10-K 1 apple6-90096.htm 10-K apple6-90096.htm - Generated by Worth Higgins & Associates

 



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


FORM 10-K


x   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  For the fiscal year ended December 31, 2008
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-51270

 


APPLE REIT SIX, INC.
(Exact name of registrant as specified in its charter)


 

VIRGINIA 20-0620523
(State of Organization) (I.R.S. Employer Identification Number)
 
 
814 EAST MAIN STREET  
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)

(804) 344-8121
(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the act: None

Securities registered pursuant to Section 12(g) of the Act:

Units (Each Unit consists of one common share, no par value and one Series A preferred share)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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 ¨

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

     There is currently no established public market in which the Company’s common shares are traded. Based upon the price that Apple REIT Six, Inc.’s common equity last sold, which was $11, on June 30, 2008, the aggregate market value of the voting common equity held by non-affiliates of the registrant on such date was $1,000,391,000. The Company does not have any non-voting common equity.

Number of registrant’s common shares outstanding as of February 28, 2009: 91,179,010

Documents Incorporated by Reference

     The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the registrant’s definitive proxy statement for the annual meeting of shareholders to be held on May 14, 2009.

 



 


APPLE REIT SIX, INC.

FORM 10-K

Index

      Page
Part I      
  Item 1. Business 3
Item 1A. Risk Factors 6
  Item 1B. Unresolved Staff Comments 7
  Item 2. Properties 8
  Item 3. Legal Proceedings 11
  Item 4. Submission of Matters to a Vote of Security Holders 11
 
Part II      
  Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities  12
  Item 6. Selected Financial Data 15
  Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 24
  Item 8. Financial Statements and Supplementary Data 25
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 42
Item 9A. Controls and Procedures 42
  Item 9B. Other Information 42
 
Part III      
 
  Item 10. Directors, Executive Officers and Corporate Governance 43
  Item 11. Executive Compensation 43
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters  43
  Item 13. Certain Relationships and Related Transactions and Director Independence 43
  Item 14. Principal Accounting Fees and Services 43
 
Part IV      
 
  Item 15. Exhibits, Financial Statement Schedules 44
Signatures      

     This Form 10-K 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.

2


PART I

     This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Apple REIT Six, Inc. (“the Company”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the ability of the Company to implement its acquisition strategy and operating strategy; the Company’s ability to manage planned growth; changes in economic cycles, including the current economic recession throughout the United States; and competition within the hotel industry. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this Annual Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the Company’s financial statements and the notes thereto, as well as the risk factors described in the Company’s filings with the Securities and Exchange Commission and Item 1A.

Item 1.    Business

     Apple REIT Six, Inc. is a Virginia corporation formed to invest in hotels and other selected real estate in select metropolitan areas in the United States. Initial capitalization occurred on January 20, 2004 and operations began on May 28, 2004 when the Company acquired its first hotel.

     The Company is a real estate investment trust (“REIT”) which owns hotels in the United States. The REIT Modernization Act, effective January 1, 2001, permits real estate investment trusts to establish taxable businesses to conduct certain previously disallowed business activities. The Company has wholly-owned taxable REIT subsidiaries which lease all of the Company’s hotels from wholly-owned qualified REIT subsidiaries. The hotels are operated and managed by affiliates of Marriott International, Inc. (“Marriott”), Stonebridge Realty Advisors, Inc. (“Stonebridge”), Hilton Hotels Corporation (“Hilton”), Western International (“Western”), Larry Blumberg & Associates (“LBA”), White Lodging Services Corporation (“WLS”), Inn Ventures, Inc. (“Inn Ventures”), or Newport Hospitality Group, Inc. (“Newport”) under separate hotel management agreements.

     The Company has no foreign operations or assets and its operating structure includes only one segment. The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated upon consolidation. Refer to Part II, Item 8 of this report, for the consolidated financial statements.

Website Access

     The address of the Company’s Internet website is www.applereitsix.com. The Company makes available free of charge through its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.

Business Objectives

     The Company’s primary objective is to enhance shareholder value by increasing funds from operations and cash available for distributions through internal growth and selective hotel renovation. This strategy includes utilizing the Company’s asset management expertise to improve the quality of the Company’s hotels by aggressively managing room rates, partnering with industry leaders in hotel management and franchising the hotels with leading brands, thereby improving the performance of an individual hotel in its local market. When cost effective, the Company renovates its properties to increase its ability to compete in particular markets. The Company believes its planned renovations and strong asset management will continue to increase each hotel’s performance in its individual market, although there can be no assurance of such results. As of December 31, 2008, the Company owned 68 hotels.

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Financing

     The Company has seven notes payable that were assumed in conjunction with the acquisition of hotels. These notes have maturity dates ranging from 2011 to 2014. The Company also has available a $20 million line of credit that is used to fund capital expenditures along with general working capital needs. Although there can be no assurance that additional debt will not be utilized, it is anticipated that cash on hand, cash from operations and the line of credit will satisfy the Company’s cash requirements. The Company’s bylaws require board approval and review of any debt financing obtained by the Company.

Industry and Competition

     The hotel industry is highly competitive. Each of the Company’s hotels is located in a developed area that includes other hotels and competes for guests primarily with other hotels in the Company’s immediate vicinity and secondarily with other hotels in the Company’s geographic market. An increase in the number of competitive hotels in a particular area could have a material adverse effect on the occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) of the Company’s hotels in that area. The Company believes that brand recognition, location, price and quality (of both the hotel and the services provided) are the principal competitive factors affecting the Company’s hotels. General economic conditions in a particular market and nationally impact the performance of the hotel industry nationally and in particular markets.

Hotel Operating Performance

     As of December 31, 2008, the Company owned fourteen Hilton Garden Inn hotels, ten Residence Inn hotels, ten Courtyard hotels, eight SpringHill Suites hotels, six Homewood Suites hotels, six TownePlace Suites hotels, five Fairfield Inn hotels, four Hampton Inn hotels, three Hampton Inn & Suites hotels and two full service Marriott hotels. They are located in various states and, in aggregate, consist of 7,897 rooms.

     Room revenue for these hotels totaled $238.4 million in 2008, and the hotels achieved average occupancy of 71%, ADR of $117 and RevPAR of $83, compared with $236.3 million of room revenue, average occupancy of 74%, ADR of $113 and RevPAR of $84 for the period owned in 2007. The Company’s average RevPAR index increased by 0.4% to 119.5 in 2008, compared to the market average of 100. The RevPAR index measures an individual hotel’s performance as compared to other hotels in a particular market, and is provided by Smith Travel Research, Inc.®, an independent company that tracks historical hotel performance in most markets throughout the world. The Company began 2007 with 67 hotels and acquired one additional hotel in March 2008. The overall RevPAR decline is due primarily to poor economic conditions in the United States. In general, performance at the Company’s hotels, relative to hotels in their market, has met expectations for the period held. 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 historical operating performance will continue in the future. Due to a general decline in economic conditions throughout the United States, the Company experienced its first decline in net income in the fourth quarter of 2008 as compared to the fourth quarter of 2007. The decline is expected to continue throughout 2009.

Management and Franchise Agreements

     Each of the Company’s 68 hotels are operated and managed, under separate management agreements, by affiliates of one of the following companies: Marriott, Stonebridge, Hilton, Western, LBA, WLS, Inn Ventures or Newport. The agreements have remaining terms ranging from 2 to 26 years. Fees associated with the agreements generally include the payment of base management fees, incentive management fees, accounting fees, and other fees for centralized services which are allocated among all of the hotels that receive the benefit of such services. Base management fees are calculated as a percentage of gross revenues. Incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements. The Company has the option to terminate the management agreements if specified performance thresholds are not satisfied. During the years ended December 31, 2008 and 2007, the Company incurred approximately $9.8 and $9.9 million in management fees.

     Stonebridge, Western, LBA, WLS, Inn Ventures and Newport are not affiliated with either Marriott or Hilton, and as a result, the hotels managed by these companies were required to obtain separate franchise agreements with each respective franchisor. The Hilton franchise agreements generally provide for a term of 13 to 20 years. Fees associated with the Hilton agreements generally include the payment of royalty fees and program fees based on room revenues. The Marriott franchise agreements provide for an initial term of 15 to 20 years. Fees associated with the Marriott agreements include the payment of royalty fees, marketing fees, reservation fees and a communications support fee based on room revenues. During the years ended December 31, 2008 and 2007, the Company incurred approximately $10.5 and $10.3 million in franchise fees.

4


Maintenance

     The hotels have an ongoing need for renovation and refurbishment. Under various hotel management agreements, the Company has agreed to fund expenditures for periodic repairs, replacement or refurbishment of furniture, fixtures and equipment for the hotels in an amount equal to a certain percentage of gross revenues. In addition, other capital improvement projects are directly funded by the Company. During 2008 the Company spent approximately $14 million on capital expenditures.

Employees

     During 2008, all employees involved in the day-to-day operation of the Company’s hotels were employed by third party management companies engaged pursuant to the hotel management agreements. At December 31, 2008, the Company had 38 employees.

Environmental Matters

     In connection with each of the Company’s hotel acquisitions, the Company obtains a Phase I Environmental Report and additional environmental reports and surveys, as are necessitated by the preliminary report. Based on the reports, the Company is not aware of any environmental situations requiring remediation at the Company’s properties, which have not been, or are not currently being remediated. No material remediation costs have or are expected to occur.

Property Acquisition

     In March 2008, the Company purchased a Hilton Garden Inn hotel in Roanoke Rapids, North Carolina for $17.8 million. The hotel has 147 rooms and is managed by Newport under an agreement with terms and fees similar to the Company’s existing management agreements. The purchase price was funded with available cash. In conjunction with the acquisition, the Company paid a commission to Apple Six Realty Group, Inc. (“ASRG”) of 2% of the gross purchase price, or approximately $0.4 million. ASRG is wholly-owned by the Company’s Chairman and Chief Executive Officer, Glade M. Knight. This commission was capitalized as part of the purchase price of the hotel. No goodwill or intangible assets were recorded in connection with the acquisition.

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 (“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 December 31, 2008, payments to ASRG for services under the terms of this contract have totaled $16.9 million since inception, which were capitalized as a part of the purchase price of the hotels. The Company incurred fees totaling approximately $0.4 million in 2008 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, are payable for these services.

     Through its wholly-owned subsidiary, Apple Fund Management, LLC, the Company provides support services to ASRG, Apple Suites Realty Group, Inc. (“Suites”), ASA, Apple Seven Advisors, Inc. (“A7A”), Apple REIT Seven, Inc., Apple Eight Advisors, Inc. (“A8A”), Apple REIT Eight, Inc., Apple Nine Advisors, Inc. (“A9A”) and Apple REIT Nine, Inc. A7A provides day to day advisory and administrative functions for Apple REIT Seven, Inc. A8A provides day to day advisory and administrative functions for Apple REIT Eight, Inc. A9A provides day to day advisory and administrative functions for Apple REIT Nine, Inc. Suites provides real estate brokerage services to Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. Each of these companies has agreed to reimburse the Company for its costs in providing these services. ASRG, Suites, ASA, A7A, A8A and A9A are 100% owned by Glade Knight, the Company’s Chairman and Chief Executive Officer.

     Including ASRG, Suites, ASA, A7A, A8A and A9A discussed above, Mr. Knight is also Chairman and CEO of Apple REIT Seven, Inc. (a hotel REIT), Apple REIT Eight, Inc. (a hotel REIT) and Apple REIT Nine, Inc. (a newly formed company that intends to qualify as a diversified REIT). Members of the Company’s Board of Directors are also on the boards of Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

5


Item 1A.    Risk Factors

The following describes several risk factors which are applicable to the Company.

Hotel Operations

     The Company’s hotels are subject to all of the risks common to the hotel industry. These risks could adversely affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses, and generally include:

  • increases in supply of hotel rooms that exceed increases in demand;
  • increases in energy costs and other travel expenses that reduce business and leisure travel;
  • reduced business and leisure travel due to continued geo-political uncertainty, including terrorism;
  • adverse effects of declines in general and local economic activity; and
  • adverse effects of a downturn in the hotel industry.

General Economic Conditions

     Changes in general or local economic or market conditions, increased costs of energy, increased costs of insurance, increased costs of products, increased costs and shortages of labor, competitive factors, fuel shortages, quality of management, the ability of a hotel chain to fulfill any obligations to operators of its hotel business, limited alternative uses for the building, changing consumer habits, condemnation or uninsured losses, changing demographics, changing traffic patterns, inability to remodel outmoded buildings as required by the franchise or lease agreement and other factors beyond the Company’s control may reduce the value of properties that the Company owns. As a result, cash available to make distributions to shareholders may be affected.

Current General Economic Recession and Slowdown in the Lodging Industry

     The present economic recession and the uncertainty over its depth and duration will continue to have a negative impact on the lodging industry. There is now a general consensus among economists that the economy in the United States is now in a recession and as a result the Company is experiencing reduced demand for hotel rooms. Accordingly, financial results have been impacted by the economic slowdown and future financial results and growth will be further harmed while the recession continues.

Hospitality Industry

     The success of the Company’s properties will depend largely on the property operators’ ability to adapt to dominant trends in the hotel industry as well as greater competitive pressures, increased consolidation, industry overbuilding, dependence on consumer spending patterns and changing demographics, the introduction of new concepts and products, availability of labor, price levels and general economic conditions. The success of a particular hotel brand, the ability of a hotel brand to fulfill any obligations to operators of its business, and trends in the hotel industry may affect the Company’s income and the funds it has available to distribute to shareholders.

     The hospitality industry could also experience a significant decline in occupancy and average daily rates due to a reduction in both business and leisure travel. General economic conditions, increased fuel costs, natural disasters and terrorist attacks are a few factors that could affect an individual’s willingness to travel. The Company’s property insurance will typically cover losses for property damage due to terrorist attacks or natural disasters. However, the Company is not insured against the potential negative effect a terrorist attack or natural disaster would have on the hospitality industry as a whole.

Seasonality

     The hotel industry is seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. As a result, there may be quarterly fluctuations in results of operations. As a result, the Company may need to enter into short-term borrowing in certain periods in order to offset these fluctuations in revenues and to make distributions to shareholders.

Franchise Agreements

     The Company’s wholly-owned taxable REIT subsidiaries operate all of the properties pursuant to franchise or license agreements with nationally recognized hotel brands. These agreements contain specific standards for, and restrictions and limitations on, the operation and maintenance of the Company’s properties in order to maintain uniformity within the

6


franchisor system. These standards could potentially conflict with the Company’s ability to create specific business plans tailored to each property and to each market.

Competition

     The hotel industry is highly competitive. Each of the Company’s hotels is located in a developed area that includes other hotels and competes for guests primarily with other hotels in the Company’s immediate vicinity and secondarily with other hotels in the Company’s geographic market. An increase in the number of competitive hotels in a particular area could have a material adverse effect on the occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”) of the Company’s hotels in that area. In addition, increases in operating costs due to inflation may not be offset by increased room rates.

Transferability of Shares

     There will be no public trading market for the common shares and the Series A preferred shares for an indefinite period of time, if ever. Therefore, the Units will be highly illiquid and very difficult to trade. In addition, there are restrictions on the transfer of the common shares. In order to qualify as a REIT, the shares must be beneficially owned by 100 or more persons and no more than 50% of the value of the Company’s issued and outstanding shares may be owned directly or indirectly by five or fewer individuals. Therefore, the Company’s bylaws provide that no person may own more than 9.8% of the issued and outstanding Units. Any purported transfer of the Company’s shares that would result in a violation of either of these limits will be declared null and void.

Qualification as a REIT

     The rules governing a REIT are highly technical and complex. They require ongoing compliance with a variety of tests that depend on, among other things, future operations. While the Company expects to satisfy these tests, it cannot ensure it will qualify as a REIT for any particular year. There is also the risk that the applicable laws governing a REIT could be changed, which could adversely affect the Company and its shareholders.

Distributions to Shareholders

     If the Company’s properties do not generate sufficient revenue to meet operating expenses, cash flow and the Company’s ability to make distributions to shareholders may be adversely affected. The Company is subject to all operating risks common to hotels. These risks might adversely affect occupancy or room rates. Increases in operating costs due to inflation and other factors may not necessarily be offset by increased room rates. The local, regional and national hotel markets may limit the extent to which room rates may be increased to meet increased operating expenses without decreasing occupancy rates. While the Company intends to make monthly distributions to shareholders, there can be no assurance that the Company will be able to make distributions at any particular time or rate, or at all. Further, there is no assurance that a distribution rate achieved for a particular period will be maintained in the future. Also, while management may establish goals as to particular rates of distribution or have an intention to make distributions at a particular rate, there can be no assurance that such goals or intentions will be realized.

