POS AM 1 c71281_posam.htm 3B2 EDGAR HTML -- c70376_s11.htm

As filed with the Securities and Exchange Commission on October 19, 2012.

Registration No. 333-168971



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


POST-EFFECTIVE AMENDMENT NO. 7

TO FORM S-11
REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933


APPLE REIT TEN, INC.
(Exact name of Registrant as specified in its charter)


 

 

 

 

 

Virginia

 

814 East Main Street
Richmond, Virginia 23219
(804) 344-8121

 

27-3218228

(State or other jurisdiction
of incorporation)

 

(Address. Including zip code, and
telephone number, including area code, of
Registrant’s Principal Executive Offices)

 

(I.R.S. Employer
Identification Number)


Glade M. Knight
Chairman and Chief Executive Officer
Apple REIT Ten, Inc.
814 East Main Street
Richmond, Virginia 23219
(804) 344-8121

(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:
Martin B. Richards, Esq.
David F. Kurzawa, Esq.
McGuireWoods LLP
901 East Cary Street, One James Center
Richmond, Virginia 23219
(804) 775-1029
(804) 775-7471


Approximate date of commencement of proposed sale to the public: As soon as possible after effectiveness of the Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  S

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  £

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  £

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  £

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  £

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 £
(Do not check if a smaller reporting company)

 

Smaller reporting company S




Post-Effective Amendment No. 7

to

Registration Statement on Form S-11
(Registration No. 333-168971)

Contents

 

(1)

 

 

 

Part I of Registration Statement

 

(a)

 

 

 

Sticker Supplement for Supplement No. 6

 

(b)

 

 

 

Supplement No. 6 dated October 19, 2012 (cumulative, replacing all prior supplements)

 

(c)

 

 

 

Prospectus dated May 2, 2012

 

(2)

 

 

 

Part II of Registration Statement

 

(3)

 

 

 

Signature Page

 

(4)

 

 

 

Exhibits (see Part II, Item 36, for Exhibit Index)


APPLE REIT TEN, INC.

STICKER SUPPLEMENT TO
SUPPLEMENT NO. 6 DATED OCTOBER 19, 2012

Supplement No. 6 to be used with
PROSPECTUS DATED MAY 2, 2012

Summary of Supplement to Prospectus (See Supplement for Additional Information)

Supplement No. 6 (cumulative, replacing all prior supplements) dated October 19, 2012 reports on (a) the status of our best-efforts offering of Units; (b) our recent purchase of 3 hotels containing a total of 378 guest rooms for an aggregate gross purchase price of approximately $37.5 million; (c) our execution of certain purchase contracts that relate to 5 hotels containing a total of 585 guest rooms and that provide for an aggregate gross purchase price of approximately $77.3 million; (d) the termination of one purchase contract; (e) an update regarding our legal proceedings; (f) financial and operating information for all of our recently purchased hotels; and (g) our recent financial information and certain additional information about us.

As of January 27, 2011, we completed our minimum offering of 9,523,810 Units at $10.50 per Unit and raised gross proceeds of $100 million and proceeds net of selling commissions and marketing expenses of $90 million. Each Unit consists of one common share and one Series A Preferred Share. We are continuing the offering at $11 per Unit in accordance with the prospectus.

As of September 30, 2012, we had closed on the sale of 54,092,067 additional Units at $11 per Unit and from such sale we raised gross proceeds of approximately $595.0 million and proceeds net of selling commissions and marketing expenses of approximately $535.5 million. Sales of all Units at $10.50 per Unit and $11.00 per Unit, when combined, represent gross proceeds of approximately $695.0 million and proceeds net of selling commissions and marketing expenses of approximately $625.5 million.

In connection with our hotel purchases to date, we paid a total of approximately $10.4 million, representing 2% of the aggregate gross purchase price, as a commission to Apple Suites Realty Group, Inc. This entity is owned by Glade M. Knight, who is our Chairman and Chief Executive Officer.


SUPPLEMENT NO. 6 DATED OCTOBER 19, 2012

TO PROSPECTUS DATED MAY 2, 2012

APPLE REIT TEN, INC.

The following information supplements the prospectus of Apple REIT Ten, Inc. dated May 2, 2012 and is part of the prospectus. This Supplement updates the information presented in the prospectus. Prospective investors should carefully review the prospectus and this Supplement No. 6 (which is cumulative and replaces all prior Supplements).

TABLE OF CONTENTS

 

 

 

Status of the Offering

 

 

 

S-3

 

Legal Proceedings

 

 

 

S-5

 

Incorporation by Reference

 

 

 

S-6

 

Summary Overview

 

 

 

S-8

 

Summary of Contracts for Our Recently Purchased Properties

 

 

 

S-11

 

Financial and Operating Information for Our Recently Purchased Properties

 

 

 

S-13

 

Selected Financial Data

 

 

 

S-15

 

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

 

 

 

S-17

 

Experts

 

 

 

S-17

 

Index to Financial Statements

 

 

 

F-1

 

Certain forward-looking statements are included in the prospectus and this supplement. These forward-looking statements may involve our plans and objectives for future operations, including future growth and availability of funds. These forward-looking statements are based on current expectations, which are subject to numerous risks and uncertainties. Assumptions relating to these statements involve judgments with respect to, among other things, the continuation of our offering of Units, the outcome of current and future litigation, regulatory proceedings or inquiries, future economic, competitive and market conditions and future business decisions, together with local, national and international events (including, without limitation, acts of terrorism or war, and their direct and indirect effects on travel and the economy). All of these matters are difficult or impossible to predict accurately and many of them are beyond our control. Although we believe the assumptions relating to the forward-looking statements, and the statements themselves, are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that these forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans, which we consider to be reasonable, will be achieved.

