High Quality Assets, Low Leverage and a 5.9% Yield
In November, 2016, I made a decision to partner with the Knight family by becoming a shareholder in a relatively new publicly traded REIT. My retirement income portfolio tilts toward blue chip Dividend Champions and companies with AA or better S&P credit ratings, but I have included this non-rated REIT with no record of dividend increases. Why would I divert from my normal pattern?
I made this investment in Apple Hospitality REIT (NYSE:APLE) because:
- APLE's management team has been together for over a decade, learning how to launch, develop and market non-traded REITs, culminating with the merger of three non-traded REITs that formed Apple Hospitality REIT in March, 2014. I'm comfortable with this model of rolling non-traded REITs into a publicly traded REIT. It was pioneered by William Polk Carey, which led to the development of WP Carey (NYSE:WPC), a long-time holding.
- APLE's portfolio of 236 relatively upscale hotels in 33 states is evenly divided between the venerable Marriott and Hilton families. The average effective age of the properties is 4 years. The hotels are located in metropolitan areas with strong demographics that are business and/or tourist destinations.
- APLE's balance sheet is strong. Debt is less than 28% of capitalization. The company has an unusually attractive collection of assets for a REIT with low leverage. We likely are at the end of a very long cycle of low interest rates, and investors are becoming reluctant to embrace "bond-like" equities such as REITs. In this atmosphere--and as a hedge against the next recession--I'm looking for REITs with solid balance sheets. I have very little exposure to the lodging REIT sub-sector, and I find APLE to be an intriguing entry in this space.
- APLE's dividend commenced with a monthly payout of $.10 in May 2015. The annual dividend is $1.20. At a February 10, 2017 price of $20.34, the yield is 5.9%. I don't necessarily look for companies that pay monthly dividends, but I view it as a positive because it tells me that these companies are "investor friendly," and understand that many of their investor constituents are primarily focused on income.
(Photo of Marriott Residence Inn, Downtown San Diego, from APLE website)
Apple Hospitality's Relationship with Marriott and Hilton
The Welcome at the APLE website says:
"Apple Hospitality REIT, Inc. is a publicly traded real estate investment trust that owns one of the largest portfolios of upscale, select service hotels in the United States....with over 30,000 guestrooms, diversified across the Hilton® and Marriott® families of brands with locations in urban, high-end suburban and developing markets...."
Marriott brands in the portfolio include:
- Courtyard by Marriott®
- Fairfield Inn by Marriott®
- Fairfield Inn & Suites by Marriott®
- Marriott® Hotels
- Renaissance® Hotels
- Residence Inn by Marriott®
- SpringHill Suites by Marriott®
- TownePlace Suites by Marriott®
Hilton brands in the portfolio include:
- Embassy Suites by Hilton®
- Hampton Inn by Hilton®
- Hampton Inn & Suites by Hilton®
- Hilton Garden Inn®
- Home2 Suites by Hilton®
- Homewood Suites by Hilton®.
Half of Apple Hospitality's properties are operated by affiliates of Hilton and half are operated by affiliates of Marriott:
The best REIT "landlords" are actually partners with their tenants. The best REITs work hard to maintain a mutually beneficial relationship with their lessees. In my opinion, APLE's management has been wise to limit its focus to the Marriott and Hilton brands. Members of the APLE managment team are represented on seven advisory councils and other advisory committees within the Marriott and Hilton brands. APLE is among the five largest property owners for both Marriott and Hilton.
(Logo from Business Wire)
(APLE logo from company website)
Some Key Statistics
Revenue per available room (RevPAR) is a performance metric used in the hotel industry and is calculated by multiplying a hotel's average daily room rate (ADR) by its occupancy rate. APLE's RevPAR for the three months ending September 30, 2016 was $107.97.
(Photo of Hilton Embassy Suites, Anchorage, AK, from APLE website)
On September 30, 2016, assets were $5.019 billion and liabilities were $1.482.3 billion. There were 223.4 million shares. Shareholder equity was $3.536 billion, or $6.635 per share.
