Apple Hospitality REIT has been patient with the hotel transactions market, and that patience could soon pay off.
Justin Knight, president and CEO of the Richmond, Virginia-based hotel real estate investment trust, said more sellers — who in the past may have wanted to sell larger portfolios of hotels — are now more open to discussions on transacting single-asset deals.
"As we were initially underwriting, the portfolios often contained assets that we thought would be less additive to our portfolio, and that impacted the value for us and our pricing and competitiveness around the portfolio," Knight said on the company's second-quarter earnings call. "As the portfolios are coming back to market, sellers are increasingly willing to consider disposition of a subset of the larger portfolio, which puts us in a position to more effectively align the makeup of the portfolio that we're underwriting with our existing strategy and the portfolio we currently have."
He added Apple Hospitality is in a good position financially to spend on the right property through potentially several individual-asset transactions. It has 3.7 times net debt to earnings before interest, taxes, depreciation and amortization, extended and staggered maturities, a relatively young portfolio and more than $700 million in current total liquidity.
"We are able to be both patient and flexible as we work to capitalize on potential dislocations in the market," he said. "We continue to actively underwrite and exploit dozens of opportunities both on and off market and anticipate that we will be a net acquirer of assets in 2022, with the transactions likely over the coming months."
Some sellers, meanwhile, are staying patient, too.
"Today I'd say brokers are guiding to somewhere around a 10% discount to where values were prior to the disruption of the debt markets," he said. "For a portion of the potential sellers, that's a non-starter, and they'll pull assets from market. For other assets, the more rapid recovery in operating performance puts them in a position where they can achieve their objectives even at a higher potential cap rate, meaning that for us as a buyer, we could potentially achieve higher yield."
When asked if Apple Hospitality would pursue hotels in markets that might be taking longer to recover, Knight said the company has been looking at such markets. It's appetite depends on the long-term view of how any market will perform.
"There has been a shift — a demographic and economic shift in our country over the past five to 10 years — away from higher-cost markets into more business-friendly markets with lower operating costs," he said.
"And we've seen that with some of the larger corporate announcements that have happened over the past couple years. That will have a long-term impact on some markets that have historically been top performers. That then colors our expectations and the pricing that we would offer for assets in those markets."
Apple Hospitality ended the quarter with $1.4 billion in total outstanding debt with combined weighted-average interest rate of 3.6%. In July, the company amended and restated its unsecured $850 million credit facility, raising the total credit facility to $1.2 billion.
Segment Mix
The timing of the business travel recovery is one of the main talking points across the hotel industry. Across Apple Hospitality's portfolio, there's still room for improvement in regard to group and business-transient demand, said Liz Perkins, the company's senior vice president and chief financial officer.
"When you think about our overall occupancy levels and where we still have a little bit of room to grow to reach 2019 levels, it's our midweek occupancy, it's the [business transient]," she said. "So we still see a meaningful upside as we look at some of these markets that are slower to return, but as a portfolio overall, we still see some opportunity on midweek occupancies.
"The good news is that we anticipated more markets midweek would start approaching and exceeding 2019 levels, and we've had pricing power, so there's opportunity on the rate side as that [business transient] comes back."
Knight added that the business-transient segment of guests have continued to improve month to month, and he added business travel "will continue to improve through the back half of the year."
Quarterly Performance
In the second quarter, Apple Hospitality REIT's comparable revenue per available room was $119.41, outpacing the second quarter of 2019 by 4%. Average daily rate was $153.35, which was up 8% over the second quarter of 2019.
"Our portfolio is now producing top-line results above pre-pandemic levels even without the full recovery in business travel," Perkins said. "As we look forward to the remainder of the year, we are optimistic that continued improvement in midweek occupancy driven by further recovery in business travel will push our operating performance even higher."
Apple Hospitality's total revenue was $337.7 million, net income was $65.3 million and comparable hotel adjusted EBITDA of $136.5 million, according to its earnings release.
As of press time, Apple Hospitality's stock was trading at $16.37 per share, up 1.36% year to date. The NASDAQ Composite Index was down 19.4% for the same period.