Table of Contents
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-147414
SUPPLEMENT NO. 14 DATED JUNE 18, 2009
TO PROSPECTUS DATED APRIL 25, 2008
APPLE REIT NINE, INC.
The following information supplements the prospectus of Apple REIT Nine, Inc. dated April 25, 2008 and is part of the prospectus. This Supplement updates the information presented in the prospectus.Prospective investors should carefully review the prospectus, Supplement No. 12 (which is cumulative and replaces all prior Supplements), Supplement No. 13, and this Supplement No. 14.
| S – 3 | ||
| S – 5 | ||
| S – 7 | ||
| S – 7 | ||
| S – 9 |
Certain forward-looking statements are included in the prospectus and in each supplement. These forward-looking statements may involve our plans and objectives for future operations, including future growth and availability of funds. These forward-looking statements are based on current expectations, which are subject to numerous risks and uncertainties. Assumptions relating to these statements involve judgments with respect to, among other things, the continuation of our offering of units, future economic, competitive and market conditions and future business decisions, together with local, national and international events (including, without limitation, acts of terrorism or war, and their direct and indirect effects on travel and the economy). All of these matters are difficult or impossible to predict accurately and many of them are beyond our control. Although we believe the assumptions relating to the forward-looking statements, and the statements themselves, are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that these forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans, which we consider to be reasonable, will be achieved.
S-1
Table of Contents
“Courtyard by Marriott,” “Fairfield Inn,” “Fairfield Inn & Suites,” “TownePlace Suites,” “Marriott,” “SpringHill Suites” and “Residence Inn” are each a registered trademark of Marriott International, Inc. or one of its affiliates. All references below to “Marriott” mean Marriott International, Inc. and all of its affiliates and subsidiaries, and their respective officers, directors, agents, employees, accountants and attorneys. Marriott is not responsible for the content of this prospectus supplement, whether relating to hotel information, operating information, financial information, Marriott’s relationship with Apple REIT Nine, Inc., or otherwise. Marriott is not involved in any way, whether as an “issuer” or “underwriter” or otherwise, in the offering by Apple REIT Nine, Inc. and receives no proceeds from the offering. Marriott has not expressed any approval or disapproval regarding this prospectus supplement or the offering related to this prospectus supplement, and the grant by Marriott of any franchise or other rights to Apple REIT Nine, Inc. shall not be construed as any expression of approval or disapproval. Marriott has not assumed, and shall not have, any liability in connection with this prospectus supplement or the offering related to this prospectus supplement.
“Hampton Inn,” “Hampton Inn & Suites,” “Homewood Suites,” “Embassy Suites” and “Hilton Garden Inn” are each a registered trademark of Hilton Hotels Corporation or one of its affiliates. All references below to “Hilton” mean Hilton Hotels Corporation and all of its affiliates and subsidiaries, and their respective officers, directors, agents, employees, accountants and attorneys. Hilton is not responsible for the content of this prospectus supplement, whether relating to hotel information, operating information, financial information, Hilton’s relationship with Apple REIT Nine, Inc., or otherwise. Hilton is not involved in any way, whether as an “issuer” or “underwriter” or otherwise, in the offering by Apple REIT Nine, Inc. and receives no proceeds from the offering. Hilton has not expressed any approval or disapproval regarding this prospectus supplement or the offering related to this prospectus supplement, and the grant by Hilton of any franchise or other rights to Apple REIT Nine, Inc. shall not be construed as any expression of approval or disapproval. Hilton has not assumed, and shall not have, any liability in connection with this prospectus supplement or the offering related to this prospectus supplement.
S-2
Table of Contents
We completed the minimum offering of units (with each unit consisting of one Common Share and one Series A Preferred Share) at $10.50 per unit on May 14, 2008. We are continuing the offering at $11 per unit in accordance with the prospectus. We registered to sell a total of 182,251,082 units. As of May 28, 2009, 119,920,196 units remained unsold. We will offer units until April 25, 2010, unless the offering is extended, provided that the offering will be terminated if all of the units are sold before then.
As of May 28, 2009, we had closed on the following sales of units in the offering:
Price Per Unit | Number of Units Sold | Gross Proceeds | Proceeds Net of Selling Commissions and Marketing Expense Allowance | |||||
$10.50 | 9,523,810 | $ | 100,000,000 | $ | 90,000,000 | |||
$11.00 | 52,807,076 | $ | 580,877,844 | $ | 522,790,061 | |||
Total | 62,330,886 | $ | 680,877,844 | $ | 612,790,061 | |||
Our distributions since the initial capitalization through March 31, 2009 totaled approximately $22.9 million of which approximately $14.7 million was used to purchase additional units under the Company’s best-efforts offering. Thus the net cash distributions were $8.2 million. Our distributions were paid at a monthly rate of $0.073334 per common share beginning in June 2008. For the same period our net cash generated from operations, from our Consolidated Statements of Cash Flows, was approximately $5.5 million. We funded $5.5 million of the net $8.2 million distributions through March 31, 2009 with net cash from operating activities. The remaining $2.7 million of the net $8.2 million distributions through March 31, 2009 was funded with offering proceeds (assuming we had no other receipts, borrowings or disbursements).
