Executive Summary / Key Takeaways

• Apple Hospitality REIT, a leading owner of upscale, rooms-focused hotels, is navigating a dynamic lodging market, demonstrating resilience through its diversified portfolio and low-leverage balance sheet.
• Recent financial performance in Q1 2025 reflects headwinds from weather, reduced government travel, and macroeconomic uncertainty, resulting in a slight RevPAR decline and pressure on bottom-line metrics compared to the prior year.
• Management has tempered full-year 2025 guidance, anticipating near-term trends to persist, but does not forecast a recession and expects seasonal improvement and potential market share gains in the latter half of the year.
• The company is actively engaged in capital recycling, strategically selling assets at attractive valuations to fund share repurchases, capitalizing on the perceived discount of its stock relative to private market values.
• Favorable supply-demand dynamics, particularly muted new construction in APLE's core markets, provide a significant competitive advantage, enhancing potential upside capture and limiting downside risk compared to historical cycles.

A Foundation of Diversification and Operational Acumen

Apple Hospitality REIT has established itself as a prominent player in the U.S. lodging sector, built upon a strategy of owning a large and diverse portfolio of upscale, rooms-focused hotels. Formed in 2007 and publicly listed on the NYSE, the company has grown to encompass 219 hotels with over 29,500 guest rooms spread across 37 states and the District of Columbia as of March 31, 2025. This broad geographic and demand generator diversification, spanning 85 different markets, is a foundational element of its business model, aiming to provide stability across various economic cycles. The portfolio is heavily concentrated with industry-leading brands like Marriott (MAR) and Hilton (HLT), managed by a network of 16 third-party operators.

The company's operational approach leverages scale and data to drive efficiency and optimize performance. While not relying on proprietary guest-facing technology in the traditional sense, APLE's competitive edge in this area stems from its sophisticated asset management platform and close collaboration with third-party managers. This includes utilizing detailed performance data and benchmarking across its extensive portfolio to identify best practices, manage costs effectively, and refine revenue management strategies. Efforts to enhance operational efficiency are ongoing, focusing on areas like optimizing labor costs, reducing reliance on contract labor (which decreased by 160 basis points or 18% in Q1 2025 year-over-year), and implementing adjustments to the hotel operating model in response to evolving guest preferences and the operating environment. This focus on operational execution and data-driven decision-making contributes to managing margins in a challenging cost environment.

The competitive landscape for APLE includes other publicly traded hotel REITs such as Host Hotels & Resorts (HST), Park Hotels & Resorts (PK), Sunstone Hotel Investors (SHO), and Ryman Hospitality Properties (RHP), as well as indirect competitors like alternative lodging platforms. While peers like HST and PK may focus more heavily on urban or gateway markets, APLE's strength lies in its widespread diversification, which can offer greater occupancy stability across cycles compared to more concentrated portfolios. Its operational model, emphasizing rooms-focused properties and efficient management, often translates to a lower operating cost structure per unit compared to full-service or highly urban-centric hotels. This positioning allows APLE to compete effectively on value and service delivery within its target segments.

A critical factor shaping the competitive environment is the current supply-demand dynamic. New construction starts in the industry have been muted, particularly within the upscale and upper mid-scale segments where APLE operates. As of the end of Q1 2025, nearly 60% of APLE's hotels had no new competitive supply under construction within a five-mile radius. This limited supply growth fundamentally alters the risk profile compared to past cycles, reducing potential downside from oversupply and enhancing APLE's ability to capture incremental demand growth and push rate. While peers also benefit from this trend, APLE's broad market exposure ensures it is well-positioned to capitalize on demand recovery wherever it occurs across the country.

Performance Amidst Headwinds and Strategic Capital Allocation

Recent financial performance reflects the impact of various market factors. In the first quarter of 2025, total revenue saw a slight dip of 0.5% year-over-year to $327.7 million. Comparable Hotels RevPAR declined by 0.5% to $111, as a 1% increase in ADR was offset by a 1.5% decrease in occupancy. This performance was influenced by temporary factors such as severe weather in early Q1, reduced government travel in late March due to spending curtailments, and general macroeconomic uncertainty.

The pressure on the top line, combined with persistent cost increases, impacted profitability. Hotel operating expenses rose by 1.3% in Q1 2025, driven by higher labor and utility costs, although the pace of wage growth has moderated. Property taxes, insurance, and other expenses also increased by 11.3%. Consequently, Adjusted Hotel EBITDA for Comparable Hotels decreased by approximately 5% to $105 million, and the margin compressed by 180 basis points to 32.3%. Adjusted EBITDAre fell by approximately 5% to $95 million, and Modified Funds from Operations (MFFO) decreased by 9% to $76 million. Interest expense also rose, reflecting higher average borrowings on variable-rate debt and increased interest rates.

