Business Overview and History
Apple Hospitality REIT, Inc. (APLE) is a publicly traded real estate investment trust (REIT) that owns one of the largest and most diverse portfolios of upscale, rooms-focused hotels in the United States. The company's strategy of strategic acquisitions, disciplined capital allocation, and active portfolio management has enabled it to navigate the challenges of the pandemic and position itself for long-term success.
Apple Hospitality REIT was formed in November 2007 as a Virginia corporation and has since grown to become a self-advised REIT that invests in income-producing real estate, primarily in the lodging sector, across the United States. As of September 30, 2024, the company owned 224 hotels with an aggregate of 30,070 guest rooms located in 37 states and the District of Columbia, including one hotel with 90 guest rooms classified as held for sale.
The company's portfolio is broadly diversified across urban, high-end suburban, and developing markets, with a focus on rooms-focused, upscale hotels operating under well-known brands such as Marriott, Hilton, and Hyatt. Some of the key brands represented in APLE's portfolio include Hilton Garden Inn, Hampton, Courtyard, Residence Inn, Homewood Suites, Fairfield, Home2 Suites, SpringHill Suites, TownePlace Suites, Embassy Suites, AC Hotels, Hyatt Place, and Marriott. Substantially all of Apple Hospitality's hotels are operated and managed under separate management agreements with 16 different hotel management companies, none of which are affiliated with the company.
In May 2023, Apple Hospitality entered into an operating lease for an initial 15-year term with a third-party hotel operator at its independent boutique hotel in New York, New York for all hotel operations of the hotel's 210 guest rooms. As a result of the lease and transfer of possession to the operator, this property has been excluded from the company's hotel and guest room counts since May 2023.
During the nine months ended September 30, 2024, Apple Hospitality acquired two hotels and sold three hotels to two unrelated parties. The company utilized proceeds from the sale of the three hotels and borrowings under its Revolving Credit Facility to purchase the two new hotels. As of September 30, 2024, the company had one outstanding contract for the potential purchase of a hotel under development in Nashville, Tennessee.
Apple Hospitality's disciplined capital allocation strategy has been a key driver of its success. Over the years, the company has actively managed its portfolio through strategic acquisitions and dispositions, using the proceeds from asset sales to fund new acquisitions, share repurchases, and capital improvements. This approach has enabled the company to enhance the quality and performance of its portfolio, maintain a strong balance sheet, and create value for shareholders.
Financial Performance
Apple Hospitality's financial performance has been solid, with the company reporting net income of $184.2 million and adjusted EBITDAre of $370.6 million for the nine months ended September 30, 2024. The company's comparable hotels RevPAR (revenue per available room) grew by 2.0% during this period, driven by improvements in both average daily rate (ADR) and occupancy.
For the most recent quarter ended September 30, 2024, Apple Hospitality reported revenue of $333,036,000, representing a 5.7% increase compared to the same quarter in the prior year. Net income for the quarter was $29,817,000, a decrease of 3.8% year-over-year. The increase in revenue was driven by the acquisition of additional hotels, while the decrease in net income was primarily due to higher interest expense and an impairment charge.
Operating cash flow (OCF) for the quarter was $95,205,000, while free cash flow (FCF) stood at $74,442,000. The company's revenue performance is heavily influenced by occupancy rates, average daily rates (ADR), and revenue per available room (RevPAR) at its Comparable Hotels. For the three months ended September 30, 2024, APLE's Comparable Hotels achieved an average occupancy of 77%, an ADR of $162.66, and a RevPAR of $125.30. This represents a 1.8% increase in RevPAR compared to the same period in 2023, driven by a 2% increase in ADR partially offset by a slight 0.4% decrease in occupancy.
On the expense side, APLE's hotel operating expenses, which include direct room operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees, and management fees, totaled $219.9 million for the third quarter of 2024, or 58.1% of total revenue. This represents an 8% increase compared to the prior year period, primarily due to the additional hotels acquired in 2023 and 2024 as well as inflationary pressures on labor, repairs, maintenance, and sales and marketing costs.
The company also incurred $20.9 million in property taxes, insurance, and other expenses during the third quarter, a 3.4% decrease from the same period in 2023. This decrease was largely attributable to a state franchise tax refund received in the third quarter of 2024. General and administrative expenses for the quarter were $9.2 million, or 2.4% of total revenue, down 17.1% from the prior year period due to decreased accruals for executive incentive compensation.
APLE recorded a $2.9 million loss on impairment of depreciable real estate assets during the third quarter of 2024 related to two properties identified for potential sale. The company also recognized a $18.2 million gain on the sale of three hotels during the first nine months of 2024.
