Apple Hospitality Merger Highlights Investor Interest in Select-Service Properties

Why is this sector the darling of hospitality investment groups?
Anne Lloyd-Jones, HVS

Anne Lloyd-Jones, HVS

Richmond, Va.—Creating one of the largest upscale, select-service lodging REITs in the industry, with a value of about $5.7 billion, the merger of Apple Hospitality REIT Inc. with Apple REIT Ten Inc. has been completed. The transaction had been announced back in April.

“We are excited to have significantly grown our platform of leading Hilton and Marriott branded select-service hotels, while preserving our conservative capital structure,” Justin Knight, Apple Hospitality’s president & CEO, said in a prepared statement. “The merger further strengthens our presence in key markets and expands our geographic footprint to include locations in 96 MSAs throughout 33 states.”

The common shares of Apple Hospitality will continue to trade on the NYSE under the APLE symbol.

An analysis of 16 hotel REITs tracked by Hotel Appraisers & Advisors, of Chicago, ranked APLE third in profitability, Hans Detlefsen, president of HA&A, told Commercial Property Executive. He attributes this to the REIT portfolio’s being made up largely of select-service hotels.

Detlefsen added that his firm found that APLE ranked first in terms of overhead efficiency, meaning its combined expenses associated with corporate overhead and third-party hotel managers was the lowest among the 16 REITs, as a percentage of hotel portfolio revenue.

Further, he predicted, the merger “should augment this overhead efficiency advantage,” because APLE’s overhead expenses are unlikely to increase nearly as much as its revenues, as a result of having acquired 55 hotels.

One question many investors are concerned about, according to Detlefsen, is whether these 55 hotels are worth the nearly $1.3 billion cost. (For the sake of full disclosure, Detlefsen notes that he currently owns shares of APLE.)

In recent years the select-service sector “has been the darling of the hotel investment groups,” and “Apple can be credited as the first of the major investment entities” to focus on this sector, Anne Lloyd-Jones, senior managing director/consulting and valuation
 at HVS, told CPE.

The relative simplicity of operation and lack of public spaces make these properties more profitable than typical full-service hotels, she said, adding that a select-service hotel is “just a more efficient investment vehicle.”

“The [select-service] sector has performed strongly” and has recovered well from the recession, Lloyd-Jones said. One potential caveat is the low barriers to entry, though, except for a few markets, there’s no concern yet about overbuilding, she said.

Based on HA&A’s research over the past two decades, the select-service segment in the United States has generally proven to be the most profitable hotel segment, Detlefsen agreed.