Although ADR decreased during the first nine months of 2010 as compared to the same period in 2009; both occupancy and RevPAR increased during this same period. The decline in ADR during the first nine months of 2010 as compared to the same period in 2009 is due to several factors. General economic conditions in the United States have caused industry declines in certain markets. In addition, of the 21 hotels acquired by the Company since September 30, 2009, seven were newly constructed. Generally, newly constructed hotels require 12-24 months to establish themselves in their respective markets. Therefore, revenue is below anticipated or market levels for this period of time.
Although the industry in general has revenue below pre-recession levels, the industry and the Company have begun to experience improvements in its hotel occupancy levels, as reflected in the overall increase of the Company’s occupancy during the third quarter as compared to prior year. With the continued increase in occupancy, the Company has also seen a stabilization in ADR as compared to prior years, with ADR increasing in the third quarter by approximately 4%. Additionally, the Company’s hotels continue to be leaders in RevPAR in their respective markets. The Company’s average RevPAR index was 130 for the first nine months of 2010 (the index excludes hotels under renovation or open less than two years). The RevPAR index is a measure of each hotel’s RevPAR compared to the average in the market, with 100 being the average, and is provided by Smith Travel Research, Inc.®, an independent company that tracks historical hotel performance in most markets throughout the world. Although it is not possible to predict general economic conditions or their impact on the hotel industry, many industry analysts are forecasting single digit percentage increases in RevPAR for 2010 as compared to 2009 for hotels established in their market. For 2011, industry analysts are forecasting a mid-single digit percentage increase in revenue as compared to 2010. The Company will continue to pursue market opportunities to improve revenue.
Hotel operating expenses relate to the 54 hotels acquired through September 30, 2010 for their respective periods owned and consist of direct room expenses, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. For the three months ended September 30, 2010 and 2009, hotel operating expenses totaled $26.1 million or 60% of hotel revenue and $14.3 million or 63% of hotel revenue. For the nine months ended September 30, 2010 and 2009, hotel operating expenses totaled $63.8 million or 60% of hotel revenue and $37.8 million or 60% of hotel revenue. Nine of the 12 hotels acquired in 2009 and seven (including a full service Marriott hotel) of the 21 hotels acquired in 2010 are new hotels and as a result, hotel operating expenses as a percentage of hotel revenue for these hotels are higher than is expected once the properties have established themselves within their respective markets. In addition, operating expenses were impacted by several hotel renovations, with approximately 11,700 room nights out of service during the first nine months of 2010 due to such renovations. While weakened economic conditions persist, the Company will continue to work with its management companies to reduce costs as aggressively as possible, however it is not anticipated that these reductions will offset any future revenue declines.
Taxes, insurance, and other expense for the three months ended September 30, 2010 and 2009 totaled $2.2 million or 5% of hotel revenue and $1.5 million or 6% of hotel revenue. For the nine months ended September 30, 2010 and 2009, taxes, insurance, and other expense totaled $6.6 million or 6% of hotel revenue and $4.5 million or 7% of hotel revenue.
The Company generates rental revenue from its purchase and leaseback transaction completed during the second quarter of 2009. In April 2009, the Company purchased 417 acres of land located on 113 sites in the Ft. Worth, Texas area and simultaneously entered into a long-term, triple net lease with Chesapeake, one of the nation’s largest producers of natural gas. In February 2010, the Company agreed to sell back to Chesapeake two of the 113 sites originally purchased and release Chesapeake from their associated lease obligations. Rental payments are fixed and have determinable rent increases during the initial lease term. The lease is classified as an operating lease and rental income is recognized on a straight line basis over the initial term of the lease. Rental income for the three months ended September 30, 2010 and 2009 was $5.3 million and $5.4 million, respectively and includes $1.5 and $1.6 million of adjustments to record rent on the straight line basis. Rental income for the nine months ended September 30, 2010 and 2009 was $16.0 million and $10.5 million, respectively and includes $4.6 million and $3.0 million of adjustments to record rent on the straight line basis.
Other Expenses
General and administrative expense for the three months ended September 30, 2010 and 2009 was $1.4 million and $937,000. For the nine months ended September 30, 2010 and 2009, general and administrative expenses were $4.5 million and $2.8 million. The principal components of general and administrative expense are advisory fees, legal fees, accounting fees, the Company’s share of the loss in its investment in Apple Air Holding, LLC, and reporting expenses. The increases as compared to 2009 are due to the growth of the Company. It is anticipated that after the Company completes its acquisition phase that general and administrative expenses will be more consistent on an annual basis.
