APLE

Apple REIT Nine, Inc. - 2009 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2009. Apple REIT Nine, Inc. is a Virginia corporation organized as a Real Estate Investment Trust (REIT) focused on acquiring and operating hotels and income-producing real estate. The Company commenced operations in July 2008. As of year-end 2009, the portfolio consisted of 33 hotels (3,900 rooms) across 14 states and a significant ground lease investment involving 417 acres of land in Fort Worth, Texas, leased to Chesapeake Energy Corporation for natural gas production.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Expansion: The Company acquired 12 hotels in 2009 (gross purchase price ~$189 million) and 417 acres of land (~$147 million), increasing total hotel count from 21 to 33.
• Revenue Growth: Total revenue increased nearly 8x year-over-year, driven by the addition of new properties and the commencement of rental revenue from the Chesapeake Energy ground lease ($16.0 million).
• Operating Performance: While occupancy improved to 62% from 59%, ADR declined to $104 from $110 due to the economic recession. RevPAR remained relatively flat at $64.
• Liquidity: Cash balances grew significantly to $273 million, funded primarily by an ongoing best-efforts offering of Units. The Company raised approximately $881 million in net proceeds during 2009.
• Debt Assumption: Total debt increased to $58.7 million, primarily due to assuming $19.3 million in secured debt associated with three hotel acquisitions.

Guidance, Outlook, and Risks

• Economic Outlook: Management notes that the U.S. economic recession has negatively impacted lodging demand. Industry analysts forecast flat to single-digit declines in hotel revenues for 2010. The Company expects demand to remain below pre-recession levels until general economic conditions improve.
• Acquisition Strategy: The Company continues to pursue acquisitions in underdeveloped markets. As of December 31, 2009, it held contracts for eight additional hotels totaling $132.1 million, though closings are subject to conditions.
• Distributions: The Company paid distributions of $0.88 per share in 2009. Approximately 53% of these distributions were classified as a return of capital for tax purposes. The Company intends to maintain monthly distributions but notes that future rates depend on cash flow and acquisition success.
• Key Risks:
  • Concentration Risk: A significant portion of assets (approx. 16%) is tied to a single tenant, Chesapeake Energy Corporation, under a long-term ground lease.
  • Related Party Transactions: The Company pays significant fees to affiliates of the Chairman/CEO (Apple Suites Realty Group and Apple Nine Advisors) for acquisition and advisory services.
  • Liquidity of Shares: There is no established public market for the Company's common shares; they are highly illiquid.
  • REIT Qualification: Failure to meet complex REIT requirements could result in significant tax liabilities.

Investor Verification Checklist

• Related Party Fees: Verify the total compensation paid to Apple Suites Realty Group (ASRG) and Apple Nine Advisors (A9A), which totaled approximately $13.6 million and $2.4 million respectively since inception.
• Chesapeake Lease Terms: Review the specific terms of the 40-year ground lease with Chesapeake Energy, including rent escalations and the tenant's option to purchase sites.
• Offering Proceeds: Confirm the utilization of the $273 million cash balance and the status of the ongoing best-efforts offering (83.5 million Units remained unsold as of year-end).
• Acquisition Pipeline: Assess the likelihood of closing on the eight pending hotel contracts totaling $132.1 million, noting that six are under construction.
• Series B Preferred Stock: Understand the conversion rights of the 480,000 Series B shares held by the CEO, which could result in significant dilution (up to 5.8 million common shares) upon a triggering event.