Apple REIT Nine, Inc. - 2010 Annual Report (10-K) Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2010, for Apple REIT Nine, Inc. (the "Company"), a Virginia corporation organized as a Real Estate Investment Trust (REIT). The Company invests in hotels and income-producing real estate. As of year-end, the portfolio consisted of 76 hotels (9,695 rooms) across 26 states and approximately 410 acres of land in Fort Worth, Texas, leased to a subsidiary of Chesapeake Energy Corporation for natural gas production. The Company completed its best-efforts offering of Units in December 2010.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenue | $181.5 million | $101.2 million |
| Net Income | $16.3 million | $16.9 million |
| Funds From Operations (FFO) | $47.0 million | $32.8 million |
| Modified FFO | $60.3 million | $33.1 million |
| Cash and Cash Equivalents | $224.1 million | $272.9 million |
| Total Debt (Notes Payable) | $99.6 million | $58.7 million |
| Hotel Operating Expenses | $97.3 million (61% of hotel revenue) | $52.3 million (61% of hotel revenue) |
| Distributions Paid | $118.1 million ($0.88/share) | $57.3 million ($0.88/share) |
Material Changes vs. Prior Period
- Portfolio Expansion: The Company acquired 43 hotels in 2010 (gross purchase price of $781.6 million), increasing the total portfolio from 33 to 76 hotels. This drove a 79% increase in total revenue compared to 2009.
- Operating Performance: Average Daily Rate (ADR) decreased to $102 from $104 in 2009, while Occupancy increased to 65% from 62%. Revenue Per Available Room (RevPAR) improved to $66 from $64.
- Acquisition Costs: Acquisition-related costs increased significantly to $19.4 million in 2010 from $5.0 million in 2009, reflecting the volume of transactions.
- Debt Assumption: The Company assumed approximately $42.7 million of secured debt associated with five hotel acquisitions in 2010, contributing to the rise in total notes payable.
- Net Income: Despite significant revenue growth, Net Income remained relatively flat ($16.3M vs $16.9M) due to increased depreciation ($30.7M vs $15.9M) and acquisition costs.
Guidance, Outlook, and Risks
- Outlook: Management expects ADR to stabilize and improve slightly in 2011. Industry analysts forecast a mid-single-digit percentage increase in hotel revenues for 2011. The Company intends to maintain a stable distribution rate of $0.88 per share annually.
- Pipeline: As of December 31, 2010, the Company had contracts to purchase 12 additional hotels for approximately $209.2 million. Seven are expected to close by Q2 2011, and five are under construction.
- Liquidity: The Company holds $224.1 million in cash. Liquidity is supported by cash on hand, cash flow from operations, and the ability to borrow. The Company anticipates cash flow will be adequate to meet liquidity requirements, including distributions and debt service.
- Risks:
- Economic Conditions: Continued recessionary impacts on business and leisure travel.
- Concentration: Rental income from the Chesapeake Energy ground lease represents approximately 12% of total revenue; default by this single tenant would be material.
- Related Parties: Significant transactions with affiliates (Apple Nine Advisors, Apple Suites Realty Group) owned by the Chairman/CEO.
- Seasonality: Quarterly fluctuations in revenue due to seasonal occupancy variations.
Investor Verification Checklist
- Related Party Fees: Verify the 2% brokerage commission paid to Apple Suites Realty Group (ASRG) and advisory fees paid to Apple Nine Advisors (A9A), totaling approximately $19.2 million in 2010.
- Chesapeake Lease: Confirm the financial health of Chesapeake Energy Corporation, the sole tenant for the ground lease segment representing ~12% of revenue.
- Acquisition Closing: Monitor the closing status of the 12 hotels under contract ($209.2M), noting that closings are subject to conditions not yet satisfied.
- Distribution Sustainability: Assess whether operating cash flow ($38.8M) is sufficient to cover the annualized distribution rate ($118.1M) without relying on offering proceeds or debt.
- Debt Maturities: Review the debt schedule; while maturities are spread out, a significant portion ($37.2M) is due in 2015.