Acquisition related costs for the three months ended September 30, 2010 and 2009 were $4.6 million and $2.4 million, and $10.1 million and $4.9 million for the nine months ended September 30, 2010 and 2009. In accordance with the Accounting Standards Codification on business combinations, the Company has expensed as incurred all transaction costs associated with the acquisitions of existing businesses that occurred on or after January 1, 2009, including title, legal, accounting and other related costs, as well as the brokerage commission paid to Apple Suites Realty Group, Inc. (“ASRG”), owned 100% by Glade M. Knight, Chairman and Chief Executive Officer of the Company. For acquisitions that occurred prior to January 1, 2009, these costs were capitalized as part of the cost of the acquisition.
Depreciation expense for the three months ended September 30, 2010 and 2009 was $7.9 million and $4.6 million, and $20.5 million and $11.0 million for the nine months ended September 30, 2010 and 2009. Depreciation expense primarily represents expense of the Company’s 54 hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for their respective periods owned. Also, included in depreciation expense for the three and nine months ended September 30, 2010 and 2009 is the depreciation of the Company’s land improvements (acquired in April 2009) located on 111 sites in Fort Worth, Texas which is leased to one of the nation’s largest producers of natural gas.
Interest expense for the three months ended September 30, 2010 and 2009 was $788,000 and $550,000, and is net of approximately $103,000 and $158,000 of interest capitalized associated with renovation and construction projects. Interest expense for the nine months ended September 30, 2010 and 2009 was $1.9 million and $1.8 million, and is net of approximately $419,000 and $218,000 of interest capitalized associated with renovation and construction projects. Interest expense primarily arose from debt assumed with the acquisition of ten of the Company’s hotels (four loan assumptions during 2008, three in 2009, and three in 2010). During the three months ended September 30, 2010 and 2009, the Company also recognized $525,000 and $248,000 in interest income, and $1.4 million and $836,000 for the nine months ended September 30, 2010 and 2009, representing interest on excess cash invested in short-term money market instruments and certificates of deposit.
Related Parties
The Company has significant transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different than if conducted with non-related parties.
The Company has a contract with ASRG, to acquire and dispose of real estate assets for the Company. A fee of 2% of the gross purchase price or gross sale price in addition to certain reimbursable expenses is paid to ASRG for these services. As of September 30, 2010, payments to ASRG for services under the terms of this contract have totaled approximately $21.7 million since inception.
26
The Company is party to an advisory agreement with Apple Nine Advisors, Inc. (“A9A”) to provide management services to the Company. An annual fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable for these services. A9A has entered into an agreement with Apple REIT Six, Inc. (“AR6”) to provide certain management services to the Company. The Company will reimburse A9A for the cost of the services provided by AR6. A9A will in turn reimburse AR6. Total advisory fees and reimbursable expenses incurred by the Company under the advisory agreement are included in general and administrative expenses and totaled approximately $2.5 million and $1.5 million for the nine months ended September 30, 2010 and 2009. Of this total expense, approximately $1.0 million and $481,000 were fees paid to A9A and $1.5 million and $1.0 million were expenses reimbursed by A9A to AR6 for the nine months ended September 30, 2010 and 2009.
ASRG and A9A are 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company.
Mr. Knight is also Chairman and Chief Executive Officer of AR6, Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Ten, Inc. ( a newly formed REIT). Members of the Company’s Board of Directors are also on the Board of Directors of AR6, Apple REIT Seven, Inc. and Apple REIT Eight, Inc.
Series B Convertible Preferred Stock
The Company has issued 480,000 Series B convertible preferred shares to Glade M. Knight, Chairman and Chief Executive Officer of the Company, in exchange for the payment by him of $0.10 per Series B convertible preferred share, or an aggregate of $48,000. The Series B convertible preferred shares are convertible into common shares pursuant to the formula and on the terms and conditions set forth below.
There are no distributions payable on the Series B convertible preferred shares. Holders of more than two-thirds of the Series B convertible preferred shares must approve any proposed amendment to the articles of incorporation that would adversely affect the Series B convertible preferred shares.
Upon the Company’s liquidation, the holder of the Series B convertible preferred shares is entitled to a priority liquidation payment before any distribution of liquidation proceeds to the holders of the common shares. However, the priority liquidation payment of the holder of the Series B convertible preferred shares is junior to the holders of the Series A preferred shares distribution rights. The holder of a Series B convertible preferred share is entitled to a liquidation payment of $11 per number of common shares each Series B convertible preferred share would be convertible into according to the formula described below. In the event that the liquidation of the Company’s assets results in proceeds that exceed the distribution rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed between the common shares and the Series B convertible preferred shares, on an as converted basis.
