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

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

 

¨ 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 000-53175

 

 

Apple REIT Eight, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   20- 8268625

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

814 East Main Street

Richmond, Virginia

  23219
(Address of principal executive offices)   (Zip Code)

(804) 344-8121

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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   ¨    Smaller reporting company   x

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

Number of registrant’s common shares outstanding as of November 1, 2008: 92,045,504

 

 

 


Table of Contents

Apple REIT Eight, Inc.

FORM 10-Q

INDEX

 

          Page
Number

PART I. FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (Unaudited)

  
  

Consolidated Balance Sheets – September 30, 2008 and December 31, 2007

   3
  

Consolidated Statements of Operations and Comprehensive Income – Three and nine months ended September 30, 2008 and three months ended September 30, 2007 and Period from January 22, 2007 (initial capitalization) through September 30, 2007

   4
  

Consolidated Statements of Cash Flows – Nine months ended September 30, 2008 and Period from January 22, 2007 (initial capitalization) through September 30, 2007

   5
  

Notes to Consolidated Financial Statements

   6

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   15

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   25

Item 4.

  

Controls and Procedures

   25

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

   26

Item 3.

  

Defaults Upon Senior Securities (not applicable)

  

Item 4.

  

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

  

Item 5.

  

Other Information (not applicable)

  

Item 6.

  

Exhibits

   27

Signatures

   28

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, Residence Inn® by Marriott, Courtyard® by Marriott and Renaissance® 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 Eight, Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

 

     September 30,
2008
    December 31,
2007
 

ASSETS

    

Investment in hotels, net of accumulated depreciation of $14,800 and $333

   $ 925,366     $ 87,310  

Cash and cash equivalents

     55,464       562,009  

Restricted cash-furniture, fixtures and other escrows

     10,552       —    

Due from third party managers, net

     6,540       370  

Other assets, net

     11,287       21,082  
                

TOTAL ASSETS

   $ 1,009,209     $ 670,771  
                

LIABILITIES

    

Accounts payable and accrued expenses

   $ 7,198     $ 452  

Intangible liabilities, net

     12,115       —    

Note payable

     128,959       —    
                

TOTAL LIABILITIES

     148,272       452  
                

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 91,920,807 and 68,942,756 shares

     —         —    

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 91,920,807 and 68,942,756 shares

     907,301       679,361  

Distributions greater than net income

     (42,915 )     (9,066 )

Accumulated other comprehensive loss

     (3,473 )     —    
                

TOTAL SHAREHOLDERS’ EQUITY

     860,937       670,319  
                

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,009,209     $ 670,771  
                

See notes to consolidated financial statements.

Note: The Company was initially capitalized on January 22, 2007 and commenced operations November 9, 2007.

 

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Apple REIT Eight, Inc.

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(In thousands, except per share data)

 

     Three months
ended
September 30, 2008
    Three months
ended
September 30, 2007
    Nine months
ended
September 30, 2008
    For the period
January 22, 2007 (Initial

Capitalization) through
September 30, 2007
 

Revenues:

        

Room revenue

   $ 46,011     $ —       $ 87,895     $ —    

Other revenue

     3,107       —         6,053       —    
                                

Total revenue

     49,118       —         93,948       —    

Expenses:

        

Operating expense

     11,987       —         23,073       —    

Hotel administrative expense

     3,738       —         7,316       —    

Sales and marketing

     3,050       —         5,693       —    

Utilities

     2,153       —         3,880       —    

Repair and maintenance

     2,228       —         4,339       —    

Franchise fees

     1,966       —         3,653       —    

Management fees

     1,944       —         3,421       —    

Taxes, insurance and other

     2,372       —         4,500       —    

Land lease expense

     1,583       —         4,674       —    

General and administrative

     1,023       241       3,438       309  

Depreciation expense

     6,825       —         14,467       —    
                                

Total expenses

     38,869       241       78,454       309  

Operating income (loss)

     10,249       (241 )     15,494       (309 )

Investment income

     315       —         3,315       —    

Interest income

     648       663       5,959       655  

Interest expense

     (1,752 )     —         (2,494 )     —    
                                

Net income

   $ 9,460     $ 422     $ 22,274     $ 346  
                                

Unrealized loss on investments

     (1,136 )     —         (3,473 )     —    
                                

Comprehensive income

   $ 8,324     $ 422     $ 18,801     $ 346  
                                

Basic and diluted earnings per common share

   $ 0.10     $ 0.08     $ 0.26     $ 0.17  
                                

Weighted average common shares outstanding—basic and diluted

     91,604       5,491       85,627       2,013  

Distributions declared and paid per common share

   $ 0.22     $ 0.15     $ 0.66     $ 0.15  
                                

See notes to consolidated financial statements.

Note: The Company was initially capitalized on January 22, 2007 and commenced operations November 9, 2007.

 

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Apple REIT Eight, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

     Nine months
ended
September 30, 2008
    For the period
January 22, 2007 (Initial
Capitalization) through
September 30, 2007
 

Cash flow from operating activities:

    

Net income

   $ 22,274     $ 346  

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

    

Depreciation

     14,467       —    

Amortization of deferred financing costs and fair value adjustments

     (551 )  

Stock option expense

     61       20  

Net realized gain on sale of investments

     (2,545 )     —    

Changes in operating assets and liabilities:

    

Increase in other assets

     (1,033 )     —    

Increase in funds due from third party managers

     (6,250 )     —    

Increase in accounts payable and accrued expenses

     4,660       107  
                

Net cash provided by operating activities

     31,083       473  

Cash flow used in investing activities:

    

Increase in capital improvement reserves

     (1,040 )     —    

Cash paid for the acquisition of hotel properties

     (694,041 )     —    

Deposits and other disbursements for the potential acquisition of hotel properties

     (378 )     (4,260 )

