Analysis on the Effect of Apple REIT 9 Merger
It is unlikely that shareholders of Apple REIT 9 will see a refund of their investment through the merger, according to a recent REIT wrecks post.
Among the reasons cited, first, the merging price of $10.25 for REIT 9 is unreasonable. The book value per share based on Q3 2013 financial of Apple REIT 9 is $7.07. Considering there is no public market for its shares, book value is the only indication of value available to shareholders. Additionally, Apple REIT 9 does not generate enough income. In the Q3 2013, only about 40% of the dividends were paid out from cash generated from operations. And based on the brokerage statement generated by David Lerner Associates, after subtracting the 10% front-end commission, and the special distribution, the price per share should be $9.15.
Second, there is no cash on the balance sheet of Apple REIT 9, which means that the only way dividends can continue to be funded is from selling real estate assets or from continuing to borrow. Currently, Apple REIT 9alreadyhas taken out $22m of a $100m total capacity credit line. Alternatively, Apple REIT 9 will extend its runway by cutting the dividend.
Third, Apple REIT 7 and 8 have even worse assets with the same management as Apple REIT 9. The merger is dilutive to Apple REIT 9. And there is no independent decision making between the board of directors of all three companies. Three of the five directors of Apple REIT 9 the sameare three of the five on both Apple REIT 7 and Apple REIT 8.
Normally, a sale to a strategic acquirer is the only exit for the merged company. According to the REIT Wrecks author, Apple REIT 9 will be publiclylisted, its price will sink terribly. A strategic acquirer will cherry pick the assets, and sell-off the rest. They may pay a premium over the book price ($7.07), but it is hard to see how they could receive to $9.15 (1.29x book value), which is what investors need in order to be made whole on their investment, or to receive $10.25(1.44x book value), which includes the front-end fee paid to David Lerner Associate.
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