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EX-31.2 - Apple REIT Eight, Inc.c63234_ex31-2.htm
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EX-32.1 - Apple REIT Eight, Inc.c63234_ex32-1.htm



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 SEPTEMBER 30, 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 November 1, 2010: 94,221,139



Apple REIT Eight, Inc.
FORM 10-Q
INDEX

 

 

 

 

 

 

 

Page
Number

 

 

 


PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

Consolidated Balance Sheets –September 30, 2010 and December 31, 2009

 

3

 

Consolidated Statements of Operations and Comprehensive Income – Three and nine months ended September 30, 2010 and 2009

 

4

 

Consolidated Statements of Cash Flows – Nine months ended September 30, 2010 and 2009

 

5

 

Notes to Consolidated Financial Statements

 

6

Item 2.

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

 

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

20

Item 4.

Controls and Procedures

 

20

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

21

Item 6.

Exhibits

 

22

 

 

 

 

Signatures

 

 

23

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


Apple REIT Eight, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

September 30,
2010

 

December 31,
2009

 

 

 




 

ASSETS

 

 

 

 

 

 

 

Investment in hotels, net of accumulated depreciation of $81,472 and $55,282

 

$

953,643

 

$

974,773

 

Cash and cash equivalents

 

 

501

 

 

 

Restricted cash-furniture, fixtures and other escrows

 

 

10,178

 

 

12,268

 

Due from third party managers, net

 

 

6,597

 

 

3,919

 

Other assets, net

 

 

4,452

 

 

7,891

 

 

 






 

TOTAL ASSETS

 

$

975,371

 

$

998,851

 

 

 






 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

16,597

 

$

14,465

 

Intangible liabilities, net

 

 

10,816

 

 

11,112

 

Notes payable

 

 

192,668

 

 

184,175

 

 

 






 

TOTAL LIABILITIES

 

 

220,081

 

 

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 94,619,378 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 94,619,378 and 93,643,430 shares

 

 

938,693

 

 

927,269

 

Distributions greater than net income

 

 

(183,427

)

 

(140,598

)

Accumulated other comprehensive income

 

 

 

 

2,404

 

 

 






 

TOTAL SHAREHOLDERS’ EQUITY

 

 

755,290

 

 

789,099

 

 

 






 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

975,371

 

$

998,851

 

 

 






 

See notes to consolidated financial statements.

3



 

Apple REIT Eight, Inc.

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(In thousands, except per share data)


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months
ended
September 30,

2010

 

Three months
ended
September 30,

2009

 

Nine months
ended
September 30,

2010

 

Nine months
ended
September 30,

2009

 

 

 




 


 


 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Room revenue

 

$

48,418

 

$

44,953

 

$

131,057

 

$

121,472

 

Other revenue

 

 

3,519

 

 

3,396

 

 

9,557

 

 

9,373

 

 

 



 



 



 



 

Total revenue

 

 

51,937

 

 

48,349

 

 

140,614

 

 

130,845

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

12,940

 

 

12,591

 

 

36,293

 

 

34,787

 

Hotel administrative expense

 

 

4,024

 

 

4,064

 

 

11,747

 

 

12,210

 

Sales and marketing

 

 

3,795

 

 

3,367

 

 

10,646

 

 

9,699

 

Utilities

 

 

2,441

 

 

2,274

 

 

6,228

 

 

6,058

 

Repair and maintenance

 

 

2,686

 

 

2,412

 

 

7,292

 

 

6,779

 

Franchise fees

 

 

2,093

 

 

1,974

 

 

5,565

 

 

5,348

 

Management fees

 

 

1,864

 

 

1,729

 

 

4,918

 

 

4,652

 

Taxes, insurance and other

 

 

2,558

 

 

2,596

 

 

7,844

 

 

7,615

 

Land lease expense

 

 

1,597

 

 

1,596

 

 

4,791

 

 

4,777

 

General and administrative

 

 

1,164

 

 

1,033

 

 

3,900

 

 

3,393

 

Depreciation expense

 

 

8,791

 

 

8,355

 

 

26,190

 

 

24,330

 

 

 



 



 



 



 

Total expenses

 

 

43,953

 

 

41,991

 

 

125,414

 

 

119,648

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

7,984

 

 

6,358

 

 

15,200

 

 

11,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income, net

 

 

5

 

 

16

 

 

3,028

 

 

33

 

Interest expense

 

 

(2,328

)

 

(1,873

)

 

(6,767

)

 

(5,283

)

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,661

 

$

4,501

 

$

11,461

 

$

5,947

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

 

 

 

618

 

 

 

 

2,195

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

5,661

 

$

5,119

 

$

11,461

 

$

8,142

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per common share

 

$

0.06

 

$

0.05

 

$

0.12

 

$

0.06

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

 

94,381

 

 

93,105

 

 

94,075

 

 

92,812

 

 

 



 



 



 



 

See notes to consolidated financial statements.

