Why Baird Thinks Apple Hospitality REIT Looks Crisp And Juicy

Baird maintained its Neutral rating and $20 target price on Apple Hospitality REIT Inc APLE saying that valuation is increasingly attractive following Apple REIT Ten merger, as the stock has underperformed peers by 600+ bps over the past two months.

In addition, the brokerage views Apple REIT's 6.4 percent dividend yield as "safe and attractive," especially in today's low interest rate environment.

"We believe the above-peer dividend also could help mitigate selling pressure from legacy A10 retail shareholders as Apple REIT will continue to provide A10 investors with steady monthly income," analyst David Loeb wrote in a note.

Meanwhile, Loeb expects a modest amount of near-term selling pressure as A10 shareholders could seek liquidity. However, Apple's recently implemented 10b5-1 Plan should provide support for shares if selling pressure materializes.

"Overall, similar to Apple REIT's previous share repurchase activity, we expect the company will be a better buyer of its own stock below $18.00/share," Loeb noted.

Further, the analyst expects the merger to be 0.7 percent dilutive to his 2016 FFO/share estimates but 1.9 percent accretive to his 2017 FFO/share estimates.

Meanwhile, Apple REIT lowered its 2016 RevPAR growth guidance by 100 bps but increased adjusted EBITDA guidance by $30 million (at the midpoints of the ranges).

"We believe approximately half of the RevPAR growth reduction is due to slower top-line growth expectations at the A10 portfolio; therefore, we believe Apple REIT is lowering implied 2H16 RevPAR growth guidance by approximately 50-100 bps for its legacy portfolio," Loeb continued.

The analyst also cut his full-year RevPAR growth guidance to 2-4 percent from the prior 3-5 percent range. That said, Loeb projects the A10 portfolio to contribute about $34.3 million and about $119.0 million of Hotel EBITDA in 2016 and 2017, respectively.