Business context and reporting period
This is Apple REIT Nine, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013—not a filing under the name Apple Hospitality REIT, Inc. The Virginia REIT owned 89 hotels with 11,371 rooms in 27 states. The company reports one operating segment.
Financial performance and position
Amounts below are in millions except per-share and hotel operating data.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $100.2 | $93.7 | $297.2 | $278.9 |
| Operating income | $20.8 | $19.9 | $66.4 | $61.1 |
| Net income | $18.2 | $17.9 | $58.6 | $62.3 |
| Net income per share | $0.10 | $0.10 | $0.32 | $0.34 |
| Cash from operations | Not separately provided for quarter | $98.0 | $93.9 |
Operating margin was approximately 20.8% in Q3 2013 versus 21.3% in Q3 2012, and 22.3% for the first nine months versus 21.9%. Hotel operating expenses were 57% of revenue in both Q3 periods and 56% in both nine-month periods.
- Comparable hotel measures improved: Q3 occupancy was 77% versus 74%, ADR was $115 versus $111, and RevPAR was $88 versus $82. For the nine months, occupancy was 76% versus 73%, ADR $115 versus $112, and RevPAR $87 versus $82.
- Nine-month investing cash use was $14.4 million; financing cash use was $92.6 million. The company spent $8.8 million on existing hotel capital improvements and reported $11.4 million of capital improvements and development costs in investing activities.
- At September 30, assets were $1,496.7 million, liabilities $203.7 million, and shareholders’ equity $1,293.0 million. Debt comprised $22.0 million drawn on a revolving credit facility and $163.6 million of notes payable; estimated debt fair value was $190.1 million.
- Cash was zero at quarter-end, compared with $9.0 million at December 31, 2012. Restricted cash was $10.4 million, including $7.7 million in capital expenditure reserves.
Material changes versus comparable periods
Nine-month revenue rose 7% and operating income rose 9%, while net income declined 6% from 2012, when results included $6.8 million of discontinued-operation income from the sold land parcels. Excluding that item, continuing-operations income increased to $58.6 million from $55.6 million. Interest expense increased to $6.7 million from $4.7 million for the nine months; merger transaction costs were $2.0 million versus $0.6 million. Cash from operations increased to $98.0 million from $93.9 million.
Monthly distributions totaled $113.6 million in the first nine months, exceeding operating cash flow by approximately $15.6 million; the filing says the shortfall was funded primarily by credit-facility borrowings and cash on hand. Distribution payments were $0.6227 per share for the nine months. The company suspended both its redemption and dividend reinvestment programs in June 2013 while evaluating the proposed mergers.
Outlook, contingencies and unusual items
- Management and the industry forecast a mid-single-digit revenue increase in 2013 for comparable hotels, with the trend expected to continue in 2014. Management cited improved demand, occupancy and rates, while noting economic uncertainty and reduced government spending in some markets.
- The August 2013 merger agreement would combine Apple REIT Nine with Apple REIT Seven and Apple REIT Eight, subject to shareholder and other approvals and closing conditions. The filing said completion was expected in Q4 2013 or Q1 2014, with no assurance it would occur. If completed, a preliminary estimated $104–$128 million expense could arise from conversion of Apple Nine’s Series B preferred shares.
- The $50 million revolving facility had $22.0 million outstanding at a 2.43% annual rate and matures in November 2014, with a conditional extension option to November 2015. The company reported compliance with its financial covenants. A 100-basis-point rate change was estimated to affect annual net income by about $0.2 million.
- On November 1, 2013, the purchaser repaid the $60 million note receivable. The company expects to recognize approximately $42.3 million of deferred gain and interest in Q4 2013, after waiving approximately $0.5 million of October interest. Proceeds were intended primarily to reduce facility borrowings and fund general corporate needs.
- A securities class action had been dismissed with prejudice, but plaintiffs appealed; the company could not estimate a possible loss. The SEC was conducting a non-public investigation into disclosures and certain transactions; the company could not predict its outcome or timing.
- Other risks include seasonality, hotel-market and economic conditions, financing availability, costs of planned renovations and development, and related-party arrangements. Management disclosed that related-party transactions are not necessarily at arm’s length. The company expects approximately $20–$25 million of additional existing-hotel capital spending through 2014 and about $35 million total for two Richmond hotel developments.
Important facts for investors to verify
- Confirm the registrant’s identity: this filing is for Apple REIT Nine, Inc., notwithstanding the request metadata naming Apple Hospitality REIT, Inc.
- Review merger approvals, closing status, exchange terms, and the potential preferred-share conversion expense.
- Assess whether distributions are sustainable given zero unrestricted cash at quarter-end and distributions exceeding operating cash flow.
- Verify the subsequent repayment of the note, the expected Q4 gain recognition, and the use of proceeds.
- Monitor the class-action appeal and SEC investigation, for which the filing provides no estimable loss or resolution timing.