Apple REIT Nine, Inc. - Form 8-K Summary
Business Context and Reporting Period
Company: Apple REIT Nine, Inc. (Apple Hospitality REIT, Inc.)
Filing Date: October 16, 2008 (Report Date)
Reporting Period: Current Report covering events from October 16, 2008, through October 21, 2008.
Business Overview: The Company is a Real Estate Investment Trust (REIT) engaged in the acquisition and ownership of hotel properties. This filing details the completion of two hotel acquisitions and the entry into material definitive agreements for nine additional hotels currently under construction.
Key Financial Metrics and Transactions
Completed Acquisitions (Item 2.01):
The Company closed on the purchase of two Hilton Garden Inn properties in Texas, funded primarily by proceeds from its ongoing offering of Units (common and Series A preferred shares).
| Property | Location | Rooms | Purchase Price | Closing Date |
|---|---|---|---|---|
| Hilton Garden Inn | Lewisville, TX | 165 | $28,000,000 | Oct 16, 2008 |
| Hilton Garden Inn | Duncanville, TX | 142 | $19,500,000 | Oct 21, 2008 |
| Total | - | 307 | $47,500,000 | - |
Debt Assumption:
The Duncanville acquisition included the assumption of an existing mortgage with an outstanding principal balance of $13,965,857. The loan carries a fixed interest rate of 5.88% and matures in May 2017.
Pending Acquisitions (Item 1.01):
The Company entered into purchase contracts for nine additional hotels (three in California/Florida and six in the Southeast). These properties are currently under construction.
| Group | Locations | Total Rooms | Total Purchase Price | Deposit Status |
|---|---|---|---|---|
| California & Florida | Clovis (2), Panama City (1) | 264 | $35,185,000 | $110,000 initial deposit |
| Southeast Portfolio | AL (2), GA, MS, FL, TN | 558 | $58,530,244 | $15,000 initial deposit ($2,500/property) |
| Total Pending | 9 Hotels | 822 | $93,715,244 | Refundable during review |
Material Changes and Financial Position
Pro Forma Impact:
The filing includes unaudited pro forma financial information assuming the acquisition of seven hotels (including the two closed and five others acquired between July and October 2008) as of June 30, 2008.
- Total Pro Forma Assets: $181,033,000 (up from historical $162,821,000).
- Total Pro Forma Liabilities: $18,263,000 (up from historical $51,000), primarily due to assumed mortgage debt of $13,966,000.
- Pro Forma Net Income (6 months ended June 30, 2008): $992,000 (compared to historical net income of $274,000).
- Pro Forma EPS (6 months ended June 30, 2008): $0.09 per share.
Historical Performance of Acquired Entities:
The financial statements for the acquired entities (SCI Lewisville and SCI Duncanville) show net losses for the years ended December 31, 2007, primarily due to high interest expenses, depreciation, and start-up costs associated with new construction. However, operating income was positive for both properties in 2007.
Outlook, Risks, and Contingencies
Acquisition Risks:
The nine pending hotel acquisitions are subject to closing conditions that are currently unsatisfied. These include the completion of construction, obtaining third-party consents, and the execution of new franchise and management agreements. The Company may terminate the contracts during the review periods (expiring December 1, 2008, and November 19, 2008) for any reason. If terminated after the review period without seller default, deposits may be forfeited.
Liquidity and Funding:
Initial deposits for pending acquisitions were funded by proceeds from the Company's ongoing offering of Units. Future deposits and purchase prices are expected to be funded similarly. There is no assurance that further closings will occur under the remaining purchase contracts.
Management Commentary:
The Company continues to execute its strategy of acquiring hotel properties through its Unit offering. The pro forma data suggests that the recent acquisitions contribute positively to the Company's consolidated revenue and net income, although the historical data for the specific entities reflects the typical start-up losses of newly constructed hotels.
Key Facts for Investor Verification
- Closing Certainty: Verify the status of the nine pending hotel acquisitions, as they are subject to construction completion and other closing conditions with no assurance of closing.
- Debt Assumption: Confirm the terms of the $13.97 million mortgage assumed in the Duncanville acquisition (5.88% fixed rate, May 2017 maturity).
- Funding Source: Monitor the Company's ongoing offering of Units to ensure sufficient capital is raised to fund the remaining purchase prices of pending acquisitions.
- Pro Forma Accuracy: Review the pro forma financial statements to understand the projected impact of the acquisitions on the Company's balance sheet and earnings per share.
- Start-up Costs: Note that the acquired properties were in start-up phases, resulting in historical net losses; future profitability depends on occupancy and revenue growth post-construction.