APLE - Apple Hospitality: Take A Bite Of This Premier Hotel REIT

Summary

• Apple Hospitality has now met or exceeded its pre-pandemic operating metrics.
• It carries one of the strongest balance sheets in the hotel REIT segment, and was the first among peers to materially restore its dividend.
• Income investors who understand the risks associated with hotel REITs ought to give APLE consideration for potential upside from here.

It's important to set the right expectations for stocks in one's portfolio, as each asset class has its own strengths and vulnerabilities. For one thing, hotel REITs are vulnerable to black swan events such as the pandemic in 2020.

However, for those who are willing to hold for the long-run, this asset class can be great for riding out inflationary pressures, due to their ability to set daily rates.

This brings me to Apple Hospitality ( APLE ) which is a well-run hotel REIT that income investors who understand the risks associated with the lodging segment may want to put on their radar.

Why APLE?

Apple Hospitality is a self-managed hotel REIT with a strong portfolio of 220 hotels containing 29K rooms spread across 87 markets in 37 states. It prides itself on having industry leading brands, including 96 Marriot-branded hotels and 119 Hilton-branded hotels.

APLE also maintains a young portfolio with an average effective age of 5 years, representing the number of years since the hotel was built or last renovated. Average actual age of its hotels since being built is still a relatively new 15 years.

APLE's active portfolio management with focus on newer properties results in high EBITDA margins compared to the rest of the industry. As shown below APLE generates the second highest hotel EBITDA margin in its peer group, sitting just behind the leader Chatham Lodging Trust ( CLDT ).

Meanwhile, APLE has come a long way in not only returning to but exceeding pre-pandemic operating fundamentals. This includes its highest quarterly RevPAR (revenue per available room) during the third quarter, exceeding third quarter 2019 by 8%. Also, as shown below, APLE's occupancy since March of last year has been more or less on par with that of 2019 levels.

Looking ahead, APLE is set to benefit from continued strength in the lodging sector and limited new supply , considering that higher interest rates have pushed up the cost of funding new hotel construction and hesitancy around starting new development projects since the start of the pandemic. Management estimates that nearly 50% of its hotels do not have exposure to new projects within a five-mile radius.

Moreover, APLE maintains a strong balance sheet with $776 million in total liquidity. In addition, 199 of its 220 hotels are unencumbered by mortgage debt, 87% of its debt is fixed rate, and it carries a low net debt to EBITDA ratio of just 3.3x. Management views its balance sheet strength as giving it the ability to take advantage of price dislocations in the current market, as remarked during the last conference call :

With just 3.3x net debt to EBITDA, extended and staggered maturities, a relatively young portfolio and over $700 million in total liquidity, we are able to be both patient and flexible as we work to capitalize on dislocations in the market.

We have been and will continue to be highly selective and intentional in the build-out of our portfolio pursuing assets that are additive to those that we currently own where we can achieve attractive pricing.

Future acquisitions will be consistent with our strategy of investing in high-quality rooms-focused hotels located in strong RevPAR markets with attractive cost structures and meaningful growth potential.

Importantly, APLE was the first hotel REIT to materially restore its dividend in early 2022, followed by Host Hotels ( HST ) several months later. At present, APLE has a forward yield of 5.5%, and the dividend is well covered by a 62% payout ratio based on its forward FFO per share of $1.54. Hoya Capital sees a "flight to quality" hotel REITs, with APLE being one of them, considering its strong balance sheet, as noted in a recent report :

Lifted by solid high-frequency demand data and decent preliminary earnings updates, Hotel REITs are among the better-performing sectors through the first three weeks of 2023 as well with average returns of nearly 9% - outpacing the 6% gain on the broader REIT Index.

Since the start of the pandemic, we've observed a clear "flight to quality" performance pattern across the hotel REIT sector with outperformance from REITs owning the strongest balance sheet including Apple Hospitality and Host Hotels .

Lastly, I see value in APLE at the current price of $17.57 with a forward P/FFO of 11.4. This is considering the strength of its balance sheet and robust improvement in operating fundamentals. Analysts anticipate 9% FFO per share growth next year, and have a consensus Buy rating with an average price target of $19.57, implying a potential one-year 17% total return including dividends.

Investor Takeaway

Apple Hospitality is well positioned to benefit from a continued recovery in the lodging sector, and has limited exposure to new supply. Moreover, its strong balance sheet provides it with the ability to take advantage of dislocations in pricing.

It was the first hotel REIT to materially restore its dividend and currently yields a well-covered 5.5%. As such, investors who understand the risks associated with owning hotel REITs ought to give APLE considering for potential continued upside in the near term.

For further details see: