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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR THE TRANSITION PERIOD FROM              TO            

 

Commission File Number 000-53175

 

Apple REIT Eight, Inc.

(Exact name of registrant as specified in its charter)

 

Virginia

20- 8268625

(State or other jurisdiction
of incorporation or organization)

(IRS Employer
Identification No.)

 

 

814 East Main Street

 

Richmond, Virginia

23219

(Address of principal executive offices)

(Zip Code)

 

(804) 344-8121

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer o

Accelerated filer o

 

 

Non-accelerated filer x

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Number of registrant’s common shares outstanding as of May 1, 2010:  93,904,658

 

 

 



Table of Contents

 

Apple REIT Eight, Inc.

FORM 10-Q

INDEX

 

 

 

 

Page
Number

PART I.     FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets —March 31, 2010 and December 31, 2009

 

3

 

Consolidated Statements of Operations and Comprehensive Income (Loss) — Three months ended March 31, 2010 and 2009

 

4

 

Consolidated Statements of Cash Flows — Three months ended March 31, 2010 and 2009

 

5

 

Notes to Consolidated Financial Statements

 

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

10

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

17

Item 4.

Controls and Procedures

 

17

 

 

 

 

PART II.     OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings (not applicable)

 

 

Item 1A.

Risk Factors (not applicable)

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

18

Item 3.

Defaults Upon Senior Securities (not applicable)

 

 

Item 4.

(Removed and Reserved)

 

 

Item 5.

Other Information (not applicable)

 

 

Item 6.

Exhibits

 

19

 

 

 

 

Signatures

 

 

20

 

This Form 10-Q includes references to certain trademarks or service marks. The SpringHill Suites® by Marriott, TownePlace Suites® by Marriott, Fairfield Inn® by Marriott, Residence Inn® by Marriott, Courtyard® by Marriott, Marriott®, and Renaissance® trademarks are the property of Marriott International, Inc. or one of its affiliates. The Homewood Suites® by Hilton, Hilton Garden Inn®, Hampton Inn® and Hampton Inn & Suites® trademarks are the property of Hilton Worldwide or one or more of its affiliates. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above referenced terms are used.

 

2



Table of Contents

 

Apple REIT Eight, Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

 

 

 

March 31,

 

December 31,

 

 

 

2010

 

2009

 

ASSETS

 

 

 

 

 

Investment in hotels, net of accumulated depreciation of $63,934 and $55,282

 

$

968,524

 

$

974,773

 

Restricted cash-furniture, fixtures and other escrows

 

12,463

 

12,268

 

Due from third party managers, net

 

7,067

 

3,919

 

Other assets, net

 

4,955

 

7,891

 

TOTAL ASSETS

 

$

993,009

 

$

998,851

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Accounts payable and accrued expenses

 

$

15,634

 

$

14,465

 

Intangible liabilities, net

 

10,912

 

11,112

 

Notes payable

 

192,144

 

184,175

 

TOTAL LIABILITIES

 

218,690

 

209,752

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, authorized 15,000,000 shares; none issued and outstanding

 

 

 

Series A preferred stock, no par value, authorized 200,000,000 shares; issued and outstanding 94,019,755 and 93,643,430 shares

 

 

 

Series B convertible preferred stock, no par value, authorized 240,000 shares; issued and outstanding 240,000 shares

 

24

 

24

 

Common stock, no par value, authorized 200,000,000 shares; issued and outstanding 94,019,755 and 93,643,430 shares

 

931,541

 

927,269

 

Distributions greater than net income

 

(157,246

)

(140,598

)

Accumulated other comprehensive income

 

 

2,404

 

TOTAL SHAREHOLDERS’ EQUITY

 

774,319

 

789,099

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

993,009

 

$

998,851

 

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

Apple REIT Eight, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

(In thousands, except per share data)

 

 

 

Three months

 

Three months

 

 

 

ended

 

ended

 

 

 

March 31,

 

March 31,

 

 

 

2010

 

2009

 

Revenues:

 

 

 

 

 

Room revenue

 

$

36,555

 

$

34,179

 

Other revenue

 

2,848

 

2,781

 

Total revenue

 

39,403

 

36,960

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Operating expense

 

11,025

 

10,444

 

Hotel administrative expense

 

3,736

 

3,982

 

Sales and marketing

 

3,114

 

3,026

 

Utilities

 

1,930

 

1,970

 

Repair and maintenance

 

2,185

 

2,119

 

Franchise fees

 

1,507

 

1,501

 

Management fees

 

1,379

 

1,327

 

Taxes, insurance and other

 

2,575

 

2,424

 

Land lease expense

 

1,597

 

1,591

 

General and administrative

 

1,197

 

1,062

 

Depreciation expense

 

8,652

 

7,865

 

Total expenses

 

38,897

 

37,311

 

 

 

 

 

 

 

Operating income (loss)

 

506

 

(351

)

 

 

 

 

 

 

Investment income, net

 

3,016

 

12

 

Interest expense

 

(2,133

)

(1,543

)

 

 

 

 

 

 

Net income (loss)

 

$

1,389

 

$

(1,882

)

 

 

 

 

 

 

Unrealized gain on investments

 

 

371

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

1,389

 

$

(1,511

)

 

 

 

 

 

 

Basic and diluted net income per common share

 

$

0.01

 

$

(0.02

)

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

93,769

 

92,500

 

 

 

 

 

 

 

Distributions declared and paid per common share

 

$

0.19

 

$

0.22

 

 

See notes to consolidated financial statements.

 

4



Table of Contents

 

Apple REIT Eight, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three months

 

Three months

 

 

 

ended

 

ended

 

 

 

March 31, 2010

 

March 31, 2009

 

 

 

 

 

 

 

Cash flow from operating activities:

 

 

 

 

 

Net income (loss)

 

$

1,389

 

$

(1,882

)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

Depreciation

 

8,652

 

7,865

 

Amortization of deferred financing costs, fair value adjustments and other non-cash expenses, net

 

(64

)

(159

)

Net realized gain on sale of investments

 

(3,011

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Increase (decrease) in other assets

 

(567

)

1,249

 

Increase in funds due from third party managers

 

(3,148

)

(1,659

)

Increase in accounts payable and accrued expenses

 

1,297

 

820

 

 

 

 

 

 

 

Net cash provided by operating activities

 

4,548

 

6,234

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

Increase in capital improvement reserves

 

(84

)

(541

)

Proceeds from sale of equity securities - available for sale

 

3,804

 

 

Investment in other assets

 

 

(3,240

)

Capital improvements

 

(2,531

)

(9,333

)

Net cash provided by (used in) investing activities

 

1,189

 

(13,114

)

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

Net proceeds related to issuance of Units

 

6,520

 

7,287

 

Redemptions of Units

 

(2,248

)

(4,015

)

Cash distributions paid to common shareholders

 

(18,037

)

(20,338

)

Net proceeds from line of credit

 

8,610

 

24,500

 

Payments of notes payable

 

(582

)

(554

)

Net cash (used in) provided by financing activities

 

(5,737

)

6,880

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

 

$

 

 

See notes to consolidated financial statements.

 

5



Table of Contents

 

APPLE REIT EIGHT, INC.

 

Notes to Consolidated Financial Statements

 

1.  General Information and Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Article 10 of Regulation S-X. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements included in its 2009 Annual Report on Form 10-K.  Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the period ending December 31, 2010.

 

Organization

 

Apple REIT Eight, Inc., together with its wholly owned subsidiaries, (the “Company”) is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The Company was formed to invest in hotels, residential apartment communities and other income-producing real estate assets in selected metropolitan areas in the United States. Initial capitalization occurred on January 22, 2007, when 10 Units, each Unit consisting of one share of common stock and one share of Series A preferred stock, were purchased by Apple Eight Advisors, Inc. (“A8A”), owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer, and 240,000 Series B convertible shares were also purchased individually by Glade M. Knight. The Company began operations on November 9, 2007 when it acquired its first hotels.  The Company completed its best efforts offering of Units in April 2008.  The Company’s fiscal year end is December 31. As of March 31, 2010, the Company owned 51 hotels.  45 of the hotels were acquired in 2008 and six in late 2007.  The Company has no foreign operations or assets and its operating structure includes two segments. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

 

Significant Accounting Policies

 

Use of Estimates

 

The preparation of the financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Earnings Per Common Share

 

Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. There were no potential common shares with a dilutive effect for the three months ended March 31, 2010 or 2009.  As a result, basic and diluted outstanding shares were the same.  Series B convertible preferred shares are not included in earnings per common share calculations until such time the Series B convertible preferred shares are converted to common shares.

 

6



Table of Contents

 

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.

 

2.  Other Assets

 

The Company has a 24% ownership interest in Apple Air Holding, LLC (“Apple Air”), purchased by the Company for $3.2 million in cash in 2009.  The interest was purchased to allow the Company access to two Lear jets for asset management and renovation purposes.  The Company has recorded its share of income and losses of the entity under the equity method of accounting and adjusted its investment in Apple Air accordingly. This investment is included in Other assets, net on the Company’s Consolidated Balance Sheets.  The Company’s ownership interest was $2.7 million at March 31, 2010 and $2.8 million at December 31, 2009.  For the three months ended March 31, 2010 and 2009, the Company recorded a loss of approximately $0.1 million in each period as its share of the net loss of Apple Air, which primarily relates to depreciation of the aircraft, and is included in General and Administrative expense in the Company’s Consolidated Statements of Operations.  The other members of Apple Air are Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc.

 

At December 31, 2009 the Company held equity securities classified as available-for-sale, in accordance with the FASB’s pronouncement for accounting for certain investments in debt and equity securities.  These securities were included in Other assets, net on the Company’s Consolidated Balance Sheet at December 31, 2009 at fair value of $3.2 million.  Unrealized gains were reported as accumulated other comprehensive income, $2.4 million at December 31, 2009.  In the first quarter of 2010, the Company sold these equity securities, resulting in a realized gain of $3.0 million which is recorded in Investment income, net on the Company’s Consolidated Statement of Operations.

 

3.  Line of Credit

 

In November 2008, the Company entered into a $75 million unsecured line of credit with a commercial bank. The applicable interest rate is equal to LIBOR (the London Interbank Offered Rate, 0.25% at March 31, 2010) plus 1.75% annually. Interest payments are due monthly. The principal must be paid by the maturity date of November 2010, and may be prepaid without penalty. At March 31, 2010, the credit line had an outstanding principal balance of $67.0 million. At December 31, 2009, the credit line had an outstanding principal balance of $58.3 million.  The line of credit is unsecured, however does contain a negative pledge agreement that requires approval from the lender to materially change the Company’s investment in 10 properties including using those 10 properties as security for additional financing.

 

4.  Fair Value of Financial Instruments

 

The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of the debt obligation with similar credit policies. Market rates take into consideration general market conditions and maturity. As of March 31,

 

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Table of Contents

 

2010, the carrying value and estimated fair value of the Company’s debt was $192.1 million and $189.7 million.  As of December 31, 2009, the carrying value and estimated fair value of the Company’s debt was $184.2 million and $186.0 million. The carrying value of the Company’s other financial instruments approximates fair value due to the short-term nature of these financial instruments.

 

5.  Related Parties

 

The Company has significant transactions with related parties.  These transactions cannot be construed to be arm’s length, and the results of the Company’s operations may be different if these transactions were conducted with non-related parties.

 

The Company is party to an advisory agreement with A8A, pursuant to which A8A provides 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. A8A utilizes Apple REIT Six, Inc. to provide these services.  Total expenses related to this agreement totaled $0.8 million in the first three months of 2010 and $0.7 million for the same three months of 2009.  Of this total expense, $0.3 million and $0.2 million were fees paid to A8A and $0.5 million were expenses reimbursed by A8A to Apple REIT Six, Inc. in both first quarters.  These expenses are recorded in General and Administrative expense.

 

A8A is 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc.  Members of the Company’s Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc.

 

6.  Shareholder’s Equity

 

In the second quarter of 2008, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. The Company has registered 10 million Units for potential issuance under the plan. During the first three months of 2010, approximately 0.6 million Units were issued under the plan representing approximately $6.5 million.  For the three months ending March 31, 2009, approximately 0.7 million Units were issued under the plan representing approximately $7.3 million.  Since inception of the plan through March 31, 2010, the Company has issued approximately 4.5 million Units representing approximately $49.3 million.

 

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 12-month period 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 for redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program.  During the three months ended March 31, 2010, the Company redeemed approximately 216 thousand Units in the amount of $2.2 million under the program.  For the first three months of 2009, the Company redeemed approximately 387 thousand Units in the amount of $4.0 million.  Since inception of the program through March 31, 2010, the Company has redeemed approximately 1.6 million Units representing approximately $16.5 million.

 

8



Table of Contents

 

7.  Segments

 

The Company has two reportable segments (the New York hotel and all other hotels).  The Company does not allocate corporate-level accounts to its operating segments, including corporate general and administrative expenses, non-operating interest income and interest expense.  Dollar amounts are in thousands.

 

 

 

For the three months ended March 31, 2010

 

 

 

New York,

 

 

 

 

 

 

 

 

 

New York

 

All Other

 

 

 

 

 

 

 

Hotel

 

Hotels

 

Corporate

 

Consolidated

 

Total revenue

 

$

3,948

 

$

35,455

 

$

 

$

39,403

 

Hotel operating expenses

 

4,074

 

24,974

 

 

29,048

 

General and administrative expense

 

 

 

1,197

 

1,197

 

Depreciation expense

 

1,593

 

7,059

 

 

8,652

 

Operating income/(loss)

 

(1,719

)

3,422

 

(1,197

)

506

 

Investment income, net

 

 

 

3,016

 

3,016

 

Interest expense

 

 

(1,805

)

(328

)

(2,133

)

Net income/(loss)

 

$

(1,719

)

$

1,617

 

$

1,491

 

$

1,389

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

121,925

 

$

868,255

 

$

2,829

 

$

993,009

 

 

 

 

For the three months ended March 31, 2009

 

 

 

New York,

 

 

 

 

 

 

 

 

 

New York

 

All Other

 

 

 

 

 

 

 

Hotel

 

Hotels

 

Corporate

 

Consolidated

 

Total revenue

 

$

1,823

 

$

35,137

 

$

 

$

36,960

 

Hotel operating expenses

 

3,351

 

25,033

 

 

28,384

 

General and administrative expense

 

 

 

1,062

 

1,062

 

Depreciation expense

 

1,311

 

6,554

 

 

7,865

 

Operating income/(loss)

 

(2,839

)

3,550

 

(1,062

)

(351

)

Investment income, net

 

 

 

12

 

12

 

Interest (expense)/income

 

336

 

(1,729

)

(150

)

(1,543

)

Net income/(loss)

 

$

(2,503

)

$

1,821

 

$

(1,200

)

$

(1,882

)

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

119,651

 

$

882,048

 

$

4,026

 

$

1,005,725

 

 

8.  Subsequent Events

 

In April 2010, the Company declared and paid approximately $6.0 million in distributions to its common shareholders, or $0.064167 per outstanding common share.  Under the Company’s Dividend Reinvestment Plan, $2.2 million were reinvested, resulting in the issuance of approximately 198,000 Units.

