APLE Q4 2024: Divest 7-10% Noncore Assets to Fund Buybacks
- Portfolio Optimization & Capital Return: Management identified that roughly 7%-10% of the portfolio is considered noncore and is targeted for strategic dispositions. These transactions, executed at low cap rates, allow for efficient redeployment of capital, notably into share repurchases, thus potentially driving shareholder value.
- Operative Performance Uplift: Q&A discussions emphasized that the 2025 RevPAR guidance is driven by a mix of occupancy growth and ADR increases, particularly with improvements in midweek occupancy compression. This reflects confidence in the portfolio’s underlying demand and pricing power.
- Attractive Debt Refinancing Prospects: Executives noted that upcoming maturing term loans can be refinanced at favorable pricing, with potential interest savings improving financial flexibility and strengthening balance sheet fundamentals.
- Rising fixed cost pressure: The Q&A highlighted that normalized fixed expenses, particularly property taxes (projected at 5% increase), could put additional margin pressure if revenue growth does not keep pace.
- Challenging transaction market: Executives noted that the market for portfolio sales is weak, with limited bidder interest resulting in lower premium valuations for assets, which may hinder optimal portfolio redeployment.
- Debt refinancing risks: With significant maturing debt (e.g., term loans and mortgage loans) on the horizon, there is uncertainty whether refinancing can be achieved on favorable terms, potentially increasing financing costs.
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Cost Normalization
Q: What is normalized expense growth assumption?
A: Management expects about a 5% increase in fixed costs after removing one-time benefits, leading to overall expense guidance below 4.2%. -
RevPAR Mix
Q: What drives 2025 RevPAR growth?
A: The guidance relies on a blend of improved occupancy and increased ADR, targeting roughly 2% RevPAR growth. -
Debt Refinancing
Q: What are the refinancing terms for maturing debt?
A: They are aiming to refinance term loans at around a 5-year maturity, with discussions focused on securing favorable pricing despite tougher conditions for secured debt. -
Asset Sales
Q: How are asset sales and buybacks approached?
A: The strategy involves selling smaller, noncore assets individually to capture attractive valuations and redeploy proceeds through share repurchases in a market with limited portfolio bids. -
Noncore Assets
Q: What percentage is considered noncore?
A: Approximately 7% to 10% of the portfolio is viewed as noncore, representing assets with aging CapEx and subdued growth potential. -
Real Estate Values
Q: How have property values shifted recently?
A: Property values have remained stable with individually transacted assets achieving low cap rates, reflecting a robust pricing environment. -
Midweek Occupancy
Q: How close are you to midweek occupancy targets?
A: Midweek occupancy is still about 5% below pre-pandemic levels, though improvements are expected to allow for gradual rate enhancements. -
Wage Growth
Q: What is the outlook for wages and benefits?
A: Wage and benefit expenses are forecasted to rise between 3.5% and 4%, backed by efforts to rein in contract labor. -
Expense Management
Q: What measures are taken on operating expenses?
A: Operators are focusing on benchmarking and productivity improvements to control variable expenses per occupied room while managing fixed cost pressures. -
Supply Pipeline
Q: Any near-term construction or Las Vegas plans?
A: There is limited new construction within a 5-mile radius; for Las Vegas, they are working with a developer off-balance sheet, planning to acquire post-construction given the long lead time.
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