10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

 

¨ 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 000-51270

 


APPLE REIT SIX, INC.

(Exact name of registrant as specified in its charter)

 


 

VIRGINIA   20-0620523

(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  ¨

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

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

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, 2007: 89,761,976

 



Table of Contents

APPLE REIT SIX, INC.

FORM 10-Q

INDEX

 

     

Page

Number

PART I. FINANCIAL INFORMATION

Item 1.        Financial Statements (Unaudited)

  

Consolidated Balance Sheets -

   3

September 30, 2007 and December 31, 2006

  

Consolidated Statements of Operations -

   4

Three and nine months ended September 30, 2007 and

  

Three and nine months ended September 30, 2006

  

Consolidated Statements of Cash Flows -

   5

Nine months ended September 30, 2007 and

  

Nine months ended September 30, 2006

  

Notes to Consolidated Financial Statements

   6

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

   9

Item 3.         Quantitative and Qualitative Disclosures About Market Risk

   14

Item 4.         Controls and Procedures

   14
PART II. OTHER INFORMATION   

Item 1.        Legal Proceedings (not applicable)

  

Item 1A.     Risk Factors (not applicable)

  

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

   15

Item 3.        Defaults Upon Senior Securities (not applicable)

  

Item 4.        Submission of Matters to a Vote of Security Holders (not applicable)

  

Item 5.        Other Information (not applicable)

  

Item 6.         Exhibits

   16
Signatures    17

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 Suites® 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 Hotels Corporation 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.

 

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Apple REIT Six, Inc.

Consolidated Balance Sheets

(unaudited)

(in thousands, except share data)

 

     September 30,
2007
    December 31,
2006
 

ASSETS

    

Investment in real estate, net of accumulated depreciation of $57,872 and $37,928, respectively

   $ 822,434     $ 836,906  

Cash and cash equivalents

     35,386       26,160  

Restricted cash-furniture, fixtures and other escrows

     3,827       3,350  

Due from third party manager, net

     13,017       8,948  

Other assets, net

     8,880       11,475  
                

TOTAL ASSETS

   $ 883,544     $ 886,839  
                

LIABILITIES

    

Notes payable

   $ 52,186     $ 53,660  

Other liabilities

     10,860       7,133  
                

TOTAL LIABILITIES

     63,046       60,793  

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 89,962,312 and 89,773,345 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 89,962,312 and 89,773,345 shares, respectively

     885,371       883,174  

Distributions greater than net income

     (64,897 )     (57,152 )
                

TOTAL SHAREHOLDERS’ EQUITY

     820,498       826,046  
                

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 883,544     $ 886,839  
                

See notes to consolidated financial statements.

 

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Apple REIT Six, Inc.

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

 

     Three months
ended
September 30,
2007
    Three months
ended
September 30,
2006
    Nine Months
ended
September 30,
2007
    Nine Months
ended
September 30,
2006
 

Revenues:

        

Room revenue

   $ 64,532     $ 61,292     $ 182,808     $ 167,765  

Other revenue

     4,873       4,366       14,735       13,116  
                                

Total revenue

     69,405       65,658       197,543       180,881  

Expenses:

        

Operating expense

     16,615       16,196       47,796       46,357  

Hotel administrative expense

     5,261       4,889       15,254       13,857  

Sales and marketing

     5,186       4,891       14,815       13,863  

Utilities

     2,695       2,707       7,401       7,321  

Repair and maintenance

     2,817       2,593       8,247       7,369  

Franchise fees

     2,787       2,503       7,882       6,827  

Management fees

     2,587       2,092       7,930       6,820  

Taxes, insurance and other

     3,634       3,663       10,689       10,244  

General and administrative

     1,211       939       3,962       3,125  

Depreciation expense

     6,956       6,476       20,580       18,913  
                                

Total expenses

     49,749       46,949       144,556       134,696  
                                

Operating income

     19,656       18,709       52,987       46,185  

Interest expense, net

     (447 )     (589 )     (1,679 )     (1,890 )
                                

Net income

   $ 19,209     $ 18,120     $ 51,308     $ 44,295  
                                

Basic and diluted net income per common share

   $ 0.21     $ 0.20     $ 0.57     $ 0.50  
                                

Weighted average common shares outstanding - basic and diluted

     89,704       89,545       89,525       88,619  

Distributions declared per common share

   $ 0.22     $ 0.22     $ 0.66     $ 0.66  
                                

See notes to consolidated financial statements.