 

In April 2010, the Company redeemed approximately 313,000 Units in the amount of $3.2 million under its Unit Redemption Program.

 

9



Table of Contents

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the ability of the Company to implement its acquisition strategy and operating strategy; the Company’s ability to manage planned growth; changes in economic cycles, including the current economic recession throughout the United States, and competition within the hotel industry. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in the quarterly report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the Company’s financial statements and the notes thereto, as well as the risk factors described in the Company’s filings with the Securities and Exchange Commission.  Any forward-looking statement that the Company makes speaks only as of the date of this report.  The Company undertakes no obligation to publically update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law.

 

Overview

 

Apple REIT Eight, Inc. together with its wholly owned subsidiaries (the “Company”) is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The Company, which owned 51 properties as of March 31, 2010 and has a limited operating history with its first hotel acquired on November 9, 2007, was formed to invest in hotels, residential apartment communities and other real estate in selected metropolitan areas in the United States. Initial capitalization occurred on January 22, 2007, when 10 Units, each Unit consisting of one share of common stock and one share of Series A preferred stock were purchased by Apple Eight Advisors, Inc. (“A8A”) and 240,000 shares of Series B Preferred shares were purchased by Mr. Glade M. Knight, the Company’s Chairman and Chief Executive Officer. The Company completed its best-efforts offering of Units in April 2008.  The Company’s fiscal year end is December 31. The consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany transactions and balances have been eliminated upon consolidation.

 

Hotel performance can be influenced by many factors including local competition, local and national economic conditions in the United States and the performance of individual managers assigned to each hotel.  While the Company’s hotels’ performance as compared to other hotels within each individual market has met expectations for the periods held, overall financial results did not meet expectations in 2009 and in the first quarter of 2010, due to the significant decline in economic conditions throughout the United States.  It is anticipated the properties’ financial performance will be below pre-recession levels until general economic conditions improve.  Many industry analysts believe the hotel industry will see revenue stabilize in 2010 as compared to 2009, with increases occurring in 2011 once the general economy improves.  In evaluating financial condition and operating performance, the most important matters on which the Company focuses are revenue measurements, such as average occupancy, average daily rate (“ADR”), revenue per available room (“RevPAR”), and Market Yield which compares an individual hotel’s results to other hotels in its local market, and expenses, such as hotel operating expenses, general and administrative and other expenses described below. Although it is not possible to predict when general economic conditions will improve or their impact on the hotel industry, with the significant number of renovations (15) of existing properties by the Company in 2009, the number of hotels that were new (9) when acquired by the Company, and the expected industry stabilization, the Company anticipates moderate growth in 2010 as compared to 2009 for the Company’s hotels.  Additionally, with the overall economic

 

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declines, the Company continues to focus on improving market share.  The Company’s properties overall are revenue leaders in their respective markets with an Average RevPAR Index (a comparison of a property’s RevPAR to the market average) of 135 for the first three months of 2010, a 4% increase from the same period in 2009 for comparable hotels.

 

The following is a summary of the Company’s results for the first three months of 2010 and 2009:

 

 

 

Three months ended

 

Percent of

 

Three months ended

 

Percent of

 

Percent

 

(in thousands, except statistical data)

 

March 31, 2010

 

Revenue

 

March 31, 2009

 

Revenue

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

39,403

 

100

%

$

36,960

 

100

%

7

%

Hotel direct expenses

 

24,876

 

63

%

24,369

 

66

%

2

%

Taxes, insurance and other expense

 

2,575

 

7

%

2,424

 

7

%

6

%

Land lease expense

 

1,597

 

4

%

1,591

 

4

%

%

General and administrative expense

 

1,197

 

3

%

1,062

 

3

%

13

%

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

$

8,652

 

 

 

$

7,865

 

 

 

10

%

Investment income, net

 

3,016

 

 

 

12

 

 

 

N/A

 

Interest expense

 

(2,133

)

 

 

(1,543

)

 

 

38

%

 

 

 

 

 

 

 

 

 

 

 

 

Number of hotels

 

51

 

 

 

51

 

 

 

%

Average RevPAR Index(1)

 

135

 

 

 

130

 

 

 

4

%

ADR

 

$

105

 

 

 

$

108

 

 

 

-3

%

Occupancy

 

65

%

 

 

60

%

 

 

8

%

RevPAR

 

$

68

 

 

 

$

64

 

 

 

6

%

 


(1)Statistics calculated from data provided by Smith Travel Research, Inc.® and excludes new properties open less than 2 years.

 

Hotels Owned

 

The following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each of the 51 hotels the Company owned at March 31, 2010.  All dollar amounts are in thousands.