For the full year 2024, Apple Hospitality reported the following results: - Comparable hotels RevPAR was up over 1% compared to 2023. - Comparable hotels occupancy was 75%, up approximately 1% compared to 2023. - Comparable hotels ADR was $159, up approximately 1% compared to 2023. - Comparable hotels EBITDA margin was 36%, down only 70 basis points compared to 2023. - Adjusted EBITDAre was $467 million, up approximately 7% compared to 2023. - Modified funds from operations (MFFO) was $389 million, up approximately 6% compared to 2023.
Liquidity
As of September 30, 2024, Apple Hospitality had $1.5 billion in total debt outstanding, with a weighted average interest rate of 4.7% and a weighted average debt maturity of approximately three years. The company had $568 million in available borrowing capacity under its revolving credit facility and $10 million in cash on hand, providing ample liquidity to fund its operations and growth initiatives.
The company's debt/equity ratio stands at 0.456, with $1.5 billion of total debt outstanding, including $256.5 million in mortgage debt and $1.3 billion in unsecured credit facilities. Apple Hospitality has $6.15 million in cash and $539.5 million available under its revolving credit facility. The company's current ratio and quick ratio are both 0.856.
Operational Highlights and Outlook
Apple Hospitality's operating performance has been bolstered by strong leisure demand and continued recovery in business travel. During the third quarter of 2024, the company's comparable hotels RevPAR grew by 1.8% year-over-year, with ADR increasing by 2.0% and occupancy remaining relatively flat.
The company's recent acquisition and disposition activity has further enhanced its portfolio. In 2024, Apple Hospitality acquired two hotels, including a 234-room AC Hotel in Washington, D.C. and a 262-room Embassy Suites in Madison, Wisconsin, while selling six hotels for a combined gross sales price of $40.6 million. These transactions have helped to improve the overall quality and performance of the company's portfolio.
Looking ahead, Apple Hospitality has provided the following guidance for the full year 2025: - Net income is expected to be between $173 million and $202 million. - Comparable hotels RevPAR change is expected to be between 1% and 3%. - Comparable hotels EBITDA margin is expected to be between 34.2% and 35.2%. - Adjusted EBITDAre is expected to be between $447 million and $471 million. - Total hotel expenses are expected to increase by approximately 4.2% at the midpoint, driven by higher growth rates for certain fixed expenses like real estate taxes and insurance. - The low end of the adjusted EBITDAre guidance assumes a $2 million loss related to hotel 57.
The company plans to continue its disciplined approach to capital allocation, balancing acquisitions, dispositions, share repurchases, and capital improvements to drive long-term value for shareholders.
Industry Trends
The US hotel industry has seen a compound annual growth rate (CAGR) of approximately 3-4% in revenue per available room (RevPAR) over the past 5 years, driven by a combination of occupancy and average daily rate (ADR) growth. However, the industry has faced challenges in recent years, including the COVID-19 pandemic, which significantly impacted travel demand. The outlook for the industry remains cautiously optimistic, with continued recovery in both business and leisure travel expected.
Risks and Challenges
While Apple Hospitality's diversified portfolio and strong operational execution have helped it navigate the challenges of the pandemic, the company faces several risks and challenges going forward. These include:
1. Macroeconomic conditions: The company's performance is closely tied to the broader economy and any slowdown or recession could impact travel demand and hotel performance.
2. Competition and supply growth: The hotel industry is highly competitive, and new supply in the company's markets could put pressure on occupancy and pricing.
3. Regulatory and legislative changes: Changes in laws and regulations, such as those related to taxation or labor, could impact the company's operating costs and profitability.
4. Reliance on third-party management companies: Apple Hospitality's hotels are operated and managed by third-party companies, which introduces operational and reputational risks.
5. Leverage and debt maturities: While the company's balance sheet is currently strong, any difficulties in refinancing or accessing capital markets could limit its financial flexibility.
Conclusion
Apple Hospitality REIT has proven its ability to navigate the challenges of the pandemic and position itself for long-term success. The company's diversified portfolio, disciplined capital allocation, and strong operational execution have enabled it to deliver solid financial performance and create value for shareholders. Looking ahead, Apple Hospitality remains well-positioned to capitalize on the evolving trends in the lodging industry and continue its growth trajectory through strategic acquisitions, dispositions, and capital improvements. With its focus on upscale, rooms-focused hotels and its portfolio of well-known branded properties, Apple Hospitality is poised to benefit from the ongoing recovery in both business and leisure travel demand.