S-1


“Courtyard by Marriott,” “Fairfield Inn,” “Fairfield Inn & Suites,” “TownePlace Suites,” “Marriott,” “SpringHill Suites” and “Residence Inn” are each a registered trademark of Marriott International, Inc. or one of its affiliates. All references below to “Marriott” mean Marriott International, Inc. and all of its affiliates and subsidiaries, and their respective officers, directors, agents, employees, accountants and attorneys. Marriott is not responsible for the content of this prospectus supplement, whether relating to hotel information, operating information, financial information, Marriott’s relationship with Apple REIT Ten, Inc., or otherwise. Marriott is not involved in any way, whether as an “issuer” or “underwriter” or otherwise, in the offering by Apple REIT Ten, Inc. and receives no proceeds from the offering. Marriott has not expressed any approval or disapproval regarding this prospectus supplement or the offering related to this prospectus supplement, and the grant by Marriott of any franchise or other rights to Apple REIT Ten, Inc. shall not be construed as any expression of approval or disapproval. Marriott has not assumed, and shall not have, any liability in connection with this prospectus supplement or the offering related to this prospectus supplement.

“Hampton Inn,” “Hampton Inn & Suites,” “Homewood Suites,” “Embassy Suites,” “Hilton Garden Inn” and “Home2 Suites by Hilton” are each a registered trademark of Hilton Worldwide or one of its affiliates. All references below to “Hilton” mean Hilton Worldwide and all of its affiliates and subsidiaries, and their respective officers, directors, agents, employees, accountants and attorneys. Hilton is not responsible for the content of this prospectus supplement, whether relating to hotel information, operating information, financial information, Hilton’s relationship with Apple REIT Ten, Inc., or otherwise. Hilton is not involved in any way, whether as an “issuer” or “underwriter” or otherwise, in the offering by Apple REIT Ten, Inc. and receives no proceeds from the offering. Hilton has not expressed any approval or disapproval regarding this prospectus supplement or the offering related to this prospectus supplement, and the grant by Hilton of any franchise or other rights to Apple REIT Ten, Inc. shall not be construed as any expression of approval or disapproval. Hilton has not assumed, and shall not have, any liability in connection with this prospectus supplement or the offering related to this prospectus supplement.

S-2


STATUS OF THE OFFERING

As of January 27, 2011, we completed our minimum offering of 9,523,810 Units at $10.50 per Unit and raised gross proceeds of $100,000,000 and proceeds net of selling commissions and marketing expenses of $90,000,000. Each Unit consists of one common share and one Series A preferred share. We are continuing the offering at $11.00 per Unit in accordance with the prospectus. We registered to sell a total of 182,251,082 Units. As of September 30, 2012, 118,635,205 Units remain unsold. We will offer Units until January 19, 2013, unless the offering is extended, provided that the offering will be terminated if all of the Units are sold before then.

As of September 30, 2012, we had closed on the following sales of Units in the offering:

 

 

 

 

 

 

 

Price Per Unit

 

Number of
Units Sold

 

Gross
Proceeds

 

Proceeds Net
of Selling
Commissions
and Marketing
Expense
Allowance

$10.50

 

 

 

9,523,810

 

 

 

$

 

100,000,000

 

 

 

$

 

90,000,000

 

$11.00

 

 

 

54,092,067

 

 

 

 

595,012,737

 

 

 

 

535,511,463

 

 

 

 

 

 

 

 

Total

 

 

 

63,615,877

 

 

 

$

 

695,012,737

 

 

 

$

 

625,511,463

 

 

 

 

 

 

 

 

Distributions

Our distributions since initial capitalization through June 30, 2012 totaled approximately $43.5 million and were paid at a monthly rate of $0.06875 per common share beginning in February 2011. For the same period, our net cash generated from operations was approximately $12.3 million. Due to the inherent delay between raising capital and investing that same capital in income producing real estate, we have had significant amounts of cash earning interest at short term money market rates. As a result, a portion of distributions paid through June 30, 2012 have been funded from proceeds from our on-going best-efforts offering of Units, and are expected to be treated as a return of capital for federal income tax purposes. The following is a summary of the distributions and net cash from (used in) operations.

 

 

 

 

 

 

 

 

 

Period

 

Total
Distributions
Declared and
Paid per Share

 

Total
Distributions
Declared and
Paid

 

Net Cash From/
(Used in)
Operations
(a)

 

Net Income/
(Loss)
(a)

For the period Aug. 13, 2010 (initial capitalization) through Dec. 31, 2010

 

 

$

 

 

 

 

$

 

 

 

 

$

 

(6,000

)

 

 

 

$

 

(31,000

)

 

1st Quarter 2011

 

 

 

0.13750

 

 

 

 

1,855,000

 

 

 

 

(2,488,000

)

 

 

 

 

(2,390,000

)

 

2nd Quarter 2011

 

 

 

0.20625

 

 

 

 

5,753,000

 

 

 

 

(1,059,000

)

 

 

 

 

(1,179,000

)

 

3rd Quarter 2011

 

 

 

0.20625

 

 

 

 

7,596,000

 

 

 

 

846,000

 

 

 

 

(473,000

)

 

4th Quarter 2011

 

 

 

0.20625

 

 

 

 

8,390,000

 

 

 

 

3,522,000

 

 

 

 

(1,092,000

)

