Apple REIT Nine, Inc. — Form 10-Q Summary
Entity note: The supplied filing identifies the registrant as Apple REIT Nine, Inc., not Apple Hospitality REIT, Inc. Confirm the filing is for the intended company. Reporting period: three months ended March 31, 2012; financial statements are unaudited and amounts below are in U.S. dollars.
Business context and reporting period
The company is a Virginia REIT investing in U.S. hotels. At quarter-end it owned 88 hotels with 11,252 rooms in 27 states. It also held 110 Texas natural-gas lease parcels for sale; those results are reported as discontinued operations. The company’s hotel portfolio had expanded since the prior-year quarter, so reported year-over-year results reflect both portfolio growth and property-level performance.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $88.1 million | $72.0 million; up 22% |
| Operating income | $18.0 million | $10.8 million |
| Net income | $21.9 million | $14.9 million |
| Net income per common share | $0.12 | $0.08 |
| Cash from operating activities | $20.6 million | $17.9 million |
| Cash and cash equivalents | $2.8 million | $30.7 million at Dec. 31, 2011 |
| Notes payable | $123.4 million | $124.1 million at Dec. 31, 2011 |
| Total assets / shareholders’ equity | $1,676.1 million / $1,542.8 million | $1,701.0 million / $1,563.6 million at Dec. 31, 2011 |
- Continuing-operations income was $16.6 million, compared with $10.2 million; discontinued-operations income was $5.3 million, compared with $4.7 million.
- Operating margin was approximately 20.4%, up from 14.9%. Hotel operating expenses were 56% of revenue versus 57% a year earlier.
- Hotel statistics improved: occupancy was 70% versus 67%, average daily rate was $112 versus $108, and RevPAR was $78 versus $72. These portfolio-wide comparisons are affected by acquisitions; comparable-hotel occupancy rose 5% and ADR rose 3%.
- Investing activities used $5.2 million, including $4.7 million of capital improvements. Financing activities used $43.3 million, including $40.1 million of distributions and $16.0 million of unit redemptions, partly offset by $13.4 million of reinvestment-plan proceeds.
- Cash distributions were $0.22 per common share for the quarter. Operating cash flow was below distributions paid.
Material changes, outlook, and risks
- Management expected mid-single-digit 2012 revenue growth for comparable hotels versus 2011, citing improved hotel demand and room rates. No specific earnings or cash-flow guidance was provided. Management cautioned that comparable hotel revenue and operating income were not expected to reach pre-recession levels.
- In April 2012, after quarter-end, the company sold the 110 parcels for $198.4 million: $138.4 million in cash and a $60.0 million note secured by a junior lien. The note bears 10.5% interest, with payment dependent on the purchaser’s senior loan terms; maturity is April 2049. The company anticipated deferring the gain, but had not finalized the accounting.
- Liquidity was supported by operating cash flow and expected sale proceeds, but cash declined substantially during the quarter. Management said expected cash and operating flows would meet anticipated needs, including debt service, capital work, distributions, and planned redemptions. Distributions may require sources beyond operating cash, and their continuation at the stated rate is not assured.
- Redemption requests exceeded program limits: the January 2012 redemption fulfilled about 14% of requests, leaving about 9.2 million requested units unredeemed. The program can be limited, amended, or suspended.
- A consolidated putative class action alleges federal and certain state securities-law violations and other claims. The company moved to dismiss, disputes the claims, and said it could not estimate the outcome or potential loss. Management also expected significant legal costs for the remainder of 2012, including costs related to SEC inquiries.
- Related-party transactions include advisory and asset-service arrangements with entities owned by the CEO; the filing notes these arrangements are not necessarily arm’s length. Other risks include hotel seasonality, economic and local-market conditions, competition, and natural disasters.
Important facts for investors to verify
- Confirm the registrant identity, given the mismatch between the request metadata and the filing cover page.
- Review the April parcel sale’s final accounting, note collectability and payment priority, and timing of any gain recognition.
- Assess the sustainability and funding sources of distributions relative to operating cash flow and the company’s stated REIT distribution requirements.
- Check available liquidity and capital needs after the quarter-end sale, redemptions, planned capital improvements, and proposed hotel projects.
- Monitor the class action, SEC-related legal costs, redemption demand and limits, and related-party governance and expense allocations.