Attached files
| file | filename |
|---|---|
| EX-21.1 - APPLE REIT SIX INC | c64650_ex21-1.htm |
| EX-31.2 - APPLE REIT SIX INC | c64650_ex31-2.htm |
| EX-23.1 - APPLE REIT SIX INC | c64650_ex23-1.htm |
| EX-32.1 - APPLE REIT SIX INC | c64650_ex32-1.htm |
| EX-31.1 - APPLE REIT SIX INC | c64650_ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
|
|
S |
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|
|
For the fiscal year ended December 31, 2010 |
|
or |
||
£ |
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|
Commission File Number 000-51270
APPLE REIT SIX, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Virginia |
20-0620523 |
|
|
||
814 East Main Street |
|
|
|
||
(804) 344-8121 |
||
Securities registered pursuant to Section 12(b) of the act: None
Securities registered pursuant to Section 12(g) of the Act:
Units (Each Unit consists of one common share, no par value and one Series A preferred share)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No S
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No S
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 S No £
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. S
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 £ |
Accelerated filer £ |
|
Non-accelerated filer S |
Smaller reporting company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S
There is currently no established public market in which the Company’s common shares are traded. Based upon the price that Apple REIT Six, Inc.’s common equity last sold, which was $11, on June 30, 2010, the aggregate market value of the voting common equity held by non-affiliates of the registrant on such date was $1,006,521,000. The Company does not have any non-voting common equity.
Number of registrant’s common shares outstanding as of February 28, 2011: 91,311,797
Documents Incorporated by Reference
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the registrant’s definitive proxy statement for the annual meeting of shareholders to be held on May 12, 2011.
APPLE REIT SIX, INC.
Page Business
2 Risk Factors
6 Unresolved Staff Comments
8 Properties
8 Legal Proceedings
11 (Removed and Reserved) Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
12 Selected Financial Data
14 Management’s Discussion and Analysis of Financial Condition and Results of Operations
17 Quantitative and Qualitative Disclosures about Market Risk
27 Financial Statements and Supplementary Data
28 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
47 Controls and Procedures
47 Other Information
47 Directors, Executive Officers and Corporate Governance
48 Executive Compensation
48 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
48 Certain Relationships and Related Transactions, and Director Independence
48 Principal Accounting Fees and Services
48 Exhibits, Financial Statement Schedules
49 This Form 10-K includes references to certain trademarks or service marks. The SpringHill SuitesÒ by Marriott, TownePlace SuitesÒ by Marriott, Fairfield InnÒ by Marriott, CourtyardÒ by Marriott, Residence Inn
Ò by Marriott and Marriott SuitesÒ trademarks are the property of Marriott International, Inc.
or one of its affiliates. The Homewood SuitesÒ by Hilton, Hilton Garden InnÒ, Hampton InnÒ and Hampton Inn & SuitesÒ trademarks are the property of Hilton Worldwide or one or more of its affiliates. For convenience, the applicable trademark or servicemark symbol has been omitted but will be deemed
to be included wherever the above-referenced terms are used. 1
FORM 10-K
Index
PART I This Annual 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 Apple REIT Six, Inc. (“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, 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 this Annual 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 and Item 1A. Item 1. Business Apple REIT Six, Inc. is a Virginia corporation formed to invest in hotels and other selected real estate in select metropolitan areas in the United States. Initial capitalization occurred on January 20, 2004 and operations began on May 28, 2004 when the Company acquired its first hotel. The Company is a real estate investment trust (“REIT”) which owns hotels in the United States. The REIT Modernization Act, effective January 1, 2001, permits real estate investment trusts to establish taxable businesses to conduct certain previously disallowed business activities. The Company has
wholly-owned taxable REIT subsidiaries which lease all of the Company’s hotels from wholly-owned qualified REIT subsidiaries. The hotels are operated and managed by affiliates of Marriott International, Inc. (“Marriott”), Stonebridge Realty Advisors, Inc. (“Stonebridge”), Hilton Worldwide (“Hilton”),
Western International (“Western”), Larry Blumberg & Associates (“LBA”), White Lodging Services Corporation (“WLS”), Inn Ventures, Inc. (“Inn Ventures”), or Newport Hospitality Group, Inc. (“Newport”) under separate hotel management agreements. The Company has no foreign operations or assets and its operating structure includes only one segment. The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated upon consolidation. Refer to Part
II, Item 8 of this report, for the consolidated financial statements. Website Access The address of the Company’s Internet website is www.applereitsix.com. The Company makes available free of charge through its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Business Objectives The Company’s primary objective is to enhance shareholder value by increasing funds from operations and cash available for distributions through internal growth and selective hotel renovation. This strategy includes utilizing the Company’s asset management expertise to improve the quality of the
Company’s hotels by aggressively managing room rates, partnering with industry leaders in hotel management and franchising the hotels with leading brands, thereby improving the performance of an individual hotel in its local market. When cost effective, the Company renovates its properties to increase
its ability to compete in particular markets. The Company believes its planned renovations and strong asset management will continue to increase each hotel’s performance in its individual market, although there can be no assurance of such results. As of December 31, 2010, the Company owned 68 hotels,
including two hotels under contract for sale. 2
Financing The Company has six notes payable that were assumed in conjunction with the acquisition of hotels. These notes have maturity dates ranging from 2011 to 2014. The Company also has available a $60 million line of credit that is used to fund capital expenditures along with general working capital
needs. The outstanding balance of the line of credit was $39.6 million at December 31, 2010, which matures in June 2011 with an option for the Company to extend to June 2012. It is anticipated that cash on hand, cash from operations and the line of credit will satisfy the Company’s cash requirements.
Historically, the Company has maintained a relatively stable monthly distribution rate instead of raising and lowering the distribution with varying economic cycles. With the depressed financial results of the Company and the lodging industry compared to pre-recessionary levels, the Company may 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 levels required to maintain its REIT status. The Company’s bylaws require board approval
and review of any debt financing obtained by the Company. Industry and Competition The hotel industry is highly competitive. Each of the Company’s hotels is located in a developed area that includes other hotels and competes for guests primarily with other hotels in the Company’s immediate vicinity and secondarily with other hotels in the Company’s geographic market. An
increase in the number of competitive hotels in a particular area could have a material adverse effect on the occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) of the Company’s hotels in that area. The Company believes that brand recognition, location, price and
quality (of both the hotel and the services provided) are the principal competitive factors affecting the Company’s hotels. General economic conditions in a particular market and nationally impact the performance of the hotel industry. Hotel Operating Performance As of December 31, 2010, the Company’s continuing operations owned 66 hotels consisting of fourteen Hilton Garden Inn hotels, ten Residence Inn hotels, ten Courtyard hotels, seven SpringHill Suites hotels, six Homewood Suites hotels, five TownePlace Suites hotels, five Fairfield Inn hotels, four
Hampton Inn hotels, three Hampton Inn & Suites hotels and two full service Marriott hotels. They are located in 18 states and, in aggregate, consist of 7,657 rooms. The Company also owns two hotels in Tempe, Arizona that are currently under contract for sale. The results of operations of these two
hotels are classified as discontinued operations. Room revenue from continuing operations totaled $206.6 million in 2010, and the hotels achieved average occupancy of 71%, ADR of $104 and RevPAR of $74, compared with $195.7 million of room revenue, average occupancy of 66%, ADR of $107 and RevPAR of $70 in 2009. Since the
beginning of 2010 the Company has experienced an increase in demand compared to 2009, as shown by the improved occupancy rates. However, in addition to a stabilizing economy, this improvement is a result of reduced room rates as reflected in the ADR decline in 2010 versus 2009. The Company
believes room rate has stabilized and should improve slightly in 2011. With expected demand improvement and room rate improvement, the Company and industry anticipate percentage revenue growth in 2011 in the mid single digits as compared to 2010. While 2010 and 2009 results reflect the impact of
recessionary to stagnant levels of economic activity, the Company’s hotels continue to be leaders in their respective markets. The Company’s average RevPAR index was 120 in 2010, compared to the market average of 100. The RevPAR index measures an individual hotel’s performance as compared to
other hotels in a particular market, and is provided by Smith Travel Research, Inc.Ò, an independent company that tracks historical hotel performance in most markets throughout the world. Management and Franchise Agreements Each of the Company’s continuing 66 hotels are operated and managed, under separate management agreements, by affiliates of one of the following companies: Marriott, Stonebridge, Hilton, Western, LBA, WLS, Inn Ventures or Newport. The agreements have remaining terms ranging from 1 to 24
years. Fees associated with the agreements generally include the payment of base management fees, incentive management fees, accounting fees, and other fees for centralized services which are allocated among all of the hotels that receive the benefit of such services. Base management fees are calculated
as a percentage of gross revenues. Incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements. The Company has the option to terminate the 3
management agreements if specified performance thresholds are not satisfied. During the years ended December 31, 2010, 2009 and 2008, the Company incurred approximately $7.0, $6.6 and $9.6 million in management fees for continuing operations. Stonebridge, Western, LBA, WLS, Inn Ventures and Newport are not affiliated with either Marriott or Hilton, and as a result, the hotels managed by these companies were required to obtain separate franchise agreements with each respective franchisor. The Hilton franchise agreements generally
provide for an initial term of 13 to 20 years. Fees associated with the Hilton agreements generally include the payment of royalty fees and program fees based on room revenues. The Marriott franchise agreements provide for an initial term of 15 to 20 years. Fees associated with the Marriott agreements
include the payment of royalty fees, marketing fees, reservation fees and a communications support fee based on room revenues. During the years ended December 31, 2010, 2009 and 2008, the Company incurred approximately $9.3, $8.8 and $10.3 million in franchise fees for continuing operations. Maintenance and Renovation The hotels have an ongoing need for renovation and refurbishment. Under various hotel management agreements, the Company has agreed to fund expenditures for periodic repairs, replacement or refurbishment of furniture, fixtures and equipment for the hotels in an amount equal to a certain
percentage of gross revenues. In addition, other capital improvement projects are directly funded by the Company. During 2010 and 2009 the Company spent approximately $8 and $9 million on capital expenditures. Employees During 2010, all employees involved in the day-to-day operation of the Company’s hotels were employed by third party management companies engaged pursuant to the hotel management agreements. At December 31, 2010, a subsidiary of the Company (Apple Fund Management, LLC) had 45
employees. These employees not only provide support to the Company, but as discussed below, they also provide support to various related parties. Environmental Matters In connection with each of the Company’s hotel acquisitions, the Company obtained a Phase I Environmental Report and additional environmental reports and surveys, as are necessitated by the preliminary report. Based on the reports, the Company is not aware of any environmental situations
requiring remediation at the Company’s properties, which have not been, or are not currently being remediated. No material remediation costs have occurred or are expected to occur. Under various laws, owners as well as tenants and operators of real estate may be required to investigate and clean up or
remove hazardous substances present at or migrating from properties they own, lease or operate and may be held liable for property damage or personal injuries that result from hazardous substances. These laws also expose the Company to the possibility that it may become liable to reimburse
governments for damages and costs they incur in connection with hazardous substances. Seasonality The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. 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. Related Parties The Company has significant transactions with related parties. These transactions cannot be construed to be arms length, and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. The Company’s independent members of the Board of Directors oversee and annually review the Company’s related party relationships (which include the relationships discussed in this section) and are required to approve any significant modifications to these contracts, as well as any new significant
related party transactions. There were no changes to the contracts discussed in this section and no new significant related 4
party transactions during 2010. The Board of Directors is not required to approve each individual transaction that falls under a related party relationship, however under the direction of the Board of Directors, at least one member of the Company’s senior management team approves each related party
transaction. The Company has a contract with Apple Six Realty Group (“A6RG”), a related party, to provide brokerage services for the acquisition and disposition of the Company’s real estate assets. In accordance with the contract, A6RG 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 plus certain reimbursable costs. As of December 31, 2010, payments to A6RG for services under the terms of this contract have totaled $16.9 million since inception which were capitalized as a part of the purchase
price of the hotels. No fees were incurred during 2010 and 2009 under the contract. The Company is party to an advisory agreement with Apple Six Advisors, Inc. (“A6A”), pursuant to which A6A 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. During the years ended December 31, 2010, 2009 and 2008, the Company incurred $1.5, $1.5 and $2.5 million in fees under this agreement. Through its wholly-owned subsidiary, Apple Fund Management, LLC, the Company provides support services to A6RG, Apple Suites Realty Group, Inc. (“ASRG”), A6A, Apple Seven Advisors, Inc. (“A7A”), Apple REIT Seven, Inc., Apple Eight Advisors, Inc. (“A8A”), Apple REIT Eight, Inc.,
Apple Nine Advisors, Inc. (“A9A”), Apple REIT Nine, Inc., Apple Ten Advisors, Inc. (“A10A”) and Apple REIT Ten, Inc. A7A provides day to day advisory and administrative functions for Apple REIT Seven, Inc. A8A provides day to day advisory and administrative functions for Apple REIT Eight,
Inc. A9A provides day to day advisory and administrative functions for Apple REIT Nine, Inc. A10A provides day to day advisory and administrative functions for Apple REIT Ten, Inc. ASRG provides real estate brokerage services to Apple REIT Seven, Inc., Apple REIT Eight, Inc., Apple REIT
Nine, Inc. and Apple REIT Ten, Inc. Each of these companies has agreed to reimburse the Company for its costs in providing these services. A6RG, ASRG, A6A, A7A, A8A, A9A and A10A are 100% owned by Glade Knight, the Company’s Chairman and Chief Executive Officer. For the years ended
December 31, 2010, 2009 and 2008, the Company received reimbursement of its costs totaling $6.1, $5.9 and $4.6 million from the participating entities. The Company’s net allocated cost for these support services was approximately $1.7 million, $1.9 million and $1.8 million for the years ended December
31, 2010, 2009 and 2008. As part of this arrangement, the day to day transactions may result in amounts due to or from the related parties. To effectively manage cash disbursements, the individual companies may make payments for any or all of the related companies. The amounts due to or from the
related companies are reimbursed or collected and are not significant in amount. Although there is a potential conflict on time allocation of personnel due to the fact that a senior manager, officer or staff member will provide services to more than one company, the Company believes that the executives and staff compensation sharing arrangement allows the companies to share
costs yet attract and retain superior executives and staff. The cost sharing structure also allows each entity to maintain a much more cost effective structure than having separate staffing arrangements. Amounts reimbursed to the Company include both compensation for personnel and “overhead” (office
rent, utilities, benefits, office supplies, etc.) utilized by the companies. The allocation of costs is made by the management of the several REITs and is reviewed at least annually by the Compensation Committees of the several REITs. In making the allocation, management and the Compensation
Committee consider all relevant facts related to the Company’s level of business activity and the extent to which the Company requires the services of particular personnel. The costs allocated are actual costs and do not include any profit/markup for the Company. Including A6RG, ASRG, A6A, A7A, A8A, A9A and A10A discussed above, Mr. Knight is also Chairman and CEO of Apple REIT Seven, Inc., Apple REIT Eight, 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 Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. The Company is a member of Apple Air Holding, LLC (“Apple Air”) which owned two Learjets at December 31, 2010. The other members of Apple Air are Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. 5
Item 1A. Risk Factors The following describes several risk factors which are applicable to the Company. Hotel Operations The Company’s hotels are subject to all of the risks common to the hotel industry. These risks could adversely affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses, and generally include:
•
increases in supply of hotel rooms that exceed increases in demand; • increases in energy costs and other travel expenses that reduce business and leisure travel; • reduced business and leisure travel due to continued geo-political uncertainty, including terrorism; • adverse effects of declines in general and local economic activity; and • adverse effects of a downturn in the hotel industry. General Economic Conditions Changes in general or local economic or market conditions, increased costs of energy, increased costs of insurance, increased costs of products, increased costs and shortages of labor, competitive factors, fuel shortages, quality of management, the ability of a hotel chain to fulfill any obligations to
operators of its hotel business, limited alternative uses for the building, changing consumer habits, condemnation or uninsured losses, changing demographics, changing traffic patterns, inability to remodel outmoded buildings as required by the franchise or lease agreement and other factors beyond the
Company’s control may reduce the value of properties that the Company owns. As a result, cash available to make distributions to shareholders may be affected. Current General Economic Slowdown in the Lodging Industry A recessionary environment, and uncertainty over its depth and duration, continues to have a negative impact on the lodging industry. There is some general consensus among economists that the economy in the United States is emerging from the recessionary environment of 2009, but high
unemployment levels and sluggish business and consumer travel trends remain; as a result the Company continues to experience reduced revenue as compared to pre-recessionary levels. Accordingly, financial results have been impacted by the economic slowdown, and future financial results and growth
could be further harmed until a more expansive national economic environment is prevalent. Hospitality Industry The success of the Company’s properties will depend largely on the property operators’ ability to adapt to dominant trends in the hotel industry as well as greater competitive pressures, increased consolidation, industry overbuilding, dependence on consumer spending patterns and changing
demographics, the introduction of new concepts and products, availability of labor, price levels and general economic conditions. The success of a particular hotel brand, the ability of a hotel brand to fulfill any obligations to operators of its business, and trends in the hotel industry may affect the
Company’s income and the funds it has available to distribute to shareholders. The hospitality industry could also experience a significant decline in occupancy and average daily rates due to a reduction in both business and leisure travel. General economic conditions, increased fuel costs, natural disasters and terrorist attacks are a few factors that could affect an individual’s
willingness to travel. The Company’s property insurance will typically cover losses for property damage due to terrorist attacks or natural disasters. However, the Company is not insured against the potential negative effect a terrorist attack or natural disaster would have on the hospitality industry as a
whole. Seasonality The hotel industry is 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 and the Company may need to enter into short-term
borrowing in certain periods in order to offset these fluctuations in revenues and to make distributions to shareholders. 6
Franchise Agreements The Company’s wholly-owned taxable REIT subsidiaries operate all of the properties pursuant to franchise or license agreements with nationally recognized hotel brands. These agreements contain specific standards for, and restrictions and limitations on, the operation and maintenance of the
Company’s properties in order to maintain uniformity within the franchisor system. These standards could potentially conflict with the Company’s ability to create specific business plans tailored to each property and to each market. Competition The hotel industry is highly competitive. Each of the Company’s hotels is located in a developed area that includes other hotels and competes for guests primarily with other hotels in the Company’s immediate vicinity and secondarily with other hotels in the Company’s geographic market. An
increase in the number of competitive hotels in a particular area could have a material adverse effect on the occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) of the Company’s hotels in that area. In addition, increases in operating costs due to inflation may not be
offset by increased room rates. Transferability of Shares There is and will be no public trading market for the common shares and the Series A preferred shares for an indefinite period of time, if ever. Therefore, the Units are and will be highly illiquid and very difficult to trade. In addition, there are restrictions on the transfer of the common shares. In
order to qualify as a REIT, the shares must be beneficially owned by 100 or more persons and no more than 50% of the value of the Company’s issued and outstanding shares may be owned directly or indirectly by five or fewer individuals. Therefore, the Company’s bylaws provide that no person may
own more than 9.8% of the issued and outstanding Units. Any purported transfer of our shares that would result in a violation of either of these limits will be declared null and void. Qualification as a REIT The rules governing a REIT are highly technical and complex. They require ongoing compliance with and interpretation of a variety of tests and regulations that depend on, among other things, future operations. While the Company expects to satisfy these tests, it cannot ensure it will qualify as a
REIT for any particular year. There is also the risk that the applicable laws governing a REIT could be changed, which could adversely affect the Company and its shareholders. Distributions to Shareholders If the Company’s properties do not generate sufficient revenue to meet operating expenses, cash flow and the Company’s ability to make distributions to shareholders may be adversely affected. The Company is subject to all operating risks common to hotels. These risks might adversely affect
occupancy or room rates. Increases in operating costs due to inflation and other factors may not necessarily be offset by increased room rates. The local, regional and national hotel markets may limit the extent to which room rates may be increased to meet increased operating expenses without
decreasing occupancy rates. While the Company intends to make monthly distributions to shareholders, there can be no assurance that the Company will be able to make distributions at any particular time or rate, or at all. Further, there is no assurance that a distribution rate achieved for a particular
period will be maintained in the future. Also, while management may establish goals as to particular rates of distribution or have an intention to make distributions at a particular rate, there can be no assurance that such goals or intentions will be realized. The Company’s objective in setting a distribution rate is to project a rate that will provide consistency over the life of the Company, taking into account acquisitions and capital improvements, ramp up of new properties and varying economic cycles. The Company anticipates that it may need to
utilize debt, offering proceeds and cash from operations to meet this objective. The Company evaluates the distribution rate on an ongoing basis and may make changes at any time if the Company feels the rate is not appropriate based on available cash resources. While the Company generally seeks to make distributions from its operating cash flows, distributions may be made (although there is no obligation to do so) in certain circumstances in part from financing proceeds or other sources, such as proceeds from the offering of Units. While distributions from
such sources would result 7
in the shareholder receiving cash, the consequences to the shareholder would differ from a distribution from operating cash flows. For example, if financing is the source of a distribution, that financing would have to be repaid, and if proceeds from the offering of Units are distributed, those proceeds
would not then be available for other uses (such as property acquisitions or improvements). Financing Risks Although the Company anticipates maintaining low levels of debt, it may periodically use short-term financing to perform renovations to its properties or make shareholder distributions in periods of fluctuating income from its properties. The debt markets have been volatile and subject to increased
regulation and, as a result, the Company may not be able to use debt to meet its cash requirements. Item 1B. Unresolved Staff Comments Not applicable. Item 2. Properties As of December 31, 2010, the Company owned 68 hotels, including two hotels held for sale in Tempe, Arizona, consisting of the following:
Brand
Total by
Number of Hilton Garden Inn
14
1,793 Residence Inn
10
1,247 Courtyard
10
993 SpringHill Suites
8
858 Homewood Suites
6
713 TownePlace Suites
6
766 Fairfield Inn
5
351 Hampton Inn
4
454 Hampton Inn & Suites
3
303 Marriott
2
419 Total
68
7,897 The following table includes the location, the date of construction, the date acquired, encumbrances, initial acquisition cost, gross carrying value and the number of rooms of each of the hotels included in continuing operations. 8
Brand
Rooms
REAL ESTATE AND ACCUMULATED DEPRECIATION(1)
City State Brand
Encumbrances
Initial Cost
Subsequently
Total
Acc
Date of
Date
Depreciable
# of
Bldg
Land
Bldg./FF&E Birmingham Alabama Fairfield Inn
$
—
$
354
$
2,057
$
150
$
2,561
$
(408
)
1995
Aug-05
3 - 39 yrs.
