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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 


x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______

Commission File Number 000-52585

Apple REIT Seven, Inc.
(Exact name of registrant as specified in its charter)
 
Virginia   20-2879175
(State or other jurisdiction
of incorporation or organization)
 
(IRS Employer
Identification No.)
     
814 East Main Street
Richmond, Virginia  
  23219
(Address of principal executive offices)   (Zip Code)
     
  (804) 344-8121  
  (Registrant's telephone number, including area code)  

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No ¨
 
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 x  
 
Smaller reporting company   ¨
       
(Do not check if a 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  x

Number of registrant’s common shares outstanding as of November 1, 2012: 90,712,459

 
 


APPLE REIT SEVEN, INC.
FORM 10-Q
 
 
Page Number
PART I.  FINANCIAL INFORMATION
 
 
 
Item 1.
 
 
   
 
3
   
 
4
   
 
5
   
 
6
  Item 2.
 
12
 
Item 3.
 
22
 
Item 4.
 
22
PART II.  OTHER INFORMATION
 
 
 
Item 1.
 
23
 
Item 2.
 
24
 
Item 6.
 
25
26

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

 
PART I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
Apple REIT Seven, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
Assets
           
Investment in real estate, net of accumulated depreciation
   of $174,105 and $148,257, respectively
  $ 826,352     $ 846,377  
Restricted cash-furniture, fixtures and other escrows
    11,123       7,141  
Due from third party managers, net
    9,124       6,426  
Other assets, net
    5,113       5,197  
  Total Assets
  $ 851,712     $ 865,141  
                 
Liabilities
               
Credit facility
  $ 22,600     $ 64,700  
Mortgage debt
    170,399       110,147  
Accounts payable and accrued expenses
    13,810       12,314  
  Total Liabilities
    206,809       187,161  
                 
Shareholders' Equity
               
                 
Preferred stock, authorized 15,000,000 shares; none issued and outstanding     0       0  
Series A preferred stock, no par value, authorized 200,000,000 shares;
   issued and outstanding 90,958,090 and 91,109,651 shares, respectively
    0       0  
Series B convertible preferred stock, no par value, authorized 240,000 shares;
   issued and outstanding 240,000 shares
    24       24  
Common stock, no par value, authorized 200,000,000 shares;
   issued and outstanding 90,958,090 and 91,109,651 shares, respectively
    898,994       900,555  
Distributions greater than net income
    (254,115 )     (222,599 )
  Total Shareholders' Equity
    644,903       677,980  
                 
  Total Liabilities and Shareholders' Equity
  $ 851,712     $ 865,141  
 
See notes to consolidated financial statements.
 
 
3

 
Apple REIT Seven, Inc.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues:
                       
Room revenue
  $ 52,084     $ 50,920     $ 150,548     $ 145,258  
Other revenue
    4,663       4,907       14,895       14,924  
Total revenue
    56,747       55,827       165,443       160,182  
                                 
Expenses:
                               
Operating expense
    15,149       14,535       43,818       42,598  
Hotel administrative expense
    4,127       4,074       12,087       12,086  
Sales and marketing
    4,331       4,171       12,798       12,133  
Utilities
    2,590       2,620       6,764       6,908  
Repair and maintenance
    2,573       2,367       7,340       6,924  
Franchise fees
    2,387       2,332       6,898       6,640  
Management fees
    1,883       1,830       5,603       5,309  
Taxes, insurance and other
    3,309       3,099       9,718       9,359  
General and administrative
    1,685       1,269       5,538       3,783  
Depreciation expense
    8,655       8,491       25,848       25,641  
Total expenses
    46,689       44,788       136,412       131,381  
                                 
Operating income
    10,058       11,039       29,031       28,801  
                                 
Interest expense, net
    2,759       2,602       8,063       7,430  
                                 
Net income
  $ 7,299     $ 8,437     $ 20,968     $ 21,371  
                                 
Basic and diluted net income per common share
  $ 0.08     $ 0.09     $ 0.23     $ 0.23  
                                 
                                 
Weighted average common shares outstanding      
     - basic and diluted
    90,866       91,356       90,903       91,562  
 
See notes to consolidated financial statements.
 
 
4

 
Apple REIT Seven, Inc.
Consolidated Statements of Cash Flows
 (Unaudited)
(in thousands)
 
   
Nine Months Ended
 
   
September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income
  $ 20,968     $ 21,371  
Adjustments to reconcile net income to cash provided
   by operating activities:
               
Depreciation
    25,848       25,641  
Amortization of deferred financing costs, fair value
   adjustments and other non-cash expenses, net
    297       419  
Changes in operating assets and liabilities:
               
Increase in due from third party managers, net
    (2,698 )     (3,404 )
Increase in other assets
    (650 )     (362 )
Increase in accounts payable and accrued expenses
    1,927       1,828  
Net cash provided by operating activities
    45,692       45,493  
                 
Cash flows from investing activities:
               
Capital improvements
    (6,255 )     (6,013 )
Net decrease (increase) in cash restricted for property improvements
    (3,270 )     9  
Net cash used in investing activities
    (9,525 )     (6,004 )
                 
Cash flows from financing activities:
               
Net proceeds related to issuance of Units
    12,180       17,478  
Redemptions of Units
    (13,835 )     (24,040 )
Distributions paid to common shareholders
    (52,484 )     (52,870 )
Proceeds from (payments on) extinguished credit facility
    (64,700 )     11,700  
Net proceeds from existing credit facility
    22,600       0  
Proceeds from mortgage debt
    63,000       10,500  
Payments of mortgage debt
    (2,300 )     (2,122 )
Deferred financing costs
    (628 )     (135 )
Net cash used in financing activities
    (36,167 )     (39,489 )
                 
Net change in cash and cash equivalents
    0       0  
                 
Cash and cash equivalents, beginning of period
    0       0  
                 
Cash and cash equivalents, end of period
  $ 0     $ 0  
 
See notes to consolidated financial statements.
 
 
5

 
Apple REIT Seven, Inc.
Notes to Consolidated Financial Statements

1.  Organization and Summary of Significant Accounting Policies

Organization

Apple REIT Seven, Inc., together with its wholly owned subsidiaries (the “Company”), is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes.  The Company was formed to invest in income-producing real estate in the United States. Initial capitalization occurred on May 26, 2005 and operations began on April 27, 2006 when the Company acquired its first hotel. The Company concluded its best-efforts offering of Units (each Unit consists of one common share and one Series A preferred share) in July 2007. The Company’s fiscal year end is December 31. 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 intercompany accounts and transactions have been eliminated.  As of September 30, 2012, the Company owned 51 hotels located in 18 states with an aggregate of 6,426 rooms.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its 2011 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2012.

Significant Accounting Policies

    Use of Estimates

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

    Earnings per Common Share 

Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted earnings per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. There were no potential common shares with a dilutive effect for the three and nine months ended September 30, 2012 or 2011. 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 that such shares are eligible to be converted to common shares.
 
