As part of my goals for this year, every interesting stock idea must successfully pass through my investing framework. This is a series of qualifications on both an individual and portfolio level.

The first company under that lens is Apple Hospitality (APLE).

Apple Hospitality is a real estate company that owns a portfolio of hotels across the United States. You may not realize it but the companies that operate hotels rent them from real estate companies. Just take a look at the hotel brands that operate inside of the hotels owned by Apple. Brands such as Hilton, Hampton, Courtyard and Marriott to name a few.

From Finviz, here is a quick look at the competitors to Apple in the hotel / motel REIT industry. They are not the largest player in the space but they do currently sport the best dividend yield.

Not only do they sport the highest dividend but they actually have the lowest debt/capitalization than any peer!

Valuation

From Fast Graphs, the company has actually seen declining stock price since it first IPO’d. The reason is quite obvious to me, funds from operation (FFO) has simply not grown. What has happened is the market has repriced shares and will not grant them a premium. They traded at approximately 15x FFO (equivalent to a P/E of 15) but have trended down to under 11. What this has done is boost the yield to the current juicy 7.6% level.

This has resulted in a very reasonable payout ratio which gives them room to maintain the current dividend. The dividend has not increased in years but that can be OK. My thesis does not involve an increasing dividend from Apple. If they are able to maintain the dividend this is a high yielding cash cow.

Correlation

Be sure to read my primer on correlation if you need more background information.

Part of the investing framework is defaulting to using ETFs in place of individual holdings where possible. An ETF can give broad exposure to an asset class while avoiding individual name risk. It’s also easier to monitor and doesn’t require digging through quarterly or annual reports.

The correlation matrix for Apple Hospitality versus some peers is quite telling. I added VNQ, SRET, KBWY and REM for my Real Estate ETF comparisons. All ranked as only having an average correlation of 0.50 which actually shows that Apple does not move much in conjunction with other Real Estate ETFs. Finally, I added the S&P as a proxy and interestingly enough, the results were similar at 0.47 for the S&P.

With that information as a backdrop, I want to mesh those thoughts against some of the questions I’ve outlined as part of my investing framework.

How does this fit into my portfolio?

Apple Hospitality fits into my portfolio as a high yielding opportunity. As part of this process, I created a pie chart approximating my investments by category. Approximately 2/3 is already in what I would consider “dividend growth stocks”, which can include ETFs by the way. I decided to include Visa and MasterCard in this group though they blur the lines between growth and dividend growth since they have lots of both.

About 18% is in growth stocks which includes Amazon, Facebook, Google and the broad S&P. “High Yield” holds my REITs and AT&T currently. I have Altria as a dividend growth stock, though the current yield is quite high over 7%. Finally there is a cash component and my “Former Dividend Growth” is CVS which I have not been happy with.


I am still working on the final allocations of a target portfolio but I approximately see 60% as core “dividend growth”, 20% growth and 20% “high yield”.

With all of that said, Apple Hospitality fits into my portfolio as a high yielding opportunity.

Am I excited about the business?

I wouldn’t say I’m necessarily excited about the business but I see it as a stable business that may offer some low growth over time. I am optimistic given the low debt profile when compared to other players in their space.

What are expected returns?

I’m expecting about 8% returns, virtually all from the dividend yield. There may be some small growth over time from actual business growth.
I’m not actually expecting the dividend to grow at this time. It has been fixed at $1.20 per year ($0.10 per month) since the IPO. Additionally, market gyrations may provide an opportunity to add or subtract from my holding.

Should the stock rise materially, without a fundamental change in the business, I may write covered calls to generate more income. Alternatively should the price drop significantly, again, without a fundamental change, I may either add to my stake or sell puts to generate income and possibly add to my stake.

Does it offer something materially different than an equivalent ETF?

This is where I ran the correlation calculation above and did not see much linkage to current ETFs within the REIT space. It also does offer a higher yield than many REIT ETFs.

Conclusion

Apple Hospitality is a select-service REIT with strong brands such as Hilton and Marriott operating their businesses within their hotels. Though the business seems like it is not currently growing, it sports a fat 7.6% dividend yield and has the lowest debt metrics in its class.

It does not seem to be correlated to passive alternatives and seems like a stable business to add to my portfolio. The high yielding component of my portfolio could use some shares of Apple Hospitality to bring that allocation closer in line with my target 20%.

In conclusion, I added 100 shares, a small starter position to my portfolio. I have the flexibility to add more down the road depending on market opportunities. Dividend reinvestment is not turned on, I will be receiving the income generated as cash while exploring my next investment opportunity.


Leave a Comment