4



 

Apple REIT Eight, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


 

 

 

 

 

 

 

 

 

 

Nine months
ended

September 30, 2010

 

Nine months
ended

September 30, 2009

 

 

 




 

Cash flow from operating activities:

 

 

 

 

 

 

 

Net income

 

$

11,461

 

$

5,947

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

26,190

 

 

24,330

 

 

 

 

 

 

 

 

 

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

 

 

268

 

 

(461

)

Net realized gain on sale of investments

 

 

(3,011

)

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase)/decrease in other assets

 

 

(1,054

)

 

2,264

 

Increase in funds due from third party managers

 

 

(2,678

)

 

(3,202

)

Increase in accounts payable and accrued expenses

 

 

2,956

 

 

7,145

 

 

 






 

Net cash provided by operating activities

 

 

34,132

 

 

36,023

 

 

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

 

 

Decrease/(increase) in capital improvement reserves

 

 

2,788

 

 

(1,056

)

Proceeds from sale of equity securities - available for sale

 

 

3,804

 

 

 

Investment in other assets

 

 

 

 

(3,240

)

Capital improvements

 

 

(5,884

)

 

(22,404

)

 

 






 

Net cash provided by (used in) investing activities

 

 

708

 

 

(26,700

)

 

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

 

 

Net proceeds related to issuance of Units

 

 

19,576

 

 

20,334

 

Redemptions of Units

 

 

(8,271

)

 

(10,193

)

Cash distributions paid to common shareholders

 

 

(54,290

)

 

(56,955

)

Net proceeds from line of credit

 

 

10,320

 

 

39,055

 

Payments of notes payable

 

 

(1,674

)

 

(1,564

)

 

 






 

Net cash used in financing activities

 

 

(34,339

)

 

(9,323

)

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

501

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

 

 

 

 

 

 






 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

501

 

$

 

 

 






 

See notes to consolidated financial statements.

5


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 rules and regulations for reporting on Form 10-Q. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States for complete financial statements. 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 and nine months ended September 30, 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 common share and one Series A preferred share, 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 September 30, 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.

Distributions

The Company’s annual distribution rate as of September 30, 2010 was $0.77 per common share payable monthly. For the nine months ended September 30, 2010 and 2009 the Company made distributions of $0.58 and $0.61 per common share for a total $54.3 million and $57.0 million. For the three months ended September 30, 2010 and 2009 the Company made distributions of $0.19 and $0.19 per common share for a total $18.2 million and $17.9 million.

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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Earnings Per Common Share

Basic earnings per common share is computed as net income divided by the weighted average number of common 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 shares with a dilutive effect for the three and nine months ended September 30, 2010 or 2009. As a result, basic and

6


dilutive 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.

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

Included in Other assets, net on the Company’s consolidated balance sheet is a 24% ownership interest in Apple Air Holding, LLC (“Apple Air”), purchased by the Company for $3.2 million in cash in 2009. The other members of Apple Air are Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc. 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. The Company’s ownership interest was $2.4 million at September 30, 2010 and $2.8 million at December 31, 2009. For the three months ended September 30, 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. For the nine months ended September 30, 2010 and 2009, the Company recorded a loss of approximately $0.3 million in each period as its share of the net loss of Apple Air. This loss primarily relates to depreciation of the aircraft, and is included in General and Administrative expense on the Company’s consolidated statements of operations.

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. Notes Payable

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, 0.26% at September 30, 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 September 30, 2010, the credit line had an outstanding principal balance of $68.7 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.