Cost of investments in equity securities—available for sale

     (30,562 )     —    

Proceeds from sale of equity securities—available for sale

     22,692       —    

Capital improvements

     (3,836 )     —    
                

Net cash used in investing activities

     (707,165 )     (4,260 )

Cash flow from financing activities:

    

Net proceeds related to issuance of common stock

     227,879       136,674  

Cash distributions paid to common shareholders

     (56,123 )     (1,098 )

Mortgage principal payments

     (497 )     —    

Deferred financing costs

     (1,722 )     —    
                

Net cash provided by financing activities

     169,537       135,576  
                

Net increase/(decrease) in cash and cash equivalents

     (506,545 )     131,789  

Cash and cash equivalents, beginning of period

     562,009       24  
                

Cash and cash equivalents, end of period

   $ 55,464     $ 131,813  
                

Non-cash transactions:

    

Notes payable assumed in acquisitions

   $ 128,924     $ —    

Intangible liabilities assumed in acquisition

   $ 12,685     $ —    

See notes to consolidated financial statements.

Note: The Company was initially capitalized on January 22, 2007 and commenced operations November 9, 2007.

 

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APPLE REIT EIGHT, INC.

Notes to Consolidated Financial Statements

1. General Information and Summary of Significant Accounting Policies

Basis of Presentation

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

Organization

Apple REIT Eight, Inc. (the “Company”) is a Virginia corporation that intends to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. The Company was formed to invest in hotels, residential apartment communities and other income-producing real estate assets in selected metropolitan areas in the United States. Initial capitalization occurred on January 22, 2007, when 10 Units, each Unit consisting of one share of common stock and one share of Series A preferred stock, were purchased by Apple Eight Advisors, Inc. (“A8A”), owned by Glade M. Knight, the Company’s Chairman and CEO, and 240,000 Series B convertible shares were also purchased individually by Glade M. Knight. The Company began operations on November 9, 2007 when it purchased its first hotel. The Company’s fiscal year end is December 31. The Company has no foreign operations or assets and its operating structure includes two segments. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

Significant Accounting Policies

Use of Estimates

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

Offering Costs

In April 2008, the Company completed its best-efforts offering of Units by David Lerner Associates, Inc., (the “Managing Dealer”), which received a selling commission and a marketing expense allowance based on proceeds of the Units sold. Additionally, the Company incurred other offering costs including costs for legal, accounting and reporting services. These offering costs are recorded by the Company as a reduction of shareholders’ equity. From the Company’s initial capitalization on January 22, 2007 through the conclusion of the offering, the Company sold 91.1 million Units for gross proceeds of $1.0 billion and proceeds net of offering costs of $899 million.

Investments

The Company owns equity securities that are classified as available-for-sale, in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, and are included in Other assets, net in the Company’s Consolidated Balance Sheets at fair value, with unrealized gains and losses reported as accumulated other comprehensive income or loss.

 

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Under Financial Accounting Standards Board Statement No. 157 the investments are classified as Level 1 as the fair value is determined based on quoted prices of identical investments. Realized gains and losses on the sale of investments, as well as declines in value of a security considered to be other than temporary, are recognized in operations on the specific identification basis. As of September 30, 2008, the Company owned marketable securities with a cost of $10.4 million and a fair value of approximately $6.9 million. The Company realized gains on sale of equity securities of $2.5 million during the nine months ending September 30, 2008 which are included in Investment income in the Company’s Consolidated Statements of Operations. The Company reviews the status of each security quarterly to determine whether an other-than-temporary impairment has occurred. Based on this review, the Company has concluded none of the available-for-sale securities has experienced an other-than-temporary impairment.

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 potential common shares with a dilutive effect for the nine months ended 2008 or during the period January 22, 2007 through September 30, 2007. 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.

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 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 159 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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2. Investments in Hotels

The Company has purchased 43 hotels in 2008. 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. All dollar amounts are in thousands.

 

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Location

  

Brand

  