 

1st Quarter 2012

 

 

 

0.20625

 

 

 

 

9,336,000

 

 

 

 

1,905,000

 

 

 

 

1,974,000

 

2nd Quarter 2012

 

 

 

0.20625

 

 

 

 

10,596,000

 

 

 

 

9,616,000

 

 

 

 

5,900,000

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

1.16875

 

 

 

$

 

43,526,000

 

 

 

$

 

12,336,000

 

 

 

$

 

2,709,000

 

 

 

 

 

 

 

 

 

 


Note for Table:

 

(a)

 

 

 

See complete consolidated statements of cash flows and consolidated statements of operations for the 12 months ending December 31, 2011 included in our most recent Form 10-K for the year ended December 31, 2011 and six months ending June 30, 2012 included in our most recent Form 10-Q for the quarter ended June 30, 2012.

In February 2011, our Board of Directors established a policy for an annualized distribution rate of $0.825 per common share, payable in monthly distributions. We intend to continue paying distributions on a monthly basis, consistent with the annualized distribution rate established by our Board of Directors. Our objective in setting a distribution rate is to project a rate that will provide consistency over our existence taking into account acquisitions and capital improvements, ramp up of

S-3


new properties and varying economic cycles. To meet this objective, we may require the use of debt or offering proceeds in addition to cash from operations. Since a portion of distributions to date have been funded with proceeds from our offering of Units, our ability to maintain our current intended rate of distribution will be based on our ability to fully invest our offering proceeds and thereby increase our cash generated from operations. As there can be no assurance of our 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. See “Updated Risk Factor—We may be unable to make distributions to our shareholders,” as set forth below in this Supplement No. 6 to our prospectus dated May 2, 2012.

Net Book Value Per Share

In connection with this on-going offering of Units, we are providing information about our net book value per share. Net book value per share is calculated as total book value of assets minus total liabilities. It assumes that the value of real estate assets diminishes predictably over time as shown through the depreciation and amortization of real estate investments. Real estate values have historically risen or fallen with market conditions. Net book value does not reflect value per share upon an orderly sale or liquidation of the Company in accordance with our investment objectives. Our net book value reflects dilution in the value of our Units from the issue price as a result of (i) operating losses, which reflect accumulated depreciation and amortization of real estate investments as well as the fees and expenses paid to acquire real estate including commissions to Apple Suites Realty Group, Inc. (“ASRG”), (ii) the funding of distributions from sources other than cash flow from operations, and (iii) fees paid in connection with our on-going best-efforts offering, including selling commissions and marketing fees. As of June 30, 2012, our net book value per share was $9.07. We calculated our net book value by subtracting total liabilities from total assets and dividing by the total number of Units outstanding at June 30, 2012.

The offering price of shares under our on-going best-efforts offering at September 30, 2012 was $11.00. Our offering price was not established on an independent basis and bears no relationship to the net book value of our assets. There is currently no established public market in which our common shares or Units are traded, however as discussed above in the Status of the Offering section of this supplement, 54.1 million Units have been purchased at $11 per Unit. As discussed in the prospectus the Units will be illiquid for an indefinite period of time. We will continue to use the $11 per Unit price as the offering price until such time as buyers are not available, or until we have an orderly sale or liquidation in accordance with our investment objectives outlined in the prospectus.

Updated Risk Factor

The following risk factor amends and replaces the current risk factor found on page 26 of our prospectus dated May 2, 2012.

We may be unable to make distributions to our shareholders.

If our properties do not generate sufficient revenue to meet operating expenses, our cash flow and our ability to make distributions to shareholders may be adversely affected. We are subject to all operating risks common to hotels. These risks might adversely affect occupancy or room rates. Increases in operating costs due to inflation and other factors may not necessarily be offset by increased room rates. The local, regional and national hotel markets may limit the extent to which room rates may be increased to meet increased operating expenses without decreasing occupancy rates. There can be no assurance that we will be able to make distributions at any particular time or rate, or at all. Further, there is no assurance that a distribution rate achieved for a particular period will be maintained in the future.

Our Board of Directors has established a policy for an annualized distribution rate of $0.825 per common share, payable in monthly distributions. We began making distributions in February 2011

S-4


and from inception through June 30, 2012, we made distributions of $1.16875 per common share for a total of $43.5 million. For the same period, our cash generated from operations was approximately $12.3 million. Due to the inherent delay between raising capital and investing that same capital in income producing real estate, we had significant amounts of cash earning interest at short term money market rates. Thus, a portion of distributions paid through June 30, 2012 was funded from proceeds from our on-going best-efforts offering of Units. Although cash is fungible and there is no way to specifically identify exactly what receipt pays which disbursement, cash from operations per the Company’s statement of cash flows was 28% of distributions from inception through June 30, 2012. Assuming the remainder of the distributions was from offering proceeds, that difference would represent 72% of distributions. While we intend to continue paying distributions on a monthly basis, consistent with the annualized distribution rate established by our Board of Directors, we may require the use of financing or offering proceeds in addition to cash from operations. Since a portion of distributions to date have been funded with proceeds from the offering of Units, our ability to maintain the current intended rate of distribution will be based on our ability to fully invest our offering proceeds and thereby increase our cash generated from operations. As there can be no assurance of our 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.

While funding a portion of our distributions from other sources, such as financing or offering proceeds, would result in the shareholder receiving cash, the consequences to us would differ from a distribution out of our cash generated from operations. For example, if financing is the source of a distribution, that financing would have to be repaid, and if proceeds from the offering of Units are distributed to our shareholders, those proceeds would not then be available for other uses (such as property acquisitions or improvements, investments, or other general corporate purposes). The consequences to a shareholder would also differ as their return of capital would be greater the lower the amount of cash from operations. See “Distributions Policy.”