 
6


2.  Credit Facility and Mortgage Debt

In August 2012, the Company entered into a new $40 million unsecured credit facility with a commercial bank that is utilized for working capital, hotel renovations, and other general corporate funding purposes, including the payment of redemptions and distributions. Interest payments are due monthly and the interest rate is equal to the LIBOR (London Interbank Offered Rate for a one-month term) plus 3.25%. Under the terms of the credit agreement, the Company may make voluntary prepayments in whole or in part, at any time. The Company is also required to pay a quarterly fee at an annual rate of 0.35% on the average unused balance of the credit facility.  The credit facility matures in August 2014. At closing, the Company borrowed approximately $24.5 million under the credit facility to repay the outstanding balance and extinguish the prior $85 million credit facility and pay transaction costs. The balance outstanding under the credit facility on September 30, 2012 was $22.6 million, at an annual interest rate of approximately 3.5%. Loan origination costs totaled approximately $0.3 million and are being amortized as interest expense through the August 2014 maturity date. The credit facility contains the following quarterly financial covenants (capitalized terms are defined in the loan agreements):

·  
Tangible Net Worth must exceed $325 million;
 
·  
Total Debt to Asset Value must not exceed 50%;
 
·  
Cumulative 12 month Distributions and Redemptions, net of proceeds from the Company’s Dividend Reinvestment Program, cannot exceed $84 million and quarterly Distributions cannot exceed $0.193 per share, unless such cumulative Net Distributions are less than total Funds From Operations for the period;
 
·  
Loan balance must not exceed 45% of the Unencumbered Asset Value;
 
·  
Ratio of Net Operating Income for the Company’s unencumbered properties compared to an Implied Debt Service for the properties must exceed two; and
 
·  
Ratio of net income before depreciation and interest expense to total Fixed Charges, on a cumulative 12 month basis, must exceed two.
 
The Company was in compliance with each of these covenants at September 30, 2012.

In August 2012, the Company entered into four mortgage loan agreements with a commercial bank, secured by four hotel properties, for a total of $63.0 million. Scheduled payments of interest and principal totaling approximately $368,000 are due monthly. At closing, the Company used proceeds from each loan to reduce the outstanding balance on the Company’s prior credit facility and pay transaction costs. Combined total loan origination costs of approximately $0.3 million are being amortized as interest expense through the September 2022 maturity date for each loan. The following table summarizes the hotel property securing each loan, the interest rate, loan origination date, maturity date and principal amount originated under each loan agreement.  All dollar amounts are in thousands.
 
Hotel Location
 
Brand
 
Interest Rate
   
Loan Origination Date
 
Maturity Date
 
Principal Originated
 
Seattle, WA
 
Residence Inn
    4.96 %  
8/30/2012
 
9/1/2022
  $ 29,100  
Hattiesburg, MS
 
Courtyard
    5.00 %  
8/24/2012
 
9/1/2022
    5,900  
Rancho Bernardo, CA   Courtyard     5.00 %  
8/24/2012
 
9/1/2022
    15,500  
Kirkland, WA
 
Courtyard
    5.00 %  
8/24/2012
 
9/1/2022
    12,500  
    Total
                      $ 63,000  

3.  Fair Value of Financial Instruments

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 terms and credit characteristics which are Level 3 inputs.  Market rates take into consideration general market conditions and maturity.  As of September 30, 2012, the carrying value and estimated fair value of the Company’s debt was approximately $193.0 million and $198.3 million. As of December 31, 2011, the carrying value and estimated fair value of the Company’s debt was $174.8 million and $175.6 million. The carrying value of the Company’s other financial instruments approximates fair value due to the short-term nature of these financial instruments.
 
 
7


4.  Related Parties

The Company has, and is expected to continue to engage in, significant transactions with related parties. These transactions cannot be construed to be at arm’s length, and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. The Company’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 the nine months ended September 30, 2012. The Board of Directors is not required to approve each individual transaction that falls under the related party relationships.  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 is party to an advisory agreement with Apple Seven Advisors, Inc. (“A7A”) pursuant to which A7A provides management services to the Company.  A7A provides these management services through an affiliate called Apple Fund Management, LLC (“AFM”), which is a subsidiary of Apple REIT Six, Inc.  An annual advisory fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable to A7A for these management services. Total advisory fees incurred by the Company under the advisory agreement are included in general and administrative expenses and totaled approximately $1.1 million and $0.8 million for the nine months ended September 30, 2012 and 2011. At September 30, 2012, $0.4 million of the 2012 advisory fee had not been paid and was included in accounts payable and accrued expenses in the Company’s consolidated balance sheet.

In addition to the fees payable to A7A, the Company reimbursed A7A or paid directly to AFM on behalf of A7A approximately $1.3 million for both the nine months ended September 30, 2012 and 2011. The costs are included in general and administrative expenses and are for the Company’s proportionate share of the staffing and related costs provided by AFM at the direction of A7A.

AFM is an affiliate of Apple Six Advisors, Inc., Apple Seven Advisors, Inc., Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., Apple Ten Advisors, Inc., Apple Suites Realty Group, Inc. and Apple Six Realty Group, Inc., (collectively the “Advisors” which are wholly owned by Glade M. Knight).  As such, the Advisors provide management services through the use of AFM to, respectively, Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc. (collectively the “Apple REIT Entities”).  Although there is a potential conflict on time allocation of employees 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 described more fully below 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 AFM include both compensation for personnel and “overhead” (office rent, utilities, benefits, office supplies, etc.) used by the companies. Since the employees of AFM perform services for the Apple REIT Entities and Advisors at the direction of the Advisors, individuals, including executive officers, receive their compensation at the direction of the Advisors and may receive consideration directly from the Advisors.

The Advisors and Apple REIT Entities allocate all of the costs of AFM among the Apple REIT Entities and the Advisors.  The allocation of costs from AFM is reviewed at least annually by the Compensation Committees of the Apple REIT Entities.  In making the allocation, management of each of the entities and their Compensation Committee consider all relevant facts related to each Company’s level of business activity and the extent to which each Company requires the services of particular personnel of AFM. Such payments are based on the actual costs of the services and 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 the Company. As part of this arrangement, the day to day transactions may result in amounts due to or from the Apple REIT Entities. To efficiently manage cash disbursements, an individual Apple REIT Entity may make payments for any or all of the related companies. The amounts due to or from the related Apple REIT Entity are reimbursed or collected and are not significant in amount.
 
 
8


A7A is 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc. Members of the Company’s Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

Included in other assets, net on the Company’s consolidated balance sheet, is a 26% equity investment in Apple Air Holding, LLC (“Apple Air”). The other members of Apple Air are Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. Through its equity investment the Company has access to Apple Air’s aircraft for asset management and renovation purposes. The Company’s equity investment was approximately $1.8 million and $1.9 million at September 30, 2012 and December 31, 2011. The Company has recorded its share of income and losses of the entity under the equity method of accounting and adjusted its investment in Apple Air accordingly. For each of the nine months ended September 30, 2012 and 2011, the Company recorded a loss of approximately $158,000 as its share of the net loss of Apple Air, which primarily relates to the depreciation of the aircraft, and is included in general and administrative expense in the Company’s consolidated statements of operations.

The Company has incurred legal fees associated with the Legal Proceedings discussed herein. The Company also incurs other professional fees such as accounting, auditing and reporting. These fees are included in general and administrative expense in the Company’s consolidated statements of operations. To be cost effective, the services received by the Company are shared as applicable across the Apple REIT Entities. The professionals cannot always specifically identify their fees for one company; therefore management allocates these costs across the companies that benefit from the services.

5.  Shareholders’ Equity

Unit Redemption Program

In April 2007, 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 92% of the price paid per Unit if the Units have been owned less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. 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. Since inception of the program through September 30, 2012, the Company has redeemed approximately 11.1 million Units representing $120.2 million, including 1.3 million Units in the amount of $13.8 million and 2.2 million Units in the amount of $24.0 million redeemed during the nine months ended September 30, 2012 and 2011.  As contemplated in the program, beginning with the January 2011 redemption, the scheduled redemption date for the first quarter of 2011, the Company redeemed Units on a pro-rata basis. Prior to 2011, the Company redeemed 100% of redemption requests. The following is a summary of the Unit redemptions during 2011 and the first nine months of 2012:

Redemption Date
 
Requested Unit Redemptions
   
Units Redeemed
   
Redemption Requests Not Redeemed
 
                   
January 2011
    1,137,969       728,135       409,834  
April 2011
    1,303,574       728,883       574,691  
July 2011
    5,644,778       732,160       4,912,618  
October 2011
    11,332,625       727,980       10,604,645  
January 2012
    12,885,635       455,093       12,430,542  
April 2012
    12,560,001       441,458       12,118,543  
July 2012
    12,709,508       364,299       12,345,209  
 
As noted in the table above, beginning with the January 2011 redemption, the total redemption requests exceeded the authorized amount of redemptions and, as a result, the Board of Directors has and will continue to limit the amount of redemptions as it deems prudent.
 