(Photo of Fairfield Inn & Suites at SeaWorld, Orlando, FL, from APLE website)
F.A.S.T. Graphs shows a market capitalization of $4.543 billion; 27% debt/capitalization; a current Price/Funds From Operations ratio of 11.4; a "normal" P/FFO ratio of 11.9; 2016 FFO of $1.77 per share, 2017 estimated FFO of $1.83, and a 2018 estimated FFO of $1.90.
(Photo of Marriott Residence Inn at Marlborough, Boston, MA from APLE website)
APLE says its strategy is to invest in geographically diversified, well-branded, upscale hotels while purposefully maintaining a conservative capital structure to generate attractive returns for shareholders.
Apple Hospitality's Predecessors
APLE's history as a publicly traded REIT is just two-and-one-half years old. Because of this, it's important to take a look at its predecessor companies.
They have created, developed and merged numerous real estate companies. Here is a brief summary:
- Apple Hospitality Two, was sold to an affiliate of ING Clarion in May 2007.
- Apple Hospitality Five, was sold to Inland American Real Estate Trust, Inc. in October 2007.
- Apple REIT Six, merged with an affiliate of Blackstone Real Estate Partners VII in May 2013.
- On March 1, 2014, Apple REIT Seven and Apple REIT Eight merged into Apple REIT Nine. Following these transactions, Apple REIT Nine's name was changed to Apple Hospitality REIT, Inc., which began trading on the NYSE under the ticker symbol APLE on May 18, 2015.
- Apple REIT Ten merged with the Company in September 2016.
Additionally, Glade Knight served as Chairman and Chief Executive Officer and Kristian Gathright served as Assistant Vice President and Investor Relations Manager for Cornerstone Realty Income Trust, which merged with a subsidiary of Colonial Properties Trust in 2005. Following the merger in 2005 until April 2011, Mr. Knight served as a trustee of Colonial Properties Trust.
Controversy with Some Investors and the SEC
Another reason to explore the origins of APLE in its predecessor companies is that there was considerable controversy along the way. Their multiple real estate operations generated a flurry of activity, along with some complaints from investors and regulators. A lawsuit the was filed in 2011 against Apple REIT Nine and Apple REIT Ten was dismissed in March, 2015, by a Federal Appeals Court. A year earlier, in February, 2014, a financial settlement was reached with the Securities and Exchange Commission, which had alleged deficient disclosures in the shares' pricing process, as well as deficiencies in disclosures relating to executive compensation and certain transactions among the REITs.
I made the decision to invest in APLE in spite of these events. The most troublesome for me was the settlement reached in the SEC investigation. I believe the many inter-related business transactions involving the non-traded companies made the APLE companies somewhat vulnerable. When relationships are close-knit and decisions are often made verbally, I can see how the APLE companies might be subject to hard questions. Life as a public REIT involves more scrutiny. I satisfied myself that the current Apple Hospitality REIT has an effective Board of Directors and that the management team has benefitted from what they learned during the process of bringing APLE public.
Brad Thomas Analyzes the New Public REIT
In Seeking Alpha's first analysis of APLE on May 23, 2015, "Don't Let A Few Bad Apples Spoil This New REIT," Brad Thomas described the company's transition to a publicly-traded REIT. In an October 19, 2015 follow-up article, Brad reaffirmed his buy recommendation and his attraction "to APLE's conservatively structured balance sheet that has excellent access to capital markets--and one the safest balance sheets overall." Finally, in an October 21, 2016 article, Brad updated his analysis of the company merged Apple REIT Ten's 56 hotels into APLE. He said the balance sheet differentiates APLE from most other lodging REITs: "The strength of APLE's balance sheet continues to be an important differentiating factor for the company providing additional security during periods of volatility and the flexibility to act in meaningful ways to enhance shareholder value."
It's clear that the Executive Chairman, Glade Knight, has been the driving creative force behind APLE and its predecessor companies. The Knight family is well-represented on the management team, so an investor is partnering alongside a close-knit team that is centered in the Knight family.
I'm providing a biographical sketch of the management team for these reasons:
- The company is relatively new as a publicly traded REIT;
- The management team has worked together on numerous projects prior to the company's present structure;
- There was controversy with some of the predecessor companies;
- The inter-woven nature of the management team; and
- The prominent leadership position of members of the Knight family,
The APLE leadership team, led by Glade Knight, has been together for more than a decade. The average tenure with APLE and its predecessor companies is 14 years.
