10-Q 1 d10q.htm FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008 Form 10-Q for the quarterly period ended June 30, 2008
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2008

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 000-52585

 

 

APPLE REIT SEVEN, INC.

(Exact name of registrant as specified in its charter)

 

 

 

VIRGINIA   20-2879175
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
814 EAST MAIN STREET, RICHMOND, VA   23219
(Address of principal executive offices)   (Zip Code)

(804) 344-8121

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

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.    x  Yes    ¨  No

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)    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    x  No

As of August 1, 2008 there were 92,695,918 outstanding shares of common stock, no par value, of the registrant.

 

 

 


Table of Contents

APPLE REIT SEVEN, INC.

FORM 10-Q

INDEX

 

               Page
Number

PART I. FINANCIAL INFORMATION

  
   Item 1.    Financial Statements (Unaudited)   
      Consolidated Balance Sheets - June 30, 2008 and December 31, 2007    3
      Consolidated Statements of Operations – For the three and six months ended June 30, 2008 and 2007    4
      Consolidated Statements of Cash Flows – For the six months ended June 30, 2008 and 2007    5
      Notes to Consolidated Financial Statements    6
   Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    11
   Item 3.    Quantitative and Qualitative Disclosures About Market Risk    19
   Item 4.    Controls and Procedures    19

PART II. OTHER INFORMATION

  
   Item 1.    Legal Proceedings (not applicable)   
   Item 1A.    Risk Factors (not applicable)   
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    20
   Item 3.    Defaults Upon Senior Securities (not applicable)   
   Item 4.    Submission of Matters to a Vote of Security Holders    20
   Item 5.    Other Information (not applicable)   
   Item 6.    Exhibits    21

Signatures

         22

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

 

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Apple REIT Seven, Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

 

     June 30,
2008
    December 31,
2007
 

ASSETS

    

Investment in real estate, net of accumulated depreciation of $33,559 and $20,063, respectively

   $ 905,167     $ 786,765  

Cash and cash equivalents

     42,750       142,437  

Restricted cash-furniture, fixtures and other escrows

     10,973       10,658  

Due from third party managers

     11,723       6,249  

Other assets, net

     12,372       15,139  
                

TOTAL ASSETS

   $ 982,985     $ 961,248  
                

LIABILITIES

    

Notes payable

   $ 110,708     $ 84,705  

Accounts payable and accrued expenses

     11,606       8,012  
                

TOTAL LIABILITIES

     122,314       92,717  
                

SHAREHOLDERS’ EQUITY

    

Preferred stock, authorized 15,000,000 shares; none issued and outstanding

     —         —    

Series A preferred shares, no par value, authorized 200,000,000 shares; issued and outstanding 92,741,611 and 91,713,410 shares, respectively

     —         —    

Series B convertible preferred stock, no par value, authorized 240,000 shares; issued and outstanding 240,000 shares

     24       24  

Common stock, no par value, authorized 200,000,000 shares; issued and outstanding 92,741,611 and 91,713,410 shares, respectively

     916,189       904,649  

Distributions greater than net income

     (55,542 )     (36,142 )
                

TOTAL SHAREHOLDERS’ EQUITY

     860,671       868,531  
                

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 982,985     $ 961,248  
                

See notes to consolidated financial statements.

 

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Apple REIT Seven, Inc.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

     Three months
ended
June 30, 2008
    Three months
ended
June 30, 2007
   Six months
ended
June 30, 2008
    Six months
ended
June 30, 2007
 

Revenues:

         

Room revenue

   $ 52,179     $ 30,260    $ 98,479     $ 51,064  

Other revenue

     5,000       2,109      9,156       3,760  
                               

Total revenue

     57,179       32,369      107,635       54,824  
                               

Expenses:

         

Operating expense

     14,573       7,882      27,923       13,226  

Hotel administrative expense

     4,992       2,256      9,083       3,858  

Sales and marketing

     4,333       2,581      8,205       4,371  

Utilities

     2,134       1,242      4,204       2,237  

Repair and maintenance

     2,417       1,332      4,699       2,248  

Franchise fees

     2,267       1,261      4,220       2,109  

Management fees

     2,116       1,107      3,838       1,827  

Taxes, insurance and other

     3,245       2,398      6,443       3,966  

General and administrative

     1,660       975      3,058       1,650  

Depreciation expense

     7,008       3,730      13,496       6,488  
                               

Total expenses

     44,745       24,764      85,169       41,980  
                               

Operating income

     12,434       7,605      22,466       12,844  

Interest income (expense), net

     (1,014 )     141      (1,338 )     (295 )
                               

Net income

   $ 11,420     $ 7,746    $ 21,128     $ 12,549  
                               

Basic and diluted net income per common share

   $ 0.12     $ 0.13    $ 0.23     $ 0.25  
                               

Weighted average common shares outstanding; basic and diluted

     92,459       58,847      92,206       49,886  

Distributions declared and paid per common share

   $ 0.22     $ 0.22    $ 0.44     $ 0.44  
                               

See notes to consolidated financial statements.

