APLE - Apple Hospitality REIT: Harvesting A Steady Income Stream

2023-12-12 01:56:54 ET

Summary

• Apple Hospitality REIT is one of the largest hospitality REITs in the US, with a portfolio of 224 hotels across 37 states.
• The company has a strong balance sheet, with a diversified debt structure, staggered maturity schedule, and substantial liquidity.
• Apple Hospitality REIT offers an attractive dividend yield of close to 5.7% and has the potential for future dividend increases.

Introduction

Due to personal circumstances, there has been a hiatus in my articles in recent months, with my last article coming in September. The focus of this article, Apple Hospitality REIT ( APLE ), is one which I have written about several times previously. My most recent article on this company came in August, after the company announced its Q2 2023 earnings. With the year coming to a close, I figure now would be a good time to resume my writing by taking a look at the company to determine if it proves to be a good investment.

The Portfolio

With a market capitalization exceeding $3.8 billion, Apple Hospitality REIT is one of the largest hospitality REITs in the country. An internally managed select-service REIT, the company's portfolio spans 224 hotels located across 87 markets in 37 states. Not only does the company's expansive geographical presence allow the company to mitigate localized economic fluctuations - its largest market accounts for only 6% of the company's EBITDA - it also positions the company to tap on both established and emerging markets, benefiting from a variety of demand generators.

The company's 29,601 rooms are operated under industry-leading brands such as Marriott and Hilton, allowing the company to leverage the robust reservation systems and loyalty programs of these brands. The company is also committed to reinvesting in its hotels to ensure guest satisfaction. This is reflected in the low average effective age of its hotels standing at a mere 5 years, not only enhancing the overall guest experience but also positioning the company to remain competitive.

Balance Sheet

Examining the company's balance sheet provides a glimpse into its financial health, providing investors with valuable insights. As of Q3 2023, the company maintains a total debt of close to $1.4 billion. Notably, one-fifth of this debt, approximately $280 million, is tied to property-level debt, securing 15 specific properties, leaving the remainder of the portfolio unencumbered. The remaining $1.1 billion comprises unsecured credit facilities. All together, the weighted average maturity of the debt stands at approximately 4 years. Looking ahead, the debt maturity schedule presents a favorable outlook. Over the next three years, until the end of 2026, around 35% of the debt, totaling $476 million, is due. This staggered maturity schedule provides Apple Hospitality REIT with ample flexibility and minimizes liquidity risks.

Considering the financing costs, the company maintains a weighted average interest rate of approximately 4.3%. Importantly, a considerable 80% of its debt is fixed, shielding the company from potential interest rate volatility. This prudent approach to managing interest rate risk ensures the company is able to accurately forecast its expected cash outlay over the next few years.

Moving on to liquidity, the company boasts a robust financial position with a total liquidity of $685 million, an increase from the previous quarter's figure of $632 million. The composition of this liquidity is predominantly through a $650 million revolving credit facility, supplemented by an additional $35 million in cash and cash equivalents. This ample liquidity not only safeguards against unforeseen challenges but also positions the company to seize strategic opportunities as they arise in the market.

In conclusion, the company has a strong balance sheet. Its diversified debt structure, staggered maturity schedule, and substantial liquidity position the company for resilience in the face of economic uncertainties.

Dividend

The company maintains a monthly dividend payout structure. Its upcoming dividend payment on December 15, amounting to $0.08/share, has been consistently maintained since November 2022. On an annualized basis, this equates to a dividend of $0.96/share, translating to an attractive dividend yield of close to 5.7%, considering the current share price of $16.90. This dividend payout is comfortably covered by the company's modified funds from operations (MFFO). In the first three quarters of the year, the MFFO reached a commendable $1.29 per share. This translates to a dividend payout ratio of approximately 55.8%, ensuring that the company not only covers its dividend obligations but does so with a healthy buffer. In fact, when considering the full year, the MFFO covers the dividend payout at an impressive 134%.

While management has not explicitly indicated plans for dividend increases, investors should consider the potential for future adjustments. Reflecting on the period up to Q1 2020, just before the onset of the pandemic, the company was distributing a monthly dividend of $0.10/share, marking a 25% increase from the current rate. If Apple Hospitality REIT were to return to a monthly dividend of $0.10/share, annualized at $1.20/share, the dividend yield would soar to 7.10%.

Even under this hypothetical scenario of a $0.10/share monthly dividend, the MFFO for the first three quarters alone is robust enough to cover the increased dividend payout. This financial strength and flexibility of the company not only instills confidence in the sustainability of the current dividend but also opens the door for potential future enhancements.

Nevertheless, it is crucial to highlight that management has not signaled for an imminent dividend increase. Nevertheless, the possibility of future dividend increases is certainly one worth considering.

Share Price

Since I last wrote about the company, when it was at $14.74/share, there has been a close to 15% increase in the company's share price. Even just looking at its year-to-date performance, the company has posted a commendable gain of approximately 9%. While purchasing the stock at either of those times would have certainly been ideal, the question arises - is this a favorable time to initiate a position in the stock?

Comparing the current price to the post-COVID high of around $18/share reveals a slight upside of just 6.5%. This suggests that the stock is close to its highs over the past few years, and there may not be room for much potential upside. Hence, there are valid concerns about whether this is an opportune moment to enter the market or if it might be wiser to wait for a potential pullback.

Conclusion

The most recent quarter has seen Apple Hospitality REIT deliver a strong performance. Metrics such as average daily rate (ADR), revenue per available room (RevPAR), and occupancy rate have all performed favorably, improving on the previous year's metrics. Perhaps more impressively, these metrics exceeded industry averages , underscoring the strength of the company. This strength is reflected in the price of the company's shares, which are approaching post-pandemic highs.

The high share price notwithstanding, I continue to maintain my "Buy" rating on the company. With a strong balance sheet, dividends which are comfortably covered and a consistent track record, Apple Hospitality REIT is an attractive income stock for investors looking to obtain a reliable income stream.

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