After a second quarter in which the real estate investment trust posted its strongest performance since the onset of the COVID-19 pandemic, Apple Hospitality REIT is eager to acquire and grow its hotel portfolio in U.S. markets that are better-positioned to recover stronger.
The Richmond, Virginia-based company currently owns 212 hotels, comprising 27,620 hotels, in 35 states that are primarily under Hilton, Marriott and Hyatt brand flags. In July, Apple Hospitality sold 20 hotels as part of a dispositions and acquisitions strategy aimed at reducing the age of its hotel portfolio and diversifying its assets across strategic growth markets.
The sale of the 20 hotels netted approximately $211 million in capital that the company is deploying to acquisition, starting with four hotels that it entered into contracts to buy in July — the existing AC Hotel Portland Downtown/Waterfront in Maine and the Hyatt Place Downtown Greenville in South Carolina, as well as two hotels in development, an Aloft also on the waterfront in Portland and an Embassy Suites by Hilton in Madison, Wisconsin. The combined cost of the four hotels is approximately $227 million.
"The portfolio we sold has an average effective age of seven years — two years greater than our current portfolio — and reported an average 2019 [revenue per available room] approximately 18% lower and an average 2019 [earnings before interest, taxes, depreciation and amortization] margin approximately 170 basis points lower than our remaining portfolio averages. Half of the hotels in the sale portfolio had fewer than 100 keys," Apple Hospitality CEO Justin Knight said on a call with analysts to discuss second quarter performance.
Knight called the assets "relatively young, non-prototypical hotels," and said he expects them to produce stabilized returns of 8%, and to have long-term RevPAR margins and growth rates that exceed those of our existing portfolio."
Closing on the Portland and Greenville hotels should happen in the second half of this year, Knight said. The company will close on the Embassy Suites in Madison upon completion of construction, slated now for the fourth quarter of 2023 at the earliest.
Chief Financial Officer Liz Perkins said the four hotels Apple Hospitality REIT is acquiring are in the kind of strong markets where growth will be sustainable coming out of the pandemic.
"Looking at their more recent performance, in May the Portland AC was up 14% from a RevPAR standpoint to the same period in 2019, and then in June was up 36%. The Greenville asset, again up 22% and up 60% for those same time periods relative to the 2019. Recognizing they were new hotels, and there's some ramp in those numbers, still, a wonderful signal that those are incredibly strong markets that will likely outperform in the near term," she said.
She added the company is in active discussions with brokers and ownership groups to acquire additional assets that could be announced in the coming months.
"We expect to be net acquirers through the recovery," she said.
Part of the motivation behind the acquisitions strategy comes from the company exiting its covenant waiver period earlier than expected on July 29.
"As a result, we are no longer subject to the lender-imposed restrictions and limitations on investing in financing activities, including the acquisition of property, capital expenditures, payment of distributions to shareholders, and use of proceeds from the sale of property or common shares," Perkins said. "In addition, as a result of exiting the covenant waiver period, interest rates are expected to decrease on our unsecured credit facilities, resulting in an estimated $3 million in savings for the remainder of the year, and nearly $8 million annualized based on debt levels at the end of July, consistent with the terms of the amendment. ... Having exited the covenant waiver period, we now have additional flexibility to manage our business and pursue creative opportunities."
Knight said that while diversifying the portfolio is important, the company is active in the select-service segment and in urban markets for a reason.
"We actually love select-service in urban markets and we've been clear for a long time, we're incredibly bullish, especially on secondary and smaller urban markets," he said. "We saw them outperform through the last cycle, and continue to outperform through the downturn. The demand drivers in markets like Greenville and Portland are meaningfully different than they are in downtown Chicago, New York or San Francisco, and we've seen a demographic shift towards those markets with companies expanding and reorganizing there. We'll continue to explore assets like those."
The company's acquisitions and disposition strategy considers the strength of submarkets as well, Perkins said.
"If you look at our broader transactions over time, we sold an asset in Greenville, and now have another asset in Greenville under contract. In some instances, the repositioning will be within markets — exiting one particular suburb to move into a new suburb or a downtown area where we anticipate greater growth," she said. "That broad strategy continues to be diversification, and really given our portfolio's outperformance, we're not looking to radically shift our strategy — just to fine-tune around the edges in order to maximize the growth rate throughout the recovery and to adapt to changing trends within individual markets and across the country as a whole."
Second Quarter Performance
Apple Hospitality's portfolio outperformed industry averages and internal expectations in the second quarter, Knight said.
Occupancy for the quarter was 70.7%, up 150.8% over the second quarter of 2020 but down 13.1% from 2019. Average daily rate was $120.56, up 19.6% from 2020 and down 14.8% from 2019. RevPAR was $85.28, up 200% from 2020 and down 26% fom 2019. Adjusted hotel EBITDA was approximately $95 million, according to the company's earnings release.
At the property level, 25% of its hotels "ran an occupancy above 90% and more than a third had occupancy above 80%" in the second quarter, Perkins said.
"Twenty-nine hotels had RevPAR that exceeded 2019 levels for the quarter, representing many areas of the country including Houston; Santa Clarita, California; Tucson; Miami; Provo (Utah); Suffolk, Virginia; Carolina Beach; Birmingham; and Hilton Head, among others," she said.
"Our suburban hotels continued to outperform urban hotels in the quarter with occupancy of 73% compared to 62%. Similar to trends in the first quarter, we generally experienced weaker performance from hotels located in markets with greater historic exposure to large groups and conventions. Our hotels in Northern Virginia, Chicago, St. Paul, and in a number of markets in the Northeast and Northwest were among the weakest performers relative to 2019. We also continue to see weaker performance from our full-service hotels in Richmond and Houston," she added.
Performance was on an upward trajectory in June, and subsequent to the second quarter in July, company executives said.
"With the acceleration of vaccine distribution and loosening of travel restrictions, demand continued to improve more quickly than anticipated, resulting in occupancy of 74% for the month of June, only down 11% since June of 2019," Perkins said.
Weekend demand continued to outperform the weekday, but improvement in weekday demand points to some rebound in business transient bookings, Perkins said.
"Weekday occupancy moved from 63% in April to 70% in June, while weekend occupancy moved from 81% to 86%. Although weekend occupancy continues to exceed weekday occupancy, we saw greater acceleration in weekday, indicating in part an improvement in more traditional business transient demand," she said.
In July, the company's hotels achieved 75% occupancy, and rates of $137 midweek and $150 on weekends.
Apple Hospitality executives are confident about the trajectory of the recovery, despite concerns about rising COVID-19 cases in the U.S. due to the Delta variant.
"While we remain cautious of the continued impacts of COVID-19 and the new Delta variant, we are optimistic that the worst of the pandemic is behind us, and travel will continue to strengthen," Knight said.
Perkins added that the company's results so far have not shown negative impact from the Delta variant.
"Given the likely trajectory of the continued recovery, we are optimally positioned for continued outperformance, and we remain optimistic based on recent increases in vaccination rates and the resiliency of people's desire to travel when restrictions are lifted and they feel safe to do so, as demonstrated over the last quarter," she said.
As of press time, Apple Hospitality REIT's stock was trading at $14.04 per share, up 15.7% year to date. The NASDAQ Composite was up 15.2% for the same period.