 

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Apple REIT Seven, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

     Six months
ended
June 30, 2008
    Six months
ended
June 30, 2007
 

Cash flow from operating activities:

    

Net income

   $ 21,128     $ 12,549  

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

    

Depreciation of real estate owned

     13,496       6,488  

Amortization of deferred financing costs and fair value adjustments

     (117 )     395  

Changes in operating assets and liabilities:

    

Increase in funds due from third party managers

     (5,121 )     (4,988 )

Increase in other operating assets

     (195 )     (275 )

Increase in accounts payable and accrued expenses

     205       1,357  
                

Net cash provided by operating activities

     29,396       15,526  

Cash flow used in investing activities:

    

Cash paid for the acquisition of hotel properties

     (87,761 )     (208,008 )

Deposits and other disbursements for potential acquisition of hotel properties

     (129 )     (1,221 )

Capital improvements

     (11,154 )     (1,888 )

Net decrease (increase) in cash restricted for property improvements

     369       (721 )
                

Net cash used in investing activities

     (98,675 )     (211,838 )

Cash flow from financing activities:

    

Payment of notes payable

     (1,057 )     (18,491 )

Payment of financing costs related to loan assumptions

     (301 )     (829 )

Redemptions of common stock

     (2,236 )     (215 )

Net proceeds related to issuance of common stock

     13,714       514,123  

Cash distributions paid to common shareholders

     (40,528 )     (20,254 )
                

Net cash (used in) provided by financing activities

     (30,408 )     474,334  
                

Increase (decrease) in cash and cash equivalents

     (99,687 )     278,022  

Cash and cash equivalents, beginning of period

     142,437       44,604  
                

Cash and cash equivalents, end of period

   $ 42,750     $ 322,626  
                

Non-cash transactions:

    

Notes payable assumed in acquisitions

   $ 27,334     $ 57,464  

See notes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements included in its 2007 Annual Report on Form 10-K. Operating results for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2008.

General Information and Summary of Significant Accounting Policies

Organization

Apple REIT Seven, Inc. (the “Company”) is a Virginia corporation formed to invest in hotels and other selected real estate in select metropolitan areas in the United States. Initial capitalization occurred on May 26, 2005 and operations began on April 27, 2006 when the Company acquired its first hotel. The Company concluded its best-efforts offering of Units (each Unit consists of one common share and one Series A preferred share) in July 2007. The Company 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.

Earnings per Common Share

Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. There were no shares with a dilutive effect for the six months ended June 30, 2008 and 2007. As a result, basic and dilutive outstanding shares were the same. Series B convertible preferred shares are not included in earnings per common share until such time the Series B convertible preferred shares are converted to common shares.

Use of Estimates

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

Recent 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.

 

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In February 2007, FASB issued SFAS 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 is 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.

In March 2008, FASB issued SFAS 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.

In May 2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s (“SEC”) approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 162 on its financial statements.

Note 2

Investments in Real Estate

During the six months ended June 30, 2008, the Company completed the purchase of six hotels. The following table sets forth the location, brand, manager, gross purchase price, number of hotel rooms and date of purchase by the Company for each hotel acquired during this period (dollars in thousands).

 

Location

  

Brand

  

Manager

   Gross
Purchase
Price
   Rooms    Date of
Purchase

Tucson, AZ

   Residence Inn    Western    $ 16,640    124    1/17/08

Richmond, VA

   Marriott    White      53,300    401    1/25/08

Columbus, GA

   SpringHill Suites    LBA      9,675    85    3/06/08

Dothan, AL

   Residence Inn    LBA      9,669    84    4/16/08

El Paso, TX

   Homewood Suites    Western      15,390    114    4/23/08

Columbus, GA

   TownePlace Suites    LBA      8,428    86    5/22/08
                    
         $ 113,102    894   
                    

 

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In conjunction with the January 2008 acquisition of the full-service Marriott hotel in Richmond, Virginia (“MRV”), the Company assumed mortgage indebtedness in the principal amount of $25.3 million. The note bears interest at a rate of 6.95% per annum and has a stated maturity date of September 1, 2014. With the exception of the assumed mortgage note payable, substantially all of the purchase price of the six hotels acquired in the first six months of 2008 was funded by the Company’s cash balances on hand at December 31, 2007. Additionally, the Company used cash on hand to pay 2% of the gross purchase price for these hotels, which totaled $2.3 million, as a brokerage commission to Apple Suites Realty Group, Inc. (“ASRG”). This entity is wholly-owned by Glade M. Knight, who is one of the Company’s directors and its Chief Executive Officer. These costs have been capitalized to investment in real estate properties.