63 Dothan Alabama Courtyard
—
1,270
7,142
1,338
9,750
(1,530
)
1996
Aug-05
3 - 39 yrs.
78 Dothan Alabama Hampton Inn & Suites
—
842
8,129
77
9,048
(1,559
)
2004
Jun-05
3 - 39 yrs.
85 Huntsville Alabama Fairfield Inn
2,685
506
4,813
269
5,588
(783
)
1999
Sep-05
3 - 39 yrs.
79 Huntsville Alabama Residence Inn
—
947
7,632
1,541
10,120
(1,684
)
2002
Jun-05
3 - 39 yrs.
78 Montgomery Alabama SpringHill Suites
3,357
963
6,327
244
7,534
(1,015
)
1998
Sep-05
3 - 39 yrs.
79 Tuscaloosa Alabama Courtyard
—
—
7,953
1,009
8,962
(1,504
)
1996
Aug-05
3 - 39 yrs.
78 Tuscaloosa Alabama Fairfield Inn
—
—
4,240
168
4,408
(722
)
1996
Aug-05
3 - 39 yrs.
63 Anchorage Alaska Hampton Inn
—
1,220
10,501
2,138
13,859
(2,873
)
1997
Mar-05
3 - 39 yrs.
101 Anchorage Alaska Hilton Garden Inn
—
4,230
14,788
1,889
20,907
(3,324
)
2002
Oct-04
3 - 39 yrs.
125 Anchorage Alaska Homewood Suites
—
1,803
11,046
248
13,097
(2,443
)
2004
Oct-04
3 - 39 yrs.
122 Phoenix Arizona Hampton Inn
—
1,425
5,205
914
7,544
(1,511
)
1998
Oct-04
3 - 39 yrs.
99 Arcadia California Hilton Garden Inn
—
1,718
10,195
2,374
14,287
(2,959
)
1999
Oct-04
3 - 39 yrs.
124 Arcadia California SpringHill Suites
—
1,633
6,459
895
8,987
(1,739
)
1999
Oct-04
3 - 39 yrs.
86 Bakersfield California Hilton Garden Inn
—
1,166
10,565
214
11,945
(2,244
)
2004
Mar-05
3 - 39 yrs.
120 Folsom California Hilton Garden Inn
—
1,521
16,989
1,220
19,730
(3,164
)
1999
Nov-05
3 - 39 yrs.
100 Foothill Ranch California Hampton Inn
3,984
1,056
6,499
1,003
8,558
(1,623
)
1998
Apr-05
3 - 39 yrs.
84 Lake Forest California Hilton Garden Inn
—
1,541
9,425
236
11,202
(2,136
)
2004
Oct-04
3 - 39 yrs.
103 Milpitas California Hilton Garden Inn
—
2,565
16,534
2,020
21,119
(3,626
)
1999
Nov-05
3 - 39 yrs.
161 Roseville California Hilton Garden Inn
—
2,362
18,937
1,680
22,979
(3,713
)
1999
Nov-05
3 - 39 yrs.
131 San Francisco California Hilton Garden Inn
—
2,007
9,545
2,116
13,668
(2,762
)
1999
Jan-06
3 - 39 yrs.
169 Boulder Colorado Marriott
—
3,066
27,825
2,177
33,068
(5,812
)
1997
May-05
3 - 39 yrs.
157 Glendale Colorado Hampton Inn & Suites
5,216
3,641
11,221
1,301
16,163
(2,794
)
1999
Oct-04
3 - 39 yrs.
133 Lakewood Colorado Hampton Inn
—
2,508
8,090
793
11,391
(2,003
)
2003
Oct-04
3 - 39 yrs.
170 Farmington Connecticut Courtyard
—
1,794
15,434
28
17,256
(2,546
)
2005
Oct-05
3 - 39 yrs.
119 Rocky Hill Connecticut Residence Inn
—
1,472
11,284
18
12,774
(1,942
)
2005
Aug-05
3 - 39 yrs.
96 Wallingford Connecticut Homewood Suites
—
1,419
12,072
190
13,681
(2,178
)
2005
Jul-05
3 - 39 yrs.
104 Clearwater Florida SpringHill Suites
—
—
7,214
6
7,220
(1,212
)
2006
Feb-06
3 - 39 yrs.
79 Lake Mary Florida Courtyard
—
690
5,568
2,166
8,424
(1,686
)
1995
Mar-05
3 - 39 yrs.
86 Lakeland Florida Residence Inn
—
1,520
8,699
1,310
11,529
(1,942
)
2001
Jun-05
3 - 39 yrs.
78 Orange Park Florida Fairfield Inn
—
855
6,979
211
8,045
(1,055
)
1998
Nov-05
3 - 39 yrs.
83 Panama City Florida Courtyard
—
1,407
8,217
56
9,680
(1,373
)
2006
Mar-06
3 - 39 yrs.
84 Pensacola Florida Courtyard
—
1,186
10,728
1,047
12,961
(1,794
)
1997
Aug-05
3 - 39 yrs.
90 Pensacola Florida Fairfield Inn
—
470
4,703
229
5,402
(783
)
1995
Aug-05
3 - 39 yrs.
63 Pensacola Florida Hampton Inn & Suites
—
1,248
8,354
37
9,639
(1,604
)
2005
Jul-05
3 - 39 yrs.
85 Tallahassee Florida Hilton Garden Inn
—
1,103
10,130
1,019
12,252
(2,090
)
1997
Mar-05
3 - 39 yrs.
99 Albany Georgia Courtyard
—
1,253
7,658
146
9,057
(1,475
)
2004
Jun-05
3 - 39 yrs.
84 Columbus Georgia Residence Inn
—
—
8,184
198
8,382
(1,480
)
2003
Jun-05
3 - 39 yrs.
78 Savannah Georgia SpringHill Suites
2,719
693
5,099
256
6,048
(827
)
1999
Sep-05
3 - 39 yrs.
79 Valdosta Georgia Courtyard
—
1,036
7,529
1,204
9,769
(1,473
)
2002
Oct-05
3 - 39 yrs.
84 Mt. Olive New Jersey Residence Inn
—
1,410
11,331
141
12,882
(2,033
)
2005
Sep-05
3 - 39 yrs.
123 Somerset New Jersey Homewood Suites
—
1,813
16,801
203
18,817
(2,873
)
2005
Aug-05
3 - 39 yrs.
123 Saratoga Springs New York Hilton Garden Inn
—
2,399
15,885
1,574
19,858
(2,913
)
1999
Sep-05
3 - 39 yrs.
112 Roanoke Rapids North Carolina Hilton Garden Inn
—
2,458
15,713
6
18,177
(1,593
)
2008
Mar-08
3 - 39 yrs.
147 Hillsboro Oregon Courtyard
6,036
1,879
9,484
2,365
13,728
(1,723
)
1996
Mar-06
3 - 39 yrs.
155 Hillsboro Oregon Residence Inn
—
2,665
13,295
429
16,389
(2,236
)
1994
Mar-06
3 - 39 yrs.
122 Hillsboro Oregon TownePlace Suites
—
2,150
9,715
1,242
13,107
(2,125
)
1999
Dec-05
3 - 39 yrs.
136 Portland Oregon Residence Inn
—
4,400
38,687
3,262
46,349
(7,097
)
2001
Dec-05
3 - 39 yrs.
258 Pittsburgh Pennsylvania Residence Inn
—
1,161
10,267
1,710
13,138
(2,458
)
1998
Sep-05
3 - 39 yrs.
156 Myrtle Beach South Carolina Courtyard
—
1,857
7,631
1,280
10,768
(2,249
)
1999
Jun-04
3 - 39 yrs.
135 Nashville Tennessee Homewood Suites
—
1,170
7,177
687
9,034
(1,685
)
1999
May-05
3 - 39 yrs.
121 Arlington Texas SpringHill Suites
—
1,122
6,649
484
8,255
(1,329
)
1998
Jun-05
3 - 39 yrs.
122 Arlington Texas TownePlace Suites
—
1,033
6,373
183
7,589
(1,236
)
1999
Jun-05
3 - 39 yrs.
95 Dallas Texas SpringHill Suites
—
1,372
18,737
623
20,732
(3,338
)
1997
Dec-05
3 - 39 yrs.
147 Fort Worth Texas Homewood Suites
—
1,152
8,210
2,206
11,568
(2,310
)
1999
May-05
3 - 39 yrs.
137 Fort Worth Texas Residence Inn
—
1,873
15,586
35
17,494
(2,877
)
2005
May-05
3 - 39 yrs.
149 Ft. Worth Texas SpringHill Suites
—
2,125
11,619
66
13,810
(2,517
)
2004
May-04
3 - 39 yrs.
145 9
As of December 31, 2010
(dollars in thousands)
Capitalized
Gross Cost
Deprec
Construction
Acquired
Life
Rooms
Imp. &
FF&E
REAL ESTATE AND ACCUMULATED DEPRECIATION—(Continued)(1)
City State Brand
Encumbrances
Initial Cost
Subsequently
Total
Acc
Date of
Date
Depreciable
# of
Bldg
Land
Bldg./FF&E Laredo Texas Homewood Suites
$
—
$
1,118
$
9,781
$
64
$
10,963
$
(1,755
)
2005
Nov-05
3 - 39 yrs.
106 Laredo Texas Residence Inn
—
902
10,969
38
11,909
(1,971
)
2005
Sep-05
3 - 39 yrs.
109 Las Colinas Texas TownePlace Suites
—
1,205
6,256
167
7,628
(1,341
)
1998
Jun-05
3 - 39 yrs.
136 McAllen Texas Hilton Garden Inn
—
1,178
8,143
1,620
10,941
(1,935
)
2000
Jul-05
3 - 39 yrs.
104 Fredericksburg Virginia Hilton Garden Inn
—
1,822
15,362
163
17,347
(2,668
)
2005
Dec-05
3 - 39 yrs.
148 Richmond Virginia Corporate Office
—
381
1,038
3,831
5,250
(2,012
)
1893
Jun-04
3 - 39 yrs.
N/A Kent Washington TownePlace Suites
—
1,841
10,721
1,487
14,049
(2,383
)
1999
Dec-05
3 - 39 yrs.
152 Mukilteo Washington TownePlace Suites
—
1,505
11,055
1,339
13,899
(2,273
)
1999
Dec-05
3 - 39 yrs.
128 Redmond Washington Marriott
—
9,504
56,168
1,584
67,256
(11,754
)
2004
Jul-04
3 - 39 yrs.
262 Renton Washington Hilton Garden Inn
—
1,277
14,674
2,063
18,014
(3,377
)
1998
Nov-05
3 - 39 yrs.
150 Deposits on Construction in Progress
—
—
464
464
—
$
23,997
$
107,262
$
747,296
$
63,451
$
918,009
$
(153,452
)
7,657
(1) 10
As of December 31, 2010
(dollars in thousands)
Capitalized
Gross Cost
Deprec
Construction
Acquired
Life
Rooms
Imp. &
FF&E
Excludes the Tempe, Arizona TownePlace Suites and SpringHill Suites which are under contract to be sold.
Investment in real estate at December 31, 2010, consisted of the following (in thousands): Land
$
107,225 Building and Improvements
743,475 Furniture, Fixtures and Equipment
67,309
918,009 Less Accumulated Depreciation
(153,452
) Investment in Real Estate, net
$
764,557 For additional information about the Company’s properties, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company or any of its properties, other than routine actions arising in the ordinary course of business, some of which are expected to be covered by liability
insurance and all of which collectively are not expected to have a material adverse effect on the Company’s business or financial condition or results of operations. 11
Common Shares There is currently no established public market in which the Company’s common shares are traded. As of December 31, 2010, there were 91,473,791 Units outstanding. Each Unit consists of one common share, no par value, and one Series A preferred share of the Company. The per-share estimated
market value is deemed to be the offering price of the shares, which is currently $11.00 per share. This is supported by the fact that the Company is currently selling shares to the public at a price of $11.00 per share through its Dividend Reinvestment Plan and the Company is repurchasing shares at
$11.00 from shareholders under its Unit Redemption Program. The Units are held by approximately 19,400 beneficial shareholders. Dividend Reinvestment Plan In February 2006, 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. As of December 31, 2010, approximately 14.2
million Units, representing $156.5 million in proceeds to the Company, have been issued under the plan. Unit Redemption Program In July 2005, the Company instituted 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 the lesser of: (1) the purchase price per Unit that the
shareholder actually paid for the Unit; or (2) $11.00 per Unit. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As of December 31, 2010, the Company
has redeemed approximately 13.9 million Units in the amount of $152.2 million under the program. The redemptions represent 100% of the redemption requests as of the last scheduled redemption date in 2010, which was October 2010. See the Company’s complete Consolidated Statements of Cash Flows
for the years ended December 31, 2010, 2009 and 2008 in the Company’s audited financial statements in Item 8 of this Form 10-K for a description of the sources and uses of the Company’s cash flows. The following is a summary of redemptions during the fourth quarter of 2010 (no redemptions
occurred in November and December 2010): Issuer Purchases of Equity Securities
Period
(a)
(b)
(c)
(d)
Total Number
Average Price Paid
Total Number of
Maximum Number October 2010
679,820
$
10.98
13,877,752
(1)
(1)
The maximum number of Units that may be redeemed in any 12 month period is limited to up to five percent (5.0%) of the weighted average number of Units outstanding from the beginning of the 12 month period, subject to the Company’s right to change the number of Units to be redeemed.