 
9


Dividend Reinvestment Plan

In July 2007, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. The Company has registered 15 million Units for potential issuance under the plan. During the nine months ended September 30, 2012 and 2011, approximately 1.1 million Units, representing $12.2 million in proceeds to the Company and 1.6 million Units, representing $17.5 million in proceeds to the Company, were issued under the plan.  Since inception of the plan through September 30, 2012, approximately 11.0 million Units, representing $120.7 million in proceeds to the Company, were issued under the plan.

Distributions

The Company’s annual distribution rate as of September 30, 2012 was $0.77 per common share, payable monthly. For the three months ended September 30, 2012 and 2011, the Company made distributions of $0.193 per common share for a total of $17.5 million and $17.6 million.  For the nine months ended September 30, 2012 and 2011, the Company made distributions of $0.578 per common share for a total of $52.5 million and $52.9 million.

6.  Legal Proceedings

The term the “Apple REIT Companies” means Apple REIT Seven, Inc. (the “Company”), Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

On December 13, 2011, the United States District Court for the Eastern District of New York ordered that three putative class actions, Kronberg, et al. v. David Lerner Associates, Inc., et al., Kowalski v. Apple REIT Ten, Inc., et al., and Leff v. Apple REIT Ten, Inc., et al., be consolidated and amended the caption of the consolidated matter to be In re Apple REITs Litigation. The District Court also appointed lead plaintiffs and lead counsel for the consolidated action and ordered lead plaintiffs to file and serve a consolidated complaint by February 17, 2012. The Company was previously named as a party in all three of the above mentioned class action lawsuits.

On February 17, 2012, lead plaintiffs and lead counsel in the In re Apple REITs Litigation, Civil Action No. 1:11-cv-02919-KAM-JO, filed an amended consolidated complaint in the United States District Court for the Eastern District of New York against the Company, Apple Suites Realty Group, Inc., Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., Apple Ten Advisors, Inc., Apple Fund Management, LLC, Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc., their directors and certain officers, and David Lerner Associates, Inc. and David Lerner. The consolidated complaint, purportedly brought on behalf of all purchasers of Units in the Company and the other Apple REIT Companies, or those who otherwise acquired these Units that were offered and sold to them by David Lerner Associates, Inc., or its affiliates and on behalf of subclasses of shareholders in New Jersey, New York, Connecticut and Florida, asserts claims under Sections 11, 12 and 15 of the Securities Act of 1933. The consolidated complaint also asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, negligence, and unjust enrichment, and claims for violation of the securities laws of Connecticut and Florida. The complaint seeks, among other things, certification of a putative nationwide class and the state subclasses, damages, rescission of share purchases and other costs and expenses.

On February 16, 2012, one shareholder of the Company and Apple REIT Six, Inc., filed a putative class action lawsuit captioned Laurie Brody v. David Lerner Associates, Inc., et al., Case No. 1:12-cv-782-ERK-RER, in the United States District Court for the Eastern District of New York against the Company, Apple REIT Six, Inc., Glade M. Knight, Apple Suites Realty Group, Inc., David Lerner Associates, Inc., and certain executives of David Lerner Associates, Inc.  The complaint, purportedly brought on behalf of all purchasers of Units of the Company and Apple REIT Six, Inc., or those who otherwise acquired these Units, asserts claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, unjust enrichment, negligence, breach of written or implied contract (against the David Lerner Associates, Inc. defendants only), and for violation of New Jersey’s state securities laws.  On March 13, 2012, by order of the court, Laurie Brody v. David Lerner Associates, Inc., et al. was consolidated into the In re Apple REITs Litigation.
 
 
10


On April 18, 2012, the Company, and the other Apple REIT Companies, served a motion to dismiss the consolidated complaint in the In re Apple REITs Litigation. The Company and the other Apple REIT Companies accompanied their motion to dismiss the consolidated complaint with a memorandum of law in support of their motion to dismiss the consolidated complaint. The briefing period for any motion to dismiss was completed on July 13, 2012.

The Company believes that any claims against it, its officers and directors and other Apple entities are without merit, and intends to defend against them vigorously. At this time, the Company cannot reasonably predict the outcome of these proceedings or provide a reasonable estimate of the possible loss or range of loss due to these proceedings, if any.

7.  Subsequent Events

In October 2012, the Company declared and paid approximately $5.8 million, or $0.064167 per outstanding common share, in distributions to its common shareholders, of which approximately $1.3 million or 118,000 Units were reinvested under the Company’s Dividend Reinvestment Plan.

In October 2012, under the guidelines of the Company’s Unit Redemption Program, the Company redeemed approximately 364,000 Units in the amount of $4.0 million.  As contemplated in the program, the Company redeemed Units on a pro-rata basis, whereby a percentage of each requested redemption was fulfilled at the discretion of the Company’s Board of Directors.  This redemption was approximately 3% of the total 13.0 million requested Units to be redeemed, with approximately 12.6 million requested Units not redeemed.

In October 2012, the Company extinguished, through payment of the outstanding principal amount, two mortgage loans secured by its Tallahassee, Florida Fairfield Inn and Lakeland, Florida Courtyard hotels. The mortgage loans had a combined outstanding balance of $6.7 million when extinguished.

On October 22, 2012, the Financial Industry Regulatory Authority (“FINRA”) issued an order against David Lerner Associates, Inc. (“DLA”) and David Lerner, individually, requiring DLA to pay approximately $12 million in restitution to certain investors in Units of Apple REIT Ten, Inc. In addition, David Lerner, individually, was fined $250,000 and suspended for one year from the securities industry, followed by a two year suspension from acting as a principal. The Company relies on DLA for the administration of its Units and does not believe this settlement will affect the administration of its Units. The Company intends to continue to cooperate with regulatory or governmental inquiries.
 
 
11

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

Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are typically identified by use of terms such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “target,” “goal,” “plan,” “should,” “will,” “predict,” “potential” and similar expressions that convey the uncertainty of future events or outcomes.  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; the outcome of current and future litigation, regulatory proceedings or inquiries; and competition within the real estate industry. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in the quarterly report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the Company’s financial statements and the notes thereto, as well as the risk factors described in the Company’s filings with the Securities and Exchange Commission. Any forward-looking statement that the Company makes speaks only as of the date of this report. The Company undertakes no obligation to publically update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law.

Overview

Apple REIT Seven, Inc., together with its wholly owned subsidiaries (the “Company”), was formed to invest in income-producing real estate in the United States.  The Company was initially capitalized on May 26, 2005, with its first investor closing on March 15, 2006. The Company completed its best-efforts offering of Units (each Unit consists of one common share and one Series A preferred share) in July 2007.  The Company has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes.  As of September 30, 2012, the Company owned 51 hotels within different markets in the United States.  The Company’s first hotel was acquired on April 27, 2006.

Hotel Operations

Although hotel performance can be influenced by many factors including local competition, local and general economic conditions in the United States and the performance of individual managers assigned to each hotel, performance of the hotels as compared to other hotels within their respective local markets, in general, has met the Company’s expectations for the period owned.  Beginning in 2011 and continuing through the first nine months of 2012, the hotel industry and Company’s revenues have shown improvement from the significant decline in the industry during 2008 through 2010.  Although there is no way to predict future general economic conditions, the Company anticipates low-to-mid single digit revenue percentage increases for the remainder of 2012 as compared to 2011 and similar year over year increases in 2013. Although the Company believes that the hotel industry will continue to improve, several key factors continue to negatively affect economic recovery and add to general market uncertainty, including but not limited to, the continued high levels of unemployment, the slow pace of the U.S. economic recovery and the uncertainty surrounding the U.S. fiscal policy.  Therefore, there can be no assurance that revenue at the Company’s hotel properties will continue to grow at the current rate.
 
