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  • Student Research Challenge

    CFA Virginia Investment Research Challenge

    January 28, 2016

    CFA Institute Research Challenge hosted by :

    Local Challenge CFA Society of Virginia

    Team E


    January 28, 2016

    Sector: Hotel/Lodging REITs

    Apple Hospitality REIT, Inc

    Strong Buy Hold Strong Sell Sell

    Recommendation: Buy Target Price: $20.06

    Closing Price $18.29

    Shares Out $174.4 Million

    Market Cap $3.189 Billion

    52 Week Range $13.82 - $20.97

    Dividend $1.20

    Dividend Yield 6.56%


    Long term strategy of minimizing risk by maintaining low leverage.

    Apple maintains the lowest Debt/EBITDA level of its peers. The compa-

    ny expects to fund its next four acquisitions through the use of its credit

    facility. The four hotels are under construction, and are expected to come

    online within the next 6 to 21 months.

    We initiate coverage on Apple Hospitality with a Buy recommendation

    based on our quantitative analysis suggesting a price $20.52. We be-

    lieve Apple Hospitality is in a better position than any other publicly

    listed upscale lodging REIT. Our highlights below outline these


    With 179 hotels in 32 states Apple reduces volatility in its portfolio

    with geographic diversification. Apple uses a disciplined strategy of in-

    vesting in markets where diverse demand generators drive consistent per-

    formance. Apples portfolio of properties has a low concentration in US

    gateway cities. The appreciation of the US dollar has put pressure on hotel

    operators to have the ability to raise rates in gateway cities where demand

    is driven in part by foreign tourism.

    Demand is expected to continue to outpace supply. Occupancy rates

    are expected by PKF to have eight consecutive years of growth through

    2017. Over 95% of Apples portfolio consists of upscale to upper midscale

    select service hotels. Within this segment supply of new rooms is expected

    to exceed 85,000 in the coming year.

    Estimates Year 2014A 2015E 2016E 2017E

    1.18 1.37 1.42 1.50



    .70 1.54 1.64 1.72

    Key Statistics


    1Q15A 2Q15A 3Q15A 4Q15E

    2014A 2015E 2016E 2017E



    % change

    % change


    % change

    $126.6 $131.3 $133.6 $133.0 4.71% 4.99% 5.51% 5.07%

    74.0% 81.9% 80.6% 71.7% 2.64% 1.24% 0.88% 0.88%

    $93.7 $107.5 $107.6 $95.0

    7.55% 6.24% 6.44% 5.59%



    $122.0 $131.2 $137.8 $144.7

    76.0% 77.1% 77.2% 77.4% Occupancy

    $92 $101.1 $106.4 $112.0

    2014A 2015E 2016E 2017E

    Downside Scenario

    Current Price

    Price Target

    Upside Scenario

    $18.29 $17.00 $20.52 22.00

    4.5% 10.8% 16.8%

    Significant balance sheet capacity. Apple has a remaining 478 million

    left within its share repurchase program that ends in July 2016. In the past

    six months Apple has purchased shares between $17.50 and $18.40. Given

    the current price of the stock, and the capacity within the companies bal-

    ance sheet we expect Apple to remain active in repurchasing its own



    Team E Student Research This report is published for educational purposes only by students competing in

    the CFA Virginia Investment Research Challenge, part of CFA Institute Global

    Investment Research Challenge.


  • Student Research Challenge

    CFA Virginia Investment Research Challenge

    January 28, 2016

    Investment Summary

    Our buy recommendation on the stock reflects our expecta-

    tions that the company is well positioned to benefit from a

    number of external, and internal driving factors.

    Focused product knowledge: Apples focus within the

    lodging industry is on select service upscale hotels. Select

    service or room focus products have lower volatility as

    they produce both higher, and more stable margins.

    Competitive advantage: Compared with competitors

    Apple is both geographically diversified through the num-

    ber of hotels, and the number of rooms within its portfo-


    Quality products: Apple has aligned with the Marr iot

    and Hilton brands exclusively. The Hilton and Marriot

    family brands have a large focus on upscale select service,

    and bring more business than any other brands in the seg-

    ment. Through strong loyalty programs, and broad con-

    sumer recognition that generate returning customers.

    Brand expertise: Upper management sits on the boards

    of seven advisory councils including the Marriott Owners

    council, The Residence Inn Association Board, and the

    Courtyard Franchise Council. Serving on these boards al-

    lows Apples management team to have a say in develop-

    ing brand standards.