Each holder of outstanding Series B convertible preferred shares shall have the right to convert any of such shares into common shares of the Company upon and for 180 days following the occurrence of any of the following events:
| |
| (1) substantially all of the Company’s assets, stock or business is sold or transferred through exchange, merger, consolidation, lease, share exchange, sale or otherwise, other than a sale of assets in liquidation, dissolution or winding up of the Company; |
| |
| (2) the termination or expiration without renewal of the advisory agreement with A9A, or if the Company ceases to use ASRG to provide property acquisition and disposition services; or |
| |
| (3) the Company’s common shares are listed on any securities exchange or quotation system or in any established market. |
Upon the occurrence of any conversion event, each Series B convertible preferred share may be converted into a number of common shares based upon the gross proceeds raised through the date of conversion in the Company’s $2 billion offering according to the following table:
27
| | | | | | |
Gross Proceeds Raised from Sales of
Units through Date of Conversion | | Number of Common Shares
through Conversion of
One Series B Convertible Preferred Share | |
| |
| |
| $ | 1.7 billion | | | 20.55400 | |
| $ | 1.8 billion | | | 21.75968 | |
| $ | 1.9 billion | | | 22.96537 | |
| $ | 2 billion | | | 24.17104 | |
| | | | | | |
In the event that after raising gross proceeds of $2 billion, the Company raises additional gross proceeds in a subsequent public offering, each Series B convertible preferred share may be converted into an additional number of common shares based on the additional gross proceeds raised through the date of conversion in a subsequent public offering according to the following formula: (X/100 million) x 1.20568, where X is the additional gross proceeds rounded down to the nearest 100 million.
No additional consideration is due upon the conversion of the Series B convertible preferred shares. The conversion into common shares of the Series B convertible preferred shares will result in dilution of the shareholders’ interests.
Expense related to the issuance of 480,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B shares to common shares occurs. The expense will be measured as the difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares. Although the fair market value cannot be determined at this time, expense if the maximum offering is achieved could range from $0 to in excess of $127 million (assumes $11 per unit fair market value). Based on equity raised through September 30, 2010, if a triggering event had occurred, expense would have ranged from $0 to $109 million (assumes $11 per unit fair market value) and approximately 9.9 million common shares would have been issued.
Liquidity and Capital Resources
The Company was initially capitalized on November 9, 2007, with its first investor closing on May 14, 2008. The Company’s principal source of liquidity is cash on hand, the proceeds of its on-going best-efforts offering and the cash flow generated from properties the Company has or will acquire and any short term investments. In addition, the Company may borrow funds, subject to the approval of the Company’s Board of Directors.
The Company anticipates that cash flow, and cash on hand, will be adequate to cover its operating expenses and to permit the Company to meet its anticipated liquidity requirements, including debt service, capital improvements and anticipated distributions to shareholders. The Company intends to use the proceeds from the Company’s on-going best-efforts offering, and cash on hand, to purchase income producing real estate.
The Company is raising capital through a best-efforts offering of Units (each Unit consists of one common share and one Series A preferred share) by David Lerner Associates, Inc., the managing dealer, which receives selling commissions and a marketing expense allowance based on proceeds of the Units sold. The minimum offering of 9,523,810 Units at $10.50 per Unit was sold as of May 14, 2008, with proceeds net of commissions and marketing expenses totaling $90 million. Subsequent to the minimum offering and through September 30, 2010, an additional 150.2 million Units, at $11 per Unit, were sold, with the Company receiving proceeds, net of commissions, marketing expenses and other offering costs of approximately $1.5 billion. On April 25, 2010, the offering was extended for one additional year. The offering expires on April 25, 2011, provided that the offering will be terminated if all of the Units are sold before then. As of September 30, 2010, 22,573,725 Units remained unsold.
28
To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions during the first nine months of 2010 totaled approximately $81.0 million of which approximately $49.8 million was used to purchase additional Units under the Company’s best-efforts offering. Thus the net cash distributions were $31.2 million. The distributions were paid at a monthly rate of $0.073334 per common share. For the same period the Company’s net cash generated from operations was approximately $30.9 million. During the initial phase of the Company’s operations, the Company may, due to the inherent delay between raising capital and investing that same capital in income producing real estate, have a portion of its distributions funded from offering proceeds. The portion of the distributions funded from offering proceeds is expected to be treated as a return of capital for federal income tax purposes. In May 2008, the Company’s Board of Directors established a policy for an annualized distribution rate of $0.88 per common share, payable in monthly distributions. The Company intends to continue paying distributions on a monthly basis, consistent with the annualized distribution rate established by its Board of Directors. The Company’s Board of Directors, upon the recommendation of the Audit Committee, may amend or establish a new annualized distribution rate and may change the timing of when distributions are paid. The Company’s objective in setting a distribution rate is to project a rate that will provide consistency over the life of the Company taking into account acquisitions and capital improvements, ramp up of new properties and varying economic cycles. To meet this objective, the Company may require the use of debt or offering proceeds in addition to cash from operations. Since a portion of distributions has to date been funded with proceeds from the offering of Units, the Company’s ability to maintain its current intended rate of distribution will be based on its ability to fully invest its offering proceeds and thereby increase its cash generated from operations. As there can be no assurance of the Company’s ability to acquire properties that provide income at this level, or that the properties already acquired will provide income at this level, there can be no assurance as to the classification or duration of distributions at the current rate. Proceeds of the offering which are distributed are not available for investment in properties.