Under terms of the purchase contract for the MRV hotel, the Company assumed an existing land lease with a third-party lessor. The land lease extends through December 2102. The lease is subject to payment adjustments, based on Consumer Price Index measurements, at stated intervals during its term. A fair value adjustment was recorded by the Company upon the assumption of the below market rate ground lease. This favorable lease asset will be amortized over the remaining term of the ground lease. The unamortized balance of the land lease’s fair value adjustment was approximately $0.9 million at June 30, 2008, and is included in other assets on the Company’s consolidated balance sheet. Upon assumption of the MRV land lease, the Company also assumed certain contingent responsibilities of the predecessor owner. Dependent on conditions which include the hotel exceeding stated revenue per available room (“REVPar”) thresholds for a trailing twelve month period (with such thresholds adjusting upward by 3% annually), the Company may be obligated to construct an addition to the MRV hotel containing a minimum of 209 rooms. As of June 30, 2008, there is no requirement to commence an expansion of the MRV hotel.

A fair value adjustment was recorded upon the assumption of the above market rate mortgage loan for the MRV hotel. The premium will be amortized over the remaining stated term of the mortgage note payable using a method approximating the effective interest rate method. The unamortized balance of the fair value adjustment for this mortgage loan payable was approximately $1.9 million at June 30, 2008; this balance is included in notes payable on the Company’s consolidated balance sheet. As noted above, the mortgage assumed has a stated maturity of September 1, 2014. As a condition of the mortgage loan, the maturity of the note payable may be accelerated by the lender should the Company be required to expand the MRV hotel as previously discussed.

The aggregate amounts of scheduled principal payments due under the MRV mortgage note, and the aggregate amounts of estimated minimum lease payments pertaining to the MRV land lease, for the periods subsequent to the January 25, 2008 acquisition of the MRV hotel, are as follows (in thousands):

 

     2008    2009    2010    2011    2012    After
2012
   Total

MRV note payable

   $ 472    $ 550    $ 590    $ 632    $ 678    $ 22,376    $ 25,298

MRV land lease

     92      200      200      200      200      43,000      43,892
                                                

Total

   $ 564    $ 750    $ 790    $ 832    $ 878    $ 65,376    $ 69,190
                                                

No goodwill was recorded in connection with any of these acquisitions.

The Company has leased all of its hotels to wholly-owned taxable REIT subsidiaries under master hotel lease arrangements.

 

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At June 30, 2008, the Company’s investment in real estate consisted of the following (in thousands):

 

Land

   $ 90,727

Building and Improvements

     798,486

Furniture, Fixtures and Equipment

     49,513
      
     938,726

Less Accumulated Depreciation

     33,559
      

Investment in Real Estate, net

   $ 905,167
      

As of June 30, 2008, the Company had one outstanding hotel purchase contract, relating to the potential purchase of a newly constructed hotel located in Miami, Florida. Although the Company believes there is a reasonable probability that it will acquire this hotel, there can be no assurance that all of the conditions to closing will be satisfied. Contract deposits for this hotel, totaling $300 thousand, are included in other assets in the Company’s consolidated balance sheet as of June 30, 2008. The purchase price for the 118 room Courtyard hotel is approximately $15.0 million.

Note 3

Related Parties

The Company has, and is expected to continue to engage in, significant transactions with related parties. These transactions cannot be construed to be at arms length, and the results of the Company’s operations may be different than if 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 June 30, 2008, payments to ASRG for services under the terms of this contract have totaled approximately $17.7 million since inception, which were capitalized as a part of the purchase price of the hotels.

The Company is party to an advisory agreement with Apple Seven 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. ASA utilizes Apple REIT Six, Inc. to provide these services. The total fees incurred under the agreement with ASA during each of the six month periods ended June 30, 2008 and 2007 were approximately $1.8 million and $0.9 million, respectively.