    Strong fundamentals: Apples balance sheet can sup-

    port additional debt. They have sought to always maintain

    very low leverage. Their debt is structured to maximize

    return by utilizing short term debt. The company also pays

    a monthly dividend of a $1.20 that has a current yield of

    6.56%. Apple is unique in that only a handful of REITs

    choose to pay a monthly dividend. Our research found in

    the Business Description section shows that monthly divi-

    dend payers reduce volatility in returns.

    Institutional Recognition: The Vanguard Group estab-

    lished a 10.8% position as of December 10, 2015.

    Blackrock a previous buyer of Apple REIT Six in 2012

    for 1.2 Billion, and has established a 5.8% stake in Apple

    Hospitality as of January 28, 2016.


  • Student Research Challenge

    CFA Virginia Investment Research Challenge

    January 28, 2016


    Using four methodologies we have derived a range of reasonable

    price expectations for Apple Hospitality in the intermediate term.

    We expect the price of Apples stock to trade within a range of

    $18 to $21 dollars with the expectation that the stock will reach

    our target of $20.08 within the year.


    Discounted Cash Flow Analysis: Using a two separate

    discounted cash flow analysis we estimated price based on

    five years of forecasted cash flows discounted at different

    costs of capital. The two differences being the use of differ-

    ing market proxies for the estimation of risk premium. Tradi-

    tional equity risk premium estimation will use an annualized

    return of the SP 500 as a market proxy. Given that Apple

    Hospitality is a REIT we thought it would be more appropri-

    ate to use the annualized returns of the NARIET All Equity

    index over the same 30 year period for comparison. Given

    out inputs we derived an intrinsic value of the stock to be

    $23.71 using the SP 500 and $19.17 using the NARIET in-


    Secondly in estimating the market risk premium we chose to

    use the 10 year US Treasury at 2.05%. Given the volatile

    nature of this asset whos range has varied from 1.90% to

    2.30% in the past month we decided to use a sensitivity anal-

    ysis to approximate a range of prices for both the US Treas-

    ury and our two market proxies.

    In estimating the beta of Apple Hospitality we found that the

    company did not have returns long enough to estimate its

    beta appropriately. We used a list of comparable companies

    based on size, and portfolio mix to determine Apples beta.

    By un-levering the comparable companies betas we then re-

    levered the average of those betas by Apples debt to equity

    ratio. It is not surprising that Apples beta is lower than most

    of its competitors as it has a comparatively low debt struc-

    ture to that of its peers.


    23.71 11.00% 11.25% 11.50% 11.75% 12.00% 12.25% 12.50%

    1.95% 23.98 23.06 22.20 21.38 20.61 19.89 19.20

    1.98% 23.97 23.05 22.19 21.37 20.60 19.88 19.19

    2.00% 23.96 23.04 22.18 21.36 20.60 19.87 19.18

    2.03% 23.95 23.03 22.17 21.35 20.59 19.86 19.18

    2.05% 23.94 23.02 22.16 21.35 20.58 19.85 19.17

    2.08% 23.93 23.01 22.15 21.34 20.57 19.85 19.16

    2.10% 23.92 23.00 22.14 21.33 20.56 19.84 19.15

    2.13% 23.91 22.99 22.13 21.32 20.55 19.83 19.14

    2.15% 23.89 22.98 22.12 21.31 20.54 19.82 19.14

    2.18% 23.88 22.97 22.11 21.30 20.53 19.81 19.13

    Sensitivity of US Treasury and Market Proxy

    Figure 1

  • Student Research Challenge

    CFA Virginia Investment Research Challenge

    January 28, 2016

    Methodologies continued

    NAV Calculation: REITs are commonly valued us-

    ing a Net Asset Valuation. This is due to the nature of

    a REITs balance sheet having a large portion real es-

    tate assets which are he greatest driver of value for

    there investors. We backed into the market value of

    equity by using an implied Capitalization Rate sourced

    from Bloomberg. Calculating the firms 12 month for-

    ward Net Operating Income (NOI), by first subtracting

    total hotel expenses from total revenues we found raw

    EBITDA and then subtracted out our calculation of

    reoccurring capital expenditures. Dividing the NOI by

    the implied Capitalization Rate of 7.26% and adding

    back debt minus cash and cash equ