Part 2 Of Our Interview With The CEO of Apple Hospitality REIT

The following is part 2 of Tim Melvin's interview with Justin Knight, the CEO of Apple Hospitality REIT Inc APLE. Part 1 is here.

Melvin: Now you just recently closed a merger with Apple Ten. Can you tell us about the merger and how that’s progressing at this point?

Knight: Apple Ten represented a unique opportunity for us in that the portfolio was built by the management team that runs Apple Hospitality, and was built in a way that was fully consistent with our strategy in that the portfolio was exclusively Hilton Worldwide Holdings Inc HLT and Marriott International Inc MAR branded, predominantly focused on select service and extended stay assets, and had an extremely strong balance sheet. The merger actually strengthens both companies. It increases the geographic diversification of the portfolio while expanding without weakening the balance sheet. The transaction enabled us to grow the balance sheet by over a billion dollars while maintaining the levels of debt that we had prior to the merger.

Melvin: Now looking ahead, the hotel market has been kind of stagnant. Occupancy levels have kind of evened out and most of your increase has been from room rate increases. How do you see the market playing out for the rest of the year and going into 2017?

Knight: That’s a good question and one that we get a lot as we interact with investors and analysts on the road. There is a tremendous amount of political and economy uncertainty in the country, and markets are performing very differently. Early in the cycle we saw significant supply growth in gateway markets. That, paired with a decline in demand in many of those markets which negatively impacted performance, hasn’t been exclusively the case, and there are a number of markets within the country that continue to perform extremely well.

I think it’s easier to speak to the performance of individual markets in some ways than it is to speak to the performance of the country as a whole because as I highlighted, the picture is very different depending on where you’re at in the country and which particular market you’re operating in. That’s likely to continue until we see more robust growth in the overall U.S. economy.

Melvin: Well that leads us right into one of my questions. You guys are in 33 states right now. Where are we seeing decent economic strength and operating results and where aren’t we?

Knight: A very good question. As I mentioned earlier, we saw early supply growth in the cycle in gateway and major urban markets. To a large extent those markets had been underserved by new supply, and the new supply initially was very welcomed. Looking at winners and losers over the past several years, there have been a number of markets in southern California that have done extremely well. A lot of markets in the middle of the country in the southeast have also performed very well. Within our portfolio, we’ve seen tremendous strength in Arizona in markets like Phoenix, while we’ve seen weakness in markets like New York.

Any market that’s nearly wholly dependent on energy has struggled as oil and gas prices have been low. Obviously in a market like Houston has seen more weakness than have other markets. But generally speaking what we’ve seen is an increase in performance in lower cost markets as businesses shift and adjust their operation in order to maximize the performance of their business, markets like Dallas or Phoenix or Austin or even Nashville have benefited as businesses shifted in the country. I think a number of those markets will continue to benefit as we move through the remainder of this year and the beginning of next.

Melvin: It sounds a little bit like you’re saying in some of the larger urban and gateway markets actually are starting to see a little bit too much supply and it’s harder to maintain pricing.

Knight: That’s certainly been the case in a number of urban markets. As we look across our portfolio, the markets that have struggled the most are markets like New York, Houston, Chicago. We’ve seen some weakness in Denver and some of the markets that have historically been very strong. Now those are large markets, and we anticipate that over time they’ll stabilized and return to strength, but in the near term those markets have been challenges for us and others.

Melvin: Now looking at the hotel market, there has been a bit of consolidation in the past couple of years. Is this a trend that’s going to continue or do you see it accelerating or decelerating and leveling off? Where are we in the hotel consolidation space?

Knight: I really anticipate that that trend will continue. There are tremendous efficiencies that can be gained through scale so long as those efficiencies remain I believe that there will be groups, like ours, that will continue to grow their platform when it makes sense to do so.

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