 

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Apple REIT Six, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

     Nine months ended
September 30, 2007
    Nine months ended
September 30, 2006
 

Cash flow provided by operating activities:

    

Net income

   $ 51,308     $ 44,295  

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

    

Depreciation

     20,580       18,913  

Amortization of deferred financing costs and fair value adjustments

     (305 )     (314 )

Stock option expense

     68       69  

Changes in operating assets and liabilities, net of amounts acquired/assumed:

    

Due from third party manager

     (4,069 )     (4,408 )

Other assets

     (727 )     (73 )

Other liabilities

     930       3,036  
                

Net cash provided by operating activities

     67,785       61,518  

Cash flow used in investing activities:

    

Cash paid in acquisition of hotels

     —         (37,180 )

Acquisition of other assets

     (246 )     (8,447 )

Capital improvements

     (4,390 )     (10,096 )

Net decrease (increase) in cash restricted for property improvements

     (393 )     9  

Other investing activities, net

     865       —    
                

Net cash used in investing activities

     (4,164 )     (55,714 )

Cash flow used in financing activities:

    

Payment of financing costs

     —         (101 )

Repayment of secured notes payable

     (1,072 )     (28,966 )

Minority interest contribution

     3,601       —    

Net proceeds from issuance of common stock

     24,776       101,822  

Redemptions of common stock

     (22,647 )     (25,341 )

Cash distributions paid to shareholders

     (59,053 )     (58,312 )
                

Net cash used in financing activities

     (54,395 )     (10,898 )

Increase (decrease) in cash and cash equivalents

     9,226       (5,094 )

Cash and cash equivalents, beginning of period

     26,160       35,948  
                

Cash and cash equivalents, end of period

   $ 35,386     $ 30,854  
                

Non-cash transactions:

    

Notes payable-secured assumed in acquisitions

   $ —       $ 6,663  

See notes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financials should be read in conjunction with the Company’s audited financial statements included in its 2006 Annual Report on Form 10-K. Operating results for the period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the period ending December 31, 2007.

Note 2

General Information and Summary of Significant Accounting Policies

Organization

Apple REIT Six, Inc. (the “Company”) 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. On March 3, 2006, the Company concluded its best-efforts offering of Units (each Unit consists of one common share and one Series A preferred share). 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 transactions and balances have been eliminated upon consolidation.

Earnings per Common Share

Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the year. Diluted earnings per share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. There were no potential common shares with a dilutive effect during the three and nine months ended September 30, 2007 or 2006. Series B convertible preferred shares are not included in earnings per common share calculations until such time as the Series B convertible preferred shares are converted to common shares.

Use of Estimates

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

Recently Adopted Accounting Pronouncements

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109. This interpretation requires that income tax positions recognized in an entity’s returns have a more-likely-than-not chance of being sustained prior to recording the related tax benefit in the financial statements. Tax benefits would be derecognized if information became available which indicated that it was more-likely-than-not that the position would not be sustained. The adoption of this interpretation has not had a material impact on the Company’s results of operations or financial position.

 

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Note 3

Sale of Ownership Interest

In July 2007, the Company sold a 50% ownership interest in its subsidiary, Apple Air Holding, LLC (Apple Air), to Apple REIT Seven, Inc. for $3.7 million in cash. This ownership interest is accounted for as a minority interest and is included in other liabilities on the Company’s consolidated balance sheets.