     While the Company continues to seek generally to make distributions from its operating revenues, distributions may be made (although there is no obligation to do so) in certain circumstances in part from financing proceeds or other sources, such as proceeds from the offering of Units. While distributions from such sources would result in the shareholder receiving cash, the consequences to the shareholder would differ from a distribution out of operating revenues. For example, if financing is the source of a distribution, that financing would have to be repaid, and if proceeds from the offering of Units are distributed, those proceeds would not then be available for other uses (such as property acquisitions or improvements).

Financing Risks

     Although the Company anticipates maintaining low levels of debt, it may periodically use short-term financing to perform renovations to its properties or make shareholder distributions in periods of fluctuating income from its properties. Due to the recent economic events in the United States, there has been a contraction in available credit in the marketplace. As a result, the Company may not be able to use debt to meet its cash requirements.

Item 1B.    Unresolved Staff Comments

None.

7


Item 2.     Properties

As of December 31, 2008, the Company owned 68 hotels consisting of the following:

    Total by
Brand
Number of
Rooms
Brand    
Hilton Garden Inn     14   1,793
Residence Inn     10   1,247
Courtyard     10   993
SpringHill Suites     8   858
Homewood Suites     6   713
TownePlace Suites     6   766
Fairfield Inn     5   351
Hampton Inn     4   454
Hampton Inn & Suites     3   303
Marriott     2   419
  Total 68 7,897

     The following table includes the location of each hotel, the date of construction, the date acquired, encumbrances, initial acquisition cost, gross carrying value and the number of rooms of each hotel.

8


Real Estate and Accumulated Depreciation
As of December 31, 2008
(dollars in thousands)


Initial Cost
Subsequently
Capitalized

City
 
State
 
Brand
 
Encumbrances
 
Land

Bldg./FF&E
  Bldg
Imp. & FF&E
  Total
Gross Cost
  Acc
Deprec
  Date of
Construction
  Date
Acquired
  Depreciable
Life
# of
Rooms
Birmingham   Alabama Fairfield Inn $ - $ 354 $ 2,057 $ 118 $ 2,529 $ (248 ) 1995 Aug-05 3 - 39 yrs.   63
Dothan Alabama Courtyard   -         1,270     7,142   291   8,703   (832 ) 1996 Aug-05 3 - 39 yrs. 78
Dothan Alabama Hampton Inn & Suites   -   842   8,129   51   9,022   (988 ) 2004 Jun-05 3 - 39 yrs. 85
Huntsville Alabama Fairfield Inn   2,831   506   4,813   135   5,454   (465 ) 1999 Sep-05 3 - 39 yrs. 79
Huntsville Alabama Residence Inn   -   947   7,632   363   8,942   (855 ) 2002 Jun-05 3 - 39 yrs. 78
Montgomery        Alabama SpringHill Suites   3,538   963   6,327   176   7,466   (607 ) 1998 Sep-05 3 - 39 yrs. 79
Tuscaloosa Alabama Courtyard   -   -   7,953   282   8,235   (839 ) 1996 Aug-05 3 - 39 yrs. 78
Tuscaloosa Alabama Fairfield Inn   -   -   4,240   156   4,396   (448 ) 1996 Aug-05 3 - 39 yrs. 63
Anchorage Alaska Hampton Inn   -   1,220   10,501   2,031   13,752   (1,812 ) 1997 Mar-05 3 - 39 yrs. 101
Anchorage Alaska Hilton Garden Inn   -   4,230   14,788   407   19,425   (1,936 ) 2002 Oct-04 3 - 39 yrs. 125
Anchorage Alaska Homewood Suites   -   1,803   11,046   89   12,938   (1,644 ) 2004 Oct-04 3 - 39 yrs. 122
Phoenix Arizona Hampton Inn   -   1,425   5,205   811   7,441   (996 ) 1998 Oct-04 3 - 39 yrs. 99
Tempe Arizona SpringHill Suites   -   1,170   7,159   112   8,441   (888 ) 1998 Jun-05 3 - 39 yrs. 121
Tempe Arizona TownePlace Suites   -   1,226   7,169   123   8,518   (882 ) 1998 Jun-05 3 - 39 yrs. 119
Arcadia California Hilton Garden Inn   -   1,718   10,195   2,225   14,138   (1,689 ) 1999 Oct-04 3 - 39 yrs. 124
Arcadia California SpringHill Suites   -   1,633   6,459   806   8,898   (1,147 ) 1999 Oct-04 3 - 39 yrs. 86
Bakersfield California Hilton Garden Inn   -   1,166   10,565   209   11,940   (1,449 ) 2004 Mar-05 3 - 39 yrs. 120
Folsom California Hilton Garden Inn   -   1,521   16,989   1,173   19,683   (1,870 ) 1999 Nov-05 3 - 39 yrs. 100
Foothill Ranch California Hampton Inn   4,195   1,056   6,499   827   8,382   (1,027 ) 1998 Apr-05 3 - 39 yrs. 84
Lake Forest California Hilton Garden Inn   -   1,541   9,425   220   11,186   (1,419 ) 2004 Oct-04 3 - 39 yrs. 103
Milpitas California Hilton Garden Inn   -   2,565   16,534   1,904   21,003   (2,108 ) 1999 Nov-05 3 - 39 yrs. 161
Roseville California Hilton Garden Inn   -   2,362   18,937   1,579   22,878   (2,186 ) 1999 Nov-05 3 - 39 yrs. 131
San Francisco California Hilton Garden Inn   -   2,007   9,545   2,048   13,600   (1,542 ) 1999 Jan-06 3 - 39 yrs. 169
Boulder Colorado Marriott   -   3,066   27,825   2,118   33,009   (3,647 ) 1997 May-05 3 - 39 yrs. 157
Glendale Colorado Hampton Inn & Suites   5,732   3,641   11,221   1,248   16,110   (1,867 ) 1999 Oct-04 3 - 39 yrs. 133
Lakewood Colorado Hampton Inn   -   2,508   8,090   464   11,062   (1,319 ) 2003 Oct-04 3 - 39 yrs. 170
Farmington Connecticut Courtyard   -   1,794   15,434   1   17,229   (1,555 ) 2005 Oct-05 3 - 39 yrs. 119
Rocky Hill Connecticut Residence Inn   -   1,472   11,284   3   12,759   (1,218 ) 2005 Aug-05 3 - 39 yrs. 96
Wallingford Connecticut Homewood Suites   -   1,419   12,072   140   13,631   (1,349 ) 2005 Jul-05 3 - 39 yrs. 104
Clearwater Florida SpringHill Suites   -   -   7,214      -   7,214   (715 ) 2006 Feb-06 3 - 39 yrs. 79
Lake Mary Florida Courtyard   -   690   5,568   1,525   7,783   (897 ) 1995 Mar-05 3 - 39 yrs. 86
Lakeland Florida Residence Inn   -   1,520   8,699   1,227   11,446   (1,088 ) 2001 Jun-05 3 - 39 yrs. 78
Orange Park Florida Fairfield Inn   3,006   855   6,979   177   8,011   (629 ) 1998 Nov-05 3 - 39 yrs. 83
Panama City Florida Courtyard   -   1,407   8,217   45   9,669   (788 ) 2006 Mar-06 3 - 39 yrs. 84
Pensacola Florida Courtyard   -      1,186   10,728   353   12,267   (1,105 ) 1997 Aug-05 3 - 39 yrs. 90

9


Real Estate and Accumulated Depreciation (continued)
As of December 31, 2008
 (dollars in thousands)

    Initial Cost Subsequently
Capitalized
City   State   Brand Encumbrances   Land Bldg./FF&E   Bldg
Imp. & FF&E
Total
Gross Cost
Acc
Deprec
Date of
Construction
  Date
Acquired
  Depreciable
Life
  # of
Rooms
Pensacola Florida Fairfield Inn   -   470     4,703     152     5,325     (477 ) 1995   Aug-05 3 - 39 yrs.   63
Pensacola Florida Hampton Inn & Suites   -   1,248   8,354   7   9,609   (1,015 ) 2005 Jul-05 3 - 39 yrs. 85
Tallahassee Florida Hilton Garden Inn   -   1,103   10,130   678   11,911   (1,307 ) 1997 Mar-05 3 - 39 yrs. 99
Albany Georgia Courtyard   -   1,253   7,658   73   8,984   (938 ) 2004 Jun-05 3 - 39 yrs. 84
Columbus Georgia Residence Inn   -   -   8,184   94   8,278   (946 ) 2003 Jun-05 3 - 39 yrs. 78
Savannah Georgia SpringHill Suites   2,866   693   5,099   165   5,957   (486 ) 1999 Sep-05 3 - 39 yrs. 79
Valdosta Georgia Courtyard   -   1,036   7,529   199   8,764   (810 ) 2002 Oct-05 3 - 39 yrs. 84
Mt. Olive New Jersey Residence Inn   -   1,410   11,331   22   12,763   (1,258 ) 2005 Sep-05 3 - 39 yrs. 123
Somerset New Jersey Homewood Suites   -   1,813   16,801   120   18,734   (1,781 ) 2005 Aug-05 3 - 39 yrs. 123
Saratoga Springs New York Hilton Garden Inn   -   2,399   15,885   1,441   19,725   (1,618 ) 1999 Sep-05 3 - 39 yrs. 112
Roanoke Rapids North Carolina Hilton Garden Inn   -   2,458   15,713   -   18,171   (469 ) 2008 Mar-08 3 - 39 yrs. 147
Hillsboro Oregon Courtyard   6,325   1,879   9,484   118   11,481   (846 ) 1996 Mar-06 3 - 39 yrs. 155
Hillsboro Oregon Residence Inn   -   2,665   13,295   196   16,156   (1,272 ) 1994 Mar-06 3 - 39 yrs. 122
Hillsboro Oregon TownePlace Suites   -   2,150   9,715   1,223   13,088   (1,147 ) 1999 Dec-05 3 - 39 yrs. 136
Portland Oregon Residence Inn   -   4,400   38,687   3,205   46,292   (3,931 ) 2001 Dec-05 3 - 39 yrs. 258
Pittsburgh Pennsylvania Residence Inn   -   1,161   10,267   1,573   13,001   (1,468 ) 1998 Sep-05 3 - 39 yrs. 156
Myrtle Beach South Carolina Courtyard   -   1,857   7,631   1,036   10,524   (1,510 ) 1999 Jun-04 3 - 39 yrs. 135
Nashville Tennessee Homewood Suites   -   1,170   7,177   514   8,861   (1,041 ) 1999 May-05 3 - 39 yrs. 121
Arlington Texas SpringHill Suites   -   1,122   6,649   80   7,851   (833 ) 1998 Jun-05 3 - 39 yrs. 122
Arlington Texas TownePlace Suites   -   1,033   6,373   129   7,535   (775 ) 1999 Jun-05 3 - 39 yrs. 95
Dallas Texas SpringHill Suites   -   1,372   18,737   464   20,573   (1,967 ) 1997 Dec-05 3 - 39 yrs. 147
Fort Worth Texas Homewood Suites   -   1,152   8,210   1,017   10,379   (1,216 ) 1999 May-05 3 - 39 yrs. 137
Fort Worth Texas Residence Inn   -   1,873   15,586   16   17,475   (1,855 ) 2005 May-05 3 - 39 yrs. 149
Fort Worth Texas SpringHill Suites   -   2,125   11,619   53   13,797   (1,754 ) 2004 May-04 3 - 39 yrs. 145
Laredo Texas Homewood Suites   -   1,118   9,781   48   10,947   (1,067 ) 2005 Nov-05 3 - 39 yrs. 106
Laredo Texas Residence Inn   -   902   10,969   19   11,890   (1,229 ) 2005 Sep-05 3 - 39 yrs. 109
Las Colinas Texas TownePlace Suites   -   1,205   6,256   110   7,571   (835 ) 1998 Jun-05 3 - 39 yrs. 136
McAllen Texas Hilton Garden Inn   -   1,178   8,143   622   9,943   (1,016 ) 2000 Jul-05 3 - 39 yrs. 104
Fredericksburg Virginia Hilton Garden Inn   -   1,822   15,362   93   17,277   (1,602 ) 2005 Dec-05 3 - 39 yrs. 148
Richmond Virginia Corporate Office   -   381   1,038   3,565   4,984   (1,073 ) 1893 Jun-04 3 - 39 yrs. N/A
Kent Washington TownePlace Suites   -   1,841   10,721   1,377   13,939   (1,278 ) 1999 Dec-05 3 - 39 yrs. 152
Mukilteo Washington TownePlace Suites   -   1,505   11,055   1,199   13,759   (1,238 ) 1999 Dec-05 3 - 39 yrs. 128
Redmond Washington Marriott   -   9,504   56,168   1,026   66,698   (7,950 ) 2004 Jul-04 3 - 39 yrs. 262
Renton Washington Hilton Garden Inn   -   1,277   14,674   1,858   17,809   (1,943 ) 1998 Nov-05 3 - 39 yrs. 150
Deposits on Construction in Progress   -   -   -   257   257   -          
            $ 28,493   $ 109,658   $ 761,624   $ 46,186   $ 917,468   $ (94,005 )             7,897

10


 

Investment in hotels at December 31, 2008, consisted of the following (in thousands):

Land $ 109,621  
Building and Improvements   748,729  
Furniture, Fixtures and Equipment   59,118  
    917,468  
Less Accumulated Depreciation   (94,005 )
Investment in Hotels, net $ 823,463  

     For additional information about the Company’s properties, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 3.    Legal Proceedings

     The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company or any of its properties, other than routine actions arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the Company’s business or financial condition or results of operations.

Item 4.     Submission of Matters to a Vote of Security Holders

     None.

11


PART II

Item 5.     Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Common Shares

     There is currently no established public market in which the Company’s common shares are traded. As of December 31, 2008, there were 91,761,828 Units outstanding. Each Unit consists of one common share, no par value, and one Series A preferred share of the Company. The per-share estimated market value is deemed to be the offering price of the shares, which is currently $11.00 per share. This is supported by the fact that the Company is currently selling shares to the public at a price of $11.00 per share through its Dividend Reinvestment Plan and the Company is repurchasing shares at $11.00 from shareholders under its Unit Redemption Program. The Units are held by approximately 21,000 beneficial shareholders.

Dividend Reinvestment Plan

     In February 2006, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. As of December 31, 2008, approximately 8.3 million Units, representing $90.9 million in proceeds to the Company, have been issued under the plan.

Unit Redemption Program

     In July 2005, the Company instituted a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equal to the lesser of: (1) the purchase price per Unit that the shareholder actually paid for the Unit; or (2) $11.00 per Unit. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As of December 31, 2008, the Company has redeemed approximately 7.6 million Units in the amount of $83.6 million under the program. The following is a summary of redemptions during the fourth quarter of 2008:

                             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
October 2008 475,749 $     10.98 7,630,003 (1 )


(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.
    

Series A Preferred Shares

     The Series A preferred shares have no voting rights and no conversion rights. In addition, the Series A preferred shares are not separately tradable from the common shares to which they relate. The Series A preferred shares do not have any distribution rights except a priority distribution upon the sale of the Company’s assets. The priority distribution (“Priority Distribution”) will be equal to $11.00 per Series A preferred share, and will be paid before any distribution will be made to the holders of any other shares. Upon the Priority Distribution, the Series A preferred shares will have no other distribution rights.

Series B Convertible Preferred Shares

     The Company currently has 240,000 Series B convertible preferred shares issued and outstanding, all owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer. There are no dividends payable on the Series B convertible preferred shares. Holders of more than two-thirds of the Series B convertible preferred shares must approve any proposed amendment to the Articles of Incorporation that would adversely affect the Series B convertible preferred shares. Upon liquidation, each holder of the Series B convertible preferred shares is entitled to a priority liquidation payment. However, the priority liquidation payment of the holder of the Series B convertible preferred shares is junior to the holders of

12


the Series A preferred shares distribution rights. The holder of a Series B convertible preferred share is entitled to a liquidation payment of $11 per number of common shares into which each Series B convertible preferred share would convert. In the event that the liquidation of the Company’s assets results in proceeds that exceed the distribution rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed between the common shares and the Series B convertible preferred shares, on an as converted basis. The Series B convertible preferred shares are convertible into common shares upon and for 180 days following the occurrence of any of the following events: (1) substantially all of the Company’s assets, stock or business is sold or transferred through exchange, merger, consolidation, lease, share exchange or otherwise, other than a sale of assets in liquidation, dissolution or winding up of the Company’s business; or (2) the termination or expiration without renewal of the advisory agreement with Apple Six Advisors, Inc., or if the Company ceases to use Apple Six Realty Group, Inc. to provide property acquisition and disposition services; or (3) the Company’s common shares are listed on any securities exchange or quotation system or in any established market.