 

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Gross

 

 

 

 

 

 

 

 

 

Date

 

 

 

Purchase

 

Location

 

State

 

Brand

 

Manager

 

Acquired

 

Rooms

 

Price

 

Birmingham

 

AL

 

Homewood Suites

 

McKibbon

 

5/23/2008

 

95

 

$

16,500

 

Rogers

 

AR

 

Fairfield Inn & Suites

 

Intermountain

 

2/29/2008

 

99

 

8,000

 

Rogers

 

AR

 

Residence Inn

 

Intermountain

 

2/29/2008

 

88

 

11,744

 

Springdale

 

AR

 

Residence Inn

 

Intermountain

 

3/14/2008

 

72

 

5,606

 

Sacramento

 

CA

 

Hilton Garden Inn

 

Dimension

 

3/7/2008

 

154

 

27,630

 

Cypress

 

CA

 

Courtyard

 

Dimension

 

4/30/2008

 

180

 

31,164

 

Burbank

 

CA

 

Residence Inn

 

Marriott

 

5/13/2008

 

166

 

50,500

 

Oceanside

 

CA

 

Residence Inn

 

Marriott

 

5/13/2008

 

125

 

28,750

 

Tulare

 

CA

 

Hampton Inn & Suites

 

Inn Ventures

 

6/26/2008

 

86

 

10,331

 

San Jose

 

CA

 

Homewood Suites

 

Dimension

 

7/2/2008

 

140

 

21,862

 

Tallahassee

 

FL

 

Hilton Garden Inn

 

LBA

 

1/25/2008

 

85

 

13,200

 

Sanford

 

FL

 

SpringHill Suites

 

LBA

 

3/14/2008

 

105

 

11,150

 

Jacksonville

 

FL

 

Homewood Suites

 

McKibbon

 

6/17/2008

 

119

 

23,250

 

Tampa

 

FL

 

TownePlace Suites

 

McKibbon

 

6/17/2008

 

95

 

11,250

 

Port Wentworth

 

GA

 

Hampton Inn

 

Newport

 

1/2/2008

 

106

 

10,780

 

Savannah

 

GA

 

Hilton Garden Inn

 

Newport

 

7/31/2008

 

105

 

12,500

 

Overland Park

 

KS

 

SpringHill Suites

 

True North

 

3/17/2008

 

102

 

8,850

 

Overland Park

 

KS

 

Residence Inn

 

True North

 

4/30/2008

 

120

 

15,850

 

Wichita

 

KS

 

Courtyard

 

Intermountain

 

6/13/2008

 

90

 

8,874

 

Overland Park

 

KS

 

Fairfield Inn & Suites

 

True North

 

8/20/2008

 

110

 

12,050

 

Bowling Green

 

KY

 

Hampton Inn

 

Newport

 

12/6/2007

 

130

 

18,832

 

Marlborough

 

MA

 

Residence Inn

 

True North

 

1/15/2008

 

112

 

20,200

 

Westford

 

MA

 

Hampton Inn & Suites

 

True North

 

3/6/2008

 

110

 

15,250

 

Westford

 

MA

 

Residence Inn

 

True North

 

4/30/2008

 

108

 

14,850

 

Annapolis

 

MD

 

Hilton Garden Inn

 

White

 

1/15/2008

 

126

 

25,000

 

Kansas City

 

MO

 

Residence Inn

 

True North

 

4/30/2008

 

106

 

17,350

 

Greensboro

 

NC

 

SpringHill Suites

 

Newport

 

11/9/2007

 

82

 

8,000

 

Matthews

 

NC

 

Hampton Inn

 

Newport

 

1/15/2008

 

92

 

11,300

 

Dunn

 

NC

 

Hampton Inn

 

McKibbon

 

1/24/2008

 

120

 

12,500

 

Concord

 

NC

 

Hampton Inn

 

Newport

 

3/7/2008

 

101

 

9,200

 

Fayetteville

 

NC

 

Residence Inn

 

Intermountain

 

5/9/2008

 

92

 

12,201

 

Winston-Salem

 

NC

 

Courtyard

 

McKibbon

 

5/19/2008

 

122

 

13,500

 

Carolina Beach

 

NC

 

Courtyard

 

Crestline

 

6/5/2008

 

144

 

24,214

 

Wilmington

 

NC

 

Fairfield Inn & Suites

 

Crestline

 

12/11/2008

 

122

 

14,800

 

Somerset

 

NJ

 

Courtyard

 

Newport

 

11/9/2007

 

162

 

16,000

 

New York

 

NY

 

Renaissance

 

Marriott

 

1/4/2008

 

200

 

99,000

 

Tulsa

 

OK

 

Hampton Inn & Suites

 

Western

 

12/28/2007

 

102

 

10,200

 

Greenville

 

SC

 

Residence Inn

 

McKibbon

 

5/19/2008

 

78

 

8,700

 

Hilton Head

 

SC

 

Hilton Garden Inn

 

McKibbon

 

5/29/2008

 

104

 

13,500

 

Columbia

 

SC

 

Hilton Garden Inn

 

Newport

 

9/22/2008

 

143

 

21,200

 

Chattanooga

 

TN

 

Homewood Suites

 

