New Acquisitions And Renovations Will Shape Hotels Amid Cost Risks

Key Takeaways

• Limited new supply growth and strategic acquisitions are expected to enhance demand dynamics, stabilize revenue, and drive higher earnings.
  
• Focused capital reinvestment and asset sales aim to improve competitive positioning, increase shareholder value, and optimize financial flexibility.
  
• Increased fixed costs and pricing pressures threaten revenue stability and profitability, while transaction challenges hinder financial flexibility and earnings growth.

Catalysts

Apple Hospitality REIT, Inc. (NYSE: APLE) is a publicly traded real estate investment trust ("REIT") that owns one of the largest and most diverse portfolios of upscale, rooms-focused hotels in the United States.

• Limited new supply growth in Apple Hospitality REIT's markets is expected to enhance the demand dynamics and risk profile, potentially stabilizing or increasing future revenue as new hotel inventory pressures are minimized.
  
• The acquisition of high-yield properties, like the Homewood Suites Tampa Brandon, coupled with synergies from existing nearby assets, may drive higher earnings and cash flows in the future due to strategic portfolio concentration and improved yield from operations.
  
• Focused capital reinvestment in existing properties, including major renovations at 20 hotels, aims to maintain competitive positioning and drive EBITDA growth, potentially leading to improved net margins by keeping the properties in prime condition.
  
• Strategic asset sales and share repurchases are positioned to capitalize on current market valuations, with proceeds from sales expected to increase shareholder value and EPS by reducing share count and optimizing the balance sheet.
  
• The disciplined approach to capital allocation and balance sheet management, with a focus on maintaining low leverage, offers financial flexibility and positions the company to take advantage of any macroeconomic improvements, which could enhance future earnings stability and margin improvements.

Apple Hospitality REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Apple Hospitality REIT's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 13.4% today to 12.8% in 3 years time.
• Analysts expect earnings to reach $191.7 million (and earnings per share of $0.73) by about May 2028, up from $191.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, up from 14.1x today. This future PE is lower than the current PE for the US Hotel and Resort REITs industry at 23.0x.
• Analysts expect the number of shares outstanding to decline by 1.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Apple Hospitality REIT Future Earnings Per Share Growth

Risks

• A slight decline in occupancy and RevPAR suggests potential struggles in maintaining consistent demand, which could impact revenue stability.
  
• The increase in fixed costs and the lower-than-expected top-line growth have led to a decrease in bottom-line performance, impacting net margins and profitability.
  
• The decision to revise down full-year guidance due to underperformance in the first quarter highlights challenges in achieving expected earnings.
  
• Pricing pressures from tariffs and increased costs could lead to higher expenses and impact net earnings due to CapEx requirements.
  
• The transaction market's challenges and reduced deal volume might hinder asset sales and limit capital recycling opportunities, affecting financial flexibility and earnings growth.

Valuation

• The analysts have a consensus price target of $13.5 for Apple Hospitality REIT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $191.7 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $11.31, the analyst price target of $13.5 is 16.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.