Note 4

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 has a contract with Apple Six Realty Group, Inc. (“ASRG”), a related party, to provide brokerage services for the acquisition and disposition of the Company’s real estate assets. In accordance with the contract, ASRG is paid a fee of 2% of the gross purchase price of any acquisitions or gross sale price of any dispositions of real estate investments, subject to certain conditions. As of September 30, 2007, payments to ASRG for services under the terms of this contract have totaled $16.6 million since inception, which were capitalized as a part of the purchase price of the hotels. There were no fees incurred during the first nine months of 2007 under this contract.

The Company is party to an advisory agreement with Apple Six Advisors, Inc. (“ASA”), pursuant to which ASA provides management services to the Company. An annual fee ranging from .1% to .25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, is payable for these services. From May to October 2007, ASA utilized Apple Hospitality Five, Inc. to provide these services. Until May 2007, ASA used Apple Hospitality Two, Inc. to provide these services. Expenses related to the ASA agreement for the nine months ended September 30, 2007 and 2006, totaled approximately $2.4 million and $1.7 million, respectively.

Mr. Knight is Chairman and Chief Executive Officer of ASRG, ASA, Apple REIT Seven, Inc. (a diversified REIT) and Apple REIT Eight, Inc. (a newly formed company that intends to qualify as a REIT). Mr. Knight was also Chairman and Chief Executive Officer of Apple Hospitality Two, Inc. (a hospitality REIT) until May 2007 and Apple Hospitality Five, Inc. (a hospitality REIT) until October 2007. Members of the Company’s Board of Directors are also on the boards of Apple REIT Seven, Inc. and Apple REIT Eight, Inc. Until May 2007, members of the Company’s Board of Directors were also on the board of Apple Hospitality Two, Inc. and, until October 2007, were on the board of Apple Hospitality Five, Inc.

Note 5

Shareholders’ Equity

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. During the nine months ended September 30, 2007, the Company redeemed approximately 2.1 million Units in the amount of $22.6 million under the program.

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,

 

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satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. During the nine months ended September 30, 2007, approximately 2.3 million Units, representing $24.8 million in proceeds to the Company, were issued under the plan.

In January 2004, the Board of Directors approved a Non-Employee Directors Stock Option Plan whereby directors, who are not employees of the Company or affiliates, automatically receive the option to purchase Units. During the second quarters of 2007 and 2006 the Company issued approximately 72,000 directors’ stock options in each period and share-based expense of approximately $68,000 and $69,000, respectively, was recorded.

Note 6

Subsequent Events

In October 2007, the Company declared and paid approximately $6.6 million, or $.073 per share, in distributions to its common shareholders of which $2.8 million or 257,261 Units were reinvested under the Company’s Dividend Reinvestment Plan.

On October 22, 2007, the Company redeemed 457,598 Units in the amount of $5.0 million under its Unit Redemption Program.

In October 2007, Apple Hospitality Five, Inc. (“AHF”) was merged with and into an unrelated third party. Upon the merger, the Company acquired all of AHF’s interest in Apple Fund Management, LLC, which was a wholly-owned subsidiary of AHF that provides the services to the Company under its advisory agreements with ASA and ASRG. There was no significant incremental cost to the Company as a result of acquiring this entity.

 

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

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include 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 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.

Overview

Apple REIT Six, Inc. (together with its wholly owned subsidiaries, the “Company”) was formed and initially capitalized on January 20, 2004, with its first investor closing on April 23, 2004. The Company owns 67 hotels 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, with 11 total hotels purchased in 2004, 51 hotels purchased in 2005 and 5 hotels purchased in 2006. Accordingly, the results of operations include only the results of the hotels for the period owned. 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, in general, has met the Company’s expectations for the period owned. 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 and revenue per available room, and expenses, such as hotel operating expenses, general and administrative and other expenses described below. The following is a summary of the Company’s results:

 