In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, average daily rate (“ADR”), revenue per available room (“RevPAR”) and market yield which compares an individual hotel’s results to others in its local market, and expenses, such as hotel operating expenses, general and administrative and other expenses described below.
 
 
12

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

    Three Months Ended September 30,     Nine Months Ended September 30,  
(in thousands except statistical data)   2012     Percent of Revenue     2011     Percent of Revenue     Percent Change     2012     Percent of Revenue     2011     Percent of Revenue     Percent Change  
                                                             
Total hotel revenue
  $ 56,747       100 %   $ 55,827       100 %     2 %   $ 165,443       100 %   $ 160,182       100 %     3 %
Hotel operating expenses
    33,040       58 %     31,929       57 %     3 %     95,308       58 %     92,598       58 %     3 %
Taxes, insurance and other expense
    3,309       6 %     3,099       6 %     7 %     9,718       6 %     9,359       6 %     4 %
General and administrative expense
    1,685       3 %     1,269       2 %     33 %     5,538       3 %     3,783       2 %     46 %
                                                                                 
Depreciation
    8,655               8,491               2 %     25,848               25,641               1 %
Interest expense, net
    2,759               2,602               6 %     8,063               7,430               9 %
                                                                                 
Number of hotels
    51               51               0 %     51               51               0 %
Average Market Yield (1)
    123               127               -3 %     124               125               -1 %
ADR
  $ 116             $ 111               5 %   $ 115             $ 111               4 %
Occupancy
    76 %             78 %             -3 %     75 %             75 %             0 %
RevPAR
  $ 88             $ 86               2 %   $ 85             $ 83               2 %
Total rooms sold (2)
    446,925               456,735               -2 %     1,304,564               1,301,490               0 %
Total rooms available (3)
    587,416               587,416               0 %     1,750,424               1,744,512               0 %
 
(1) Calculated from data provided by Smith Travel Research, Inc.®  Excludes hotels under renovation during the applicable periods.
   
(2) Represents the number of room nights sold during the period.
   
(3) Represents the number of rooms owned by the Company multiplied by the number of nights in the period.
   
 
Legal Proceedings

The term the “Apple REIT Companies” means Apple REIT Seven, Inc. (the “Company”), Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

On December 13, 2011, the United States District Court for the Eastern District of New York ordered that three putative class actions, Kronberg, et al. v. David Lerner Associates, Inc., et al., Kowalski v. Apple REIT Ten, Inc., et al., and Leff v. Apple REIT Ten, Inc., et al., be consolidated and amended the caption of the consolidated matter to be In re Apple REITs Litigation. The District Court also appointed lead plaintiffs and lead counsel for the consolidated action and ordered lead plaintiffs to file and serve a consolidated complaint by February 17, 2012. The Company was previously named as a party in all three of the above mentioned class action lawsuits.

On February 17, 2012, lead plaintiffs and lead counsel in the In re Apple REITs Litigation, Civil Action No. 1:11-cv-02919-KAM-JO, filed an amended consolidated complaint in the United States District Court for the Eastern District of New York against the Company, Apple Suites Realty Group, Inc., Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., Apple Ten Advisors, Inc., Apple Fund Management, LLC, Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc., their directors and certain officers, and David Lerner Associates, Inc. and David Lerner. The consolidated complaint, purportedly brought on behalf of all purchasers of Units in the Company and the other Apple REIT Companies, or those who otherwise acquired these Units that were offered and sold to them by David Lerner Associates, Inc., or its affiliates and on behalf of subclasses of shareholders in New Jersey, New York, Connecticut and Florida, asserts claims under Sections 11, 12 and 15 of the Securities Act of 1933. The consolidated complaint also asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, negligence, and unjust enrichment, and claims for violation of the securities laws of Connecticut and Florida. The complaint seeks, among other things, certification of a putative nationwide class and the state subclasses, damages, rescission of share purchases and other costs and expenses.
 
 
13


On February 16, 2012, one shareholder of the Company and Apple REIT Six, Inc., filed a putative class action lawsuit captioned Laurie Brody v. David Lerner Associates, Inc., et al., Case No. 1:12-cv-782-ERK-RER, in the United States District Court for the Eastern District of New York against the Company, Apple REIT Six, Inc., Glade M. Knight, Apple Suites Realty Group, Inc., David Lerner Associates, Inc., and certain executives of David Lerner Associates, Inc.  The complaint, purportedly brought on behalf of all purchasers of Units of the Company and Apple REIT Six, Inc., or those who otherwise acquired these Units, asserts claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, unjust enrichment, negligence, breach of written or implied contract (against the David Lerner Associates, Inc. defendants only), and for violation of New Jersey’s state securities laws.  On March 13, 2012, by order of the court, Laurie Brody v. David Lerner Associates, Inc., et al. was consolidated into the In re Apple REITs Litigation.

On April 18, 2012, the Company, and the other Apple REIT Companies, served a motion to dismiss the consolidated complaint in the In re Apple REITs Litigation. The Company and the other Apple REIT Companies accompanied their motion to dismiss the consolidated complaint with a memorandum of law in support of their motion to dismiss the consolidated complaint. The briefing period for any motion to dismiss was completed on July 13, 2012.

The Company believes that any claims against it, its officers and directors and other Apple entities are without merit, and intends to defend against them vigorously. At this time, the Company cannot reasonably predict the outcome of these proceedings or provide a reasonable estimate of the possible loss or range of loss due to these proceedings, if any.

Hotels Owned

The following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each of the 51 hotels the Company owned at September 30, 2012.  All dollar amounts are in thousands.
 
Location
 
State
 
Brand
 
Manager
 
Date of Purchase
 
Rooms
   
Gross Purchase Price
 
Auburn
 
AL
 
Hilton Garden Inn
 
LBA
 
8/17/06
    101     $ 10,185  
Dothan
 
AL
 
Fairfield Inn
 
LBA
 
5/16/07
    63       4,584  
Dothan
 
AL
 
Residence Inn
 
LBA
 
4/16/08
    84       9,669  
Huntsville
 
AL
 
Hilton Garden Inn
 
LBA
 
8/17/06
    101       10,285  
Huntsville
 
AL
 
Homewood Suites
 
LBA
 
10/27/06
    107       11,606  
Huntsville
 
AL
 
TownePlace Suites
 
LBA
 
12/10/07
    86       8,927  
Montgomery
 
AL
 
Hilton Garden Inn
 
LBA
 
8/17/06
    97       10,385  
Montgomery
 
AL
 
Homewood Suites
 
LBA
 
8/17/06
    91       10,660  
Prattville
 
AL
 
Courtyard
 
LBA
 
4/24/07
    84       9,304  
Troy
 
AL
 
Hampton Inn
 
LBA
 
8/17/06
    82       6,130  
Trussville
 
AL
 
Courtyard
 
LBA
 
10/4/07
    84       9,510  
Tucson
 
AZ
 
Residence Inn
 
Western
 
1/17/08
    124       16,640  
Agoura Hills
 
CA
 
Homewood Suites
 
Dimension
 
5/8/07
    125       25,250  
Rancho Bernardo
 
CA
 
Courtyard
 
Dimension
 
12/12/06
    210       36,000  
San Diego
 
CA
 
Hampton Inn
 
Dimension
 
7/19/07
    177       42,000  
San Diego
 
CA
 
Hilton Garden Inn
 
Inn Ventures
 
5/9/06
    200       34,500  
 
 
14

 
San Diego
 
CA
 
Residence Inn
 
Dimension
 
6/13/07
    121       32,500  
Highlands Ranch
 
CO
 
Hilton Garden Inn
 
Dimension
 
3/9/07
    128       20,500  
Highlands Ranch
 
CO
 
Residence Inn
 
Dimension
 
2/22/07
    117       19,000  
Lakeland
 
FL
 
Courtyard
 
LBA
 
4/24/07
    78       9,805  
Miami
 
FL
 
Courtyard
 
Dimension
 
9/5/08
    118       15,000  
Miami
 
FL
 
Homewood Suites
 
Dimension
 
2/21/07
    159       24,300  
Sarasota
 
FL
 
Homewood Suites
 
Hilton
 
9/15/06
    100       13,800  
Tallahassee
 
FL
 
Fairfield Inn
 
LBA
 
4/24/07
    79       6,647  
Columbus
 
GA
 
Fairfield Inn
 
LBA
 
4/24/07
    79       7,333  
Columbus
 
GA
 
SpringHill Suites
 
LBA
 
3/6/08
    85       9,675  
Columbus
 
GA
 
TownePlace Suites
 
LBA
 
5/22/08
    86       8,428  
Macon
 
GA
 
Hilton Garden Inn
 
LBA
 
6/28/07
    101       10,660  
Boise
 
ID
 
SpringHill Suites
 
Inn Ventures
 
9/14/07
    230       21,000  
New Orleans
 
LA
 
Homewood Suites
 
Dimension
 
12/15/06
    166       43,000  
Hattiesburg
 
MS
 
Courtyard
 
LBA
 
10/5/06
    84       9,455  
Tupelo
 
MS
 
Hampton Inn
 
LBA
 
1/23/07
    96       5,245  
Omaha
 
NE
 
Courtyard
 
Marriott
 
11/4/06
    181       23,100  
Cranford
 
NJ
 
Homewood Suites
 
Dimension
 
3/7/07
    108       13,500  
Mahwah
 
NJ
 
Homewood Suites
 
Dimension
 
3/7/07
    110       19,500  
Ronkonkoma
 
NY
 
Hilton Garden Inn
 
White
 
12/15/06
    164       27,000  
Cincinnati
 
OH
 
Homewood Suites
 
White
 
12/1/06
    76       7,100  
Memphis
 
TN
 
Homewood Suites
 
Hilton
 
5/15/07
    140       11,100  
Addison
 
TX
 
SpringHill Suites
 
Marriott
 
8/10/07
    159       12,500  
Brownsville
 
TX
 
Courtyard
 
Western
 
6/19/06
    90       8,550  
El Paso
 
TX
 
Homewood Suites
 
Western
 
4/23/08
    114       15,390  
Houston
 
TX
 
Residence Inn
 
Western
 
4/27/06
    129       13,600  
San Antonio
 
TX
 
TownePlace Suites
 
Western
 
6/29/07
    106       11,925  
San Antonio
 
TX
 
TownePlace Suites
 
Western
 
9/27/07
    123       13,838  
Stafford
 
TX
 
Homewood Suites
 
Western
 
8/15/06
    78       7,800  
Provo
 
UT
 
Residence Inn
 
Dimension
 
6/13/07
    114       11,250  
Alexandria
 
VA
 
Courtyard
 
Marriott
 
7/13/07
    178       36,997  
Richmond
 
VA
 
Marriott
 
White
 
1/25/08
    410       53,300  
Kirkland
 
WA
 
Courtyard
 
Inn Ventures
 
10/23/07
    150       31,000  
Seattle
 
WA
 
Residence Inn
 
Inn Ventures
 
9/1/06
    234       56,173  
Vancouver
 
WA
 
SpringHill Suites
 
Inn Ventures
 
6/1/07
    119       15,988  
     Total
                    6,426     $ 901,594  
 
 Results of Operations

As of September 30, 2012, the Company owned 51 hotels with 6,426 rooms. The Company’s portfolio of hotels owned is unchanged since 2008. Hotel performance is impacted by many factors including the economic conditions in the United States as well as each locality. During the period from the second half of 2008 through 2010, the overall weakness in the U.S. economy had a considerable negative impact on both consumer and business travel. As a result, hotel revenue in most markets in the United States declined from levels of 2007 and the first half of 2008. However, economic conditions have shown evidence of improvement in 2011 and the first nine months of 2012. Although the Company expects continued modest revenue improvement for the remainder of 2012 and into 2013, it is not anticipated that revenue will completely return to pre-recession levels in 2012. The Company’s hotels in general have shown results consistent with its local markets and brand averages for the period of ownership.
 
 
15


Revenues

The Company’s principal source of revenue is hotel revenue consisting of room and other related revenue. For the three months ended September 30, 2012 and 2011, the Company had total hotel revenue of $56.7 million and $55.8 million, respectively.  For the nine months ended September 30, 2012 and 2011, the Company had total hotel revenue of $165.4 million and $160.2 million. For the three months ended September 30, 2012 and 2011, the hotels achieved average occupancy of 76% and 78%, ADR of $116 and $111, and RevPAR of $88 and $86.  For the nine months ended September 30, 2012 and 2011, the hotels achieved average occupancy of 75% for each period, ADR of $115 and $111, and RevPAR of $85 and $83. ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR.

Since the beginning of 2010, the Company has experienced an increase in demand over prior recessionary periods of 2008 and 2009. While occupancy for the first nine months of 2012 is stable with the same period of 2011, the Company has been able to modestly increase average room rates. Signifying a stabilizing economy, the Company experienced an increase in ADR of 5% during the third quarter of 2012 as compared to the third quarter of 2011 and 4% for the first nine months of 2012 as compared to the same period in 2011. Although the Company has realized modest revenue growth, its growth rate trails the overall industry growth rate, which is in the mid single digits as compared to 2011.  The below average growth is due primarily to factors specific to the individual markets where the Company’s hotels are located. Many of the Company’s markets have been impacted by declining demand from the government sector and increased supply.  With steady demand and room rate improvement, the Company is forecasting a low-to-mid single digit percentage increase in revenue for the remainder of 2012 as compared to 2011 with the trend expected to continue in 2013. Although impacted by increased supply in certain markets, the Company’s hotels continue to be leaders in their respective markets.  The Company’s average Market Yield for the first nine months of 2012 and 2011 was 124 and 125.  The Market Yield is a measure of each hotel’s RevPAR compared to the average in the market, with 100 being the average (the index excludes hotels under renovation) and is provided by Smith Travel Research, Inc.®, an independent company that tracks historical hotel performance in most markets throughout the world.  The Company will continue to pursue market opportunities to improve revenue.

Expenses

Hotel operating expenses consist of direct room expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees.  For the three months ended September 30, 2012 and 2011, hotel operating expenses totaled $33.0 million and $31.9 million, representing 58% and 57% of total hotel revenue.  For the nine months ended September 30, 2012 and 2011, hotel operating expenses totaled $95.3 million and $92.6 million, representing 58% of total hotel revenue. Results for the three and nine months ended September 30, 2012 reflect the impact of modest increases in revenues at most of the Company’s hotels and the Company’s efforts to control costs.  Certain operating costs such as management costs, certain utility costs and minimum supply and maintenance costs are relatively fixed in nature. The Company has been successful in reducing, relative to revenue increases, certain labor costs, hotel supply costs, maintenance costs and utilities by continually monitoring and sharing utilization data across its hotels and management companies. Although operating expenses will increase as occupancy and revenue increases, the Company has and will continue to work with its management companies to reduce costs as a percentage of revenue where possible while maintaining quality and service levels at each property.
 
Taxes, insurance and other expenses for the three months ended September 30, 2012 and 2011 were $3.3 million and $3.1 million, representing 6% of total hotel revenue for each period. For the nine months ended September 30, 2012 and 2011, taxes, insurance, and other expenses were $9.7 million and $9.4 million, representing 6% of total hotel revenue. Taxes have increased due to reassessment of property values by localities resulting from the improved economy. Insurance rates have increased in 2012 due to property and casualty carriers’ losses world-wide in the past year.
 