ASRG and ASA are 100% owned by Glade M. Knight, Chairman, Chief Executive Officer and President of the Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Six, Inc. (a diversified REIT), Apple REIT Eight, Inc. (a diversified 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 Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

Note 4

Shareholders’ Equity

The Company has a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned for less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. The maximum number of Units that may be redeemed in any 12-month period will be three percent of the weighted average

 

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number of Units outstanding during the 12-month period. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. During the six months ended June 30, 2008, the Company redeemed approximately 219 thousand Units for approximately $2.2 million under the program. During the six months ended June 30, 2007, the Company redeemed approximately 22 thousand Units in the amount of $0.2 million under the program.

In July 2007, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. During the six months ended June 30, 2008, approximately 1.2 million Units, representing $13.7 million in proceeds to the Company, were issued under the plan. No issuances occurred during the six months ended June 30, 2007.

Note 5

Pro Forma Information

The following unaudited pro forma information for the three month and six month periods ended June 30, 2007 is presented as if the acquisitions of the Company’s 26 hotels acquired in 2007 had occurred on the latter of January 1, 2007 or the opening date of the hotel. The results of operations for the hotels acquired in the first six months of 2008 for the period not owned were not significant compared to the Company’s total results of operations. The pro forma information does not purport to represent what the Company’s results of operations would actually have been if such transactions, in fact, had occurred on these applicable dates, nor does it purport to represent the results of operations for future periods.

 

(in thousands, except per share data)

   For the three months
ended June 30, 2007
   For the six months
ended June 30, 2007

Hotel revenues

   $ 43,833    $ 82,147

Net income

   $ 9,216    $ 15,088

Net income per share - basic and diluted

   $ 0.14    $ 0.26

The pro forma information reflects adjustments for actual revenues and expenses of the 26 hotels acquired during 2007 for the respective period owned prior to acquisition by the Company. Net income has been adjusted as follows: (1) interest income and expense has been adjusted to reflect the reduction in cash and cash equivalents required to fund the acquisitions, and where applicable, utilization of the Company’s line of credit borrowing facility; (2) interest expense related to prior owner’s debt which was not assumed has been eliminated; and (3) depreciation has been adjusted based on the Company’s basis in the hotels.

Note 6

Subsequent Events

On July 14, 2008, the Company paid $0.073334 per common share, totaling $6.8 million, in a dividend distribution to its common shareholders. Under the Company’s Dividend Reinvestment Plan, $2.4 million were reinvested, resulting in the issuance of 214,264 Units.

In July 2008, the Company redeemed 259,957 Units for approximately $2.7 million under its Unit Redemption Program.

 

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Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

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

Overview

The Company is a Virginia corporation formed to invest in hotels and other selected real estate in select metropolitan areas in the United States. The Company was initially capitalized on May 26, 2005, with its first investor closing on March 15, 2006. The best-efforts offering was completed in July 2007. The Company owned 50 hotels as of June 30, 2008, located 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 April 27, 2006. An additional 17 hotels were purchased during 2006, 26 hotels were purchased during 2007, and six hotels were purchased during the first six months of 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, in general, has met the Company’s expectations for the period owned. In evaluating financial condition and operating performance, the most important matters on which the Company focuses are revenue measurements, such as average occupancy, average daily rate and revenue per available room, and expenses, such as hotel operating expenses, general and administrative and other expenses described below. The following is a summary of the Company’s results (in thousands, except statistical data):

 

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     Three months ended June 30,     Six months ended June 30,  
     2008     % of
Revenue
    2007     % of
Revenue
    Percent
change
    2008     % of
Revenue
    2007     % of
Revenue
    Percent
change
 

Total hotel revenue

   $ 57,179     100 %   $ 32,369     100 %   77 %   $ 107,635     100 %   $ 54,824     100 %   96 %

Hotel operating expenses

     32,832     57 %     17,661     55 %   86 %     62,172     58 %     29,876     54 %   108 %

Taxes, insurance and other expense

     3,245     6 %     2,398     7 %   35 %     6,443     6 %     3,966     7 %   62 %

General and administrative expense

     1,660     3 %     975     3 %   70 %     3,058     3 %     1,650     3 %   85 %

Depreciation

     7,008         3,730       88 %     13,496         6,488       108 %

Interest (expense) income, net

     (1,014 )       141       NA       (1,338 )       (295 )     354 %

Number of hotels

     50         36       39 %     50         36       39 %

ADR

   $ 121       $ 120       1 %   $ 121       $ 121       0 %

Occupancy

     76 %       78 %     -3 %     74 %       76 %     -3 %

RevPAR

   $ 92       $ 94       -2 %   $ 90       $ 92       -2 %

Hotels Owned

The following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each of the 50 hotels the Company owned at June 30, 2008:

