Real estate investment trust Apple Hospitality REIT CEO Justin Knight expects an increase in the number of hotels coming to market this year. However, he isn't betting on new listings or meaningful price adjustments just yet.
Speaking during the company's fourth-quarter and full-year 2022 earnings call Wednesday, Knight said the REIT has been active in the deals market since 2020 and has significant capacity on its balance sheet "to be acquisitive when the market is right." He pointed to the latter half of 2023 as a time when opportunities could especially arise.
"We've been in market and active since the beginning of the pandemic, and have made significant acquisitions. But we've been selective in that process and allowed our core portfolio to build back from an operational standpoint," he said. "We have acquired assets that are additive and been able to maintain the strength of our balance sheet."
Knight said the acquisitions market continues to be relatively quiet now. Apple REIT, however, is "underwriting a number of deals today," he said.
"Many of them are deals that we looked at last year and that have come back to market. Our expectation continues to be that the higher interest rates, combined with greater pressure from the brands around [capital expenditure projects], will cause more assets to come to market as we move through the year. That said, we're not seeing a lot of new deals today; most of what we're underwriting are deals that, again, we've looked at last year and that have continued to be marketed," he said.
Knight added that because buyers in many cases had firm contracts in place last year at elevated price tags, they've been reluctant to meaningfully adjust pricing.
"The other factor that continued to support the bid-ask spread is the fact that operating fundamentals continue to be strong and improve year over year," he said.
Sellers in today's environment anticipate they'll get value for their properties, Knight said.
"Should things go well this year, even with adjustments in cap rates, they might be in a position to get similar pricing for the assets," he said. "We do feel that there will be increased pressure on a number of sellers as we move through the year."
Knight added that higher interest rates have made private equity participants in the market "meaningfully less competitive." Several private equity players were unable to complete transactions that they had intended to in the latter part of 2022.
"As a result, looking at the two deals that we closed last year, we were able to acquire those assets without being the high bid because we did not have a financing contingency," he said. "As we think about our ability to underwrite assets based on our experience in the space and our existing portfolio and our ability to act quickly to close without financing contingency, we have a meaningful competitive advantage."
In the fourth quarter, Apple Hospitality acquired the AC Hotel by Marriott Louisville Downtown and the AC Hotel by Marriott Pittsburgh Downtown for a total combined purchase price of $85 million.
In 2021, the company acquired a portfolio of three hotels for a total purchase price of $126 million. Hotels in the portfolio include: Hilton Garden Inn Fort Worth Medical Center in Fort Worth, Texas; Homewood Suites by Hilton Fort Worth Medical Center; and the Hampton Inn & Suites by Hilton Portland Pearl District in Portland, Oregon.
Other acquisitions in 2021 include the Aloft Portland, Maine, for $51.2 million, the Hyatt Place in downtown Greenville, South Carolina, for $30 million, and the AC Hotel in Portland, Maine, for $66.8 million.
Acquisitions in 2020 include the Hyatt House and Hyatt Place in Tempe, Arizona, for a gross purchase price of $64.6 million.
Looking ahead, Knight said Apple REIT's acquisition strategy will continue to be capturing single assets and smaller portfolios.
"That primary driver for us [to pencil deals] is per-share-earnings accretion," he added.
Fourth-Quarter, Full-Year 2022 Performance
According to the company's earnings release, Apple REIT's total revenue for the fourth quarter was $299 million, compared to $251 million in the same quarter in 2021. Net income for the quarter was $2.3 million compared to $13.2 million in the same quarter in 2021.
Revenue per available room for Apple Hospitality's comparable hotels in fourth quarter 2022 grew 16.3% year over year to $102.87. Average daily rate increased 12.2% year over year to $147.45, and occupancy rose 3.7% year over year to 69.8%.
Liz Perkins, Apple Hospitality's senior vice president and chief financial officer, said during the call with analysts that preliminary results for January show continued strength in traveler demand, with "occupancy of approximately 64%, just 4% shy of January 2019."
Perkins said 61% of Apple REIT's portfolio produced RevPAR above pre-pandemic levels during the fourth quarter.
Top performers included a mix of urban and suburban locations such as Tampa; Phoenix; Anchorage, Alaska; Syracuse, New York; Huntsville, Alabama; San Diego; Savannah, Georgia; and Fort Worth, Texas.
Fourth-quarter adjusted earnings before interest, taxes, depreciation, amortization for real estate was $90 million, up 22% to the same period in 2021, she said, and up 4% to 2019.
As of Dec. 31, 2022, Apple Hospitality had $1.4 billion in total outstanding debt. At the end of the quarter it had roughly $4 million cash on hand, availability under its revolving credit facility of approximately $650 million and term loan availability of $50 million, she said.
As of press time, Apple Hospitality's stock was trading at $16.61, up 5.3% year to date. The New York Stock Exchange Composite was up 2.3% over the same period.
2023 Outlook
Perkins said although forward-booking data for Apple Hospitality's portfolio does not currently show evidence of a slowdown, the team's outlook anticipates that the lodging industry recovery will be "impacted by macroeconomic headwinds in the latter portion of the year."
For the full year, Apple Hospitality expects net income to be between $165 million to $209 million, as well as comparable hotels RevPAR change to be between 3% and 7%, she said.
Adjusted EBITDA for real estate is expected to be between $420 million and $457 million.