LBA

 

12/14/2007

 

76

 

8,600

 

Texarkana

 

TX

 

Courtyard

 

Intermountain

 

3/7/2008

 

90

 

12,924

 

Texarkana

 

TX

 

TownePlace Suites

 

Intermountain

 

3/7/2008

 

85

 

9,057

 

Harrisonburg

 

VA

 

Courtyard

 

Newport

 

11/16/2007

 

125

 

23,219

 

Charlottesville

 

VA

 

Courtyard

 

Crestline

 

6/5/2008

 

137

 

27,900

 

Virginia Beach

 

VA

 

Courtyard

 

Crestline

 

6/5/2008

 

141

 

27,100

 

Virginia Beach

 

VA

 

Courtyard

 

Crestline

 

6/5/2008

 

160

 

39,700

 

Suffolk

 

VA

 

Courtyard

 

Crestline

 

7/2/2008

 

92

 

12,500

 

Suffolk

 

VA

 

TownePlace Suites

 

Crestline

 

7/2/2008

 

72

 

10,000

 

Chesapeake

 

VA

 

Marriott

 

Crestline

 

10/21/2008

 

226

 

38,400

 

Tukwila

 

WA

 

Homewood Suites

 

Dimension

 

7/2/2008

 

106

 

15,707

 

 

 

 

 

 

 

 

 

 

 

5,908

 

$

950,745

 

 

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With the exception of assumed mortgage loans in 2008 on 15 of its hotel properties, substantially all of the purchases were funded with proceeds of the Company’s best-efforts offering of Units, which was completed in April 2008.  The Company leases all of its hotels to its wholly-owned taxable REIT subsidiaries under hotel lease agreements. The Company also used the proceeds of its offering to pay $19.0 million, representing 2% of the gross purchase price for these hotels, as a commission to Apple Suites Realty Group, Inc. (“ASRG”), 100% owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer.  No hotels have been purchased since December 2008, and there are no outstanding purchase contracts for additional hotels as of March 31, 2010.

 

Of the Company’s 51 hotels owned at March 31, 2010, six were purchased in 2007 and 45 were purchased in 2008.

 

Results of Operations

 

As of March 31, 2010, the Company owned 51 hotels with 5,908 rooms.  The Company’s portfolio of hotels owned is unchanged since 2008.  Hotel performance is impacted by many factors, including economic conditions in the United States, as well as each locality.  Due to a continuing recessionary economic environment throughout the United States, the financial results of the Company’s hotels were below pre-recessionary levels, however they did show modest improvement from results for the same period in 2009.  Although it is anticipated the properties’ performance will continue to be below comparable pre-recession operating periods until general economic conditions improve, the Company does anticipate moderate revenue and income improvement as compared to 2009 due to the significant number of renovations (12) completed in 2009 and the significant number of newly opened properties acquired by the Company in 2008 (9) which were in a ramp up stage in 2009.  The Company will continue to aggressively pursue market opportunities to improve revenue and aggressively pursue cost controls to improve results during and after the economic downturn.  Although it is not possible to predict when economic conditions will improve or their impact on the hotel industry, many analysts forecast RevPAR to stabilize in 2010 as compared to 2009.

 

Revenues

 

The Company’s principal source of revenue is hotel room revenue and other related revenue.  For the three months ended March 31, 2010 and 2009, the Company had total revenue of $39.4 million and $37.0 million.  Revenue for the hotel located in New York, New York (the “New York hotel”) was $3.9 million or 10% of total revenue for the first quarter of 2010 and $1.8 million or 5% of total revenue for the first quarter of 2009.

 

For the three months ended March 31, 2010, the hotels achieved combined average occupancy of approximately 65%, ADR of $105 and RevPAR of $68.  The New York hotel had average occupancy of 82%, ADR of $211 and RevPAR of $173.  For the three months ended March 31, 2009, the hotels achieved combined average occupancy of approximately 60%, ADR of $108 and RevPAR of $64.  For the same period, the New York hotel had average occupancy of 53%, ADR of $137 and RevPAR of $72.  As reflected in the Company’s occupancy increase, the industry is beginning to realize an increase in demand.  The increase is a result of reduced room rates and the sense that the overall economy is stabilizing, generating more business and leisure travelers.

 

While the revenue rates earned by the Company are consistent with industry and brand averages, the Company continues to focus on improving market share.  The Company’s properties overall lead their respective markets with an Average RevPAR Index (a comparison of a property’s RevPAR to the market average) of 135 year-to-date, a 4% increase from 2009 for comparable properties.

 

During the first quarter of 2009, the Company was in the process of completing its conversion of the New York hotel from an unbranded hotel to a Renaissance hotel.  Consequently, the hotel had an average of 35 rooms out of service each night for the first three months of 2009 and experienced other disruptions to its common areas.  As a result of the conversion effort and declines in economic conditions, revenue at the hotel was unusually low for the first quarter of 2009.  The Company completed the conversion to a Renaissance in late April 2009.  The RevPAR Index for the New York hotel was 115 for the three months

 

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ending March 31, 2010, an increase of 130% from 50% for the first three months of 2009.  The Company believes there continues to be opportunity for market penetration and continues to work with Marriott management to increase the RevPAR Index for the New York hotel.