The Company has a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned for less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. The maximum number of Units that may be redeemed in any given year will be three percent of the weighted average number of Units outstanding during the 12-month period immediately prior to the date of redemption. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. During the nine months ended September 30, 2010 and 2009, the Company redeemed 519,557 Units and 120,353 Units in the amount of $5.4 million and $1.3 million under the program.
The Company has on-going capital commitments to fund its capital improvements. The Company is required, under all of the hotel management agreements and certain loan agreements, to make available, for the repair, replacement, refurbishing of furniture, fixtures, and equipment, a percentage of gross revenues provided that such amount may be used for the Company’s capital expenditures with respect to the hotels. As of September 30, 2010, the Company held with various lenders $5.5 million in reserves for capital expenditures. As of September 30, 2010, the Company had four major renovations scheduled to be completed within the next six months. For the first nine months of 2010, the Company spent approximately $10.0 million on capital expenditures and anticipates an additional $3-$5 million for the remainder of the year. Additionally, the Company is in the process of constructing a SpringHill Suites hotel in Alexandria, Virginia which is expected to be completed over the next six months. To date the Company has incurred approximately $7.5 million in construction costs and anticipates the total construction costs to be approximately $20-$25 million.
As of September 30, 2010, the Company had outstanding contracts for the potential purchase of 25 additional hotels for a total purchase price of $416.9 million. Of these 25 hotels, six are under construction and should be completed over the next 24 months. The other 19 hotels are expected to close within the next six months. Although the Company is working towards acquiring these hotels, there are many conditions to closing that have not yet been satisfied and there can be no assurance that closings will occur under the outstanding purchase contracts. The following table summarizes the location, brand, number of rooms, refundable (if the seller does not meet its obligations under the contract) contract deposits paid, and gross purchase price for each of the contracts. All dollar amounts are in thousands.
29
| | | | | | | | | | | | | | | |
Location | | | Brand | | | Rooms | | Deposits
Paid | | Gross Purchase
Price | | | |
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|
|
|
|
|
|
|
|
|
| | | |
Holly Springs, NC | | | Hampton Inn | | | 124 | | $ | 100 | | $ | 14,880 | | (a) | |
Jacksonville, NC | | | Fairfield Inn & Suites | | | 79 | | | 125 | | | 7,800 | | | |
Santa Ana, CA | | | Courtyard | | | 155 | | | 6,200 | | | 24,800 | | (a) | |
Lafayette, LA | | | SpringHill Suites | | | 103 | | | 3 | | | 10,232 | | (a)/(b) | |
Irving, TX | | | Homewood Suites | | | 77 | | | 200 | | | 10,250 | | (c) | |
Tucson, AZ | | | TownePlace Suites | | | 124 | | | 10 | | | 15,852 | | (a)/(b) | |
El Paso, TX | | | Hilton Garden Inn | | | 145 | | | 10 | | | 19,974 | | (a)/(b) | |
Nashville, TN | | | Home2 by Hilton | | | 110 | | | 50 | | | 15,400 | | (a) | |
Andover, MA | | | SpringHill Suites | | | 136 | | | 250 | | | 6,500 | | | |
Indianapolis, IN | | | SpringHill Suites | | | 130 | | | 300 | | | 12,800 | | | |
Mishawaka, IN | | | Residence Inn | | | 106 | | | 300 | | | 13,700 | | | |
Phoenix, AZ | | | Courtyard | | | 164 | | | 300 | | | 16,000 | | | |
Phoenix, AZ | | | Residence Inn | | | 129 | | | 300 | | | 14,000 | | | |
Mettawa, IL | | | Residence Inn | | | 130 | | | 300 | | | 23,500 | | | |
Mettawa, IL | | | Hilton Garden Inn | | | 170 | | | 300 | | | 30,500 | | | |
Austin, TX | | | Hilton Garden Inn | | | 117 | | | 300 | | | 16,000 | | | |
Novi, MI | | | Hilton Garden Inn | | | 148 | | | 300 | | | 16,200 | | | |
Warrenville, IL | | | Hilton Garden Inn | | | 135 | | | 300 | | | 22,000 | | | |
Schaumburg, IL | | | Hilton Garden Inn | | | 166 | | | 300 | | | 20,500 | | | |
Salt Lake City, UT | | | SpringHill Suites | | | 143 | | | 300 | | | 17,500 | | | |
Austin, TX | | | Fairfield Inn & Suites | | | 150 | | | 300 | | | 17,750 | | | |
Austin, TX | | | Courtyard | | | 145 | | | 300 | | | 20,000 | | | |
Chandler, AZ | | | Courtyard | | | 150 | | | 300 | | | 17,000 | | | |
Chandler, AZ | | | Fairfield Inn & Suites | | | 110 | | | 300 | | | 12,000 | | | |
Tampa, FL | | | Embassy Suites | | | 147 | | | 300 | | | 21,800 | | | |
| | | | |
|
|
|
|
|
|
|
| | | |
| | | | | | 3,293 | | $ | 11,748 | | $ | 416,938 | | | |
| | | | |
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|
|
|
| | | |
| | |
| |
(a) | The hotels are currently under construction. The table shows the expected number of rooms upon hotel completion and the expected franchise. |
(b) | If the seller meets all of the conditions to closing, the Company is obligated to specifically perform under the contract. As the properties are under construction, at this time, the seller has not met all of the conditions to closing. |
