Apple REIT Nine, Inc. - Q1 2009 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2009. Apple REIT Nine, Inc. (the "Company") is a Virginia corporation qualifying as a Real Estate Investment Trust (REIT). The Company commenced operations on July 31, 2008, and as of the reporting date, owned 23 hotels with 2,666 rooms across 11 states. The Company is in the midst of a best-efforts offering of Units (common and Series A preferred shares) to raise capital for hotel acquisitions and land development.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenue | $18.7 million | $0 |
| Net Income | $1.6 million | ($20,000) loss |
| Operating Cash Flow | $2.2 million | ($19,000) used |
| Cash and Equivalents | $155.8 million | $10,000 |
| Total Debt (Notes Payable) | $42.7 million | $38.6 million |
| Shareholders' Equity | $499.6 million | $389.7 million |
| Dividends Paid | $9.9 million | $0 |
Operational Statistics (Q1 2009): Average Daily Rate (ADR) of $114; Occupancy of 64%; Revenue Per Available Room (RevPAR) of $73.
Material Changes and Acquisitions
- Acquisitions: The Company acquired two operating hotels (Round Rock, TX and Panama City, FL) and land for a future SpringHill Suites in Alexandria, VA during Q1 2009. Total gross purchase price for these assets was approximately $28.2 million.
- Accounting Changes: Adoption of SFAS 141R required the expensing of acquisition-related costs (previously capitalized). This resulted in $1.0 million in acquisition-related costs being recorded in Q1 2009, materially impacting operating income.
- Capital Formation: Net proceeds from the issuance of common shares totaled $118.1 million in Q1 2009, significantly increasing liquidity.
- Debt Assumption: The Company assumed approximately $4.2 million in debt related to the Round Rock, TX acquisition.
Outlook, Risks, and Unusual Items
- Economic Outlook: Management notes that the significant decline in the U.S. economy has negatively impacted hotel performance, with occupancy and revenue declines expected to continue until general economic conditions improve.
- Dividend Policy: The Company pays monthly dividends. Due to the lag between capital raising and investment, a portion of distributions is funded by offering proceeds and may be classified as a return of capital for tax purposes. There is no assurance the current dividend rate can be maintained if investment income does not increase.
- Related Party Transactions: Significant fees are paid to Apple Suites Realty Group, Inc. (ASRG) and Apple Nine Advisors, Inc. (A9A), both 100% owned by Chairman Glade M. Knight. ASRG receives a 2% commission on acquisitions; A9A receives advisory fees.
- Series B Preferred Stock: 480,000 shares held by the CEO are convertible into common stock upon specific triggering events (e.g., listing on an exchange). Conversion could result in significant dilution and a potential expense ranging from $0 to over $127 million if the maximum offering is achieved.
- Subsequent Events: In April 2009, the Company preliminarily closed on a $147 million land purchase for natural gas production in Texas and acquired two additional hotels in Austin, TX for $35.7 million.
Investor Verification Checklist
- Dividend Sustainability: Verify the ratio of cash flow from operations to dividend payments, noting the reliance on equity offering proceeds to fund distributions.
- Related Party Costs: Review the magnitude of fees paid to ASRG and A9A relative to total acquisition costs and operating expenses.
- Acquisition Pipeline: Assess the risk of the $304.9 million in outstanding contracts for 17 hotels, many of which are under construction and subject to closing conditions.
- Series B Conversion Risk: Evaluate the potential dilution impact of the CEO's Series B convertible preferred stock if a listing or sale event occurs.
- Land Investment Strategy: Investigate the strategic rationale and risk profile of the $147 million natural gas land lease, which deviates from the core hotel REIT strategy.