 
16


General and administrative expense for the three months ended September 30, 2012 and 2011 was $1.7 million and $1.3 million, representing 3% and 2% of total hotel revenue.  For the nine months ended September 30, 2012 and 2011, general and administrative expense was $5.5 million and $3.8 million, representing 3% and 2% of total hotel revenue. The principal components of general and administrative expense are advisory fees and reimbursable expenses, legal fees, accounting fees, the Company’s share of the loss in its investment in Apple Air Holding, LLC, and reporting expenses.  During the nine months ended September 30, 2012 and 2011, the Company incurred approximately $1.3 million and $0.7 million, respectively, in legal costs, an increase over the prior year due to the legal matters discussed herein and continued costs related to responding to requests from the staff of the Securities and Exchange Commission (“SEC”).  The SEC staff has been conducting a non-public investigation, which is focused principally on the adequacy of certain disclosures in the Company’s filings with the SEC beginning in 2008, as well as the Company’s review of certain transactions involving the Company and the other Apple REIT Companies. The Company intends to continue to cooperate with the SEC staff, and is engaging in a dialogue with the SEC staff concerning these issues and the roles of certain officers. The Company does not believe the issues raised by the SEC staff affect the material accuracy of the Company's Consolidated Balance Sheets, Consolidated Statements of Operations or Consolidated Statements of Cash Flows. At this time, the Company cannot predict the outcome of this investigation as to the Company or any of its officers, nor can it predict the timing associated with any such conclusion or resolution. The Company anticipates it will continue to incur significant legal costs for at least the remainder of 2012 related to these matters and possibly into 2013.  Also, during the fourth quarter of 2011, the Company began to incur costs associated with its evaluation of a potential consolidation transaction with Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.  Total costs incurred during the nine months ended September 30, 2012 were approximately $0.7 million.  In May 2012, it was determined by the Board of Directors of the Company and the Board of Directors of each of the other Apple REIT’s not to move forward with the potential consolidation transaction at that time.

Depreciation expense for the three months ended September 30, 2012 and 2011 was $8.7 million and $8.5 million, and $25.8 million and $25.6 million for the nine months ended September 30, 2012 and 2011.  Depreciation expense represents the expense of the Company’s hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment), for the respective periods owned.

Interest expense, net for the three months ended September 30, 2012 and 2011 was $2.8 million and $2.6 million. Interest expense, net for the nine months ended September 30, 2012 and 2011 was $8.1 million and $7.4 million. Interest expense primarily arose from mortgage debt outstanding on certain properties, in addition to interest on borrowings under the Company’s credit facility.  Interest expense for the nine months ended September 30, 2012 and 2011 was reduced by capitalized interest of approximately $0.2 million and $0.1 million in conjunction with hotel renovations. As of September 30, 2012, the Company had debt outstanding of $193.0 million compared to $167.6 million at September 30, 2011.  For the nine month periods ended September 30, 2012 and 2011, interest expense increased from 2011 due to an increase in the average outstanding balance of the Company’s debt. The increase in overall debt outstanding during 2012 is to fund working capital needs, while maintaining a relatively stable distribution rate to Unit holders during a low-growth economic period.

Related Parties

The Company has, and is expected to continue to engage in, significant transactions with related parties. These transactions cannot be construed to be at arm’s length, and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. The Company’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 the nine months ended September 30, 2012. The Board of Directors is not required to approve each individual transaction that falls under the related party relationships.  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.
 
 
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The Company is party to an advisory agreement with Apple Seven Advisors, Inc. (“A7A”) pursuant to which A7A provides management services to the Company.  A7A provides these management services through an affiliate called Apple Fund Management, LLC (“AFM”), which is a subsidiary of Apple REIT Six, Inc.  An annual advisory fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable to A7A for these management services. Total advisory fees incurred by the Company under the advisory agreement are included in general and administrative expenses and totaled approximately $1.1 million and $0.8 million for the nine months ended September 30, 2012 and 2011. At September 30, 2012, $0.4 million of the 2012 advisory fee had not been paid and was included in accounts payable and accrued expenses in the Company’s consolidated balance sheet.

In addition to the fees payable to A7A, the Company reimbursed A7A or paid directly to AFM on behalf of A7A approximately $1.3 million for both the nine months ended September 30, 2012 and 2011. The costs are included in general and administrative expenses and are for the Company’s proportionate share of the staffing and related costs provided by AFM at the direction of A7A.

AFM is an affiliate of Apple Six Advisors, Inc., Apple Seven Advisors, Inc., Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., Apple Ten Advisors, Inc., Apple Suites Realty Group, Inc. and Apple Six Realty Group, Inc., (collectively the “Advisors” which are wholly owned by Glade M. Knight).  As such, the Advisors provide management services through the use of AFM to, respectively, Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc. (collectively the “Apple REIT Entities”).  Although there is a potential conflict on time allocation of employees 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 described more fully below 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 AFM include both compensation for personnel and “overhead” (office rent, utilities, benefits, office supplies, etc.) used by the companies. Since the employees of AFM perform services for the Apple REIT Entities and Advisors at the direction of the Advisors, individuals, including executive officers, receive their compensation at the direction of the Advisors and may receive consideration directly from the Advisors.

The Advisors and Apple REIT Entities allocate all of the costs of AFM among the Apple REIT Entities and the Advisors.  The allocation of costs from AFM is reviewed at least annually by the Compensation Committees of the Apple REIT Entities.  In making the allocation, management of each of the entities and their Compensation Committee consider all relevant facts related to each Company’s level of business activity and the extent to which each Company requires the services of particular personnel of AFM. Such payments are based on the actual costs of the services and 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 the Company. As part of this arrangement, the day to day transactions may result in amounts due to or from the Apple REIT Entities. To efficiently manage cash disbursements, an individual Apple REIT Entity may make payments for any or all of the related companies. The amounts due to or from the related Apple REIT Entity are reimbursed or collected and are not significant in amount.

A7A is 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc. Members of the Company’s Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

Included in other assets, net on the Company’s consolidated balance sheet, is a 26% equity investment in Apple Air Holding, LLC (“Apple Air”). The other members of Apple Air are Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. Through its equity investment the Company has access to Apple Air’s aircraft for asset management and renovation purposes. The Company’s equity investment was approximately $1.8 million and $1.9 million at September 30, 2012 and December 31, 2011. The Company has recorded its share of income and losses of the entity under the equity method of accounting and adjusted its investment in Apple Air accordingly. For each of the nine months ended September 30, 2012 and 2011, the Company recorded a loss of approximately $158,000 as its share of the net loss of Apple Air, which primarily relates to the depreciation of the aircraft, and is included in general and administrative expense in the Company’s consolidated statements of operations.
 
 
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The Company has incurred legal fees associated with the Legal Proceedings discussed herein. The Company also incurs other professional fees such as accounting, auditing and reporting. These fees are included in general and administrative expense in the Company’s consolidated statements of operations. To be cost effective, the services received by the Company are shared as applicable across the Apple REIT Entities. The professionals cannot always specifically identify their fees for one company; therefore management allocates these costs across the companies that benefit from the services.

Liquidity and Capital Resources

In August 2012, the Company entered into a new $40 million unsecured credit facility with a commercial bank that is utilized for working capital, hotel renovations, and other general corporate funding purposes, including the payment of redemptions and distributions. The outstanding principal is required to be paid by the maturity date of August 30, 2014. Interest payments are due monthly and the interest rate is equal to the LIBOR (London Interbank Offered Rate for a one-month term) plus 3.25%. The Company is also required to pay a quarterly fee at an annual rate of 0.35% on the average unused balance of the credit facility. With the availability of this credit facility, the Company generally maintains little cash on hand, accessing the facility as necessary.  As a result, cash on hand was $0 at September 30, 2012.  The outstanding balance on the credit facility as of September 30, 2012 was $22.6 million, and its annual interest rate was approximately 3.5%.

