APLE

Business Context and Reporting Period

Company: Apple REIT Nine, Inc. (Apple Hospitality REIT, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Status: The Company is a Virginia corporation formed to qualify as a Real Estate Investment Trust (REIT). As of the reporting date, the Company owned no properties and had no operating history, focusing primarily on capital formation through a "best-efforts" offering of Units (one common share and one Series A preferred share). Initial capitalization occurred on November 9, 2007.

Key Financial Metrics

Note: Net income is derived primarily from interest income on cash balances ($385k for 6 months) rather than property operations.

Material Changes vs. Prior Period

• Capitalization: The Company transitioned from a shell entity with minimal assets ($337k total assets as of Dec 31, 2007) to a capitalized entity with $162.8 million in total assets, driven by the sale of 17 million Units.
• Liquidity: Cash balances increased from $20,000 to $162.6 million.
• Debt: A $400,000 line of credit used for start-up costs was fully paid off in May 2008 using offering proceeds. Total liabilities decreased from $306,000 to $51,000.
• Operations: The Company remains in the pre-acquisition phase with no operating revenue from real estate assets.

Guidance, Outlook, and Risks

Outlook and Strategy: The Company intends to use offering proceeds to acquire hotels and residential apartment communities. It plans to maintain a monthly dividend distribution rate of approximately $0.073334 per common share (annualized $0.88). However, management notes that because the Company has not yet fully invested its capital, a portion of current distributions is funded by offering proceeds and may be treated as a return of capital for tax purposes. Future distribution sustainability depends on the successful acquisition of income-producing properties.

Recent Acquisitions and Contracts (Subsequent Events):

• Closed: Purchased a 125-room Hilton Garden Inn in Tucson, AZ for $18.4 million (July 31, 2008).
• Under Contract: Entered into contracts for a Courtyard in Santa Clarita, CA ($22.7M); a Homewood Suites in Charlotte, NC ($5.8M); and a portfolio of five hotels in Ohio and Texas (totaling approx. $95M).

Risks and Contingencies:

• Related Party Transactions: Significant relationships exist with Apple Nine Advisors, Inc. (A9A) and Apple Suites Realty Group, Inc. (ASRG), both owned by Chairman Glade M. Knight. Fees for advisory and acquisition services are payable to these entities.
• Dilution: The Chairman holds 480,000 Series B Convertible Preferred Shares. Upon conversion (triggered by listing, sale of assets, or termination of advisory agreements), these shares convert to common stock based on gross proceeds raised. If the $2 billion offering target is met, this could result in significant dilution and a potential expense recognition of up to $127 million.
• REIT Qualification: The Company must distribute at least 90% of ordinary income to maintain REIT status. Failure to acquire properties yielding sufficient income could jeopardize the ability to sustain current dividend levels.

Investor Verification Checklist

• Capital Deployment Speed: Verify the timeline for closing the pending hotel acquisitions to ensure cash is deployed before interest rates decline or market conditions shift.
• Distribution Classification: Confirm the tax treatment of dividends paid from offering proceeds versus operating income (Return of Capital vs. Ordinary Dividend).
• Related Party Fees: Monitor the accrual of acquisition fees (2% of purchase price) and advisory fees (0.1%–0.25% of equity proceeds) payable to entities owned by the Chairman.
• Series B Conversion Trigger: Assess the likelihood of events triggering the conversion of Series B preferred shares, which could significantly dilute common shareholders.
• Offering Progress: Track the remaining capacity of the $2 billion "best-efforts" offering and the net proceeds actually received after underwriting commissions.