Series A Preferred Shares The Series A preferred shares have no voting rights and no conversion rights. In addition, the Series A preferred shares are not separately tradable from the common shares to which they relate. The Series A 12
of Units
Purchased
per Unit
Units Purchased as
Part of Publicly
Announced Plans
or Programs
of Units that May
Yet Be Purchased
Under the Plans or
Programs
preferred shares do not have any distribution rights except a priority distribution upon the sale of the Company’s assets. The priority distribution (“Priority Distribution”) will be equal to $11.00 per Series A preferred share, and will be paid before any distribution will be made to the holders of any other
shares. Upon the Priority Distribution, the Series A preferred shares will have no other distribution rights. Series B Convertible Preferred Shares In January 2004, the Company issued 240,000 Series B convertible preferred shares to Glade M. Knight, the Company’s Chairman and Chief Executive Officer. There are no dividends payable on the Series B convertible preferred shares. Holders of more than two-thirds of the Series B convertible
preferred shares must approve any proposed amendment to the Articles of Incorporation that would adversely affect the Series B convertible preferred shares. Upon liquidation, each holder of the Series B convertible preferred shares is entitled to a priority liquidation payment. However, the priority
liquidation payment of the holder of the Series B convertible preferred shares is junior to the holders of the Series A preferred shares distribution rights. The holder of a Series B convertible preferred share is entitled to a liquidation payment of $11 per number of common shares into which each Series
B convertible preferred share would convert. In the event that the liquidation of the Company’s assets results in proceeds that exceed the distribution rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed between the common
shares and the Series B convertible preferred shares, on an as converted basis. The Series B convertible preferred shares are convertible into common shares upon and for 180 days following the occurrence of any of the following events: (1) substantially all of the Company’s assets, stock or business is
sold or transferred through exchange, merger, consolidation, lease, share exchange or otherwise, other than a sale of assets in liquidation, dissolution or winding up of the Company’s business; or (2) the termination or expiration without renewal of the advisory agreement with Apple Six Advisors, Inc., or
if the Company ceases to use Apple Six Realty Group, Inc. to provide property acquisition and disposition services; or (3) the Company’s common shares are listed on any securities exchange or quotation system or in any established market. Preferred Shares The Company’s articles of incorporation authorize issuance of up to 15 million additional preferred shares. No preferred shares other than the Series A preferred shares and the Series B convertible preferred shares (discussed above) have been issued. The Company believes that the authorization to
issue additional preferred shares benefits the Company and its shareholders by permitting flexibility in financing additional growth, giving the Company additional financing options in corporate planning and in responding to developments in business, including financing of additional acquisitions and other
general corporate purposes. Having authorized preferred shares available for issuance in the future gives the Company the ability to respond to future developments and allows preferred shares to be issued without the expense and delay of a special shareholders’ meeting. At present, the Company has no
specific financing or acquisition plans involving the issuance of additional preferred shares and the Company does not propose to fix the characteristics of any series of preferred shares in anticipation of issuing preferred shares other than the Series A preferred shares and Series B convertible preferred
shares discussed above. The Company cannot now predict whether or to what extent, if any, additional preferred shares will be used or if so used what the characteristics of a particular series may be. The voting rights and rights to distributions of the holders of common shares will be subject to the prior
rights of the holders of any subsequently-issued preferred shares. Unless otherwise required by applicable law or regulation, the preferred shares would be issuable without further authorization by holders of the common shares and on such terms and for such consideration as may be determined by the
Board of Directors. The preferred shares could be issued in one or more series having varying voting rights, redemption and conversion features, distribution (including liquidating distribution) rights and preferences, and other rights, including rights of approval of specified transactions. A series of
preferred shares could be given rights that are superior to rights of holders of common shares and a series having preferential distribution rights could limit common share distributions and reduce the amount holders of common shares would otherwise receive on dissolution. 13
Distribution Policy To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions in 2010 totaled $72.3 million and were paid monthly at a rate of $0.064 per common share beginning in March 2010 and $0.075 per common share prior to that date. Distributions in
2009 totaled $82.2 million and were paid monthly at a rate of $0.075 per common share. The timing and amounts of distributions to shareholders are within the discretion of the Company’s Board of Directors. The amount and frequency of future distributions will depend on the Company’s results of
operations, cash flow from operations, economic conditions, working capital requirements, cash requirements to fund investing and financing activities, capital expenditure requirements, including improvements to and expansions of properties and the acquisition of additional properties, as well as the
distribution requirements under federal income tax provisions for qualification as a REIT. Non-Employee Directors Stock Option Plan and Incentive Plan The Company’s Board of Directors has adopted and the Company’s shareholders have approved a Non-Employee Directors Stock Option Plan and an Incentive Plan. The options issued under each plan, upon exercise, convert to Units. Each Unit consists of one common share and one Series A
preferred share of the Company. As of December 31, 2010, options to purchase 434,220 Units were outstanding with a weighted average exercise price of $11 per Unit under the Directors Plan. No options have been issued under the Incentive Plan. The following is a summary of securities issued under
the plans as of December 31, 2010:
Plan Category
Number of securities to be
Weighted-average
Number of securities Equity Compensation plans approved by security holders Non-Employee Directors Stock Option Plan
434,220
$
11.00
1,165,325 Incentive Plan
—
$
—
4,029,318 Item 6. Selected Financial Data The following table sets forth selected financial data for each of the five years in the period ended December 31, 2010. Certain information in the table has been derived from the Company’s audited financial statements and notes thereto. This data should be read in conjunction with Item 7,
Management’s Discussion and Analysis of Financial Conditions and Results of Operations, and Item 15(1), the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. 14
issued upon exercise of
outstanding options,
warrants and rights
exercise price of
outstanding options,
warrants and rights
remaining available for
future issuance under
equity compensation
plans
For the year
For the year
For the year
For the year
For the year
(in thousands except per share and statistical data) Revenues: Room revenue
$
206,624
$
195,671
$
233,112
$
229,937
$
211,559 Other revenue
14,634
14,753
19,744
20,672
18,150 Reimbursed expenses
6,055
5,899
6,057
886
— Total revenue
227,313
216,323
258,913
251,495
229,709 Expenses: Hotel operating expenses
130,896
126,120
144,751
141,252
132,029 Taxes, insurance and other
12,143
13,248
13,438
13,250
13,127 Reimbursed expenses
6,055
5,899
6,057
886
— General and administrative
6,072
4,935
5,397
5,637
5,355 Depreciation
30,806
30,417
30,411
27,201
25,040 Interest and other expenses, net
3,800
2,312
1,784
1,853
1,809 Total expenses
189,772
182,931
201,838
190,079
177,360 Income from continuing operations
37,541
33,392
57,075
61,416
52,349 Income (loss) from discontinued operations
(3,157
)
(13
)
1,427
1,912
1,764 Net income
$
34,384
$
33,379
$
58,502
$
63,328
$
54,113 Per Share Income from continuing operations per common share
$
0.41
$
0.37
$
0.63
$
0.69
$
0.59 Income (loss) from discontinued operations per common share
(0.03
)
—
0.01
0.02
0.02 Net income per common share
$
0.38
$
0.37
$
0.64
$
0.71
$
0.61 Distributions paid to common shareholders
$
0.79
$
0.90
$
0.90
$
0.88
$
0.88 Weighted-average common shares outstanding—basic and diluted
91,323
91,178
90,899
89,644
88,869 Balance Sheet Data (at end of period) Cash and cash equivalents
$
—
$
—
$
935
$
33,261
$
26,160 Investment in real estate, net
$
764,557
$
801,646
$
823,463
$
820,468
$
836,906 Total assets
$
788,213
$
815,584
$
849,783
$
882,657
$
886,839 Notes payable
$
63,736
$
54,040
$
29,097
$
51,679
$
53,660 Shareholders’ equity
$
719,771
$
757,488
$
809,382
$
816,244
$
826,046 Net book value per share
$
7.87
$
8.28
$
8.82
$
9.04
$
9.20 Other Data Cash flow from: Operating activities
$
70,956
$
66,029
$
88,747
$
89,848
$
81,363 Investing activities
$
(8,505
)
$
(6,571
)
$
(33,234
)
$
(15,627
)
$
(61,766
) Financing activities
$
(62,451
)
$
(60,393
)
$
(87,839
)
$
(67,120
)
$
(29,385
) Number of hotels owned at end of period (including hotels held for sale)
68
68
68
67
67 Average Daily Rate (ADR)(b)(f)
$
104
$
107
$
117
$
113
$
105 Occupancy(f)
71
%
66
%
71
%
74
%
74
% Revenue Per Available Room (RevPAR)(c)(f)
$
74
$
70
$
83
$
84
$
78 Total room nights sold
1,986
1,836
1,990
2,028
2,014 Total room nights available
2,792
2,792
2,795
2,738
2,707 Modified Funds From Operations Calculation(a) Net income
$
34,384
$
33,379
$
58,502
$
63,328
$
54,113 Depreciation of real estate owned
31,199
30,938
29,313
26,782
24,681 Funds from operations
65,583
64,317
87,815
90,110
78,794 Loss on hotels held for sale
3,567
—
—
—
— Modified funds from operations
$
69,150
$
64,317
$
87,815
$
90,110
$
78,794 15
ended
December 31, 2010
ended
December 31, 2009
ended
December 31, 2008
ended
December 31, 2007
ended
December 31, 2006
(in thousands)(d)(f)
(in thousands)(e)(f)
(a)
Funds from operations (FFO) is defined as net income (computed in accordance with generally accepted accounting principles—GAAP) excluding gains and losses from sales of depreciable property, plus depreciation and amortization. Modified funds from operations (MFFO) excludes the loss on hotels
held for sale. The Company considers FFO and MFFO in evaluating property acquisitions and its operating performance and believes that FFO and MFFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of the Company’s activities in accordance
with GAAP. The Company considers FFO and MFFO as supplemental measures of operating performance in the real estate industry, and along with the other financial measures included in this Form 10-K, including net income, cash flow from operating activities, financing activities and investing
activities, they provide investors with an indication of the performance of the Company. The Company’s definitions of FFO and MFFO are not necessarily the same as such terms that are used by other companies. FFO and MFFO are not necessarily indicative of cash available to fund cash needs. (b) Total room revenue divided by number of room nights sold. (c) ADR multiplied by occupancy percentage. (d) Represents the total number of room nights sold during the period. (e) Represents the number of rooms owned by the Company multiplied by the number of nights in the period. (f) From continuing operations. 16
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Annual 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; 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 this Annual 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 and Item 1A. General The Company was formed and initially capitalized on January 20, 2004, with its first investor closing on April 23, 2004. The Company owns 68 hotels, including two hotels under contract for sale, within different markets in the United States. The Company is treated as a Real Estate Investment Trust
(“REIT”) for federal income tax purposes. The Company’s first hotel was acquired on May 28, 2004 and the last hotel was purchased in March 2008. In the third quarter of 2010, the Company committed to sell its two hotels in Tempe, Arizona due to the properties’ underperformance, weakness in the
Tempe market and capital requirements. The results for these properties have been reclassified to discontinued operations. 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 within their respective markets, in general, has met the Company’s expectations for the period owned. With the decline in economic conditions throughout the United States, the Company has experienced a significant decline in revenue as
compared to 2008, but a slight recovery in revenue as compared to 2009. Although there is no way to predict general economic conditions, based on industry forecasts, the Company anticipates revenue to grow at a mid-single digit percentage rate in 2011 as compared to 2010. 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 represents a comparison of a 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. The following is a summary of Company’s results from continuing operations:
(in thousands except statistical data)
Year ended
Percent of
Year ended
Percent of
Percent Total hotel revenue
$
221,258
100
%
$
210,424
100
%
5
% Hotel operating expenses
130,896
59
%
126,120
60
%
4
% Taxes, insurance and other expense
12,143
5
%
13,248
6
%
(8
)% General and administrative expense
6,072
3
%
4,935
2
%
23
% Depreciation
30,806
30,417
1
% Interest expense, net
3,800
2,312
64
% Number of Hotels
66
66
—
% Average RevPAR Market Yield(1)
120
120
—
% ADR
$
104
$
107
(3
)% Occupancy
71
%
66
%
8
% RevPAR
$
74
$
70
6
%
(1)
Calculated from data provided by Smith Travel Research, Inc.Ò Excludes properties under renovations during the applicable periods.
17
December 31, 2010
Hotel Revenue
December 31, 2009
Hotel Revenue
Change
Hotels Owned As of December 31, 2010, the Company owned 68 hotels, two of which are classified as held for sale, with a total of 7,897 rooms. The following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each hotel. All dollar amounts are in
thousands.
City State Brand Manager
Date
Rooms
Gross Birmingham Alabama Fairfield Inn LBA
8/25/05
63
$
2,176 Dothan Alabama Courtyard LBA
8/11/05
78
8,016 Dothan Alabama Hampton Inn & Suites LBA
6/24/05
85
8,673 Huntsville Alabama Fairfield Inn LBA
9/30/05
79
4,954 Huntsville Alabama Residence Inn LBA
6/24/05
78
8,288 Montgomery Alabama SpringHill Suites LBA
9/30/05
79
6,835 Tuscaloosa Alabama Courtyard LBA
8/25/05
78
7,551 Tuscaloosa Alabama Fairfield Inn LBA
8/25/05
63
3,982 Anchorage Alaska Hampton Inn Stonebridge
3/14/05
101
11,500 Anchorage Alaska Hilton Garden Inn Stonebridge
10/12/04
125
18,900 Anchorage Alaska Homewood Suites Stonebridge
10/12/04
122
13,200 Phoenix Arizona Hampton Inn Stonebridge
10/12/04
99
6,700 Tempe* Arizona SpringHill Suites Western
6/30/05
121
8,060 Tempe* Arizona TownePlace Suites Western
6/30/05
119
8,128 Arcadia California Hilton Garden Inn Stonebridge
10/12/04
124
12,000 Arcadia California SpringHill Suites Stonebridge
10/12/04
86
8,100 Bakersfield California Hilton Garden Inn Hilton
3/18/05
120
11,500 Folsom California Hilton Garden Inn Inn Ventures
11/30/05
100
18,028 Foothill Ranch California Hampton Inn Stonebridge
4/21/05
84
7,400 Lake Forest California Hilton Garden Inn Stonebridge
10/12/04
103
11,400 Milpitas California Hilton Garden Inn Inn Ventures
11/30/05
161
18,600 Roseville California Hilton Garden Inn Inn Ventures
11/30/05
131
20,759 San Francisco California Hilton Garden Inn Inn Ventures
1/30/06
169
12,266 Boulder Colorado Marriott WLS
5/9/05
157
30,000 Glendale Colorado Hampton Inn & Suites Stonebridge
10/12/04
133
14,700 Lakewood Colorado Hampton Inn Stonebridge
10/12/04
170
10,600 Farmington Connecticut Courtyard WLS
10/20/05
119
16,330 Rocky Hill Connecticut Residence Inn WLS
8/1/05
96
12,070 Wallingford Connecticut Homewood Suites WLS
7/8/05
104
12,780 Clearwater Florida SpringHill Suites LBA
2/17/06
79
6,923 Lake Mary Florida Courtyard LBA
3/18/05
86
6,000 Lakeland Florida Residence Inn LBA
6/24/05
78
9,886 Orange Park Florida Fairfield Inn LBA
11/8/05
83
7,221 Panama City Florida Courtyard LBA
4/26/06
84
9,245 Pensacola Florida Courtyard LBA
8/25/05
90
11,369 Pensacola Florida Fairfield Inn LBA
8/25/05
63
4,858 Pensacola Florida Hampton Inn & Suites LBA
7/21/05
85
9,279 Tallahassee Florida Hilton Garden Inn Hilton
3/18/05
99
10,850 Albany Georgia Courtyard LBA
6/24/05
84
8,597 Columbus Georgia Residence Inn LBA
6/24/05
78
7,888 Savannah Georgia SpringHill Suites LBA
9/30/05
79
5,407 Valdosta Georgia Courtyard LBA
10/3/05
84
8,284 Mt. Olive New Jersey Residence Inn WLS
9/15/05
123
12,070 Somerset New Jersey Homewood Suites WLS
8/17/05
123
17,750 Saratoga Springs New York Hilton Garden Inn WLS
9/29/05
112
17,750 Roanoke Rapids North Carolina Hilton Garden Inn Newport
3/10/08
147
17,764 Hillsboro Oregon Courtyard Inn Ventures
3/9/06
155
11,000 Hillsboro Oregon Residence Inn Inn Ventures
3/9/06
122
15,500 18
Acquired
Purchase
Price
City State Brand Manager
Date
Rooms
Gross Hillsboro Oregon TownePlace Suites Inn Ventures
12/19/05
136
$
11,500 Portland Oregon Residence Inn Inn Ventures
12/19/05
258
42,000 Pittsburgh Pennsylvania Residence Inn WLS
9/2/05
156
11,000 Myrtle Beach South Carolina Courtyard Marriott
6/8/04
135
9,200 Nashville Tennessee Homewood Suites Hilton
5/24/05
121
8,103 Arlington Texas SpringHill Suites Western
6/30/05
122
7,486 Arlington Texas TownePlace Suites Western
6/30/05
95
7,148 Dallas Texas SpringHill Suites Western
12/9/05
147
19,500 Ft. Worth Texas Homewood Suites Hilton
5/24/05
137
9,097 Ft. Worth Texas Residence Inn Western
5/6/05
149
17,000 Ft. Worth Texas SpringHill Suites Marriott
5/28/04
145
13,340 Laredo Texas Homewood Suites Western
11/30/05
106
10,500 Laredo Texas Residence Inn Western
9/12/05
109
11,445 Las Colinas Texas TownePlace Suites Western
6/30/05
136
7,178 McAllen Texas Hilton Garden Inn Western
7/19/05
104
9,000 Fredericksburg Virginia Hilton Garden Inn Hilton
12/20/05
148
16,600 Kent Washington TownePlace Suites Inn Ventures
12/19/05
152
12,000 Mukilteo Washington TownePlace Suites Inn Ventures
12/19/05
128
12,000 Redmond Washington Marriott Marriott
7/7/04
262
64,000 Renton Washington Hilton Garden Inn Inn Ventures
11/30/05
150
16,096 Total
7,897
$
845,330
*
Hotels are reported as held for sale
With the exception of approximately $54 million of assumed debt secured by 14 hotels, substantially all of the purchase price for the hotels was funded by proceeds from the Company’s best-efforts offering of Units. No goodwill or intangible assets were recorded in connection with any of the
acquisitions. The Company leased all of its hotels to wholly-owned taxable REIT subsidiaries (collectively, the “lessee”) under master hotel lease agreements. The Company also used the proceeds of its offering to pay 2% of the gross purchase price for these hotels, which equals approximately $16.9
million, as a commission to Apple Six Realty Group, Inc. (“A6RG”). A6RG is 100% owned by the Company’s Chairman and Chief Executive Officer, Glade M. Knight. Management and Franchise Agreements Each of the 66 hotels included in the Company’s continuing operations are operated and managed, under separate management agreements, by affiliates of one of the following companies: Marriott International, Inc. (“Marriott”), Stonebridge Realty Advisors, Inc. (“Stonebridge”), Hilton Worldwide
(“Hilton”), Western International (“Western”), Larry Blumberg & Associates (“LBA”), White Lodging Services Corporation (“WLS”), Inn Ventures, Inc. (“Inn Ventures”), or Newport Hospitality Group, Inc. (“Newport”). The agreements have remaining terms ranging from 1 to 24 years. Fees associated
with the agreements generally include the payment of base management fees, incentive management fees, accounting fees, and other fees for centralized services which are allocated among all of the hotels that receive the benefit of such services. Base management fees are calculated as a percentage of
gross revenues. Incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements. The Company has the option to terminate the management agreements if specified performance thresholds are not
satisfied. During the years ended December 31, 2010, 2009 and 2008, the Company incurred approximately $7.0, $6.6 and $9.6 million in management fees for continuing operations. Stonebridge, Western, LBA, WLS, Inn Ventures and Newport are not affiliated with either Marriott or Hilton, and as a result, the hotels managed by these companies were required to obtain separate franchise agreements with each respective franchisor. The Hilton franchise agreements generally
provide for an initial term of 13 to 20 years. Fees associated with the Hilton agreements generally include the payment of royalty fees and program fees based on room revenues. The Marriott franchise agreements provide for an initial term 19
Acquired
Purchase
Price
of 15 to 20 years. Fees associated with the Marriott agreements include the payment of royalty fees, marketing fees, reservation fees and a communications support fee based on room revenues. During the years ended December 31, 2010, 2009 and 2008, the Company incurred approximately $9.3, $8.8 and
