Apple REIT Nine, Inc. - 10-Q Summary (Period Ended September 30, 2009)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, for Apple REIT Nine, Inc. (Apple REIT Nine). The Company is a Virginia corporation electing to be treated as a Real Estate Investment Trust (REIT). It operates two segments: hotel investments and a ground lease on land used for natural gas production. As of the reporting date, the Company owned 33 hotels with 3,900 rooms and 417 acres of land leased to a subsidiary of Chesapeake Energy Corporation. The Company is in a capital formation phase, conducting a best-efforts offering of Units (common and preferred stock) to fund acquisitions.
Key Financial Metrics
| Metric | Nine Months Ended Sept 30, 2009 | Three Months Ended Sept 30, 2009 |
|---|---|---|
| Total Revenue | $73.4 million | $28.1 million |
| Net Income | $12.6 million | $4.7 million |
| Operating Cash Flow | $20.0 million | Filing text does not provide a clear value for the three-month period |
| Net Cash Used in Investing | ($333.9 million) | Filing text does not provide a clear value for the three-month period |
| Net Cash Provided by Financing | $353.6 million | Filing text does not provide a clear value for the three-month period |
| Cash and Equivalents (End of Period) | $114.9 million | $114.9 million |
| Total Debt (Notes Payable) | $59.0 million | $59.0 million |
| Hotel Operating Expenses / Revenue | 60% (Nine Months) | 63% (Three Months) |
| Hotel Occupancy | 64% (Nine Months) | 62% (Three Months) |
| RevPAR | $68 (Nine Months) | $62 (Three Months) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue for the nine months ended September 30, 2009, was $73.4 million, a significant increase from $0.7 million in the same period in 2008. This growth is driven by the acquisition of 12 hotels in 2009 and the commencement of the ground lease with Chesapeake Energy in April 2009.
- Profitability: Net income increased to $12.6 million for the nine months ended September 30, 2009, compared to $1.3 million in the prior year period. Operating income turned positive ($13.5 million) from a loss of $0.6 million in the prior year.
- Asset Base: Total assets grew from $431.6 million at December 31, 2008, to $822.3 million at September 30, 2009, primarily due to real estate acquisitions funded by equity offerings.
- Accounting Changes: The adoption of new accounting standards for business combinations (effective Jan 1, 2009) required the expensing of acquisition-related costs (e.g., legal, brokerage fees) rather than capitalizing them. This resulted in $4.9 million of acquisition-related costs being expensed in the nine months ended September 30, 2009.
Guidance, Outlook, and Risks
- Outlook: Management notes that the significant decline in the U.S. economy has negatively impacted hotel performance, with occupancy and RevPAR declining. They expect revenue declines to continue until general economic conditions improve.
- Capital Formation: The Company is continuing its best-efforts offering of Units at $11.00 per Unit until April 25, 2010. Proceeds are used to fund acquisitions and pay distributions.
- Distributions: The Company intends to maintain an annualized dividend rate of $0.88 per common share. However, a portion of distributions may be funded by offering proceeds (treated as a return of capital) until the capital is fully invested in income-producing properties.
- Risks:
- Economic Conditions: Continued recessionary pressures may further reduce hotel demand.
- Related Parties: Significant transactions exist with entities owned by the Chairman/CEO (Apple Suites Realty Group and Apple Nine Advisors), including acquisition commissions and advisory fees.
- Convertible Preferred Stock: The CEO holds Series B convertible preferred stock. Upon conversion (triggered by events like an IPO or sale of assets), this could result in significant dilution and a potential expense ranging from $0 to over $127 million.
- Acquisition Uncertainty: The Company has contracts for eight additional hotels ($162.3 million) under construction, but closing is not assured.
Key Facts for Investor Verification
- Capital Deployment: Verify the pace of the ongoing equity offering and the ability to deploy the $114.9 million cash balance into income-producing assets to sustain the $0.88 annualized dividend rate.
- Related Party Fees: Review the 2% acquisition commission paid to Apple Suites Realty Group (owned by the CEO) and the advisory fees paid to Apple Nine Advisors, totaling approximately $13.6 million and $1.5 million respectively since inception.
- Chesapeake Lease: Confirm the financial stability of the single tenant (Chesapeake Energy Corporation) which accounts for nearly 20% of total assets and provides significant rental revenue ($10.5 million for the nine months).
- Series B Conversion: Assess the potential dilution and expense impact if the Series B convertible preferred stock held by the CEO is converted, particularly if the Company lists on a securities exchange.
- Hotel Performance: Monitor occupancy and RevPAR trends against industry averages, given the Company's expectation of continued revenue declines due to the economic recession.