7


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 September 30, 2010, the carrying value and estimated fair value of the Company’s debt was $192.7 million and $197.6 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 $2.3 million for the first nine months of 2010 and $2.1 million for the same period in 2009. Of these total expenses, $0.8 million were fees paid to A8A for each of the nine months ended September 30, 2010 and 2009 and $1.5 million and $1.4 million were expenses reimbursed by A8A to Apple REIT Six, Inc. for the nine months ended September 30, 2010 and 2009. 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., Apple REIT Nine, Inc. and Apple REIT Ten, Inc. (a newly formed REIT). Members of the Company’s Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, 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 nine months of 2010, approximately 1.8 million Units were issued under the plan representing approximately $19.6 million. For the nine months ending September 30, 2009, approximately 1.8 million Units were issued under the plan representing approximately $20.3 million. Since inception of the plan through September 30, 2010, the Company has issued approximately 5.7 million Units representing approximately $62.4 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 is 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 nine months ended September 30, 2010, the Company redeemed approximately 804 thousand Units in the amount of $8.3 million under the program. For the first nine months of 2009, the Company redeemed

8


approximately 989 thousand Units in the amount of $10.2 million. Since inception of the program through September 30, 2010, the Company has redeemed approximately 2.2 million Units representing approximately $22.5 million.

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.

9



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2010

 

 

 


 

 

 

New York,
New York
Hotel

 

All Other
Hotels

 

Corporate

 

Consolidated

 

 

 








 

Total revenue

 

$

4,555

 

$

47,382

 

$

 

$

51,937

 

Hotel operating expenses

 

 

4,541

 

 

29,457

 

 

 

 

33,998

 

General and administrative expense

 

 

 

 

 

 

1,164

 

 

1,164

 

Depreciation expense

 

 

1,627

 

 

7,164

 

 

 

 

8,791

 

 

 












 

Operating income/(loss)

 

 

(1,613

)

 

10,761

 

 

(1,164

)

 

7,984

 

Investment income, net

 

 

 

 

 

 

5

 

 

5

 

Interest expense

 

 

 

 

(1,939

)

 

(389

)

 

(2,328

)

 

 












 

Net income/(loss)

 

$

(1,613

)

$

8,822

 

$

(1,548

)

$

5,661

 

 

 












 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

119,231

 

$

853,057

 

$

3,083

 

$

975,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2010

 

 

 


 

 

 

New York,
New York
Hotel

 

All Other
Hotels

 

Corporate

 

Consolidated

 

 

 








 

Total revenue

 

$

13,363

 

$

127,251

 

$

 

$

140,614

 

Hotel operating expenses

 

 

13,023

 

 

82,301

 

 

 

 

95,324

 

General and administrative expense

 

 

 

 

 

 

3,900

 

 

3,900

 

Depreciation expense

 

 

4,822

 

 

21,368

 

 

 

 

26,190

 

 

 












 

Operating income/(loss)

 

 

(4,482

)

 

23,582

 

 

(3,900

)

 

15,200

 

Investment income, net

 

 

 

 

 

 

3,028

 

 

3,028

 

Interest expense

 

 

 

 

(5,672

)

 

(1,095

)

 

(6,767

)

 

 












 

Net income/(loss)

 

$

(4,482

)

$

17,910

 

$

(1,967

)

$

11,461

 

 

 












 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

119,231

 

$

853,057

 

$

3,083

 

$

975,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2009

 

 

 


 

 

 

New York,
New York
Hotel

 

All Other
Hotels

 

Corporate

 

Consolidated

 

 

 








 

Total revenue

 

$

3,929

 

$

44,420

 

$

 

$

48,349

 

Hotel operating expenses

 

 

4,351

 

 

28,252

 

 

 

 

32,603

 

General and administrative expense

 

 

 

 

 

 

1,033

 

 

1,033

 

Depreciation expense

 

 

1,536

 

 

6,819

 

 

 

 

8,355

 

 

 












 

Operating income/(loss)

 

 

(1,958

)

 

9,349

 

 

(1,033

)

 

6,358

 

Investment income, net

 

 

 

 

 

 

16

 

 

16

 

Interest (expense)/income

 

 

168

 

 

(1,782

)

 

(259

)

 

(1,873

)

 

 












 

Net income/(loss)

 

$

(1,790

)

$

7,567

 

$

(1,276

)

$

4,501

 

 

 












 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

123,119

 

$

876,348

 

$

6,288

 

$

1,005,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2009

 

 

 


 

 

 

New York,
New York
Hotel

 

All Other
Hotels

 

Corporate

 

Consolidated

 

 

 








 

Total revenue

 

$

8,901

 