Manager

   Gross
Purchase
Price
   Rooms    Date of
Purchase

Port Wentworth, GA

   Hampton Inn    Newport    $ 10,780    106    1/2/2008

New York, NY

   Independent    Marriott      99,000    200    1/4/2008

Marlborough, MA

   Residence Inn    True North      20,200    112    1/15/2008

Annapolis, MD

   Hilton Garden Inn    White      25,000    126    1/15/2008

Matthews, NC

   Hampton Inn    Newport      11,300    92    1/15/2008

Dunn, NC

   Hampton Inn    McKibbon      12,500    120    1/24/2008

Tallahassee, FL

   Hilton Garden Inn    LBA      13,200    85    1/25/2008

Rogers, AR

   Residence Inn    Intermountain      11,744    88    2/29/2008

Rogers, AR

   Fairfield Inn    Intermountain      8,000    99    2/29/2008

Westford, MA

   Hampton Inn & Suites    True North      15,250    110    3/6/2008

Concord, NC

   Hampton Inn    Newport      9,200    101    3/7/2008

Sacramento, CA

   Hilton Garden Inn    Dimension      27,630    154    3/7/2008

Texarkana, TX

   TownePlace Suites    Intermountain      9,057    85    3/7/2008

Texarkana, TX

   Courtyard    Intermountain      12,924    90    3/7/2008

Sanford, FL

   SpringHill Suites    LBA      11,150    105    3/14/2008

Springdale, AR

   Residence Inn    Intermountain      5,606    72    3/14/2008

Overland Park, KS

   SpringHill Suites    True North      8,850    102    3/17/2008

Westford, MA

   Residence Inn    True North      14,850    108    4/30/2008

Cypress, CA

   Courtyard    Dimension      31,164    180    4/30/2008

Overland Park, KS

   Residence Inn    True North      15,850    120    4/30/2008

Kansas City, MO

   Residence Inn    True North      17,350    106    4/30/2008

Fayetteville, NC

   Residence Inn    Intermountain      12,201    92    5/9/2008

Burbank, CA

   Residence Inn    Marriott      50,500    166    5/13/2008

Oceanside, CA

   Residence Inn    Marriott      28,750    125    5/13/2008

Greenville, SC

   Residence Inn    McKibbon      8,700    78    5/19/2008

Winston-Salem, NC

   Courtyard    McKibbon      13,500    122    5/19/2008

Birmingham, AL

   Homewood Suites    McKibbon      16,500    95    5/23/2008

Hilton Head, SC

   Hilton Garden Inn    McKibbon      13,500    104    5/29/2008

Virginia Beach, VA

   Courtyard    Crestline      27,100    141    6/5/2008

Virginia Beach, VA

   Courtyard    Crestline      39,700    160    6/5/2008

Carolina Beach, NC

   Courtyard    Crestline      24,214    144    6/5/2008

Charlottesville, VA

   Courtyard    Crestline      27,900    137    6/5/2008

Wichita, KS

   Courtyard    Intermountain      8,874    90    6/13/2008

Tampa, FL

   TownePlace Suites    McKibbon      11,250    95    6/17/2008

Jacksonville, FL

   Homewood Suites    McKibbon      23,250    119    6/17/2008

Tulare, CA

   Hampton Inn & Suites    Inn Ventures      10,331    86    6/26/2008

Suffolk, VA

   TownePlace Suites    Crestline      10,000    72    7/2/2008

Suffolk, VA

   Courtyard    Crestline      12,500    92    7/2/2008

San Jose, CA

   Homewood Suites    Dimension      21,862    140    7/2/2008

Tukwila, WA

   Homewood Suites    Dimension      15,707    106    7/2/2008

Savannah, GA

   Hilton Garden Inn    Newport      12,500    105    7/31/2008

Overland Park, KS

   Fairfield Inn & Suites    True North      12,050    110    8/20/2008

Columbia, SC

   Hilton Garden Inn    Newport      21,200    143    9/22/2008
                    
         $ 812,694    4,883   
                    

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

The Company assumed approximately $128.9 million of mortgage indebtedness during the first nine months of 2008, associated with 15 of its hotel acquisitions. The following table summarizes the interest rate, maturity date and principal amount assumed associated with each mortgage. All dollar amounts are in thousands.

 

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Location

  

Brand

   Interest
Rate
    Maturity
Date
   Principal
Assumed

Concord, NC

   Hampton Inn    6.10 %   3/1/2017    $ 5,143

Westford, MA

   Residence Inn    6.50 %   11/10/2010      7,199

Overland Park, KS

   Residence Inn    5.74 %   4/1/2015      7,079

Kansas City, MO

   Residence Inn    5.74 %   11/1/2015      11,645

Fayetteville, NC

   Residence Inn    8.12 %   11/1/2011      7,204

Greenville, SC

   Residence Inn    6.03 %   2/8/2017      6,512

Winston-Salem, NC

   Courtyard    5.94 %   12/8/2016      8,000

Birmingham, AL

   Homewood Suites    6.03 %   2/8/2017      11,815

Hilton Head, SC

   Hilton Garden Inn    6.29 %   4/11/2016      6,371

Tampa, FL

   TownePlace Suites    6.06 %   2/8/2017      8,268

Jacksonville, FL

   Homewood Suites    6.03 %   2/8/2017      17,159

Suffolk, VA

   TownePlace Suites    6.03 %   7/1/2017      6,630

Suffolk, VA

   Courtyard    6.03 %   7/1/2017      8,644

Savannah, GA

   Hilton Garden Inn    5.87 %   2/1/2017      5,679

Columbia, SC

   Hilton Garden Inn      (a)   2/1/2012      11,576
              
           $ 128,924
              

 

(a) The interest rate on this mortgage is a variable rate based on 3-month LIBOR. As of September 30, 2008, the current interest rate was 7.49%.

In addition to the gross purchase price for the hotels in New York, New York, Tallahassee, Florida, one of the Virginia Beach, Virginia hotels and the hotel in Savannah, Georgia, the Company assumed land leases. The remaining minimum lease payments for the New York lease are $229.6 million and the term runs through August 2046. The remaining minimum lease payments for the Tallahassee lease are $3.2 million and the term runs through December 2088. The remaining minimum lease payments for the Virginia Beach property are $0.9 million and the term runs through December 31, 2023. The remaining minimum lease payments for the Savannah property are $0.8 million and the term runs through August 2054.

Also, as part of the purchase of the New York, New York hotel, the Company assumed six leases for retail space in the building. The remaining terms of these leases range from approximately five to ten years and the remaining minimum lease payments to be received are $10.8 million. Rental income from these leases is recorded in “Other Revenue” in the Company’s Consolidated Statements of Operations.

In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”), the Company allocates the purchase price of acquired properties to tangible and identified intangible assets and liabilities based on their respective fair values. In conjunction with the Company’s acquisition of the hotel in New York, New York and one of the Savannah, Georgia hotels in 2008, amounts were identified and allocated for market lease values and tenant relationships and are included in Intangible liabilities, net in the Company’s Consolidated Balance Sheets. These amounts are being amortized to rental income and land lease expense over the remaining terms of the associated contracts. The total value of these liabilities was $10.2 million for the New York hotel and $2.4 million for the Savannah, Georgia hotel.

The purchase price for the hotels, net of debt assumed, was funded by the Company’s cash on hand. Additionally, the Company used cash on hand to pay 2% of the aggregate gross purchase price for the 43 hotels purchased in the first nine months of 2008, totaling $16.3 million, as a brokerage commission to Apple Suites Realty Group, Inc. (“ASRG”). This entity is wholly-owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer. These costs have been capitalized to Investment in hotels, net.