     Three months ended September 30,     Nine months ended September 30,  
     2007     Percent of
Revenue
    2006     Percent of
Revenue
    Percent
change
    2007     Percent of
Revenue
    2006     Percent of
Revenue
    Percent
change
 

Total revenues

   $ 69,405     100 %   $ 65,658     100 %   6 %   $ 197,543     100 %   $ 180,881     100 %   9 %

Hotel direct expenses

     37,948     55 %     35,871     55 %   6 %     109,325     55 %     102,414     57 %   7 %

Taxes, insurance and other expense

     3,634     5 %     3,663     6 %   -1 %     10,689     5 %     10,244     6 %   4 %

General and administrative

     1,211     2 %     939     1 %   29 %     3,962     2 %     3,125     2 %   27 %

Depreciation

     6,956         6,476       7 %     20,580         18,913       9 %

Interest expense, net

     447         589       -24 %     1,679         1,890       -11 %

ADR

   $ 117       $ 108       8 %   $ 114       $ 105       9 %

Occupancy

     77 %       79 %     -3 %     76 %       76 %     —   %

RevPAR

   $ 90       $ 85       6 %   $ 86       $ 80       8 %

 

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Hotels Owned

As of September 30, 2007, the Company owned 67 hotels, with a total of 7,750 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
Acquired
   Rooms    Gross
Purchase
Price

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

Hillsboro

   Oregon    Courtyard    Inn Ventures    3/9/06    155      11,000

Hillsboro

   Oregon    Residence Inn    Inn Ventures    3/9/06    122      15,500

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    7,750    $ 827,566
                       

 

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The Company leased all of its hotels to wholly-owned taxable REIT subsidiaries (collectively, the “lessee”) under hotel lease agreements. The Company also used the proceeds from its “best-efforts” offering to pay 2% of the gross purchase price for these hotels, which equals approximately $16.6 million, as a commission to Apple Six Realty Group, Inc. (“ASRG”). ASRG is owned by the Company’s chairman, Chief Executive Officer and President, Glade M. Knight.

No goodwill or intangible assets were recorded in connection with any of the acquisitions.

Results of Operations

In general, performance at the Company’s hotels has met expected financial results. Hotel performance is impacted by many factors including the economic conditions in the United States, as well as each locality. As a result, there can be no assurance that the Company’s operating performance will continue to meet expectations in the future.

Revenues

The Company’s principal source of revenue is hotel room revenue and other related revenue. Hotel operations are for the 67 hotels acquired through September 30, 2007 for their respective periods owned. For the three months ended September 30, 2007 and 2006, the Company had total revenue of $69.4 and $65.7 million, respectively, with average occupancy of 77% and 79%, average daily rate (“ADR”) of $117 and $108 and revenue per available room (“RevPAR”) of $90 and $85. For the nine months ended September 30, 2007 and 2006, the Company had total revenue of $197.5 and $180.9 million, respectively, with average occupancy of 76% in both periods, ADR of $114 and $105 and RevPAR of $86 and $80. 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. The industry and the Company have seen RevPAR increases due to increases in demand exceeding increases in supply of hotel rooms in the markets where the Company’s hotels are located. Additionally, the Company continually works with the hotel managers to maximize rates. Although supply is beginning to increase in certain markets that the company serves, growth in RevPAR as compared to 2006 is anticipated for the remainder of 2007.

Expenses

For the three months ended September 30, 2007 and 2006, hotel operating expenses totaled $37.9 and $35.9 million, respectively, or 55% of total revenue for each period. For the nine months ended September 30, 2007 and 2006, hotel operating expenses totaled $109.3 and $102.4 million, or 55% and 57% of total revenue, respectively. This percentage has decreased as revenues for newly opened properties have increased and ADR has increased.

Taxes, insurance, and other expenses for the three months ended September 30, 2007 and 2006 were $3.6 and $3.7 million or 5% and 6% of total revenue. For the nine months ended September 30, 2007 and 2006, taxes, insurance, and other expenses were $10.7 and $10.2 million or 5% and 6% of total revenue for each period.

