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The Apple Of Its Eye

Apple Hospitality REIT Enters Into Agreement To Merge With Apple REIT Ten

Friday, April 15, 2016
Dennis Nessler
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In an effort to fortify its position as the largest select-service focused lodging REIT, Apple Hospitality REIT has entered into a definitive merger agreement with Apple REIT Ten, Inc., in a deal that surprised some on Wall Street in terms of its timing.

The Apple Ten portfolio, which was created in 2011 and has an average age of seven years, is comprised of 55 Hilton- and Marriott-branded hotels and achieved 2015 Comparable Hotels RevPAR of $97.10. Meanwhile, Apple Hospitality’s portfolio is comprised of 179 Hilton- and Marriott-branded hotels and achieved 2015 Comparable Hotels RevPAR of $100.59. Upon completion of the proposed merger, the company would have a combined portfolio of 234 hotels in 33 states.

The implied transaction value of Apple REIT Ten is $1.3 billion and is comprised of approximately $94 million in cash, approximately 49.1 million Apple Hospitality common shares issued to Apple Ten shareholders and the extinguishment or assumption of approximately $239 million in debt (as of March 31, 2016). Under terms of the agreement, Apple Ten’s shareholders would receive $1.00 in cash per each Apple Ten Unit and each Unit of Apple Ten would be converted into a fixed exchange ratio of 0.522 Apple Hospitality common shares. The Pro Forma Combined Company will have an enterprise value of approximately $5.7 billion and a total equity market capitalization of approximately $4.4 billion, based on the 20-day volume weighted average price of Apple Hospitality’s common shares ending April 12, 2016.

Justin Knight, President and CEO, Apple Hospitality REIT, Inc., stated during a conference call with investors, “The proposed merger will enable us to continue to build upon our core strategy and differentiators in the lodging sector.” Knight was specifically referring to the publicly traded company’s core attributes such as deep ownership in Hilton and Marriott’s select-service and extended-stay brands; geographic diversification, including more than 90 top MSAs; and a young, well-maintained portfolio.

Knight also pointed to the company’s familiarity with the 55 properties of Apple Ten as being a key benefit. “Perhaps most importantly, our management team assembled the Apple Ten portfolio of hotels and has managed the company since its first acquisition in 2011 providing us deep knowledge of each of the assets,” he said.

According to Knight, another major appeal of Apple Ten is its low leverage, which aligns with Apple Hospitality’s strategy of maintaining a conservative capital structure. “Our balance sheet will continue to be one of the strongest and most agile in the lodging sector, with pro forma combined debt to 2016 estimated adjusted EBITDA of approximately 3 times,” he said. Knight added the company expects the transaction to be accretive to Apple Hospitality shareholders in the first year after closing.

Apple Hospitality REIT (formerly Apple REIT Nine, Inc.) was founded in 2007 and became one of the largest hospitality REITs in the United States following the mergers of Apple REIT Seven, Inc., and Apple REIT Eight, Inc. into the Company on March 1, 2014. The most recent transaction, which the company expects to close during the third quarter of this year, is subject to a vote by both company’s shareholders. Upon completion of the merger, the combined company would retain the Apple Hospitality REIT name and continue to trade under the NYSE ticker symbol APLE. In addition, the company’s management team would remain in place as well.

However, the merger agreement also provides Apple Ten with a go-shop period, during which Apple Ten will actively solicit alternative proposals from third parties for the next 45 days until May 28, 2016. The merger agreement provides for Apple Ten to pay a termination fee of $5 million to Apple Hospitality if Apple Ten terminates the merger agreement in connection with a superior proposal that arises during the go-shop period and a fee of $25 million if Apple Ten terminates the agreement following the go-shop period.

Knight addressed the possibility for brand mandated PIPs related to the transaction despite the fact that the Apple Ten portfolio has an average age of seven years and an average time since opening or last renovation of three years. “We have a long-standing relationship with both Marriott and Hilton and are optimistic. We are confident that they’ll work with us on this transaction,” he said.
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Dennis Nessler    Dennis Nessler
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