With a juicy dividend monthly dividend amounting to an annual yield of 7.4% and a relatively stable market niche, Apple Hospitality REIT (APLE -0.96%) appeals to many in the current low-yield environment. But before jumping in, we need to look at its performance among peers, its financial stability, and the trajectory of the company.
Apple Hospitality REIT is the largest publicly traded limited-service hotel landlord. Hotel names falling into the limited-service category include Hampton Inn & Suites, Courtyard by Marriott, Hilton Garden Inn, and Residence Inn, to name a few.
Is Apple Hospitality ripe for the buying?
Today, Apple Hospitality owns 235 branded hotels across 34 states and 87 markets. The broad diversification provides exposure to a wide variety of economies and reduces volatility.
Apple is among the top five largest owners for both Hilton (HLT -0.95%) and Marriott (MAR 0.30%). Brand focus creates consistency and efficiencies, attracting travelers who appreciate steady quality in accommodations.
Although these mid- to upper-middle-quality hotels don't offer things like room service, in-hotel restaurants, or resortlike activities, they still provide a strong value proposition to business travelers, families, and vacationers. The hotels typically offer loyalty members free Wi-Fi, free or reasonably priced breakfast, free or low-cost parking, and access to fitness facilities without extra fees.
CEO Justin Knight said, "While this value proposition is consistently recognized by our guests, it becomes increasingly relevant during periods where business and leisure travelers are focused on expense control."
The hotel business is cyclical, and during recessions, travel slows down markedly. But it doesn't stop altogether, and affordable, mid-quality, limited-service hotels in good locations fare the best of any of them, according to a study by Hotel News Now. Apple's portfolio of properties falls squarely into that category.
Unemployment is low, average wages increasing, and travel is high on the list of affordable luxuries. Apple has taken advantage of favorable conditions to sell nine hotels this year, and has three more under contract to sell. The company is strategically maximizing the markets served by adjusting the concentration of hotels in promising areas.
Management also takes a disciplined approach to refreshing existing hotels to gain as much market share as possible while economic conditions are good. Brand loyalty goes a long way when reduced travel budgets become a reality.
Third-quarter results reflect lean operations
In third-quarter 2019 results, reported Nov. 11, revenue per average room (revPAR) increased 2.3% to $110, the lowest in the lodging peer REIT group. However, EBITDA margin was the second highest in the peer group at 38%. This indicates Apple Hospitality is one of the most efficient operations in its peer group -- a great quality to have anytime, but especially when the hotel market slows down.
Funds from operations (FFO) were in line with consensus at $0.45 per share, compared with $0.47 per share for the same quarter in 2018. It easily covered the period's dividend obligation of $0.30 per share.
Apple Hospitality's undrawn capacity on unsecured credit was reported as approximately $274 million. Total debt to total capitalization was a low 27%. The access to capital provides Apple the financial flexibility to pursue opportunities and fund capital improvements as necessary.
Guidance indicated a bit of a pullback in expectations. On the Q3 earnings conference call Nov. 5, Knight said:
As we highlighted in our second-quarter call, we anticipate a decline in revPAR during the fourth quarter as compared to the same period in 2018, primarily as a result of more challenging year-over-year comparisons and the potential for some softening in demand tied to macroeconomic and geopolitical factors.
We are tightening the ranges of our full-year 2019 revPAR guidance, slightly lower in the midpoint. In addition, we are reducing the midpoint of the company's guidance for net income and adjusted EBITDA to match top-line guidance and to reflect higher anticipated general and administrative expenses.
Take a bite of the apple?
Are management's interests aligned with those of shareholders? If management has skin in the game with stock ownership, the interests do line up.
In the last 12 months, several insiders have purchased stock and none have sold. Insiders at Apple Hospitality REIT own about $234 million worth of shares, or 6.4% of the company.This is good news for investors.
Apple Hospitality is well managed, has a stable dividend, and is well positioned for an eventual economic pullback. Investors should keep Apple Hospitality on their radar screens and consider nibbling at shares during overall market swoons.
If a recession hits, the stock will probably get pulled down with the rest of the market, presenting additional accumulation opportunities, but this dividend payer should be just fine.