At closing, the Company borrowed approximately $24.5 million under the credit facility to repay the outstanding balance and extinguish the prior $85 million credit facility and to pay transaction costs. Loan origination costs totaled approximately $0.3 million and are being amortized as interest expense through the August 2014 maturity date. The credit facility contains the following quarterly financial covenants (capitalized terms are defined in the loan agreements):

·  
Tangible Net Worth must exceed $325 million;
 
·  
Total Debt to Asset Value must not exceed 50%;
 
·  
Cumulative 12 month Distributions and Redemptions, net of proceeds from the Company’s Dividend Reinvestment Program, cannot exceed $84 million and quarterly Distributions cannot exceed $0.193 per share, unless such cumulative Net Distributions are less than total Funds From Operations for the period;
 
·  
Loan balance must not exceed 45% of the Unencumbered Asset Value;
 
·  
Ratio of Net Operating Income, for the Company’s unencumbered properties compared to an Implied Debt Service for the properties must exceed two; and
 
·  
Ratio of net income before depreciation and interest expense to total Fixed Charges, on a cumulative 12 month basis, must exceed two.
 
 The Company was in compliance with each of these covenants at September 30, 2012.

In August 2012, the Company entered into four mortgage loan agreements with a commercial bank, secured by four hotel properties for a total of $63.0 million. Scheduled payments of interest and principal totaling approximately $368,000 are due monthly. At closing, the Company used proceeds from each loan to reduce the outstanding balance on the Company’s prior credit facility and pay transaction costs. Combined total loan origination costs of approximately $0.3 million are being amortized as interest expense through the September 2022 maturity date for each loan. The following table summarizes the hotel property securing each loan, the interest rate, loan origination date, maturity date and principal amount originated under each loan agreement.  All dollar amounts are in thousands.
 
 
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Hotel Location
 
Brand
 
Interest Rate
   
Loan Origination Date
 
Maturity Date
 
Principal Originated
 
Seattle, WA
 
Residence Inn
    4.96 %  
8/30/2012
 
9/1/2022
  $ 29,100  
Hattiesburg, MS
 
Courtyard
    5.00 %  
8/24/2012
 
9/1/2022
    5,900  
Rancho Bernardo, CA   Courtyard     5.00 %  
8/24/2012
 
9/1/2022
    15,500  
Kirkland, WA
 
Courtyard
    5.00 %  
8/24/2012
 
9/1/2022
    12,500  
    Total
                      $ 63,000  
 
The Company anticipates that cash flow from operations, its current revolving credit facility and other available 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), planned Unit redemptions, capital expenditures and debt service.  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 lodging industry as compared to pre-recession levels, the Company has and will, if necessary, attempt to utilize additional financing to achieve this objective. Although the Company has relatively low levels of debt, there can be no assurances it will be successful with this strategy and may need to reduce its distribution to required levels. If the Company were to default on its debt or be unable to refinance debt maturing in the future 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 life of the Company, taking into account acquisitions, capital improvements, ramp-up of new properties and varying economic cycles. Distributions in the first nine months of 2012 totaled $52.5 million and were paid monthly at a rate of $0.064167 per common share.  For the same period, the Company’s cash generated from operations was approximately $45.7 million. This shortfall includes a return of capital and was funded primarily by borrowings on the credit facility.  Since a portion of distributions has been funded with borrowed funds, the Company’s ability to maintain its current intended rate of distribution will be primarily based on the ability of the Company’s properties to generate cash from operations at this level, the Company’s ability to utilize currently available financing, or the Company’s ability to obtain additional financing. Since there can be no assurance of the Company’s ability to obtain additional financing or that properties owned by the Company will provide income at this level, there can be no assurance as to the classification or duration of distributions at the current rate.  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.
 
The Company has on-going capital commitments to fund its capital improvements. The Company is required, under all of the hotel management agreements and under certain loan agreements, to make available, for the repair, replacement, refurbishing of furniture, fixtures, and equipment, a percentage of gross revenues provided that such amount may be used for the Company’s capital expenditures with respect to the hotels. The Company expects that this amount will be adequate to fund required repair, replacement, and refurbishments and to maintain the Company’s hotels in a competitive condition. As of September 30, 2012, the Company held $8.7 million in reserve for capital expenditures.  For the first nine months of 2012, the Company spent approximately $6.3 million on capital expenditures and anticipates spending approximately $5 million for the remainder of the year.  The Company currently does not have any existing or planned projects for new development.
 
 
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In April 2007, 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 92% of the price paid per Unit if the Units have been owned less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. 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. Since inception of the program through September 30, 2012, the Company has redeemed approximately 11.1 million Units representing $120.2 million, including 1.3 million Units in the amount of $13.8 million and 2.2 million Units in the amount of $24.0 million redeemed during the nine months ended September 30, 2012 and 2011.  As contemplated in the program, beginning with the January 2011 redemption, the scheduled redemption date for the first quarter of 2011, the Company redeemed Units on a pro-rata basis. Prior to 2011, the Company redeemed 100% of redemption requests. The following is a summary of the Unit redemptions during 2011 and the first nine months of 2012:

Redemption Date
 
Requested Unit Redemptions
   
Units Redeemed
   
Redemption Requests Not Redeemed
 
                   
January 2011
    1,137,969       728,135       409,834  
April 2011
    1,303,574       728,883       574,691  
July 2011
    5,644,778       732,160       4,912,618  
October 2011
    11,332,625       727,980       10,604,645  
January 2012
    12,885,635       455,093       12,430,542  
April 2012
    12,560,001       441,458       12,118,543  
July 2012
    12,709,508       364,299       12,345,209  
 
As noted in the table above, beginning with the January 2011 redemption, the total redemption requests exceeded the authorized amount of redemptions and, as a result, the Board of Directors has and will continue to limit the amount of redemptions as it deems prudent.  Currently, the Company plans to redeem under its Redemption Program approximately 2% of weighted average Units during 2012.

In July 2007, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. The Company has registered 15 million Units for potential issuance under the plan. During the nine months ended September 30, 2012 and 2011, approximately 1.1 million Units, representing $12.2 million in proceeds to the Company and 1.6 million Units, representing $17.5 million in proceeds to the Company, were issued under the plan.  Since inception of the plan through September 30, 2012, approximately 11.0 million Units, representing $120.7 million in proceeds to the Company, were issued under the 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.
 
Business Interruption

Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale. Although management believes there is adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company’s financial position or results of operations.

Seasonality

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, if necessary, any available other financing sources to make distributions.
 
 
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Subsequent Events

In October 2012, the Company declared and paid approximately $5.8 million, or $0.064167 per outstanding common share, in distributions to its common shareholders, of which approximately $1.3 million or 118,000 Units were reinvested under the Company’s Dividend Reinvestment Plan.

In October 2012, under the guidelines of the Company’s Unit Redemption Program, the Company redeemed approximately 364,000 Units in the amount of $4.0 million.  As contemplated in the program, the Company redeemed Units on a pro-rata basis, whereby a percentage of each requested redemption was fulfilled at the discretion of the Company’s Board of Directors.  This redemption was approximately 3% of the total 13.0 million requested Units to be redeemed, with approximately 12.6 million requested Units not redeemed.

In October 2012, the Company extinguished, through payment of the outstanding principal amount, two mortgage loans secured by its Tallahassee, Florida Fairfield Inn and Lakeland, Florida Courtyard hotels. The mortgage loans had a combined outstanding balance of $6.7 million when extinguished.