During the initial phase of our operations, we may, due to the inherent delay between raising capital and investing that same capital in income producing real estate, have a portion of our distributions funded from offering proceeds. Our objective in setting a distribution rate is to project a rate, taking into account acquisitions and capital improvements, ramp up of new properties and varying economic cycles, that will provide consistency over the life of the program. We anticipate that we may need to utilize debt, offering proceeds and cash from operations to meet this objective. We evaluate the distribution rate on an ongoing basis and may make changes if we feel the rate is not appropriate based on available cash resources. The following table summarizes distributions made in each quarter of 2008 and 2009:
| 2008 | |||
Quarter 1 | $ | — | |
Quarter 2 | 893,000 | ||
Quarter 3 | 4,788,000 | ||
Quarter 4 | 7,331,000 | ||
2009 | 13,012,000 | ||
Quarter 1 | 9,889,000 | ||
Total | $ | 22,901,000 | |
Due to the inherent delay between raising capital and investing that same capital in income producing real estate, we have had significant amounts of cash earning interest at short term money market rates. As a result, the difference between distributions paid and cash generated from operations has been funded from proceeds from the offering of units, and this portion of distributions is expected to be treated as a return of capital for federal
S-3
Table of Contents
income tax purposes. In May, 2008, our Board of Directors established a policy for an annualized dividend rate of $0.88 per common share, payable in monthly distributions. We intend to continue paying dividends on a monthly basis, consistent with the annualized dividend rate established by our Board of Directors. Our Board of Directors, upon the recommendation of the Audit Committee, may amend or establish a new annualized dividend rate. Since a portion of distributions has to date been funded with proceeds from the offering of units, our ability to maintain our current intended rate of distributions will be based on our ability to fully invest our offering proceeds and thereby increase our cash generated from operations. Since there can be no assurance of our ability to acquire properties that provide income at this level, there can be no assurance as to the classification or duration of distributions at the current rate.
For the year ended December 31, 2008, as stated in Note 1 to our consolidated financial statements for that period, 58% of distributions made to investors represented a return of capital and the remaining 42% represented ordinary income. Proceeds of the offering which are distributed are not available for investment in properties. See “Risk Factors”—“We may be unable to make distributions to our shareholders,” on page 28 of the prospectus, and “Our distributions to our shareholders may not be sourced from operating cash flow but from offering proceeds or indebtedness and this will decrease our distributions in the future,” on page 29 of the prospectus.
(Remainder of Page Intentionally Left Blank)
S-4
Table of Contents
Recent Purchases
On June 1, 2009, through one of our indirect wholly-owned subsidiaries, we closed on the purchase of an entity which owns a hotel located in Dothan, Alabama and that contains a total of 104 guest rooms. The gross purchase price for this acquisition was $11,600,836.
On June 18, 2009, through one of our indirect wholly-owned subsidiaries, we closed on the purchase of an entity which owns a hotel located in Troy, Alabama and that contains a total of 90 guest rooms. The gross purchase price for this acquisition was $8,696,456.
Further information about our recently purchased hotels is provided in other sections below.
Source of Funds and Related Party Payments
Our recent purchases, which resulted in our ownership of two additional hotels, were funded by the proceeds from our ongoing offering of units.
We have entered into a property acquisition and disposition agreement with Apple Suites Realty Group, Inc. to acquire and dispose of our real estate assets. A fee of 2% of the gross purchase price or gross sale price in addition to certain reimbursable expenses will be payable for these services. This entity is owned by Glade M. Knight, who is one of our directors and our Chairman and Chief Executive Officer. We used our offering proceeds to pay $405,946 representing 2% of the gross purchase price for our recent hotel purchases on June 1, 2009 and June 18, 2009.
We have entered into an advisory agreement with Apple Nine Advisors, Inc. to manage us and our assets. An annual fee ranging from 0.1% to 0.25% of total equity proceeds received by us in addition to certain reimbursable expenses will be payable for these services. Apple Nine Advisors, Inc. has entered into an agreement with Apple REIT Six, Inc. to provide certain management services to us. We will reimburse Apple Nine Advisors, Inc. for the cost of the services provided by Apple REIT Six, Inc. Apple Nine Advisors, Inc. in turn will pay Apple REIT Six, Inc. for the cost of the services provided by Apple REIT Six, Inc. Apple Nine Advisors, Inc. is owned by Glade M. Knight, who is also the Chairman and Chief Executive Officer of Apple REIT Six, Inc.
