An Interview With The CEO of Apple Hospitality REIT (Part 1)

Tim Melvin, author of Banking On Profit, caught up with Justin Knight, the CEO of Apple Hospitality REIT Inc APLE. The following is a part one of their conversation. Part 2 can be found here

Melvin: Mr. Knight, thank you for taking some time to talk with us today.

Knight: It’s a pleasure.

Melvin: Now, Apple REIT is not really a headline kind of stock. Can you tell us a little bit about your company and what you guys do?

Knight: Apple Hospitality listed on the New York Stock Exchange in May of last year. We are the second largest publicly traded hospitality REIT and the largest hospitality REIT focused on flex service. We have 236 hotels and geographically diversified across 33 states and over 90 markets. We have a relatively young portfolio with an average age of 11 years and average effective age, meaning time since built or last renovated, of approximately four years.

Over that period of time, we’ve headed eight separate hospitality real estate investment trusts and purchased over 400 hotels. Four of the hospitality real estate investment trusts were taken full cycle in private equity transactions, and the remaining four were merged into our current platform

Melvin: What kind of hotels do you specialize in? Do you have a wide mix of property types or are you focused on one property type?

Knight: We’re really unique in that we have chosen to focus on rooms-focused product. In the industry we refer to the product as upscale flex service and extended stay product. Within that particular category, we focus exclusively on Hilton Worldwide Holdings Inc HLT and Marriott International Inc MAR. So brands that would be familiar to you like Courtyard by Marriott or Hampton Suites or Hilton Garden, Residence Inn, brands that resonate with consumers, have broad distribution, and generally speaking have a reputation for producing high value for consumers.

Melvin: Let’s talk a little bit about the relationship with Hilton and Marriott because you do business pretty much exclusively with them. What are the benefits to Apple in that relationship?

Knight: At this point and throughout the time that we’ve been involved in the hospitality industry, we’ve done business exclusively with Hilton and Marriott. I mentioned earlier, several of the brands that we’ve chosen to focus on because those brands are broadly known and have a tremendous amount of consumer loyalty they tend to produce outstanding results for us and for our shareholders. Having an exclusive relationship with those two companies has enabled us to build significant scale of ownership within specific brands, and that benefits us in a number of ways.

One, it gives us a seat at the table where brand level decisions are made. Executives from our company sit on several different brand advisory boards for Hilton and Marriott and we discuss with senior executives and brand managers within those organizations a variety of issues and opportunities ranging from how to position the product to what types of services and offerings we should provide guests in order to maintain an established relevance for the brands over time.

Beyond that, being focused on a specific segment and on specific brands has enabled us to build out an internal infrastructure that has a tremendous amount of experience which we then utilize to drive margins and profitability on our individual assets. 

Melvin: Now, I know a lot of the hotel REITs have been reporting some operating weakness this year. Of course, we’re still in a very slow growth economy. How have your results been so far in the first eight months of 2016?

Knight: At this point we have reported results through the first six months. At that point through the second quarter, we were up from a revenue standpoint on comparable hotels 4.5%. Because of the majority of that increase came in the form of rates with occupancies having stabilized earlier, that increase translated into margin expansion and increased profitability. We’re unique, as I mentioned before, in that we’re broadly diversified across a variety of markets. While it’s true that certain markets in the country saw weakness in the first half of the year, we saw other markets that performed exceptionally well, and the balanced effect for our portfolio was positive. In an environment where there is low macro economic growth for the country as a whole, it’s incredibly important to look at the geographic distribution of a portfolio and managing that effectively helps to generate higher returns.

Melvin: We’re going circle back to that point about diversification and different locations here in a little bit. But you’ve talked a lot and mentioned today the strength of the balance sheet. Can you elaborate a little bit on that with a little more detail?

Knight: Certainly. From the beginning, it’s been our strategic intent to mitigate risk for our shareholders in ways that enable us to generate strong risk adjusted returns over an extended period of time. A part of that strategy has always been to use very low levels of debt. You highlighted the difficulties that a number of companies encountered in the 2008 and 2009 timeframe. A lot of those companies were heavily levered. They forced into a position where they had to issue diluted equity in order to maintain covenants on the debt that they had. For us, that’s never been an issue. We’re conservatively levered with a significant portion of our debt being unsecured by assets.

Click here for part 2.