on for new construction projects is relatively similar to the risk we’re taking on existing assets. And that’s market risk, which we’re very comfortable underwriting.”