Preferred Shares

     The Company’s articles of incorporation authorize issuance of up to 15 million additional preferred shares. No preferred shares other than the Series A preferred shares and the Series B convertible preferred shares (discussed above) have been issued. The Company believes that the authorization to issue additional preferred shares benefits the Company and its shareholders by permitting flexibility in financing additional growth, giving the Company additional financing options in corporate planning and in responding to developments in business, including financing of additional acquisitions and other general corporate purposes. Having authorized preferred shares available for issuance in the future gives the Company the ability to respond to future developments and allows preferred shares to be issued without the expense and delay of a special shareholders’ meeting. At present, the Company has no specific financing or acquisition plans involving the issuance of additional preferred shares and the Company does not propose to fix the characteristics of any series of preferred shares in anticipation of issuing preferred shares other than the Series A preferred shares and Series B convertible preferred shares discussed above. The Company cannot now predict whether or to what extent, if any, additional preferred shares will be used or if so used what the characteristics of a particular series may be. The voting rights and rights to distributions of the holders of common shares will be subject to the prior rights of the holders of any subsequently-issued preferred shares. Unless otherwise required by applicable law or regulation, the preferred shares would be issuable without further authorization by holders of the common shares and on such terms and for such consideration as may be determined by the Board of Directors. The preferred shares could be issued in one or more series having varying voting rights, redemption and conversion features, distribution (including liquidating distribution) rights and preferences, and other rights, including rights of approval of specified transactions. A series of preferred shares could be given rights that are superior to rights of holders of common shares and a series having preferential distribution rights could limit common share distributions and reduce the amount holders of common shares would otherwise receive on dissolution.

Distribution Policy

     To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions in 2008 totaled $81.7 million and were paid monthly at a rate of $0.075 per common share beginning in February 2008 and $0.073 per common share prior to that date. Distributions in 2007 totaled $78.8 million and were paid monthly at a rate of $0.073 per common share. The timing and amounts of distributions to shareholders are within the discretion of the Company’s Board of Directors. The amount and frequency of future distributions will depend on the Company’s results of operations, cash flow from operations, economic conditions, working capital requirements, cash requirements to fund investing and financing activities, capital expenditure requirements, including improvements to and expansions of properties and the acquisition of additional properties, as well as the distribution requirements under federal income tax provisions for qualification as a REIT.

Non-Employee Directors Stock Option Plan and Incentive Plan

     The Company’s Board of Directors has adopted and the Company’s shareholders have approved a Non-Employee Directors Stock Option Plan and an Incentive Plan. The options issued under each plan, upon exercise, convert to Units. Each Unit consists of one common share and one Series A preferred share of the Company. As of December 31, 2008, options to purchase 288,360 Units were outstanding with a weighted average exercise price of $11 per Unit. The following is a summary of securities issued under the plans as of December 31, 2008:

13


          Number of securities
remaining available for
future issuance under
equity compensation
plans
    Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
 
Plan Category
Equity Compensation plans approved by security holders        
Non-Employee Directors Stock Option Plan 288,360 $ 11.00 1,311,185
Incentive Plan $ 4,029,318

14


Item 6.    Selected Financial Data

     The following table sets forth selected financial data for the years ended December 31, 2008, 2007, 2006 and 2005, and the period from January 20, 2004 (initial capitalization) through December 31, 2004. Certain information in the table has been derived from the Company’s audited financial statements and notes thereto. This data should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Conditions and Results of Operations, and Item 15(1), the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K.

 
(in thousands except per share and statistical data) For the year
ended
December 31, 2008
For the year
ended
December 31, 2007
For the year
ended
December 31, 2006
For the year
ended
December 31, 2005
For the period
January 20, 2004
(initial capitalization)
through
December 31, 2004
Revenues:                              
Room revenue $ 238,423   $ 236,278   $ 217,629   $ 91,610   $ 12,092  
Other revenue   19,822     20,770     18,246     10,180     2,343  
Reimbursed expenses 6,057      886     -     -     -  
Total revenue   264,302     257,934     235,875     101,790     14,435  
 
Expenses:                              
Hotel operating expenses   147,832     144,931     135,578     59,867     9,750  
Taxes, insurance and other   13,812     13,605     13,491     5,340     663  
Reimbursed expenses   6,057     886     -     -     -  
General and administrative   5,397     5,637     5,355     3,526     1,210  
Depreciation   30,918     27,694     25,529     11,366     1,881  
Interest and other expenses, net   1,784     1,853     1,809     (2,126 )   (328 )
Total expenses   205,800     194,606     181,762     77,973     13,176  
Net income $ 58,502   $ 63,328   $ 54,113   $ 23,817   $ 1,259  
 
Per Share                              
Net income per common share $ 0.64   $ 0.71   $ 0.61   $ 0.42   $ 0.10  
Distributions paid to common shareholders $ 0.90   $ 0.88   $ 0.88   $ 0.88   $ 0.55  
Weighted-average common shares outstanding - basic and diluted   90,899     89,644     88,869     56,451     12,300  
 
Balance Sheet Data (at end of period)                              
Cash and cash equivalents $ 935   $ 33,261   $ 26,160   $ 35,948   $ 142,790  
Investment in hotels, net $ 823,463   $ 820,468   $ 836,906   $ 790,170   $ 184,084  
Total assets $ 849,783   $ 882,657   $ 886,839   $ 854,316   $ 332,259  
Notes payable $ 29,097   $ 51,679   $ 53,660   $ 76,855   $ 6,557  
Shareholders' equity $ 809,382   $ 816,244   $ 826,046   $ 771,835   $ 325,099  
Net book value per share $ 8.82   $ 9.04   $ 9.20   $ 9.44   $ 9.56  
 
Other Data                              
Cash flow from:                              
 Operating activities $ 88,747   $ 89,848   $ 81,363   $ 28,907   $ 2,904  
 Investing activities $ (33,234 ) $ (15,627 ) $ (61,766 ) $ (585,507 ) $ (183,840 )
 Financing activities $ (87,839 ) $ (67,120 ) $ (29,385 ) $ 449,758   $ 323,702  
Number of hotels owned at end of period   68     67     67     62     11  
Average Daily Rate (ADR) (b) $ 117   $ 113   $ 105   $ 101   $ 105  
Occupancy   70.7 %   73.9 %   74.5 %   71.1 %   59.8 %
Revenue Per Available Room (RevPAR) (c) $ 83   $ 84   $ 78   $ 72   $ 63  
 
Funds From Operations Calculation                              
Net income $ 58,502   $ 63,328   $ 54,113   $ 23,817   $ 1,259  
 Depreciation of real estate owned   29,313     26,782     24,681     11,366     1,881  
Funds from operations (a) $ 87,815   $ 90,110   $ 78,794   $ 35,183   $ 3,140  

(a)  

Funds from operations (FFO) is defined as net income (computed in accordance with generally accepted accounting principles - GAAP) excluding gains and losses from sales of depreciable property, plus depreciation and amortization of real estate. The Company considers FFO in evaluating property acquisitions and its operating performance and believes that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of the Company's activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs.

(b) Total room revenue divided by number of rooms sold.
(c) ADR multiplied by occupancy percentage.

15


 

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the ability of the Company to implement its acquisition strategy and operating strategy; the Company’s ability to manage planned growth; changes in economic cycles, including the current economic recession throughout the United States; and competition within the hotel industry. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this Annual Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the Company’s financial statements and the notes thereto, as well as the risk factors described in the Company’s filings with the Securities and Exchange Commission and Item 1A.

General

     The Company was formed and initially capitalized on January 20, 2004, with its first investor closing on April 23, 2004. The Company owns 68 hotels 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, an additional 51 hotels purchased throughout 2005, 5 additional hotels purchased throughout 2006, and one additional hotel purchased in March 2008. Accordingly, the results of operations include only the results of operations 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 within their respective markets, 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 (“ADR”), revenue per available room (“RevPAR”) and market yield, which represents a comparison of a hotel’s results to other hotels in its local market; and expenses, such as hotel operating expenses, general and administrative and other expenses described below. The following is a summary of results.

                           
(in thousands except statistical data) Year ended
December 31, 2008
  Percent of
Hotel Revenue
  Year ended
December 31, 2007
  Percent of
Hotel Revenue
  Percent
Change
Total hotel revenue $ 258,245   100 % $ 257,048   100 % - %
Hotel operating expenses     147,832   57 %   144,931   56 % 2
Taxes, insurance and other expense   13,812   5 %   13,605   5 %  2 %
General and administrative expense   5,397   2 %   5,637   2 % -4 %
 
Depreciation   30,918         27,694        12 %
Interest expense, net   1,784         1,853       -4 %
 
Number of Hotels   68         67        1 %
Average RevPAR Market Yield(1)   119.5         119.1       - %
ADR $ 117       $ 113        4 %
Occupancy   70.7 %       73.9 %     -4 %
RevPAR $ 83       $ 84       -1 %


(1) From reports published by Smith Travel Research, Inc.®

Hotels Owned

     As of December 31, 2008, the Company owned 68 hotels, with a total of 7,897 rooms. The following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each hotel. All dollar amounts are in thousands.

16


            Gross
Purchase
Price
            Date
Acquired
 
City   State   Brand      Manager   Rooms
Birmingham Alabama Fairfield Inn LBA 8/25/05 63 $ 2,176
Dothan Alabama Courtyard LBA 8/11/05 78   8,016
Dothan Alabama Hampton Inn & Suites LBA 6/24/05 85   8,673
Huntsville Alabama Fairfield Inn LBA 9/30/05 79   4,954
Huntsville Alabama Residence Inn LBA 6/24/05 78   8,288
Montgomery Alabama SpringHill Suites LBA 9/30/05 79   6,835
Tuscaloosa Alabama Courtyard LBA 8/25/05 78   7,551
Tuscaloosa Alabama Fairfield Inn LBA 8/25/05 63   3,982
Anchorage Alaska Hampton Inn Stonebridge 3/14/05 101   11,500
Anchorage Alaska Hilton Garden Inn Stonebridge 10/12/04 125   18,900
Anchorage Alaska Homewood Suites Stonebridge 10/12/04 122   13,200
Phoenix Arizona Hampton Inn Stonebridge 10/12/04 99   6,700
Tempe Arizona SpringHill Suites Western 6/30/05 121   8,060
Tempe Arizona TownePlace Suites Western 6/30/05 119   8,128
Arcadia California Hilton Garden Inn Stonebridge 10/12/04 124   12,000
Arcadia California SpringHill Suites Stonebridge 10/12/04 86   8,100
Bakersfield California Hilton Garden Inn Hilton 3/18/05 120   11,500
Folsom California Hilton Garden Inn Inn Ventures 11/30/05 100   18,028
Foothill Ranch California Hampton Inn Stonebridge 4/21/05 84   7,400
Lake Forest California Hilton Garden Inn Stonebridge 10/12/04 103   11,400
Milpitas California Hilton Garden Inn Inn Ventures 11/30/05 161   18,600
Roseville California Hilton Garden Inn Inn Ventures 11/30/05 131   20,759
San Francisco California Hilton Garden Inn Inn Ventures 1/30/06 169   12,266
Boulder Colorado Marriott WLS 5/9/05 157   30,000
Glendale Colorado Hampton Inn & Suites Stonebridge 10/12/04 133   14,700
Lakewood Colorado Hampton Inn Stonebridge 10/12/04 170   10,600
Farmington Connecticut Courtyard WLS 10/20/05 119   16,330
Rocky Hill Connecticut Residence Inn WLS 8/1/05 96   12,070
Wallingford Connecticut Homewood Suites WLS 7/8/05 104   12,780
Clearwater Florida SpringHill Suites LBA 2/17/06 79   6,923
Lake Mary Florida Courtyard LBA 3/18/05 86   6,000
Lakeland Florida Residence Inn LBA 6/24/05 78   9,886
Orange Park Florida Fairfield Inn LBA 11/8/05 83   7,221
Panama City Florida Courtyard LBA 4/26/06 84   9,245
Pensacola Florida Courtyard LBA 8/25/05 90   11,369
Pensacola Florida Fairfield Inn LBA 8/25/05 63   4,858
Pensacola Florida Hampton Inn & Suites LBA 7/21/05 85   9,279
Tallahassee Florida Hilton Garden Inn Hilton 3/18/05 99   10,850
Albany Georgia Courtyard LBA 6/24/05 84   8,597
Columbus Georgia Residence Inn LBA 6/24/05 78   7,888
Savannah Georgia SpringHill Suites LBA 9/30/05 79   5,407
Valdosta Georgia Courtyard LBA 10/3/05 84   8,284
Mt. Olive New Jersey Residence Inn WLS 9/15/05 123   12,070
Somerset New Jersey Homewood Suites WLS 8/17/05 123   17,750
Saratoga Springs New York Hilton Garden Inn WLS 9/29/05 112   17,750
Roanoke Rapids North Carolina Hilton Garden Inn Newport 3/10/08 147   17,764
Hillsboro Oregon Courtyard Inn Ventures 3/9/06 155   11,000
Hillsboro Oregon Residence Inn Inn Ventures 3/9/06 122   15,500
Hillsboro Oregon TownePlace Suites Inn Ventures 12/19/05 136   11,500
Portland Oregon Residence Inn Inn Ventures 12/19/05 258   42,000
Pittsburgh Pennsylvania Residence Inn WLS 9/2/05 156   11,000
Myrtle Beach South Carolina Courtyard Marriott 6/8/04 135   9,200
Nashville Tennessee Homewood Suites Hilton 5/24/05 121   8,103
Arlington Texas SpringHill Suites Western 6/30/05 122   7,486
Arlington Texas TownePlace Suites Western 6/30/05 95   7,148
Dallas Texas SpringHill Suites Western 12/9/05 147   19,500
Ft. Worth Texas Homewood Suites Hilton 5/24/05 137   9,097
Ft. Worth Texas Residence Inn Western 5/6/05 149   17,000
Ft. Worth Texas SpringHill Suites Marriott 5/28/04 145   13,340
Laredo Texas Homewood Suites Western 11/30/05 106   10,500
Laredo Texas Residence Inn Western 9/12/05 109   11,445
Las Colinas Texas TownePlace Suites Western 6/30/05 136   7,178
McAllen Texas Hilton Garden Inn Western 7/19/05 104   9,000
Fredericksburg Virginia Hilton Garden Inn Hilton 12/20/05 148   16,600
Kent Washington TownePlace Suites Inn Ventures 12/19/05 152   12,000
Mukilteo Washington TownePlace Suites Inn Ventures 12/19/05 128   12,000
Redmond Washington Marriott Marriott 7/7/04 262   64,000
Renton Washington Hilton Garden Inn Inn Ventures 11/30/05 150   16,096
             Total 7,897 $ 845,330

17


     With the exception of approximately $54 million of assumed debt secured by 14 hotels, substantially all of the purchase price for the hotels was funded by proceeds from the Company’s best-efforts offering of Units. No goodwill or intangible assets were recorded in connection with any of the acquisitions. The Company leased all of its hotels to wholly-owned taxable REIT subsidiaries (collectively, the “lessee”) under master hotel lease agreements. The Company also used the proceeds of its offering to pay 2% of the gross purchase price for these hotels, which equals approximately $16.9 million, as a commission to Apple Six Realty Group, Inc. (“ASRG”). ASRG is 100% owned by the Company’s Chairman and Chief Executive Officer, Glade M. Knight.

Management and Franchise Agreements

     Each of the Company’s 68 hotels are operated and managed, under separate management agreements, by affiliates of one of the following companies: Marriott International, Inc. (“Marriott”), Stonebridge Realty Advisors, Inc. (“Stonebridge”), Hilton Hotels Corporation (“Hilton”), Western International (“Western”), Larry Blumberg & Associates (“LBA”), White Lodging Services Corporation (“WLS”), Inn Ventures, Inc. (“Inn Ventures”), or Newport Hospitality Group, Inc. (“Newport”). The agreements have remaining terms ranging from 2 to 26 years. Fees associated with the agreements generally include the payment of base management fees, incentive management fees, accounting fees, and other fees for centralized services which are allocated among all of the hotels that receive the benefit of such services. Base management fees are calculated as a percentage of gross revenues. Incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements. The Company has the option to terminate the management agreements if specified performance thresholds are not satisfied. During the years ended December 31, 2008, 2007 and 2006 the Company incurred approximately $9.8, $9.9 and $8.7 million in management fees.

     Stonebridge, Western, LBA, WLS, Inn Ventures and Newport are not affiliated with either Marriott or Hilton, and as a result, the hotels managed by these companies were required to obtain separate franchise agreements with each respective franchisor. The Hilton franchise agreements generally provide for a term of 13 to 20 years. Fees associated with the Hilton agreements generally include the payment of royalty fees and program fees based on room revenues. The Marriott franchise agreements provide for an initial term of 15 to 20 years. Fees associated with the Marriott agreements include the payment of royalty fees, marketing fees, reservation fees and a communications support fee based on room revenues. During the years ended December 31, 2008, 2007 and 2006 the Company incurred approximately $10.5, $10.3 and $9.0 million in franchise fees.