$10.3 million in franchise fees for continuing operations. Results of Operations for Years 2010 and 2009 Hotel performance is impacted by many factors including the 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 impact on both leisure and business travel. As a result, revenue and income in
most markets in the U.S. declined from 2008 to 2009. Economic conditions stabilized and showed modest growth in 2010 as compared to 2009 throughout the U.S., which led to the Company’s improved revenue and net income in 2010 as compared to 2009. Although the Company expects continued
improvement in 2011, it is not anticipated that revenue and net income will reach pre-recessionary levels. While reflecting the impact of declining economic activity, the Company’s hotel performance as compared to other hotels within each individual market has generally met expectations for the period
held. Revenues The Company’s principal source of revenue is hotel room revenue and other related revenue. For the years ended December 31, 2010 and 2009, the Company had total hotel revenue from continuing operations of $221.3 and $210.4 million, respectively. For the years ended December 31, 2010 and
2009, the hotels achieved average occupancy of 71% and 66%, ADR of $104 and $107 and RevPAR of $74 and $70. ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR. These rates are consistent with industry and brand
averages. Since the beginning of 2010 the Company has experienced an increase in demand, as shown by the improved occupancy rates in comparison to 2009. However, in addition to a stabilizing economy, this improvement is a result of reduced room rates as reflected in the ADR decline in 2010 from
comparable 2009 results. The Company believes ADR has stabilized and will continue to improve in 2011. ADR for the fourth quarter of 2010 increased 1% from the fourth quarter of 2009. With improvements in demand and expected rate, the Company and industry anticipate percentage revenue growth
in 2011 in the mid single digits, as compared to 2010. While reflecting the impact of recessionary to low-growth levels of economic activity in 2009 and 2010, the Company’s hotels continue to be leaders in their respective markets. The Company’s average Market Yield for 2010 and 2009 was 120. The
Market Yield is a measure of each hotel’s RevPAR compared to the average (100) in its local market (the index excludes hotels under renovations). Expenses With the Company’s revenue decline in 2009, the Company and its managers were aggressively reducing expenses where possible while still maintaining the quality and service levels of its properties. Although operating expenses will increase as revenue and occupancy increase, the Company will
continue to aggressively work with its managers to contain operating costs. While certain costs of a hotel are fixed in nature, such as management costs, certain utility costs, minimum maintenance and supply costs, the Company has been successful in reducing overall payroll costs, food and supplies, and
utilities relative to revenue increases by continually monitoring and sharing utilization data across its hotels and management companies. For the years ended December 31, 2010 and 2009, hotel operating expenses from continuing operations totaled $130.9 and $126.1 million, or 59% of total hotel revenue
in 2010 and 60% of total hotel revenue in 2009. Taxes, insurance, and other expenses from continuing operations for the years ended December 31, 2010 and 2009 were $12.1 and $13.2 million, or 5% and 6% of total hotel revenue. The decline is a result of lower real estate property tax assessments at selected hotels, including the results of
successful appeals of initial assessments for some locations. In addition, the Company has experienced slightly lower property insurance expense for most hotel properties, in comparison to insurance rates in effect during 2009. The Company expects 2011 property insurance and property tax expense to be
similar to 2010. General and administrative expense for the years ended December 31, 2010 and 2009 was $6.1 and $4.9 million, or 3% and 2% of total hotel revenue. The principal components of general and administrative expense 20
are advisory fees, loss on the investment in Apple Air Holding, LLC, legal fees, accounting fees, and reporting expenses. The increases in 2010 are primarily due to approximately $0.45 million of costs incurred related to reviewing and evaluating various strategic alternatives for the Company and to
approximately $0.45 million related to Apple Air’s loss from the contract to trade in its two jets for one new jet. As a public company, the Company is subject to various regulatory oversight. In 2010 the Company incurred approximately $0.5 million in legal and related costs responding to the Securities
and Exchange Commission. Depreciation expense from continuing operations for the years ended December 31, 2010 and 2009 was $30.8 million and $30.4 million. Depreciation expense represents the expense of the 66 hotels included in the Company’s continuing operations and related personal property for their respective
periods owned. Interest expense, net was $3.8 and $2.3 million for the years ended December 31, 2010 and 2009. Interest expense relates to debt assumed with 14 of the properties acquired as well as a line of credit entered into in March 2008. Total debt assumed was approximately $54.1 million. Seven of the 14
assumed mortgages, or $23.2 million, were extinguished in 2008, and one additional mortgage, for $2.9 million, was extinguished in 2010. Interest expense increased from year to year due to increased borrowings on the Company’s line of credit. The Company capitalized interest of approximately $0.1 and
$0.3 million in 2010 and 2009 in conjunction with hotel renovations. Results of Operations for Years 2009 and 2008 Revenues The Company’s principal source of revenue is hotel room revenue and other related revenue. For the years ended December 31, 2009 and 2008, the Company had total hotel revenue from continuing operations of $210.4 and $252.9 million, respectively. For the years ended December 31, 2009 and
2008, the hotels achieved average occupancy of 66% and 71%, ADR of $107 and $117 and RevPAR of $70 and $83. These rates are consistent with industry and brand averages. However, because overall hotel room demand declined due to weakening general economic conditions in 2009, the Company’s
revenue at most individual hotels experienced declines during 2009 as compared to 2008 results. While reflecting the impact of declining economic activity, the Company continued to be a leader in its local markets. The Company’s 2009 average market yield was 120 for continuing hotels. Expenses For the years ended December 31, 2009 and 2008, hotel operating expenses from continuing operations totaled $126.1 and $144.8 million, or 60% of total hotel revenue in 2009 and 57% of total hotel revenue in 2008. The Company worked aggressively with its managers to reduce operating costs as
revenue declined; however, declines in costs did not offset declines in revenue, due to the fixed nature of certain expenses. Taxes, insurance, and other expenses from continuing operations for the years ended December 31, 2009 and 2008 were $13.2 and $13.4 million, or 6% and 5% of total hotel revenue. General and administrative expense from continuing operations for the years ended December 31, 2009 and 2008 was $4.9 and $5.4 million, or 2% of total hotel revenue in 2009 and 2008. The principal components of general and administrative expense are advisory fees, loss on the investment in
Apple Air Holding, LLC, legal fees, accounting fees, and reporting expenses. Depreciation expense from continuing operations for the years ended December 31, 2009 and 2008 was $30.4 million in both years. Interest expense, net was $2.3 and $1.8 million for the years ended December 31, 2009 and 2008. Interest expense relates to debt assumed with 14 of the properties acquired as well as a line of credit entered into in March 2008. Total debt assumed was approximately $54.1 million. Seven of the 14
assumed mortgages, or $23.2 million, were extinguished in 2008. Interest expense increased from year to year due to increased borrowings on the Company’s line of credit while interest income decreased due to the decrease in investable cash. The Company capitalized interest of approximately $0.3 and
$0.4 million in 2009 and 2008 in conjunction with hotel renovations. 21
Related Party Transactions The Company has significant transactions with related parties. These transactions cannot be construed to be arms length, and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. The Company’s independent members of the Board of Directors oversee and annually review the Company’s related party relationships (which include the relationships discussed in this section) and are required to approve any significant modifications to these contracts, as well as any new significant
related party transactions. There were no changes to the contracts discussed in this section and no new significant related party transactions during 2010. The Board of Directors is not required to approve each individual transaction that falls under a related party relationship, however under the direction
of the Board of Directors, at least one member of the Company’s senior management team approves each related party transaction. The Company has a contract with Apple Six Realty Group (“A6RG”), a related party, to provide brokerage services for the acquisition and disposition of the Company’s real estate assets. In accordance with the contract, A6RG 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 along with the reimbursement of certain costs. As of December 31, 2010, payments to A6RG for services under the terms of this contract have totaled $16.9 million since inception which were capitalized as a part
of the purchase price of the hotels. No fees were incurred under this contract during 2010 and 2009. The Company is party to an advisory agreement with Apple Six Advisors, Inc. (“A6A”), pursuant to which A6A 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. During the years ended December 31, 2010, 2009 and 2008, the Company incurred $1.5, $1.5 and $2.5 million in fees under this agreement. Through its wholly-owned subsidiary, Apple Fund Management, LLC, the Company provides support services to A6RG, Apple Suites Realty Group, Inc. (“ASRG”), A6A, Apple Seven Advisors, Inc. (“A7A”), Apple REIT Seven, Inc., Apple Eight Advisors, Inc. (“A8A”), Apple REIT Eight, Inc.,
Apple Nine Advisors, Inc. (“A9A”), Apple REIT Nine, Inc., Apple Ten Advisors, Inc. (“A10A”) and Apple REIT Ten, Inc. A7A provides day to day advisory and administrative functions for Apple REIT Seven, Inc. A8A provides day to day advisory and administrative functions for Apple REIT Eight,
Inc. A9A provides day to day advisory and administrative functions for Apple REIT Nine, Inc. A10A provides day to day advisory and administrative functions for Apple REIT Ten, Inc. ASRG provides real estate brokerage services to Apple REIT Seven, Inc., Apple REIT Eight, Inc., Apple REIT
Nine, Inc. and Apple REIT Ten, Inc. Each of these companies has agreed to reimburse the Company for its costs in providing these services. A6RG, ASRG, A6A, A7A, A8A, A9A and A10A are 100% owned by Glade Knight, the Company’s Chairman and Chief Executive Officer. For the years ended
December 31, 2010, 2009 and 2008, the Company received reimbursement of its costs totaling $6.1, $5.9 and $4.6 million from the participating entities. The Company’s net allocated cost for these support services was approximately $1.7 million, $1.9 million and $1.8 million for the years ended December
31, 2010, 2009 and 2008. As part of this arrangement, the day to day transactions may result in amounts due to or from the related parties. To effectively manage cash disbursements, the individual companies may make payments for any or all of the related companies. The amounts due to or from the
related companies are reimbursed or collected and are not significant in amount. Although there is a potential conflict on time allocation of personnel due to the fact that a senior manager, officer or staff member will provide services to more than one company, the Company believes that the executives and staff compensation sharing arrangement allows the companies to share
costs yet attract and retain superior executives and staff. The cost sharing structure also allows each entity to maintain a much more cost effective structure than having separate staffing arrangements. Amounts reimbursed to the Company include both compensation for personnel and “overhead” (office
rent, utilities, benefits, office supplies, etc.) utilized by the companies. The allocation of costs is made by the management of the several REITs and is reviewed at least annually by the Compensation Committees of the several REITs. In making the allocation, management and the Compensation
Committee consider all relevant facts related to the Company’s level of business activity and the extent to which the Company requires the services of particular personnel. The costs allocated are actual costs and do not include any profit/markup for the Company. Such payments are not based on formal
record keeping regarding the time these personnel devote to the Company, but are based on a good 22
faith estimate by the employee and/or his or her supervisor of the time devoted by the employee to each company. Including A6RG, ASRG, A6A, A7A, A8A, A9A and A10A discussed above, Mr. Knight is also Chairman and CEO of Apple REIT Seven, Inc., Apple REIT Eight, 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 Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. Until January 2009, the Company, through a jointly-owned subsidiary, Apple Air Holding, LLC (“Apple Air”), owned two Lear 40 jets used primarily for renovation and asset management purposes. The total purchase price for the aircraft, purchased in January 2006 and December 2007, was
approximately $16.0 million. Apple Air was jointly owned by the Company and Apple REIT Seven, Inc. (“Apple Seven”). Apple Seven’s ownership interest was accounted for as a minority interest and was included in other liabilities in the Company’s Consolidated Balance Sheet with a balance of $6.6
million at December 31, 2008. The aircraft were also leased to affiliates of the Company at market rates. In 2008, aircraft lease revenues from affiliates totaling $1.5 million were included in reimbursed expenses on the Company’s Consolidated Statement of Operations. The aircraft were depreciated on a
straight-line basis over a useful life of ten years. For the year ended December 31, 2008, the Company recorded depreciation expense in the amount of approximately $1.6 million on the two aircraft. In January 2009, the Company’s ownership interest in Apple Air was reduced from 50% to 26% through the redemption of a 24% ownership interest by Apple Air. The Company received approximately $3.2 million for the ownership interest redeemed. No gain or loss from the redemption was
recognized by the Company. Due to the reduction in ownership the Company deconsolidated Apple Air and now records its ownership interest of approximately $1.8 and $2.4 million at December 31, 2010 and 2009 in “Other assets, net” in the Company’s Consolidated Balance Sheets. The Company
records its share of income or loss of Apple Air under the equity method of accounting, adjusting its investment accordingly. The total expense incurred by the Company in 2010 and 2009 related to its ownership interest in Apple Air was approximately $0.9 and $0.5 million, which is included in general
and administrative expenses on the Company’s Consolidated Statements of Operations. The expense related primarily to the depreciation of the aircraft and the reduction in basis of the aircraft due to the planned trade in for one new airplane in 2011. The other members of Apple Air are Apple Seven,
Apple REIT Eight, Inc. and Apple REIT Nine, Inc. The Company has issued 240,000 Series B convertible preferred shares to Mr. Knight in exchange for the payment by him of $0.10 per Series B convertible preferred share, or an aggregate of $24,000. The Series B convertible preferred shares are convertible into common shares pursuant to the
formula and on the terms and conditions set forth below. There are no dividends payable on the Series B convertible preferred shares. Holders of more than two-thirds of the Series B convertible preferred shares must approve any proposed amendment to the articles of incorporation that would adversely affect the Series B convertible preferred shares. Upon the Company’s liquidation, the holder of the Series B convertible preferred shares is entitled to a priority liquidation payment before any distribution of liquidation proceeds to the holders of the common shares. However, the priority liquidation payment of the holder of the Series B
convertible preferred shares is junior to the holders of the Series A preferred shares distribution rights. The holder of a Series B convertible preferred share is entitled to a liquidation payment of $11 per number of common shares each Series B convertible preferred share would be convertible into
according to the formula described below. In the event that the liquidation of the Company’s assets results in proceeds that exceed the distribution rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed between the common shares
and the Series B convertible preferred shares, on an as converted basis. Each holder of outstanding Series B convertible preferred shares shall have the right to convert any of such shares into common shares of the Company upon and for 180 days following the occurrence of any of the following events:
substantially all of the Company’s assets, stock or business is sold or transferred through exchange, merger, consolidation, lease, share exchange, sale or otherwise, other than a sale of assets in liquidation, dissolution or winding up of the Company;
23
(1)
(2) the termination or expiration without renewal of the advisory agreement with A6A, or if the Company ceases to use A6RG to provide property acquisition and disposition services; or (3) the Company’s common shares are listed on any securities exchange or quotation system or in any established market. Upon the occurrence of any conversion event, each Series B convertible preferred share may be converted into 24.17104 common shares. In the event that the Company raises additional gross proceeds in a subsequent public offering, each Series B convertible preferred share may be converted into an
additional number of common shares based on the additional gross proceeds raised through the date of conversion in a subsequent public offering according to the following formula: (X/50 million) x 1.20568, where X is the additional gross proceeds rounded down to the nearest 50 million. No additional consideration is due upon the conversion of the Series B convertible preferred shares. The conversion into common shares of the Series B convertible preferred shares will result in dilution of the shareholders’ interests. Expense related to the issuance of 240,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B
shares to common shares occurs. The expense will be measured as the difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares. Expense if a conversion event had occurred at December 31, 2010 could range from
$0 to $63.8 million (assumes $11 per Unit fair market value), which represents approximately 5.8 million shares of common stock. Liquidity and Capital Resources The following is a summary of the Company’s significant contractual obligations as of December 31, 2010:
Commercial Commitments (000’s)
Total
Amount of Commitments Expiring per Period
Less than
2-3 Years
4-5 Years
Over Debt (including interest of $4.6 million)
$
68,168
$
46,782
$
15,505
$
5,881
$
— Ground Lease Commitments
3,620
326
660
668
1,966 Total Commercial Commitments
$
71,788
$
47,108
$
16,165
$
6,549
$
1,966 Capital Requirements and Resources In March 2008 the Company entered into a $20 million unsecured revolving line of credit which expires in June 2011, but has an option for the Company to extend until June 2012. In August 2009 and June 2010, the Company modified the agreement, increasing its capacity to $60 million. The line of
credit bears interest based on LIBOR with a minimum interest rate of 5.0%. The line of credit was obtained to meet short-term cash needs as the Company planned to complete several renovations in 2009. With the availability of this line of credit, the Company maintains little cash on hand, accessing
the line as necessary. As a result, cash on hand was $0 at December 31, 2010 and 2009. The outstanding balance on the line as of December 31, 2010 and 2009 was $39.6 and $25.9 million and its interest rate was 5.0%. The Company anticipates that cash flow from operations and the revolving line of
credit will be adequate to meet its anticipated liquidity requirements, including required distributions to shareholders (the Company is not required to make distributions at its current rate for REIT purposes), capital expenditures and debt service. While the Company’s line of credit matures in June 2011,
it has an option to extend maturity to June 2012. 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-
recessionary levels, the Company will attempt if necessary 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 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. The Company’s objective in setting a distribution rate is to project a rate that will provide consistency over the 24
