APLE

Business Context and Reporting Period

Company: Apple REIT Nine, Inc. (Apple Hospitality REIT, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: The Company is a Virginia corporation qualifying as a Real Estate Investment Trust (REIT) focused on investing in hotels and income-producing real estate. Operations commenced on July 31, 2008. As of June 30, 2009, the portfolio consisted of 27 hotels (3,081 rooms) and a significant land acquisition in Fort Worth, Texas, leased to Chesapeake Energy Corporation.

Key Financial Metrics

Hotel Operating Statistics (Six Months Ended June 30, 2009):
- Average Daily Rate (ADR): $111
- Occupancy: 66%
- Revenue Per Available Room (RevPAR): $73

Material Changes vs. Prior Period

• Revenue Growth: The Company reported $45.3 million in revenue for the six months ended June 30, 2009, compared to $0 in the same period in 2008. This increase is due to the commencement of operations in July 2008 and the acquisition of six additional hotels in the first half of 2009.
• Profitability: Net income increased from $274,000 in the first six months of 2008 to $7.9 million in 2009. The 2008 figure was primarily interest income as the Company held no properties for most of the period.
• Asset Base: Total assets grew from $431.6 million to $690.3 million, driven by the acquisition of six hotels ($84.2 million gross purchase price) and a major land purchase ($147 million) in Fort Worth, Texas.
• Accounting Changes: Adoption of SFAS 141R required the expensing of acquisition-related costs ($2.5 million for the six months ended June 30, 2009) rather than capitalizing them, impacting operating income.

Guidance, Outlook, and Risks

• Outlook: Management notes that while hotel performance has met expectations for the period owned, the significant decline in the U.S. economy has negatively impacted lodging demand. The Company expects revenue declines to continue until general economic conditions improve.
• Capital Formation: The Company is in an ongoing best-efforts offering of Units (Common + Series A Preferred) at $11.00 per Unit, with a target of $2 billion. As of June 30, 2009, gross proceeds totaled $727.1 million. The offering is scheduled to continue until April 25, 2010.
• Distributions: The Company intends to maintain an annualized dividend rate of $0.88 per common share. However, a portion of distributions is currently 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 revenues are highly sensitive to economic cycles and travel demand.
  • 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.
  • Series B Preferred Stock: 480,000 Series B shares held by the CEO are convertible into common stock upon specific events (e.g., listing on an exchange), potentially causing significant dilution (estimated expense up to $44.9 million based on current equity raised).
  • Acquisition Pipeline: The Company has contracts for 14 additional hotels ($267.4 million) under construction, but closing is not assured.

Investor Verification Checklist

• Offering Status: Verify the current status of the $2 billion best-efforts offering and the rate of capital deployment into income-producing assets.
• Distribution Sustainability: Confirm the ratio of distributions funded by operating cash flow versus offering proceeds to assess the "return of capital" classification risk.
• Related Party Fees: Review the 2% acquisition fee and advisory fees paid to entities owned by the Chairman/CEO to ensure alignment with market rates.
• Chesapeake Energy Lease: Validate the creditworthiness of Chesapeake Energy Corporation, the sole tenant for the $147 million land lease, which represents a significant portion of assets.
• Series B Conversion: Monitor for triggering events (such as an IPO or listing) that would activate the conversion of Series B preferred shares, potentially diluting common shareholders significantly.