APLE

Apple REIT Nine, Inc. - Q1 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010. Apple REIT Nine, Inc. (the "Company") is a Virginia corporation organized 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 38 hotels (4,465 rooms) across 15 states and approximately 410 acres of land in Fort Worth, Texas, leased to Chesapeake Energy Corporation for natural gas production. The Company is in an active growth phase, funded primarily by an ongoing best-efforts offering of Units.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 70% year-over-year, driven by the acquisition of 15 new hotels since March 2009 and the addition of rental revenue from the Chesapeake Energy ground lease ($5.3 million in Q1 2010 vs. $0 in Q1 2009).
• Acquisition Activity: The Company acquired five hotels in Q1 2010 for a gross purchase price of $90.9 million. This contrasts with Q1 2009, which saw no hotel acquisitions.
• Operating Performance: While revenue grew, hotel operating metrics declined due to the broader economic recession and the inclusion of newly constructed hotels that require time to ramp up. Average Daily Rate (ADR) fell from $114 to $102, and occupancy dropped from 64% to 61%.
• Liquidity: Cash balances increased significantly to $319.8 million, supported by $162.8 million in net proceeds from the issuance of common shares during the quarter.

Outlook, Risks, and Management Commentary

• Guidance and Outlook: Management notes that while economic conditions appear to be stabilizing, demand remains below pre-recession levels. Industry analysts forecast flat RevPAR for 2010 compared to 2009. The Company expects to continue acquiring properties to deploy capital raised from its offering.
• Capital Deployment: The Company has outstanding contracts for 14 additional hotels totaling $254.1 million. Four are under construction, and ten are expected to close within six months, though closing is not guaranteed.
• Distribution Policy: The Company maintains an annualized dividend rate of $0.88 per common share. A portion of distributions continues to be funded by offering proceeds rather than operating cash flow, which may be treated as a return of capital for tax purposes.
• Risks:
  • Economic Sensitivity: Hotel performance is heavily dependent on general economic conditions and travel demand.
  • Related Party Transactions: Significant fees are paid to affiliates of the CEO (Apple Nine Advisors and Apple Suites Realty Group) for advisory and brokerage services.
  • 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 recognition of up to $76.7 million based on current equity raised.

Investor Verification Checklist

• Offering Status: Verify the remaining capacity of the best-efforts offering (67 million Units unsold as of March 31, 2010) and the timeline for capital deployment.
• Acquisition Pipeline: Confirm the status of the 14 hotels under contract ($254.1 million) and the likelihood of closing, given the conditions precedent.
• Related Party Fees: Review the impact of the 2% brokerage fee paid to the CEO's affiliate (ASRG) on acquisition costs and the advisory fees paid to Apple Nine Advisors.
• Dilution Risk: Assess the potential impact of the Series B convertible preferred stock held by the CEO on future earnings per share and equity ownership.
• Operating Metrics: Monitor the ramp-up period for the 12 newly constructed hotels acquired in 2009 and the 5 acquired in 2010, as their current performance is below market averages.