Why Apple REIT is taking a bigger bite of larger deals

RICHMOND, Virginia — In a stifled hotel transaction market that has remained challenging because of unchanged interest rates, Apple Hospitality’s CEO knows the REIT can have a competitive advantage.

“If you look at our performance over the past 12 months, we’ve taken more than our fair share of total transactions, and we certainly continue to view ourselves as well positioned relative to potential competition,” Justin Knight said.

Knight, speaking during Apple’s first-quarter earnings call on Tuesday, pointed to its two latest acquisitions, the 299-key SpringHill Suites by Marriott Las Vegas Convention Center for approximately $75 million and the 234-key AC Hotel by Marriott Washington DC Convention Center for approximately $116.8 million (it highest price yet for an asset), as prime examples of the space where the REIT continues to be competitive.

“We find ourselves in a position to be very competitive around larger assets in some of these urban markets, where ordinarily we would have seen very stiff competition, mainly from private equity, but from a variety of potential buyers,” Knight said. “Given our ready access to capital and ability to bid on assets without financing contingencies, we’ve been more successful.”

Apple’s Q1 earnings

The REIT said its ADR (+0.8%) and RevPAR (+0.7%) were both up slightly and “seasonally stable” in the first quarter, while occupancy remained flat. Knight said April’s RevPAR numbers are already on the higher end of its full-year guidance range, which points to better trends in the second and third quarters.

Apple Hospitality REIT CEO Justin Knight

“We see continued upside opportunity to rebuild occupancy in many markets, especially midweek,” Knight said. “We anticipate that we will be in a position to more meaningfully grow rate as we move into our seasonally stronger occupancy months in the second and third quarters.”

Analyst Michael Bellisario of R.W. Baird said the earnings finished slightly ahead of expectations, with lower hotel operating expenses as the positive variance.

Bellisario said, “Recently, sentiment has been relatively negative toward [Apple] (and other select-service-focused hotel REITs on our coverage list, too) given more challenging growth comparisons and less urban/group exposures. But with this setup, we expect investors to have a directionally positive view of Apple’s 1Q24 earnings beat and full-year guidance updates.”

Apple said the first quarter performance reached the midpoint of its internal forecast and has revised its EBITDA and margin outlooks because of its most recent acquisitions. The company’s RevPAR guidance has remained unchanged at 2% to 4% growth while its hotel EBITDA rose to $498.9-$523.7 million, an approximate $11 million increase over its prior guidance.

Adding to the portfolio

Apple currently owns 224 hotels and 29,886 rooms in 87 markets across 37 states and the District of Columbia and plans to invest approximately $75-$85 million in capital improvements throughout 2024.

Apple is under contract for two previously disclosed assets: a 262-key Embassy Suites by Hilton in Madison, Wisconsin, for an approximate purchase price of $79.3 million later this year when it’s completed, and a 260-key Motto by Hilton under development in Nashville, Tennessee, for approximately $98.2 million when it’s completed in late 2025.

Knight said the transaction landscape hasn’t changed, especially given the evolving interest-rate market. “From a total transaction volume, we’ve seen very little change in that area,” he said. “The bulk of the deals that we’re underwriting today are with groups exploring potential sales, either because of pending financing, specific to the asset or their larger portfolio, or in some cases, upcoming renovations. [Interest rates have] been less of a driver today than we had anticipated would be.”

Knight said Apple is still seeing value in its relative valuations, and he thinks the REIT “will continue to underwrite a number of potential transaction assets that we feel would be meaningfully additive to our portfolio.”

He said the company is fortunate “to have a broad palette to paint with” acquisition-wise. “Where we have seen meaningful competition and continued strong appetite is around smaller assets, where the total purchase price is lower,” Knight said.

He said that also means the company can also be active in the disposition market, including selling a pair of hotels in Arkansas in February, a 122-key Hampton Inn by Hilton Bentonville/Rogers and 126-key Homewood Suites by Hilton Bentonville-Rogers for a combined gain on the sale of approximately $17.8 million. Apple then used a portion of those proceeds to complete a 1031 exchange for the acquisition of the AC Hotel Washington DC Convention Center.

“We see ourselves in a position to sell quality assets in smaller markets, potentially assets where we have near-term CapEx needs, and then to redeploy into larger assets where we have less competition,” Knight said.