It doesn’t make any must-have consumer electronics. It’s not the biggest company in the world now; most investors don’t even know it exists. Aside from sheer coincidence, it doesn’t even have a particularly recognizable name.
Yet, Apple Hospitality REIT Inc (APLE) is worth a closer look, rather than being overlooked as the name that occasionally turns up during a search for the far-more-ubiquitous Apple Inc. (AAPL).
And it just became a bit more look-worthy today, even if it didn’t necessarily become any more investment-worthy.
How so? Its newest analyst coverage was lackluster.
The $64,000 question is, are analysts collectively missing the boat on this REIT, or are the so-so stances from the pros right on target?
What Is Apple Hospitality?
Just for the record, there’s not even a slight connection between Apple Hospitality REIT and the Apple that makes the iPhone. It is possible you’ve been a customer of both, however, without even realizing you were patronizing the former.
Apple Hospitality owns a portfolio of (mostly) upscale hotels, including Hilton and Marriott brands. Courtyard by Marriott, Fairfield Inn by Marriott, Hampton Inn & Suites by Hilton and Embassy Suites by Hilton all fall under the Apple Hospitality, just to name a few. It has a presence in 32 states — urban, high-end suburban and developing markets — operating 179 hotels, for a total of 22,950 guestrooms.
Like most REITs, APLE pays a respectable dividend. The current yield stands at 6.3%, with a 10-cent payout reliably being dished out every month for the nearly a year that this instrument has been trading.
Prior to that, it drove similar income as a company called Apple REIT Nine, created by the merger of Apple REIT Seven and Apple REIT Eight. [The company scores zero points for creative monikers.]
The Math Isn’t Working Yet for APLE Stock
While it remains to be seen if more merger-driven restructuring is in the cards, there’s little doubt as to the viability of the operation itself. What is in doubt is the ability of APLE to keep paying its current dividend.
REITs — an acronym for real estate investment trusts — are designed to be income-driving investments. They own rental-oriented real estate, and pass most of their income along to shareholders before it’s ever taxed.
Sometimes — arguably too often — REITs pay dividends that aren’t actually being earned by operations. This may or may not matter in some cases, as the necessary income will be produced in the future by projects currently in development. In the meantime, dividends are paid from available cash to keep the price of the REIT propped up.
In the case of Apple Hospitality, however, one can’t help but wonder if the organization is acting a little too generously with its dividend payments; it technically can’t afford them.
The chart of Apple’s historical financials below tells the tale. Generating revenue hasn’t been problem. Affording the dividends after all the other bills have been paid, however, has been a problem.
The per-share snapshot of APLE isn’t any more encouraging.
The reality of the situation may not be as dire as it looks. It’s not unusual for REITs to pay dividends not currently being produced based on knowledge that a certain amount of income will be produced in the future.
It’s a leap of faith, however, to make an investment on such a promise — and Apple Hospitality REIT hasn’t exactly given the market any convincing reasons to take that leap.
Bottom Line for APLE
As is the case with most stocks, you wouldn’t own APLE today for where it is today. You’d buy it today for where’s it’s likely to be in the foreseeable future. Problem: It’s not clear Apple Hospitality will be able to sustain that dividend in the foreseeable future.
That uncertainty is reflected in today’s new coverage of APLE. FBR & Co. initiated coverage on Apple Hospitality, but only at a “market perform” and only posting a target price of $20 … about 4% above where APLE is presently trading.
That outlook jibes with the average outlook for APLE at this time. That is, the average target price stands at $19.20, and the recommendation on a scale of 1 to 5 (1 being a strong buy and 5 being a sell) stands at 2.8, or right around a hold.
Like most of the other analysts covering the stock, this new coverage of Apple Hospitality REIT is a tacit way of saying this could turn into something investment-worthy, and as such should be on your radar.
It’s not yet ready for prime-time though.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