 

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

 

Land

   $ 82,776  

Building and Improvements

     808,920  

Furniture, Fixtures and Equipment

     48,470  
        
     940,166  

Less Accumulated Depreciation

     (14,800 )
        

Investment in hotels, net

   $ 925,366  
        

As of September 30, 2008, the Company has entered into purchase contracts for 7 additional hotels which were under construction as of September 30, 2008, with completion expected within the next one to fifteen months. Although the Company is working towards acquiring these hotels, there are many conditions to closing that have not yet been satisfied and there can be no assurance that all of the conditions to closing will be satisfied. Contract deposits for these hotels are included in Other assets, net in the Company’s Consolidated Balance Sheets as of September 30, 2008, and in Deposits and other disbursements for the potential acquisition of hotel properties in the Company’s Consolidated Statements of Cash Flows. The following table summarizes the location, brand, number of rooms, refundable contract deposits, and gross purchase price for each hotel. All dollar amounts are in thousands.

 

Location

  

Brand

   Rooms    Deposits
Paid
   Gross
Purchase Price
 

Memphis, TN

   Hilton Garden Inn    120    $ 250    $ 17,150  

Orlando, FL

   Fairfield Inn    200      500      (a )

Orlando, FL

   SpringHill Suites    200      500      (a )

Baton Rouge, LA

   SpringHill Suites    119      100      15,100  

Rochester, MN

   Hampton Inn & Suites    124      100      14,136  

Chesapeake, VA

   Marriott    226      —        38,400  

Wilmington, NC

   Fairfield Inn & Suites    122      —        14,800  
                       
      1,111    $ 1,450    $ 154,386  
                       

 

(a) These two hotels are covered by the same purchase contract, which provides for a combined gross purchase price of $54,800. The total shown for the table includes this combined amount.

3. 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 negotiated and entered into, a Property Acquisition and Disposition Agreement with ASRG, to provide brokerage services for the acquisition and disposition of real estate assets for the Company. In accordance with the contract, ASRG is paid a fee of 2% of the gross purchase price of any acquisitions or gross sale price of any dispositions of real estate investments, subject to certain conditions. As of September 30, 2008, payments to ASRG for services under the terms of this contract have totaled $17.9 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 A8A, pursuant to which A8A provides management services to the Company. An annual fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable for these services. A8A utilizes Apple REIT Six, Inc. to provide these services. Advisory fees and other reimbursable expenses incurred by the Company under the A8A advisory agreement during the nine months ended September 30, 2008 were $2.0 million. These expenses are recorded in General and Administrative expense. For the period January 22, 2007 through September 30, 2007, the Company incurred $149 thousand for these expenses.

 

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ASRG and A8A 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., Apple REIT Seven, Inc. 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 Board of Directors of Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc.

4. Shareholder’s Equity

In the second quarter of 2008, 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. The Company has registered 10 million Units for potential issuance under the plan. Since inception through September 30, 2008, 795,255 Units were issued under the plan representing approximately $8.7 million.

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 immediately prior to the date of redemption. The Company reserves the right to change the purchase price for redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. The initial redemption under the program occurred subsequent to the third quarter of 2008.

5. Series B Convertible Preferred Stock

The Company has issued 240,000 Series B convertible preferred shares to Glade M. Knight, Chairman, Chief Executive Officer and President 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;

 

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(2) the termination or expiration without renewal of the advisory agreement with A8A, 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 a number of common shares based upon the gross proceeds raised through the date of conversion in the Company’s $1 billion offering. With the completion of the Company’s $1 billion offering in April 2008, each Series B convertible preferred share may be converted into 24.17104 common shares upon the occurrence of any conversion event.

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

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

Expense related to the issuance of 240,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B shares to common shares occurs. The expense will be measured as the difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares. Although the fair market value cannot be determined at this time, compensation expense could range from $0 to in excess of $63 million (assumes $11 per unit fair market value) which represents approximately 5.8 million shares of common stock.

6. Segments

The Company separately evaluates the performance of each of its hotel properties. Until the acquisition of the hotel in New York, New York in 2008, each hotel owned was not individually significant; therefore, the Company consolidated all hotels into one reportable segment. Due to the significance of the New York, New York hotel, the Company now has two reportable segments. The Company does not allocate corporate-level accounts to its operating segments, including corporate general and administrative expenses, non-operating interest income and interest expense. Dollar amounts are in thousands.

 

     For the three months ended September 30, 2008  
     New York,
New York
Hotel
    All Other
Hotels
    Corporate    Consolidated  

Total revenue

   $ 3,710     $ 45,408     $ —      $ 49,118  

Hotel operating expenses

     3,708       27,313       —        31,021  
                               

Property operating income

     2       18,095       —        18,097  

Interest income/(expense)

     —         (1,923 )     819      (1,104 )

Investment income

     —         —         315      315  

Depreciation/amortization

     1,059       5,766       —        6,825  

General and administrative expense

     —         —         1,023      1,023  
                               

Net income/(loss)

   $ (1,057 )   $ 10,406     $ 111    $ 9,460  
                               

Total assets

   $ 113,490     $ 833,225     $ 62,494    $ 1,009,209  

 

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     For the nine months ended September 30, 2008
     New York,
New York
Hotel
    All Other
Hotels
    Corporate    Consolidated

Total revenue

   $ 11,192     $ 82,756     $ —      $ 93,948

Hotel operating expenses

     11,170       49,379       —        60,549
                             

Property operating income

     22       33,377       —        33,399

Interest income/(expense)

       (2,665 )     6,130      3,465

Investment income

     —         —         3,315      3,315

Depreciation/amortization

     3,058       11,409       —        14,467

General and administrative expense

     —         —         3,438      3,438
                             

Net income/(loss)

   $ (3,036 )   $ 19,303     $ 6,007    $ 22,274
                             

Total assets

   $ 113,490     $ 833,225     $ 62,494    $ 1,009,209

7. Pro Forma Information (unaudited)

The following unaudited pro forma information for the three and nine months ended September 30, 2008 is presented as if the acquisitions of the Company’s hotels acquired after December 31, 2007 had occurred on the latter of January 1, 2008 or the opening date of the hotel. 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. Amounts are in thousands, except per share data.