Results of Operations for Years 2008 and 2007

     Hotel performance is impacted by many factors including the economic conditions in the United States, as well as each locality. Due to a general decline in economic conditions throughout the United States, the Company experienced its first decline in net income in the fourth quarter of 2008 as compared to the fourth quarter of 2007. The decline is expected to continue throughout 2009.

Revenues

     The Company’s principal source of revenue is hotel room revenue and other related revenue. Hotel operations are for the 68 hotels acquired through December 31, 2008 for their respective periods owned. For the years ended December 31, 2008 and 2007, the Company had total hotel revenue of $258 and $257 million, respectively. For the years ended December 31, 2008 and 2007, the hotels achieved average occupancy of 70.7% and 73.9%, average daily rate, or ADR of $117 and $113 and revenue per available room, or RevPAR of $83 and $84. 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 Company continually works with the hotel managers to maximize rates, and as a result managed to keep RevPAR consistent in the face of declining occupancy in 2008. The Company’s overall average RevPAR market yield (a comparison of an individual hotel’s results to other hotels in its local market) increased 0.4% as compared to 2007. However, as supply of hotel rooms in markets that the Company serves has begun to meet demand and general economic conditions have deteriorated, the Company’s revenue has begun to decline as compared to previous years. In the fourth quarter of 2008, RevPAR was down approximately 9% compared to the fourth quarter of 2007. The Company anticipates this trend to continue into 2009. Although it is not possible to predict when economic conditions will improve or their impact on the hotel industry, many industry analysts forecast 10-15% declines in RevPAR in 2009 as compared to 2008 rates.

Expenses

     Expenses for the years ended December 31, 2008 and 2007 represented the expenses related to the 68 hotels acquired through December 31, 2008 for their respective periods owned.

     For the years ended December 31, 2008 and 2007, hotel operating expenses totaled $147.8 and $144.9 million, or 57% of total hotel revenue in 2008 and 56% of total hotel revenue in 2007. The increase in expenses as a percent of revenue

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results from several factors, including: spending to upgrade amenities such as food and beverage offerings and linens on certain brands, increases in labor costs, the opening of one new hotel and the renovation of nine hotels during the year which led to approximately 16,000 room nights out of service. The Company will continue to aggressively work with its managers to reduce operating costs as revenue declines; however, declines in costs will not offset declines in revenue.

     Taxes, insurance, and other expenses for the years ended December 31, 2008 and 2007 were $13.8 and $13.6 million, or 5% of total hotel revenue in 2008 and 2007. The Company expects 2009 property insurance and property taxes to remain consistent with 2008 expenses.

     General and administrative expense for the years ended December 31, 2008 and 2007 was $5.4 and $5.6 million, or 2% of total hotel revenue in 2008 and 2007. The principal components of general and administrative expense are advisory fees, legal fees, accounting fees and reporting expense.

     Depreciation expense for the years ended December 31, 2008 and 2007 was $30.9 and $27.7 million. Depreciation expense represents the expense of the Company’s 68 hotels and related personal property for their respective periods owned. The increase in depreciation is primarily due to the addition of the Roanoke Rapids Hilton Garden Inn in March 2008 and the addition of $14 million of capital expenditures throughout the year.

     Interest expense, net was $1.8 and $1.9 million for the years ended December 31, 2008 and 2007. Interest expense relates to debt assumed with 14 of the properties acquired as well as a line of credit entered into in March 2008. Total debt assumed was approximately $54.1 million. Interest expense decreased from year to year as $0.4 million of interest costs were capitalized in conjunction with the renovation of nine of the Company’s hotels and the Company extinguished $22 million of outstanding debt with the maturity of seven notes payable during the year. The decline in interest expense, due to the capitalization of interest and the maturity of certain notes, was offset by a reduction in interest income. Interest income declined due to a reduction in cash on hand related to the hotel acquisition and debt maturities.

Results of Operations for Years 2007 and 2006

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 December 31, 2007 for their respective periods owned. For the years ended December 31, 2007 and 2006, the Company had total hotel revenue of $257 and $236 million, respectively. For the years ended December 31, 2007 and 2006, the hotels achieved average occupancy of 73.9% and 74.5%, average daily rate, or ADR of $113 and $105 and revenue per available room, or RevPAR of $84 and $78. 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.

Expenses

     Expenses for the years ended December 31, 2007 and 2006 represented the expenses related to the 67 hotels acquired through December 31, 2007 for their respective periods owned.

     For the years ended December 31, 2007 and 2006, hotel operating expenses totaled $144.9 and $135.6 million, or 56% of total hotel revenue in 2007 and 57% of total hotel revenue in 2006. This percentage has decreased as revenues for newly opened properties have increased and ADR has increased.

     Taxes, insurance, and other expenses for the years ended December 31, 2007 and 2006 were $13.6 and $13.5 million, or 5% of total hotel revenue in 2007 and 6% of total hotel revenue in 2006, as these expenses remained stable on a growing revenue base.

     General and administrative expense for the years ended December 31, 2007 and 2006 was $5.6 and $5.4 million, or 2% of total hotel revenue in 2007 and 2006. The principal components of general and administrative expense are advisory fees, legal fees, accounting fees and reporting expense.

     Depreciation expense for the years ended December 31, 2007 and 2006 was $27.7 and $25.5 million. Depreciation expense represents the expense of the Company’s 67 hotels and related personal property for their respective periods owned.

     Interest expense for the years ended December 31, 2007 and 2006 was $3.1 and $3.0 million. Interest expense arose from debt assumed with 14 of the hotels acquired in 2005 and 2006.

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     For the years ended December 31, 2007 and 2006, the Company had interest income of $1.3 and $1.2 million. Interest income represents earnings on excess cash invested in short term money market instruments, pending investment in hotel properties or other capital investments.

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 December 31, 2008, total payments to ASRG for services under the terms of this contract were $16.9 million, which was capitalized as a part of the purchase price of the hotels. The Company incurred fees totaling approximately $0.4 million in 2008 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, are payable for these services. Until May 2007, ASA utilized Apple Hospitality Two, Inc. to provide these services. From May to October 2007, ASA utilized Apple Fund Management, LLC, a subsidiary of Apple Hospitality Five, Inc. (“AHF”) to provide these services. In October 2007, AHF merged with an unrelated third party and the Company acquired all of AHF’s interest in Apple Fund Management, LLC at no incremental cost to the Company. The advisory fees incurred under the agreement with ASA in 2008, 2007 and 2006 were approximately $2.5, $2.5 and $2.3 million, respectively.

     Effective October 2007, through its wholly-owned subsidiary, Apple Fund Management, LLC, the Company provides support services to ASRG, ASA, Apple Seven Advisors, Inc. (“A7A”), Apple Suites Realty Group, Inc. (“Suites”), Apple REIT Seven, Inc., Apple Eight Advisors, Inc. (“A8A”), Apple REIT Eight, Inc.. Apple Nine Advisors, Inc. (“A9A”) and Apple REIT Nine, Inc. A7A provides day to day advisory and administrative functions for Apple REIT Seven, Inc. A8A provides day to day advisory and administrative functions for Apple REIT Eight, Inc. A9A provides day to day advisory and administrative functions for Apple REIT Nine, Inc. Suites provides real estate brokerage services to Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. Each of these companies has agreed to reimburse the Company for its costs in providing these services. For the years ended December 31, 2008 and 2007, the Company received reimbursement of its costs totaling approximately $4.6 and $0.9 million. ASRG, ASA, A7A, Suites, A8A and A9A are 100% owned by Glade Knight, the Company’s Chairman and Chief Executive Officer.

     The Company, through a jointly-owned subsidiary, Apple Air Holding, LLC, owns two Lear 40 jets used primarily for renovation and asset management purposes. The total purchase price for the aircraft, purchased in January 2006 and December 2007, was approximately $16.0 million. Apple Air Holding, LLC is jointly owned by the Company and Apple REIT Seven, Inc. (“Apple Seven”). Apple Seven’s ownership interest is accounted for as a minority interest and is included in other liabilities on the Company’s consolidated balance sheets with balances of $6.6 and $7.5 million at December 31, 2008 and 2007. The aircraft are also leased to affiliates of the Company at market rates. In 2008, revenues from affiliates totaling $1.5 million are included in reimbursed expenses on the Company’s consolidated statement of operations. The aircraft are depreciated on a straight-line basis over a useful life of ten years. For the years ended December 31, 2008, 2007 and 2006, the Company recorded depreciation expense in the amount of approximately $1.6, $0.9 and $0.8 million on the two aircraft.

     Including ASRG, Suites, ASA, A7A, A8A and A9A discussed above, Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Seven, Inc. (a hotel REIT), Apple REIT Eight, Inc. (a hotel REIT) and Apple REIT Nine, Inc. (a newly formed company that intends to qualify as a diversified 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., Apple REIT Eight, Inc. and Apple REIT Nine, 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.

     The Company has issued 240,000 Series B convertible preferred shares to Mr. Knight in exchange for the payment by him of $0.10 per Series B convertible preferred share, or an aggregate of $24,000. The Series B convertible preferred shares are convertible into common shares pursuant to the formula and on the terms and conditions set forth below.

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     There are no dividends payable on the Series B convertible preferred shares. Holders of more than two-thirds of the Series B convertible preferred shares must approve any proposed amendment to the articles of incorporation that would adversely affect the Series B convertible preferred shares.

     Upon the Company’s liquidation, the holder of the Series B convertible preferred shares is entitled to a priority liquidation payment before any distribution of liquidation proceeds to the holders of the common shares. However, the priority liquidation payment of the holder of the Series B convertible preferred shares is junior to the holders of the Series A preferred shares distribution rights. The holder of a Series B convertible preferred share is entitled to a liquidation payment of $11 per number of common shares each Series B convertible preferred share would be convertible into according to the formula described below. In the event that the liquidation of the Company’s assets results in proceeds that exceed the distribution rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed between the common shares and the Series B convertible preferred shares, on an as converted basis.

     Each holder of outstanding Series B convertible preferred shares shall have the right to convert any of such shares into common shares of the Company upon and for 180 days following the occurrence of any of the following events:

(1) substantially all of the Company’s assets, stock or business is sold or transferred through exchange, merger, consolidation, lease, share exchange, sale or otherwise, other than a sale of assets in liquidation, dissolution or winding up of the Company;

(2) the termination or expiration without renewal of the advisory agreement with ASA, or if the Company ceases to use ASRG to provide property acquisition and disposition services; or

(3) the Company’s common shares are listed on any securities exchange or quotation system or in any established market.

     Upon the occurrence of any conversion event, each Series B convertible preferred share may be converted into 24.17104 common shares. In the event that the Company raises additional gross proceeds in a subsequent public offering, each Series B convertible preferred share may be converted into an additional number of common shares based on the additional gross proceeds raised through the date of conversion in a subsequent public offering according to the following formula: (X/50 million) x 1.20568, where X is the additional gross proceeds rounded down to the nearest 50 million.

     No additional consideration is due upon the conversion of the Series B convertible preferred shares. The conversion into common shares of the Series B convertible preferred shares will result in dilution of the shareholders’ interests.

     Expense related to issuance of 240,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B shares to common shares occurs. The expense will be measured as the difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares. Expense if a conversion event had occurred at December 31, 2008 could range from $0 to $63.8 million (assumes $11 per Unit fair market value), which represents approximately 5.8 million shares of common stock.

Liquidity and Capital Resources

The following is a summary of the Company’s significant contractual obligations as of December 31, 2008:

 
Amount of Commitments Expiring per Period
Commercial Commitments
              (000’s)

Total
  Less than
1 Year
2-3 Years 4-5 Years Over
5 Years
Debt (including interest of $7.7 million)   $ 36,150 $ 2,813   $ 11,951 $ 15,505 $    5,881
Ground Lease Commitments     4,211   310     648   660      2,593
Total Commercial Commitments   $ 40,361 $ 3,123   $ 12,599 $ 16,165 $    8,474

Capital Requirements and Resources

     Operating cash flow from the properties owned, cash on hand ($0.9 million at December 31, 2008) and a $20 million line of credit 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, over the next year, cash flow, cash on hand and the line of credit 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 distribution requirements, capital expenditures and debt service.

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     To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions in 2008 totaled $81.7 million and were paid monthly at a rate of $0.075 per common share beginning in February 2008 and $0.073 per common share prior to that date. These distributions included a return of capital. For the same period the Company’s cash generated from operations was $88.7 million. The Company intends to continue paying distributions on a monthly basis. However, since there can be no assurance of the ability of the Company’s properties to provide income at this level, there can be no assurance as to the classification or duration of distributions at the current rate. Additionally, in light of the weakness in economic conditions throughout the United States, the Board of Directors monitors the Company’s distribution rate relative to the performance of the hotels on an ongoing basis and may make adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company.

     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 completed significant renovations of nine hotels in 2008, with total capital expenditures of approximately $14 million. The company anticipates expenditures of approximately $15 million in 2009 in connection with renovations on 5 to 8 hotels.

     In February 2006, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. As of December 31, 2008, approximately 8.3 million Units, representing $90.9 million in proceeds to the Company, have been issued under the plan, including 3.2 million Units representing $35.6 million issued in 2008 and 3.0 million Units representing $33.3 million issued in 2007.

     In July 2005, the Company instituted a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equal to the lesser of: (1) the purchase price per Unit that the shareholder actually paid for the Unit; or (2) $11.00 per Unit. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As of December 31, 2008, the Company has redeemed 7.6 million Units in the amount of $83.6 million under the program, including 1.8 million Units for $19.3 million redeemed in 2008 and 2.5 million Units in the amount of $27.7 million redeemed in 2007.

Subsequent Events

     In January 2009, the Company declared and paid $6.9 million or $.075 per common share, in a distribution to its common shareholders, of which $2.9 million or 266,705 Units were reinvested under the Company’s Dividend Reinvestment Plan.

     On January 20, 2009, the Company redeemed 1.1 million Units in the amount of $12.3 million under its Unit Redemption Program.

     In February 2009, the Company declared and paid $6.8 million or $.075 per common share, in a distribution to its common shareholders, of which $3.0 million or 268,265 Units were reinvested under the Company’s Dividend Reinvestment Plan.

Impact of Inflation

     Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the operators’ ability to raise room rates. Currently the Company is not experiencing any material impact from inflation.

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.

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Seasonality

     The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available credit to make distributions.

Critical Accounting Policies

     The following contains a discussion of what the Company believes to be critical accounting policies. These items should be read to gain a further understanding of the principles used to prepare the Company’s financial statements. These principles include application of judgment; therefore, changes in judgments may have a significant impact on the Company’s reported results of operations and financial condition.

Capitalization Policy

     The Company considers expenditures to be capital in nature based on the following criteria: (1) for a single asset, the cost must be at least $500, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2) for group purchases of 10 or more identical assets, the unit cost for each asset must be at least $50, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; and (3) for major repairs to buildings, the repair must be at least $2,500 and the useful life of the asset must be substantially extended.

Impairment Losses Policy

     The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective properties are less than the properties’ carrying amounts. Impairment losses are measured as the difference between the asset’s fair value less cost to sell, and its carrying value. No impairment losses have been recorded to date.

Recently Adopted Accounting Pronouncements

     In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. In February 2008, the FASB released FASB Staff Position (FSP) FAS 157-2 – Effective Date of FASB Statement No. 157, which defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities, except those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The effective date of the statement related to those items not covered by the deferral (all financial assets and liabilities or nonfinancial assets and liabilities recorded at fair value on a recurring basis) is for fiscal years beginning after November 15, 2007. The adoption of this statement did not have and is not anticipated to have a material impact on the Company’s results of operations or financial position.

     In February 2007, FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the guidance is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. SFAS 159 was effective for the Company beginning January 1, 2008. The Company has elected not to use the fair value measurement provisions of SFAS 159 and therefore, adoption of this standard did not have an impact on the financial statements.

Recently Issued Accounting Pronouncements

     In December 2007, the FASB issued FASB Statement No. 141R, Business Combinations (“SFAS 141R”). This statement revises SFAS 141, Business Combinations, by requiring an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This method replaces the cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. A significant change included in SFAS 141R is the requirement that costs incurred to effect an acquisition, as well as restructuring costs resulting

23


from an acquisition, must be accounted for separately as expenses. These costs were previously capitalized as part of the cost of the acquisition. Another significant change is the requirement that pre-acquisition contingencies be recognized at fair value as of the date of acquisition if it is more likely than not that they will meet the definition of an asset or liability. Statement 141R will be adopted by the Company in the first quarter of 2009. The adoption of the statement is not anticipated to have a material impact on the Company’s results of operations or financial position, as the Company does not anticipate the acquisition of any significant businesses after the effective date.

     In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. The Statement also requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. SFAS 160 will be adopted by the Company in the first quarter of 2009. The adoption of the statement is not anticipated to have a material impact on the Company’s results of operations or financial position.

     In March 2008, FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under SFAS 133. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not currently have any instruments that qualify within the scope of SFAS 133, and therefore the adoption of this statement is not anticipated to have a material impact on the Company’s financial statements.

Item 7A.    Quantitative and Qualitative Disclosure About Market Risk

     The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of December 31, 2008, the Company’s financial instruments were not exposed to significant market risk due to interest rate risk, foreign currency exchange risk, commodity price risk or equity price risk. The Company will be exposed to changes in short term money market rates as it invests its cash. Based on the Company’s cash invested at December 31, 2008, of $0.9 million, every 100 basis points change in interest rates will impact the Company’s net income by $9,000, all other factors remaining the same. Although the Company had no outstanding balance on its $20 million line of credit at December 31, 2008, the Company is exposed to changes in short-term interest rates to the extent that it utilizes the line of credit.

     The Company has assumed fixed interest rate notes payable to lenders under permanent financing arrangements. The following table summarizes the annual maturities and average interest rates of the Company’s notes payable outstanding at December 31, 2008.

                                             
(000’s) 2009   2010   2011   2012   2013   Thereafter   Total Fair
Market

Value
Maturities   $ 791   $ 850   $ 7,546   $ 756   $ 13,022   $ 5,528   $ 28,493 $ 31,161
Average Interest Rate     7.1 %   7.1 %   6.9 %   6.7 %   6.6 %   6.4 %        

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Item 8.     Financial Statements and Supplementary Data

Report of Management
on Internal Control Over Financial Reporting

March 3, 2009
To the Shareholders
Apple REIT Six, Inc.

     Management of Apple REIT Six, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.

     The Company’s internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In connection with the preparation of the Company’s annual consolidated financial statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls.

     Based on this assessment, management has concluded that as of December 31, 2008, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

     Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this report, has issued an attestation report on the Company’s internal control over financial reporting, a copy of which appears on the next page of this annual report.

      /s/ GLADE M. KNIGHT     /s/ BRYAN PEERY
Glade M. Knight
Chairman and Chief Executive Officer
Bryan Peery
Chief Financial Officer
(Principal Accounting Officer)
 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Apple REIT Six, Inc.

     We have audited Apple REIT Six Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Apple REIT Six Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our opinion, Apple REIT Six, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2008 consolidated financial statements of Apple REIT Six, Inc. and our report dated March 2, 2009 expressed an unqualified opinion thereon.

                                                                                                                                                /s/ ERNST & YOUNG LLP

Richmond, Virginia
March 2, 2009

26


Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Apple REIT Six, Inc.

     We have audited the accompanying consolidated balance sheets of Apple REIT Six, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the index at Item 15(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Apple REIT Six, Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Apple REIT Six, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2009 expressed an unqualified opinion thereon.

                                                                                                                                           /s/ ERNST & YOUNG LLP

Richmond, Virginia
March 2, 2009

27


Apple REIT Six, Inc.
Consolidated Balance Sheets
(in thousands, except share data)

  December 31,
2008
  December 31,
2007
 
     
ASSETS            
       Investment in real estate, net of accumulated depreciation of $94,005 and $64,692, respectively $ 823,463   $ 820,468  
       Cash and cash equivalents   935     33,261  
       Restricted cash-furniture, fixtures and other escrows   3,872     3,928  
       Due from third party manager, net   7,804     8,855  
       Other assets, net   13,709     16,145  
 
TOTAL ASSETS $ 849,783   $ 882,657  
 
LIABILITIES            
       Notes payable $ 29,097   $ 51,679  
       Other liabilities   11,304     14,734  
 
TOTAL LIABILITIES   40,401     66,413  
 
SHAREHOLDERS' EQUITY            
       Preferred stock, authorized 15,000,000 shares; none issued and outstanding   -     -  
           
       Series A preferred stock, no par value, authorized 200,000,000 shares;
              issued and outstanding 91,761,828 and 90,280,401 shares, respectively
  -     -  
           
       Series B convertible preferred stock, no par value, authorized 240,000 shares;
              issued and outstanding 240,000 and 240,000 shares, respectively
  24     24  
           
       Common stock, no par value, authorized 200,000,000 shares;
              
issued and outstanding 91,761,828 and 90,280,401 shares, respectively
  905,260     888,878  
       Distributions greater than net income   (95,902 )   (72,658 )
 
TOTAL SHAREHOLDERS' EQUITY   809,382     816,244  
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 849,783   $ 882,657  

See notes to consolidated financial statements.

28


 

Apple REIT Six, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)

Year ended
December 31, 2008
Year ended
December 31, 2007
Year ended
December 31, 2006
Revenues:                  
     Room revenue $ 238,423   $ 236,278   $ 217,629  
     Other revenue   19,822     20,770     18,246  
     Reimbursed expenses   6,057     886     -  
Total revenue   264,302     257,934     235,875  
 
Expenses:                  
     Operating expense   64,939     63,748     61,758  
     Hotel administrative expense   21,097     20,298     18,448  
     Sales and marketing   19,253     19,692     18,297  
     Utilities   10,578     9,765     9,592  
     Repair and maintenance   11,660     11,237     9,749  
     Franchise fees   10,521     10,256     9,004  
     Management fees   9,784     9,935     8,730  
     Taxes, insurance and other   13,812     13,605     13,491  
     General and administrative   5,397     5,637     5,355  
     Reimbursed expenses   6,057     886     -  
     Depreciation expense   30,918     27,694     25,529  
Total expenses   204,016     192,753     179,953  
 
     Operating income   60,286     65,181     55,922  
 
     Interest income   458     1,289     1,220  
     Interest expense   (2,242 )   (3,142 )   (3,029 )
 
Net income $ 58,502   $ 63,328   $ 54,113  
 
Basic and diluted net income per common share $ 0.64   $ 0.71   $ 0.61  
 
Weighted average common shares outstanding - basic and diluted   90,899     89,644     88,869  
 
Distributions declared per common share $ 0.90   $ 0.88   $ 0.88  

See notes to consolidated financial statements.

29


Apple REIT Six, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands except per share data)

Common Stock  Class B Convertible
Preferred Stock
Distributions
Greater
Total
Number of Number of than Shareholders'
  Shares Amount Shares Amount Net income Equity
Balance at December 31, 2005 81,775   $ 805,079   240   $ 24   $ (33,268 ) $ 771,835  
 
Net proceeds from the sale of common shares 10,914     109,957                -   -   -     109,957  
Stock options granted -     69                -   -   -     69  
Common shares redeemed (2,916 )   (31,931 )              -   -   -     (31,931 )
Net income -     -                -   -   54,113     54,113  
Cash distributions declared and paid to shareholders ($.88 per share) -     -                -   -   (77,997 )   (77,997 )
 
Balance at December 31, 2006 89,773     883,174   240   24   (57,152 )   826,046  
 
Net proceeds from the sale of common shares 3,028     33,309                -   -   -     33,309  
Stock options granted -     68                -   -   -     68  
Common shares redeemed (2,521 )   (27,673 )              -   -   -     (27,673 )
Net income -     -                -   -   63,328     63,328  
Cash distributions declared and paid to shareholders ($.88 per share) -     -                -   -   (78,834 )   (78,834 )
 
Balance at December 31, 2007 90,280     888,878   240   24   (72,658 )   816,244  
 
Net proceeds from the sale of common shares 3,237     35,609                -   -   -     35,609  
Stock options granted -     57                -   -   -     57  
Common shares redeemed (1,755 )   (19,284 )              -   -   -     (19,284 )
Net income -     -                -   -   58,502     58,502  
Cash distributions declared and paid to shareholders ($.90 per share) -     -                -   -   (81,746 )   (81,746 )
 
Balance at December 31, 2008 91,762   $ 905,260   240 $ 24 $ (95,902

)

$ 809,382  
 
See notes to consolidated financial statements.                            

30


Apple REIT Six, Inc.
Consolidated Statements of Cash Flows
(in thousands)

  Year ended
December 31, 2008
  Year ended
December 31, 2007
  Year ended
December 31, 2006
 
       
Cash flow provided by operating activities:                  
Net income $ 58,502   $ 63,328   $ 54,113  
                 
Adjustments to reconcile net income to cash provided by operating activities:                  
Depreciation   30,918     27,694     25,529  
Amortization of deferred financing costs and fair value adjustments   (223 )   (407 )   (418 )
Stock option expense   57     68     69  
Changes in operating assets and liabilities, net of amounts acquired/assumed:                  
           Due from third party manager   1,051     93     (1,132 )
           Other assets   435     (341 )   142  
           Other liabilities   (1,993 )   (587 )   3,060  
                       Net cash provided by operating activities   88,747     89,848     81,363  
 
Cash flow from investing activities:                  
     Cash paid in acquisition of hotels   (18,159 )   -     (37,180 )
     Acquisition of other assets   (325 )   (7,647 )   (9,181 )
     Capital improvements   (14,950 )   (7,988 )   (15,714 )
     Net (increase) decrease in cash restricted for property improvements   (189 )   (842 )   309  
     Other investing activities, net   389     850     -  
                       Net cash used in investing activities   (33,234 )   (15,627 )   (61,766 )
 
Cash flow from financing activities:                  
     Net payments on unsecured note payable   -     -     (28,000 )
     Payment of financing costs   (225 )   -     (101 )
     Repayment of secured notes payable   (22,193 )   (1,445 )   (1,313 )
     Minority interest contributions   -     7,523     -  
     Net proceeds from issuance of common stock   35,609     33,309     109,957  
     Redemptions of common stock   (19,284 )   (27,673 )   (31,931 )
     Cash distributions paid to shareholders   (81,746 )   (78,834 )   (77,997 )
                       Net cash used in financing activities   (87,839 )   (67,120 )   (29,385 )
 
                       Increase (decrease) in cash and cash equivalents   (32,326 )   7,101     (9,788 )
 
Cash and cash equivalents, beginning of period   33,261     26,160     35,948  
 
Cash and cash equivalents, end of period $ 935   $ 33,261   $ 26,160  
 
 
Supplemental information:                  
     Interest paid $ 3,044   $ 3,774   $ 4,037  
 
Non-cash transactions:                  
     Notes payable assumed in acquisitions $ -   $ -   $ 6,663  

See notes to consolidated financial statements.

31


Notes to Consolidated Financial Statements

Note 1

General Information and Summary of Significant Accounting Policies

Organization

     Apple REIT Six, Inc. (the “Company”) is a Virginia corporation formed to invest in real estate in select metropolitan areas in the United States. Initial capitalization occurred on January 20, 2004 and operations began on May 28, 2004 when the Company acquired its first hotel. The Company has no foreign operations or assets and its operations include only one segment. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

     The Company has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The REIT Modernization Act, effective January 1, 2001, permits real estate investment trusts to establish taxable businesses to conduct certain previously disallowed business activities. The Company has formed wholly-owned taxable REIT subsidiaries (collectively, the “Lessee”), which lease all of the Company’s hotels.

Cash and Cash Equivalents

     Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value. All cash and cash equivalents are currently held at one institution, Wachovia Bank, N.A, and the balances may at times exceed federal depository insurance limits.

Investment in Hotels and Related Depreciation

     The hotels are stated at cost, net of depreciation, and include real estate brokerage commissions paid to Apple Six Realty Group, Inc. (“ASRG”), a related party 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company. Repair and maintenance costs are expensed as incurred while significant improvements, renovations, and replacements are capitalized. Depreciation is computed using the straight-line method over estimated useful lives of the assets, which are 39 years for buildings, ten years for major improvements and three to seven years for furniture and equipment.

     The Company considers expenditures to be capital in nature based on the following criteria: (1) for a single asset, the cost must be at least $500, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2) for group purchases of 10 or more identical assets, the unit cost for each asset must be at least $50, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; and (3) for major repairs to buildings, the repair must be at least $2,500 and the useful life of the asset must be substantially extended.

     The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the undiscounted cash flows estimated to be generated by the respective properties are less than their carrying amount. Impairment losses are measured as the difference between the asset’s fair value less cost to sell, and its carrying value. No impairment losses have been recorded to date.

     The purchase price of real estate properties acquired is allocated to the various components, such as land, buildings and improvements, intangible assets and in-place leases as appropriate, in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations”. The purchase price is allocated based on the fair value of each component at the time of acquisition. Generally, the Company does not acquire real estate assets that have in-place leases as lease terms for hotel properties are very short term in nature. There has been no allocation of purchase price to intangible assets such as management contracts and franchise agreements as such contracts are generally at current market rates and any other value attributable to these contracts is not considered material.

Revenue Recognition

     Revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services.

Comprehensive Income

     The Company recorded no comprehensive income other than net income for the years ended December 31, 2008, 2007 and 2006.

32


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 common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. There were no shares with a dilutive effect for the years ended December 31, 2008, 2007 and 2006. As a result, basic and dilutive outstanding shares were the same. Series B convertible preferred shares are not included in earnings per common share calculations until such time the Series B convertible preferred shares are converted to common shares (see Note 5).

Federal Income Taxes

     The Company is operated as, and has elected to be taxed as, a REIT under Sections 856 to 860 of the Internal Revenue Code. Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from income reported for financial reporting purposes primarily due to the differences for federal income tax purposes in the estimated useful lives used to compute depreciation. The characterization of 2008 distributions of $0.90 per common share for tax purposes was 85% ordinary income and 15% return of capital, 2007 distributions of $0.88 per common share for tax purposes was 90% ordinary income and 10% return of capital, and 2006 distributions of $0.88 per common share for tax purposes was 82% ordinary income and 18% return of capital (unaudited).

     The Lessee, as a taxable REIT subsidiary of the Company, is subject to federal and state income taxes. The taxable REIT subsidiary incurred a loss for the years ended December 31, 2008, 2007 and 2006, and therefore did not have any federal tax expense. No operating loss benefit has been recorded in the consolidated balance sheet since realization is uncertain. Total net operating loss carry forward for federal income tax purposes was approximately $28.0 million as of December, 31, 2008. The net operating losses expire beginning in 2024. There are no material differences between the book and tax basis of the Company’s assets.

Sales and Marketing Costs

     Sales and marketing costs are expensed when incurred. These costs represent the expense for franchise advertising and reservation systems under the terms of the hotel management and franchise agreements and general and administrative expenses that are directly attributable to advertising and promotion.

Use of Estimates

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

Recently Adopted Accounting Pronouncements

     In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. In February 2008, the FASB released FASB Staff Position (FSP) FAS 157-2 – Effective Date of FASB Statement No. 157, which defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities, except those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The effective date of the statement related to those items not covered by the deferral (all financial assets and liabilities or nonfinancial assets and liabilities recorded at fair value on a recurring basis) is for fiscal years beginning after November 15, 2007. The adoption of this statement did not have and is not anticipated to have a material impact on the Company’s results of operations or financial position.

     In February 2007, FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the guidance is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. SFAS 159 was effective for the Company beginning January 1, 2008. The Company has elected not to use the fair value measurement provisions of SFAS 159 and therefore, adoption of this standard did not have an impact on the financial statements.

33


Recently Issued Accounting Pronouncements

     In December 2007, the FASB issued FASB Statement No. 141R, Business Combinations (“SFAS 141R”). This statement revises SFAS 141, Business Combinations, by requiring an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This method replaces the cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. A significant change included in SFAS 141R is the requirement that costs incurred to effect an acquisition, as well as restructuring costs resulting from an acquisition, must be accounted for separately as expenses. These costs were previously capitalized as part of the cost of the acquisition. Another significant change is the requirement that pre-acquisition contingencies be recognized at fair value as of the date of acquisition if it is more likely than not that they will meet the definition of an asset or liability. Statement 141R will be adopted by the Company in the first quarter of 2009. The adoption of the statement is not anticipated to have a material impact on the Company’s results of operations or financial position, as the Company does not anticipate the acquisition of any significant businesses after the effective date.

     In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 requires that ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. The Statement also requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. SFAS 160 will be adopted by the Company in the first quarter of 2009. The adoption of the statement is not anticipated to have a material impact on the Company’s results of operations or financial position.

     In March 2008, FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under SFAS 133. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not currently have any instruments that qualify within the scope of SFAS 133, and therefore the adoption of this statement is not anticipated to have a material impact on the Company’s financial statements.

Note 2

Investments in Real Estate

     As of December 31, 2008, the Company owned 68 hotels consisting of the following: fourteen Hilton Garden Inn hotels, ten Residence Inn hotels, ten Courtyard hotels, eight SpringHill Suites hotels, six Homewood Suites hotels, six TownePlace Suites hotels, five Fairfield Inn hotels, four Hampton Inn hotels, three Hampton Inn & Suites hotels and two Marriott hotels. The hotels are located in various states and, in aggregate, consist of 7,897 rooms.

Investment in hotels consisted of the following (in thousands):

  December 31, 2008   December 31, 2007  
Land   $ 109,621   $ 107,163  
Building and Improvements   748,729     728,005  
Furniture, Fixtures and Equipment   59,118     49,992  
    917,468     885,160  
Less Accumulated Depreciation   (94,005 )   (64,692 )
Investment in Real Estate, net $ 823,463   $ 820,468  

     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.

34


City   State   Brand   Manager   Date
Acquired
  Rooms Gross
Purchase
Price
Ft. Worth Texas SpringHill Suites Marriott 5/28/04 145 $ 13,340
Myrtle Beach South Carolina Courtyard Marriott 6/8/04 135   9,200
Redmond Washington Marriott Marriott 7/7/04 262   64,000
Anchorage Alaska Hilton Garden Inn Stonebridge 10/12/04 125   18,900
Anchorage Alaska Homewood Suites Stonebridge 10/12/04 122   13,200
Arcadia California Hilton Garden Inn Stonebridge 10/12/04 124   12,000
Arcadia California SpringHill Suites Stonebridge 10/12/04 86   8,100
Glendale Colorado Hampton Inn & Suites Stonebridge 10/12/04 133   14,700
Lakewood Colorado Hampton Inn Stonebridge 10/12/04 170   10,600
Lake Forest California Hilton Garden Inn Stonebridge 10/12/04 103   11,400
Phoenix Arizona Hampton Inn Stonebridge 10/12/04 99   6,700
Anchorage Alaska Hampton Inn Stonebridge 3/14/05 101   11,500
Bakersfield California Hilton Garden Inn Hilton 3/18/05 120   11,500
Tallahassee Florida Hilton Garden Inn Hilton 3/18/05 99   10,850
Lake Mary Florida Courtyard LBA 3/18/05 86   6,000
Foothill Ranch California Hampton Inn Stonebridge 4/21/05 84   7,400
Ft. Worth Texas Residence Inn Western 5/6/05 149   17,000
Boulder Colorado Marriott WLS 5/9/05 157   30,000
Ft. Worth Texas Homewood Suites Hilton 5/24/05 137   9,097
Nashville Tennessee Homewood Suites Hilton 5/24/05 121   8,103
Albany Georgia Courtyard LBA 6/24/05 84   8,597
Lakeland Florida Residence Inn LBA 6/24/05 78   9,886
Huntsville Alabama Residence Inn LBA 6/24/05 78   8,288
Dothan Alabama Hampton Inn & Suites LBA 6/24/05 85   8,673
Columbus Georgia Residence Inn LBA 6/24/05 78   7,888
Las Colinas Texas TownePlace Suites Western 6/30/05 136   7,178
Arlington Texas TownePlace Suites Western 6/30/05 95   7,148
Arlington Texas SpringHill Suites Western 6/30/05 122   7,486
Tempe Arizona TownePlace Suites Western 6/30/05 119   8,128
Tempe Arizona SpringHill Suites Western 6/30/05 121   8,060
Wallingford Connecticut Homewood Suites WLS 7/8/05 104   12,780
McAllen Texas Hilton Garden Inn Western 7/19/05 104   9,000
Pensacola Florida Hampton Inn & Suites LBA 7/21/05 85   9,279
Rocky Hill Connecticut Residence Inn WLS 8/1/05 96   12,070
Dothan Alabama Courtyard LBA 8/11/05 78   8,016
Somerset New Jersey Homewood Suites WLS 8/17/05 123   17,750
Birmingham Alabama Fairfield Inn LBA 8/25/05 63   2,176
Tuscaloosa Alabama Courtyard LBA 8/25/05 78   7,551
Tuscaloosa Alabama Fairfield Inn LBA 8/25/05 63   3,982
Pensacola Florida Courtyard LBA 8/25/05 90   11,369
Pensacola Florida Fairfield Inn LBA 8/25/05 63   4,858
Pittsburgh Pennsylvania Residence Inn WLS 9/2/05 156   11,000
Laredo Texas Residence Inn Western 9/12/05 109   11,445
Mt. Olive New Jersey Residence Inn WLS 9/15/05 123   12,070
Saratoga Springs New York Hilton Garden Inn WLS 9/29/05 112   17,750
Huntsville Alabama Fairfield Inn LBA 9/30/05 79   4,954
Savannah Georgia SpringHill Suites LBA 9/30/05 79   5,407
Montgomery Alabama SpringHill Suites LBA 9/30/05 79   6,835
Valdosta Georgia Courtyard LBA 10/3/05 84   8,284
Farmington Connecticut Courtyard WLS 10/20/05 119   16,330
Orange Park Florida Fairfield Inn LBA 11/8/05 83   7,221
Folsom California Hilton Garden Inn Inn Ventures 11/30/05 100   18,028
Milpitas California Hilton Garden Inn Inn Ventures 11/30/05 161   18,600
Roseville California Hilton Garden Inn Inn Ventures 11/30/05 131   20,759
Renton Washington Hilton Garden Inn Inn Ventures 11/30/05 150   16,096
Laredo Texas Homewood Suites Western 11/30/05 106   10,500
Dallas Texas SpringHill Suites Western 12/9/05 147   19,500
Hillsboro Oregon TownePlace Suites Inn Ventures 12/19/05 136   11,500
Kent Washington TownePlace Suites Inn Ventures 12/19/05 152   12,000
Mukilteo Washington TownePlace Suites Inn Ventures 12/19/05 128   12,000
Portland Oregon Residence Inn Inn Ventures 12/19/05 258   42,000
Fredericksburg Virginia Hilton Garden Inn Hilton 12/20/05 148   16,600
San Francisco California Hilton Garden Inn Inn Ventures 1/30/06 169   12,266
Clearwater Florida SpringHill Suites LBA 2/17/06 79   6,923
Hillsboro Oregon Residence Inn Inn Ventures 3/9/06 122   15,500
Hillsboro Oregon Courtyard Inn Ventures 3/9/06 155   11,000
Panama City Florida Courtyard LBA 4/26/06 84   9,245
Roanoke Rapids North Carolina Hilton Garden Inn Newport 3/10/08 147   17,764
        Total 7,897 $ 845,330

35


     The Company leased all of its hotels to wholly-owned taxable REIT subsidiaries under master hotel lease agreements. The Company also used the proceeds of its offering to pay 2% of the gross purchase price for these hotels, which equals approximately $16.9 million, as a commission to ASRG.

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

Note 3

Other Assets

     The Company, through a jointly-owned subsidiary, Apple Air Holding, LLC, owns two Lear 40 jets used primarily for renovation and asset management purposes. The total purchase price for the aircraft, purchased in January 2006 and December 2007, was approximately $16.0 million. Apple Air Holding, LLC is jointly owned by the Company and Apple REIT Seven, Inc. (“Apple Seven”). Apple Seven’s ownership interest is accounted for as a minority interest and is included in other liabilities on the Company’s consolidated balance sheets, with balances of $6.6 and $7.5 million at December 31, 2008 and 2007. The aircraft are also leased to affiliates of the Company at market rates. In 2008, revenues from affiliates totaling $1.5 million are included in reimbursed expenses on the Company’s consolidated statement of operations. The aircraft are depreciated on a straight-line basis over a useful life of ten years. For the years ended December 31, 2008, 2007 and 2006, the Company recorded depreciation expense in the amount of approximately $1.6, $0.9 and $0.8 million on the two aircraft.

Note 4

Notes Payable and Credit Agreements

     In conjunction with the acquisition of five hotels in December 2005, the Company utilized short-term unsecured financing from a commercial bank in the amount of $40 million to fund a portion of the aggregate gross purchase price. This financing was evidenced by a promissory note and was governed by a loan agreement. The outstanding principal at December 31, 2005 was $28 million, and the note was repaid and extinguished on January 24, 2006.

     In March 2008, the Company entered into a $20 million unsecured line of credit with a commercial bank. The applicable interest rate is equal to LIBOR (the London Interbank Offered Rate) plus 2%. LIBOR was 0.4% at December 31, 2008. Interest payments are due monthly. The principal must be paid by the maturity date of March 2011, and may be prepaid without penalty. At December 31, 2008, the credit line had no outstanding principal balance.

     The Company also assumed approximately $54.1 million of debt secured by a first mortgage on 14 of its properties. In 2008, the Company paid and extinguished seven of these mortgages. The following table summarizes the hotel, interest rate, maturity date and the principal amount assumed associated with each mortgage. All dollar amounts are in thousands.

             
Location   Brand   Rate   Maturity
Date
  Principal
Assumed
Outstanding
balance as of
Dec. 31, 2008
Outstanding
balance as of
Dec. 31, 2007
Glendale, CO  Hampton Inn & Suites 6.93 %  1/01/13 $ 6,603 $ 5,732 $ 5,964
Anchorage, AK Hampton Inn 7.75 %  4/01/09   5,531   -   4,903
Foothill Ranch, CA Hampton Inn 8.06 %  8/01/11   4,502   4,195   4,287
Dothan, AL Courtyard 7.35 %  4/01/08   3,244   -   3,034
Birmingham, AL Fairfield Inn 7.35 %  5/01/08   2,086   -   1,952
Tuscaloosa, AL Courtyard 7.30 %  5/01/08   3,388   -   3,169
Tuscaloosa, AL Fairfield Inn 7.30 %  5/01/08   1,690   -   1,580
Pensacola, FL Courtyard 7.35 %  5/01/08   4,557   -   4,264
Pensacola, FL Fairfield Inn 7.35 %  5/01/08   2,734   -   2,559
Huntsville, AL Fairfield Inn 6.80 %  1/11/13   3,028   2,831   2,896
Savannah, GA SpringHill Suites 6.80 %  1/11/13   3,066   2,866   2,933
Montgomery, AL SpringHill Suites 6.80 %  1/11/13   3,785   3,538   3,620
Orange Park, FL Fairfield Inn 8.52 %  2/11/11   3,193   3,006   3,071
Hillsboro, OR Courtyard 6.40 % 12/11/14   6,663   6,325   6,454
         Total $ 54,070 $ 28,493 $ 50,686

36


     The aggregate amounts of principal payable under the Company’s promissory notes, for the five years subsequent to December 31, 2008 are as follows (in thousands):

 
  Total
2009 $ 791
2010   850
2011   7,546
2012   756
2013   13,022
Thereafter   5,528
    28,493
Fair Value Adjustment of Assumed Debt   604
           Total $ 29,097

     Fair value adjustments were recorded in connection with the assumption of the above market rate debt in connection with the hotel acquisitions. These premiums are amortized into interest expense over the remaining term of the related indebtedness using the effective interest rate method. The effective rates range from 5.71% to 6.11%. The total adjustment was $2.3 million and the unamortized balances at December 31, 2008 and 2007 were $0.6 million and $1.0 million, respectively. The fair value of the Company’s outstanding debt at December 31, 2008 was approximately $31.2 million.

Note 5

Shareholders’ Equity

     The Company concluded its best-efforts offering of Units on March 3, 2006. The Company registered its Units on Registration Statement Form S-11 (File No. 333-112169) filed April 20, 2004. The Company began its best-efforts offering (the “Offering”) of Units on April 23, 2004, the same day the Registration Statement was declared effective by the Securities and Exchange Commission. Each Unit consists of one common share and one Series A preferred share.

     The Series A preferred shares have no voting rights and no conversion rights. In addition, the Series A preferred shares are not separately tradable from the common shares to which they relate. The Series A preferred shares do not have any distribution rights except a priority distribution upon the sale of the Company’s assets. The priority distribution (“Priority Distribution”) will be equal to $11.00 per Series A preferred share, and will be paid before any distribution will be made to the holders of any other shares. Upon the Priority Distribution the Series A preferred shares will have no other distribution rights.

     The Company has issued 240,000 Series B convertible preferred shares to Glade M. Knight, Chairman and Chief Executive Officer of the Company, in exchange for the payment by him of $0.10 per Series B convertible preferred share, or an aggregate of $24,000. The Series B convertible preferred shares are convertible into common shares pursuant to the formula and on the terms and conditions set forth below.

     There are no dividends payable on the Series B convertible preferred shares. Holders of more than two-thirds of the Series B convertible preferred shares must approve any proposed amendment to the articles of incorporation that would adversely affect the Series B convertible preferred shares.

     Upon the Company’s liquidation, the holder of the Series B convertible preferred shares is entitled to a priority liquidation payment before any distribution of liquidation proceeds to the holders of the common shares. However, the priority liquidation payment of the holder of the Series B convertible preferred shares is junior to the holders of the Series A preferred shares distribution rights. The holder of a Series B convertible preferred share is entitled to a liquidation payment of $11 per number of common shares each Series B convertible preferred share would be convertible into according to the formula described below. In the event that the liquidation of the Company’s assets results in proceeds that exceed the distribution rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed between the common shares and the Series B convertible preferred shares, on an as converted basis.

     Each holder of outstanding Series B convertible preferred shares shall have the right to convert any of such shares into common shares of the Company upon and for 180 days following the occurrence of any of the following events:

(1) substantially all of the Company’s assets, stock or business is sold or transferred through exchange, merger, consolidation, lease, share exchange, sale or otherwise, other than a sale of assets in liquidation, dissolution or winding up of the Company;

37


(2) the termination or expiration without renewal of the advisory agreement with Apple Six Advisors, Inc. (“ASA”), or if the Company ceases to use ASRG to provide property acquisition and disposition services; or

(3) the Company’s common shares are listed on any securities exchange or quotation system or in any established market.

     Upon the occurrence of any conversion event, each Series B convertible preferred share may be converted into 24.17104 common shares. In the event that the Company raises additional gross proceeds in a subsequent public offering, each Series B convertible preferred share may be converted into an additional number of common shares based on the additional gross proceeds raised through the date of conversion in a subsequent public offering according to the following formula: (X/50 million) x 1.20568, where X is the additional gross proceeds rounded down to the nearest 50 million.

     No additional consideration is due upon the conversion of the Series B convertible preferred shares. The conversion into common shares of the Series B convertible preferred shares will result in dilution of the common shareholders’ interests.

     Expense related to issuance of 240,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B shares to common shares occurs. The expense will be measured as the difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares. If a conversion event had occurred at December 31, 2008, expense would have ranged from $0 to $63.8 million (assumes $11 per Unit fair market value), which represents approximately 5.8 million shares of common stock.

     In July 2005, the Company instituted a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equal to the lesser of: (1) the purchase price per Unit that the shareholder actually paid for the Unit; or (2) $11.00 per Unit. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As of December 31, 2008, the Company has redeemed 7.6 million Units in the amount of $83.6 million under the program, including 1.8 million Units for $19.3 million redeemed in 2008 and 2.5 million Units in the amount of $27.7 million redeemed in 2007.

     In February 2006, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. As of December 31, 2008, approximately 8.3 million Units, representing $90.9 million in proceeds to the Company, have been issued under the plan, including 3.2 million Units representing $35.6 million issued in 2008 and 3.0 million Units representing $33.3 million issued in 2007.

     The Company’s articles of incorporation authorize issuance of up to 15 million additional preferred shares. No preferred shares other than the Series A preferred shares and the Series B convertible preferred shares (discussed above) have been issued. The Company believes that the authorization to issue additional preferred shares benefits the Company and its shareholders by permitting flexibility in financing additional growth, giving the Company additional financing options in corporate planning and in responding to developments in business, including financing of additional acquisitions and other general corporate purposes. Having authorized preferred shares available for issuance in the future gives the Company the ability to respond to future developments and allows preferred shares to be issued without the expense and delay of a special shareholders’ meeting. At present, the Company has no specific financing or acquisition plans involving the issuance of additional preferred shares and the Company does not propose to fix the characteristics of any series of preferred shares in anticipation of issuing preferred shares other than the Series A preferred shares and Series B convertible preferred shares discussed above. The Company cannot now predict whether or to what extent, if any, additional preferred shares will be used or if so used what the characteristics of a particular series may be. The voting rights and rights to distributions of the holders of common shares will be subject to the prior rights of the holders of any subsequently-issued preferred shares. Unless otherwise required by applicable law or regulation, the preferred shares would be issuable without further authorization by holders of the common shares and on such terms and for such consideration as may be determined by the Board of Directors. The preferred shares could be issued in one or more series having varying voting rights, redemption and conversion features, distribution (including liquidating distribution) rights and preferences, and other rights, including rights of approval of specified transactions. A series of preferred shares could be given rights that are superior to rights of holders of common shares and a series having preferential distribution rights could limit common share distributions and reduce the amount holders of common shares would otherwise receive on dissolution.

38


Note 6

Stock Incentive Plans

     On January 20, 2004, the Board of Directors approved a Non-Employee Directors Stock Option Plan (the “Directors Plan”) whereby directors, who are not employees of the Company or affiliates, automatically receive the option to purchase Units. Under the Directors Plan, the number of Units authorized for issuance is equal to 45,000 plus 1.8% of the number of Units sold in excess of the minimum offering of 4,761,905 Units. This plan currently relates to the initial public offering of 91,125,541 Units. Therefore, the maximum number of Units authorized under the Directors Plan is currently 1,599,545 based on the number of shares issued as of December 31, 2008.

     On January 20, 2004, the Board of Directors approved an Incentive Stock Option Plan (the “Incentive Plan”) whereby incentive awards may be granted to certain employees of the Company or affiliates. Under the Incentive Plan, the number of Units authorized for issuance is equal to 35,000 plus 4.625% of the number of Units sold in the initial offering in excess of 4,761,905. This plan also currently relates to the initial public offering of 91,125,541 Units. Therefore, the maximum number of Units that can be issued under the Incentive Plan is currently 4,029,318 based on the number of shares issued as of December 31, 2008.

     Both plans generally provide, among other things, that options be granted at exercise prices not lower than the market value of the Units on the date of grant. The options expire 10 years from the date of the grant. During 2008, 2007 and 2006, the Company granted options to purchase 72,548, 71,640 and 71,948 Units, respectively, under the Directors Plan. All of the options issued vested at the date of issuance, and have an exercise price of $11 per Unit. The Company has granted no options under the Incentive Plan. Activity in the Company’s share option plan during 2008, 2007 and 2006 is summarized in the following table:

    2008 2007 2006
Outstanding, beginning of year:   215,812     144,172     72,224
           Granted   72,548   71,640   71,948
           Exercised      
           Expired or canceled      
Outstanding, end of year:   288,360   215,812   144,172
Exercisable, end of year:   288,360   215,812   144,172
The weighted-average exercise price: $ 11.00 $ 11.00 $ 11.00

     The Company recorded $57, $68 and $69 thousand of share-based expense for the 73, 72 and 72 thousand options issued during the years ended December 31, 2008, 2007 and 2006.

Note 7

Management and Franchise Agreements

     Each of the Company’s 68 hotels are operated and managed, under separate management agreements, by affiliates of one of the following companies (indicates the number of hotels managed): Marriott International, Inc. (“Marriott”) (3), Stonebridge Realty Advisors, Inc. (“Stonebridge”) (10), Hilton Hotels Corporation (“Hilton”) (5), Western International (“Western”) (10), Larry Blumberg & Associates (“LBA”) (20), White Lodging Services Corporation (“WLS”) (8), Inn Ventures, Inc. (“Inn Ventures”) (11) or Newport Hospitality Group, Inc. (“Newport”) (1). The agreements have remaining terms ranging from 2 to 26 years. Fees associated with the agreements generally include the payment of base management fees, incentive management fees, accounting fees, and other fees for centralized services which are allocated among all of the hotels that receive the benefit of such services. Base management fees are calculated as a percentage of gross revenues. Incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements. The Company has the option to terminate the management agreements if specified performance thresholds are not satisfied. During the years ended December 31, 2008, 2007 and 2006 the Company incurred approximately $9.8, $9.9 and $8.7 million in management fees, respectively.

     Stonebridge, Western, LBA, WLS, Inn Ventures and Newport are not affiliated with either Marriott or Hilton, and as a result, the hotels managed by these companies were required to obtain separate franchise agreements with each respective franchisor. The Hilton franchise agreements generally provide for a term of 13 to 20 years. Fees associated with the Hilton agreements generally include the payment of royalty fees and program fees based on room revenues. The Marriott franchise

39


agreements provide for an initial term of 15 to 20 years. Fees associated with the Marriott agreements include the payment of royalty fees, marketing fees, reservation fees and a communications support fee based on room revenues. During the years ended December 31, 2008, 2007 and 2006 the Company incurred approximately $10.5, $10.3 and $9.0 million in franchise fees.

Note 8

Related Parties

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

     The Company 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 December 31, 2008, total payments to ASRG for services under the terms of this contract were $16.9 million, which was capitalized as a part of the purchase price of the hotels. The Company incurred fees totaling approximately $0.4 million in 2008 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, are payable for these services. Until May 2007, ASA utilized Apple Hospitality Two, Inc. to provide these services. From May to October 2007, ASA utilized Apple Fund Management, LLC, a subsidiary of Apple Hospitality Five, Inc. (“AHF”) to provide these services. In October 2007, AHF merged with an unrelated third party and the Company acquired all of AHF’s interest in Apple Fund Management, LLC at no incremental cost to the Company. The advisory fees incurred under the agreement with ASA in 2008, 2007 and 2006 were approximately $2.5, $2.5 and $2.3 million, respectively.

     Effective October 2007, through its wholly-owned subsidiary, Apple Fund Management, LLC, the Company provides support services to ASRG, ASA, Apple Seven Advisors, Inc. (“A7A”), Apple Suites Realty Group, Inc. (“Suites”), Apple REIT Seven, Inc., Apple Eight Advisors, Inc. (“A8A”), Apple REIT Eight, Inc.. Apple Nine Advisors, Inc. (“A9A”) and Apple REIT Nine, Inc. A7A provides day to day advisory and administrative functions for Apple REIT Seven, Inc. A8A provides day to day advisory and administrative functions for Apple REIT Eight, Inc. A9A provides day to day advisory and administrative functions for Apple REIT Nine, Inc. Suites provides real estate brokerage services to Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. Each of these companies has agreed to reimburse the Company for its costs in providing these services. For the years ended December 31, 2008 and 2007, the Company received reimbursement of its costs totaling approximately $4.6 and $0.9 million. ASRG, ASA, A7A, Suites, A8A and A9A are 100% owned by Glade Knight, the Company’s Chairman and Chief Executive Officer.

     Including ASRG, Suites, ASA, A7A, A8A and A9A discussed above, Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Seven, Inc. (a hotel REIT), Apple REIT Eight, Inc. (a hotel REIT) and Apple REIT Nine, Inc. (a newly formed company that intends to qualify as a diversified 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., Apple REIT Eight, Inc. and Apple REIT Nine, 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 9

Commitments

     In March 2008, in conjunction with the purchase of the Hilton Garden Inn in Roanoke Rapids, North Carolina, the company purchased the land on which the hotel is located, terminating a ground lease with a remaining term of 49 years and minimum lease payments of $8.4 million. In addition, the Company has ground leases for five of its hotels with remaining terms ranging from 8 to 19 years. The aggregate amounts of minimum lease payments under these agreements for the five years subsequent to December 31, 2008 are as follows (in thousands):

40


    Total
2009 $ 310
2010   322
2011   326
2012   326
2013   334
Thereafter   2,593
           Total $ 4,211

Note 10

Industry Segments

     The Company owns extended-stay and limited service hotel properties throughout the United States that generate rental and other property related income. The Company separately evaluates the performance of each of its hotel properties. However, because each of the hotels has similar economic characteristics, facilities, and services, the properties have been aggregated into a single operating segment. All segment disclosures are included in, or can be derived from, the Company’s consolidated financial statements.

Note 11

Quarterly Financial Data (unaudited)

The following is a summary of quarterly results of operations for the period ended December 31, 2008:

  First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands except per share data)
Revenues   $ 64,291 $ 71,213 $ 71,610 $ 57,188
Net income $ 13,530 $ 18,149 $ 18,228 $ 8,595
Basic and diluted income per common share $ 0.15 $ 0.20 $ 0.20 $ 0.09
Distributions declared and paid per common share $ 0.224 $ 0.226 $ 0.226 $ 0.226

The following is a summary of quarterly results of operations for the period ended December 31, 2007:

    First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(in thousands except per share data)
Revenues $ 60,179 $ 67,959 $ 69,405 $ 60,391
Net income $ 13,781 $ 18,318 $ 19,209 $ 12,020
Basic and diluted income per common share $ 0.15 $ 0.20 $ 0.21 $ 0.14
Distributions declared and paid per common share $ 0.220 $ 0.220 $ 0.220 $ 0.220

Note 12

Subsequent Events

     In January 2009, the Company declared and paid $6.9 million or $.075 per common share, in a distribution to its common shareholders, of which $2.9 million or 266,705 Units were reinvested under the Company’s Dividend Reinvestment Plan.

     On January 20, 2009, the Company redeemed 1.1 million Units in the amount of $12.3 million under its Unit Redemption Program.

     In February 2009, the Company declared and paid $6.8 million or $.075 per common share, in a distribution to its common shareholders, of which $3.0 million or 268,265 Units were reinvested under the Company’s Dividend Reinvestment Plan.

41


Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
    None.  
 
Item 9A.  Controls and Procedures

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

     See Item 8 for the Report of Management on Internal Control over Financial Reporting and the Company’s Independent Registered Public Accounting Firm’s attestation report regarding internal control over financial reporting.

Item 9B.   Other Information

None.

42


PART III

Item 10.     Directors, Executive Officers and Corporate Governance

     The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K will be set forth in the Company’s 2009 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 10, the 2009 Proxy Statement is incorporated herein by this reference.

Item 11.    Executive Compensation

     The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K will be set forth in the Company’s 2009 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 11, the 2009 Proxy Statement is incorporated herein by this reference.

Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

     The information required by Items 201(d) and 403 of Regulation S-K will be set forth in the Company’s 2009 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 12, the 2009 Proxy Statement is incorporated herein by this reference.

Item 13.     Certain Relationships and Related Transactions and Director Independence

     The information required by Items 404 and 407(a) of Regulation S-K will be set forth in the Company’s 2009 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 13, the 2009 Proxy Statement is incorporated herein by this reference.

Item 14.     Principal Accounting Fees and Services

     This information required by Item 9(e) of Schedule 14A will be set forth in the Company’s 2009 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 14, the 2009 Proxy Statement is incorporated herein by this reference.

43


PART IV

Item 15.     Exhibits, Financial Statement Schedules

1. Financial Statements of Apple REIT Six, Inc.

Report of Management on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting—Ernst & Young LLP

Report of Independent Registered Public Accounting Firm—Ernst & Young LLP

Consolidated Balance Sheets as of December 31, 2008 and 2007

Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2008, 2007 and 2006

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006

Notes to Consolidated Financial Statements

These financial statements are set forth in Item 8 of this report and are hereby incorporated by reference.

2. Financial Statement Schedules

Schedule III—Real Estate and Accumulated Depreciation (Included at the end of this Part IV of this report.)

Financial statement schedules not listed are either omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

3. Exhibits

Incorporated herein by reference are the exhibits listed under “Exhibits Index” to this Report available at www.sec.gov.

44


SCHEDULE III
Real Estate and Accumulated Depreciation
As of December 31, 2008
(dollars in thousands)


Initial Cost
Subsequently
Capitalized

City
 
State
 
Brand
 
Encumbrances
 
Land

Bldg./FF&E
  Bldg
Imp. & FF&E
  Total
Gross Cost(1)
  Acc
Deprec
  Date of
Construction
  Date
Acquired
  Depreciable
Life
# of
Rooms
Birmingham   Alabama Fairfield Inn $ - $ 354 $ 2,057 $ 118 $ 2,529 $ (248 ) 1995 Aug-05 3 - 39 yrs.   63
Dothan Alabama Courtyard   -         1,270     7,142   291   8,703   (832 ) 1996 Aug-05 3 - 39 yrs. 78
Dothan Alabama Hampton Inn & Suites   -   842   8,129   51   9,022   (988 ) 2004 Jun-05 3 - 39 yrs. 85
Huntsville Alabama Fairfield Inn   2,831   506   4,813   135   5,454   (465 ) 1999 Sep-05 3 - 39 yrs. 79
Huntsville Alabama Residence Inn   -   947   7,632   363   8,942   (855 ) 2002 Jun-05 3 - 39 yrs. 78
Montgomery        Alabama SpringHill Suites   3,538   963   6,327   176   7,466   (607 ) 1998 Sep-05 3 - 39 yrs. 79
Tuscaloosa Alabama Courtyard   -   -   7,953   282   8,235   (839 ) 1996 Aug-05 3 - 39 yrs. 78
Tuscaloosa Alabama Fairfield Inn   -   -   4,240   156   4,396   (448 ) 1996 Aug-05 3 - 39 yrs. 63
Anchorage Alaska Hampton Inn   -   1,220   10,501   2,031   13,752   (1,812 ) 1997 Mar-05 3 - 39 yrs. 101
Anchorage Alaska Hilton Garden Inn   -   4,230   14,788   407   19,425   (1,936 ) 2002 Oct-04 3 - 39 yrs. 125
Anchorage Alaska Homewood Suites   -   1,803   11,046   89   12,938   (1,644 ) 2004 Oct-04 3 - 39 yrs. 122
Phoenix Arizona Hampton Inn   -   1,425   5,205   811   7,441   (996 ) 1998 Oct-04 3 - 39 yrs. 99
Tempe Arizona SpringHill Suites   -   1,170   7,159   112   8,441   (888 ) 1998 Jun-05 3 - 39 yrs. 121
Tempe Arizona TownePlace Suites   -   1,226   7,169   123   8,518   (882 ) 1998 Jun-05 3 - 39 yrs. 119
Arcadia California Hilton Garden Inn   -   1,718   10,195   2,225   14,138   (1,689 ) 1999 Oct-04 3 - 39 yrs. 124
Arcadia California SpringHill Suites   -   1,633   6,459   806   8,898   (1,147 ) 1999 Oct-04 3 - 39 yrs. 86
Bakersfield California Hilton Garden Inn   -   1,166   10,565   209   11,940   (1,449 ) 2004 Mar-05 3 - 39 yrs. 120
Folsom California Hilton Garden Inn   -   1,521   16,989   1,173   19,683   (1,870 ) 1999 Nov-05 3 - 39 yrs. 100
Foothill Ranch California Hampton Inn   4,195   1,056   6,499   827   8,382   (1,027 ) 1998 Apr-05 3 - 39 yrs. 84
Lake Forest California Hilton Garden Inn   -   1,541   9,425   220   11,186   (1,419 ) 2004 Oct-04 3 - 39 yrs. 103
Milpitas California Hilton Garden Inn   -   2,565   16,534   1,904   21,003   (2,108 ) 1999 Nov-05 3 - 39 yrs. 161
Roseville California Hilton Garden Inn   -   2,362   18,937   1,579   22,878   (2,186 ) 1999 Nov-05 3 - 39 yrs. 131
San Francisco California Hilton Garden Inn   -   2,007   9,545   2,048   13,600   (1,542 ) 1999 Jan-06 3 - 39 yrs. 169
Boulder Colorado Marriott   -   3,066   27,825   2,118   33,009   (3,647 ) 1997 May-05 3 - 39 yrs. 157
Glendale Colorado Hampton Inn & Suites   5,732   3,641   11,221   1,248   16,110   (1,867 ) 1999 Oct-04 3 - 39 yrs. 133
Lakewood Colorado Hampton Inn   -   2,508   8,090   464   11,062   (1,319 ) 2003 Oct-04 3 - 39 yrs. 170
Farmington Connecticut Courtyard   -   1,794   15,434   1   17,229   (1,555 ) 2005 Oct-05 3 - 39 yrs. 119
Rocky Hill Connecticut Residence Inn   -   1,472   11,284   3   12,759   (1,218 ) 2005 Aug-05 3 - 39 yrs. 96
Wallingford Connecticut Homewood Suites   -   1,419   12,072   140   13,631   (1,349 ) 2005 Jul-05 3 - 39 yrs. 104
Clearwater Florida SpringHill Suites   -   -   7,214      -   7,214   (715 ) 2006 Feb-06 3 - 39 yrs. 79
Lake Mary Florida Courtyard   -   690   5,568   1,525   7,783   (897 ) 1995 Mar-05 3 - 39 yrs. 86
Lakeland Florida Residence Inn   -   1,520   8,699   1,227   11,446   (1,088 ) 2001 Jun-05 3 - 39 yrs. 78
Orange Park Florida Fairfield Inn   3,006   855   6,979   177   8,011   (629 ) 1998 Nov-05 3 - 39 yrs. 83
Panama City Florida Courtyard   -   1,407   8,217   45   9,669   (788 ) 2006 Mar-06 3 - 39 yrs. 84
Pensacola Florida Courtyard   -      1,186   10,728   353   12,267   (1,105 ) 1997 Aug-05 3 - 39 yrs. 90

45


SCHEDULE III
Real Estate and Accumulated Depreciation (continued)
As of December 31, 2008
(dollars in thousands)

    Initial Cost Subsequently
Capitalized
City   State   Brand Encumbrances   Land Bldg./FF&E   Bldg
Imp. & FF&E

Total
Gross Cost(1)

Acc
Deprec
Date of
Construction
  Date
Acquired
  Depreciable
Life
  # of
Rooms
Pensacola Florida Fairfield Inn   -   470     4,703     152     5,325     (477 ) 1995   Aug-05 3 - 39 yrs.   63
Pensacola Florida Hampton Inn & Suites   -   1,248   8,354   7   9,609   (1,015 ) 2005 Jul-05 3 - 39 yrs. 85
Tallahassee Florida Hilton Garden Inn   -   1,103   10,130   678   11,911   (1,307 ) 1997 Mar-05 3 - 39 yrs. 99
Albany Georgia Courtyard   -   1,253   7,658   73   8,984   (938 ) 2004 Jun-05 3 - 39 yrs. 84
Columbus Georgia Residence Inn   -   -   8,184   94   8,278   (946 ) 2003 Jun-05 3 - 39 yrs. 78
Savannah Georgia SpringHill Suites   2,866   693   5,099   165   5,957   (486 ) 1999 Sep-05 3 - 39 yrs. 79
Valdosta Georgia Courtyard   -   1,036   7,529   199   8,764   (810 ) 2002 Oct-05 3 - 39 yrs. 84
Mt. Olive New Jersey Residence Inn   -   1,410   11,331   22   12,763   (1,258 ) 2005 Sep-05 3 - 39 yrs. 123
Somerset New Jersey Homewood Suites   -   1,813   16,801   120   18,734   (1,781 ) 2005 Aug-05 3 - 39 yrs. 123
Saratoga Springs New York Hilton Garden Inn   -   2,399   15,885   1,441   19,725   (1,618 ) 1999 Sep-05 3 - 39 yrs. 112
Roanoke Rapids North Carolina Hilton Garden Inn   -   2,458   15,713   -   18,171   (469 ) 2008 Mar-08 3 - 39 yrs. 147
Hillsboro Oregon Courtyard   6,325   1,879   9,484   118   11,481   (846 ) 1996 Mar-06 3 - 39 yrs. 155
Hillsboro Oregon Residence Inn   -   2,665   13,295   196   16,156   (1,272 ) 1994 Mar-06 3 - 39 yrs. 122
Hillsboro Oregon TownePlace Suites   -   2,150   9,715   1,223   13,088   (1,147 ) 1999 Dec-05 3 - 39 yrs. 136
Portland Oregon Residence Inn   -   4,400   38,687   3,205   46,292   (3,931 ) 2001 Dec-05 3 - 39 yrs. 258
Pittsburgh Pennsylvania Residence Inn   -   1,161   10,267   1,573   13,001   (1,468 ) 1998 Sep-05 3 - 39 yrs. 156
Myrtle Beach South Carolina Courtyard   -   1,857   7,631   1,036   10,524   (1,510 ) 1999 Jun-04 3 - 39 yrs. 135
Nashville Tennessee Homewood Suites   -   1,170   7,177   514   8,861   (1,041 ) 1999 May-05 3 - 39 yrs. 121
Arlington Texas SpringHill Suites   -   1,122   6,649   80   7,851   (833 ) 1998 Jun-05 3 - 39 yrs. 122
Arlington Texas TownePlace Suites   -   1,033   6,373   129   7,535   (775 ) 1999 Jun-05 3 - 39 yrs. 95
Dallas Texas SpringHill Suites   -   1,372   18,737   464   20,573   (1,967 ) 1997 Dec-05 3 - 39 yrs. 147
Fort Worth Texas Homewood Suites   -   1,152   8,210   1,017   10,379   (1,216 ) 1999 May-05 3 - 39 yrs. 137
Fort Worth Texas Residence Inn   -   1,873   15,586   16   17,475   (1,855 ) 2005 May-05 3 - 39 yrs. 149
Fort Worth Texas SpringHill Suites   -   2,125   11,619   53   13,797   (1,754 ) 2004 May-04 3 - 39 yrs. 145
Laredo Texas Homewood Suites   -   1,118   9,781   48   10,947   (1,067 ) 2005 Nov-05 3 - 39 yrs. 106
Laredo Texas Residence Inn   -   902   10,969   19   11,890   (1,229 ) 2005 Sep-05 3 - 39 yrs. 109
Las Colinas Texas TownePlace Suites   -   1,205   6,256   110   7,571   (835 ) 1998 Jun-05 3 - 39 yrs. 136
McAllen Texas Hilton Garden Inn   -   1,178   8,143   622   9,943   (1,016 ) 2000 Jul-05 3 - 39 yrs. 104
Fredericksburg Virginia Hilton Garden Inn   -   1,822   15,362   93   17,277   (1,602 ) 2005 Dec-05 3 - 39 yrs. 148
Richmond Virginia Corporate Office   -   381   1,038   3,565   4,984   (1,073 ) 1893 Jun-04 3 - 39 yrs. N/A
Kent Washington TownePlace Suites   -   1,841   10,721   1,377   13,939   (1,278 ) 1999 Dec-05 3 - 39 yrs. 152
Mukilteo Washington TownePlace Suites   -   1,505   11,055   1,199   13,759   (1,238 ) 1999 Dec-05 3 - 39 yrs. 128
Redmond Washington Marriott   -   9,504   56,168   1,026   66,698   (7,950 ) 2004 Jul-04 3 - 39 yrs. 262
Renton Washington Hilton Garden Inn   -   1,277   14,674   1,858   17,809   (1,943 ) 1998 Nov-05 3 - 39 yrs. 150
Deposits on Construction in Progress   -   -   -   257   257   -          
            $ 28,493   $ 109,658   $ 761,624   $ 46,186   $ 917,468   $ (94,005 )             7,897

    2008   2007   2006       2008   2007   2006
Real estate owned:                     Accumulated depreciation:                  
Balance as of January 1   $ 885,160   $ 874,834   $ 803,417   Balance as of January 1   $ 64,692   $ 37,928   $ 13,247
Acquisitions     18,171     -     54,840   Depreciation expense     29,313     26,782     24,681
Improvements     14,137     10,360     16,577   Disposals     -     (18 )   -
Disposals     -     (34 )   -                      
Balance at December 31   $ 917,468   $ 885,160   $ 874,834   Balance at December 31   $ 94,005   $ 64,692   $ 37,928


(1) The cost basis for Federal Income Tax purposes approximates the basis used in this schedule.

46


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: March 3, 2009
  Glade M. Knight,
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
 
   
   
   
 
 
By: /s/ BRYAN PEERY Date: March 3, 2009
  Bryan Peery,
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
 
   
   

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.

By: /s/ GLADE M. KNIGHT Date: March 3, 2009
  Glade M. Knight, Director  
 
By: /s/ LISA B. KERN Date: March 3, 2009
  Lisa B. Kern, Director  
 
By: /s/ BRUCE H. MATSON Date: March 3, 2009
  Bruce H. Matson, Director  
 
By: /s/ MICHAEL S. WATERS Date: March 3, 2009
  Michael S. Waters, Director  
 
By: /s/ ROBERT M. WILY Date: March 3, 2009
  Robert M. Wily, Director  

47


EXHIBIT INDEX

   
Exhibit
Number
  Description
       2.1     Master Purchase Agreement between Apple Six Hospitality Ownership, Inc. and the parties named therein dated
    June 14, 2005 (Incorporated by reference to Exhibit 2.1 to the registrant’s quarterly report on Form 10-Q (SEC
    File No 333-1112169) filed August 4, 2005)
 
       2.2     Purchase Contract between Sunbelt Hotels—Florida II, L.L.C. and Apple Six Hospitality Ownership, Inc. dated
    June 14, 2005 (Incorporated by reference to Exhibit 2.2 to the registrant’s quarterly report on Form 10-Q (SEC
    File No 333-1112169) filed August 4, 2005)
 
        2.3     Purchase Contract between Sunbelt Hotel Enterprises, Inc. and Apple Six Hospitality Ownership, Inc. dated June
    14, 2005 (Incorporated by reference to Exhibit 2.3 to the registrant’s quarterly report on Form 10-Q (SEC File
    No 333-1112169) filed August 4, 2005)
 
       2.4     Schedule of information for two additional and substantially identical purchase contracts dated June 14, 2005
    (substantially identical to Exhibit 2.2 above) (Incorporated by reference to Exhibit 2.4 to the registrant’s
    quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
 
       2.5     Schedule of information for twelve additional and substantially identical purchase contracts dated June 14, 2005
    (substantially identical to Exhibit 2.3 above) (Incorporated by reference to Exhibit 2.5 to the registrant’s
    quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
 
       2.6     Purchase Contract between McHot Property, L.P. and Apple Six Hospitality Texas, L.P. dated June 21, 2005
    (Incorporated by reference to Exhibit 2.6 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-
    1112169) filed August 4, 2005)
 
       2.7     Purchase Contract between BMC Hotel Property, Ltd. and Apple Six Hospitality Texas, L.P. dated June 21,
    2005 (Incorporated by reference to Exhibit 2.7 to the registrant’s quarterly report on Form 10-Q (SEC File No
    333-1112169) filed August 4, 2005)
 
       2.8     Purchase Contract between Temfield Hotel Property, L.P. and Apple Six Hospitality Ownership, Inc. dated June
    21, 2005 (Incorporated by reference to Exhibit 2.8 to the registrant’s quarterly report on Form 10-Q (SEC File
    No 333-1112169) filed August 4, 2005)
 
       2.9     Schedule of information for four additional and substantially identical purchase contracts dated June 21, 2005
    (substantially identical to Exhibit 2.8 above) (Incorporated by reference to Exhibit 2.9 to the registrant’s
    quarterly report on Form 10-Q (SEC File No 333-1112169) filed August 4, 2005)
 
       2.10   Purchase and Sale Agreement among Folsom Garden Hotel Company, LLC, Milpitas Garden Hotel Company,
    LLC, Roseville Garden Hotel Company, LLC, South San Francisco Garden Hotel Company, LLC, Renton
    Garden Hotel Company, LLC and Apple Six Hospitality Ownership, Inc. dated October 25, 2005 (Incorporated
    by reference to Exhibit 2.1 to the registrant’s quarterly report on Form 10-Q (SEC File No 333-1112169) filed
    November 3, 2005)
 
       2.11   Purchase Contract dated as of November 2, 2005 between Stonebrook Hillsboro LLC, Stonebrook Kent LLC,
    Stonebrook Mukilteo LLC, Portland Riverplace LLC, Portland West Cym Hotel, L.L.C., Hillsboro Hotel
    Associates Limited Partnership and Apple Six Hospitality Ownership, Inc. (Incorporated by reference to Exhibit
    2.10 to the registrant’s Post-Effective Amendment No. 4 to Form S-11 (SEC File No 333-1112169) filed
    December 14, 2005)
 
       3.1     Articles of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1 to the registrant’s
    registration statement on Form S-11 (SEC File No. 333-112169) effective April 23, 2004)
 
       3.2     Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the registrant’s Post Effective Amendment
    No. 4 to Form S-11 (SEC File No. 333-112169) effective June 14, 2005)
 
       10.1     Management Agreement dated as of May 28, 2004 between SpringHill SMC Corporation and Apple Six
    Services, L.P. (Incorporated by reference to Exhibit 10.1 to the Post-Effective Amendment No. 2 to the
    Registrant’s Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)

48


Exhibit
Number
  Description
         10.2     Owner Agreement dated as of May 28, 2004 among Apple Six Hospitality Texas, L.P., Apple Six Services, L.P.
    and SpringHill SMC Corporation (Incorporated by reference to Exhibit 10.2 to the Post-Effective Amendment
    No. 2 to the Registrant’s Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.3     Hotel Lease Agreement dated as of May 28, 2004 between Apple Six Hospitality Texas, L.P. and Apple Six
    Services, L.P. regarding the Fort Worth, Texas—Spring Hill Suites hotel (Incorporated by reference to Exhibit
    10.3 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 (SEC File
    No. 333-112169) filed on July 29, 2004)
 
         10.4     Management Agreement dated as of June 8, 2004 between Courtyard Management Corporation and Apple Six
    Hospitality Management, Inc. (Incorporated by reference to Exhibit 10.4 to the Post-Effective Amendment No. 2
    to the Registrant’s Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.5     Owner Agreement dated as of June 8, 2004, but effective as of June 19, 2004, among Apple Six Hospitality, Inc.,
    Apple Six Hospitality Management, Inc. and Courtyard Management Corporation (Incorporated by reference to
    Exhibit 10.5 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11
    (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.6     Schedule of information for substantially identical Hotel Lease Agreement dated as of June 8, 2004 between
    Apple Six Hospitality, Inc. and Apple Six Hospitality Management, Inc. regarding the Myrtle Beach, South
    Carolina hotel (Incorporated by reference to Exhibit 10.6 to the Post-Effective Amendment No. 2 to the
Registrant’s Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.7     Management Agreement dated as of July 22, 2002 between Marriott International, Inc. and Redmar Property,
    L.P., as assigned by Consent, Assignment and Assumption and Amendment of Management Agreement dated as
    of July 6, 2004, but effective June 12, 2004, among Marriott International, Inc., Redmar Property, L.P., Apple
    Six Hospitality Management, Inc. and Apple Six Hospitality, Inc. regarding the Redmond, Washington hotel
(Incorporated by reference to Exhibit 10.7 to the Post-Effective Amendment No. 2 to the Registrant’s
    Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.8     Owner Agreement dated as of July 6, 2004, but effective as of June 12, 2004, among Apple Six Hospitality
    Management, Inc., Apple Six Hospitality, Inc. and Marriott International, Inc. (Incorporated by reference to
    Exhibit 10.8 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11
    (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.9     Hotel Lease Agreement dated as of June 12, 2004 between Apple Six Hospitality, Inc. and Apple Six Hospitality
    Management, Inc. (Incorporated by reference to Exhibit 10.9 to the Post-Effective Amendment No. 2 to the
Registrant’s Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.10   Advisory Agreement between the Registrant and Apple Six Advisors, Inc. (Incorporated by reference to Exhibit 10.1
 to the registrant’s quarterly report on Form 10-Q (SEC File No. 333-112169) filed May 13, 2004)
 
         10.11   Property Acquisition/Disposition Agreement between the Registrant and Apple Six Realty Group, Inc.
    (Incorporated by reference to Exhibit 10.2 to the registrant’s quarterly report on Form 10-Q (SEC File NO. 333-
    112169) filed May 13, 2004)
 
         10.12   Apple REIT Six, Inc. 2004 Incentive Plan (Incorporated by reference to Exhibit 10.3 to the registrant’s quarterly
    report on Form 10-Q (SEC File No. 333-112169) filed May 13, 2004) *
 
         10.13   Apple REIT Six, Inc. 2004 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit
    10.4 to the registrant’s quarterly report on Form 10-Q (SEC File No. 333-112169) filed May 13, 2004) *

49


Exhibit
Number
  Description
         10.14   Management Agreement dated as of July 22, 2002 between Marriott International, Inc. and Redmar Property,
    L.P., as assigned by Consent, Assignment and Assumption and Amendment of Management Agreement dated as
    of July 6, 2004, but effective June 12, 2004, among Marriott International, Inc., Redmar Property, L.P., Apple
    Six Hospitality Management, Inc. and Apple Six Hospitality, Inc. regarding the Redmond, Washington hotel
(Incorporated by reference to Exhibit 10.7 to the Post-Effective Amendment No. 2 to the Registrant’s
    Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.15   Owner Agreement dated as of July 6, 2004, but effective as of June 12, 2004, among Apple Six Hospitality
    Management, Inc., Apple Six Hospitality, Inc. and Marriott International, Inc. (Incorporated by reference to
    Exhibit 10.8 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11
    (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.16   Management Agreement dated as of July 22, 2002 between Marriott International, Inc. and Redmar Property,
    L.P., as assigned by Consent, Assignment and Assumption and Amendment of Management Agreement dated as
    of July 6, 2004, but effective June 12, 2004, among Marriott International, Inc., Redmar Property, L.P., Apple
    Six Hospitality Management, Inc. and Apple Six Hospitality, Inc. regarding the Redmond, Washington hotel
(Incorporated by reference to Exhibit 10.7 to the Post-Effective Amendment No. 2 to the Registrant’s
    Registration Statement on Form S-11 (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.17   Owner Agreement dated as of July 6, 2004, but effective as of June 12, 2004, among Apple Six Hospitality
    Management, Inc., Apple Six Hospitality, Inc. and Marriott International, Inc. (Incorporated by reference to
    Exhibit 10.8 to the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form S-11
    (SEC File No. 333-112169) filed on July 29, 2004)
 
         10.18   Schedule of information for eight additional and substantially identical Hotel Lease Agreements dated as of
October 12, 2004 regarding eight hotels (substantially identical to Exhibit 10.9 immediately above).
    (Incorporated by reference to Exhibit 10.14 to the Post-Effective Amendment No. 3 to the Registrant’s
    Registration Statement on Form S-11 (SEC File No. 333-112169) filed on October 29, 2004)
 
         10.19   Executive Severance Plan dated October 16, 2008. (Incorporated by reference to Exhibit 10.1 to the registrant’s
    quarterly report on Form 10-Q (SEC File No. 333-112169) filed November 3, 2008) *
 
         10.20   Severance Plan dated October 16, 2008. (Incorporated by reference to Exhibit 10.2 to the registrant’s quarterly
    report on Form 10-Q (SEC File No. 333-112169) filed November 3, 2008) *
 
       21.1     Subsidiaries of Apple REIT Six, Inc.