Limited Hotel Supply Will Improve Occupancy Rates, But Rising Expenses May Impact Future Margins

Key Takeaways

• Favorable supply-demand dynamics and asset optimization can enhance revenue, margins, and overall portfolio performance, driving higher earnings.
  
• Strategic share repurchases and increasing RevPAR growth support long-term shareholder value and near-term revenue through resilient travel demand.
  
• Economic uncertainties, cost pressures, and market limitations could elevate expenses, restrict transactions, and negatively impact revenue and profitability projections.

Catalysts

Apple Hospitality REIT, Inc., formed in November 2007 as a Virginia corporation, together with its wholly-owned subsidiaries (the “Company”), is a self-advised real estate investment trust (“REIT”) that invests in income-producing real estate, primarily in the lodging sector, in the United States (“U.S.”).

• Limited supply growth in Apple Hospitality REIT's markets presents a favorable supply-demand dynamic, which can positively impact occupancy rates and ADR, thereby enhancing revenue and margins.
  
• Acquisition and selective asset sales are optimized to enhance portfolio performance, potentially increasing overall earnings through divesting low-performing assets and investing in higher-yield properties.
  
• Strong RevPAR growth driven by resilient leisure travel and recovering business demand is expected to support future revenue increases.
  
• Incremental demand from emergency services and reconstruction efforts, particularly in markets like L.A., can drive revenue growth in the short to mid-term.
  
• Continued strategic share repurchases at attractive valuations are potentially accretive to EPS, enhancing shareholder value in the long run.

Apple Hospitality REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Apple Hospitality REIT's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.0% today to 13.4% in 3 years time.
• Analysts expect earnings to reach $203.4 million (and earnings per share of $0.84) by about March 2028, down from $214.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.4x on those 2028 earnings, up from 15.1x today. This future PE is lower than the current PE for the US Hotel and Resort REITs industry at 24.5x.
• Analysts expect the number of shares outstanding to decline by 1.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Apple Hospitality REIT Future Earnings Per Share Growth

Risks

• The recent challenging comparison for 2025 fixed costs, including onetime tax benefits and increased insurance premiums, could elevate operating expenses, potentially impacting net margins.
  
• The highly limited transaction market, especially for larger hotel portfolios, may restrict potential asset sales or acquisitions, complicating efforts to optimize portfolio performance and affecting future earnings.
  
• Continued economic uncertainty and potential demand fluctuations, as seen in varying performances across regions, could impact occupancy and ADR growth, negatively affecting revenue projections.
  
• Higher property taxes and insurance costs, combined with inflationary pressures on wages and benefits, could place upward pressure on expenses, squeezing net margins and overall profitability.
  
• Although supply in certain markets remains limited, any unexpected increase in new hotel construction that causes supply growth could dampen RevPAR growth, affecting top-line revenue.
  

Valuation

• The analysts have a consensus price target of $16.333 for Apple Hospitality REIT based on their expectations of its future earnings growth, profit margins and other risk factors.
• 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 $203.4 million, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 7.9%.
• Given the current share price of $13.44, the analyst price target of $16.33 is 17.7% 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.