 

     Three months
ended
September 30, 2008
   Nine months
ended
September 30, 2008

Hotel revenues

   $ 50,494    $ 140,941

Net income

     9,370      24,970

Net income per share—basic and diluted

   $ 0.10    $ 0.28

The pro forma information reflects adjustments for actual revenues and expenses of the hotels acquired during the nine months ended September 30, 2008 for the respective period owned prior to acquisition by the Company. Net income has been adjusted as follows: (1) interest income and expense have been adjusted to reflect the reduction in cash and cash equivalents required to fund the acquisitions; (2) interest expense related to prior owners’ debt which was not assumed has been eliminated; and (3) depreciation has been adjusted based on the Company’s basis in the hotels.

8. Subsequent Events

In October 2008, the Company declared and paid approximately $6.7 million in distributions to its common shareholders, or $0.073334 per outstanding common share. Under the Company’s Dividend Reinvestment Plan, $2.4 million were reinvested, resulting in the issuance of approximately 219,000 Units.

In October 2008, the Company redeemed 94,836 Units in the amount of $1.0 million under its Unit Redemption Program.

On October 21, 2008, the Company closed on the purchase of a Marriott full-service hotel located in Chesapeake, Virginia. The total purchase price for this hotel, which contains a total of 226 guest rooms, was $38.4 million.

 

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

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

Apple REIT Eight, Inc. together with its wholly owned subsidiaries (the “Company”) is a Virginia corporation that intends to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. The Company, which owned 49 properties as of September 30, 2008 and has a limited operating history, was formed to invest in hotels, residential apartment communities and other real estate in selected metropolitan areas in the United States. Initial capitalization occurred on January 22, 2007, when 10 Units, each Unit consisting of one share of common stock and one share of Series A preferred stock were purchased by Apple Eight Advisors, Inc. (“A8A”) and 240,000 shares of Series B Preferred shares were purchased by Mr. Glade M. Knight, the Company’s Chairman, Chief Executive Officer and President. The Company’s fiscal year end is December 31. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

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 results for the three and nine months ended September 30, 2008.

 

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(in thousands, except statistical data)

   Three months
ended
September 30, 2008
    Percent
of
Revenue
    Nine months
ended
September 30, 2008
    Percent
of
Revenue
 

Total revenues

   $ 49,118     100 %   $ 93,948     100 %

Hotel direct expenses

     27,066     55 %     51,375     55 %

Taxes, insurance and other expense

     2,372     5 %     4,500     5 %

Land lease expense

     1,583     3 %     4,674     5 %

General and administrative expense

     1,023     2 %     3,438     4 %

Depreciation

     6,825     14 %     14,467     15 %

Interest income, net of (expense)

     (1,104 )       3,465    

Investment income

     315         3,315    

Number of hotels

     49         49    

Average Daily Rate (ADR)

   $ 125       $ 123    

Occupancy

     75 %       74 %  

RevPAR

   $ 94       $ 91    

Hotels Owned

The following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each of the 49 hotels the Company owned at September 30, 2008. All dollar amounts are in thousands.

 

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Location

  

Brand

  