Advisory Agreement

Upon a determination by our independent members of our Board of Directors, the Advisory Agreement between us and Apple Ten Advisors, Inc. was renewed for an additional one (1) year term expiring on December 20, 2013.

LEGAL PROCEEDINGS

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

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

On February 17, 2012, lead plaintiffs and lead counsel in the In re Apple REITs Litigation, Civil Action No. 1:11-cv-02919-KAM-JO, filed an amended consolidated complaint in the United States District Court for the Eastern District of New York against the Company, Apple Suites Realty Group, Inc., Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., Apple Ten Advisors, Inc., Apple Fund Management, LLC, Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc., their directors and certain officers, and David Lerner Associates, Inc. and David Lerner. The consolidated complaint, purportedly brought on behalf of all purchasers of Units in the Company and the other Apple REIT Companies, or those who otherwise acquired these Units that were offered and sold to them by David Lerner Associates, Inc., or its affiliates and on behalf of subclasses of shareholders in New Jersey, New York, Connecticut and Florida, asserts claims under Sections 11, 12 and 15 of the Securities Act of 1933. The consolidated complaint also

S-5


asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, negligence, and unjust enrichment, and claims for violation of the securities laws of Connecticut and Florida. The complaint seeks, among other things, certification of a putative nationwide class and the state subclasses, damages, rescission of share purchases and other costs and expenses.

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

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

INCORPORATION BY REFERENCE

We have elected to “incorporate by reference” certain information into this prospectus supplement. By incorporating by reference, we are disclosing important information to you by referring you to documents we have filed separately with the Securities and Exchange Commission, or “SEC.” The following documents filed with the SEC are incorporated by reference in this prospectus supplement (Commission File No. 333-168971), except for any document or portion thereof deemed to be “furnished” and not filed in accordance with SEC rules:

 

 

 

 

Quarterly Reports on Form 10-Q for the quarters ended June 30, 2012 and March 31, 2012 filed with the SEC on August 13, 2012 and May 7, 2012, respectively;

 

 

 

 

Definitive Proxy Statement filed on Schedule 14A filed with the SEC on April 10, 2012;

 

 

 

 

Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 13, 2012;

 

 

 

 

Current Report on Form 8-K/A filed with the SEC on November 9, 2011; includes the financial statements for the KRG/White LS Hotel, LLC and Kite Realty/White LS Hotel Operators, LLC (South Bend, Indiana Fairfield Inn & Suites) and the required pro forma financial information;

 

 

 

 

Current Report on Form 8-K/A filed with the SEC on November 9, 2011; includes the financial statements for the Ascent Hospitality, Inc. (Merrillville, Indiana Hilton Garden Inn), Omaha Downtown Lodging Investors II, LLC and Scottsdale Lodging Investors, LLC (Omaha, Nebraska Hilton Garden Inn and Scottsdale, Arizona Hilton Garden Inn) and VHRMR Round Rock, LTD (Austin/Round Rock, Texas Homewood Suites) and the required pro forma financial information;

 

 

 

 

Current Report on Form 8-K/A filed with the SEC on November 9, 2011; includes the financial statements for the Chicago Hotel Portfolio (Des Plaines, Illinois Hilton Garden Inn and Skokie, Illinois Hampton Inn & Suites) and the required pro forma financial information;

 

 

 

 

Current Report on Form 8-K/A filed with the SEC on November 9, 2011; includes the financial statements for the SASI, LLC (Mason, Ohio Hilton Garden Inn), Omaha Downtown Lodging Investors II, LLC and Scottsdale Lodging Investors, LLC (Omaha, Nebraska Hilton Garden Inn and Scottsdale, Arizona Hilton Garden Inn), and the required pro forma financial information;

 

 

 

 

Current Report on Form 8-K/A filed with the SEC on July 20, 2011; includes the financial statements for the Hawkeye Hotel Portfolio (Cedar Rapids, Iowa Homewood Suites; Cedar Rapids, Iowa Hampton Inn & Suites and Davenport, Iowa Hampton Inn & Suites) and the required pro forma financial information;

 

 

 

 

Current Report on Form 8-K/A filed with the SEC on July 20, 2011; includes the financial statements for the McKibbon Hotel Portfolio (Knoxville, Tennessee SpringHill Suites; Gainesville, Florida Hilton Garden Inn; Richmond, Virginia SpringHill Suites; Pensacola,

S-6


 

 

 

 

Florida TownePlace Suites; Mobile, Alabama Hampton Inn & Suites; Knoxville, Tennessee TownePlace Suites; Knoxville, Tennessee Homewood Suites and Gainesville, Florida Homewood Suites) and the required pro forma financial information;

 

 

 

 

Current Report on Form 8-K/A filed with the SEC on May 17, 2011; includes the financial statements for the CN Hotel Portfolio (Winston-Salem, North Carolina Hampton Inn & Suites; Matthews, North Carolina Fairfield Inn & Suites; Columbia, South Carolina TownePlace Suites and Jacksonville, North Carolina Home2 Suites) and the required pro forma financial information;

 

 

 

 

Current Report on Form 8-K/A filed with the SEC on May 17, 2011; includes the financial statements for the CN Hotel Portfolio (Winston-Salem, North Carolina Hampton Inn & Suites; Matthews, North Carolina Fairfield Inn & Suites; Columbia, South Carolina TownePlace Suites and Jacksonville, North Carolina Home2 Suites) and the required pro forma financial information;

