Apple REIT Nine, Inc. — Form 10-Q summary
Issuer identification: The supplied filing is for Apple REIT Nine, Inc., for the quarter ended June 30, 2013. It does not identify the registrant as Apple Hospitality REIT, Inc.; verify the issuer before relying on this summary.
Business context and reporting period
Apple REIT Nine was a Virginia REIT operating 89 hotels with 11,371 rooms across 27 states at June 30, 2013. The filing reports the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. The company had one operating segment and reported 2012 income from the sale of non-hotel land as discontinued operations.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $104.6 million | $97.1 million | $197.0 million | $185.2 million |
| Operating income | $26.1 million | $23.0 million | $45.6 million | $41.2 million |
| Net income | $23.5 million | $22.6 million | $40.4 million | $44.4 million |
| Net income per share | $0.13 | $0.12 | $0.22 | $0.24 |
| Operating cash flow | Not separately provided | Not separately provided | $60.2 million | $58.1 million |
- Operating margin was approximately 25.0% in Q2 2013 versus 23.7% in Q2 2012, and 23.2% for the first half of 2013 versus 22.2% in 2012.
- For comparable hotels, Q2 occupancy was 80% versus 77%, ADR was $115 versus $112, and RevPAR was $92 versus $86. First-half occupancy was 76% versus 73%, ADR $115 versus $112, and RevPAR $87 versus $82.
- At June 30, total assets were $1.509 billion, total liabilities $196.2 million, and shareholders’ equity $1.313 billion. Debt comprised $164.7 million of notes payable and $17.8 million drawn on a $50 million revolving credit facility. The facility rate was approximately 2.44%; the company reported compliance with its covenants.
- Cash and cash equivalents were zero at June 30, down from $9.0 million at year-end 2012. Restricted cash was $9.8 million. First-half investing cash use was $11.4 million and financing cash use was $57.8 million.
- First-half common distributions were $75.7 million, exceeding operating cash flow of $60.2 million; the filing says the shortfall included a return of capital and was funded primarily by credit-facility borrowings and cash on hand.
Material changes versus the prior period
- Q2 revenue rose 8% and first-half revenue rose 6%; the company attributed improvement to stronger hotel demand, occupancy, and room rates.
- First-half net income declined despite higher operating income, primarily because 2012 included $6.8 million of discontinued-operation income from the land parcels sold in April 2012. Q2 net income increased year over year.
- Interest expense increased to $4.4 million for the first half from $3.0 million, reflecting mortgage debt and new credit-facility borrowings. First-half hotel operating expenses rose 6%, in line with revenue growth; they remained 55% of revenue.
- During the first half, the company drew $17.8 million on its revolving facility, spent $5.9 million on existing-hotel capital expenditures, and began a Richmond hotel development project. It also acquired its headquarters and assumed an office lease from Apple REIT Six for approximately $4.5 million.
Outlook, commentary, risks, and unusual items
- Management and the industry forecast a mid-single-digit increase in 2013 comparable-hotel revenue and expected continued improvement in revenue and operating income. This is a forecast, not a guarantee.
- The company expected to spend a further $17–$20 million on existing-hotel capital improvements in 2013. The Richmond Courtyard and Residence Inn development is expected to cost about $35 million in total and take up to two years to complete.
- The annualized distribution rate was $0.83025 per share. Management cautioned that distributions may rely on debt or offering proceeds and that their continuation at the current level is not assured. The dividend reinvestment and unit redemption programs were suspended June 19, 2013 while a consolidation was evaluated; approximately 12.1 million requested redemptions remained unfulfilled at the last scheduled date.
- On August 7, 2013, the company agreed to a proposed merger with Apple REIT Seven and Apple REIT Eight, subject to shareholder approval and other closing conditions. Exchange terms were one company share per Apple REIT Seven unit and 0.85 shares per Apple REIT Eight unit; completion was not assured.
- A putative securities class action was dismissed with prejudice, but plaintiffs appealed. The company said it could not estimate any possible loss. The SEC was conducting a non-public investigation into historical disclosures and certain transactions; the company could not predict the outcome.
- Related-party dealings are significant and, according to the filing, may not be at arm’s length. The company also cited possible conflicts in allocating shared personnel costs among affiliated entities.
- The $60 million note received in the 2012 land sale bears stated interest of 10.5%, is secured by a junior lien, and has payment timing dependent on repayment of the purchaser’s senior loan. The reported net carrying value was $19.3 million after deferred gain and interest offsets.
Most important facts for investors to verify
- Confirm the registrant’s identity: the filing names Apple REIT Nine, Inc., not Apple Hospitality REIT, Inc.
- Review the proposed three-company merger terms, approval status, and implications for share count, governance, and operations.
- Assess cash coverage of distributions, the zero unrestricted cash balance, borrowing availability, and the suspended reinvestment and redemption programs.
- Track the class-action appeal and SEC investigation, including any subsequent disclosures about outcomes or potential financial exposure.
- Review the collectability and payment schedule of the land-sale note, along with related-party arrangements and the Richmond development’s funding needs.