(c) | Purchase contract for this hotel requires the Company to assume approximately $6.1 million in mortgage debt. The loan provides for monthly payments of principal and interest on an amortized basis. |
As there can be no assurance that all conditions to closing will be satisfied, the Company includes deposits paid for hotels under contract in other assets, net in the Company’s consolidated balance sheets, and in deposits and other disbursements for potential acquisitions in the Company’s consolidated statements of cash flows. It is anticipated that the purchase price (less any debt assumed) for the outstanding contracts will be funded from the proceeds of the Company’s on-going best-efforts offering of Units and cash on hand if a closing occurs.
On October 14, 2009, the Company entered into a ground lease for approximately one acre of land located in downtown Richmond, Virginia. The lease terminates on December 31, 2098, subject to the Company’s right to exercise two renewal periods of ten years each. The Company intends to use the land to build two nationally recognized brand hotels. Under the terms of the lease the Company has a “Study Period” to determine the viability of the hotels. The Company can terminate the lease for any reason during the Study Period, which originally ended in April 2010, and was extended to April 2011. After the Study Period, the lease continues to be subject to various conditions, including but not limited to obtaining various permits, licenses, zoning variances and franchise approvals. If any of these conditions are not met the Company has the right to terminate the lease at any time. Rent payments are not required until the Company decides to begin construction on the hotels. Annual rent under the lease is $300,000 with adjustments throughout the lease term based on the Consumer Price Index. As there are many conditions to beginning construction on the hotels, there are no assurances that the Company will construct the hotels or continue the lease.
30
Impact of Inflation
Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the operators’ ability to raise room rates. Currently the Company is not experiencing any material impact from inflation.
Business Interruption
Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale. Although management believes there is adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company’s financial position or results of operations.
Seasonality
The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand to make distributions.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued a pronouncement (Accounting Standards Update No. 2009-17) which amends its guidance surrounding a company’s analysis to determine whether any of its variable interests constitute controlling financial interests in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. The new pronouncement also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and enhanced disclosure about an enterprise’s involvement with a variable interest entity. This pronouncement was adopted by the Company in the first quarter of 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Subsequent Events
In October 2010, the Company declared and paid approximately $11.7 million in distributions to its common shareholders, or $0.073334 per outstanding common share.
During October 2010, the Company closed on the issuance of 9.6 million Units through its ongoing best-efforts offering, representing gross proceeds to the Company of $105.3 million and proceeds net of selling and marketing costs of $94.8 million.
In October 2010, the Company redeemed 206,395 Units in the amount of $2.1 million under its Unit Redemption Program.
31
Subsequent to September 30, 2010, the Company entered into a series of contracts for the potential purchase of eight hotels. The following table summarizes the hotel information. All dollar amounts are in thousands.
| | | | | | | | | | | | | | | | |
Location | | | Brand | | | Date of
Purchase
Contract | | | Rooms | | Gross
Purchase
Price | | Initial
Refundable
Deposit | |
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Philadelphia (Malvern), PA (a) | | | Courtyard | | | 10/1/2010 | | | 127 | | $ | 21,000 | | $ | 500 | |
Philadelphia (Collegeville), PA | | | Courtyard | | | 10/1/2010 | | | 132 | | | 20,000 | | | 500 | |
Texarkana, TX (a) | | | Hampton Inn & Suites | | | 10/18/2010 | | | 81 | | | 9,100 | | | 100 | |
Arlington, TX | | | Hampton Inn & Suites | | | 10/18/2010 | | | 98 | | | 9,900 | | | 100 | |
Manassas, VA | | | Residence Inn | | | 11/1/2010 | | | 107 | | | 14,900 | | | 125 | |
Mount Laurel, NJ | | | Homewood Suties | | | 11/1/2010 | | | 118 | | | 15,000 | | | 125 | |
San Bernardino, CA | | | Residence Inn | | | 11/1/2010 | | | 95 | | | 13,600 | | | 125 | |
West Orange, NJ | | | Courtyard | | | 11/1/2010 | | | 131 | | | 21,500 | | | 125 | |
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| | | | | | | | | 889 | | $ | 125,000 | | $ | 1,700 | |
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(a) | Purchase contracts for these hotels require the Company to assume approximately $12.9 million in mortgage debt. Each of these loans provide for monthly payments of principal and interest on an amortized basis. |
Subsequent to September 30, 2010, the Company closed on the purchase of 16 hotels. The following table summarizes the hotel information. All dollar amounts are in thousands.