 

 

 

 

Current Report on Form 8-K/A filed with the SEC on May 17, 2011; includes the financial statements for the Denver, Colorado—Hilton Garden Inn and the required pro forma financial information;

 

 

 

 

The description of our Units contained in our Registration Statement filed on Form 8-A (File No. 000-54651), filed with the SEC on April 12, 2012;

 

 

 

 

Current Reports on Form 8-K filed with the SEC on August 23, 2012, July 11, 2012, May 23, 2012, May 23, 2012, May 9, 2012, March 5, 2012, February 3, 2012, February 2, 2012, January 13, 2012, January 4, 2012, December 21, 2011, December 13, 2011, December 1, 2011, November 30, 2011, November 14, 2011, November 7, 2011, November 4, 2011, November 2, 2011, October 19, 2011, October 11, 2011, October 5, 2011, September 23, 2011, September 7, 2011, August 25, 2011, August 11, 2011, July 22, 2011, July 18, 2011, July 13, 2011, July 6, 2011, June 27, 2011, June 14, 2011, June 13, 2011, June 7, 2011, June 7, 2011, June 2, 2011, May 13, 2011, May 6, 2011, May 5, 2011, April 15, 2011, April 7, 2011, March 29, 2011, March 18, 2011, March 8, 2011, March 4, 2011, March 1, 2011, February 14, 2011, February 9, 2011, February 3, 2011, and January 27, 2011.

All of the documents that we have incorporated by reference into this prospectus supplement are available on the SEC’s website, www.sec.gov. In addition, these documents can be inspected and copied at the Public Reference Room maintained by the SEC at 100 F Street, NE, Washington, D.C. 20549. Copies also can be obtained by mail from the Public Reference Room at prescribed rates. Please call the SEC at (800) SEC-0330 for further information on the operation of the Public Reference Room.

In addition, we will provide to each person, including any beneficial owner of our common shares, to whom this prospectus supplement is delivered, a copy of any or all of the information that we have incorporated by reference into this prospectus supplement but not delivered with this prospectus supplement. To receive a free copy of any of the documents incorporated by reference in this prospectus supplement, other than exhibits, unless they are specifically incorporated by reference in those documents, call or write us at 814 East Main Street, Richmond, Virginia 23219, Attention: Kelly Clarke, (804) 344-8121. The documents also may be accessed through our website at www.applereitten.com. The information relating to us contained in this prospectus supplement does not purport to be comprehensive and should be read together with the information contained in the documents incorporated or deemed to be incorporated by reference in this prospectus supplement.

S-7


SUMMARY OVERVIEW

Summary of Real Estate Investments

Since our prospectus dated May 2, 2012, we have purchased 3 additional hotels. Currently, through our subsidiaries, we own a total of 31 hotels. These hotels contain a total of 3,882 guest rooms. They were purchased for an aggregate gross purchase price of $520.2 million. Financial and operating information about our recently purchased hotels is provided in another section below.

Description of Real Estate Owned

The map below shows the states in which our hotels are located, and the following charts summarize our room and franchise information.

States in which Our Hotels are Located

S-8


Number of Guest Rooms by State:

Type and Number of Hotel Franchises:

S-9


Summary of Potential Acquisitions

We have entered into, or caused one of our indirect wholly-owned subsidiaries to enter into, purchase contracts for five other hotels. These contracts are for direct hotel purchases or, in certain cases, a purchase of the entity that currently owns the property. The following table summarizes hotel and contract information:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Location

 

Franchise

 

Date of
Purchase Contract

 

Number
of Rooms

 

Gross
Purchase Price

1.

 

Grapevine, Texas(a)

 

Courtyard

 

 

 

November 1, 2011

 

 

 

 

180

 

 

 

$

 

(b)

 

2.

 

Grapevine, Texas(a)

 

TownePlace Suites

 

 

 

November 1, 2011

 

 

 

 

120

 

 

 

 

(b)

 

3.

 

Huntsville, Alabama(a)/(d)

 

Home2 Suites

 

 

 

November 1, 2011

 

 

 

 

77

 

 

 

 

(c)

 

4.

 

Huntsville, Alabama(a)/(d)

 

Hampton Inn & Suites

 

 

 

November 1, 2011

 

 

 

 

98

 

 

 

 

(c)

 

5.

 

Clemson, South Carolina(e)

 

Courtyard

 

 

 

October 12, 2012

 

 

 

 

110

 

 

 

 

15,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

585

 

 

 

$

 

77,287,000

 

 

 

 

 

 

 

 

 

 

 

 


Notes for Table:

 

(a)

 

 

 

The indicated hotels are currently under construction. The table shows the expected number of rooms upon hotel completion and the expected franchise.

 

(b)

 

 

 

The Courtyard and TownePlace Suites hotels in Grapevine, TX are part of an adjoining two-hotel complex that will be located on the same site. The two hotels are covered by the same purchase contract with a total gross purchase price of $41,700,000. The amount is reflected in the total gross purchase price as indicated above.

 

(c)

 

 

 

The Home2 Suites and Hampton Inn & Suites hotels in Huntsville, AL are part of an adjoining two-hotel complex that will be located on the same site. The two hotels are covered by the same purchase contract with a total gross purchase price of $20,587,000. The amount is reflected in the total gross purchase price indicated above.