$

121,944

 

$

 

$

130,845

 

Hotel operating expenses

 

 

11,470

 

 

80,455

 

 

 

 

91,925

 

General and administrative expense

 

 

 

 

 

 

3,393

 

 

3,393

 

Depreciation expense

 

 

4,279

 

 

20,051

 

 

 

 

24,330

 

 

 












 

Operating income/(loss)

 

 

(6,848

)

 

21,438

 

 

(3,393

)

 

11,197

 

Investment income, net

 

 

 

 

 

 

33

 

 

33

 

Interest (expense)/income

 

 

809

 

 

(5,455

)

 

(637

)

 

(5,283

)

 

 












 

Net income/(loss)

 

$

(6,039

)

$

15,983

 

$

(3,997

)

$

5,947

 

 

 












 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

123,119

 

$

876,348

 

$

6,288

 

$

1,005,755

 

10


8. Subsequent Events

In October 2010 the following events occurred:

 

 

 

The Company declared and paid approximately $6.1 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.

 

 

 

The Company redeemed approximately 596,000 Units in the amount of $6.5 million under its Unit Redemption Program.

 

 

 

The Company refinanced its mortgage note payable on its Westford Residence Inn property. The new mortgage note has a principal balance of $7.0 million with an interest rate of 5.3%. The loan calls for monthly payments of principal and interest of approximately $40,000, with the balance of $6.3 million due at maturity (October 1, 2015).

 

 

 

The Company effectively renewed its $75 million unsecured line of credit with Branch Banking and Trust Company (“BB&T”), extending the term for 2 years to October 2012. The interest rate on the loan increased to LIBOR plus 2.25% with a floor of 3.5%. Additionally, the Company entered into a secured $25 million term loan with BB&T. The loan is secured by two properties and matures in October 2012. The loan requires interest only payments monthly at LIBOR plus 2.25% with a floor of 3.5%. Both loans have financial covenants requiring a minimum consolidated net worth and debt service charge and a maximum debt to equity and distribution to income ratio.

 

 

 

Apple REIT Nine, Inc. purchased from the Company’s third party lender, the note payable secured by the Columbia Hilton Garden Inn. The purchase of the note by Apple REIT Nine, Inc. had no financial effect on the Company.

11


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 September 30, 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 select 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.

Although hotel performance can be influenced by many factors, including local competition, local and general economic conditions in the United States and the performance of individual managers assigned to each hotel, performance of the hotels as compared to other hotels within their respective local market, in general, has met the Company’s expectations for the period owned. With the significant decline in economic conditions throughout the United States, overall performance of the Company’s hotels since acquisition have not met expectations. Although there is no way to predict future general economic conditions, the Company’s and industry’s revenues and income are improving as compared to 2009, with industry estimates for the full year 2010 for revenue percentage increases in the low single digits as compared to 2009. Additionally, industry analysts are forecasting 2011 revenue percentage growth in the mid-single digits as compared to 2010.

In evaluating financial condition and operating performance, the most important indicators 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 if or how quickly general economic conditions will improve or their impact on the hotel industry, with the significant number of

12


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 improvement, the Company anticipates moderate growth for the remainder of 2010 as compared to 2009 for the Company’s hotels and continued growth in 2011. Additionally, with the overall economic 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 132 for the first nine months of 2010, a 3% increase from the same period in 2009 for comparable hotels.

The following is a summary of the Company’s results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 


 


 

(in thousands, except statistical data)

 

9/30/10

 

Percent of
Revenue

 

9/30/09

 

Percent of
Revenue

 

Percent
Change

 

9/30/10

 

Percent of
Revenue

 

9/30/09

 

Percent of
Revenue

 

Percent
Change

 






 






 




 






 

Total revenues

 

$

51,937

 

 

100

%

$

48,349

 

 

100

%

 

7

%

$

140,614

 

 

100

%

$

130,845

 

 

100

%

 

7

%

Hotel direct expenses

 

 

29,843

 

 

57

%

 

28,411

 

 

59

%

 

5

%

 

82,689

 

 

59

%

 

79,533

 

 

61

%

 

4

%

Taxes, insurance and other expense

 

 

2,558

 

 

5

%

 

2,596

 

 

5

%

 

-1

%

 

7,844

 

 

6

%

 

7,615

 

 

6

%

 

3

%

Land lease expense

 

 

1,597

 

 

3

%

 

1,596

 

 

3

%

 

%

 

4,791

 

 

3

%

 

4,777

 

 

4

%

 

%

General and administrative expense

 

 

1,164

 

 

2

%

 

1,033

 

 

2

%

 

13

%

 

3,900

 

 

3

%

 

3,393

 

 

3

%

 

15

%

Depreciation

 

 

8,791

 

 

 

 

 

8,355

 

 

 

 

 

5

%

 

26,190

 

 

 

 

 

24,330

 

 

 

 

 

8

%

Investment income, net

 

 

5

 

 

 

 

 

16

 

 

 

 

 

-69

%

 

3,028

 

 

 

 

 

33

 

 

 

 

 

N/A

 

Interest expense

 

 

(2,328

)

 

 

 

 

(1,873

)

 

 

 

 

24

%

 

(6,767

)

 

 

 

 

(5,283

)

 

 

 

 

28

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average RevPAR Index(1)

 

 

131

 

 

 

 

 

131

 

 

 

 

 

%

 

132

 

 

 

 

 

128

 

 

 

 

 

3

%

Number of hotels

 

 

51

 

 

 

 

 

51

 

 

 

 

 

%

 

51

 

 

 

 

 

51

 

 

 

 

 

%

Average Daily Rate (ADR)

 

$

117

 

 

 

 

$

116

 

 

 

 

 

1

%

$

112

 

 

 

 

$

112

 

 

 

 

 

%

Occupancy

 

 

76

%

 

 

 

 

71

%

 

 

 

 

7

%

 

72

%

 

 

 

 

67

%

 

 

 

 

7

%

RevPAR

 

$

89

 

 

 

 

$

82

 

 

 

 

 

9

%

$

81

 

 

 

 

$

75

 

 

 

 

 

8

%

Total Rooms Sold (2)

 

 

408,262

 

 

 

 

 

381,769

 

 

 

 

 

7

%

 

1,155,759

 

 

 

 

 

1,073,603

 

 

 

 

 

8

%

Total Rooms Available (3)

 

 

539,516

 

 

 

 

 

539,524

 

 

 

 

 

%

 

1,602,300

 

 

 

 

 

1,602,321

 

 

 

 

 

%


(1) Statistics calculated from data provided by Smith Travel Research, Inc.® and excludes new properties open less than 2 years or under renovation during the applicable period.
(2) Represents the number of room nights sold during the period.
(3) Represents the number of rooms owned by the Company multiplied by the number of nights in the period.

 


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 September 30, 2010. All dollar amounts are in thousands.

13



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location

 

 

State

 

 

Brand

 

 

Manager

 

 

Date
Acquired

 

 

Rooms

 

Gross
Purchase
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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14


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 September 30, 2010.

Of the Company’s 51 hotels owned at September 30, 2010, six were purchased in 2007 and 45 were purchased in 2008.

Results of Operations

As of September 30, 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. During the past two years, the overall weakness in the U.S. economy has had a considerable negative impact on both consumer and business travel. As a result, lodging demand in most markets in the United States has declined as compared to pre-recession levels. Although economic conditions have begun to improve, the Company expects demand for the industry as a whole to improve modestly and be below pre-recession levels until general economic conditions become more stable. The Company does anticipate moderate revenue and income improvements for the remainder of the year as compared to 2009 due to industry improvements, the significant number of renovations (15) 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. This improvement is expected to continue into 2011. The Company’s hotels have shown results consistent with industry and brand averages for the period of ownership.

 

Revenues

The Company’s principal source of revenue is hotel room revenue and other related revenue. For the three months ended September 30, 2010 and 2009, the Company had total revenue of $51.9 million and $48.3 million. Revenue for the hotel located in New York, New York (the “New York hotel”) was $4.6 million or 9% of total revenue for the third quarter of 2010 and $3.9 million or 8% of total revenue for the third quarter of 2009. For the three months ended September 30, 2010, the hotels achieved combined average occupancy of approximately 76%, ADR of $117 and RevPAR of $89. The New York hotel had average occupancy of 82%, ADR of $257 and RevPAR of $211. For the three months ended September 30, 2009, the hotels achieved combined average occupancy of approximately 71%, ADR of $116 and RevPAR of $82. For the same period, the New York hotel had average occupancy of 80%, ADR of $221 and RevPAR of $176.

