Apple REIT Nine, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011; filed November 9, 2011. The filing identifies the registrant as Apple REIT Nine, Inc. (not Apple Hospitality REIT, Inc.). Financial statement amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
The company is a Virginia REIT focused on U.S. hotel properties. At September 30, 2011, it owned 86 hotels with 10,982 rooms in 27 states. Results reflect different periods of ownership following significant acquisitions, so reported year-over-year growth is not a like-for-like comparison.
Nine hotels were acquired in the first nine months of 2011, and a newly constructed hotel opened. Separately, 110 leased natural-gas parcels in Texas were classified as held for sale, with their results reported as discontinued operations.
Financial results and key metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Continuing-operations revenue | $85.7 | $43.8 | $242.1 | $105.9 |
| Operating income | $16.9 | $2.1 | $44.6 | $2.1 |
| Income from continuing operations | $15.6 | $1.8 | $41.5 | $1.5 |
| Income from discontinued operations | $5.1 | $4.7 | $14.6 | $14.1 |
| Net income | $20.8 | $6.6 | $56.1 | $15.7 |
| Basic and diluted earnings per share | $0.11 | $0.05 | $0.31 | $0.13 |
Operating margin, calculated as operating income divided by continuing-operations revenue, was approximately 19.8% in Q3 2011 versus 4.8% in Q3 2010, and 18.4% versus 2.0% for the respective nine-month periods. Higher property count and acquisition timing materially affect the comparisons.
- Hotel performance: For Q3, occupancy was 72% versus 70%, ADR was $107 versus $104, and RevPAR was $78 versus $73. For the nine months, occupancy was 71% versus 67%, ADR $108 versus $103, and RevPAR $76 versus $69. Comparable-hotel occupancy and ADR also improved year over year.
- Cash flow: Nine-month operating cash flow was $86.4, investing cash outflow $148.4, and financing cash outflow $100.7. Cash fell by $162.7 to $61.4 from $224.1 at year-end 2010.
- Debt and liquidity: Notes payable were $124.9 at September 30, compared with $99.6 at December 31, 2010. Total liabilities were $138.7 and total assets $1,730.4. The filing states that cash and expected operating cash flow should cover anticipated needs, including debt service, capital spending, distributions, and planned redemptions.
- Distributions: The annualized distribution rate was $0.88 per common share, paid monthly. Nine-month distributions were $120.2, exceeding operating cash flow of $86.4; management said some distributions may be funded from offering proceeds and may constitute return of capital for tax purposes.
- Capital spending: The company held $8.7 in capital reserves, spent approximately $8.3 on capital expenditures in the first nine months, and anticipated a further $15.0 over the next 12 months.
Material changes versus the prior comparable period
- Reported revenue rose substantially alongside the portfolio’s expansion: 86 hotels at September 30, 2011 versus 54 a year earlier. The filing cautions that results are not directly comparable because properties were acquired at different times.
- Hotel operating expenses were 58% of revenue in Q3 2011 versus 60% in Q3 2010; for the nine months, 57% versus 60%. Depreciation and interest expense increased with the larger portfolio.
- Cash declined as the company funded acquisitions, distributions, and redemptions. Nine-month net proceeds from unit issuance were $44.8, while $120.2 was paid in distributions and $23.3 in unit redemptions.
- The company entered into a contract in August 2011 to sell the 110 Texas parcels for $198.4. Their carrying amount was $157.0, including straight-line rent receivable; the filing anticipated a fourth-quarter sale but did not report it as completed.
Outlook, commentary, risks, and unusual items
- Management expected mid-single-digit revenue growth for comparable hotels for the remainder of 2011 versus 2010, with similar year-over-year increases in 2012. It also noted that hotel results were improving but were not expected to reach pre-recession levels.
- Three additional hotel purchase contracts totaling approximately $51.2 were outstanding at quarter-end, subject to conditions; the Tucson hotel purchase closed in October 2011. Management said it did not plan further hotel acquisition or construction contracts beyond those described.
- Three putative securities class actions were ongoing. The company said it could not reasonably predict their outcome or estimate possible losses. FINRA had also filed a complaint against David Lerner Associates, the company’s unit distributor; the company said it would cooperate with regulatory inquiries and noted continuing SEC-related legal costs.
- Related-party arrangements include a 2% acquisition and disposition fee paid to Apple Suites Realty Group, owned by the CEO, and advisory and expense-reimbursement arrangements with affiliated entities. The company cautioned these transactions are not at arm’s length.
- Other stated risks include economic and hotel-market conditions, competition, litigation and regulatory matters, seasonality, natural disasters, and the company’s ability to maintain REIT status and its distribution rate. Management reported disclosure controls were effective at September 30, 2011.
Most important facts for investors to verify
- Whether the $198.4 Texas-parcel sale closed, its final proceeds, and how proceeds were used.
- Comparable-hotel operating trends separately from portfolio growth, including occupancy, ADR, RevPAR, and expense ratios.
- How distributions are funded and classified for tax purposes, given distributions exceeded operating cash flow in the nine-month period.
- Cash needs for planned hotel purchases, capital improvements, debt service, and the redemption program, including the extent of unmet redemption requests.
- Developments and potential financial exposure from the class actions, regulatory inquiries, and related-party transactions.