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Where Will Apple Hospitality REIT be in 5 Years?

Jul 29, 2020 by Matthew DiLallo

Real estate has been one of the worst-performing sectors in the market since the COVID-19 pandemic began, and hotel REITs are a big contributing factor. Travel demand fell off a cliff earlier this year and is yet to recover to anything resembling previous levels.

Having said that, there could be some long-term value opportunities for patient investors. Apple Hospitality REIT (NYSE: APLE), which has fallen by 47% in 2020, is one particularly interesting example, so here's a bit about what the REIT invests in, how the pandemic has affected its business, and what could be in store for the future.

Apple Hospitality REIT: The quick version

Apple Hospitality REIT owns 233 hotels with nearly 30,000 guest rooms located in 34 states. The company's hotels are "rooms-focused," meaning you generally won't find large conference spaces, restaurants, or other such amenities on the property -- the main focus of each property is hotel rooms and nothing else.

Most of the company's hotels are select service hotels, which essentially means mid-level hotel properties. They don't have the level of service, amenities, and luxury that would typically be expected in larger-scale or luxury resorts. And they offer more to travelers than budget hotel chains -- such as moderate food and beverage options.

To give you an idea of what we're talking about, some of the most prevalent brands in Apple Hospitality REIT's portfolio are Hilton Garden Inn, Courtyard by Marriott, and Homewood Suites. They often cater to business travelers and the extended-stay market, as well as to leisure travelers -- particularly those who want more space and functionality than a traditional hotel room offers, as many of the properties are suite-based.

How has the pandemic affected the business?

Obviously, the COVID-19 pandemic has been generally devastating to the hotel business. Leisure and business travel ground to a halt as the pandemic worsened in March and still hasn't recovered nearly to pre-pandemic levels.

However, the good news is that since Apple Hospitality REIT isn't focused on vacationers or group events, its business took less of a hit than most. Its hotels mostly stayed open throughout the pandemic, with occupancy bottoming at 18% in April, but recovering to 43% by the end of June. These may sound like terrible numbers (and compared to before the pandemic, they certainly are), but consider that many hotel real estate investment trusts aren't even close to this level of business. For example, luxury hotel REIT Host Hotels & Resorts (NYSE: HST) achieved an occupancy level of 15% in May, while Apple Hospitality REIT had nearly twice that level.

What's more, Apple Hospitality REIT has $437 million in cash available and even at 15%–20% occupancy is only burning through $18 million per month, so it's not in much danger even if the recovery to pre-pandemic levels of occupancy (in the 70%-80% range) takes longer than expected.

What's in store for the future?

Apple Hospitality Properties' hotels sit comfortably in the middle of the market and tend to perform better than other types during recessions. After all, while they certainly see a drop in demand from their core business and leisure customers, they also get an uptick from guests who would ordinarily stay in higher-end properties but are trying to scale back expenses.

And, Apple Hospitality REIT's focus on rooms gives it an edge in the COVID-19 pandemic. It doesn't have to worry about mass cancellations of group business from conventions, nor does it need to worry about restaurant shutdowns having a massive impact on revenue.

In a nutshell, while Apple Hospitality REIT's business is certainly suffering along with the rest of the hotel REIT subsector, the company is in a strong position to bounce back quicker than many of its rivals, and it has the liquidity to make it through the tough times while maintaining a comfortable amount of breathing room.

So in five years, the company's business will likely have long since returned to pre-COVID levels of occupancy, and it will be back to doing what it does best -- maintaining and growing its portfolio of rooms-focused hotels. While nobody has a crystal ball that can predict a company's future, Apple Hospitality REIT could end up being a long-term bargain at the current price level.

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Matthew DiLallo owns shares of Host Hotels & Resorts. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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