Slower rate growth and increased price sensitivity have led Apple Hospitality REIT to lower its full-year 2024 guidance despite strong performance during the second quarter.
During the hotel real estate investment trust's second-quarter earnings call, Senior Vice President and Chief Financial Officer Liz Perkins said the company is decreasing its midpoint net income guidance by $6 million and comparable hotels revenue per available room change by 150 basis points. It is increasing its comparable hotels earnings before interest, taxes, depreciation and amortization margin by 10 basis points while decreasing adjusted EBITDA for real estate by $7 million.
For full-year 2024, Apple Hospitality REIT expects net income of between $202 million and $225 million, according to its earnings release. It projects comparable hotels RevPAR change of 0.5% to 2.5%, with a comparable hotels adjusted EBITDA margin percentage of 35% to 35.8%. Adjusted EBITDA for real estate is expected to range between $456 million and $474 million.
"While operational results for the first quarter of 2024 were in line with our expectations at a previously provided midpoint, and demand continued to improve during the second quarter, rate growth during the second quarter was modest, and the updated outlook takes into account increased price sensitivity in the leisure consumer and the impact of the increase in business transient as a percent of mix, which is currently coming at lower rates than those we'd seen for leisure consumers following the pandemic," Perkins said.
The high end of the full-year range reflects relatively steady macroeconomic conditions with continued strengthened leisure demand and improvement in business transient with greater ADR growth as Apple Hospitality REIT moves past the strongest leisure months, she said. The low end reflects continued pressure on rate growth with a slight pullback in leisure demand.
"Despite the pullback in our expectations for the full year, we are confident we are well-positioned for continued strong operating fundamentals and bottom-line performance," she said.
As of press time, Apple REIT's stock was trading at $14.18, down 15.8% year to date. The NYSE Composite was up 7.3% for the same period.
Second-Quarter Performance
For the quarter, Apple REIT reported net income of $73.9 million, a 13.2% year-over-year increase. Adjusted earnings before interest, taxes, depreciation, amortization and real estate costs grew 9.1% year over year to $140.9 million. Comparable hotel adjusted hotel EBITDA was $151.5 million, up 1.5%, while comparable hotels adjusted hotel EBITDA margin was 39.1%, a 50-basis-point dip.
Average daily rate during the quarter reached $162.98, a 1.2% increase compared to last year. Occupancy grew 2% year over year to 79.8%, and revenue per available room increased by 3.3% to $130.07.
Comparable hotel ADR grew by 0.3% to $163.01, while occupancy grew by 2.2% to 79.8%, resulting in RevPAR growth of 2.5% to $130.09.
In day-over-day trends, leisure travel remained resilient as weekend occupancy was up 2.3% year over year, Perkins said. Weekday occupancy also improved, growing 2.3% as well.
"While we have been pleased to see steady improvement in overall demand, leisure demand, which has produced the strongest rate growth post-pandemic, showed signs of increased rate sensitivity during the quarter, and midweek demand came at lower absolute rates than those achieved on weekends," she said.
The combined effect weighed on overall ADR growth during the quarter, Perkins said. Weekend ADR was up 1.1% in April, but it was down 1.9% and 2.3% in May and June, respectively. Weekday ADR was up 1.1% in April while increasing slightly year over year for May and June.
The strongest rate growth came on Monday nights, followed by Tuesdays and Wednesdays when the REIT's portfolio achieved 86% occupancy, she said. Weekend ADR was $170, while weekday was $156.
"We believe that future growth will come largely from continued improvement in midweek occupancy, which will support more significant midweek rate growth, both of which have lagged the leisure recovery post-pandemic," she said.
Portfolio Management
The seven hotels that Apple REIT has acquired since June 2023, along with the parking garage adjacent to its downtown Salt Lake City hotels while excluding its most recent purchase, are yielding about 9% after capital improvements on a trailing 12-month unlevered basis with meaningful upside from projected market growth and operational improvements, CEO Justin Knight said.
The company bought the 262-key Embassy Suites by Hilton Madison Downtown in June for $79.5 million after construction was complete. The hotel is ramping up in line with expectations, Knight said. A long-standing relationship with the developer allowed Apple REIT to secure a fixed-price takeout contract prior to the start of construction.
"We continue to feel good about the overall strength of the Madison market and the location and position of this hotel," he said.
Apple REIT has one more hotel under contract for purchase, the Motto by Hilton in downtown Nashville that is currently under construction, he said. The company and developer have agreed to a fixed-price contract, approximately $98 million, and the expected acquisition date is in late 2025.
Since the beginning of 2024, Apple REIT has sold three hotels for a combined gross sales price of approximately $41 million, Knight said. That has resulted in a gain on sale of approximately $18 million, including the 82-key SpringHill Suites by Marriott Greensboro, sold during the second quarter for a gross sales price of approximately $7 million.
Since the start of the pandemic, the company has sold approximately $294 million in hotels and invested $1 billion into new acquisitions while maintaining strength in its balance sheet, he said.
"These transactions have lowered the average age of our portfolio, increased revenue per available room and margins, helped to manage near-term [capital expenditure] needs, grown the size of our platform and positioned us to continue to benefit from near-term economic and demographic trends," he said.
Through the first six months of the year, Apple REIT has invested about $33 million into capital expenditures, Knight said. The company expects to reinvest between $75 million and $85 million into its portfolio during the year, with major renovations at about 20 of its hotels.
By the Numbers
At the end of the second quarter, Apple REIT reported approximately $7 million in cash on hand with roughly $481 million available through its revolving credit facility, according to its earnings release.
The company has approximately $1.5 billion in total outstanding debt with a combined weighted-average interest rate of about 4.8%. When excluding unamortized debt issuance costs and fair-value adjustments, its total outstanding debt included approximately $278 million in property-level debt secured by 15 hotels and approximately $1.3 billion outstanding under its unsecured credit facilities. It has 209 unencumbered hotels in its portfolio.
As of June 30, its weighted-average debt maturities were 3.1 years.
On July 17, Apple REIT amended its unsecured $85 million term loan facility, increasing the amount of the term loan facility to $130 million, with the additional $45 million funded at closing. It also extended the maturity date to July 25, 2026. Its interest rate, subject to certain exceptions, is equal to an annual rate of the one-month SOFR plus a 0.10% SOFR spread adjustment plus a margin ranging from 1.35% to 2.20%, depending on the company's leverage ratio, as calculated under the terms of the amended credit agreement.
Subject to certain conditions, Apple REIT may extend the maturity date of the $130 million term loan facility to July 25, 2027.
During the second quarter, the company repurchased approximately 1.1 million common shares for about $15.5 million. Since the end of the quarter, the company repurchased an additional 500,000 shares, bringing the total purchase price to about $23.1 million. As of July 31, it has about $312 million still available through its share repurchase program.