CFA Institute Research Challenge
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Transcript of 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