Apple Hospitality REIT was an active buyer and seller during the third quarter of 2021, and CEO Justin Knight said that appetite will continue.
During a third quarter earnings call with analysts on Friday, Knight said his team at the Richmond, Virginia-based real estate investment trust continues to pursue assets that are additive to the existing portfolio and are in markets where pricing allows for the company to achieve its targeted returns.
"In terms of a total acquisition strategy, that for us remains unchanged. We continue to believe that investment in high-quality, branded rooms-focused hotels in small urban and high-density suburban markets will yield the strongest results for our shareholders," he said. "If you look at our total acquisitions activity since the beginning of the pandemic last year and this year ... exactly 50% of the hotels that we purchased have been high-density suburban and 50% have been in these smaller urban markets, generally speaking."
"We're actually incredibly pleased with the quality and selection that's available to us now," he said. "You've seen us be active, as we said we would be once we had our house in order, and I think it's safe to assume we will continue to be active."
Knight said Apple Hospitality is in constant dialogue with a variety of sellers, competing in competitive bidding processes as well as having direct conversations with potential sellers around off-market deals.
He attributes his company's strong presence in the transaction market to underwriting deals quickly and having a track record for building portfolios.
As of July 29, 2021, Apple Hospitality exited its extended covenant waiver period. He said the covenant waiver period in the past hindered the company from competing with private equity players.
"We see ourselves as continuing to be active players throughout the recovery," he said.
Knight said Apple Hospitality's recent acquisition and disposition activity improved the average age of the overall portfolio and reduced exposure to near-term capital expenditure projects.
During and subsequent to the end of the third quarter, Apple sold a 20-hotel por approximately $211 million and purchased four hotels for a combined price of about $186 million. Additionally, it has outstanding contracts for the acquisition of four more hotels for a total of $205 million.
A portion of the four deals under contract were obtained through a competitive bidding process, he added, including the 243-room Hampton Inn and Suites by Hilton Portland Pearl District in Portland, Oregon, for $75 million.
The four completed hotel acquisitions during or subsequent to third quarter end include the 178-room AC Hotel by Marriott Portland Downtown Waterfront in Portland, Maine, for $67 million; the 130-room Hyatt Place Greenville Downtown in Greenville, South Carolina, for $30 million; the newly developed 157-room Aloft Portland in downtown Portland, Maine, for $51 million; and the 150-room Hilton Garden Inn Memphis Downtown in Memphis, Tennessee for $38 million.
Hotels that were sold during the third quarter include the 97-room Hilton Garden Inn and 91-room Homewood Suites in Montgomery, Alabama; the 127-room Courtyard by Marriott in Lakeland, Florida; and the 166-room Hilton Garden Inn in Schaumburg, Illinois.
Knight said he's seen a significant pullback in new construction across the U.S., and 47% of his hotels don't have any new supply under construction within a five-mile radius.
"That's the lowest that we have ever had since we began tracking," he said.
Senior Vice President and Chief Financial Officer Liz Perkins said Apple Hospitality REIT invested about $10 million in the first nine months of 2021 in capital expenditures and will invest between $15 million and $20 million during the rest of 2021.
Apple Hospitality ended the third quarter with a total portfolio of 215 hotels.
Pricing Power
Knight said the highest-rated customer tends to correlate with the highest occupancy night. Because leisure is driving high occupancy on the weekends, that's where the company is currently achieving the highest rates.
Perkins said she is optimistic about gaining more pricing power midweek as occupancies consistently reach 70%.
"As those occupancies continue to increase, we'll also work with our management teams on the level of base business on those nights, which would typically be lower-rated, and start yielding out. We're getting to a point where we'll be able to drive rate more incrementally Tuesday and Wednesday nights," she said.
Looking ahead to reservations on the books for November and December, Perkins said there's encouragement that trend will continue.
Knight added that typically corporate travelers have been less price-sensitive than leisure travelers.
"It's basic economics — supply and demand — to the extent of [if there's] fewer rooms available and people want to stay in them, we have greater pricing power ... the revenue-management systems that the brands have put in place have done an admirable job assessing demand in markets helping us to make real-time adjustments to rates," he said. "When we look at business transient segments, specifically, there are a lot of potential accounts that we capture there, and with lower occupancies in many markets midweek, we've shifted our focus away from what had traditionally been the higher-rated corporate business to some lower-rated corporate business to build occupancy."
Apple Hospitality continues to benefit from local and regional corporate-negotiated accounts, which isn't atypical for the portfolio, Perkins said. However, the company is starting to see improvement from larger corporate-negotiated accounts despite there still being a lack in employees across the U.S. returning to office.
Third Quarter Performance
During the third quarter, Apple Hospitality reported strong operational results, according to an earnings release. Occupancy, average daily rate and revenue per available room approached 2019 levels and exceeded industry averages.
Occupancy for the REIT's portfolio for the beginning of third quarter, in July, was roughly 76%, which was the highest monthly level since the onset of the pandemic in 2020. In October, it was around 73%, up from 69% in September.
Apple Hospitality recorded total revenue of $277.2 million, up 86.2% compared to the third quarter in 2020. Adjusted hotel earnings before interest, taxes, depreciation and amortization was $107 million, up 16% from the second quarter.
Apple Hospitality REIT's comparable ADR increased 33.4% year over year to $141.56, occupancy was up 47% to 71.6% and revenue per available room increased 96.2% to $101.32 during the third quarter.
As of press time, Apple Hospitality's stock was trading at $16.67 a share, up 32.8% year to date. The New York Stock Exchange Composite Index was up 19.9% for the same period.