| | | | | | | | | | | | | |
Location | | | Brand | | Gross
Purchase
Price | | | Rooms | | | Date of
Purchase | |
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Indianapolis, IN | | | SpringHill Suites | | $ | 12,800 | | | 130 | | | 11/2/2010 | |
Mishawaka, IN | | | Residence Inn | | | 13,700 | | | 106 | | | 11/2/2010 | |
Phoenix, AZ | | | Courtyard | | | 16,000 | | | 164 | | | 11/2/2010 | |
Phoenix, AZ | | | Residence Inn | | | 14,000 | | | 129 | | | 11/2/2010 | |
Mettawa, IL | | | Residence Inn | | | 23,500 | | | 130 | | | 11/2/2010 | |
Mettawa, IL | | | Hilton Garden Inn | | | 30,500 | | | 170 | | | 11/2/2010 | |
Austin, TX | | | Hilton Garden Inn | | | 16,000 | | | 117 | | | 11/2/2010 | |
Novi, MI | | | Hilton Garden Inn | | | 16,200 | | | 148 | | | 11/2/2010 | |
Warrenville, IL | | | Hilton Garden Inn | | | 22,000 | | | 135 | | | 11/2/2010 | |
Schaumburg, IL | | | Hilton Garden Inn | | | 20,500 | | | 166 | | | 11/2/2010 | |
Salt Lake City, UT | | | SpringHill Suites | | | 17,500 | | | 143 | | | 11/2/2010 | |
Austin, TX | | | Fairfield Inn & Suites | | | 17,750 | | | 150 | | | 11/2/2010 | |
Austin, TX | | | Courtyard | | | 20,000 | | | 145 | | | 11/2/2010 | |
Chandler, AZ | | | Courtyard | | | 17,000 | | | 150 | | | 11/2/2010 | |
Chandler, AZ | | | Fairfield Inn & Suites | | | 12,000 | | | 110 | | | 11/2/2010 | |
Tampa, FL | | | Embassy Suites | | | 21,800 | | | 147 | | | 11/2/2010 | |
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| | | | | $ | 291,250 | | | 2,240 | | | | |
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|
| | | | |
On October 15, 2010, the Company purchased a mortgage note with an outstanding balance of approximately $11.3 million for a total purchase price of approximately $10.8 million from a third party. The interest rate on this mortgage is a variable rate based on the 3-month LIBOR, and as is currently 5.0%. The note requires monthly payments of principal and interest and matures on February 1, 2012. The borrower on the note is Apple Eight SPE Columbia, Inc., an indirect wholly owned subsidiary of Apple REIT Eight, Inc. and the note is secured by a Hilton Garden Inn hotel located in Columbia, South Carolina.
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of September 30, 2010, the Company’s financial instruments were not exposed to significant market risk due to interest rate risk, foreign currency exchange risk, commodity price risk or equity price risk. The Company will be exposed to changes in short term money market rates as it invests the proceeds from the sale of Units pending use in acquisitions and renovations. Based on the Company’s cash invested at September 30, 2010, of $411.5 million, every 100 basis points change in interest rates will impact the Company’s annual net income by approximately $4.1 million, all other factors remaining the same.
Item 4. Controls and Procedures
Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective and that there have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Since that evaluation process was completed, there have been no significant changes in internal controls or in other factors that could significantly affect these controls.