David Lerner Associates, Inc., Apple Suites Realty Group, Inc. and Apple Nine Advisors, Inc. earned the compensation and expense reimbursements shown below in connection with their services from inception through the period ending March 31, 2009 relating to our offering phase, acquisition phase and operations phase.
David Lerner Associates, Inc. is not related to Apple Suites Realty Group, Inc. or Apple Nine Advisors, Inc.
As described on page 42 of the prospectus under the heading “Compensation” and as shown below, we pay certain fees and expenses as they are incurred, while others accrue and will be paid in future periods, subject in some cases to the achievement of performance criteria. We did not incur any amounts in connection with our disposition phase through March 31, 2009.
S-5
Table of Contents
Cumulative through March 31, 2009
| Incurred | Paid | Accrued | |||||||
Offering Phase | |||||||||
Selling commissions paid to David Lerner Associates, Inc. in connection with the offering | $ | 43,343,200 | $ | 43,343,200 | $ | — | |||
Marketing Expense Allowance paid to David Lerner Associates, Inc. in connection with the offering | 14,447,800 | 14,447,800 | — | ||||||
| 57,791,000 | 57,791,000 | ||||||||
Acquisition Phase | |||||||||
Acquisition Commission paid to Apple Suites Realty Group, Inc. | 7,388,000 | 7,388,000 | — | ||||||
Operations Phase | |||||||||
Asset management fee paid to Apple Nine Advisors, Inc. | 295,000 | 295,000 | — | ||||||
Reimbursement of costs paid to Apple Nine Advisors, Inc. | 946,000 | 946,000 | — | ||||||
Overview of Owned Hotels
As a result of our recent purchases, we currently own 27 hotels, which are located in the states indicated in the map below:
S-6
Table of Contents
ACQUISITIONS AND RELATED MATTERS
Each of our recently purchased hotels has been leased to one of our indirect wholly-owned subsidiaries, as the lessee, under a separate hotel lease agreement. For simplicity, the applicable lessee will be referred to below as the “lessee.”
Each hotel is managed under a separate management agreement between the applicable lessee and the manager. For simplicity, the applicable manager will be referred to below as the “manager.”
The hotel lease agreements and the management agreements are among the contracts described in another section below. The table below specifies the franchise, hotel owner, lessee and manager for our recently purchased hotels:
Hotel Location | Franchise (a) | Hotel Owner/Lessor | Lessee | Manager (b) | ||||
Dothan, Alabama | Hilton Garden Inn | Sunbelt-GDA, L.L.C. | Apple Nine Hospitality Management, Inc. | LBAM-Investor Group, L.L.C. | ||||
Troy, Alabama | Courtyard | Sunbelt-CTY, L.L.C. | Apple Nine Hospitality Management, Inc. | LBAM-Investor Group, L.L.C. |
Notes for Table:
| (a) | All brand and trade names, logos or trademarks contained, or referred to, in this prospectus supplement are the properties of their respective owners. These references shall not in any way be construed as participation by, or endorsement of, our offering by any of our franchisors or managers. |
| (b) | The hotel specified was purchased from an affiliate of the manager. |
We have no material relationship or affiliation with the sellers or managers, except for the relationship resulting from our purchases, our management agreements for the hotels we own and any related documents.
FOR OUR PROPERTIES
Hotel Lease Agreements
Each of our recently purchased hotels is covered by a separate hotel lease agreement between the owner (one of our indirect wholly-owned subsidiaries) and the applicable lessee (another one of our indirect wholly-owned subsidiaries, as specified in the previous section). Each lease provides for an initial term of 10 years. The applicable lessee has the option to extend its lease term for two additional five-year periods, provided it is not in default at the end of the prior term or at the time the option is exercised.
Each lease provides for annual base rent and percentage rent. The annual base rent is payable in advance in equal monthly installments and will be adjusted each year in proportion to the Consumer Price Index (based on the U.S. City Average). Shown below is the annual base rent and the lease commencement date for our recently purchased hotels:
Hotel Location | Franchise | Annual Base Rent | Date of Lease Commencement | ||||
Dothan, Alabama | Hilton Garden Inn | $ | 1,047,042 | June 1, 2009 | |||
Troy, Alabama | Courtyard | 794,047 | June 18, 2009 | ||||
The annual percentage rent depends on a formula that compares fixed “suite revenue breakpoints” with a portion of “suite revenue,” which is equal to gross revenue from guest rentals less sales and room taxes and credit card fees. The suite revenue breakpoints will be adjusted each year in proportion to the Consumer Price Index
S-7
Table of Contents
(based on the U.S. City Average). Specifically, the annual percentage rent is equal to the sum of (a) 17% of all suite revenue for the year, up to the applicable suite revenue breakpoint; plus (b) 55% of the suite revenue for the year in excess of the applicable suite revenue breakpoint, as reduced by base rent paid for the year.