General and administrative expenses for the three months ended September 30, 2007 and 2006 were $1.2 and $0.9 million, or 2% and 1% of total revenue for each period, respectively. For the nine months ended September 30, 2007 and 2006, general and administrative expenses were $4.0 and $3.1 million, or 2% of total revenue. The principal components of general and administrative expense are advisory fees, accounting fees and reporting expense.

 

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Depreciation expense for the three months ended September 30, 2007 and 2006 was $7.0 and $6.5 million. Depreciation expense for the nine months ended September 30, 2007 and 2006 was $20.6 and $18.9 million. Depreciation expense represents expense of the Company’s 67 hotels and related personal property for their respective periods owned.

Interest expense, net was $0.4 and $0.6 million for the three months ended September 30, 2007 and 2006. Interest expense, net for the nine months ended September 30, 2007 and 2006 was $1.7 and $1.9 million, respectively. Interest expense arose from debt assumed with 14 of the properties acquired and short term financing used in the first quarter of 2006 to bridge the purchase of properties and the raising of capital. Total debt assumed was approximately $54.1 million.

Liquidity and Capital Resources

Operating cash flow from the properties owned and cash on hand ($35.4 million at September 30, 2007) are the Company’s principal source of liquidity. In addition, the Company may borrow funds, subject to limitations set forth in its bylaws. The Company anticipates that cash flow, and cash on hand, will be adequate to cover substantially all of its operating expenses and to permit the Company to meet substantially all of its anticipated liquidity requirements, including distributions, capital expenditures and debt service.

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. 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, 2007, the Company had made approximately $4.4 million of capital expenditures during 2007. The Company has begun significant renovations on seven hotels. These renovations are expected to be completed during the fourth quarter of 2007 and the first quarter of 2008. The Company expects to make a total of approximately $8 million of capital expenditures related to these projects.

To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions in the first nine months of 2007 totaled $59.1 million and were paid monthly at a rate of $0.073 per common share. For the same period the Company’s cash generated from operations was $67.8 million. The Company intends to continue paying dividends on a monthly basis at an annual rate of 8%. 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.

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. During the nine months ended September 30, 2007, approximately 2.3 million Units, representing $24.8 million in proceeds to the Company, were issued under the plan.

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. During the nine months ended September 30, 2007, the Company redeemed approximately 2.1 million Units in the amount of $22.6 million under the program. It is anticipated the funds required for the redemption program will be offset by the funds received from the Dividend Reinvestment Plan over the course of the calendar year.

 

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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 has a contract with ASRG, a related party, to provide brokerage services for the acquisition and disposition of the Company’s real estate assets. In accordance with the contract, ASRG is paid a fee of 2% of the gross purchase price of any acquisitions or gross sale price of any dispositions of real estate investments, subject to certain conditions. As of September 30, 2007, payments to ASRG for services under the terms of this contract have totaled $16.6 million since inception, which were capitalized as a part of the purchase price of the hotels. There were no fees incurred during the first nine months of 2007 under this contract.

The Company is party to an advisory agreement with Apple Six Advisors, Inc. (“ASA”), pursuant to which ASA provides management services to the Company. An annual fee ranging from .1% to .25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, is payable for these services. From May to October 2007, ASA utilized Apple Hospitality Five, Inc. to provide these services. Until May 2007, ASA used Apple Hospitality Two, Inc. to provide these services. Expenses related to the ASA agreement for the nine months ended September 30, 2007 and 2006, totaled approximately $2.4 and $1.7 million, respectively.

Mr. Knight is Chairman and Chief Executive Officer of ASRG, ASA, Apple REIT Seven, Inc. (a diversified REIT) and Apple REIT Eight, Inc. (a newly formed company that intends to qualify as a REIT). Mr. Knight was also Chairman and Chief Executive Officer of Apple Hospitality Two, Inc. (a hospitality REIT) until May 2007 and Apple Hospitality Five, Inc. (a hospitality REIT) until October 2007. Members of the Company’s Board of Directors are also on the boards of Apple REIT Seven, Inc. and Apple REIT Eight, Inc. Until May 2007, members of the Company’s Board of Directors were also on the board of Apple Hospitality Two, Inc. and, until October 2007, were on the board of Apple Hospitality Five, Inc.

