While navigating a challenging second quarter, Apple Hospitality REIT continued to sell off full-service hotels to concentrate its efforts on its select-service assets.
RICHMOND, Virginia—Apple Hospitality REIT President and CEO Justin Knight opened his company’s second quarter earnings call thanking everyone for their concern and support following an accident in July when the small plane he was piloting stalled and crash-landed in a cornfield.
“Unexpected interruptions to our daily lives often stand to remind us of the importance of each day and all that we have to be thankful for,” he said. “I'm incredibly grateful to be a part of such a thoughtful and caring industry, so thank you.”
The second quarter has proven to be a difficult period for the hotel industry. Executives at Apple Hospitality, much like their counterparts at other hotel companies, spoke about challenges they had to navigate in Q2.
The company raised $332 million in revenue in the quarter, said EVP and CFO Bryan Peery, and adjusted earnings before interest, taxes, depreciation and amortization came to $126 million. Tougher year-over-year comps in several larger markets, soft business demand and calendar shifts contributed to slight declines in revenue per available room growth, he said.
However, even though property taxes and higher pressure on labor costs and property taxes combined with a lack of growth in average daily rate led to a decrease in hotel adjusted EBITDA margin, the company still achieved a margin of 39.9%.
Peery said business travel remains less than ideal because of higher labor costs and uncertainty over the direction of the federal government despite higher consumer confidence and modestly favorable gross domestic product growth.
“The restraining corporate spending mixed with increased supply in many of our markets has muted our ability to increase rates,” he said.
As a result, the company revised its full-year adjusted EBITDA guidance by $5 million on the low end and by $10 million on the higher end. Similarly, it lowered its full-year RevPAR growth guidance by 50 basis points on the high end as well as tightened its hotel EBITDA margin guidance by 50 basis points on the low end and by 80 basis points on the high end.
As of press time, Apple Hospitality’s stock was down 11% year to date. The Baird/STR Hotel Stock Index was up 23.2% for the same time period.
Apple Hospitality continues to look for opportunities to reduce the number of full-service hotels in its portfolio, Peery said, as the company wants to focus on its core select-service and extended-stay hotels through which executives believe they can generate stronger, more stable returns to shareholders.
The company closed on its sale of the full-service 224-room Hilton Dallas Park Cities for $56 million in April, he said, through which the company recognized a gain of about $16 million in the quarter. In June, the company entered into a contract to sell its 316-room Marriott in Fairfax, Virginia, for $42 million, and the deal is expected to close by the end of the year.
“If the Fairfax sale is completed, our remaining full-service portfolio would consist of 30 hotels, or 1% of our total portfolio,” he said.
The acquisition market continues to be a challenge with uncertainty in operations, more competition and sellers who appear to have little incentive to sell, Peery said. The company anticipates closing on the $38-million contract for acquiring a dual-branded Home2 Suites and Hilton Garden Inn in Birmingham, Alabama, when it opens in September, he said.
“This is another good example of an effective piece of our strategy,” he said. “We entered into the contract for these hotels in the middle of 2015 for a fixed price, thus taking no development risk. With a significant increase in construction costs in the last couple of years, we believe that we have achieved a very attractive price per key for new assets in a growing market.”
Market by market
The company’s strongest-performing markets in the quarter were Seattle; Richmond, Virginia; San Diego; and Denver, EVP and COO Kristian Gathright said. The weakest markets were Austin, Texas; Omaha; Dallas; and Los Angeles.
“The West/South central region was our poorest-performing region with a RevPAR decline of 7.1% with the previously mentioned under performance in Dallas and Austin as well as continued impact from declines in energy-related demand,” she said.
The Austin market only represented 2.2% of EBITDA contribution in the quarter, she said, but the 14% decline in RevPAR led to a 40-basis-point drag on overall RevPAR growth. While there’s still demand in the market, the amount of supply coming outpaces it and the markets have become more compartmentalized, reducing compression downtown.
A softer convention calendar has hurt the Dallas market, she said, along with the new hotels opening ahead of the ramp-up of new business generators. However, the convention center calendar is pacing well for 2018 and beyond.
Excluding Los Angeles, Apple Hospitality’s West Coast properties have performed well, Gathright said. Seattle hotels are benefiting from Amazon and military defense spending with Boeing, and San Diego sees strong business from leisure groups and government.