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Use of Proceeds from Offering
The following tables set forth information concerning the best-efforts offering and the use of proceeds from the offering as of September 30, 2010. All amounts in thousands, except per Unit data:
| | | | | | | | | | | | | | | |
Units Registered: | | | | | | | | | | | | | |
| | | 9,524 | | | Units | | $ | 10.50 per Unit | | $ | 100,000 | |
| | | 172,727 | | | Units | | $ | 11 per Unit | | | 1,900,000 | |
| |
|
| | | | | | | |
|
| |
Totals: | | | 182,251 | | | Units | | | | | $ | 2,000,000 | |
| | | | | | | | | | | | | |
Units Sold: | | | | | | | | | | | | | |
| | | 9,524 | | | Units | | $ | 10.50 per Unit | | $ | 100,000 | |
| | | 150,153 | | | Units | | $ | 11 per Unit | | | 1,651,689 | |
| |
|
| | | | | | | |
|
| |
Totals: | | | 159,677 | | | Units | | | | | | 1,751,689 | |
| | | | | | | | | | | | | |
Expenses of Issuance and Distribution of Units | | | | |
|
1. | | Underwriting discounts and commission | | | 175,169 | |
2. | | Expenses of underwriters | | | — | |
3. | | Direct or indirect payments to directors or officers of the Company or their associates, to ten percent shareholders, or to affiliates of the Company | | | — | |
4. | | Fees and expenses of third parties | | | 2,660 | |
| |
|
| |
Total Expenses of Issuance and Distribution of Common Shares | | | 177,829 | |
| |
|
| |
Net Proceeds to the Company | | $ | 1,573,860 | |
| |
|
| |
1. | | Purchase of real estate (net of debt proceeds and repayment) | | $ | 1,002,829 | |
2. | | Deposits and other costs associated with potential real estate acquisitions | | | 12,166 | |
3. | | Repayment of other indebtedness, including interest expense paid | | | 7,166 | |
4. | | Investment and working capital | | | 524,380 | |
5. | | Fees to the following (all affiliates of officers of the Company): | | | | |
| | a. Apple Nine Advisors, Inc. | | | 5,661 | |
| | b. Apple Suites Realty Group, Inc. | | | 21,658 | |
6. | | Fees and expenses of third parties | | | — | |
7. | | Other | | | — | |
| |
|
| |
Total of Application of Net Proceeds to the Company | | $ | 1,573,860 | |
| |
|
| |
34
Unit Redemption Program
The Company has a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned for less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. The maximum number of Units that may be redeemed in any given year will be three percent of the weighted average number of Units outstanding during the 12-month period immediately prior to the date of redemption. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. The following is a summary of redemptions during the third quarter of 2010 (no redemptions occurred in August and September 2010).
| | | | | | | | | |
Issuer Purchases of Equity Securities |
|
| | (a) | | (b) | | (c) | | (d) | |
|
|
|
|
|
|
|
|
|
|
Period | | Total Number
of Units
Purchased | | Average Price Paid
per Unit | | Total Number of
Units Purchased as
Part of Publicly
Announced Plans
or Programs | | Maximum Number
of Units that May
Yet Be Purchased
Under the Plans or
Programs | |
|
|
|
|
|
|
|
|
|
|
July 2010 | | 212,804 | | 10.37 | | 772,028 | | (1) | |
(1) The maximum number of Units that may be redeemed in any 12 month period is limited to three percent (3.0%) of the weighted average number of Units outstanding from the beginning of the 12 month period.
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ITEM 6. EXHIBITS
| | | | | |
Exhibit
Number | | | Description of Documents | |
| | |
| |
| | | | |
3.1 | | | Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.1 to the registrant’s registration statement on Form S-11 (SEC File No. 333-147414) filed November 15, 2007 and effective April 25, 2008) |
| | | |
3.2 | | | Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form S-11 (SEC File No. 333-147414) filed November 15, 2007 and effective April 25, 2008) |
| | | |
10.72 | | | Purchase Agreement dated as of March 16, 2010 between Denali Lodging, LLC and Apple Nine Services Anchorage, LLC (Incorporated by reference to Exhibit 10.72 to registrant’s Post-effective Amendment No. 8 to Form S-11 (SEC File No. 333-147414) filed April 21, 2010) |
| | | |
10.73 | | | Purchase Contract dated as of March 16, 2010 between Boise Lodging Investors, LLC, Apple Nine Hospitality Ownership, Inc. and Raymond Management Company, Inc. (Incorporated by reference to Exhibit 10.73 to registrant’s Post-effective Amendment No. 8 to Form S-11 (SEC File No. 333-147414) filed April 21, 2010) |
| | | |
10.74 | | | Purchase Contract dated as of March 16, 2010 between Forest Park Lodging Associates, LLC, Apple Nine Hospitality Ownership, Inc. and Raymond Management Company, Inc. (Incorporated by reference to Exhibit 10.74 to registrant’s Post-effective Amendment No. 8 to Form S-11 (SEC File No. 333-147414) filed April 21, 2010) |
| | | |
10.75 | | | Purchase Contract dated as of March 16, 2010 between Liberty Lodging Associates, LLC, Apple Nine Hospitality Ownership, Inc. and Raymond Management Company, Inc. (Incorporated by reference to Exhibit 10.75 to registrant’s Post-effective Amendment No. 8 to Form S-11 (SEC File No. 333-147414) filed April 21, 2010) |
| | | |
10.76 | | | Purchase Contract dated as of March 16, 2010 between OKC-Bricktown Lodging Associates, LLC, Apple Nine Hospitality Ownership, Inc. and Raymond Management Company, Inc. (Incorporated by reference to Exhibit 10.76 to registrant’s Post-effective Amendment No. 8 to Form S-11 (SEC File No. 333-147414) filed April 21, 2010) |