 

(d)

 

 

 

If the seller meets all of the conditions to closing, the Company is obligated to specifically perform under the contract. As the properties are under construction, at this time, the seller has not met all of the conditions to closing.

 

(e)

 

 

 

The purchase price for this hotel requires the assumption of three loans secured by the hotel. The total outstanding principal is approximately $9.2 million. The maturity dates of the loans range from May 2016 to November 2048 and the effective interest rates are fixed rates of 3.6%, 6.1% and a variable rate of LIBOR plus 2.5%.

We have no material relationship or affiliation with the prospective sellers of the hotels described above, except through the pending purchase contracts and any related documents.

In general, each purchase contract listed above required a deposit upon (or shortly after) execution. An additional deposit is typically due upon the expiration of the contract review period. If a closing occurs under a purchase contract, the initial and additional deposits are credited toward the purchase price. If a closing does not occur because the seller fails to satisfy a condition to closing or breaches the purchase contract, the applicable deposits would be refunded to us. The total of both the initial and additional deposits for the purchase contracts listed above is approximately $0.2 million.

For each purchase contract listed above, there are material conditions to closing that presently remain unsatisfied. Accordingly, there can be no assurance at this time that a closing will occur under any of these purchase contracts.

Recent Termination

On October 11, 2012, we caused one of our indirect wholly-owned subsidiaries to terminate a purchase contract for a hotel located in Dallas, Texas. The hotel had a purchase price of $27,300,000 and was currently under construction. In connection with the termination of the purchase contract, the initial deposit of $50,000 was repaid to our contracting subsidiary.

S-10


Source of Funds and Related Party Payments

Our recent purchases, which resulted in our ownership of three additional hotels, were funded by the proceeds from our ongoing offering of Units. Our offering proceeds also have been used to fund the initial deposits required by the hotel purchase contracts and will be used for the related additional deposits.

We have entered into a property acquisition and disposition agreement with ASRG to acquire and dispose of our real estate assets. A fee of 2% of the gross purchase price or gross sale price in addition to certain reimbursable expenses will be payable for these services. The entity is owned by Glade M. Knight, who is our Chairman and Chief Executive Officer. We used our offering proceeds to pay $0.75 million to ASRG, representing 2% of the gross purchase price for our recent purchases.

David Lerner Associates, Inc., ASRG and Apple Ten Advisors, Inc. earned the compensation and expense reimbursements shown below in connection with their services from inception through the period ending June 30, 2012 relating to our offering phase, acquisition phase and operations phase.

David Lerner Associates, Inc. is not related to ASRG or Apple Ten Advisors, Inc. ASRG and Apple Ten Advisors, Inc. are owned by Glade M. Knight, our Chairman and Chief Executive Officer.

As described on page 11 of our prospectus under the heading “Compensation” and as shown below, we pay certain fees and expenses as they are incurred, while others accrue and will be paid in future periods, subject in some cases to the achievement of performance criteria. We did not incur any amounts in connection with our disposition phase through June 30, 2012.

Cumulative through June 30, 2012

 

 

 

 

 

 

 

 

 

Incurred

 

Paid

 

Accrued

Offering Phase

 

 

 

 

 

 

Selling commissions paid to David Lerner Associates, Inc. in connection with the offering

 

 

$

 

47,126,250

 

 

 

$

 

47,126,250

 

 

 

$

 

 

Marketing expense allowance paid to David Lerner Associates, Inc. in connection with the offering

 

 

 

15,708,750

 

 

 

 

15,708,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62,835,000

 

 

 

 

62,835,000

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition Phase

 

 

 

 

 

 

Acquisition commission paid to Apple Suites Realty Group, Inc.

 

 

 

9,893,000

 

 

 

 

9,893,000

 

 

 

 

 

Reimbursement of costs paid to Apple Suites Realty Group, Inc.

 

 

 

1,000,000

 

 

 

 

1,000,000

 

 

 

 

 

Reimbursement of certain deposits to Apple Suites Realty Group, Inc.

 

 

 

105,000

 

 

 

 

105,000

 

 

 

 

 

Operations Phase

 

 

 

 

 

 

Asset management fee paid to Apple Ten Advisors, Inc.

 

 

 

584,000

 

 

 

 

584,000

 

 

 

 

 

Reimbursement of costs paid to Apple Ten Advisors, Inc.

 

 

 

1,200,000

 

 

 

 

1,200,000

 

 

 

 

 

Fees for Account Maintenance Services to Shareholders paid to David Lerner Associates, Inc.

 

 

 

271,000

 

 

 

 

216,000

 

 

 

 

55,000

 

SUMMARY OF CONTRACTS FOR OUR RECENTLY PURCHASED PROPERTIES

The following information updates the contract information included in our prospectus dated May 2, 2012 for our recently purchased hotels.

Ownership, Leasing and Management Summary

Each of our recently purchased hotels has been leased to one of our indirect wholly-owned subsidiaries, as the lessee, under a separate hotel lease agreement. For simplicity, the applicable lessee will be referred to below as the “lessee.”

S-11


Each hotel is managed under a separate management agreement between the applicable lessee and the manager. For simplicity, the applicable manager will be referred to below as the “manager.”

We have no material relationship or affiliation with the sellers or managers, except for the relationship resulting from our purchases, our management agreements for the hotels we own, and any related documents.

The hotel lease agreements and the management agreements are among the contracts described in another section below. The table below specifies the franchise, hotel owner, lessee and manager for the hotels we have purchased since our prospectus dated May 2, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Location

 

Franchise(a)

 

Hotel Owner/
Lessor

 

Lessee

 

Manager

1.