1 Year
5 Years
life of the Company, taking into account acquisitions and capital improvements, ramp up of new properties and varying economic cycles. Distributions in 2010 totaled $72.3 million and were paid monthly at a rate of $0.064 per common share beginning March 2010, and $0.075 per common share in
January and February. These distributions included a return of capital. For the same period the Company’s cash generated from operations was $71.0 million. The shortfall was funded primarily by borrowing on the line of credit. 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 rate. Additionally, 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 January 2010 the Board of Directors reduced the Company’s annual distribution rate from $0.90 to $0.77 per
common share. The reduction was effective March 2010. The distribution continues to be paid monthly. 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, an amount of 3% to 5% of gross revenues
provided that such amount may be used for the Company’s capital expenditures with respect to the hotels. Due to the work done on the properties in prior years and the depressed economic environment the Company invested approximately $8 million in capital expenditures in 2010. The company
anticipates expenditures of approximately $13 million in 2011 in connection with renovations and brand initiatives. In February 2006, 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. As of December 31, 2010, approximately 14.2
million Units, representing $156.5 million in proceeds to the Company, have been issued under the plan, including 2.8 million Units representing $30.5 million issued in 2010 and 3.2 million Units representing $35.1 million issued in 2009. In July 2005, the Company instituted 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 the lesser of: (1) the purchase price per Unit that the
shareholder actually paid for the Unit; or (2) $11.00 per Unit. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As of December 31, 2010, the Company
has redeemed 13.9 million Units in the amount of $152.2 million under the program, including 2.8 million Units for $30.4 million redeemed in 2010 and 3.5 million Units in the amount of $38.2 million redeemed in 2009. Subsequent Events In January 2011, the Company declared and paid $5.9 million or $0.064 per common share, in a distribution to its common shareholders, of which $2.4 million or 221,014 Units were reinvested under the Company’s Dividend Reinvestment Plan. In January 2011, the Company redeemed 606,064 Units in the amount of $6.7 million under its Unit Redemption Program. In February 2011, the Company declared and paid $5.8 million or $0.064 per common share, in a distribution to its common shareholders, of which $2.5 million or 223,056 Units were reinvested under the Company’s Dividend Reinvestment Plan. 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. 25
Business Interruption Being in the real estate industry, the Company is exposed to natural disasters both locally and nationally, and 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 The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. 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. Critical Accounting Policies The following contains a discussion of what the Company believes to be critical accounting policies. These items should be read to gain a further understanding of the principles used to prepare the Company’s financial statements. These principles include application of judgment; therefore, changes in
judgments may have a significant impact on the Company’s reported results of operations and financial condition. Capitalization Policy The Company considers expenditures to be capital in nature based on the following criteria: (1) for a single asset, the cost must be at least $500, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2) for group purchases of 10 or more
identical assets, the unit cost for each asset must be at least $50, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; and (3) for major repairs to a single asset, the repair must be at least $2,500 and the useful life of the asset must be
substantially extended. Impairment Losses Policy The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective properties, based on historical and industry data, is less than the properties’ carrying
amount. Indicators of impairment include a property with current or potential losses from operations, when it becomes more likely than not that a property will be sold before the end of its previously estimated useful life or when events, trends, contingencies or changes in circumstances indicate that a
triggering event has occurred and an asset’s carrying value may not be recoverable. Impairment losses are measured as the difference between the asset’s fair value and its carrying value. In connection with the decision to sell its two hotels in Tempe, Arizona, the Company recorded an impairment charge
of approximately $3.6 million which represented the difference between the net book value and the fair value less cost to sell. 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 26
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 7A. Quantitative and Qualitative Disclosures About Market Risk The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of December 31, 2010, the Company’s financial instruments were not exposed to significant market risk due to interest rate risk, foreign currency exchange risk, commodity price
risk or equity price risk. The Company will be exposed to changes in short term interest rates paid on its line of credit. Based on the balance of the Company’s line of credit at December 31, 2010, of $39.6 million, every 100 basis points change in interest rates will impact the Company’s net income by
$396,000, subject to the interest rate floor provisions of the line of credit and all other factors remaining the same. Although the Company had no invested cash at December 31, 2010, the Company is exposed to changes in short-term money market rates to the extent that it invests its cash. In addition to its $39.6 million outstanding balance under its line of credit facility at December 31, 2010 (which is included in the table below as due in 2011, although the Company has an option to extend the term for one year), the Company has assumed fixed interest rate notes payable to lenders
under permanent financing arrangements. The following table summarizes the annual maturities and average interest rates of the Company’s notes payable outstanding at December 31, 2010.
(000’s)
2011
2012
2013
2014
2015
Thereafter
Total
Fair Maturities
$
44,243
$
756
$
13,022
$
5,528
$
—
$
—
$
63,549
$
64,415 Average Interest Rate
6.0
%
6.7
%
6.6
%
6.4
%
—
— 27
Market
Value
Item 8. Financial Statements and Supplementary Data REPORT OF MANAGEMENT March 8, 2011 Management of Apple REIT Six, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission,
internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions and dispositions of the Company’s assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s
management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. In connection with the preparation of the Company’s annual consolidated financial statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this assessment, management has concluded that as of December 31, 2010, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this report, has issued an attestation report on the Company’s internal control over financial reporting, a copy of which appears on the next page of this
annual report.
/s/ GLADE M. KNIGHT
/S/ BRYAN
PEERY 28
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders
APPLE REIT SIX, INC.
Glade M. Knight
Chairman and Chief Executive Officer
Bryan Peery
Chief Financial Officer
(Principal Accounting Officer)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL The Board of Directors and Shareholders of We have audited Apple REIT Six, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Apple REIT Six,
Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. In our opinion, Apple REIT Six, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2010 consolidated financial statements of Apple REIT Six, Inc. and our report dated March 8, 2011 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Richmond, Virginia 29
CONTROL OVER FINANCIAL REPORTING
APPLE REIT SIX, INC.
March 8, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of We have audited the accompanying consolidated balance sheets of Apple REIT Six, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2010. Our audits also
included the financial statement schedule listed in the Index at Item 15(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Apple REIT Six, Inc. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Apple REIT Six, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2011 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Richmond, Virginia 30
APPLE REIT SIX, INC.
March 8, 2011
APPLE REIT SIX, INC.
December 31,
2010
2009 Assets Investment in real estate, net of accumulated depreciation of $153,452 and $124,943, respectively
$
764,557
$
801,646 Hotels held for sale
10,755
— Restricted cash-furniture, fixtures and other escrows
4,344
4,506 Due from third party manager, net
5,935
6,331 Other assets, net
2,622
3,101 Total Assets
$
788,213
$
815,584 Liabilities Notes payable
$
63,736
$
54,040 Other liabilities
4,706
4,056 Total Liabilities
68,442
58,096 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 91,473,791 and 91,472,421 shares, respectively
—
— Series B convertible preferred stock, no par value, authorized 240,000 shares; issued and outstanding 240,000 and 240,000 shares, respectively
24
24 Common stock, no par value, authorized 200,000,000 shares; issued and outstanding 91,473,791 and 91,472,421 shares, respectively
902,402
902,202 Distributions greater than net income
(182,655
)
(144,738
) Total Shareholders’ Equity
719,771
757,488 Total Liabilities and Shareholders’ Equity
$
788,213
$
815,584 See notes to consolidated financial statements. 31
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
APPLE REIT SIX, INC.
Year ended December 31,
2010
2009
2008 Revenues: Room revenue
$
206,624
$
195,671
$
233,112 Other revenue
14,634
14,753
19,744 Reimbursed expenses
6,055
5,899
6,057 Total revenue
227,313
216,323
258,913 Expenses: Operating expense
58,443
55,798
63,535 Hotel administrative expense
18,405
18,219
20,571 Sales and marketing
17,381
16,946
19,025 Utilities
9,602
9,547
10,342 Repair and maintenance
10,801
10,243
11,346 Franchise fees
9,286
8,781
10,290 Management fees
6,978
6,586
9,642 Taxes, insurance and other
12,143
13,248
13,438 General and administrative
6,072
4,935
5,397 Reimbursed expenses
6,055
5,899
6,057 Depreciation expense
30,806
30,417
30,411 Total expenses
185,972
180,619
200,054 Operating income
41,341
35,704
58,859 Interest expense, net
(3,800
)
(2,312
)
(1,784
) Income from continuing operations
37,541
33,392
57,075 Income (loss) from discontinued operations
(3,157
)
(13
)
1,427 Net income
$
34,384
$
33,379
$
58,502 Basic and diluted net income (loss) per common share: From continuing operations
$
0.41
$
0.37
$
0.63 From discontinued operations
(0.03
)
—
0.01
$
0.38
$
0.37
$
0.64 Weighted average common shares outstanding—basic and diluted
91,323
91,178
90,899 See notes to consolidated financial statements. 32
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
APPLE REIT SIX, INC.
Common Stock
Class B Convertible
Distributions
Total
Number of
Amount
Number of
Amount Balance at December 31, 2007
90,280
$
888,878
240
$
24
$
(72,658
)
$
816,244 Net proceeds from the sale of common shares
3,237
35,609
—
—
—
35,609 Stock options granted
—
57
—
—
—
57 Common shares redeemed
(1,755
)
(19,284
)
—
—
—
(19,284
) Net income
—
—
—
—
58,502
58,502 Cash distributions declared and paid to shareholders ($.90 per share)
—
—
—
—
(81,746
)
(81,746
) Balance at December 31, 2008
91,762
905,260
240
24
(95,902
)
809,382 Net proceeds from the sale of common shares
3,190
35,027
—
—
—
35,027 Stock options granted
—
91
—
—
—
91 Common shares redeemed
(3,480
)
(38,176
)
—
—
—
(38,176
) Net income
—
—
—
—
33,379
33,379 Cash distributions declared and paid to shareholders ($.90 per share)
—
—
—
—
(82,215
)
(82,215
) Balance at December 31, 2009
91,472
902,202
240
24
(144,738
)
757,488 Net proceeds from the sale of common shares
2,770
30,467
—
—
—
30,467 Stock options granted
—
115
—
—
—
115 Common shares redeemed
(2,768
)
(30,382
)
—
—
—
(30,382
) Net income
—
—
—
—
34,384
34,384 Cash distributions declared and paid to shareholders ($.79 per share)
—
—
—
—
(72,301
)
(72,301
) Balance at December 31, 2010
91,474
$
902,402
240
$
24
$
(182,655
)
$
719,771 See notes to consolidated financial statements. 33
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except per share data)
Preferred Stock
Greater
Than
Net Income
Shareholders’
Equity
Shares
Shares
APPLE REIT SIX, INC.
Year ended December 31,
2010
2009
2008 Cash flow from operating activities: Net income
$
34,384
$
33,379
$
58,502 Adjustments to reconcile net income to cash provided by operating activities: Depreciation, including discontinued operations
31,199
30,938
30,918 Loss on hotels held for sale
3,567
—
— Other non-cash expenses, net
1,119
560
(166
) Changes in operating assets and liabilities, net of amounts acquired/assumed: Due from third party manager
396
1,473
1,051 Other assets
(90
)
207
435 Other liabilities
381
(528
)
(1,993
) Net cash provided by operating activities
70,956
66,029
88,747 Cash flow from investing activities: Cash paid for acquisition of hotels
—
—
(18,159
) Acquisition of other assets
—
—
(325
) Capital improvements
(8,163
)
(9,155
)
(14,950
) Redemption of investment interest in non-hotel assets
—
3,240
— Net increase in cash restricted for property improvements
127
(656
)
(189
) Other investing activities, net
(469
)
—
389 Net cash used in investing activities
(8,505
)
(6,571
)
(33,234
) Cash flow from financing activities: Net proceeds from line of credit
13,612
25,940
— Payment of financing costs
(143
)
(178
)
(225
) Repayment of secured notes payable
(3,704
)
(791
)
(22,193
) Net proceeds from issuance of Units
30,467
35,027
35,609 Redemptions of Units
(30,382
)
(38,176
)
(19,284
) Cash distributions paid to shareholders
(72,301
)
(82,215
)
(81,746
) Net cash used in financing activities
(62,451
)
(60,393
)
(87,839
) Decrease in cash and cash equivalents
—
(935
)
(32,326
) Cash and cash equivalents, beginning of period
—
935
33,261 Cash and cash equivalents, end of period
$
—
$
—
$
935 Supplemental information: Interest paid
$
3,795
$
2,590
$
3,044 See notes to consolidated financial statements. 34
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 General Information and Summary of Significant Accounting Policies Organization Apple REIT Six, Inc. (the “Company”) is a Virginia corporation formed to invest in real estate in select metropolitan areas in the United States. Initial capitalization occurred on January 20, 2004 and operations began on May 28, 2004 when the Company acquired its first hotel. The Company has no
foreign operations or assets and its operations include only one segment. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation. The Company has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The REIT Modernization Act, effective January 1, 2001, permits real estate investment trusts to establish taxable businesses to conduct certain previously disallowed business activities.
The Company has formed wholly-owned taxable REIT subsidiaries (collectively, the “Lessee”), which lease all of the Company’s hotels. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value. Balances may at times exceed federal depository insurance limits. Restricted cash Restricted cash includes reserves for debt service, real estate taxes, and insurance, as well as excess cash flow deposits and reserves for furniture, fixtures, and equipment replacements of up to 5% of property revenue for certain hotels, as required by certain management or mortgage debt agreement
restrictions and provisions. Investment in Hotels and Related Depreciation The hotels are stated at cost, net of depreciation, and include real estate brokerage commissions paid to Apple Six Realty Group, Inc. (“A6RG”), a related party 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company. Repair and maintenance costs are expensed as
incurred while significant improvements, renovations, and replacements are capitalized. Depreciation is computed using the straight-line method over estimated useful lives of the assets, which are 39 years for buildings, ten years for major improvements and three to seven years for furniture and
equipment. The Company considers expenditures to be capital in nature based on the following criteria: (1) for a single asset, the cost must be at least $500, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2) for group purchases of 10 or more
identical assets, the unit cost for each asset must be at least $50, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; and (3) for major repairs to a single asset, the repair must be at least $2,500 and the useful life of the asset must be
substantially extended. The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective properties, based on historical and industry data, is less than the properties’ carrying
amount. Indicators of impairment include a property with current or potential losses from operations, when it becomes more likely than not that a property will be sold before the end of its previously estimated useful life or when events, trends, contingencies or changes in circumstances indicate that a
triggering event has occurred and an asset’s carrying value may not be recoverable. Impairment losses are measured as the difference between the asset’s fair value and its carrying value. In connection with the decision to sell its two hotels in Tempe, Arizona, the Company recorded an impairment charge
of approximately $3.6 million which represented the difference between the net book value and the fair value less cost to sell. 35
Revenue Recognition Revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services. Comprehensive Income The Company recorded no comprehensive income other than net income for the years ended December 31, 2010, 2009 and 2008. Earnings Per Common Share Basic earnings per common share are computed based upon the weighted average number of shares outstanding during the year. Diluted earnings per common share are calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. There were no shares
with a dilutive effect for the years ended December 31, 2010, 2009 and 2008. As a result, basic and 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. Federal Income Taxes The Company is operated as, and has elected to be taxed as, a REIT under Sections 856 to 860 of the Internal Revenue Code. Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from income reported for financial reporting purposes primarily due to
the differences for federal income tax purposes in the estimated useful lives used to compute depreciation. The characterization of 2010 distributions of $0.79 per common share for tax purposes was 75% ordinary income and 25% return of capital, 2009 distributions of $0.90 per common share for tax
purposes was 62% ordinary income and 38% return of capital, and 2008 distributions of $0.90 per common share for tax purposes was 85% ordinary income and 15% return of capital (unaudited). The Lessee, as a taxable REIT subsidiary of the Company, is subject to federal and state income taxes. The taxable REIT subsidiary incurred a loss for the years ended December 31, 2010, 2009 and 2008, and therefore did not have any federal tax expense. No operating loss benefit has been
recorded in the Consolidated Balance Sheet since realization is uncertain. Total net operating loss carry forward for federal income tax purposes was approximately $49 million as of December, 31, 2010. The net operating losses expire beginning in 2024. There are no material differences between the book
and tax cost basis of the Company’s assets. As of December 31, 2010, the tax years that remain subject to examination by major tax jurisdictions generally include 2007 to 2010. Sales and Marketing Costs Sales and marketing costs are expensed when incurred. These costs represent the expense for franchise advertising and reservation systems under the terms of the hotel management and franchise agreements and general and administrative expenses that are directly attributable to advertising and
promotion. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results may differ from
those estimates. 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 36
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. Note 2 Investment in Real Estate As of December 31, 2010, the Company owned 68 hotels consisting of the following: fourteen Hilton Garden Inn hotels, ten Residence Inn hotels, ten Courtyard hotels, eight SpringHill Suites hotels, six Homewood Suites hotels, six TownePlace Suites hotels, five Fairfield Inn hotels, four Hampton
Inn hotels, three Hampton Inn & Suites hotels and two Marriott hotels. The hotels are located in 18 states and, in aggregate, consist of 7,897 rooms. The two hotels in Tempe, Arizona are classified as held for sale. Investment in real estate consisted of the following (in thousands):
December 31,
December 31, Land
$
107,225
$
109,621 Building and Improvements
743,475
753,460 Furniture, Fixtures and Equipment
67,309
63,508
918,009
926,589 Less Accumulated Depreciation
(153,452
)
(124,943
) Investment in Real Estate, net
$
764,557
$
801,646 The following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each hotel. All dollar amounts are in thousands.
