Apple REIT Nine, Inc. (Apple Hospitality REIT) - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2010. Apple REIT Nine, Inc. (now Apple Hospitality REIT, Inc.) is a Virginia corporation operating as a Real Estate Investment Trust (REIT). The Company invests in hotels and income-producing real estate. As of the reporting date, the portfolio consisted of 54 hotels (6,761 rooms) and approximately 410 acres of land leased to Chesapeake Energy Corporation for natural gas production. The Company is in an active acquisition phase, having purchased 21 hotels during the first nine months of 2010.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenue | $49.1 million | $121.9 million |
| Net Income | $6.6 million | $15.7 million |
| Net Income Per Share (Basic/Diluted) | $0.05 | $0.13 |
| Operating Cash Flow | N/A | $30.9 million |
| Cash and Cash Equivalents | $411.5 million | $411.5 million |
| Total Debt (Notes Payable) | $85.9 million | $85.9 million |
| Total Assets | $1.55 billion | $1.55 billion |
Hotel Operating Statistics (Nine Months Ended Sep 30, 2010):
- Occupancy: 67%
- Average Daily Rate (ADR): $103
- Revenue Per Available Room (RevPAR): $69
Material Changes vs. Prior Period
Comparing the nine months ended September 30, 2010, to the same period in 2009:
- Revenue Growth: Total revenue increased by 66% (from $73.4 million to $121.9 million), driven primarily by the acquisition of 21 new hotels and the expansion of the portfolio from 33 to 54 properties.
- Profitability: Net income increased by 38% (from $11.4 million to $15.7 million).
- Acquisition Activity: The Company spent approximately $376.5 million on hotel acquisitions (net of debt assumed) and $10.1 million on acquisition-related costs during the period.
- Debt Assumption: The Company assumed approximately $28.8 million in debt related to three hotel acquisitions in the first nine months of 2010, increasing total notes payable from $58.7 million to $85.9 million.
- Capitalization: The Company raised approximately $602.6 million in net proceeds from the issuance of common shares during the nine-month period.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Industry Trends: Management notes that while the U.S. economy remains weak, the hotel industry is showing improvements in occupancy and RevPAR. Analysts forecast single-digit revenue increases for 2010 and mid-single-digit increases for 2011.
- Performance: The Company's RevPAR index was 130 for the first nine months of 2010, indicating performance significantly above the market average.
- Capital Strategy: The Company continues its best-efforts offering of Units (extended to April 25, 2011) to fund acquisitions. As of September 30, 2010, approximately $1.6 billion in net proceeds had been raised.
Risks and Contingencies:
- Related Party Transactions: Significant fees are paid to affiliates of the Chairman/CEO (Apple Suites Realty Group and Apple Nine Advisors) for acquisition and advisory services. Acquisition-related costs included $8.2 million in brokerage commissions to an affiliate.
- Series B Preferred Stock: The CEO holds 480,000 Series B convertible preferred shares. Upon conversion (triggered by events like an IPO or sale of assets), these could result in significant dilution and a potential expense ranging from $0 to over $127 million.
- Acquisition Pipeline: The Company has contracts for 25 additional hotels ($416.9 million) and 8 subsequent contracts ($125 million), but closings are subject to conditions and are not guaranteed.
- Distribution Funding: A portion of distributions to shareholders has been funded by offering proceeds rather than operating cash flow, which may be treated as a return of capital for tax purposes.
Investor Verification Checklist
- Related Party Fees: Verify the magnitude of fees paid to Apple Suites Realty Group (ASRG) and Apple Nine Advisors (A9A), which are owned by the CEO, and assess their impact on net income.
- Series B Conversion Risk: Review the terms of the Series B convertible preferred stock held by the CEO to understand potential dilution and expense recognition upon a triggering event.
- Acquisition Pipeline Viability: Assess the likelihood of closing the 33 pending hotel contracts ($541.9 million total) given the "no assurance" language regarding conditions to closing.
- Distribution Sustainability: Confirm the extent to which current distributions are funded by operating cash flow versus capital raised from the ongoing offering.
- Chesapeake Lease Concentration: Note that the ground lease with Chesapeake Energy represents approximately 10% of total assets; monitor the financial health of this single significant tenant.