On October 22, 2012, the Financial Industry Regulatory Authority (“FINRA”) issued an order against David Lerner Associates, Inc. (“DLA”) and David Lerner, individually, requiring DLA to pay approximately $12 million in restitution to certain investors in Units of Apple REIT Ten, Inc. In addition, David Lerner, individually, was fined $250,000 and suspended for one year from the securities industry, followed by a two year suspension from acting as a principal. The Company relies on DLA for the administration of its Units and does not believe this settlement will affect the administration of its Units. The Company intends to continue to cooperate with regulatory or governmental inquiries.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of September 30, 2012, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk, commodity price risk or equity price risk. The Company will be exposed to interest rate risk due to possible changes in short term interest rates as it invests its cash, or borrows on its credit facility. Based on the balance of the Company’s credit facility at September 30, 2012 of $22.6 million, every 100 basis points change in interest rates could impact the Company’s annual net income by $226,000, all other factors remaining the same. The Company’s cash balance at September 30, 2012 was $0.

Item 4.  Controls and Procedures
 
Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2012.  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.
 
 
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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

The term the “Apple REIT Companies” means Apple REIT Seven, Inc. (the “Company”), Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

On December 13, 2011, the United States District Court for the Eastern District of New York ordered that three putative class actions, Kronberg, et al. v. David Lerner Associates, Inc., et al., Kowalski v. Apple REIT Ten, Inc., et al., and Leff v. Apple REIT Ten, Inc., et al., be consolidated and amended the caption of the consolidated matter to be In re Apple REITs Litigation. The District Court also appointed lead plaintiffs and lead counsel for the consolidated action and ordered lead plaintiffs to file and serve a consolidated complaint by February 17, 2012. The Company was previously named as a party in all three of the above mentioned class action lawsuits.

On February 17, 2012, lead plaintiffs and lead counsel in the In re Apple REITs Litigation, Civil Action No. 1:11-cv-02919-KAM-JO, filed an amended consolidated complaint in the United States District Court for the Eastern District of New York against the Company, Apple Suites Realty Group, Inc., Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., Apple Ten Advisors, Inc., Apple Fund Management, LLC, Apple REIT Six, Inc., Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc., their directors and certain officers, and David Lerner Associates, Inc. and David Lerner. The consolidated complaint, purportedly brought on behalf of all purchasers of Units in the Company and the other Apple REIT Companies, or those who otherwise acquired these Units that were offered and sold to them by David Lerner Associates, Inc., or its affiliates and on behalf of subclasses of shareholders in New Jersey, New York, Connecticut and Florida, asserts claims under Sections 11, 12 and 15 of the Securities Act of 1933. The consolidated complaint also asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, negligence, and unjust enrichment, and claims for violation of the securities laws of Connecticut and Florida. The complaint seeks, among other things, certification of a putative nationwide class and the state subclasses, damages, rescission of share purchases and other costs and expenses.

On February 16, 2012, one shareholder of the Company and Apple REIT Six, Inc., filed a putative class action lawsuit captioned Laurie Brody v. David Lerner Associates, Inc., et al., Case No. 1:12-cv-782-ERK-RER, in the United States District Court for the Eastern District of New York against the Company, Apple REIT Six, Inc., Glade M. Knight, Apple Suites Realty Group, Inc., David Lerner Associates, Inc., and certain executives of David Lerner Associates, Inc.  The complaint, purportedly brought on behalf of all purchasers of Units of the Company and Apple REIT Six, Inc., or those who otherwise acquired these Units, asserts claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, unjust enrichment, negligence, breach of written or implied contract (against the David Lerner Associates, Inc. defendants only), and for violation of New Jersey’s state securities laws.  On March 13, 2012, by order of the court, Laurie Brody v. David Lerner Associates, Inc., et al. was consolidated into the In re Apple REITs Litigation.

On April 18, 2012, the Company, and the other Apple REIT Companies, served a motion to dismiss the consolidated complaint in the In re Apple REITs Litigation. The Company and the other Apple REIT Companies accompanied their motion to dismiss the consolidated complaint with a memorandum of law in support of their motion to dismiss the consolidated complaint. The briefing period for any motion to dismiss was completed on July 13, 2012.

The Company believes that any claims against it, its officers and directors and other Apple entities are without merit, and intends to defend against them vigorously. At this time, the Company cannot reasonably predict the outcome of these proceedings or provide a reasonable estimate of the possible loss or range of loss due to these proceedings, if any.
 
 
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On October 22, 2012, the Financial Industry Regulatory Authority (“FINRA”) issued an order against David Lerner Associates, Inc. (“DLA”) and David Lerner, individually, requiring DLA to pay approximately $12 million in restitution to certain investors in Units of Apple REIT Ten, Inc. In addition, David Lerner, individually, was fined $250,000 and suspended for one year from the securities industry, followed by a two year suspension from acting as a principal. The Company relies on DLA for the administration of its Units and does not believe this settlement will affect the administration of its Units. The Company intends to continue to cooperate with regulatory or governmental inquiries.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Unit Redemption Program

In April 2007, 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. A shareholder may request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. The maximum number of Units that may be redeemed in any given year is five percent of the weighted average number of Units outstanding during the 12-month period immediately prior to the date of redemption. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As noted below, during 2011 and the first nine months of 2012, the total redemption requests exceeded the authorized amount of redemptions and the Board of Directors has and will continue to limit the amount of redemptions as it deems prudent.

Since inception of the program through September 30, 2012, the Company has redeemed approximately 11.1 million Units representing $120.2 million. During the nine months ended September 30, 2012, the Company redeemed approximately 1.3 million Units in the amount of $13.8 million. As contemplated in the program, beginning with the January 2011 redemption, the Company redeemed Units on a pro-rata basis with approximately 64%, 56%, 13%, 6%, 4%, 4% and 3% of the amounts requested redeemed in the first, second, third and fourth quarters of 2011 and the first, second, and third quarters of 2012, respectively, leaving approximately 12.3 million Units requested but not redeemed as of the last scheduled redemption date in the third quarter of 2012 (July 2012).  Prior to 2011, the Company had redeemed 100% of the redemption requests. The Company has a number of cash sources including cash from operations, dividend reinvestment plan proceeds, borrowings under its credit facilities and asset sales from which it can make redemptions. See the Company’s complete consolidated statements of cash flows for the nine months ended September 30, 2012 and 2011 included in the Company’s interim financial statements in Item 1 of this Form 10-Q for a further description of the sources and uses of the Company’s cash flows. The following is a summary of redemptions during the third quarter of 2012 (no redemptions occurred in August and September 2012):
 
Issuer Purchases of Equity Securities
 
   
(a)
   
(b)
   
(c)
   
(d)
 
Period
 
Total Number of Units Purchased
   
Average Price Paid per Unit
   
Total Number of Units Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Units that May Yet Be Purchased Under the Plans or Programs
 
July 2012
    364,299     $ 10.98       364,299         (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.
 
 
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Item 6.  Exhibits

Exhibit
Number
Description of Documents
   
   
3.1
Amended and Restated Articles of Incorporation of the Registrant.  (Incorporated by reference to Exhibit 3.3 to amendment no. 3 to the registrant’s registration statement on Form S-11 (SEC File No. 333-125546) effective March 3, 2006)
   
3.2
Bylaws of the Registrant.  (Incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form S-11 (SEC File No. 333-125546) effective March 3, 2006)
   
31.1
   
31.2
   
32.1
   
101
The following materials from Apple REIT Seven, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail (FURNISHED HEREWITH)
 
 
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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 SEVEN, INC.
   
         
By:
/s/    GLADE M. KNIGHT 
   
Date: November 6, 2012
 
Glade M. Knight,
     
 
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
     
         
By:
/s/    BRYAN PEERY
   
Date: November 6, 2012
 
Bryan Peery,
     
 
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
     
 
 
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