City State Brand Manager
Date
Rooms
Gross Ft. Worth Texas SpringHill Suites Marriott
5/28/04
145
$
13,340 Myrtle Beach South Carolina Courtyard Marriott
6/8/04
135
9,200 Redmond Washington Marriott Marriott
7/7/04
262
64,000 Anchorage Alaska Hilton Garden Inn Stonebridge
10/12/04
125
18,900 Anchorage Alaska Homewood Suites Stonebridge
10/12/04
122
13,200 Arcadia California Hilton Garden Inn Stonebridge
10/12/04
124
12,000 Arcadia California SpringHill Suites Stonebridge
10/12/04
86
8,100 Glendale Colorado Hampton Inn & Suites Stonebridge
10/12/04
133
14,700 Lakewood Colorado Hampton Inn Stonebridge
10/12/04
170
10,600 Lake Forest California Hilton Garden Inn Stonebridge
10/12/04
103
11,400 Phoenix Arizona Hampton Inn Stonebridge
10/12/04
99
6,700 Anchorage Alaska Hampton Inn Stonebridge
3/14/05
101
11,500 Bakersfield California Hilton Garden Inn Hilton
3/18/05
120
11,500 Tallahassee Florida Hilton Garden Inn Hilton
3/18/05
99
10,850 Lake Mary Florida Courtyard LBA
3/18/05
86
6,000 Foothill Ranch California Hampton Inn Stonebridge
4/21/05
84
7,400 Ft. Worth Texas Residence Inn Western
5/6/05
149
17,000 Boulder Colorado Marriott WLS
5/9/05
157
30,000 Ft. Worth Texas Homewood Suites Hilton
5/24/05
137
9,097 37
2010
2009
Acquired
Purchase
Price
City State Brand Manager
Date
Rooms
Gross Nashville Tennessee Homewood Suites Hilton
5/24/05
121
8,103 Albany Georgia Courtyard LBA
6/24/05
84
8,597 Lakeland Florida Residence Inn LBA
6/24/05
78
9,886 Huntsville Alabama Residence Inn LBA
6/24/05
78
8,288 Dothan Alabama Hampton Inn & Suites LBA
6/24/05
85
8,673 Columbus Georgia Residence Inn LBA
6/24/05
78
7,888 Tempe* Arizona SpringHill Suites Western
6/30/05
121
8,060 Tempe* Arizona TownePlace Suites Western
6/30/05
119
8,128 Las Colinas Texas TownePlace Suites Western
6/30/05
136
7,178 Arlington Texas TownePlace Suites Western
6/30/05
95
7,148 Arlington Texas SpringHill Suites Western
6/30/05
122
7,486 Wallingford Connecticut Homewood Suites WLS
7/8/05
104
12,780 McAllen Texas Hilton Garden Inn Western
7/19/05
104
9,000 Pensacola Florida Hampton Inn & Suites LBA
7/21/05
85
9,279 Rocky Hill Connecticut Residence Inn WLS
8/1/05
96
12,070 Dothan Alabama Courtyard LBA
8/11/05
78
8,016 Somerset New Jersey Homewood Suites WLS
8/17/05
123
17,750 Birmingham Alabama Fairfield Inn LBA
8/25/05
63
2,176 Tuscaloosa Alabama Courtyard LBA
8/25/05
78
7,551 Tuscaloosa Alabama Fairfield Inn LBA
8/25/05
63
3,982 Pensacola Florida Courtyard LBA
8/25/05
90
11,369 Pensacola Florida Fairfield Inn LBA
8/25/05
63
4,858 Pittsburgh Pennsylvania Residence Inn WLS
9/2/05
156
11,000 Laredo Texas Residence Inn Western
9/12/05
109
11,445 Mt. Olive New Jersey Residence Inn WLS
9/15/05
123
12,070 Saratoga Springs New York Hilton Garden Inn WLS
9/29/05
112
17,750 Huntsville Alabama Fairfield Inn LBA
9/30/05
79
4,954 Savannah Georgia SpringHill Suites LBA
9/30/05
79
5,407 Montgomery Alabama SpringHill Suites LBA
9/30/05
79
6,835 Valdosta Georgia Courtyard LBA
10/3/05
84
8,284 Farmington Connecticut Courtyard WLS
10/20/05
119
16,330 Orange Park Florida Fairfield Inn LBA
11/8/05
83
7,221 Folsom California Hilton Garden Inn Inn Ventures
11/30/05
100
18,028 Milpitas California Hilton Garden Inn Inn Ventures
11/30/05
161
18,600 Roseville California Hilton Garden Inn Inn Ventures
11/30/05
131
20,759 Renton Washington Hilton Garden Inn Inn Ventures
11/30/05
150
16,096 Laredo Texas Homewood Suites Western
11/30/05
106
10,500 Dallas Texas SpringHill Suites Western
12/9/05
147
19,500 Hillsboro Oregon TownePlace Suites Inn Ventures
12/19/05
136
11,500 Kent Washington TownePlace Suites Inn Ventures
12/19/05
152
12,000 Mukilteo Washington TownePlace Suites Inn Ventures
12/19/05
128
12,000 Portland Oregon Residence Inn Inn Ventures
12/19/05
258
42,000 Fredericksburg Virginia Hilton Garden Inn Hilton
12/20/05
148
16,600 San Francisco California Hilton Garden Inn Inn Ventures
1/30/06
169
12,266 Clearwater Florida SpringHill Suites LBA
2/17/06
79
6,923 Hillsboro Oregon Residence Inn Inn Ventures
3/9/06
122
15,500 Hillsboro Oregon Courtyard Inn Ventures
3/9/06
155
11,000 Panama City Florida Courtyard LBA
4/26/06
84
9,245 Roanoke Rapids North Carolina Hilton Garden Inn Newport
3/10/08
147
17,764 Total
7,897
$
845,330
*
Hotels are classified as held for sale.
No goodwill or intangible assets were recorded in connection with any of the acquisitions. 38
Acquired
Purchase
Price
Note 3 Other Assets Until January 2009, the Company, through a jointly-owned subsidiary, Apple Air Holding, LLC (“Apple Air”), owned two Lear 40 jets used primarily for renovation and asset management purposes. The total purchase price for the aircraft, purchased in January 2006 and December 2007, was
approximately $16.0 million. Apple Air was jointly owned by the Company and Apple REIT Seven, Inc. (“Apple Seven”). Apple Seven’s ownership interest was accounted for as a minority interest and was included in other liabilities in the Company’s Consolidated Balance Sheets with a balance of $6.6
million at December 31, 2008. The aircraft were also leased to affiliates of the Company at market rates. In 2008, revenues from affiliates totaling $1.5 million were included in reimbursed expenses on the Company’s Consolidated Statement of Operations. The aircraft were depreciated on a straight-line
basis over a useful life of ten years. For the year ended December 31, 2008, the Company recorded depreciation expense in the amount of approximately $1.6 million on the two aircraft. In January 2009, the Company’s ownership interest in Apple Air was reduced from 50% to 26% through the redemption of a 24% ownership interest by Apple Air. The Company received approximately $3.2 million for the ownership interest redeemed. No gain or loss from the redemption was
recognized by the Company. Due to the reduction in ownership the Company deconsolidated Apple Air and now records its ownership interest of approximately $1.8 and $2.4 million at December 31, 2010 and 2009 in “Other assets, net” in the Company’s Consolidated Balance Sheets. The Company
records its share of income or loss of Apple Air under the equity method of accounting, adjusting its investment accordingly. The total expense incurred by the Company in 2010 and 2009 related to its ownership interest in Apple Air was approximately $0.9 and $0.5 million, which is included in “General
and administrative” expense in the Company’s Consolidated Statements of Operations. The expense related primarily to the depreciation of the aircraft and the reduction in basis of the aircraft due to the planned trade in for one new airplane in 2011. The other members of Apple Air are Apple Seven,
Apple REIT Eight, Inc. and Apple REIT Nine, Inc. Note 4 Notes Payable and Credit Agreements In March 2008, the Company entered into a $20 million unsecured line of credit with a commercial bank. The applicable interest rate was equal to LIBOR (the London Interbank Offered Rate) plus 2%. In August 2009 and June 2010, the Company modified the agreement, increasing its capacity to
$60 million. The principal must be paid by the maturity date of June 10, 2011, may be prepaid without penalty, and may be extended by the Company to June 2012. Under the modified agreement, the new applicable interest rate is equal to LIBOR plus 3.5%, with a minimum interest rate of 5.0%. The
effective rate was 5.0% at December 31, 2010. The line of credit also has an unused fee at an annual rate of 0.5%. Interest is paid monthly. At December 31, 2010 and 2009, the credit line had an outstanding principal balance of $39.6 and $25.9 million. The Company also assumed approximately $54.1 million of debt secured by a first mortgage on 14 of its properties. The Company paid and extinguished seven of these mortgages in 2008 and one in 2010. The following table summarizes the hotel, interest rate, maturity date and the principal amount
assumed associated with each of the outstanding mortgages. All dollar amounts are in thousands.
Location Brand
Rate
Maturity
Principal
Outstanding
Outstanding Glendale, CO Hampton Inn & Suites
6.93
%
1/01/13
$
6,603
$
5,216
$
5,483 Foothill Ranch, CA Hampton Inn
8.06
%
8/01/11
4,502
3,984
4,094 Huntsville, AL Fairfield Inn
6.80
%
1/11/13
3,028
2,685
2,760 Savannah, GA SpringHill Suites
6.80
%
1/11/13
3,066
2,719
2,795 Montgomery, AL SpringHill Suites
6.80
%
1/11/13
3,785
3,357
3,451 Orange Park, FL Fairfield Inn
8.52
%
(1)
3,193
—
2,933 Hillsboro, OR Courtyard
6.40
%
12/11/14
6,663
6,036
6,185 Total
$
30,840
$
23,997
$
27,701
(1)
Note was extinguished in August 2010.
39
Date
Assumed
balance as of
Dec. 31, 2010
balance as of
Dec. 31, 2009
The aggregate amounts of principal payable under the Company’s promissory notes, for the five years subsequent to December 31, 2010 are as follows (in thousands):
Total 2011
$
44,243 2012
756 2013
13,022 2014
5,528 2015
—
63,549 Fair Value Adjustment of Assumed Debt
187 Total
$
63,736 Fair value adjustments were recorded in connection with the assumption of the above market rate debt in connection with the hotel acquisitions. These premiums are amortized into interest expense over the remaining term of the related indebtedness using the effective interest rate method. The
effective rates range from 5.85% to 6.11%. The total adjustment was $2.3 million and the unamortized balances at December 31, 2010 and 2009 were $0.2 million and $0.4 million, respectively. The Company estimates the fair value of its 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
December 31, 2010, the carrying value and estimated fair value of the Company’s debt was $63.7 million and $64.4 million. As of December 31, 2009, the carrying value and estimated fair value of the Company’s debt was $54.0 million and $55.5 million. The Company’s “Interest expense, net” in its Consolidated Statements of Operations is net of capitalized interest of $0.1, $0.3 and $0.4 million for the years ended December 31, 2010, 2009 and 2008. The interest was capitalized in conjunction with hotel renovations. Note 5 Shareholders’ Equity The Company concluded its best-efforts offering of Units on March 3, 2006. The Company registered its Units on Registration Statement Form S-11 (File No. 333-112169) filed April 20, 2004. The Company began its best-efforts offering (the “Offering”) of Units on April 23, 2004, the same day the
Registration Statement was declared effective by the Securities and Exchange Commission. Each Unit consists of one common share and one Series A preferred share. The Series A preferred shares have no voting rights and no conversion rights. In addition, the Series A preferred shares are not separately tradable from the common shares to which they relate. The Series A preferred shares do not have any distribution rights except a priority distribution upon the
sale of the Company’s assets. The priority distribution (“Priority Distribution”) will be equal to $11.00 per Series A preferred share, and will be paid before any distribution will be made to the holders of any other shares. Upon the Priority Distribution the Series A preferred shares will have no other
distribution rights. The Company has issued 240,000 Series B convertible preferred shares to Glade M. Knight, Chairman and Chief Executive Officer of the Company, in exchange for the payment by him of $0.10 per Series B convertible preferred share, or an aggregate of $24,000. The Series B convertible preferred
shares are convertible into common shares pursuant to the formula and on the terms and conditions set forth below. There are no dividends payable on the Series B convertible preferred shares. Holders of more than two-thirds of the Series B convertible preferred shares must approve any proposed amendment to the articles of incorporation that would adversely affect the Series B convertible preferred shares. Upon the Company’s liquidation, the holder of the Series B convertible preferred shares is entitled to a priority liquidation payment before any distribution of liquidation proceeds to the holders of the common shares. However, the priority liquidation payment of the holder of the Series B
convertible preferred shares is junior to the holders of the Series A preferred shares distribution rights. The holder of a Series B convertible 40
preferred share is entitled to a liquidation payment of $11 per number of common shares each Series B convertible preferred share would be convertible into according to the formula described below. In the event that the liquidation of the Company’s assets results in proceeds that exceed the distribution
rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed between the common shares and the Series B convertible preferred shares, on an as converted basis. Each holder of outstanding Series B convertible preferred shares shall have the right to convert any of such shares into common shares of the Company upon and for 180 days following the occurrence of any of the following events:
(1)
substantially all of the Company’s assets, stock or business is sold or transferred through exchange, merger, consolidation, lease, share exchange, sale or otherwise, other than a sale of assets in liquidation, dissolution or winding up of the Company; (2) the termination or expiration without renewal of the advisory agreement with Apple Six Advisors, Inc. (“A6A”), or if the Company ceases to use A6RG to provide property acquisition and disposition services; or (3) the Company’s common shares are listed on any securities exchange or quotation system or in any established market. Upon the occurrence of any conversion event, each Series B convertible preferred share may be converted into 24.17104 common shares. In the event that the Company raises additional gross proceeds in a subsequent public offering, each Series B convertible preferred share may be converted into an
additional number of common shares based on the additional gross proceeds raised through the date of conversion in a subsequent public offering according to the following formula: (X/50 million) x 1.20568, where X is the additional gross proceeds rounded down to the nearest 50 million. No additional consideration is due upon the conversion of the Series B convertible preferred shares. The conversion into common shares of the Series B convertible preferred shares will result in dilution of the common shareholders’ interests. Expense related to the issuance of 240,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B
shares to common shares occurs. The expense will be measured as the difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares. If a conversion event had occurred at December 31, 2010, expense could have
ranged from $0 to $63.8 million (assumes $11 per Unit fair market value), which represents approximately 5.8 million shares of common stock. In July 2005, the Company instituted 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 the lesser of: (1) the purchase price per Unit that the
shareholder actually paid for the Unit; or (2) $11.00 per Unit. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As of December 31, 2010, the Company
has redeemed 13.9 million Units in the amount of $152.2 million under the program, including 2.8 million Units for $30.4 million redeemed in 2010 and 3.5 million Units in the amount of $38.2 million redeemed in 2009. In February 2006, 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. As of December 31, 2010, approximately 14.2
million Units, representing $156.5 million in proceeds to the Company, have been issued under the plan, including 2.8 million Units representing $30.5 million issued in 2010 and 3.2 million Units representing $35.1 million issued in 2009. The Company’s articles of incorporation authorize issuance of up to 15 million additional preferred shares. No preferred shares other than the Series A preferred shares and the Series B convertible preferred shares (discussed above) have been issued. The Company believes that the authorization to
issue additional preferred shares benefits the Company and its shareholders by permitting flexibility in financing additional growth, giving 41
the Company additional financing options in corporate planning and in responding to developments in business, including financing of additional acquisitions and other general corporate purposes. Having authorized preferred shares available for issuance in the future gives the Company the ability to
respond to future developments and allows preferred shares to be issued without the expense and delay of a special shareholders’ meeting. At present, the Company has no specific financing or acquisition plans involving the issuance of additional preferred shares and the Company does not propose to fix
the characteristics of any series of preferred shares in anticipation of issuing preferred shares other than the Series A preferred shares and Series B convertible preferred shares discussed above. The Company cannot now predict whether or to what extent, if any, additional preferred shares will be used or
if so used what the characteristics of a particular series may be. The voting rights and rights to distributions of the holders of common shares will be subject to the prior rights of the holders of any subsequently-issued preferred shares. Unless otherwise required by applicable law or regulation, the
preferred shares would be issuable without further authorization by holders of the common shares and on such terms and for such consideration as may be determined by the Board of Directors. The preferred shares could be issued in one or more series having varying voting rights, redemption and
conversion features, distribution (including liquidating distribution) rights and preferences, and other rights, including rights of approval of specified transactions. A series of preferred shares could be given rights that are superior to rights of holders of common shares and a series having preferential
distribution rights could limit common share distributions and reduce the amount holders of common shares would otherwise receive on dissolution. The Company’s annual distribution rate as of December 31, 2010 was $0.77 per common share, payable monthly. For the years ended December 31, 2010, 2009 and 2008, the company has made distributions of $0.79, $0.90 and $0.90 per common share for a total of $72.3, $82.2 and $81.7 million. Note 6 Stock Incentive Plans On January 20, 2004, the Board of Directors approved a Non-Employee Directors Stock Option Plan (the “Directors Plan”) whereby directors, who are not employees of the Company or affiliates, automatically receive the option to purchase Units. Under the Directors Plan, the number of Units
authorized for issuance is equal to 45,000 plus 1.8% of the number of Units sold in excess of the minimum offering of 4,761,905 Units. This plan currently relates to the initial public offering of 91,125,541 Units. Therefore, the maximum number of Units authorized under the Directors Plan is currently