Manager

   Gross
Purchase
Price
   Rooms    Date of
Purchase

Somerset, NJ

   Courtyard    Newport    $ 16,000    162    11/9/2007

Greensboro, NC

   SpringHill Suites    Newport      8,000    82    11/9/2007

Harrisonburg, VA

   Courtyard    Newport      23,219    125    11/16/2007

Bowling Green, KY

   Hampton Inn    Newport      18,832    131    12/6/2007

Chattanooga, TN

   Homewood Suites    LBA      8,600    76    12/14/2007

Tulsa, OK

   Hampton Inn & suites    Western      10,200    102    12/28/2007

Port Wentworth, GA

   Hampton Inn    Newport      10,780    106    1/2/2008

New York, NY

   Independent    Marriott      99,000    200    1/4/2008

Marlborough, MA

   Residence Inn    True North      20,200    112    1/15/2008

Annapolis, MD

   Hilton Garden Inn    White      25,000    126    1/15/2008

Matthews, NC

   Hampton Inn    Newport      11,300    92    1/15/2008

Dunn, NC

   Hampton Inn    McKibbon      12,500    120    1/24/2008

Tallahassee, FL

   Hilton Garden Inn    LBA      13,200    85    1/25/2008

Rogers, AR

   Residence Inn    Intermountain      11,744    88    2/29/2008

Rogers, AR

   Fairfield Inn    Intermountain      8,000    99    2/29/2008

Westford, MA

   Hampton Inn & Suites    True North      15,250    110    3/6/2008

Concord, NC

   Hampton Inn    Newport      9,200    101    3/7/2008

Sacramento, CA

   Hilton Garden Inn    Dimension      27,630    154    3/7/2008

Texarkana, TX

   TownePlace Suites    Intermountain      9,057    85    3/7/2008

Texarkana, TX

   Courtyard    Intermountain      12,924    90    3/7/2008

Sanford, FL

   SpringHill Suites    LBA      11,150    105    3/14/2008

Springdale, AR

   Residence Inn    Intermountain      5,606    72    3/14/2008

Overland Park, KS

   SpringHill Suites    True North      8,850    102    3/17/2008

Westford, MA

   Residence Inn    True North      14,850    108    4/30/2008

Cypress, CA

   Courtyard    Dimension      31,164    180    4/30/2008

Overland Park, KS

   Residence Inn    True North      15,850    120    4/30/2008

Kansas City, MO

   Residence Inn    True North      17,350    106    4/30/2008

Fayetteville, NC

   Residence Inn    Intermountain      12,201    92    5/9/2008

Burbank, CA

   Residence Inn    Marriott      50,500    166    5/13/2008

Oceanside, CA

   Residence Inn    Marriott      28,750    125    5/13/2008

Greenville, SC

   Residence Inn    McKibbon      8,700    78    5/19/2008

Winston-Salem, NC

   Courtyard    McKibbon      13,500    122    5/19/2008

Birmingham, AL

   Homewood Suites    McKibbon      16,500    95    5/23/2008

Hilton Head, SC

   Hilton Garden Inn    McKibbon      13,500    104    5/29/2008

Virginia Beach, VA

   Courtyard    Crestline      27,100    141    6/5/2008

Virginia Beach, VA

   Courtyard    Crestline      39,700    160    6/5/2008

Carolina Beach, NC

   Courtyard    Crestline      24,214    144    6/5/2008

Charlottesville, VA

   Courtyard    Crestline      27,900    137    6/5/2008

Wichita, KS

   Courtyard    Intermountain      8,874    90    6/13/2008

Tampa, FL

   TownePlace Suites    McKibbon      11,250    95    6/17/2008

Jacksonville, FL

   Homewood Suites    McKibbon      23,250    119    6/17/2008

Tulare, CA

   Hampton Inn & Suites    Inn Ventures      10,331    86    6/26/2008

Suffolk, VA

   TownePlace Suites    Crestline      10,000    72    7/2/2008

Suffolk, VA

   Courtyard    Crestline      12,500    92    7/2/2008

San Jose, CA

   Homewood Suites    Dimension      21,862    140    7/2/2008

Tukwila, WA

   Homewood Suites    Dimension      15,707    106    7/2/2008

Savannah, GA

   Hilton Garden Inn    Newport      12,500    105    7/31/2008

Overland Park, KS

   Fairfield Inn & Suites    True North      12,050    110    8/20/2008

Columbia, SC

   Hilton Garden Inn    Newport      21,200    143    9/22/2008
                    
         $ 897,545    5,561   
                    

 

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The total gross purchase price for all 49 hotels of $897.5 million less debt assumed of approximately $128.9 million was funded primarily by the Company’s best-efforts offering of Units which was completed in April 2008. The Company assumed existing mortgage loans on 15 of its hotel properties purchased. The Company leases all of its hotels to its wholly-owned taxable REIT subsidiary (or a subsidiary thereof) under hotel lease agreements. The Company also used the proceeds of its offering to pay $17.9 million, representing 2% of the gross purchase price for these hotels, as a commission to Apple Suites Realty Group, Inc. (“ASRG”), 100% owned by Glade M. Knight, the Company’s Chairman, Chief Executive Officer and President.

Of the Company’s 49 hotels owned at September 30, 2008, 43 were purchased during the first nine months of 2008. The total gross purchase price for these 43 hotels, with a total of 4,883 rooms, was $812.7 million. In addition to the gross purchase price for the hotels in New York, New York, Tallahassee, Florida, one property in Virginia Beach, Virginia, and Savannah, Georgia, the Company assumed land leases. The minimum remaining lease payments for the New York lease are $229.6 million and the term runs through August 2046. The minimum remaining lease payments for the Tallahassee lease are $3.2 million and the term runs through December 2088. The land lease related to the Virginia Beach property was for a parking lot. The remaining lease payments for this parking lot are $0.9 million and the lease expires in December 2023. The remaining lease payments for the Savannah lease are $0.8 million and the term runs through August 2054.

Results of Operations

During the period from the Company’s initial formation on January 22, 2007 to November 8, 2007, the company owned no properties, had no revenue exclusive of interest income, and was primarily engaged in capital formation activities. Operations commenced on November 9, 2007 with the Company’s first property acquisition. A comparison of operations for the three and nine month periods ended September 30, 2008 to prior year results is therefore not meaningful. Hotel performance is impacted by many factors including local hotel competition, and local and national economic conditions in the United States. Since economic conditions throughout the United States have declined over the past several months, the Company expects weaker than originally anticipated results for the properties it has acquired, until general economic conditions improve.

The Company separately evaluates the performance of each of its hotel properties. Until the acquisition of its hotel in New York, New York in 2008, the Company had one reportable segment as each hotel owned was not individually significant. Due to the significance of the New York, New York hotel, the Company now has two reportable segments.

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 49 hotels acquired through September 30, 2008, for the respective period of ownership for each property. For the three and nine month periods ended September 30, 2008, the Company had total revenue of $49.1 million and $93.9 million. Revenue for the New York hotel was $3.7 million or 8% of total revenue for the third quarter and $11.2 million or 12% of total revenue for the nine months ended September 30, 2008.

For the three month period ended September 30, 2008, the hotels achieved combined average occupancy of approximately 75%, average daily rate (“ADR”) of $125 and revenue per available room (“RevPAR”) of $94. The New York hotel had average occupancy of 73%, ADR of $247 and RevPAR of $180. All other hotels combined had occupancy of 74%, ADR of $125 and RevPAR of $93. For the nine month period ended September 30, 2008, the hotels achieved combined average occupancy of approximately 74%, ADR of $123 and RevPAR of $91. The New York hotel had average occupancy of 72%, ADR of $244 and RevPAR of $175. All other hotels combined had occupancy of 74%, ADR of $123 and RevPAR of $90.

The New York hotel’s market demands and receives a much higher room rate than the other hotel locations. The Company believes that previous management of the New York hotel did not monitor or maintain an aggressive pricing strategy. Upon acquisition of the New York hotel, the Company transitioned the day-to-day management to an affiliate of Marriott, and will continue to implement and

 

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maintain an aggressive pricing strategy. However, this hotel is currently undergoing a renovation and will be converted to a Marriott Renaissance hotel in early 2009. As a result of the renovation, approximately 8 percent of the rooms were out of service in the third quarter of 2008. Due to the renovation and the current economic climate, RevPAR is not anticipated to increase for the remainder of 2008 at this hotel. The rates for the other hotels are comparable with industry and brand averages, and as a result of general economic conditions, the Company does not anticipate increases in RevPAR for the remainder of 2008 into 2009. RevPAR is calculated as ADR multiplied by the occupancy percentage. ADR is calculated as room revenue divided by the number of rooms sold.

