Apple REIT Will Acquire More Assets. The Only Question Is, 'At What Scale?'

RICHMOND, VA–Apple Hospitality REIT has closed on its previously announced merger with Apple REIT Ten, a $5.7 billion transaction that has created one of the largest select-service lodging REITs in the industry with a footprint across 96 major metro areas in 33 US states. The closing followed this week's approval by the respective shareholders of the deal and the usual nuts-and-bolts of how such cash-and-stock mergers are typically financed. In this case that translated into each outstanding unit of Apple Ten was exchanged for $1.00 in cash and 0.522 Apple Hospitality common shares. Ultimately Apple Hospitality issued approximately 48.7 million of its common shares and paid approximately $93.4 million. It also assumed or repaid all of Apple Ten's outstanding debt at closing, approximately $257 million.

Four Hotels to Be Acquired for $81M

Now, with the Apple Ten acquisition under its belt, Apple Hospitality is well positioned to make further acquisitions. Indeed Apple Hospitality has already announced it plans to acquire four hotels under construction for $81 million when they deliver in the course of this year and next. One asset — a 128-room Home2 Suites by Hilton in Atlanta, GA — has already closed for $24.6 million, or $192,000 per key. The other three are Fort Worth, Texas and Birmingham, AL.

But Apple may have its eye on additional acquisitions — even, maybe, another portfolio deal.  Certainly CEO Justin Knight said nothing to dissuade listeners about the prospect during the REIT's first quarter earnings call earlier this year.

We are continually exploring additional opportunities. Interestingly, over the past decade or so, there's been significant consolidation within the hospitality industry. Not all of that consolidation has happened in the public markets and there are a number of smaller to mid-sized, even large portfolios that exist outside of the public market. What happens with those has yet to be decided in many instances.

One caveat he mentioned during the call is that the deal would have to be structured similarly to how the Apple Ten acquisition was structured. Apple Ten was externally advised by Apple Hospitality and so it is very familiar with the portfolio. Indeed the merger is expected to reduce operating costs almost immediately just from the accounting costs alone — moving to reporting one set of books instead of two.

The Apple Ten portfolio was also highly complementary to Apple Hospitality's portfolio. Any further portfolio deals would have to additive to the company's portfolio, Knight said.

A Better Capital Position

Perhaps the most resounding reason to think that Apple Hospitality may be considering another portfolio deal is because this acquisition has shored up its balance sheet quite nicely, to say nothing of boosting its appeal as a borrower in the capital markets. With its new scale it could even become an investment-grade issuer although Knight said that that goal isn't high on its list of priorities.

Said Knight during the Q1 earnings call:

There are some limitations from a timing standpoint baked into the current contract that we have with Apple Ten, but assuming a transaction close in the third quarter, as is currently contemplated, we would be in a position, fairly quickly, to pursue other transactions, should there be a transaction that materialized that we thought would potentially meaningful for our shareholders.

RICHMOND, VA–Apple Hospitality REIT has closed on its previously announced merger with Apple REIT Ten, a $5.7 billion transaction that has created one of the largest select-service lodging REITs in the industry with a footprint across 96 major metro areas in 33 US states. The closing followed this week's approval by the respective shareholders of the deal and the usual nuts-and-bolts of how such cash-and-stock mergers are typically financed. In this case that translated into each outstanding unit of Apple Ten was exchanged for $1.00 in cash and 0.522 Apple Hospitality common shares. Ultimately Apple Hospitality issued approximately 48.7 million of its common shares and paid approximately $93.4 million. It also assumed or repaid all of Apple Ten's outstanding debt at closing, approximately $257 million.

Four Hotels to Be Acquired for $81M

Now, with the Apple Ten acquisition under its belt, Apple Hospitality is well positioned to make further acquisitions. Indeed Apple Hospitality has already announced it plans to acquire four hotels under construction for $81 million when they deliver in the course of this year and next. One asset — a 128-room Home2 Suites by Hilton in Atlanta, GA — has already closed for $24.6 million, or $192,000 per key. The other three are Fort Worth, Texas and Birmingham, AL.

But Apple may have its eye on additional acquisitions — even, maybe, another portfolio deal.  Certainly CEO Justin Knight said nothing to dissuade listeners about the prospect during the REIT's first quarter earnings call earlier this year.

We are continually exploring additional opportunities. Interestingly, over the past decade or so, there's been significant consolidation within the hospitality industry. Not all of that consolidation has happened in the public markets and there are a number of smaller to mid-sized, even large portfolios that exist outside of the public market. What happens with those has yet to be decided in many instances.

One caveat he mentioned during the call is that the deal would have to be structured similarly to how the Apple Ten acquisition was structured. Apple Ten was externally advised by Apple Hospitality and so it is very familiar with the portfolio. Indeed the merger is expected to reduce operating costs almost immediately just from the accounting costs alone — moving to reporting one set of books instead of two.

The Apple Ten portfolio was also highly complementary to Apple Hospitality's portfolio. Any further portfolio deals would have to additive to the company's portfolio, Knight said.

A Better Capital Position

Perhaps the most resounding reason to think that Apple Hospitality may be considering another portfolio deal is because this acquisition has shored up its balance sheet quite nicely, to say nothing of boosting its appeal as a borrower in the capital markets. With its new scale it could even become an investment-grade issuer although Knight said that that goal isn't high on its list of priorities.

Said Knight during the Q1 earnings call:

There are some limitations from a timing standpoint baked into the current contract that we have with Apple Ten, but assuming a transaction close in the third quarter, as is currently contemplated, we would be in a position, fairly quickly, to pursue other transactions, should there be a transaction that materialized that we thought would potentially meaningful for our shareholders.