 

City

  

State

  

Brand

  

Manager

  

Date
Acquired

  

Rooms

  

Gross
Purchase
Price

Montgomery    AL    Homewood Suites    LBA    8/17/2006    91    $10,660
Montgomery    AL    Hilton Garden Inn    LBA    8/17/2006    97    10,385
Troy    AL    Hampton Inn    LBA    8/17/2006    82    6,130
Auburn    AL    Hilton Garden Inn    LBA    8/17/2006    101    10,185
Huntsville    AL    Hilton Garden Inn    LBA    8/17/2006    101    10,285
Huntsville    AL    Homewood Suites    LBA    10/27/2006    107    11,606
Prattville    AL    Courtyard    LBA    4/24/2007    84    9,304
Dothan    AL    Fairfield Inn    LBA    5/16/2007    63    4,584
Trussville    AL    Courtyard    LBA    10/4/2007    84    9,510
Huntsville    AL    TownePlace Suites    LBA    12/10/2007    86    8,927
Dothan    AL    Residence Inn    LBA    4/16/2008    84    9,669
Tucson    AZ    Residence Inn    Western    1/17/2008    124    16,640
San Diego    CA    Hilton Garden Inn    Inn Ventures    5/9/2006    200    34,500
Rancho Bernardo    CA    Courtyard    Dimension    12/12/2006    210    36,000
Agoura Hills    CA    Homewood Suites    Dimension    5/8/2007    125    25,250
San Diego    CA    Residence Inn    Dimension    6/13/2007    121    32,500
San Diego    CA    Hampton Inn    Dimension    7/19/2007    177    42,000
Highlands Ranch    CO    Residence Inn    Dimension    2/22/2007    117    19,000
Highlands Ranch    CO    Hilton Garden Inn    Dimension    3/9/2007    128    20,500
Sarasota    FL    Homewood Suites    Hilton    9/15/2006    100    13,800
Miami    FL    Homewood Suites    Dimension    2/21/2007    159    24,300
Tallahassee    FL    Fairfield Inn    LBA    4/24/2007    79    6,647
Lakeland    FL    Courtyard    LBA    4/24/2007    78    9,805
Columbus    GA    Fairfield Inn    LBA    4/24/2007    79    7,333

 

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Macon    GA    Hilton Garden Inn    LBA    6/28/2007    101    10,660
Columbus    GA    SpringHill Suites    LBA    3/6/2008    85    9,675
Columbus    GA    TownePlace Suites    LBA    5/22/2008    86    8,428
Boise    ID    SpringHill Suites    Inn Ventures    9/14/2007    230    21,000
New Orleans    LA    Homewood Suites    Dimension    12/15/2006    166    43,000
Hattiesburg    MS    Courtyard    LBA    10/5/2006    84    9,455
Tupelo    MS    Hampton Inn    LBA    1/23/2007    96    5,245
Omaha    NE    Courtyard    Marriott    11/4/2006    181    23,100
Cranford    NJ    Homewood Suites    Dimension    3/7/2007    108    13,500
Mahwah    NJ    Homewood Suites    Dimension    3/7/2007    110    19,500
Ronkonkoma    NY    Hilton Garden Inn    White    12/15/2006    164    27,000
Cincinnati    OH    Homewood Suites    White    12/1/2006    76    7,100
Memphis    TN    Homewood Suites    Hilton    5/15/2007    140    11,100
Houston    TX    Residence Inn    Western    4/27/2006    129    13,600
Brownsville    TX    Courtyard    Western    6/19/2006    90    8,550
Stafford    TX    Homewood Suites    Western    8/15/2006    78    7,800
San Antonio    TX    TownePlace Suites    Western    6/29/2007    106    11,925
Addison    TX    SpringHill Suites    Marriott    8/10/2007    159    12,500
San Antonio    TX    TownePlace Suites    Western    9/27/2007    123    13,838
El Paso    TX    Homewood Suites    Western    4/23/2008    114    15,390
Provo    UT    Residence Inn    Dimension    6/13/2007    114    11,250
Alexandria    VA    Courtyard    Marriott    7/13/2007    176    36,997
Richmond    VA    Marriott    White    1/25/2008    401    53,300
Seattle    WA    Residence Inn    Inn Ventures    9/1/2006    234    56,173
Vancouver    WA    SpringHill Suites    Inn Ventures    6/1/2007    119    15,988
Kirkland    WA    Courtyard    Inn Ventures    10/23/2007    150    31,000
                     
            Total    6,297    $886,594
                     

With the exception of assumed mortgage loans (approximately $130 million of principal was assumed, secured by 10 hotels) on some hotel properties, substantially all of the purchase price of the hotels was funded by proceeds from the Company’s best-efforts offering of Units, completed in July 2007. The Company also used the proceeds of its offering to pay 2% of the gross purchase price for these hotels, which was approximately $17.7 million, as a brokerage commission to Apple Suites Realty Group, Inc. (“ASRG”), wholly-owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer. The Company leased all of its hotels to wholly-owned taxable REIT subsidiaries under master hotel lease agreements.

