Though the overall hotel transactions market continues to be quiet, Apple Hospitality REIT is capitalizing on its consistent participation in underwriting deals, so much so that the real estate investment trust is winning bids without the highest offer.
During the company’s first-quarter earnings presentation to investors and analysts, Apple REIT CEO and Director Justin Knight said his team continues to look for and underwrite acquisitions.
To date, Knight said his company has underwritten almost 100 hotel deals, including both individual assets and smaller portfolios, since the beginning of the year. And the pursuit remains both on deals that are broadly and narrowly marketed, including off-market deals.
During the first quarter, the real estate investment trust entered into a contract for the purchase of the newly renovated 154-room Courtyard by Marriott Cleveland University Circle in Cleveland for $31 million, or roughly $200,000 per room.
Knight said the hotel opened in April 2013 and underwent a complete renovation, which included adding an extra guestroom and a full remodel to guestrooms and interior public spaces such as the bar and fitness center.
“It’s located in the heart of Cleveland’s University Circle district, a premier educational, medical and social district,” he said. “As we have indicated on prior calls, we have intentionally sought acquisitions in markets that benefit from a mix of business and leisure demand. The Cleveland market fits well within this criteria. It is business-friendly, with a favorable cost of living, offers a wide variety of demand generators and is positioned well for future growth.”
For this particular deal in Cleveland, Knight said his company was not the highest bidder.
“The general partner in the deal and the management company is the same as the two assets that we closed at the end of last year. In part, this is an expansion on that relationship,” he said. “We were not the high bidder on that particular asset. In fact, it had gone under [letter of intent] at a much higher price and had fallen out and was brought back to a small group, of which we were a part.”
In general, Knight said the company’s strong track record of executing deals has in a number of cases resulted in Apple REIT securing assets below the high bid or where it is not the most competitively priced with its bid.
Apple REIT’s current portfolio has 220 hotels totaling roughly 29,000 rooms.
Knight anticipates deal volume will increase as the year progresses, and his team will maintain its approach of exploring acquisition opportunities that refine, enhance and grow its existing portfolio. The goal is also to increase exposure in markets with strong growth trajectories, he added.
The challenge industrywide, however, is there’s still a “fairly significant bid-ask spread, somewhere on the 5%-10% range on average,” Knight said.
There’s been an unwillingness among both buyers and sellers to bridge that gap, though Knight feels eventually the sellers’ expectations could break first.
“Internally, our expectation is that the two factors, … [capital expenditure] needs and refinancing risk, will create greater motivation for sellers to transact. With that motivation, our expectation is that we would begin to see greater flexibility around pricing,” he said, as well as “a fairly dramatic increase in transaction volume as we go through the end of the year.”
During the three months ending March 31, Apple REIT invested roughly $18 million in capital expenditures, and anticipates investing between $70 million and $80 million in CapEx during 2023. This includes renovations to 20 to 25 of its hotels.
During the quarter, Apple REIT’s comparable hotels revenue per available room was $109, a 19% increase year over year and a 6% increase over first quarter 2019. Comparable hotels average daily rate was $152, representing an 11% increase over first quarter 2022 and a 9% increase over the same period in 2019. Comparable hotels occupancy was 72%, a 7% increase over first quarter 2022 and a 2% decline compared to first quarter 2019.
The company’s comparable hotels adjusted earnings before interest, taxes, depreciation and amortization improved 21% over first quarter 2022 to $107 million.
As of March 31, Apple REIT’s total debt to total capitalization, net of cash and cash equivalents was approximately 29%. The company also repaid in full four secured mortgage loans totaling approximately $37 million. This resulted in an increase of unencumbered hotels in the company’s portfolio to 205.
Liz Perkins, senior vice president and chief financial officer, said during the call that April had softer hotel performance during the week leading into the Easter holiday, then subsequently rebounded in the following week.
“For the month, comparable results for April showed continued strength in demand with occupancy of approximately 77%, in line with 2022 and 5% shy of April 2019,” she said. “ADR growth for the month of April was up approximately 5% as compared to 2022, and 9% as compared to 2019.”
As of press time, Apple’s stock was trading at $15.18 a share, down 3.8% year to date. The NASDAQ Composite Index was up 15.1% for the same period.
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