Business Context and Reporting Period
Company: Apple REIT Nine, Inc. (Apple Hospitality REIT, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A Virginia corporation organized as a Real Estate Investment Trust (REIT) focused on acquiring hotels and income-producing real estate. The company was initially capitalized in November 2007 and commenced operations on July 31, 2008, with the purchase of its first hotel. As of the reporting date, the company owned four hotels and was actively conducting a best-efforts offering of Units to fund further acquisitions.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenue | $719,000 | $719,000 |
| Net Income | $988,000 | $1,262,000 |
| Operating Loss | $(492,000) | $(603,000) |
| Interest Income (Net) | $1,480,000 | $1,865,000 |
| Cash and Cash Equivalents | $196,030,000 (as of Sep 30, 2008) | |
| Total Assets | $260,452,000 | |
| Total Liabilities | $312,000 | |
| Shares Outstanding | 33,357,049 (as of Nov 1, 2008) |
Note: Net income is primarily driven by interest income on uninvested cash proceeds from the equity offering, as operating results for the newly acquired hotels resulted in an operating loss.
Material Changes and Operational Highlights
- Acquisitions: The company acquired four hotels in 2008 (Tucson, AZ; Santa Clarita, CA; Charlotte, NC; Allen, TX) with a total gross purchase price of approximately $59.3 million. Operations commenced on July 31, 2008.
- Capital Formation: Through September 30, 2008, the company sold 27.2 million Units for gross proceeds of $294.8 million. Net proceeds after offering costs were approximately $264.5 million.
- Liquidity Position: Cash and cash equivalents increased from $20,000 at year-end 2007 to $196.0 million at September 30, 2008, reflecting the ongoing equity offering and limited deployment of capital into real estate assets.
- Operating Performance: For the period owned, the four hotels achieved a combined average occupancy of 59%, an Average Daily Rate (ADR) of $104, and a Revenue Per Available Room (RevPAR) of $62.
Guidance, Outlook, and Risks
- Outlook: Management anticipates weaker than originally anticipated results for acquired properties in 2009 due to declining economic conditions in the United States.
- Distributions: The company intends to continue paying monthly dividends at an annualized rate of $0.88 per common share. However, a portion of current distributions is funded by offering proceeds rather than operating cash flow and may be treated as a return of capital for tax purposes.
- Acquisition Pipeline: As of September 30, 2008, the company had 10 purchase contracts outstanding (9 hotels and 1 land contract) with a total gross purchase price of approximately $167.5 million. Three of these contracts require the assumption of approximately $34.6 million in mortgage debt.
- Related Party Risks: Significant transactions exist with related parties, including Apple Suites Realty Group, Inc. (ASRG) and Apple Nine Advisors, Inc. (A9A), both owned by the Chairman/CEO. Fees paid to these entities include a 2% acquisition commission and advisory fees ranging from 0.1% to 0.25% of equity proceeds.
- Series B Preferred Stock: The Chairman holds 480,000 Series B convertible preferred shares. Upon conversion (triggered by specific events), these shares could result in significant dilution and a potential expense ranging from $0 to over $127 million if the maximum offering is achieved.
Key Facts for Investor Verification
- Source of Net Income: Verify that reported net income is largely derived from interest on uninvested cash ($1.9M for the nine months) rather than hotel operations, which generated an operating loss of $603,000.
- Distribution Sustainability: Confirm the company's ability to transition distributions from being funded by equity proceeds to being funded by operating cash flow as the portfolio expands.
- Related Party Fees: Review the impact of the 2% acquisition fee paid to ASRG and the advisory fees paid to A9A on the company's capital efficiency.
- Pipeline Execution: Monitor the closing of the 10 outstanding purchase contracts, noting that closing is subject to conditions and there is no assurance they will be completed.
- Dilution Risk: Assess the potential dilution impact of the Series B convertible preferred stock held by the Chairman, which converts based on gross proceeds raised.