Of the Company’s 50 hotels owned at June 30, 2008, three were purchased during the second quarter of 2008. The total gross purchase price for these three hotels, with a total of 284 rooms, was approximately $33.5 million. For the six month period ended June 30, 2008, the Company completed the purchase of six hotels, with a total of 894 rooms, for a combined gross purchase price of $113.1 million.

Results of Operations

The Company was initially capitalized in May 2005 and began operations on April 27, 2006, with the Company’s first property acquisition. As of June 30, 2008, the Company owned 50 hotels (six of which were purchased during the first six months of 2008), compared to 36 hotels owned at June 30, 2007 (eighteen of which were purchased during the first six months of 2007). As a result of this activity, a comparison of operations for the three month and six month periods ended June 30, 2008 to the prior year is not meaningful. In general, performance at the Company’s hotels have met expectations for the period held. Hotel performance is impacted by many factors including economic conditions in the United States, as well as each locality. As a result, there can be no assurance that the Company’s operating performance will continue to meet expectations in the future.

 

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Revenues

The Company’s principal source of revenue is hotel room revenue and other related revenue. Hotel operations included in the consolidated statement of operations are for the Company’s hotels acquired through June 30, 2008, for the respective period of ownership for each property. The Company owned 50 hotels as of June 30, 2008, compared to 36 hotels owned as of June 30, 2007. For the three months ended June 30, 2008 and 2007, the Company had total revenue of $57.2 and $32.4 million, respectively, with average occupancy of 76% and 78%, average daily rate (“ADR”) of $121 and $120, and revenue per available room (“RevPAR”) of $92 and $94. For the six month periods ended June 30, 2008 and 2007, the Company had total revenue of $107.6 and $54.8 million, respectively, with average occupancy of 74% and 76%, ADR of $121, and RevPAR of $90 and $92. 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 comparable with industry and brand averages, given the Company’s portfolio of hotels and the markets where the Company’s hotels are located.

Expenses

For the three month periods ended June 30, 2008 and 2007, hotel direct expenses totaled $32.8 and $17.7 million, or 57% and 55% of total revenue, respectively. For the six month periods ended June 30, 2008 and 2007, hotel direct expenses were $62.2 and $29.9 million, or 58% and 54% or total revenue for each applicable period. Hotel direct expenses consist of operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. At the time of purchase of the 401 room full-service Marriott hotel in Richmond, Virginia (“MRV”) on January 25, 2008, the Company implemented a change from the predecessor owner’s prior hotel management company to White Lodging Services Corporation. The Company incurred hotel staff recruiting, training, travel and relocation costs associated with the installation of the new management company and related personnel resources at the MRV. In addition, expenditures for non-capitalized items associated with improving the hotel’s rooms, restaurant, and overall service levels, and addressing deferred maintenance and repair, were incurred. These transition costs associated with the MRV hotel were approximately $0.4 and $0.9 million for the three and six month periods ended June 30, 2008, respectively. Excluding the results of operations of the MRV hotel, the Company’s hotel direct expenses were 54% of total revenue in the second quarter of 2008, and 55% of total revenue for the six months ended June 30, 2008.

Taxes, insurance, and other expense for the three months ended June 30, 2008 and 2007 were $3.2 and $2.4 million, or 6% and 7% of total revenue for the applicable period. For the six month periods ended June 30, 2008 and 2007, taxes, insurance, and other expense totaled $6.4 and $4.0 million, or 6% and 7% of total revenue for the applicable period. General and administrative expense for the three months ended June 30, 2008 and 2007 were $1.7 and $1.0 million, representing 3% of total revenue. For the six month periods ended June 30, 2008 and 2007, general and administrative expense totaled $3.1 and $1.7 million, or 3% of total revenue for each period.

Depreciation expense for the three months ended June 30, 2008 and 2007 was $7.0 million and $3.7 million. For the six month periods ended June 30, 2008 and 2007, depreciation expense totaled $13.5 and $6.5 million. These amounts represent depreciation expense of the Company’s hotel buildings and related improvements, and associated furniture, fixtures and equipment, for the respective periods owned.

