Apple Hospitality Remains a Welcoming Place to Invest

 | Apr 05, 2017 | 1:00 PM EDT
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These days I'm a bit hesitant about most high-yield investments, particularly due to the potential effects that higher interest rates in the broader bond market might bring. One that I'm not all that nervous about is Apple Hospitality (APLE) , not least because of this REIT's leverage of just 3x EBITDA, which is very low for hotel landlords. I recommended Apple Hospitality last July and have been enjoying its generous monthly dividends since. 

Unfortunately, APLE shares are yet to take off. At the time I recommended Apple Hospitality, the shares were about $20. Today they sit at about $19. There have been ups and downs, with APLE at one point below $18, though the stock now is close to where it was eight months ago when I recommended it. Apple Hospitality is an income play, though, and I fully expect it to be able to maintain its dividend of 10 cents per month, for a yield of 6.35%.

As you can see above, shares have slid downward since a couple months ago. The reason for this drop is some weak 2017 guidance. RevPAR, or revenue per average room, is expected to be flat to up 2% in 2017, and EBITDA is also expected to grow by low single digits this year. Some strong acquisitions might change that, but as supply expands in many markets, I would not count on a flurry of acquisitions.

Speaking of which, 60% of the markets in which Apple Hospitality operates have at least one comparable hotel being built within a five-mile radius. Management expects strong results from Los Angeles but will be competing with strong comparables due to a gas leak in a wealthy area nearby last year. Denver is expected to be weak on new supply, Houston will continue to see negative RevPAR as low oil prices continue to crunch the economy in that area, Dallas will have a "weak" convention schedule and Boston is expected to be "challenged," according to the REIT.

There are a few areas of strength. A new Intel plant and a hospital complex under construction near an existing hotel should put some momentum behind that market. Also, strong e-commerce has made the Seattle economy quite strong. Overall, however, it looks like there's going to be something of a slowdown this year.

That's all right, though. Last year was a very busy one for Apple Hospitality. It acquired Apple REIT Ten, which included a whole 56 Marriott and Hilton hotels with 7,200 rooms altogether. Late last year the company also acquired two new constructions, one Home2 Suites by Hilton in downtown Atlanta and one Courtyard Marriott near the Fort Worth Stockyards for $18 million.

Furthermore, APLE shares are still cheap and that makes Apple Hospitality a buy even if 2017 isn't the strongest. As a publicly traded company, Apple Hospitality doesn't have much history behind it, so a historical comparison can be difficult. Right now Apple Hospitality trades at just under 11x trailing funds from operations (FFO). That's pretty cheap, especially when we consider that most of this REIT's hotels are in suburban markets, which are insulated from the broader global economy.

Apple Hospitality remains a good place to invest. While I'm not expecting much from this year, I still want to be long Apple Hospitality because I believe a stronger domestic economy is going to provide refuge from a weak Europe and Asia, and this will benefit Apple Hospitality, which relies much less on international travel than most other hotel REITs.

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