Expenses

For the three month period ended September 30, 2008, hotel direct expenses of the Company’s hotels totaled $27.1 million or 55% of total revenue. The New York hotel had direct expenses of $2.1 million or 56% of its total revenue for the quarter. For the nine month period ended September 30, 2008, hotel direct expenses were $51.4 million or 55% of total revenue. The New York hotel had direct expenses of $6.3 million or 56% of its total revenue for the nine month 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.

Taxes, insurance, and other expense for the three and nine months ended September 30, 2008 totaled $2.4 million or 5% of total revenues and $4.5 million or 5% of total revenues (of which approximately $149 thousand and $493 thousand related to the New York hotel).

Land lease expense was $1.6 million and $4.7 million for the three and nine month periods. This expense represents the expense incurred by the Company to lease land for five hotel properties. Four of these hotels, located in New York, New York, Tallahassee, Florida, Virginia Beach, Virginia, and Savannah, Georgia were acquired in 2008. The fifth hotel, located in Somerset, New Jersey, was acquired in 2007. Land lease expense for the three and nine month periods for the New York hotel was $1.5 million and $4.4 million.

General and administrative expense for the three and nine months ended September 30, 2008 was $1.0 million and $3.4 million. The principal components of general and administrative expense are advisory fees, legal fees, accounting fees and reporting expense.

Depreciation expense was $6.8 million for the third quarter of 2008 and $14.5 million for the nine month period. This expense includes $1.1 million for the New York hotel for the quarter and $3.1 million for the nine month period. Depreciation expense represents 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 and nine month periods ended September 30, 2008, the Company recognized interest income of $0.6 million and $6.0 million. Interest income represents earnings on excess cash invested in short term money market instruments and certificates of deposit. Interest expense during the three and nine month periods ended September 30, 2008 totaled $1.8 million and $2.5 million and primarily represents interest expense incurred on mortgage loans assumed on 15 hotel properties acquired during 2008.

During the first nine months of 2008, the Company acquired and sold equity securities in several publicly traded Real Estate Investment Trusts, resulting in realized gains and other investment income of $3.3 million and net unrealized losses of $3.5 million. At September 30, 2008, the Company owned marketable equity securities with a fair value of $6.9 million, and a cost of $10.4 million. These investments are recorded in Other assets, net on the Company’s Consolidated Balance Sheet at September 30, 2008.

Liquidity and Capital Resources

The Company raised capital through a best-efforts offering of Units by David Lerner Associates, Inc. (the “Managing Dealer”), which received selling commissions and a marketing expense allowance based on proceeds of the Units sold. Each Unit consists of one common share and one Series A preferred share. The

 

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Series A preferred shares have no voting rights, no conversion rights and no distribution rights. The only right associated with the Series A preferred shares will be a priority distribution upon the sale of the Company’s assets. The priority would be equal to $11.00 per Series A preferred share, and no more, before any distributions are made to the holders of any other shares. The Series A preferred shares are not separately tradable from the common shares to which they relate.

In April 2008, the Company concluded its best-efforts offering of Units. From the Company’s initial capitalization on January 22, 2007 through April 2008, the Company closed on a total of 91.1 million Units representing gross proceeds of $1 billion. The Company incurred costs of approximately $101.4 million related to its offering. These costs are reflected as a reduction to shareholders’ equity.

To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions during the first nine months of 2008 totaled $56.1 million and were paid monthly at a rate of $0.073334 per common share, and included a return of capital. For the same period the Company’s cash generated from operations was approximately $31.1 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 offering of Units, 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 dividend 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 based on its ability to fully invest its offering proceeds and thereby increase its cash 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 offering which are distributed are not available for investment in properties.

At September 30, 2008, the Company had cash and cash equivalents totaling $55.5 million, primarily as a result of its sale of Units through April 2008. The Company intends to use cash on hand to invest in hotels under contract and for capital improvements at certain of its hotels. As of September 30, 2008, the Company has entered into purchase contracts for 7 hotels. Two of these hotels are expected to close within the next three months. Five of the hotels are under development and are expected to close in 2009. Although the Company is working towards acquiring these hotels, there are many conditions to closing that have not yet been satisfied and there can be no assurance that all of the conditions to closing will be satisfied. Contract deposits for these hotels are included in Other assets, net in the Company’s consolidated balance sheet as of September 30, 2008.

The following table summarizes the location, brand, number of rooms, contract deposits and gross purchase price for each hotel for which the Company has entered into purchase contracts. All dollar amounts are in thousands.

 

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Location

  

Brand

   Rooms    Deposits
Paid
   Gross
Purchase Price
 

Memphis, TN

   Hilton Garden Inn    120    $ 250    $ 17,150  

Orlando, FL

   Fairfield Inn    200      500        (a)

Orlando, FL

   SpringHill Suites    200      500        (a)

Baton Rouge, LA

   SpringHill Suites    119      100      15,100  

Rochester, MN

   Hampton Inn & Suites    124      100      14,136  

Chesapeake, VA

   Marriott    226      —        38,400  

Wilmington, NC

   Fairfield Inn & Suites    122      —        14,800  
                       
      1,111    $ 1,450    $ 154,386  
                       

 

(a) These two hotels are covered by the same purchase contract, which provides for a combined gross purchase price of $54,800. The total shown for the table includes this combined amount.

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 5% of gross revenues provided that such amount may be used for the Company’s capital expenditures with respect to the hotels. The Company expects that this amount will be adequate to fund required repair, replacement, and refurbishments and to maintain the Company’s hotels in a competitive condition.

Additionally, the Company is converting the hotel in New York to a Renaissance hotel. In order to complete this conversion, the Company anticipates spending approximately $17 million in capital expenditures with $3.4 million having been spent through the third quarter of 2008.