For the three months ended June 30, 2008 and 2007, the Company recognized interest income of $0.4 and $1.3 million, respectively. For the six month periods ended June 30, 2008 and 2007, interest income totaled $1.4 and $1.8 million, respectively. Interest income represents earnings on excess cash invested in short term money market instruments. The Company’s average balances of invested cash have decreased since completion of the Company’s Unit offering in July 2007, due to the Company’s ongoing hotel acquisition and renovation activity. Interest expense during the three months ended June 30, 2008 and 2007 totaled $1.4 and $1.2 million, respectively. For the six month periods ended June 30, 2008 and 2007, interest

 

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expense totaled $2.7 and $2.1 million. Interest expense primarily represents interest incurred on mortgage loans assumed on acquired hotels. As of June 30, 2008, mortgage loans were outstanding on ten of the Company’s hotel properties, totaling $110.7 million. Interest expense in 2008 is net of capitalized interest, of approximately $0.6 million, associated with several significant renovations occurring in the first six months of 2008.

Liquidity and Capital Resources

The Company’s cash on hand ($42.8 million at June 30, 2008) and operating cash flow from the properties owned are the Company’s principal source of liquidity. In addition, the Company may borrow funds, subject to limitations set forth in its bylaws. The Company anticipates that cash flow, and cash on hand, will be adequate to cover substantially all of its operating expenses and to permit the Company to meet substantially all of its anticipated liquidity requirements, including distributions to shareholders, property acquisitions, capital expenditures and debt service.

To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions in the first six months of 2008 totaled $40.5 million and were paid monthly at a rate of $0.073334 per common share. For the same period, the Company’s cash generated from operations was approximately $29.4 million. Due to the inherent delay between raising capital and investing that same capital in income producing real estate, the Company has had significant amounts of cash earning interest at short term money market rates. As a result, the difference between distributions paid and cash generated from operations has been funded from proceeds from the Company’s completed initial public offering of Units (completed in July 2007), and this portion of distributions is expected to be treated as a return of capital for federal income tax purposes. The Company intends to continue paying dividends on a monthly basis at an annualized rate of $0.88 per common share. Since a portion of distributions has to date been funded with proceeds from the offering of Units, the Company’s ability to maintain its current intended rate of distribution will be primarily based on its ability to fully invest its available cash on hand in hotel properties, and thereby increase its funds generated from operations. Since there can be no assurance of the Company’s ability to acquire properties that provide income at this level, or that the properties already acquired will provide income at this level, there can be no assurance as to the classification or duration of distributions at the current rate. Proceeds of the Company’s Unit offering which are distributed are not available for investment in properties.

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 between 2% to 5% of gross revenues of the applicable hotel, provided that such amount may be used for the Company’s capital expenditures with respect to the applicable hotel. The Company expects that this amount will be adequate to fund required repair, replacement, and refurbishments and to maintain the Company’s hotels in a competitive condition. As of June 30, 2008, the Company also held $9.7 million in restricted cash accounts for capital improvement purposes required by certain loan or hotel management agreements. The Company substantially completed renovations on five hotel properties during the first six months of 2008. In addition, major renovations were continuing on two other hotel properties at the end of the second quarter of 2008. An additional five properties are expected to begin major renovations during the remainder of 2008. Total capital expenditures incurred in the first six months of 2008 were approximately $11.2 million. Additional capital expenditures are anticipated to range between $14 million and $18 million over the remaining six month period in 2008.

The Company has a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned for less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. The maximum number of Units that may be redeemed in any 12-month period will be three percent of the weighted average number of Units outstanding during the 12-month period. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. During the six months ended June 30, 2008, the Company redeemed approximately 219 thousand Units in the amount of $2.2 million under the program. During the six months ended June 30, 2007, the Company redeemed approximately 22 thousand Units in the amount of $0.2 million under the program.

 

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In July 2007, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. During the six months ended June 30, 2008, approximately 1.2 million Units, representing $13.7 million in proceeds to the Company, were issued under the plan. No issuances occurred during the six months ended June 30, 2007.

As of June 30, 2008, the Company had one outstanding hotel purchase contract, relating to the potential purchase of a newly constructed hotel located in Miami, Florida. Although the Company believes there is a reasonable probability that it will acquire this hotel, there can be no assurance that all of the conditions to closing will be satisfied. Contract deposits for this hotel, amounting to $300 thousand, are included in other assets in the Company’s consolidated balance sheet as of June 30, 2008. The purchase price for the 118 room Courtyard hotel is approximately $15.0 million. The Company intends to use cash on hand to fund the purchase of the hotel.

