Business context and reporting period
The supplied filing is Apple REIT Nine, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed March 7, 2013. This differs from the requested company name, Apple Hospitality REIT, Inc.; verify the registrant before relying on this summary. The filing reports full-year results, with separate fourth-quarter data. Apple REIT Nine was a U.S. hotel REIT with 89 hotels, 11,371 rooms, and properties in 27 states at year-end. Its acquisition strategy was substantially complete; hotels were managed by third parties under brand management and franchise agreements.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $365.6 million | $320.5 million |
| Operating income | $75.4 million | $54.5 million |
| Income from continuing operations | $68.7 million | $50.2 million |
| Net income | $75.5 million | $70.0 million |
| Net income per common share | $0.41 | $0.38 |
| Operating cash flow | $123.0 million | $116.0 million |
| Cash and cash equivalents at year-end | $9.0 million | $30.7 million |
| Notes payable at year-end | $166.8 million carrying value | $124.1 million |
| Shareholders’ equity | $1,346.1 million | $1,563.6 million |
Operating margin was approximately 20.6%, versus 17.0% in 2011. Hotel operating expenses were 57% of revenue, compared with 58%. Comparable-hotel occupancy increased 3%, ADR rose 4%, and RevPAR increased 8%; portfolio-wide occupancy, ADR, and RevPAR were 72%, $111, and $80, respectively. Modified FFO was $131.0 million versus $118.9 million; the company cautions that FFO and MFFO are supplemental measures, not substitutes for GAAP results or cash flow.
Fourth-quarter 2012 revenue was $86.7 million, continuing-operations income was $13.1 million, and net income was $13.1 million, or $0.07 per share. Fourth-quarter 2011 figures were $78.4 million, $8.6 million, and $13.9 million, or $0.08 per share.
Material changes versus the prior comparable period
- Revenue rose 14% and operating income increased, reflecting improved hotel performance and a larger portfolio. Comparisons are affected by acquisitions and the timing of property ownership.
- Net income increased modestly, while continuing-operations income rose substantially. Income from discontinued operations fell to $6.8 million from $19.8 million after the sale of the Fort Worth parcels.
- The company sold 110 Fort Worth-area land parcels in April 2012 for $198.4 million: $138.4 million cash proceeds and a $60 million note receivable. The reported gain of approximately $33.4 million was deferred under the cost-recovery method; the balance sheet reported the note net at $22.4 million.
- Cash declined by $21.7 million. Investing activities provided $106.0 million, largely reflecting asset-sale proceeds, while financing activities used $250.6 million, including distributions and unit redemptions.
- Debt increased following $47.7 million of new hotel mortgages. The company repaid a separate $30 million non-revolving credit line during the third quarter and had no borrowings on its new $50 million revolving facility at year-end.
Outlook, risks, contingencies, and unusual items
- Management and the industry forecast a mid-single-digit percentage increase in comparable-hotel revenue for 2013. The company expected $20–$25 million of existing-hotel capital improvements and approximately $30 million in total development spending for adjoining Richmond Courtyard and Residence Inn hotels; construction was expected to begin in early 2013.
- The annualized regular distribution rate was reduced from $0.88 to $0.83 per share in June 2012, then adjusted to $0.83025 in August. The company paid $155.0 million in regular 2012 distributions and a separate $136.1 million special distribution ($0.75 per Unit). Management stated that distributions are discretionary beyond REIT requirements and may be reduced; some past distributions were funded from offering proceeds or borrowings.
- Redemption requests substantially exceeded completed redemptions: about 10.2 million Units remained unredeemed after the October 2012 redemption. The company planned to redeem approximately 2% of weighted-average Units in 2013. Units had no established public trading market; the $10.25 DRIP/redemption reference price was not based on an appraisal.
- The $60 million note bears stated interest of 10.5%, is secured by a junior lien, and has a long-dated maturity in 2049. Interest and principal collection depend on the purchaser’s financing and repayment of its senior loan; the company warns it may not recover all amounts if the purchaser or senior lender defaults.
- The unsecured revolving facility matures in November 2014, with a conditional one-year extension. It carries financial and distribution restrictions; the company reported covenant compliance at year-end. The filing lists $57.3 million of principal maturities in 2015.
- The company faces a consolidated securities class-action lawsuit and a non-public SEC staff investigation concerning historical disclosures and certain transactions. It could not estimate possible litigation losses or predict the investigation’s outcome. Legal costs allocated to the company were approximately $1.7 million in 2012, and management anticipated continued significant legal costs at least into the first half of 2013.
- Significant related-party arrangements include acquisition/disposition commissions and advisory services involving entities owned by CEO Glade M. Knight. The filing acknowledges that these transactions are not necessarily at arm’s length and that shared staffing costs are allocated using good-faith estimates rather than formal time records.
- The company reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified audit opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Confirm the filing’s registrant identity: this document is for Apple REIT Nine, Inc., not Apple Hospitality REIT, Inc.
- Review the collection terms, collateral priority, deferred accounting, and credit risk of the $60 million Fort Worth note receivable.
- Assess distribution coverage against operating cash flow, capital spending, debt service, and redemption demands; distinguish regular distributions from the special distribution.
- Check upcoming mortgage maturities, revolving-credit covenants, and the company’s capacity to refinance or extend debt.
- Track the securities litigation, SEC investigation, related-party transactions, and any resulting costs, rulings, or disclosures.
- Interpret reported growth in light of portfolio changes and compare comparable-hotel results with the company’s 2013 outlook.