 

Jacksonville,
North Carolina

 

Home2 Suites

 

Apple Ten
North Carolina, L.P.

 

Apple Ten Hospitality
Management, Inc.

 

LBAM Investor
Group, L.L.C.

2.

 

Boca Raton,
Florida

 

Hilton Garden Inn

 

Apple Ten Hospitality
Ownership, Inc.

 

Apple Ten
Hospitality Management, Inc.

 

White Lodging
Services Corporation

3.

 

Nassau Bay,
Texas

 

Courtyard

 

Sunbelt-CNB, L.L.C.

 

Apple Ten Hospitality
Texas Services II, Inc.

 

LBAM Investor
Group, L.L.C.
(b)


Notes for Table:

 

(a)

 

 

 

All brand and trade names, logos or trademarks contained, or referred to, in this prospectus supplement are the properties of their respective owners. These references shall not in any way be construed as participation by, or endorsement of, our offering by any of our franchisors or managers.

 

(b)

 

 

 

The hotel specified was purchased from an affiliate of the indicated manager.

Hotel Lease Agreements

Each of our recently purchased hotels is covered by a separate hotel lease agreement between the owner (one of our indirect wholly-owned subsidiaries) and the applicable lessee (another one of our indirect wholly-owned subsidiaries, as specified in the previous section). Each lease provides for an initial term of 10 years. The applicable lessee has the option to extend its lease term for two additional five-year periods, provided it is not in default at the end of the prior term or at the time the option is exercised.

Each lease provides for annual base rent and percentage rent. The annual base rent is payable in advance in equal monthly installments and will be adjusted each year in proportion to the Consumer Price Index (based on the U.S. City Average). Shown below are the annual base rent and the lease commencement date for the hotels we have purchased since our prospectus dated May 2, 2012:

 

 

 

 

 

 

 

 

 

 

 

Hotel Location

 

Franchise

 

Annual
Base Rent

 

Date of Lease
Commencement

1.

 

Jacksonville, North Carolina

 

Home2 Suites

 

 

$

 

1,134,962

 

 

 

 

May 4, 2012

 

2.

 

Boca Raton, Florida

 

Hilton Garden Inn

 

 

 

1,017,800

 

 

 

 

July 16, 2012

 

3.

 

Nassau Bay, Texas

 

Courtyard

 

 

 

945,828

 

 

 

 

July 17, 2012

 

The annual percentage rent depends on a formula that compares fixed “suite revenue breakpoints” with a portion of “suite revenue,” which is equal to gross revenue from guest rentals less sales and room taxes and credit card fees. The suite revenue breakpoints will be adjusted each year in proportion to the Consumer Price Index (based on the U.S. City Average). Specifically, the annual percentage rent is equal to the sum of (a) 17% of all suite revenue for the year, up to the applicable suite revenue breakpoint; plus (b) 55% of the suite revenue for the year in excess of the applicable suite revenue breakpoint, as reduced by base rent paid for the year.

Management Agreements

Each of our hotels is being managed by the manager under a separate management agreement between the manager and the applicable lessee (which is one of our indirect wholly-owned

S-12


subsidiaries, as specified in the previous section). The manager is responsible for managing and supervising the daily operations of the hotel and for collecting revenues for the benefit of the applicable lessee. The fees and other terms of these agreements are the result of commercial negotiations between otherwise unrelated parties. We believe that such fees and terms are appropriate for the hotels and the markets in which they operate. Our leasing subsidiary may terminate the management agreements if the managers fail to achieve certain performance levels.

Franchise Agreements

In general, for our hotels franchised by Hilton Worldwide or one of its affiliates, there is a franchise license agreement between the applicable lessee (as specified in the previous section) and Hilton Worldwide or an affiliate. Each franchise license agreement provides for the payment of royalty fees and program fees to the franchisor. A percentage of gross room revenues is used to determine these payments. Apple Ten Hospitality, Inc. or another one of our subsidiaries has guaranteed the payment and performance of the lessee under the applicable franchise license agreement.

For the hotels franchised by Marriott International, Inc. or one of its affiliates, there is a relicensing franchise agreement between the applicable lessee and Marriott International, Inc. or an affiliate. The relicensing franchise agreements provide for the payment of royalty fees and marketing contributions to the franchisor. A percentage of gross room revenues is used to determine these payments. Apple Ten Hospitality, Inc. or another one of our subsidiaries has guaranteed the payment and performance of the lessee under the applicable relicensing franchise agreement.

The fees and other terms of these agreements are the result of commercial negotiations between otherwise unrelated parties, and we believe that such fees and terms are appropriate for the hotels and the markets in which they operate.

FINANCIAL AND OPERATING INFORMATION FOR OUR RECENTLY
PURCHASED PROPERTIES

Our hotels offer guest rooms and suites, together with related amenities, that are consistent with their operations. The hotels are located in developed or developing areas and in competitive markets. We believe the hotels are well-positioned to compete in their markets based on location, amenities, rate structure and franchise affiliation. In the opinion of management, each hotel is adequately covered by insurance. The following tables present further information about the hotels we have purchased since our prospectus dated May 2, 2012:

Table 1. General Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Location

 

Franchise

 

Number
of Rooms/
Suites

 

Gross
Purchase
Price

 

Average
Daily
Rate
(Price) per
Room/
Suite
(a)

 

Federal
Income Tax
Basis for
Depreciable
Real
Property
Component
of Hotel
(b)

 

Purchase Date

1.