Management Agreements
Each of our hotels is being managed by the manager under a separate management agreement between the manager and the applicable lessee (which is one of our indirect wholly-owned subsidiaries, as specified in the previous section). The manager is responsible for managing and supervising the daily operations of the hotel and for collecting revenues for the benefit of the applicable lessee. The fees and other terms of these agreements are the result of commercial negotiations between otherwise unrelated parties. We believe that such fees and terms are appropriate for the hotels and the markets in which they operate.
Franchise Agreements
The recently purchased hotel in Troy, Alabama is franchised by Marriott International, Inc. or one of its affiliates, and there is a relicensing franchise agreement between the lessee and Marriott International, Inc. or an affiliate. The relicensing franchise agreement provides for the payment of royalty fees and marketing contributions to the franchisor. A percentage of gross room revenues is used to determine these payments. In addition, we have caused Apple Nine Hospitality, Inc. or another one of our subsidiaries to provide a separate guaranty of the payment and performance of the lessee under the relicensing franchise agreement.
The recently purchased hotel in Dothan, Alabama is franchised by Hilton Hotels Corporation or one of its affiliates, and there is a franchise license agreement between the lessee and Hilton Hotels Corporation or an affiliate. The franchise license agreement provides for the payment of royalty fees and program fees to the franchisor. A percentage of gross room revenues is used to determine these payments. Apple Nine Hospitality, Inc. or another one of our subsidiaries has guaranteed the payment and performance of the lessee under the franchise license agreement.
The fees and other terms of these agreements are the result of commercial negotiations between otherwise unrelated parties, and we believe that such fees and terms are appropriate for the hotels and the markets in which they operate. These agreements may be terminated for various reasons, including failure by the applicable lessee to operate in accordance with the standards, procedures and requirements established by the franchisors.
(Remainder of Page Intentionally Left Blank)
S-8
Table of Contents
FINANCIAL AND OPERATING INFORMATION
FOR OUR PROPERTIES
Our hotels offer guest rooms and suites, together with related amenities, that are consistent with their operations. The hotels are located in developed or developing areas and in competitive markets. We believe the hotels are well-positioned to compete in their markets based on location, amenities, rate structure and franchise affiliation. In the opinion of management, each hotel is adequately covered by insurance. The following tables present further information about our hotels:
Table 1. General Information
Hotel Location | Franchise | Number of Rooms/ Suites | Gross Purchase Price | Average Daily Rate (Price) per Room/ Suite (a) | Federal Income Tax Basis for Depreciable Real Property Component of Hotel (b) | Purchase Date | |||||||||
Dothan, Alabama | Hilton Garden Inn | 104 | $ | 11,600,836 | $ | 119-169 | $ | 10,564,205 | June 1, 2009 | ||||||
Troy, Alabama | Courtyard | 90 | 8,696,456 | 109-159 | 8,129,696 | June 18, 2009 | |||||||||
| Total | 194 | $ | 20,297,292 | ||||||||||||
Notes for Table 1:
| (a) | The amounts shown are subject to change, and exclude discounts that may be offered to corporate, frequent and other select customers. |
| (b) | The depreciable life is 39 years (or less, as may be permitted by federal tax laws) using the straight-line method. The modified accelerated cost recovery system will be used for the hotel’s personal property component. |
Table 2. Operating Information
Table 2, regarding operating information, has been omitted because our recently purchased hotels did not begin operations until May 2009 and June 2009, respectively, and there is no historical annual operating information.
Table 3. Tax and Related Information
Hotel Location | Franchise | Tax Year | Real Property Tax Rate (a) | Real Property Tax | |||||
Dothan, Alabama | Hilton Garden Inn | 2008 (b) | 3.3 | % | $7,458 (c) | ||||
Troy, Alabama | Courtyard | 2008 (b) | 3.7 | % | 3,325 (c) | ||||
Notes for Table 3:
| (a) | Property tax rate is an aggregate figure for county, city and other local taxing authorities (to the extent applicable). |
| (b) | Represents 12-month period from October 1, 2007 through September 30, 2008. |
| (c) | The hotel property consisted of undeveloped land for a portion of the 2008 tax year, and the real property tax for 2008 is not necessarily indicative of property taxes expected for the hotel in the future. |
S-9