Application Backups are for Exchange/Sql server backups. If you really just want to do VMs, then guest images > Select Clients individually should suffice. Replicated backups if if you wish to replicate data that has already been replicated to the target. Nice way to do a daisy chain of replication for extra redundancy.
Destination depends on how the target is setup. You can create custom paths with individual user permissions on the target. I'd read the docs for this since creating the custom path requires some CLI. Without it, you replicate to the root path.
Hope this works out for you.