cfa institute research challenge

CFA Institute Research Challenge

APPLE HOSPITALITY REIT (NYSE: APLE)

TEAM F

Executive Summary

Main Features: ● One of the largest hospitality REITs in the country ● Highly diversified portfolio with consistent reinvestment● Recently went public after the merger of APLE 7 and APLE 8

to become the current APLE Hospitality REIT

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

Competitive Advantage

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

Concentrated

Brand Strategy

Broad Geographic

Diversification

High Quality

Operating

Partners

Superior Operating Margins

+

Increased Performance

+

Enhanced Market Share

Properties

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

●Full-ServicesUpper UpScale- 6.5%,

●Selected-Service Upscale 73.4%, Upper Mid-Scale, 20.1%

●4 years effective age on average●Most of the hotels at suburban area●Seven years straight demand over

supply

The Real Estate Investment Trust (REIT) ● No corporate tax on REIT status companies

● Required disbursement of 90% of taxable earnings to shareholders by dividends

● Low liquidity associated with REIT assets

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

Porter’s 5 Forces

Company Overview

Financial Analysis

Valuation Risk Analysis ConclusionIndustry &

Competitive Positioning

Threat of New Entrants: MODERATEBuyer Power: SIGNIFICANT Supplier Power: LOWThreat of Substitute: MODERATEIntensity of Rivalry: MODERATE

0 No Threat

1 Insignificant Threat

2 Low Threat

3 Moderate Threat

4 Significant Threat

5 High Threat

Demand Drivers

Company Overview

Financial Analysis

Valuation Risk Analysis ConclusionIndustry &

Competitive Positioning

Positive US Economic

Growth

Falling crude oil prices

Demand Drivers

Encouraging Demographics

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

Revenue & Cost Analysis

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

● Seasonality effects to revenue● Revenue generating hotels: 177● Revenue generating rooms: 22,782● 91% of Revenue from hotel rooms

E

Transaction Currency = US Dollar only

Profitability Analysis

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

Source: CapIQ

● Encouraging Profitability Metrics

Debt Analysis● Reliance on revolving credit facility (945 million) for liquidity● (Current Terms:1 month LIBOR + 2.3%)● Covenants pertaining to credit facility● Interest rate swaps as a hedge

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

Methods of Valuation

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

DCF

45%

Relative

Valuation

10%

NAV

45%

● DCF Valuation●NAV Valuation

● Relative Valuation● Average of P/FFO, P/AFFO, P/S

●Monte Carlo Simulation

DCF Assumptions - Revenue

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

DCF Assumptions - WACC

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

Net Asset Value (NAV)● Using forecasted financial statements

data● Total Gross Real Estate Assets = Land

+ Buildings & Improvements + Furniture, Fixtures & Equipment.

● Cap rates based on the location of hotels, from Integra Realty Resources(IRR)

● It is trading at a 4.6% premium

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

Relative Valuation

● Comparables based on hotel portfolio● FFO defined as NAREIT● AFFO is FFO- Maintenance Capital

Expenditure● APLE is trading at a premium

compared to competitors

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

VIX Index and S&P 500

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

● VIX Index indicated market was very volatile in the beginning of 2016

● From Dec 15 to Jan 15, S&P 500 dropped 7.89%; VIX increased by 28.97%

● Comparable Companies’ price was highly affected by the market

Source: Yahoo

Finance

Monte Carlo Simulation

●Occupancy Rate●ADR●Room Growth

88.1%Hold

BuySell

●Cap Rate●EBITDA Growth Rate

Market Risk

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

● Rise in Interest

Rates

● Illiquidity of real

estate Market

Source: FRED

Economic and Regulatory Risks

● Poor macroeconomic

factors

● Decline in target markets

● Regulatory changes

Source: Federal Reserve

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

Credit Risk

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

● Operational credit

health is below

average

● Low liquidity metrics

pose liquidity risk

● Poor current ratio and

quick ratio

Operational Risk Key: 1: Insignificant Threat to Shareholders2: Low Threat to Shareholders3: Moderate Threat to Shareholders 4: Significant Threat to Shareholders 5: High Threat to Shareholders

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

● Board of Directors - SIGNIFICANT● Disclosure and Transparency -

INSIGNIFICANT● Executive Management - INSIGNIFICANT● Rights and Obligations of Shareholders -

LOW ● Takeover Defense - LOW

Conclusion

Company Overview

Industry & Competitive Positioning

Financial Analysis

Valuation Risk Analysis Conclusion

Apple

Hospitality(NYSE:APLE)

HOLD

MERITS ● Healthy industry

outlook

● Increasing ADR,

which drives growth

in RevPaR

● 6.56% Dividend Yield

● Well-articulated

corporate strategy of

consistent

reinvestment

CONCERNS● Low liquidity

● Interest Rate

uncertainty

● Real Estate illiquidity

● Concerns for market

performance

● Conflict of interest in

corporate governance

Current Price: $18.28 Target Price: $18.00 Downside: 1.53%

Recommendation

Appendices

Appendix A: Fed Fund Rate Projection (Dec 2015)

Source: Federal Reserve

Appendix B: Pwc US Lodging Outlook

Appendix C: Pwc Chain Scale Outlook, % change from Prior year

Appendix D: Hospitality Market Cycle

Appendix E: Implied Cap Rate and Cap rate Sensitivity Table

Appendix F: Historical Equity Risk Premium

Appendix G: Comparison of Financial Structure

LTM Total

Debt/EBITDA

Debt/Equity

APLE 3.1x 35.80%

CLDT 5.9x 87.20%

HT 7.4x 166.30%

HPT 5.0x 116.90%

RLJ 4.5x 74.20%

INN 5.5x 98.10%

Appendix H: Profitability Margin