APLE

Business Context and Reporting Period

Company: Apple REIT Nine, Inc. (Apple Hospitality REIT, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The Company is a Virginia corporation organized as a Real Estate Investment Trust (REIT) focused on investing in hotels and income-producing real estate. As of March 31, 2011, the portfolio consisted of 83 hotels (10,500 rooms) across 27 states and approximately 410 acres of land leased to Chesapeake Energy Corporation for natural gas production.

Key Financial Metrics

Hotel Operating Statistics (Q1 2011):
- Average Daily Rate (ADR): $108
- Occupancy: 67%
- Revenue Per Available Room (RevPAR): $72

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 144% year-over-year, driven primarily by the acquisition of 43 hotels in 2010 and 7 properties (6 acquisitions, 1 new construction) in Q1 2011. Hotel revenue rose from $26.5 million to $72.0 million.
• Profitability: Net income increased 295% to $14.9 million, reflecting the expanded asset base and improved operational metrics (ADR and Occupancy) compared to the prior year.
• Acquisition Activity: The Company spent approximately $80.0 million in cash on acquisitions and $5.8 million on deposits for potential acquisitions in Q1 2011. It also assumed approximately $5.0 million in debt related to a Texarkana, TX property.
• Liquidity: Cash and cash equivalents decreased by $106.5 million, primarily due to significant investing activities (acquisitions and capital improvements) and distributions paid to shareholders ($39.9 million).
• Expense Increases: Total expenses rose to $61.9 million from $27.9 million, consistent with the larger portfolio size. Depreciation expense more than doubled to $11.9 million.

Guidance, Outlook, and Risks

• Outlook: Management anticipates mid-single-digit percentage revenue increases for comparable hotels for the remainder of 2011 compared to 2010, citing improving economic conditions and demand.
• Capital Commitments: The Company has outstanding contracts for seven additional hotels with a total purchase price of $135.1 million. Five are under construction, and two are expected to close by the end of Q2 2011. Funding is anticipated to come from cash on hand.
• Distributions: The annualized distribution rate remains $0.88 per common share. The Company notes that a portion of distributions may be funded by offering proceeds (treated as a return of capital) until the portfolio is fully invested.
• Risks and Contingencies:
  • Related Party Transactions: Significant fees are paid to Apple Suites Realty Group (ASRG) and Apple Nine Advisors (A9A), both 100% owned by the CEO. Q1 2011 included $1.7 million in acquisition fees to ASRG and $0.5 million in advisory fees to A9A.
  • Concentration Risk: The ground lease with Chesapeake Energy Corporation represents approximately 9% of total assets and 7% of total revenue.
  • Market Risk: The Company is exposed to interest rate fluctuations on its cash investments; a 100 basis point change would impact annual net income by approximately $1.2 million.

Investor Verification Checklist

• Acquisition Pipeline: Verify the status of the seven hotels under contract ($135.1M total) and the likelihood of closing, particularly the five under construction.
• Distribution Sustainability: Assess the ratio of cash flow from operations ($17.9M) to distributions paid ($39.9M) to determine reliance on capital raises or return of capital for dividend payments.
• Related Party Fees: Review the 2% acquisition fee structure paid to the CEO's affiliate (ASRG) and its impact on net acquisition costs.
• Debt Maturities: Examine the maturity schedule of the $104.4 million in notes payable, noting the first major maturities begin in 2015.
• Ground Lease Dependency: Evaluate the creditworthiness of Chesapeake Energy Corporation as the sole tenant for the land lease segment.