APLE - Apple Hospitality Q3: Growth Has Been Slowing Down (Rating Downgrade)

2023-11-28 12:19:44 ET

Summary

• APLE's stock price has increased by 13.17% since May 2023, however growth is expected to slow down.
• The company has good management and has been recovering well after the pandemic and offers a 5.8% dividend.
• Still, the upside is not enough to justify risks.
• I present my analysis which leads me to a hold rating.

Dear readers/followers,

I want to take a look at a room-focused hotel REIT Apple Hospitality ( APLE ). The last time I wrote about APLE was at the end of May 2023 using the company's Q1 results. I rated them as a buy because they were recovering really well after the pandemic, had a stable balance sheet, leading industry EBITDA margins, and were fairly valued. Today I will go over their Q3 numbers , and analyze how the company has been doing and change my rating for the stock to a hold. Since the last time I wrote about APLE, the stock price has increased by 13.17%, however I expect this growth to slow down which is going to make APLE a lot less profitable.

First, a little background on the company. APLE currently owns 223 hotels in 87 markets located in 37 different states. 48% of their hotels are in suburban areas and 33% in urban so they are very well diversified in terms of location. On top of that the hotels operating under APLE are well-known brands like Marriott ( MAR ), Hilton ( HLT ), or Hyatt ( H ) and they are all managed separately from Apple Hospitality. Their management agreements are built on a mutually beneficial relationship so that both parties can manage their part most efficiently.

Financials

The occupancy for three months ended September 30, 2023, was 77.1% which is a 1.8% increase year-over-year. The revenue per available room (RevPAR) has also increased, by 2.8%, to $122.91. And the FFO per share is currently $0.45, down from 0.49% last year in the same quarter. As I mentioned in the beginning, APLE had leading margins in the industry and this has not changed since the last time I wrote about the company. The current comparable hotel's adjusted hotel EBITDA margin is 37.1% and while this is a drop of 110 bps since last year, APLE still has industry-leading margins.

As for guidance, analyst estimates on Seeking Alpha call for FFO growth between 3-4% until the end of 2025. The expectation is an FFO of $1.61 by the end of the year, $1.66 in 24 (4.45% increase), and $1.71 in 25 (3% increase). I would say these are pretty good estimates as the company has been recovering really well after the pandemic. At the same time the growth has been slowing down since the company has already returned to its pre-pandemic numbers in some aspects.

Balance Sheet

APLE's balance sheet is pretty solid. They have roughly $1.37 billion of outstanding debt 80% of which is fixed. Their weighted average interest rate is 4.34% which is an increase year-over-year from 3.93% this is a 10% increase and if this continues in the future it could put the company under a fair amount of pressure. In terms of maturities, there is quite a bit to pay off in the coming years but it is all pretty well distributed overall and with $685 million in liquidity APLE should be able to pay everything off.

Dividend

APLE pays a monthly dividend of $0.08 per share which comes up to $0.96 per share annually. This translates to a 5.9% yield with a 60% FFO payout ratio. The dividend has increased since last year's $0.76 but still hasn't reached pre-pandemic levels. The highest the dividend has ever been was $1.3 per share per year. While this might not be reached in the next year or two I don't see a reason the company would not aim there and increase the dividend further since they are doing well and have a low payout ratio.

Valuation

APLE currently trades at a P/FFO of 10.36x below its historical average of 12.14x. Their P/FFO has increased since the last time I wrote about the company from 9.23x.

For comparison peers trade at the following multiples - Park Hotels & Resorts ( PK ) at 7.43x, Summit Hotel Properties ( INN ) at 7.23x.

APLE is therefore trading above its peers but I would say that it is justified. They have a strong position in the market with a well-diversified portfolio, solid balance sheet and have been performing well. Plus they have recovered really well after the pandemic.

I don't think that APLE will return to their historical average in the next three years but I do think they can present a steady growth. I would assume around 3.5% in the next three years which will result in a P/FFO of around 11.5x and an upside of around 17%.

APLE seems like a well managed company which they proved by their performance after the pandemic and they are doing well. But even though APLE is a pretty low-risk stock this return is not enough for me to justify the risks which is why I change my May rating to a HOLD at this time. Still I expect the company to deliver a steady return in the next couple of years since APLE's performance metrics are on a good track, they are slowly adding to their portfolio and don't have any major risks in terms of debt.

Risks

Economic environment - many of the brands of APLE are used for business travel which could present a threat considering the current work-from-home trend. While their portfolio is diversified and might not take such a hit because of this it is still something to keep in mind in the long run.

Interest rates - as with most REITs if the interest rates continue to rise it could put pressure on the company and result in decreasing stock price.

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