Business context and reporting period
This is Apple REIT Nine, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2013—not a filing under the name Apple Hospitality REIT, Inc. The company was a REIT operating 89 hotels with 11,371 rooms across 27 states. The filing reports one operating segment.
Financial performance and position
Amounts below are in millions, except per-share and hotel statistics.
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Revenue | $92.4 | $88.1; up 5% |
| Operating income | $19.5 | $18.2; up 7% |
| Operating margin | 21.1% | 20.6% |
| Income from continuing operations | $16.9 | $16.6 |
| Net income | $16.9 | $21.9, including $5.3 from discontinued operations |
| Basic and diluted EPS | $0.09 | $0.12 |
| Cash from operations | $23.3 | $20.6 |
| Capital improvements and development cash outflow | $3.3 | $4.7 |
| Cash and cash equivalents | $0.0 | $9.0 at Dec. 31, 2012 |
| Total debt carrying value | $172.4 | $166.8 at Dec. 31, 2012 |
| Total assets | $1,510.5 | $1,526.0 at Dec. 31, 2012 |
Room revenue was $84.3 million and other revenue $8.1 million. Hotel operating expenses were $52.4 million, or 57% of revenue, versus $49.5 million, or 56%, a year earlier. Occupancy was 71% versus 70%; ADR was $115 versus $112; RevPAR was $82 versus $78. Average market yield remained 124.
Material changes versus the prior comparable period
- Revenue, operating income, and continuing-operations income increased, with higher occupancy and room rates. Hotel count rose from 88 to 89.
- Net income and EPS declined because Q1 2012 included $5.3 million of income from the Texas land parcels, sold in April 2012; continuing-operations earnings were higher in Q1 2013.
- Net interest expense increased to $2.2 million from $1.4 million, reflecting existing mortgages and credit-facility borrowing. Depreciation increased to $13.5 million from $12.8 million.
- Operating cash flow increased, but distributions paid were $37.8 million, exceeding quarterly operating cash flow by about $14.5 million. The company reported financing cash outflow of $30.9 million and ended the quarter with no cash.
- General and administrative expense fell to $1.9 million from $2.6 million, including lower legal costs and no comparable consolidation-evaluation costs.
Liquidity, debt, outlook, and risks
- The company had $6.7 million drawn on its $50 million revolving facility at quarter-end, at an approximately 2.45% annual rate. The facility matures in November 2014, with a conditional extension option to November 2015; it may be increased to $100 million subject to conditions. The company reported compliance with its covenants.
- Management expects operating cash flow, note interest, and facility availability to meet anticipated needs, including debt service, capital spending, distributions, and planned redemptions. However, distributions were partly funded by facility borrowings and other financing sources. Management cautioned that maintaining the distribution rate is not assured.
- Management and the industry forecast a mid-single-digit percentage increase in 2013 revenue for comparable hotels and expect continued improvement in revenue and operating income. This is an outlook, not a guarantee; results are seasonal, and management noted economic and government-spending uncertainty.
- The company planned $20–$22 million of additional 2013 capital spending for existing hotels. A Richmond development of adjoining Courtyard and Residence Inn hotels was expected to begin in Q2 2013, cost about $30 million in total, and take up to two years. The seller could reacquire the land at the company’s cost if vertical construction did not begin by July 2013.
- Unit redemptions were constrained by requests exceeding authorized amounts: about 990,000 units were redeemed in January 2013, while approximately 11.1 million requested units remained unredeemed. The company planned redemptions of approximately 2% of weighted-average units during 2013.
- A putative class action was dismissed with prejudice in March 2013, but plaintiffs appealed in April. The company said it could not predict the outcome or estimate a possible loss. The SEC staff was conducting a non-public investigation into disclosures and certain transactions; the company said it could not predict its outcome or timing.
- Related-party arrangements include advisory and shared staffing costs with entities affiliated with the CEO. The filing says these transactions may not be at arm’s length. A possible $4.5 million headquarters and office-lease acquisition depended on another REIT’s merger closing.
- The company cited hotel competition, economic conditions, labor and healthcare costs, property-tax changes, interest-rate exposure, and natural-disaster/business-interruption risk. A 100-basis-point rate change was estimated to affect annual net income by about $67,000 based on quarter-end facility borrowings.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Apple REIT Nine, Inc., although the request names Apple Hospitality REIT, Inc.
- Review distribution sustainability against operating cash flow, facility availability, covenant limits, and the absence of quarter-end unrestricted cash.
- Track the class-action appeal and SEC investigation, including any subsequent developments or change in potential exposure.
- Verify hotel-level operating trends and whether 2013 comparable-hotel revenue achieves the stated mid-single-digit growth outlook.
- Assess the planned Richmond hotel development, its July 2013 construction deadline, projected cost, and funding requirements.
- Review redemption limits and the large backlog of unfulfilled shareholder requests, as well as the effect of dividend-reinvestment proceeds on liquidity and share count.