Page 14 - Apple REIT 9 2008 Annual Report

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The Company owned 21 hotel properties as of December 31, 2008, all of which were purchased in 2008. In addition, as of
December 31, 2008, the Company had entered into contracts for the purchase of 19 additional hotels for a total purchase price of
approximately $329 million. Of these 19 hotels, 15 are under construction and should be completed over the next 12 to 18 months.
The other four hotels are expected to close within the next three months. The Company also has one purchase contract for land that
is subject to a feasibility study for the construction of a SpringHill Suites hotel. 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.
Financing
The Company purchased 21 hotels in 2008. The total gross purchase price for these properties was approximately $341 million.
The Company used the proceeds from its ongoing best-efforts offering, in addition to assuming secured debt of $34.5 million and
unsecured debt of $3.8 million to fund the purchase price. For the purchase contracts outstanding at December 31, 2008, if closings
occur, the Company will assume approximately $29.3 million of debt secured by four of the properties. It is anticipated substantially
all of the remaining purchase price will be paid from cash proceeds from the Company’s ongoing best-efforts offering and cash on
hand. Although there can be no assurance that additional debt will not be utilized, the Company does not intend to utilize a significant
amount of debt to finance future acquisitions. The Company’s bylaws require board approval or review of any debt financing obtained
by the Company.
Industry and Competition
The hotel industry is highly competitive. Each of the Company’s hotels is located in a developed area that includes other hotels
and competes for guests primarily with other hotels in the Company’s immediate vicinity and secondarily with other hotels in the
Company’s geographic market. An increase in the number of competitive hotels in a particular area could have a material adverse
effect on the occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) of the Company’s hotels in that area.
The Company believes that brand recognition, location, price and quality (of both the hotel and the services provided) are the principal
competitive factors affecting the Company’s hotels. Additionally, general economic conditions in a particular market and nationally
impact the performance of the hotel industry.
Hotel Operating Performance
During the period from the Company’s initial formation on November 9, 2007 to July 30, 2008, the Company owned no
properties, had no revenue, exclusive of interest income and was primarily engaged in capital formation activities. Operations
commenced on July 31, 2008 with the Company’s first property acquisition. During the remainder of 2008, the Company purchased an
additional 20 hotel properties.
At December 31, 2008, the Company owned six Hilton Garden Inn hotels, two Homewood Suites hotels, six Hampton Inn hotels,
three Courtyard hotels, three Residence Inn hotels and one Fairfield Inn hotel. The hotels are located in 11 states and, in aggregate,
consist of 2,478 rooms.
Room revenues for these hotels totaled $9.5 million for the period owned in 2008, and the hotels achieved average occupancy of
59%, ADR of $110 and RevPAR of $65. These rates are comparable with industry and brand averages for the short period owned.
During the past several quarters, the overall weakness in the U.S. economy has had a considerable negative impact on both
consumer and business travel. As such, lodging demand has declined. The Company expects this trend to continue into 2009 and
will not reverse course until general economic conditions improve. In its acquisition process, the Company has anticipated a certain
amount of decline in income from historical results; however, there can be no assurance that actual results will meet expectations.
Management and Franchise Agreements
Each of the Company’s hotels are operated and managed, under separate management agreements, by affiliates of one of the
following companies: Dimension, McKibbon, Gateway, LBA, Western or Vista. The agreements provide for initial terms of 1-5 years.
Fees associated with the agreements generally include the payment of base management fees, incentive management fees, accounting
fees, and other fees for centralized services which are allocated among all of the hotels that receive the benefit of such services. Base
management fees are calculated as a percentage of gross revenues. Incentive management fees are calculated as a percentage of
operating profit in excess of a priority return to the Company, as defined in the management agreements. The Company has the option
to terminate the management agreements if specified performance thresholds are not satisfied. For the year ended December 31, 2008
the Company incurred approximately $441,000 in management fees.