| | | |
10.77 | | | Purchase Contract dated as of March 16, 2010 between Rodgers Lodging Associates, LLC, Apple Nine Hospitality Ownership, Inc. and Raymond Management Company, Inc. (Incorporated by reference to Exhibit 10.77 to registrant’s Post-effective Amendment No. 8 to Form S-11 (SEC File No. 333-147414) filed April 21, 2010) |
| | | |
10.78 | | | Purchase Contract dated as of March 16, 2010 between Rodgers Lodging Associates 58, LLC, Apple Nine Hospitality Ownership, Inc. and Raymond Management Company, Inc. (Incorporated by reference to Exhibit 10.78 to registrant’s Post-effective Amendment No. 8 to Form S-11 (SEC File No. 333-147414) filed April 21, 2010) |
| | | |
10.79 | | | Purchase Contract dated as of March 16, 2010 between St. Louis Lodging Associates, LLC, Apple Nine Hospitality Ownership, Inc. and Raymond Management Company, Inc. (Incorporated by reference to Exhibit 10.79 to registrant’s Post-effective Amendment No. 8 to Form S-11 (SEC File No. 333-147414) filed April 21, 2010) |
36
| | | |
10.80 | | | Purchase Contract dated as of May 28, 2010 between Lodging America of West Monroe, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.80 to registrant’s Post-effective Amendment No. 9 to Form S-11 (SEC File No. 333-147414) filed July 21, 2010) |
| | | |
10.81 | | | Purchase Contract dated as of May 28, 2010 between Jackie’s International, Inc. and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.81 to registrant’s Post-effective Amendment No. 9 to Form S-11 (SEC File No. 333-147414) filed July 21, 2010) |
| | | |
10.82 | | | Purchase Contract dated as of August 5, 2010 between Rochelle Lodging, LP and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.82 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.83 | | | Purchase Contract dated as of August 5, 2010 between Redwood Hospitality, L.P. and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.83 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.84 | | | Purchase Contract dated as of September 10, 2010 between Fishspring, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.84 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.85 | | | Purchase Contract dated as of September 10, 2010 between Mishares, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.85 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.86 | | | Purchase Contract dated as of September 10, 2010 between Happy Valley Res, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.86 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.87 | | | Purchase Contract dated as of September 10, 2010 between Mettares, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.87 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.88 | | | Purchase Contract dated as of September 10, 2010 between Mettawhite, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.88 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.89 | | | Purchase Contract dated as of September 10, 2010 between Parmer Lane Associates III, L.P. and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.89 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.90 | | | Purchase Contract dated as of September 10, 2010 between Etkin White Novi, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.90 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.91 | | | Purchase Contract dated as of September 10, 2010 between Warriwhite, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.91 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.92 | | | Purchase Contract dated as of September 10, 2010 between Schwhite, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.92 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
37
| | | |
10.93 | | | Purchase Contract dated as of September 10, 2010 between Slicspring, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.93 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.94 | | | Purchase Contract dated as of September 10, 2010 between Ausnorth FFIS Hotel, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.94 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.95 | | | Purchase Contract dated as of September 10, 2010 between Ausnorth CY Hotel, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.95 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.96 | | | Purchase Contract dated as of September 10, 2010 between Chanprice, LLC and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.96 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
10.97 | | | Purchase Contract dated as of September 10, 2010 between Whiteco Industries, Inc. and Apple Nine Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.97 to registrant’s Post-effective Amendment No. 10 to Form S-11 (SEC File No. 333-147414) filed October 21, 2010) |
| | | |
31.1 | | | Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(FILED HEREWITH) |
| | | |
31.2 | | | Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(FILED HEREWITH) |
| | | |
32.1 | | | Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(FILED HEREWITH) |
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Apple REIT Nine, Inc.
| | | |
By: | /s/ GLADE M. KNIGHT | | Date: November 5, 2010 |
|
| | |
| Glade M. Knight, | | |
| Chairman of the Board and | | |
| Chief Executive Officer | | |
| (Principal Executive Officer) | | |
| | | |
By: | /s/ BRYAN PEERY | | Date: November 5, 2010 |
|
| | |
| Bryan Peery, | | |
| Chief Financial Officer | | |
| (Principal Financial and Principal Accounting Officer) | | |
39