1,599,545 based on the number of shares issued as of December 31, 2010. On January 20, 2004, the Board of Directors approved an Incentive Stock Option Plan (the “Incentive Plan”) whereby incentive awards may be granted to certain personnel of the Company or affiliates. Under the Incentive Plan, the number of Units authorized for issuance is equal to 35,000 plus
4.625% of the number of Units sold in the initial offering in excess of 4,761,905. This plan also currently relates to the initial public offering of 91,125,541 Units. Therefore, the maximum number of Units that can be issued under the Incentive Plan is currently 4,029,318 based on the number of shares
issued as of December 31, 2010. Both plans generally provide, among other things, that options be granted at exercise prices not lower than the market value of the Units on the date of grant. The options expire 10 years from the date of the grant. During 2010, 2009 and 2008, the Company granted options to purchase 73,032, 72,828
and 72,548 Units, respectively, under the Directors Plan. All of the options issued vested at the date of issuance, and have an exercise price of $11 per Unit. The Company has granted no options under the Incentive Plan. Activity in the Company’s share option plan during 2010, 2009 and 2008 is
summarized in the following table:
2010
2009
2008 Outstanding, beginning of year:
361,188
288,360
215,812 Granted
73,032
72,828
72,548 Exercised
—
—
— Expired or canceled
—
—
— Outstanding, end of year:
434,220
361,188
288,360 Exercisable, end of year:
434,220
361,188
288,360 The weighted-average exercise price:
$
11.00
$
11.00
$
11.00 42
The Company recorded $115, $91 and $57 thousand of share-based expense for the 73 thousand options issued in each of the years ended December 31, 2010, 2009 and 2008. Note 7 Management and Franchise Agreements Each of the 66 hotels included in the Company’s continuing operations are operated and managed, under separate management agreements, by affiliates of one of the following companies (indicates the number of hotels managed): Marriott International, Inc. (“Marriott”) (3), Stonebridge Realty
Advisors, Inc. (“Stonebridge”) (10), Hilton Worldwide (“Hilton”) (5), Western International (“Western”) (8), Larry Blumberg & Associates (“LBA”) (20), White Lodging Services Corporation (“WLS”) (8), Inn Ventures, Inc. (“Inn Ventures”) (11) or Newport Hospitality Group, Inc. (“Newport”) (1). The
agreements have remaining terms ranging from 1 to 24 years. Fees associated with the agreements generally include the payment of base management fees, incentive management fees, accounting fees, and other fees for centralized services which are allocated among all of the hotels that receive the
benefit of such services. Base management fees are calculated as a percentage of gross revenues. Incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements. The Company has the option to
terminate the management agreements if specified performance thresholds are not satisfied. During the years ended December 31, 2010, 2009 and 2008, the Company incurred approximately $7.0, $6.6 and $9.6 million in management fees for continuing operations. Stonebridge, Western, LBA, WLS, Inn Ventures and Newport are not affiliated with either Marriott or Hilton, and as a result, the hotels managed by these companies were required to obtain separate franchise agreements with each respective franchisor. The Hilton franchise agreements generally
provide for an initial term of 13 to 20 years. Fees associated with the Hilton agreements generally include the payment of royalty fees and program fees based on room revenues. The Marriott franchise agreements provide for an initial term of 15 to 20 years. Fees associated with the Marriott agreements
include the payment of royalty fees, marketing fees, reservation fees and a communications support fee based on room revenues. During the years ended December 31, 2010, 2009 and 2008, the Company incurred approximately $9.3, $8.8 and $10.3 million in franchise fees for continuing operations. Note 8 Related Parties The Company has significant transactions with related parties. These transactions cannot be construed to be arms length, and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. The Company’s independent members of the Board of
Directors oversee and annually review the Company’s related party relationships (which include the relationships discussed in this section) and are required to approve any significant modifications to these contracts, as well as any new significant related party transactions. There were no changes to the
contracts discussed in this section and no new significant related party transactions during 2010. The Board of Directors is not required to approve each individual transaction that falls under a related party relationship, however under the direction of the Board of Directors, at least one member of the
Company’s senior management team approves each related party transaction. The Company has a contract with Apple Six Realty Group (“A6RG”), a related party, to provide brokerage services for the acquisition and disposition of the Company’s real estate assets. In accordance with the contract, A6RG 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 plus reimbursement of certain costs. As of December 31, 2010, payments to A6RG for services under the terms of this contract have totaled $16.9 million since inception which were capitalized as a part of the
purchase price of the hotels. No fees were incurred under this contract during 2010 and 2009. The Company is party to an advisory agreement with Apple Six Advisors, Inc. (“A6A”), pursuant to which A6A 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 43
these services. During the years ended December 31, 2010, 2009 and 2008, the Company incurred $1.5, $1.5 and $2.5 million in fees under this agreement. Through its wholly-owned subsidiary, Apple Fund Management, LLC, the Company provides support services to A6RG, Apple Suites Realty Group, Inc. (“ASRG”), A6A, Apple Seven Advisors, Inc. (“A7A”), Apple REIT Seven, Inc., Apple Eight Advisors, Inc. (“A8A”), Apple REIT Eight, Inc.,
Apple Nine Advisors, Inc. (“A9A”), Apple REIT Nine, Inc., Apple Ten Advisors, Inc. (“A10A”) and Apple REIT Ten, Inc. A7A provides day to day advisory and administrative functions for Apple REIT Seven, Inc. A8A provides day to day advisory and administrative functions for Apple REIT Eight,
Inc. A9A provides day to day advisory and administrative functions for Apple REIT Nine, Inc. A10A provides day to day advisory and administrative functions for Apple REIT Ten, Inc. ASRG provides real estate brokerage services to Apple REIT Seven, Inc., Apple REIT Eight, Inc., Apple REIT
Nine, Inc. and Apple REIT Ten, Inc. Each of these companies has agreed to reimburse the Company for its costs in providing these services. A6RG, ASRG, A6A, A7A, A8A, A9A and A10A are 100% owned by Glade Knight, the Company’s Chairman and Chief Executive Officer. For the years ended
December 31, 2010, 2009 and 2008, the Company received reimbursement of its costs totaling $6.1, $5.9 and $4.6 million from the participating entities. The Company’s net allocated cost for these support services was approximately $1.7 million, $1.9 million and $1.8 million for the years ended December
31, 2010, 2009 and 2008. As part of this arrangement, the day to day transactions may result in amounts due to or from the related parties. To effectively manage cash disbursements, the individual companies may make payments for any or all of the related companies. The amounts due to or from the
related companies are reimbursed or collected and are not significant in amount. Although there is a potential conflict on time allocation of personnel due to the fact that a senior manager, officer or staff member will provide services to more than one company, the Company believes that the executives and staff compensation sharing arrangement allows the companies to share
costs yet attract and retain superior executives and staff. The cost sharing structure also allows each entity to maintain a much more cost effective structure than having separate staffing arrangements. Amounts reimbursed to the Company include both compensation for personnel and “overhead” (office
rent, utilities, benefits, office supplies, etc.) utilized by the companies. The allocation of costs is made by the management of the several REITs and is reviewed at least annually by the Compensation Committees of the several REITs. In making the allocation, management and the Compensation
Committee consider all relevant facts related to the Company’s level of business activity and the extent to which the Company requires the services of particular personnel. The costs allocated are actual costs and do not include any profit/markup for the Company. Such payments are not based on formal
record keeping regarding the time these personnel devote to the Company, but are based on a good faith estimate by the employee and/or his or her supervisor of the time devoted by the employee to each company. Including A6RG, ASRG, A6A, A7A, A8A, A9A and A10A discussed above, Mr. Knight is also Chairman and CEO of Apple REIT Seven, Inc., Apple REIT Eight, 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 Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. 44
Note 9 Commitments The Company has ground leases related to five of its hotels with remaining terms ranging from 6 to 17 years. Each of the leases has the option for the Company to extend the lease. The aggregate amounts of minimum lease payments under these agreements for the five years subsequent to
December 31, 2010 and thereafter are as follows (in thousands):
Total 2011
$
326 2012
326 2013
334 2014
334 2015
334 Thereafter
1,966 Total
$
3,620 Note 10 Discontinued Operations Based on the performance, location and capital requirements of the Tempe, Arizona TownePlace Suites and SpringHill Suites, the Company committed to sell these two properties in the third quarter of 2010. These hotels have been classified in the Consolidated Balance Sheets as “Hotels held for
sale” as of December 31, 2010, and are recorded at fair value less cost to sell. The net book value of the properties included in “Investment in real estate, net” at December 31, 2009 was approximately $14.7 million. The results of operations for these properties are classified in the Consolidated
Statements of Operations in the line item “Income (loss) from discontinued operations”. The results for the year ended December 31, 2010 include a loss on the anticipated sale of $3.6 million representing the difference between the net book value of the hotels and the anticipated sale proceeds less cost
to sell or fair value. The estimated fair value is based on a third party contract for the properties which is considered a Level 2 measurement under the FASB’s standard on Fair Value Measurements and Disclosures. The following table sets forth the components of income (loss) from discontinued operations for the years ended December 31, 2010, 2009 and 2008 (in thousands):
2010
2009
2008 Total revenue
$
3,696
$
3,366
$
5,389 Hotel operating expenses
2,573
2,564
3,081 Taxes, insurance and other
320
294
374 Depreciation expense
393
521
507 Loss on sale of hotels
3,567
—
— Income (loss) from discontinued operations
$
(3,157
)
$
(13
)
$
1,427 Note 11 Industry Segments The Company owns extended-stay and limited service hotel properties throughout the United States that generate rental and other property related income. The Company separately evaluates the performance of each of its hotel properties. However, because each of the hotels has similar economic
characteristics, facilities, and services, the properties have been aggregated into a single operating segment. All segment disclosures are included in, or can be derived from, the Company’s consolidated financial statements. 45
Note 12 Quarterly Financial Data (unaudited) The following is a summary of quarterly results of operations for the period ended December 31, 2010:
(in thousands except per share data)
First
Second
Third
Fourth Revenues
$
52,063
$
59,980
$
63,187
$
52,083 Income from continuing operations
$
7,268
$
11,801
$
13,526
$
4,946 Income (loss) from discontinued operations
$
389
$
(7
)
$
(3,289
)
$
(250
) Net income
$
7,657
$
11,794
$
10,237
$
4,696 Basic and diluted net income per common share
$
0.08
$
0.13
$
0.11
$
0.05 Distributions declared and paid per common share
$
0.215
$
0.193
$
0.193
$
0.193 The following is a summary of quarterly results of operations for the period ended December 31, 2009:
(in thousands except per share data)
First
Second
Third
Fourth Revenues
$
51,524
$
56,192
$
58,821
$
49,786 Income from continuing operations
$
7,395
$
9,862
$
11,294
$
4,841 Income (loss) from discontinued operations
$
367
$
(127
)
$
(270
)
$
17 Net income
$
7,762
$
9,735
$
11,024
$
4,858 Basic and diluted net income per common share
$
0.09
$
0.11
$
0.12
$
0.05 Distributions declared and paid per common share
$
0.226
$
0.226
$
0.226
$
0.226 Note 13 Subsequent Events In January 2011, the Company declared and paid $5.9 million or $0.064 per common share, in a distribution to its common shareholders, of which $2.4 million or 221,014 Units were reinvested under the Company’s Dividend Reinvestment Plan. In January 2011, the Company redeemed 606,064 Units in the amount of $6.7 million under its Unit Redemption Program. In February 2011, the Company declared and paid $5.8 million or $0.064 per common share, in a distribution to its common shareholders, of which $2.5 million or 223,056 Units were reinvested under the Company’s Dividend Reinvestment Plan. 46
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. 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. See Item 8 for the Report of Management on Internal Control over Financial Reporting and the Company’s Independent Registered Public Accounting Firm’s attestation report regarding internal control over financial reporting. None. 47
Item 10. Directors, Executive Officers and Corporate Governance The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K will be set forth in the Company’s 2011 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 10, the 2011 Proxy Statement is incorporated herein
by this reference. Item 11. Executive Compensation The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K will be set forth in the Company’s 2011 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 11, the 2011 Proxy Statement is incorporated herein by this reference. The information required by Items 201(d) and 403 of Regulation S-K will be set forth in the Company’s 2011 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 12, the 2011 Proxy Statement is incorporated herein by this reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by Items 404 and 407(a) of Regulation S-K will be set forth in the Company’s 2011 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 13, the 2011 Proxy Statement is incorporated herein by this reference. Item 14. Principal Accounting Fees and Services This information required by Item 9(e) of Schedule 14A will be set forth in the Company’s 2011 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 14, the 2011 Proxy Statement is incorporated herein by this reference. 48
Item 15. Exhibits, Financial Statement Schedules 1. Financial Statements of Apple REIT Six, Inc. Report of Management on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting—Ernst & Young LLP Report of Independent Registered Public Accounting Firm—Ernst & Young LLP Consolidated Balance Sheets as of December 31, 2010 and 2009 Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2010, 2009 and 2008 Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 Notes to Consolidated Financial Statements These financial statements are set forth in Item 8 of this report and are hereby incorporated by reference. 2. Financial Statement Schedules Schedule III—Real Estate and Accumulated Depreciation (Included at the end of this Part IV of this report.) Financial statement schedules not listed are either omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits Incorporated herein by reference are the exhibits listed under “Exhibits Index” to this Report available at www.sec.gov. 49
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
City State Brand
Encumbrances
Initial Cost
Subsequently
Total
Acc
Date of
Date
Depreciable
# of
Bldg
Land
Bldg./FF&E Birmingham Alabama Fairfield Inn
$
—
$
354
$
2,057
$
150
$
2,561
$
(408
)
1995
Aug-05
3 - 39 yrs.
63 Dothan Alabama Courtyard
—
1,270
7,142
1,338
9,750
(1,530
)
1996
Aug-05
3 - 39 yrs.
78 Dothan Alabama Hampton Inn & Suites
—
842
8,129
77
9,048
(1,559
)
2004
Jun-05
3 - 39 yrs.
85 Huntsville Alabama Fairfield Inn
2,685
506
4,813
269
5,588
(783
)
1999
Sep-05
3 - 39 yrs.
79 Huntsville Alabama Residence Inn
—
947
7,632
1,541
10,120
(1,684
)
2002
Jun-05
3 - 39 yrs.
78 Montgomery Alabama SpringHill Suites
3,357
963
6,327
244
7,534
(1,015
)
1998
Sep-05
3 - 39 yrs.
79 Tuscaloosa Alabama Courtyard
—
—
7,953
1,009
8,962
(1,504
)
1996
Aug-05
3 - 39 yrs.
78 Tuscaloosa Alabama Fairfield Inn
—
—
4,240
168
4,408
(722
)
1996
Aug-05
3 - 39 yrs.
63 Anchorage Alaska Hampton Inn
—
1,220
10,501
2,138
13,859
(2,873
)
1997
Mar-05
3 - 39 yrs.
101 Anchorage Alaska Hilton Garden Inn
—
4,230
14,788
1,889
20,907
(3,324
)
2002
Oct-04
3 - 39 yrs.
125 Anchorage Alaska Homewood Suites
—
1,803
11,046
248
13,097
(2,443
)
2004
Oct-04
3 - 39 yrs.
122 Phoenix Arizona Hampton Inn
—
1,425
5,205
914
7,544
(1,511
)
1998
Oct-04
3 - 39 yrs.
99 Arcadia California Hilton Garden Inn
—
1,718
10,195
2,374
14,287
(2,959
)
1999
Oct-04
3 - 39 yrs.
124 Arcadia California SpringHill Suites
—
1,633
6,459
895
8,987
(1,739
)
1999
Oct-04
3 - 39 yrs.
86 Bakersfield California Hilton Garden Inn
—
1,166
10,565
214
11,945
(2,244
)
2004
Mar-05
3 - 39 yrs.
120 Folsom California Hilton Garden Inn
—
1,521
16,989
1,220
19,730
(3,164
)
1999
Nov-05
3 - 39 yrs.
100 Foothill Ranch California Hampton Inn
3,984
1,056
6,499
1,003
8,558
(1,623
)
1998
Apr-05
3 - 39 yrs.
84 Lake Forest California Hilton Garden Inn
—
1,541
9,425
236
11,202
(2,136
)
2004
Oct-04
3 - 39 yrs.
103 Milpitas California Hilton Garden Inn
—
2,565
16,534
2,020
21,119
(3,626
)
1999
Nov-05
3 - 39 yrs.
161 Roseville California Hilton Garden Inn
—
2,362
18,937
1,680
22,979
(3,713
)
1999
Nov-05
3 - 39 yrs.
131 San Francisco California Hilton Garden Inn
—
2,007
9,545
2,116
13,668
(2,762
)
1999
Jan-06
3 - 39 yrs.
169 Boulder Colorado Marriott
—
3,066
27,825
2,177
33,068
(5,812
)
1997
May-05
3 - 39 yrs.
157 Glendale Colorado Hampton Inn & Suites
5,216
3,641
11,221
1,301
16,163
(2,794
)
1999
Oct-04
3 - 39 yrs.
133 Lakewood Colorado Hampton Inn
—
2,508
8,090
793
11,391
(2,003
)
2003
Oct-04
3 - 39 yrs.
170 Farmington Connecticut Courtyard
—
1,794
15,434
28
17,256
(2,546
)
2005
Oct-05
3 - 39 yrs.
