When Apple Hospitality REIT found itself as a front-runner to acquire a prized hotel in the nation's capital, the Richmond, Virginia-based real estate investment trust moved quickly.
In March, Apple Hospitality REIT acquired the 234-room AC Hotel by Marriott Washington DC Convention Center from Douglas Development Corp. for approximately $116.8 million, or just under $500,000 per key. The hotel was built in 2020 and features a rooftop bar and restaurant, ground-floor retail space and a large billboard.
Apple REIT CEO Justin Knight said during the company's first-quarter 2024 earnings call what made the acquisition attractive was D.C.'s status as one of the lowest markets for hotel supply growth in the country, as well as the city's "robust" convention calendar and consistent government business and leisure demand.
He added everything came together in his company's favor to make the deal happen.
"From a background standpoint, this was a group — a strong developer, a multi-market developer — that has investments across segments of real estate and I think were struggling a bit in an unrelated office portfolio and saw an opportunity to gain some incremental liquidity through the sale of this asset," Knight said. "This was an asset developed by the group to be held long term, and I think if you have an opportunity to visit it, you'll recognize that quality of construction and the premiere location.
"We were fortunate as we have been in several instances to be the right group at the right time and purchase the asset at a price that we believe, we already feel very good about, but we feel will look even better as we move into the future."
Appetite for Deals
Overall, finding the right hotel deals in larger markets has been tough, Knight said.
"Pricing in large urban markets has made it challenging for us to find an appropriate entry point," he said. "The cost dynamics in urban markets are different. And historically a market like D.C., an asset of this quality would have traded at a 150-basis-point lower cap rate, which given the dynamics of the market would have put it outside of kind of the return threshold that we target."
But with the U.S. Federal Reserve keeping interest rates steady and finding financing at attractive terms more difficult, Apple REIT has been able to close on hotel acquisitions that in different economic cycles the company might have been outbid.
"We've found ourselves in a position to be very competitive around larger assets in some of these urban markets where ordinarily we would have seen very stiff competition, predominantly from private equity, but from a variety of potential buyers," Knight said. "And given our ready access to capital and our ability to bid on assets without financing contingencies, we've been more successful."
Apple Hospitality REIT still has room to acquire more hotels this year, Knight said. There's a number of markets the company is interested in expanding to, but he didn't name any specific cities. The company ended the first quarter with $1.5 billion of total outstanding debt, $5 million cash on hand and approximately $519 million available under its revolving credit facility.
"We continue to underwrite a number of potential transaction assets that we feel would be meaningfully additive to our portfolio, and I think we'll continue to see how that plays out as the year progresses," he said. "We're fortunate given our strategy to have a broad palette to paint with, and I think there are a lot of markets where we have interest and a lot of assets that would fit our investment criteria. So given the appropriate cost of capital, I think we could continue to be meaningfully acquisitive."
The company will continue to diversify the types of markets it invests in, Knight added.
"Our strategy has always been to focus on rooms-focused hotels, predominantly in the upscale and upper-midscale segment and to broadly diversify our portfolio across a variety of markets and market types," Knight said. "In order to achieve that objective, we need to be in both large urban [and] small urban as well as high-density suburban markets."
In December, Apple REIT acquired the 299-room SpringHill Suites by Marriott Las Vegas Convention Center for about $75 million.
Apple REIT has two hotel acquisitions under contract for a combined purchase price of $177.5 million. The hotels are the 262-room Embassy Suites by Hilton under construction in Madison, Wisconsin — with construction slated to wrap up in mid-2024 — and a 260-room Motto by Hilton under development in Nashville, Tennessee, which is scheduled to open in 2025.
In February, Apple REIT sold the 122-room Hampton Inn by Hilton Bentonville/Rogers and the 126-room Homewood Suites by Hilton Bentonville/Rogers in northwest Arkansas for a combined $33.5 million.
Knight said his company is exploring more opportunities to sell its older hotels in its portfolio and use the proceeds to fund acquisitions.
"In today's market, we see ourselves in a position to sell quality assets in smaller markets, potentially assets where we have near-term [capital-expenditure] needs and to redeploy [sale proceeds] into assets that are larger where we have less competition.
"We'll continue to monitor markets, and we'll adjust our strategy appropriately as the market dynamics shift. But looking at the two assets we sold recently, and the asset we bought, I think you can get a sense for where we feel the opportunities are," Knight added.
First-Quarter Performance
In the first quarter, Apple REIT's revenue was $329.5 million, up 5.8% over the first quarter of 2023, according to the REIT's earnings release.
Apple REIT's net income during the quarter was $54 million — which was up 64.2% year over year — and adjusted earnings before interest, taxes, depreciation and amortization for real estate was $100.8 million, up 5.8% from a year ago.
The company's portfolio achieved first-quarter revenue per available room of $110.25, which was up 0.7% year over year. Average daily rate was $153.18, which was a 0.8% increase from the first quarter of 2023. Hotel occupancy was flat at 72%.
Apple REIT updated its full-year 2024 guidance to increase net income by $16 million to a range of $207 million to $233 million. The company also increased its full-year adjusted EBITDAre by $9 million to a range of $461 million to $483 million.
As of publication time, Apple REIT's stock was trading at $14.84 a share, down 2% year to date. The NASDAQ Composite Index was up 10.6% for the same period.