Four Apple REIT Eight Hotels Hocked At 50% of Cost

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Four Apple REIT Eight Hotels Hocked At 50% of Cost

Post by REIT Wrecks » Wed Oct 26, 2011 9:21 pm

Once upon a time, in the land of fables and fairy tales (June of 2008, to be exact, as capitalism as we knew it was coming to an end...), Apple REIT 8 paid $126 million for four hotels in Virginia and North Carolina. These four hotels were unencumbered by any debt of any sort, but in the land of fables and fairy tales, 8% dividends can be paid with promises and pixie dust...

Today, the bill for these fables and fairy tales is coming due, and last week, Apple REIT 8 borrowed $60 million against these four unencumbered hotels from Cantor Fitzgerald. Evidently, Apple could not convince Cantor to advance any more than 47% ($60 million) of the purchase price ($126 million) for the hotels, so I wonder: what might that say about the purchase price for the four hotels??

My guess: This debt deal confirms the analysis in this revised class action suit, which is that Apple habitually overpaid for assets:

http://www.reitwrecks.com/forum/docs/David-Lerner-Revised-Class-Action.pdf" onclick="window.open(this.href);return false;

In addition to overpaying for properties, Apple REIT 8 also paid dividends using borrowed money (according to its own SEC filings), not earnings, so the devaluation of Apple REIT 8 shares may not be far off, unfortunately.

It's hard to believe how FINRA and the SEC can justify the continued sales of Apple REIT 10, but apparently they have found a way....

The new loan was used to "reduce the outstanding balance on [Apple REIT's] $75 million line of credit and to pay transaction costs" and to pay off another loan from BB&T in the amount of $25 million.

The 8K filing on the new loan is here: http://www.sec.gov/Archives/edgar/data/1387361/000093041311006778/c67302_8-k.htm" onclick="window.open(this.href);return false;
The 2010 10K, which lists the total cost of the buildings, land and FF&E for each hotel on Schedule III (page 54), is here: http://www.sec.gov/Archives/edgar/data/1387361/000093041311001825/c64679_10k.htm" onclick="window.open(this.href);return false;

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Re: Four Apple REIT Eight Hotels Hocked At 50% of Cost

Post by GeorgiaGulf » Thu Oct 27, 2011 6:05 am

Being that a line of credit is cheaper than a fixed cash-out, why are they doing this?

And why are they STILL being so obviously stupid to borrow money to support the dividend when half the planet is suing them for doing just that?

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Re: Four Apple REIT Eight Hotels Hocked At 50% of Cost

Post by REIT Wrecks » Tue Dec 06, 2011 6:54 pm

GeorgiaGulf wrote:Being that a line of credit is cheaper than a fixed cash-out, why are they doing this?

And why are they STILL being so obviously stupid to borrow money to support the dividend when half the planet is suing them for doing just that?
GREAT Questions! The answer: Apple REIT 8 was in default on $100 million of debt, so they used this new debt to pay the other debt off.

http://www.reitwrecks.com/forum/viewtopic.php?f=12&t=392" onclick="window.open(this.href);return false;

No wonder boss was silent on this one.

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Re: Four Apple REIT Eight Hotels Hocked At 50% of Cost

Post by REIT Wrecks » Thu Jan 19, 2012 11:55 pm

Apple REIT Eight management crack fiends is still hocking hotels to fund the dividend. This time, [url=http://www.sec.gov/Archives/edgar/data/1387361/000093041312000203/c68148_8-k.htm]according to an 8K filed with the SEC yesterday[/url], they borrowed $40 million more, secured by a pair of Marriot-branded Residence Inns in California. The three year loan is interest only for the first year (to maximize cash flow), followed by two years in which the principal is paid down at a rate of $65,000 per month (yikes).

Once again, the company had two choices: cut the dividend to a level it can afford, or jeopardize future returns in order to maintain the fiction. The latter is not a shareholder-friendly choice, in my view, because this money will need to paid back at some point, and that obligation puts shareholder principal at even greater risk.

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Re: Four Apple REIT Eight Hotels Hocked At 50% of Cost

Post by pawnbroker » Fri Jan 20, 2012 8:15 am

I may be wrong but I thought the 8k said that $40 mil was used to pay off part of their line of credit. Here's the quote from the filing "At closing the Company used the total proceeds of the Loan to reduce the outstanding balance on its $75 million line of credit with Branch Banking and Trust Company and to pay transaction costs." Hopefully lowering borrowing costs but who knows. And of course if they go out and run back up the credit line that's a whole other story. At this point its a little like shuffling deck chairs on the Titanic though to save a couple hundred thousand maybe over time but I don't think that you can definitively say the $40 mil was to pay dividends.

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Re: Four Apple REIT Eight Hotels Hocked At 50% of Cost

Post by REIT Wrecks » Fri Jan 20, 2012 8:59 am

pawnbroker, you are absolutely correct, they did report that the proceeds were used to pay down the line of credit. But if you read the Q3 balance sheet and cash flow statement as well, you will see that Apple REIT 8 has zero unrestricted cash on hand, that the cash flow from operations is well short of what the REIT is paying out in distributions, and that the REIT is not generating any free cash.

So...you are also correct in surmising that I assumed they would hit the credit line again. In truth, it is I who could be wrong, they might not borrow again against the line of credit. But based on their pattern and practice, which they plainly disclose in black and white, they habitually borrow money to pay a dividend they cannot afford, and my guess is that they will use the line of credit to do it. In that case, absent strong growth in revenues -- which does not appear to be happening -- shareholder principal will almost always be reduced (the NY Marriott at a 2% cap rate??? Good grief).

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Re: Four Apple REIT Eight Hotels Hocked At 50% of Cost

Post by pawnbroker » Fri Jan 20, 2012 9:08 am

Did you see my post on the other thread about current redemption rates?

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Re: Four Apple REIT Eight Hotels Hocked At 50% of Cost

Post by REIT Wrecks » Fri Jan 20, 2012 12:56 pm

Yes, I did, and thanks for [url=http://www.reitwrecks.com/forum/viewtopic.php?f=12&t=415&start=10#p1690]posting those numbers[/url]. They are using proceeds from the DRIP to fund redemption requests, so that money is not being invested accretively either. It's yet another inefficient use of capital -- unless your real objective is to keep earning commissions by selling more of these dubious investments.

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Re: Four Apple REIT Eight Hotels Hocked At 50% of Cost

Post by CREInvestor1 » Sun Jan 22, 2012 10:56 am

Share redemptions are especially damaging to a funds remaining shareholders when they are redeemed at valuations that don't reflect reality. If sponsors aren't being realistic with their NAV's (like many are) it leads to substantial dilution and value erosion over time.

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Re: Four Apple REIT Eight Hotels Hocked At 50% of Cost

Post by ccppww » Sun Jan 22, 2012 1:41 pm

It should be interesting what the underwriters come up with as a range for the share price.

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