119 Rocky Hill Connecticut Residence Inn
—
1,472
11,284
18
12,774
(1,942
)
2005
Aug-05
3 - 39 yrs.
96 Wallingford Connecticut Homewood Suites
—
1,419
12,072
190
13,681
(2,178
)
2005
Jul-05
3 - 39 yrs.
104 Clearwater Florida SpringHill Suites
—
—
7,214
6
7,220
(1,212
)
2006
Feb-06
3 - 39 yrs.
79 Lake Mary Florida Courtyard
—
690
5,568
2,166
8,424
(1,686
)
1995
Mar-05
3 - 39 yrs.
86 Lakeland Florida Residence Inn
—
1,520
8,699
1,310
11,529
(1,942
)
2001
Jun-05
3 - 39 yrs.
78 Orange Park Florida Fairfield Inn
—
855
6,979
211
8,045
(1,055
)
1998
Nov-05
3 - 39 yrs.
83 Panama City Florida Courtyard
—
1,407
8,217
56
9,680
(1,373
)
2006
Mar-06
3 - 39 yrs.
84 Pensacola Florida Courtyard
—
1,186
10,728
1,047
12,961
(1,794
)
1997
Aug-05
3 - 39 yrs.
90 Pensacola Florida Fairfield Inn
—
470
4,703
229
5,402
(783
)
1995
Aug-05
3 - 39 yrs.
63 Pensacola Florida Hampton Inn & Suites
—
1,248
8,354
37
9,639
(1,604
)
2005
Jul-05
3 - 39 yrs.
85 Tallahassee Florida Hilton Garden Inn
—
1,103
10,130
1,019
12,252
(2,090
)
1997
Mar-05
3 - 39 yrs.
99 Albany Georgia Courtyard
—
1,253
7,658
146
9,057
(1,475
)
2004
Jun-05
3 - 39 yrs.
84 Columbus Georgia Residence Inn
—
—
8,184
198
8,382
(1,480
)
2003
Jun-05
3 - 39 yrs.
78 Savannah Georgia SpringHill Suites
2,719
693
5,099
256
6,048
(827
)
1999
Sep-05
3 - 39 yrs.
79 Valdosta Georgia Courtyard
—
1,036
7,529
1,204
9,769
(1,473
)
2002
Oct-05
3 - 39 yrs.
84 Mt. Olive New Jersey Residence Inn
—
1,410
11,331
141
12,882
(2,033
)
2005
Sep-05
3 - 39 yrs.
123 Somerset New Jersey Homewood Suites
—
1,813
16,801
203
18,817
(2,873
)
2005
Aug-05
3 - 39 yrs.
123 Saratoga Springs New York Hilton Garden Inn
—
2,399
15,885
1,574
19,858
(2,913
)
1999
Sep-05
3 - 39 yrs.
112 Roanoke Rapids North Carolina Hilton Garden Inn
—
2,458
15,713
6
18,177
(1,593
)
2008
Mar-08
3 - 39 yrs.
147 Hillsboro Oregon Courtyard
6,036
1,879
9,484
2,365
13,728
(1,723
)
1996
Mar-06
3 - 39 yrs.
155 Hillsboro Oregon Residence Inn
—
2,665
13,295
429
16,389
(2,236
)
1994
Mar-06
3 - 39 yrs.
122 Hillsboro Oregon TownePlace Suites
—
2,150
9,715
1,242
13,107
(2,125
)
1999
Dec-05
3 - 39 yrs.
136 Portland Oregon Residence Inn
—
4,400
38,687
3,262
46,349
(7,097
)
2001
Dec-05
3 - 39 yrs.
258 Pittsburgh Pennsylvania Residence Inn
—
1,161
10,267
1,710
13,138
(2,458
)
1998
Sep-05
3 - 39 yrs.
156 Myrtle Beach South Carolina Courtyard
—
1,857
7,631
1,280
10,768
(2,249
)
1999
Jun-04
3 - 39 yrs.
135 Nashville Tennessee Homewood Suites
—
1,170
7,177
687
9,034
(1,685
)
1999
May-05
3 - 39 yrs.
121 Arlington Texas SpringHill Suites
—
1,122
6,649
484
8,255
(1,329
)
1998
Jun-05
3 - 39 yrs.
122 Arlington Texas TownePlace Suites
—
1,033
6,373
183
7,589
(1,236
)
1999
Jun-05
3 - 39 yrs.
95 Dallas Texas SpringHill Suites
—
1,372
18,737
623
20,732
(3,338
)
1997
Dec-05
3 - 39 yrs.
147 Fort Worth Texas Homewood Suites
—
1,152
8,210
2,206
11,568
(2,310
)
1999
May-05
3 - 39 yrs.
137 Fort Worth Texas Residence Inn
—
1,873
15,586
35
17,494
(2,877
)
2005
May-05
3 - 39 yrs.
149 Ft. Worth Texas SpringHill Suites
—
2,125
11,619
66
13,810
(2,517
)
2004
May-04
3 - 39 yrs.
145 Laredo Texas Homewood Suites
—
1,118
9,781
64
10,963
(1,755
)
2005
Nov-05
3 - 39 yrs.
106 Laredo Texas Residence Inn
—
902
10,969
38
11,909
(1,971
)
2005
Sep-05
3 - 39 yrs.
109 Las Colinas Texas TownePlace Suites
—
1,205
6,256
167
7,628
(1,341
)
1998
Jun-05
3 - 39 yrs.
136 McAllen Texas Hilton Garden Inn
—
1,178
8,143
1,620
10,941
(1,935
)
2000
Jul-05
3 - 39 yrs.
104 50
As of December 31, 2010
(dollars in thousands)
Capitalized
Gross Cost(1)
Deprec
Construction
Acquired
Life
Rooms
Imp. &
FF&E
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION—(Continued)
City State Brand
Encumbrances
Initial Cost
Subsequently
Total
Acc
Date of
Date
Depreciable
# of
Bldg
Land
Bldg./FF&E Fredericksburg Virginia Hilton Garden Inn
$
—
$
1,822
$
15,362
$
163
$
17,347
$
(2,668
)
2005
Dec-05
3 - 39 yrs.
148 Richmond Virginia Corporate Office
—
381
1,038
3,831
5,250
(2,012
)
1893
Jun-04
3 - 39 yrs.
N/A Kent Washington TownePlace Suites
—
1,841
10,721
1,487
14,049
(2,383
)
1999
Dec-05
3 - 39 yrs.
152 Mukilteo Washington TownePlace Suites
—
1,505
11,055
1,339
13,899
(2,273
)
1999
Dec-05
3 - 39 yrs.
128 Redmond Washington Marriott
—
9,504
56,168
1,584
67,256
(11,754
)
2004
Jul-04
3 - 39 yrs.
262 Renton Washington Hilton Garden Inn
—
1,277
14,674
2,063
18,014
(3,377
)
1998
Nov-05
3 - 39 yrs.
150 Deposits on Construction in Progress
—
—
—
464
464
—
$
23,997
$
107,262
$
747,296
$
63,451
$
918,009
$
(153,452
)
7,657
2010
2009
2008
2010
2009
2008
Real estate owned:
Accumulated depreciation: Balance as of January 1
$
926,589
$
917,468
$
885,160
Balance as of January 1
$
124,943
$
94,005
$
64,692 Acquisition
—
—
18,171
Depreciation expense
31,199
30,938
29,313 Improvements
8,426
9,121
14,137
Disposals
—
—
— Discontinued Operations(2)
(17,006
)
—
—
Discontinued Operations(2)
(2,690
)
—
— Balance at December 31
$
918,009
$
926,589
$
917,468
Balance at December 31
$
153,452
$
124,943
$
94,005
(1)
The cost basis for Federal Income Tax purposes approximates the basis used in this schedule. (2) The Company has two hotels in Tempe, Arizona that are held for sale. 51
As of December 31, 2010
(dollars in thousands)
Capitalized
Gross Cost(1)
Deprec
Construction
Acquired
Life
Rooms
Imp. &
FF&E
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 SIX, INC. By: /S/ GLADE M. KNIGHT Glade M. Knight, Date: March 8, 2011 By: /S/ BRYAN
PEERY Bryan Peery, Date: March 8, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated. By: /S/ GLADE M. KNIGHT Glade M. Knight, Director Date: March 8, 2011 By: /S/ LISA B. KERN Lisa B. Kern, Director Date: March 8, 2011 By: /S/ BRUCE H. MATSON Bruce H. Matson, Director Date: March 8, 2011 By: /S/ MICHAEL S. WATERS Michael S. Waters, Director Date: March 8, 2011 By: /S/ ROBERT M. WILY Robert M. Wily, Director Date: March 8, 2011 52
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
Exhibit
Description
2.1
Master Purchase Agreement between Apple Six Hospitality Ownership, Inc. and the parties named therein dated June 14, 2005 (Incorporated by reference to Exhibit 2.1 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
2.2
Purchase Contract between Sunbelt Hotels—Florida II, L.L.C. and Apple Six Hospitality Ownership, Inc. dated June 14, 2005 (Incorporated by reference to Exhibit 2.2 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
2.3
Purchase Contract between Sunbelt Hotel Enterprises, Inc. and Apple Six Hospitality Ownership, Inc. dated June 14, 2005 (Incorporated by reference to Exhibit 2.3 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
2.4
Schedule of information for two additional and substantially identical purchase contracts dated June 14, 2005 (substantially identical to Exhibit 2.2 above) (Incorporated by reference to Exhibit 2.4 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
2.5
Schedule of information for twelve additional and substantially identical purchase contracts dated June 14, 2005 (substantially identical to Exhibit 2.3 above) (Incorporated by reference to Exhibit 2.5 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
2.6
Purchase Contract between McHot Property, L.P. and Apple Six Hospitality Texas, L.P. dated June 21, 2005 (Incorporated by reference to Exhibit 2.6 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
2.7
Purchase Contract between BMC Hotel Property, Ltd. and Apple Six Hospitality Texas, L.P. dated June 21, 2005 (Incorporated by reference to Exhibit 2.7 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
2.8
Purchase Contract between Temfield Hotel Property, L.P. and Apple Six Hospitality Ownership, Inc. dated June 21, 2005 (Incorporated by reference to Exhibit 2.8 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
2.9
Schedule of information for four additional and substantially identical purchase contracts dated June 21, 2005 (substantially identical to Exhibit 2.8 above) (Incorporated by reference to Exhibit 2.9 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
2.10
Purchase and Sale Agreement among Folsom Garden Hotel Company, LLC, Milpitas Garden Hotel Company, LLC, Roseville Garden Hotel Company, LLC, South San Francisco Garden Hotel Company, LLC, Renton Garden Hotel Company, LLC and Apple Six Hospitality Ownership, Inc.
dated October 25, 2005 (Incorporated by reference to Exhibit 2.1 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed November 3, 2005)
2.11
Purchase Contract dated as of November 2, 2005 between Stonebrook Hillsboro LLC, Stonebrook Kent LLC, Stonebrook Mukilteo LLC, Portland Riverplace LLC, Portland West Cym Hotel, L.L.C., Hillsboro Hotel Associates Limited Partnership and Apple Six Hospitality Ownership, Inc.
(Incorporated by reference to Exhibit 2.10 to the registrant’s Post-Effective Amendment No. 4 to Form S-11 (SEC File No 333-1112169) filed December 14, 2005)
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. 333-112169) effective April 23, 2004)
3.2
Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the registrant’s Post Effective Amendment No. 4 to Form S-11 (SEC File No. 333-112169) effective June 14, 2005)
10.1
Management Agreement dated as of May 28, 2004 between SpringHill SMC Corporation and Apple Six Services, L.P. (Incorporated by reference to Exhibit 10.1 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 (SEC File No. 333-112169) filed on
July 29, 2004) 53
Number
Exhibit
Description
10.2
Owner Agreement dated as of May 28, 2004 among Apple Six Hospitality Texas, L.P., Apple Six Services, L.P. and SpringHill SMC Corporation (Incorporated by reference to Exhibit 10.2 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 (SEC File
No. 333-112169) filed on July 29, 2004)
10.3
Hotel Lease Agreement dated as of May 28, 2004 between Apple Six Hospitality Texas, L.P. and Apple Six Services, L.P. regarding the Fort Worth, Texas—Spring Hill Suites hotel (Incorporated by reference to Exhibit 10.3 to the Post-Effective Amendment No. 2 to the Registrant’s Registration
Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
10.4
Management Agreement dated as of June 8, 2004 between Courtyard Management Corporation and Apple Six Hospitality Management, Inc. (Incorporated by reference to Exhibit 10.4 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 (SEC File
No. 333-112169) filed on July 29, 2004)
10.5
Owner Agreement dated as of June 8, 2004, but effective as of June 19, 2004, among Apple Six Hospitality, Inc., Apple Six Hospitality Management, Inc. and Courtyard Management Corporation (Incorporated by reference to Exhibit 10.5 to the Post-Effective Amendment No. 2 to the Registrant’s
Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
10.6
Schedule of information for substantially identical Hotel Lease Agreement dated as of June 8, 2004 between Apple Six Hospitality, Inc. and Apple Six Hospitality Management, Inc. regarding the Myrtle Beach, South Carolina hotel (Incorporated by reference to Exhibit 10.6 to the Post-Effective
Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
10.7
Management Agreement dated as of July 22, 2002 between Marriott International, Inc. and Redmar Property, L.P., as assigned by Consent, Assignment and Assumption and Amendment of Management Agreement dated as of July 6, 2004, but effective June 12, 2004, among Marriott International,
Inc., Redmar Property, L.P., Apple Six Hospitality Management, Inc. and Apple Six Hospitality, Inc. regarding the Redmond, Washington hotel (Incorporated by reference to Exhibit 10.7 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 (SEC File
No. 333-112169) filed on July 29, 2004)
10.8
Owner Agreement dated as of July 6, 2004, but effective as of June 12, 2004, among Apple Six Hospitality Management, Inc., Apple Six Hospitality, Inc. and Marriott International, Inc. (Incorporated by reference to Exhibit 10.8 to the Post-Effective Amendment No. 2 to the Registrant’s
Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
10.9
Hotel Lease Agreement dated as of June 12, 2004 between Apple Six Hospitality, Inc. and Apple Six Hospitality Management, Inc. (Incorporated by reference to Exhibit 10.9 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 (SEC File No. 333-112169)
filed on July 29, 2004)
10.10
Advisory Agreement between the Registrant and Apple Six Advisors, Inc. (Incorporated by reference to Exhibit 10.1 to the registrant’s quarterly report on Form 10-Q (SEC File No. 333-112169) filed May 13, 2004)
10.11
Property Acquisition/Disposition Agreement between the Registrant and Apple Six Realty Group, Inc. (Incorporated by reference to Exhibit 10.2 to the registrant’s quarterly report on Form 10-Q (SEC File No. 333-112169) filed May 13, 2004)
10.12
Apple REIT Six, Inc. 2004 Incentive Plan (Incorporated by reference to Exhibit 10.3 to the registrant’s quarterly report on Form 10-Q (SEC File No. 333-112169) filed May 13, 2004)*
10.13
Apple REIT Six, Inc. 2004 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.4 to the registrant’s quarterly report on Form 10-Q (SEC File No. 333-112169) filed May 13, 2004)* 54
Number
Exhibit
Description
10.14
Management Agreement dated as of July 22, 2002 between Marriott International, Inc. and Redmar Property, L.P., as assigned by Consent, Assignment and Assumption and Amendment of Management Agreement dated as of July 6, 2004, but effective June 12, 2004, among Marriott International,
Inc., Redmar Property, L.P., Apple Six Hospitality Management, Inc. and Apple Six Hospitality, Inc. regarding the Redmond, Washington hotel (Incorporated by reference to Exhibit 10.7 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 (SEC File
No. 333-112169) filed on July 29, 2004)
10.15
Owner Agreement dated as of July 6, 2004, but effective as of June 12, 2004, among Apple Six Hospitality Management, Inc., Apple Six Hospitality, Inc. and Marriott International, Inc. (Incorporated by reference to Exhibit 10.8 to the Post-Effective Amendment No. 2 to the Registrant’s
Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
10.16
Management Agreement dated as of July 22, 2002 between Marriott International, Inc. and Redmar Property, L.P., as assigned by Consent, Assignment and Assumption and Amendment of Management Agreement dated as of July 6, 2004, but effective June 12, 2004, among Marriott International,
Inc., Redmar Property, L.P., Apple Six Hospitality Management, Inc. and Apple Six Hospitality, Inc. regarding the Redmond, Washington hotel (Incorporated by reference to Exhibit 10.7 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 (SEC File
No. 333-112169) filed on July 29, 2004)
10.17
Owner Agreement dated as of July 6, 2004, but effective as of June 12, 2004, among Apple Six Hospitality Management, Inc., Apple Six Hospitality, Inc. and Marriott International, Inc. (Incorporated by reference to Exhibit 10.8 to the Post-Effective Amendment No. 2 to the Registrant’s
Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
10.18
Schedule of information for eight additional and substantially identical Hotel Lease Agreements dated as of October 12, 2004 regarding eight hotels (substantially identical to Exhibit 10.9 immediately above). (Incorporated by reference to Exhibit 10.14 to the Post-Effective Amendment No. 3 to the
Registrant’s Registration Statement on Form S-11 (SEC File No. 333-112169) filed on October 29, 2004)
10.19
Executive Severance Plan dated October 16, 2008. (Incorporated by reference to Exhibit 10.1 to the registrant’s quarterly report on Form 10-Q (SEC File No. 333-112169) filed November 3, 2008)*
10.20
Severance Plan dated October 16, 2008. (Incorporated by reference to Exhibit 10.2 to the registrant’s quarterly report on Form 10-Q (SEC File No. 333-112169) filed November 3, 2008)*
21.1
Subsidiaries of Apple REIT Six, Inc. (FILED HEREWITH)
23.1
Consent of Ernst & Young LLP (FILED HEREWITH)
31.1
Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)
31.2
Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Action of 2002 (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)
* 55
Number
Denotes compensation plan.