Related Party Transactions

The Company has, and is expected to continue to engage in, significant transactions with related parties. These transactions cannot be construed to be at arms length, and the results of the Company’s operations may be different than if 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 June 30, 2008, payments to ASRG for services under the terms of this contract have totaled approximately $17.7 million since inception, which were capitalized as a part of the purchase price of the hotels.

The Company is party to an advisory agreement with Apple Seven 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. ASA utilizes Apple REIT Six, Inc. to provide these services. The total fees incurred under the agreement with ASA during each of the six month periods ended June 30, 2008 and 2007 were approximately $1.8 million and $0.9 million, respectively.

ASRG and ASA are 100% owned by Glade M. Knight, Chairman, Chief Executive Officer and President of the Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Six, Inc. (a diversified REIT), Apple REIT Eight, Inc. (a diversified 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 Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

Subsequent Events

On July 14, 2008, the Company paid $0.073334 per common share, totaling $6.8 million, in a dividend distribution to its common shareholders. Under the Company’s Dividend Reinvestment Plan, $2.4 million were reinvested, resulting in the issuance of 214,264 Units.

In July 2008, the Company redeemed 259,957 Units for approximately $2.7 million under its Unit Redemption Program.

 

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Table of Contents

Impact of Inflation

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

Business Interruption

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

Seasonality

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

Recent 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 SFAS 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 is 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.

In March 2008, FASB issued SFAS 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.

 

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Table of Contents

In May 2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s (“SEC”) approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 162 on its financial statements.

 

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of June 30, 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 June 30, 2008 of $42.8 million, every 100 basis points change in interest rates will impact the Company’s annual net income by $428 thousand, all other factors remaining the same.

 

Item 4. Controls and Procedures

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

 

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PART II. OTHER INFORMATION

 

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

Unit Redemption Program

The Company has instituted a Unit Redemption Program to provide its shareholders who have held their Units for at least one year with the benefit of limited interim liquidity, by presenting for redemption all or any portion of their Units. If Units are held for the required one-year period, the Units may be redeemed for a purchase price equal to 92% of the price paid per Unit if the Units have been owned less than three years, or 100% of the price paid per Unit if the Units have been owned for three years or more. The board of directors reserves the right, in its sole discretion, at any time and from time to time, to waive the one-year holding period, reject any request for redemption, change the purchase price for redemptions or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. The following is a summary of redemptions during the second 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
 

April 2008

   129,727    $ 10.24    356,842     (1 )

 

(1)

The maximum number of Units that may be redeemed in any 12 month period is limited to three percent (3.0%) of the weighted average number of Units outstanding from the beginning of the 12 month period.

 

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

On May 8, 2008, the Company held an Annual Meeting of Shareholders for the purpose of electing three directors to the Company’s Board of Directors. The nominees to the Company’s Board of Directors were Kent W. Colton, Lisa B. Kern and Bruce H. Matson, each of whom was a current director of the Company. Mr. Colton and Mr. Matson were nominated for a three year term, and Ms. Kern was nominated for a two year term. The election was uncontested, and each of the three nominees was elected.

The total number of votes represented at the Annual Meeting of Shareholders was 92,169,426. The voting results were as follows:

 

Nominee

   Votes For    Votes Withheld/Against

Kent W. Colton

   91,643,421    526,005

Lisa B. Kern

   91,634,003    535,423

Bruce H. Matson

   91,645,168    524,258

The names of the other directors whose terms of office as directors continued after the Annual Meeting of Shareholders are Glade M. Knight and Glenn W. Bunting.

 

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Item 6. Exhibits

 

Exhibit

Number

  

Description

  3.1

   Amended and Restated Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.3 to amendment no. 3 to the Registrant’s registration statement on Form S-11 (SEC File No. 333-125546) effective March 3, 2006).

  3.2

   Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the Registrant’s registration statement on Form S-11 (SEC File No. 333-125546) effective March 3, 2006).

31.1

   Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).

31.2

   Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).

32.1

   Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).

 

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SIGNATURES

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

 

APPLE REIT SEVEN, INC.    

By:

 

/s/ GLADE M. KNIGHT

    Date: August 4, 2008
  Glade M. Knight,    
 

Chairman of the Board,

Chief Executive Officer, and President

(Principal Executive Officer)

   

By:

 

/s/ BRYAN PEERY

    Date: August 4, 2008
  Bryan Peery,    
 

Chief Financial Officer

(Principal Financial and Principal Accounting Officer)

   

 

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