For the nine months ended September 30, 2010 and 2009, the Company had total revenue of $140.6 million and $130.8 million. Revenue for the New York hotel was $13.4 million or 10% of total revenue for the nine months of 2010 and $8.9 million or 7% of total revenue for the first nine months of 2009. For the nine months ended September 30, 2010, the hotels achieved combined average occupancy of approximately 72%, ADR of $112 and RevPAR of $81. The New York hotel had average occupancy of 85%, ADR of $244 and RevPAR of $207. For the nine months ended September 30, 2009, the hotels achieved combined average occupancy of approximately 67%, ADR of $112 and RevPAR of $75. For the same period, the New York hotel had average occupancy of 67%, ADR of $190 and RevPAR of $128.

As reflected in the Company’s occupancy increase (the Company has seen year over year occupancy improvement every month since November 2009), the industry is beginning to realize an overall increase in demand as compared to 2009. 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 ADR still trails pre-recession levels, it has stabilized, and increased in the third quarter, as compared to 2009. As a result, the Company’s RevPAR has increased 8% year to date as compared to the same period in 2009. The Company anticipates

15


similar continued RevPAR improvement throughout the remainder of 2010 and mid-single digit percentage increases in 2011.

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, 100) of 132 year-to-date, a 3% increase from 2009 for comparable properties.

During the first half 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 32 rooms out of service each night for the first half 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 half of 2009. The Company completed the conversion to a Renaissance in late April 2009. The RevPAR Index for the New York hotel was 112 for the nine months ending September 30, 2010, an increase of 43% from 78 for the first nine months of 2009. Although the hotel’s revenue has increased 50% in the first nine months of 2010 as compared to the same period in 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 September 30, 2010, hotel direct expenses of the Company’s hotels totaled $29.8 million or 57% of total revenue (the New York hotel had direct expenses of $2.9 million or 60% of its total revenue for the quarter) and for the three months ended September 30, 2009 direct expenses were $28.4 million or 59% of total revenue (the New York hotel had direct expenses of $2.8 million or 72% of its total revenue for the quarter). For the nine months ended September 30, 2010 and 2009, hotel direct expenses of the Company’s hotels totaled $82.7 million or 59% of total revenue, and 79.5 million or 61% of total revenue (the New York hotel had direct expenses of $8.1 million or 60% of its total revenue for the 2010 nine-month period and direct expenses of $6.8 million or 77% of its total revenue for the first nine months of 2009). 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, relative to revenues, 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 September 30, 2010 and 2009 totaled $2.6 million, or 5% of total revenues in both years (of which approximately $186 thousand and $46 thousand related to the New York hotel). For the nine months ended September 30, 2010 and 2009, taxes, insurance, and other expenses were $7.8 million and $7.6 million, or 5% of total revenues (of which approximately $531 thousand and $221 thousand related to the New York hotel).

Land lease expense was $1.6 million for the three months ended September 30, 2010 and September 30, 2009 and was $4.8 million for the nine months ended September 30, 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 the third quarters of 2010 and 2009 and was $4.4 million for the nine months ended September 30, 2010 and 2009.

General and administrative expense for the three months ended September 30, 2010 and 2009 was $1.2 million and $1.0 million. For the nine months ended September 30, 2010 and 2009, general and administrative expense was $3.9 million and $3.4 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.

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Depreciation expense was $8.8 million for the third quarter of 2010 and $8.4 million for the third quarter of 2009. For the nine months ended September 30, 2010 and 2009, depreciation expense was $26.2 million and $24.3 million. These expenses include $1.6 million and $1.5 million for the New York hotel for the quarterly periods and $4.8 million and $4.3 million for the nine month periods ended September 30, 2010 and 2009. 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 12 renovations.

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.

Interest expense for the third quarter and nine months ended September 30, 2010 was $2.3 million and $6.8 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 the first quarter of 2010 related to the renovation of 2 hotels. Interest expense for the same periods in 2009 was $1.9 million and $5.3 million, which is offset by capitalized interest of $275 thousand for the three months of 2009 related to five hotels under renovation and $1.2 million for the nine month period in 2009, related to the renovation of 12 hotel properties.