Despite these near-term pressures, APLE's strategic capital allocation remains a key focus for value creation. The company has been actively recycling its portfolio, selling assets to optimize its market concentration and manage future capital needs. In Q1 2025, two hotels were sold for a combined $21 million, resulting in a $3.6 million gain. These dispositions, along with six hotels sold in 2024, have generally traded at attractive valuations (sub-7% cap rate before CapEx, ~5.2-5.3% after CapEx for recent sales).

Capital generated from these sales has been strategically deployed, notably into share repurchases. In Q1 2025, APLE repurchased approximately 1.9 million shares for $26.3 million at a weighted-average price of $13.61 per share, with further repurchases in April 2025. Management views this as a compelling use of capital, citing a meaningful spread between the valuation implied by recent asset sales (after accounting for required CapEx) and the price at which its shares have traded. This opportunistic approach underscores the company's commitment to enhancing shareholder value when its stock trades at a discount to its underlying asset value.

APLE is also selectively pursuing acquisitions that align with its strategy. As of March 31, 2025, the company had two hotels under contract for potential purchase totaling approximately $117 million: an existing Homewood Suites in Tampa, FL, and a Motto by Hilton under development in Nashville, TN. The Tampa acquisition is seen as a unique opportunity due to its location adjacent to an existing APLE hotel, offering potential operational synergies. The Nashville Motto represents a fixed-price development takeout, expected to close upon completion later in 2025.

Reinvestment in the existing portfolio remains a priority, with approximately $80 million to $90 million budgeted for capital expenditures in 2025, including comprehensive renovations at around 20 properties. This ongoing CapEx is essential to maintaining the competitiveness of the hotels within their respective markets and supporting future EBITDA growth, although potential inflationary pressures and tariff impacts could influence costs and timelines.

Outlook, Risks, and the Path Forward

Looking ahead, Apple Hospitality REIT has tempered its full-year 2025 guidance to reflect the Q1 performance and the expectation that current demand and expense trends may continue in the near term. The updated guidance projects Net Income between $167 million and $195 million, Comparable Hotels RevPAR change between -1% and 1%, Comparable Hotels Adjusted Hotel EBITDA margin between 33.7% and 34.7%, and Adjusted EBITDAre between $433 million and $457 million. This represents a decrease at the midpoint compared to prior guidance, primarily driven by a 200 basis point reduction in expected RevPAR change and a $14 million decrease in Adjusted EBITDAre.

Management's outlook assumes total hotel expenses will increase by approximately 3.3% at the midpoint, with higher growth rates anticipated for certain fixed expenses like real estate taxes and general liability insurance compared to 2024. Interest expense is also expected to be higher in the remainder of 2025 due to decreased variable-rate debt fixed by swaps and increased Revolving Credit Facility borrowings. The guidance does not assume a near-term recession, with expectations for seasonal improvement and some market share gains in the latter half of the year. The second quarter of 2025 is anticipated to be the weakest in terms of RevPAR growth.

Key risks to this outlook include the potential for continued macroeconomic uncertainty impacting travel demand, further pullbacks in government or business travel, persistent inflationary pressures on operating and capital costs, and the uncertainty surrounding the impact of new tariff policies. While the transaction market remains challenging with a wide bid-ask spread, APLE's strategy of focusing on smaller, opportunistic sales to local buyers mitigates some of this risk and provides liquidity for share repurchases. The company also faces refinancing risk on upcoming debt maturities, although it believes it is well-positioned to address these through various means. The resolution of the LuxUrban (LUXH) legal dispute in April 2025, resulting in the recovery of the New York property, removes a specific operational and legal uncertainty.

Conclusion

Apple Hospitality REIT enters the latter half of 2025 from a position of tempered expectations but with a clear strategic focus. The company's core investment thesis remains rooted in its broadly diversified portfolio of upscale, rooms-focused hotels, underpinned by a strong balance sheet and operational efficiency. While recent performance has been impacted by transient headwinds, the favorable supply-demand dynamics in its markets provide a compelling backdrop for future growth capture.

Management's tactical shift towards opportunistic asset sales and share repurchases highlights a commitment to value creation in the current market environment, leveraging the perceived discount in its stock price. The tempered guidance reflects near-term realities but does not signal a fundamental deterioration in the business or a forecast for recession. For investors, APLE represents a resilient lodging REIT with a proven strategy across cycles, offering an attractive dividend yield and potential upside as macroeconomic conditions stabilize and its operational initiatives and capital allocation decisions continue to bear fruit, all supported by a competitive landscape characterized by limited new supply.