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 negotiated and entered into, a Property Acquisition and Disposition Agreement with ASRG, to provide brokerage services for the acquisition and disposition of real estate assets for the Company. In accordance with the contract, ASRG is paid a fee of 2% of the gross purchase price of any acquisitions or gross sale price of any dispositions of real estate investments, subject to certain conditions. As of September 30, 2008, payments to ASRG for services under the terms of this contract have totaled $17.9 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 A8A, pursuant to which A8A provides management services to the Company. An annual fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable for these services. A8A utilizes Apple REIT Six, Inc. to provide these services. Advisory fees and other reimbursable expenses incurred by the Company under the A8A advisory agreement during the nine months ended September 30, 2008 were $2.0 million. These expenses are recorded in General and Administrative expense. For the period January 22, 2007 through September 30, 2007, the Company incurred $149 thousand in these expenses.

ASRG and A8A 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., Apple REIT Seven, Inc. 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 Board of Directors of Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc.

 

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Series B Convertible Preferred Stock

The Company has issued 240,000 Series B convertible preferred shares to Glade M. Knight, Chairman, Chief Executive Officer and President 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;

(2) the termination or expiration without renewal of the advisory agreement with A8A, 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 a number of common shares based upon the gross proceeds raised through the date of conversion in the Company’s $1 billion offering. With the completion of the Company’s $1 billion offering in April 2008, each Series B convertible preferred share may be converted into 24.17104 common shares upon the occurrence of any conversion event.

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

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

Expense related to the issuance of 240,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B shares to common shares occurs. The expense will be measured as the difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares. Although the fair market value cannot be determined at this time, compensation expense could range from $0 to in excess of $63 million (assumes $11 per unit fair market value) which represents approximately 5.8 million shares of common stock.

 

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Subsequent Events

In October 2008, the Company declared and paid approximately $6.7 million in distributions to its common shareholders, or $0.073334 per outstanding common share. Under the Company’s Dividend Reinvestment Plan, $2.4 million were reinvested, resulting in the issuance of approximately 219,000 Units.

In October 2008, the Company redeemed 94,836 Units in the amount of $1.0 million under its Unit Redemption Program.

On October 21, 2008, the Company closed on the purchase of a Marriott full-service hotel located in Chesapeake, Virginia. The total purchase price for this hotel, which contains a total of 226 guest rooms, was $38.4 million.

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 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 159 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.

 

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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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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of September 30, 2008, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk or commodity price risk. The Company will be exposed to interest rate risk due to possible changes in short term money market rates as it invests the proceeds from sale of Units pending use in acquisitions and renovations. Based on the Company’s cash invested at September 30, 2008, of $55.5 million, every 100 basis points change in interest rates will impact the Company’s annual net income by $0.6 million, all other factors remaining the same. As of September 30, 2008, the Company was exposed to market risk due to equity price risk. At September 30, 2008 the Company owned marketable equity securities, classified as available-for-sale, with a cost of $10.4 million and a market value of $6.9 million, resulting in an unrealized loss of $3.5 million in the first nine months of 2008. These equity securities were comprised of two publicly traded Real Estate Investment Trusts. There is no assurance that future declines in values will not have a material adverse impact on the Company’s future results of operations. A 10% decrease in the fair values of the Company’s equity investments as of September 30, 2008 would decrease their fair values and reduce earnings by approximately $0.7 million.

 

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

The following tables set forth information concerning the Offering and the use of proceeds from the Offering as of September 30, 2008. All amounts are in thousands except per Unit data:

Units Registered:

 

   4,762     

Units $10.50 per Unit

   $ 50,000
   86,364     

Units $11 per Unit

     950,000
                

Totals:

   91,126     

Units

   $ 1,000,000

Units Sold:

          
   4,762     

Units $10.50 per Unit

   $ 50,000
   86,364     

Units $11 per Unit

     950,000
                

Totals:

   91,126     

Units

   $ 1,000,000

Expenses of Issuance and Distribution of Units

 

1. Underwriting discounts and commission

   $ 100,000

2. Expenses of underwriters

     —  

3. Direct or indirect payments to directors or officers of the Company or their associates, to ten percent shareholders, or to affiliates of the Company

     —  

4. Fees and expenses of third parties

     1,465
      

Total Expenses of Issuance and Distribution of Common Shares

     101,465
      

Net Proceeds to the Company

   $ 898,535
      

1. Purchase of real estate (net of debt proceeds and repayment)

   $ 781,181

2. Deposits and other costs associated with potential real estate acquisitions

     1,731

3. Repayment of other indebtedness, including interest expense paid

     3,388

4. Investment and working capital

     91,676

5. Fees to the following (all affiliates of officers of the Company):

  

a. Apple Eight Advisors, Inc.

     2,613

b. Apple Suites Realty Group, Inc.

     17,946

6. Fees and expenses of third parties

     —  

7. Other

     —  
      

Total of Application of Net Proceeds to the Company

   $ 898,535
      

 

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Item 6. Exhibits

 

Exhibit
Number

 

Description of Documents

  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. 333-140548) effective July 19, 2007)
  3.2   Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.2 to amendment no. 1 to the registrant’s registration statement on Form S-11 (SEC File No. 333-140548) effective July 19, 2007)
31.1   Certification of the Company’s Chief Executive Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act, as amended (FILED HEREWITH).
31.2   Certification of the Company’s Chief Financial Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act, as amended (FILED HEREWITH).
32.1   Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).

 

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SIGNATURES

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

 

Apple REIT Eight, Inc.    
By:  

/s/ GLADE M. KNIGHT

    Date: November 3, 2008
  Glade M. Knight,    
 

Chairman of the Board,

Chief Executive Officer, and President

   
  (Principal Executive Officer)    
By:  

/s/ BRYAN PEERY

    Date: November 3, 2008
  Bryan Peery,    
  Chief Financial Officer    
  (Principal Financial and Principal Accounting Officer)    

 

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