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 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 to make distributions.

Recently Adopted Accounting Pronouncements

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB

 

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Statement No. 109. This interpretation requires that income tax positions recognized in an entity’s returns have a more-likely-than-not chance of being sustained prior to recording the related tax benefit in the financial statements. Tax benefits would be derecognized if information became available which indicated that it was more-likely-than-not that the position would not be sustained. The adoption of this interpretation has not had a material impact on the Company’s results of operations or financial position.

Subsequent Events

In October 2007, the Company declared and paid approximately $6.6 million, or $.073 per share, in distributions to its common shareholders of which $2.8 million or 257,261 Units were reinvested under the Company’s Dividend Reinvestment Plan.

On October 22, 2007, the Company redeemed 457,598 Units in the amount of $5.0 million under its Unit Redemption Program.

In October 2007, Apple Hospitality Five, Inc. (“AHF”) was merged with and into an unrelated third party. Upon the merger, the Company acquired all of AHF’s interest in Apple Fund Management, LLC, which was a wholly-owned subsidiary of AHF that provides the services to the Company under its advisory agreements with ASA and ASRG. There was no significant incremental cost to the Company as a result of acquiring this entity.

 

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, 2007, 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 is exposed to changes in short term money market rates earned on its available cash. Based on the Company’s cash invested at September 30, 2007, of $35.4 million, every 100 basis points change in interest rates will impact the Company’s annual net income by $354,000, all other factors remaining the same.

 

Item 4. Controls and Procedures

Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective and that there have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

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

Unit Redemption Program

In July 2005, the Company instituted a share redemption program to provide its shareholders who have held their Units for at least one year with the benefit of limited interim liquidity, by presenting for redemption all or any portion of their Units at any time and in accordance with certain procedures. Once this time limitation has been met, the Company may, subject to certain conditions and limitations, redeem the Units presented for redemption for cash, to the extent that the Company has sufficient funds available to fund the redemption. If Units are held for the required one-year period, the Units may be redeemed for a purchase price equal to the lesser of: (1) $11.00 per Unit; or (2) the purchase price per Unit that was actually paid for the Units. The board of directors reserves the right, in its sole discretion, at any time and from time to time, to waive the one-year holding period, reject any request for redemption, change the purchase price for redemptions or otherwise amend the terms of, suspend, or terminate the Unit redemption program. The following is a summary of redemptions during the third quarter of 2007:

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 (1)

July 2007

   597,983    $10.99    5,416,702  

(1)

The maximum number of Units that may be redeemed in any 12 month period is limited to five percent (5.0%) of the weighted average number of Units outstanding from the beginning of the 12 month period.

 

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Item 6. Exhibits

 

Exhibit

Number

 

Description

  3.1   Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company’s registration statement on Form S-11 (SEC File No. 333-112169) effective April 23, 2004).
  3.2   Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to the Company’s Post-Effective Amendment No. 4 to Form S-11 (SEC File No. 333-112169) effective June 14, 2005).
31.1   Certification of the Company’s Chief Executive Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act, as amended (FILED HEREWITH).
31.2   Certification of the Company’s Chief Financial Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act, as amended (FILED HEREWITH).
32.1   Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

APPLE REIT SIX, INC.  
By:  

/s/ GLADE M. KNIGHT

  Date: November 2, 2007
  Glade M. Knight,  
 

Chairman of the Board,

Chief Executive Officer, and President

(Principal Executive Officer)

 
By:  

/s/ BRYAN PEERY

  Date: November 2, 2007
  Bryan Peery,  
 

Chief Financial Officer

(Principal Financial and Principal Accounting Officer)

 

 

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