Liquidity and Capital Resources

In November 2008, the Company entered into a $75.0 million revolving line of credit with an original term expiring in November 2010 (see Subsequent Events). 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 September 30, 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, accessing the line as necessary. Cash on hand was $0.5 million at September 30, 2010. The outstanding balance on the line of credit was $68.7 million at September 30, 2010 and its interest rate was 2.01%. 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 (the Company is not required to make any distributions at this time), capital expenditures and debt service. As discussed further in Subsequent Events, the Company has extended its existing line of credit and entered into a $25 million term loan so that it can make distributions in excess of required amounts to maintain its REIT status. The Company intends to maintain a relatively stable distribution 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 as compared to pre-recession levels, 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. If the Company were unsuccessful in extending its maturing debt in 2011 or if it were to default on its debt, it may be unable to make distributions.

To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions in the first nine months of 2010 totaled $54.3 million and were paid monthly at a rate of $0.064167 per common share. For the same nine month period, the Company’s cash generated from operations was approximately $34.1 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 distribution was effective beginning with the May 15, 2009 distribution.

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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 September 30, 2010, the Company held $8.5 million in reserve for capital expenditures. Total capital expenditures in the first nine months of 2010 were $5.1 million. Total capital expenditures for 2010 are anticipated to be approximately $6-8 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 distributions 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 nine months of 2010, approximately 1.8 million Units were issued under the plan representing approximately $19.6 million. For the nine months ending September 30, 2009, approximately 1.8 million Units were issued under the plan representing approximately $20.3 million. Since inception of the plan through September 30, 2010, the Company has issued approximately 5.7 million Units representing approximately $62.4 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 is 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 nine months ended September 30, 2010, the Company redeemed approximately 804 thousand Units in the amount of $8.3 million under the program. For the first nine months of 2009, the Company redeemed approximately 989 thousand Units in the amount of $10.2 million. Since inception of the program through September 30, 2010, the Company has redeemed approximately 2.2 million Units representing approximately $22.5 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 September 30, 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 nine months 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 $2.3

18


million for the first nine months of 2010 and $2.1 million for the same period in 2009. Of these total expenses, $0.8 million were fees paid to A8A for each of the nine months ended September 30, 2010 and 2009 and $1.5 million and $1.4 million were expenses reimbursed by A8A to Apple REIT Six, Inc. for the nine months ended September 30, 2010 and 2009. 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., Apple REIT Nine, Inc. and Apple REIT Ten, Inc. (a newly formed REIT). Members of the Company’s Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

Subsequent Events

In October 2010 the following events occurred:

 

 

 

The Company declared and paid approximately $6.1 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.

 

 

 

The Company redeemed approximately 596,000 Units in the amount of $6.5 million under its Unit Redemption Program.

 

 

 

The Company refinanced its mortgage note payable on its Westford Residence Inn property. The new mortgage note has a principal balance of $7.0 million with an interest rate of 5.3%. The loan calls for monthly payments of principal and interest of approximately $40,000, with the balance of $6.3 million due at maturity (October 1, 2015).

 

 

 

The Company effectively renewed its $75 million unsecured line of credit with Branch Banking and Trust Company (“BB&T”), extending the term for 2 years to October 2012. The interest rate on the loan increased to LIBOR plus 2.25% with a floor of 3.5%. Additionally, the Company entered into a secured $25 million term loan with BB&T. The loan is secured by two properties and matures in October 2012. The loan requires interest only payments monthly at LIBOR plus 2.25% with a floor of 3.5%. Both loans have financial covenants requiring a minimum consolidated net worth and debt service charge and a maximum debt to equity and distribution to income ratio.

 

 

 

Apple REIT Nine, Inc. purchased from the Company’s third party lender, the note payable secured by the Columbia Hilton Garden Inn. The purchase of the note by Apple REIT Nine, Inc. had no financial effect on the Company.

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.

Seasonality

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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 September 30, 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 $68.7 million on its $75 million line of credit at September 30, 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 $10.9 million at September 30, 2010. Based on these outstanding balances at September 30, 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 September 30, 2010 was $0.5 million.

 

 

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 is 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 third quarter of 2010 (no redemption occurred in August and September 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

 











July 2010

 

 

274,454

 

 

$10.26

 

 

2,179,497

 

 

(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: November 5, 2010

 


 

 

 

Glade M. Knight,
Chairman of the Board, and
Chief Executive Officer
(Principal Executive Officer)

 

 

 

 

 

 

By:

                    /s/ BRYAN PEERY

 

Date: November 5, 2010

 


 

 

 

Bryan Peery,
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)

 

 

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