 

Expenses

 

For the three months ended March 31, 2010 and 2009, hotel direct expenses of the Company’s hotels totaled $24.9 million or 63% of total revenue (the New York hotel had direct expenses of $2.5 million or 62% of its total revenue for the quarter) and $24.4 million or 66% of total revenue (the New York hotel had direct expenses of $1.7 million or 96% of its total revenue for the quarter).  Hotel direct expenses consist of operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees.  Operating expenses in 2009 were negatively impacted due to the significant number of renovations and the ramp up of newly opened hotels in late 2008.

 

The Company continues its efforts to control costs, however, certain operating costs such as management costs, certain utility costs and minimum supply and maintenance costs are relatively fixed in nature, and cannot be curtailed or eliminated.  The Company has been successful in reducing certain labor costs, food and supply costs and utility costs by continually monitoring and sharing utilization data across its hotels and management companies.

 

Taxes, insurance, and other expense for the three months ended March 31, 2010 and 2009 totaled $2.6 million, or 7% of total revenues, and $2.4 million, or 7% of total revenues (of which approximately $137 thousand and $133 thousand related to the New York hotel).

 

Land lease expense was $1.6 million for both three months ended March 31, 2010 and 2009.  This expense represents the expense incurred by the Company to lease land for five hotel properties.  Land lease expense for the New York hotel was $1.5 million for both the first quarter of 2010 and 2009.

 

General and administrative expense for the three months ended March 31, 2010 and 2009 was $1.2 million and $1.1 million.  The principal components of general and administrative expense are advisory fees, legal fees, accounting fees, reporting expense, and the Company’s share of loss from its investment in Apple Air Holding LLC.

 

Depreciation expense was $8.7 million for the first quarter of 2010 and $7.9 million for the first quarter of 2009.  These expenses include $1.6 million and $1.3 million for the New York hotel.  Depreciation expense represents depreciation expense of the Company’s hotel buildings and related improvements, and associated furniture, fixtures and equipment, for the respective periods owned.  The increase is a result of capital improvements made by the Company in 2009 of approximately $25 million to complete its 12 renovations in 2009.

 

In the first quarter of 2010, the Company sold its equity securities in a publicly traded real estate investment trust, resulting in realized gains and other investment income of $3.0 million.  For the same period in 2009, the Company had investment income of $12 thousand.

 

Interest expense for the first quarter of 2010 and 2009 was $2.1 million and $1.5 million.  Interest expense for both periods includes interest expense on 15 mortgages assumed in 2008 and the Company’s line of credit, offset by capitalized interest of $101 thousand in 2010, related to the renovation of two hotel properties and capitalized interest of $571 thousand in the first quarter of 2009 related to the renovation of eight hotel properties.

 

Liquidity and Capital Resources

 

In November 2008, the Company entered into a $75.0 million revolving line of credit which expires in November 2010.  The line of credit was obtained to meet short-term cash needs as the Company planned on completing a significant number of hotel renovations, and newly opened properties have a period of ramp up to normal operating status.  Through March 31, 2010, substantially all of the planned renovation work was completed.  With the availability of this line of credit, the Company maintains little cash on hand,

 

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accessing the line as necessary.  As a result, cash on hand was $0 at March 31, 2010.  The outstanding balance on the line of credit was $67.0 million at March 31, 2010 and its interest rate was 2.0%.  The Company anticipates that cash flow from operations and the revolving line of credit will be adequate to meet its liquidity requirements, including required distributions to shareholders, capital expenditures and debt service.  The Company is pursuing extending its existing debt that is due in 2010 and additional financing in 2010 so that it can make distributions in excess of required amounts to maintain its REIT status.  The Company intends to maintain a relatively stable dividend rate instead of raising and lowering the distribution rate with varying economic cycles.  With the depressed financial results of the Company and the lodging industry, the Company will attempt to utilize additional financing to achieve this objective.  Although the Company has relatively low levels of debt, there can be no assurances it will be successful with this strategy and may need to reduce its distributions to required levels.

 

To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income.  Distributions in the first three months of 2010 totaled $18.0 million and were paid monthly at a rate of $0.064167 per common share.  For the same three month period, the Company’s cash generated from operations was approximately $4.5 million.  This shortfall includes a return of capital and was funded primarily by additional borrowings under the Company’s line of credit facility.  The Company intends to continue paying distributions on a monthly basis.  However, since there can be no assurance of the ability of the Company’s properties to provide income at this level, there can be no assurance as to the classification or duration of distributions at the current monthly rate.  In consideration of the weakness in economic conditions throughout the United States, the Board of Directors monitors the Company’s distribution rate relative to the performance of the hotels on an ongoing basis and may make adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company.  In April 2009, the Board of Directors approved a reduction in the Company’s annual distribution rate from $0.88 to $0.77 per common share.  The reduction of the dividend was effective beginning with the May 15, 2009 distribution.