Glade M. Knight has served as Executive Chairman of the Company since May 15, 2014, and previously served as Chairman and Chief Executive Officer of the Company since its inception.
From 1993 until it merged with a subsidiary of Colonial Properties Trust in 2005, he served as Chairman and Chief Executive Officer of Cornerstone Realty Income Trust. Following the merger in 2005 until April 2011, Mr. Knight was a trustee of Colonial Properties Trust.
Glade Knight led the development of numerous real estate companies such as Apple Hospitality Two, Apple REIT Six, etc., that merged with Apple Hospitality or with other REITs, Blackstone Real Estate Partners VII, and ING Clarion.
(Glade M. Knight photo from APLE website)
Justin Knight has served as President of the Company since its inception and was appointed Chief Executive Officer of the Company in May, 2014. He joined the Apple REIT Companies in 2000, serving as President of six predecessor Apple companies. Justin Knight has been a member of the Company's Board of Directors since January 1, 2015.
(Photo of Justin Knight from APLE website)
Kristian Gathright has served as Executive Vice President and Chief Operating Officer for the Company since its inception. She served in this capacity with several other Apple companies until they were merged with APLE or other REITs. Mrs. Gathright also served as Assistant Vice President and Investor Relations Manager for Cornerstone Realty Income Trust. From 1996 to 1998, she was an Asset Manager and Regional Controller of the Northern Region Operations for United Dominion Realty Trust. From 1994 to 1996, she served as a Senior Staff Accountant at Ernst & Young LLP.
(Photo of Kristian Gathright from APLE website)
Bryan Peery has served as Executive Vice President and Chief Financial Officer for the Company since its inception. He also served in this capacity with several Apple companies prior to their merger with APLE or another REIT. Prior to his service with these companies, Mr. Peery served as President (2000-2003), Vice President-Finance (1998- 2000) and Controller (1997-1998) of This End Up Furniture Company.
(Photo of Bryan Peery from APLE website)
David Buckley has served as Executive Vice President and Chief Legal Counsel for the Company since its inception. He also served in this capacity with several Apple companies prior to their merger with APLE or other REITs. From 1999 to 2005, Mr. Buckley served as a commercial real estate Associate with McGuireWoods, a full-service law firm headquartered in Richmond, Virginia.
(Photo of David Buckley from APLE website)
Nelson Knight has served as Executive Vice President and Chief Investment Officer since May 2014. He served as Senior Vice President of Development for the Company from 2009. He served in this capacity with several Apple companies prior to their merger with APLE or another REIT. Mr. Knight serves on several professional committees and on two alumni councils.
(Photo of Nelson Knight from APLE website)
Board of Directors:
- Glade M. Knight, Executive Chairman
- Justin G. Knight, President & Chief Executive Officer
- Glenn W. Bunting, Director (President, GB Corporation)
- Jon A. Fosheim, Director (Co-founder, Green Street Advisors)
- Bruce H. Matson, Director (Chief Legal Officer, LeClairRyan)
- Daryl A. Nickel, Director (Former Executive Vice President for Lodging Development, Marriott International)
- L. Hugh Redd, Director (Former Chief Financial Officer, General Dynamics)
APLE in the Portfolio
I became aware of Apple Hospitality REIT by RoseNose's September 28, 2016 article about her purchase of APLE and Simon Property Group SPG. I was intrigued by the quality of their property portfolio and the relatively low level of debt.
I made an initial purchase of APLE at $17.78 on November 17, 2016, and a second purchase at $18.32 on November 25, 2016. The cost basis is $18.05. APLE is now 1.5% of the portfolio.
Upcoming Earnings Call on February 28
If you are considering a purchase of APLE, I encourage you to listen to the upcoming 4th Quarter 2016 earnings call at 9 AM on Tuesday, February 28. Information about how to listen to the webcast or the replay is available at the APLE website.
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It's not my intent to advocate the purchase or sale of any security. I offer articles and blogs to provide ideas for stocks to study and to share a journal of my effort to design and build a retirement portfolio that puts a priority on relative safety, a history of dividend growth and solid future prospects. Your goals and risk tolerance may differ, so please do your own due diligence.
Disclosure: I am/we are long APLE, WPC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.