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What to Expect From Apple Hospitality's (APLE) Q3 Earnings?

Zacks Equity Research

Apple Hospitality REIT, Inc. APLE is slated to report third-quarter 2019 results after market close on Nov 4. The company’s revenues and funds from operations (FFO) per share are expected to display year-over-year (y/y) declines.

In the last reported quarter, this lodging real estate investment trust (REIT) reported modified FFO (MFFO) per share of 49 cents, in line with the Zacks Consensus Estimate. Results reflected y/y increase in revenue per available room (RevPAR). However, a decline in occupancy at its properties was a spoilsport.

The company delivered an average positive surprise of 1.63%, in the last four quarters, surpassing estimates twice, missing on one occasion and meeting in the other. The graph below depicts this surprise history:

Apple Hospitality REIT, Inc. Price and EPS Surprise

Apple Hospitality REIT, Inc. Price and EPS Surprise

Apple Hospitality REIT, Inc. price-eps-surprise | Apple Hospitality REIT, Inc. Quote

Let’s see how things are shaping up for this announcement.

The U.S hotel industry’s results have been decelerating for the last three quarters. This can be attributed to deteriorating leisure demand, persistent high supply in key lodging markets, rising wage pressures, and higher property taxes. Further, amid prevailing global slowdown and uncertainty surrounding the ongoing trade deals, businesses have recently taken a cautious outlook. This has resulted in a decline in business-transient demand. This soft operating environment is expected to have impacted hotel REITs performance.

In fact, going by data published by STR, during third-quarter 2019, the U.S. hotel industry witnessed y/y contraction of 10 basis points (bps) in occupancy. Although RevPAR inched up 0.7% year over year to $94.42, it was the lowest y/y percentage change since first-quarter 2010. Additionally, average daily rate (ADR) was modestly up 0.8% year over year to $133.25.

These weak fundamentals are expected to have affected Apple Hospitality’s growth during the quarter under review. In fact, the Zacks Consensus Estimate for third-quarter revenues is pegged at $331.1 million, suggesting a marginal y/y decline of 0.3%.

Nonetheless, the company has resorted to portfolio optimization, strategic revenue management and effective cost-control measures in a bid to fortify its fundamentals. This, along with healthy demand across majority of its markets, makes management confident about the company's fundamental strength in the third quarter as well.  

Further, Apple Hospitality has been reinvesting capital in its hotels to maintain and enhance relevance as well as the company’s competitive position. Its quarterly results will likely reflect benefits from these initiatives. In addition, since investment in room-focused hotels offers higher margins, the company will likely report healthy adjusted EBITDA margins for the September-end quarter.

Lastly, prior to the third-quarter earnings release, the company has been witnessing downward estimate revision. As such, the Zacks Consensus Estimate of FFO per share for the quarter has been revised 2.2% downward to 45 cents over the past month, reflecting analysts’ bearish sentiments. Also, it represents a y/y decline of 4.3%.

Earnings Whispers

Our proven model doesn’t conclusively predict a positive surprise in terms of FFO per share for Apple Hospitality this time around. A positive Earnings ESP is a meaningful and leading indicator of a likely FFO beat. This, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), makes us reasonably confident of a positive surprise.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Apple Hospitality’s Earnings ESP is -4.87%.

Zacks Rank: The company currently carries a Zacks Rank of 3.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks That Warrant a Look

Apartment Investment and Management Company AIV, set to release quarterly numbers on Oct 31, has an Earnings ESP of +0.6% and carries a Zacks Rank of 3, currently.

Senior Housing Properties Trust SNH, slated to report July-September quarter results on Nov 7, has an Earnings ESP of +3.23% and currently holds a Zacks Rank of 2.

Medical Properties Trust, Inc. MPW, scheduled to release earnings results on Oct 31, has an Earnings ESP of +4.76% and carries a Zacks Rank of 2, at present.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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