Apple REIT Nine, Inc. — 2011 Form 10-K
Entity and period: The supplied filing is for Apple REIT Nine, Inc., not Apple Hospitality REIT, Inc. It reports the fiscal year ended December 31, 2011; “2011 Q4” is the requested period metadata, but the filing is an annual report. Amounts below are in U.S. dollars.
Business context
The company is a REIT that owns and leases hotels to taxable REIT subsidiaries; third-party managers operate the properties under branded management and franchise agreements. At year-end it owned 88 hotels with 11,252 rooms across 27 states. It also held for sale 110 natural-gas-site parcels leased to Chesapeake Energy.
Financial and operating results
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $320.5 million | $160.1 million |
| Income from continuing operations | $50.2 million | ($2.6 million) |
| Income from discontinued operations | $19.8 million | $18.9 million |
| Net income | $70.0 million | $16.3 million |
| Operating cash flow | $116.0 million | $38.8 million |
| Modified FFO | $118.9 million | $60.3 million |
| Cash and cash equivalents at year-end | $30.7 million | $224.1 million |
| Notes payable at year-end | $124.1 million | $99.6 million |
- Hotel performance improved: reported occupancy was 70% versus 65%, ADR was $107 versus $102, and RevPAR was $74 versus $66. Average Market Yield rose to 126 from 123.
- Hotel operating expenses were $184.6 million, or 58% of revenue, compared with $97.3 million, or 61%, in 2010. Continuing-operations operating income was $54.5 million, about 17% of revenue.
- Interest expense was $6.0 million before interest income; net interest expense was $4.4 million. Notes payable carry stated rates from 0% to 6.9%; reported average fixed-rate debt cost was approximately 5.9%. Principal maturities are concentrated in 2015 and 2016.
- Net cash used in investing activities was $166.1 million, including $160.2 million of net acquisition payments. Financing used $143.3 million, including $160.4 million of distributions, partly offset by $58.8 million of Unit proceeds.
- Distributions were $0.88 per common share for the year ($0.073334 monthly), totaling $160.4 million—more than operating cash flow of $116.0 million. The filing states some distributions have been funded from offering proceeds and may be treated as return of capital.
Material changes versus 2010
- Revenue and net income increased substantially, but comparison is not like-for-like: the company ended 2011 with 88 hotels versus 76 a year earlier, and results include properties only from their acquisition dates. The 2010 best-efforts offering had enabled significant prior-year acquisitions.
- Comparable-hotel occupancy improved 7% and ADR improved 3%, according to management. Acquisition-related costs fell to $5.3 million from $19.4 million as acquisitions decreased to 11 hotels from 43.
- Operating cash flow rose, while year-end cash fell sharply, mainly amid acquisitions, distributions, and Unit redemptions. In 2011 the company redeemed $39.2 million of Units; redemption requests exceeded the program limit and were prorated.
- Eleven hotels were purchased for approximately $198.4 million, and a company-developed SpringHill Suites in Alexandria, Virginia opened in March 2011.
Outlook, risks and unusual items
- Management forecast a mid-single-digit increase in 2012 revenue for comparable hotels, while noting that revenue and operating income were not expected to reach pre-recession levels. It anticipated approximately $20 million of capital expenditures in 2012.
- The company expected cash on hand and operating cash flow to meet anticipated needs, but identified proceeds from the proposed sale of the 110 parcels as a key liquidity source. The $198.4 million sale was under contract, targeted for the first or second quarter of 2012, and was not assured. The parcels generated $21.4 million rental revenue and $19.8 million income from discontinued operations in 2011.
- A Nashville Home2 Suites acquisition for $15.4 million remained conditional at year-end; $1.4 million of deposits had been made. A Richmond hotel development was also in planning and subject to approvals and other conditions.
- A consolidated securities class action was filed against the company and related parties, alleging securities-law and other claims and seeking damages and rescission. The company said it would defend the matter but could not estimate the likelihood or range of loss.
- Related-party arrangements include a 2% acquisition/disposition fee to ASRG, owned by the CEO, and advisory fees to A9A, also CEO-owned. ASRG fees were $4.0 million and advisory fees were $3.0 million in 2011; the filing cautions these transactions are not arm’s length.
- The 480,000 Series B preferred shares held by the CEO may convert upon specified events. The filing estimates that a conversion event at year-end could entail expense ranging from zero to more than $127.6 million and approximately 11.6 million common shares, based on an assumed $11 unit value.
- Units had no established public trading market. The company reported effective internal controls and received unqualified audit opinions on its financial statements and internal control over financial reporting.
Investor verification priorities
- Confirm the filing entity: this document identifies Apple REIT Nine, Inc., despite the request naming Apple Hospitality REIT, Inc.
- Track completion, final proceeds, and use of proceeds from the contracted $198.4 million parcel sale.
- Assess distribution sustainability against operating cash flow, capital needs, debt service, and the company’s reliance on reinvestment or other funding.
- Review the class-action case, related regulatory inquiries, and any subsequent updates to potential exposure.
- Evaluate related-party fees and potential Series B conversion dilution and expense.
- Review hotel results on a comparable-property basis, given the substantial acquisition-driven changes in portfolio size and reported revenue.