 

The Company has on-going capital commitments to fund its capital improvements. The Company is required, under all of the hotel management 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 March 31, 2010, the Company held $11.4 million in reserve for capital expenditures.  Total capital expenditures in the first three months of 2010 for all renovations and items recurring in nature were $2.4 million.  Total capital expenditures for 2010 are anticipated to be approximately $11 million.  The Company completed 12 renovations throughout 2009.  In 2010 the Company anticipates the completion of three renovations, thus substantially reducing capital expenditures as compared to 2009.

 

In the second quarter of 2008, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. The Company has registered 10 million Units for potential issuance under the plan. During the first three months of 2010, approximately 0.6 million Units were issued under the plan representing approximately $6.5 million.  For the three months ending March 31, 2009, approximately 0.7 million Units were issued under the plan representing approximately $7.3 million.  Since inception of the plan through March 31, 2010, the Company has issued approximately 4.5 million Units representing approximately $49.3 million.

 

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 12-month period 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 for redemptions, reject any

 

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request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program.  During the three months ended March 31, 2010, the Company redeemed approximately 216 thousand Units in the amount of $2.2 million under the program.  For the first three months of 2009, the Company redeemed approximately 387 thousand Units in the amount of $4.0 million.  Since inception of the program through March 31, 2010, the Company has redeemed approximately 1.6 million Units representing approximately $16.5 million.

 

Related Party Transactions

 

The Company has significant transactions with related parties.  These transactions cannot be construed to be arm’s length, and the results of the Company’s operations may be different if these transactions were conducted with non-related parties.

 

The Company has a contract with Apple Suites Realty Group (“ASRG”), to provide brokerage services for the acquisition and disposition of the Company’s real estate assets. In accordance with the contract, ASRG is paid a fee of 2% of the gross purchase price of any acquisitions or gross sale price of any dispositions of real estate investments, subject to certain conditions.  As of March 31, 2010 payments to ASRG for services under the terms of this contract have totaled $19.0 million since inception, which were capitalized as a part of the purchase price of the hotels.  No brokerage services were provided by ASRG in the first quarter of 2010 or in 2009.

 

The Company is party to an advisory agreement with A8A, pursuant to which A8A provides 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. A8A utilizes Apple REIT Six, Inc. to provide these services.  Total expenses related to this agreement totaled $0.8 million in the first three months of 2010 and $0.7 million for the same three months of 2009.  Of this total expense, $0.3 million and $0.2 million were fees paid to A8A and $0.5 million were expenses reimbursed by A8A to Apple REIT Six, Inc. in both first quarters.  These expenses are recorded in General and Administrative expense.

 

ASRG and A8A 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 Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc.  Members of the Company’s Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc.

 

Subsequent Events

 

In April 2010, the Company declared and paid approximately $6.0 million in distributions to its common shareholders, or $0.064167 per outstanding common share.  Under the Company’s Dividend Reinvestment Plan, $2.2 million were reinvested, resulting in the issuance of approximately 198,000 Units.

 

In April 2010, the Company redeemed approximately 313,000 Units in the amount of $3.2 million under its Unit Redemption Program.

 

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.

 

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Seasonality

 

The hotel industry historically has been seasonal in nature.  Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters.  As a result, there may be quarterly fluctuations in results of operations.  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 or available credit to make distributions.

 

Recent Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board 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.

 

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 March 31, 2010, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk or commodity price risk.  The Company will be exposed to interest rate risk due to possible changes in short term interest rates as it invests its cash or borrows on its line of credit and due to its variable interest rate mortgage on its Columbia, South Carolina hotel.  The Company had an outstanding balance of $67.0 million on its $75 million line of credit at March 31, 2010, and to the extent it utilizes the line of credit, the Company will be exposed to changes in short-term interest rates.  The outstanding balance of the Company’s variable rate mortgage was $11.0 million at March 31, 2010.  Based on these outstanding balances at March 31, 2010, every 100 basis point change in interest rates will impact the Company’s annual net income by $0.8 million, all other factors remaining the same.  The Company’s cash balance at March 31, 2010 was $0.

 

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

 

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 12-month period 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 for 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 first quarter of 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

 

January 2010

 

216,358

 

$

10.39

 

1,592,179

 

 

(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. 333-140548) effective July 19, 2007)

 

 

 

3.2

 

Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.2 to amendment no. 1 to the registrant’s registration statement on Form S-11 (SEC File No. 333-140548) effective July 19, 2007)

 

 

 

31.1

 

Certification of the Company’s Chief Executive Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act, as amended (FILED HEREWITH).

 

 

 

31.2

 

Certification of the Company’s Chief Financial Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act, as amended (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).

 

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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 Eight, Inc.

 

 

 

 

 

 

By:

/s/    GLADE M. KNIGHT

 

Date: May 5, 2010

 

Glade M. Knight,

 

 

 

Chairman of the Board, and
Chief Executive Officer
(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

By:

/s/    BRYAN PEERY

 

Date: May 5, 2010

 

Bryan Peery,

 

 

 

Chief Financial Officer
(Principal Financial and Principal Accounting Officer)

 

 

 

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