 

Jacksonville, North Carolina

 

Home2 Suites

 

 

 

105

 

 

 

$

 

12,000,000

 

 

 

$

 

144-164

 

 

 

$

 

11,211,000

 

 

 

 

May 4, 2012

 

2.

 

Boca Raton, Florida

 

Hilton Garden Inn

 

 

 

149

 

 

 

 

10,900,000

 

 

 

 

109-149

 

 

 

 

8,755,000

 

 

 

 

July 16, 2012

 

3.

 

Nassau Bay, Texas

 

Courtyard

 

 

 

124

 

 

 

 

14,632,000

 

 

 

 

109-139

 

 

 

 

13,369,300

 

 

 

 

July 17, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

378

 

 

 

$

 

37,532,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Notes for Table 1:

 

(a)

 

 

 

The amounts shown are subject to change, and exclude discounts that may be offered to corporate, frequent and other select customers. Rates reflected were in effect at acquisition.

S-13


 

(b)

 

 

 

The depreciable life is 39 years (or less, as may be permitted by federal tax laws) using the straight-line method. The modified accelerated cost recovery system will be used for the hotel’s personal property component.

Table 2. Operating Information(a)

PART A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Location

 

Franchise

 

Avg. Daily Occupancy Rates (%)

 

2007

 

2008

 

2009

 

2010

 

2011

1.

 

Jacksonville, North Carolina

 

Home2 Suites

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

2.

 

Boca Raton, Florida

 

Hilton Garden Inn

 

66%

 

62%

 

54%

 

55%

 

68%

3.

 

Nassau Bay, Texas

 

Courtyard

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

PART B

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Location

 

Franchise

 

Revenue per Available Room/Suite ($)

 

2007

 

2008

 

2009

 

2010

 

2011

1.

 

Jacksonville, North Carolina

 

Home2 Suites

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a

2.

 

Boca Raton, Florida

 

Hilton Garden Inn

 

$86

 

$76

 

$56

 

$58

 

$67

3.

 

Nassau Bay, Texas

 

Courtyard

 

n/a

 

n/a

 

n/a

 

n/a

 

n/a


Note for Table 2:

 

(a)

 

 

 

Operating data is presented for the last five years (or since the beginning of hotel operations). See Table 1. General Information above for the date the hotel was acquired.

Table 3. Tax and Related Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hotel Location

 

Franchise

 

Tax Year

 

Real
Property
Tax Rate
(a)

 

Real
Property
Tax

 

 

 

 

1.

 

Jacksonville, North Carolina

 

Home2 Suites

 

 

 

2011(b

)

 

 

 

 

1.9

%

 

 

 

 

12,184

(c)

 

 

 

 

 

2.

 

Boca Raton, Florida

 

Hilton Garden Inn

 

 

 

2011(b

)

 

 

 

 

2.4

%

 

 

 

 

163,344

 

 

 

 

 

3.

 

Nassau Bay, Texas

 

Courtyard

 

 

 

2011(b

)

 

 

 

 

2.7

%

 

 

 

 

11,503

(c)

 

 

 

 

 


Notes for Table 3:

 

(a)

 

 

 

Property tax rate is an aggregate figure for county, city and other local taxing authorities (to the extent applicable).

 

(b)

 

 

 

Represents a calendar year.

 

(c)

 

 

 

The hotel property consisted of undeveloped land for a portion of the tax year, and the real property tax is not necessarily indicative of property taxes expected for the hotel in the future.

S-14


SELECTED FINANCIAL DATA

 

 

 

 

 

 

 

(in thousands except per share and statistical data)

 

Six Months
Ended
June 30,
2012

 

Year Ended
December 31,
2011

 

For the period
August 13, 2010
(initial capitalization)
through
December 31,
2010

Revenues:

 

 

 

 

 

 

Room revenue

 

 

$

 

50,795

 

 

 

$

 

37,911

 

 

 

$

 

 

Other revenue

 

 

 

5,149

 

 

 

 

4,180

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

 

55,944

 

 

 

 

42,091

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Hotel operating expenses

 

 

 

30,819

 

 

 

 

23,737

 

 

 

 

 

Taxes, insurance and other

 

 

 

4,185

 

 

 

 

2,545

 

 

 

 

 

General and administrative

 

 

 

2,322

 

 

 

 

3,062

 

 

 

 

28

 

Acquisition related costs

 

 

 

934

 

 

 

 

11,265

 

 

 

 

 

Depreciation

 

 

 

7,488

 

 

 

 

6,009

 

 

 

 

 

Interest expense, net

 

 

 

2,322

 

 

 

 

607

 

 

 

 

3

 

 

 

 

 

 

 

 

Total expenses

 

 

 

48,070

 

 

 

 

47,225

 

 

 

 

31

 

 

 

 

 

 

 

 

Net income (loss)

 

 

$

 

7,874

 

 

 

$

 

(5,134

)

 

 

 

$

 

(31

)

 

 

 

 

 

 

 

 

Per Share:

 

 

 

 

 

 

Net income (loss) per common share

 

 

$

 

0.16

 

 

 

$

 

(0.18

)

 

 

 

$

 

(3,083.50

)

 

Distributions paid per common share

 

 

$

 

0.41

 

 

 

$

 

0.76

 

 

 

$

 

 

Weighted-average common shares outstanding—basic and diluted

 

 

 

48,713

 

 

 

 

29,333

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (at end of period):

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

 

101,645

 

 

 

$

 

7,079

 

 

 

$

 

124

 

Investment in real estate, net

 

 

$

 

484,234

 

 

 

$

 

452,205

 

 

 

$

 

 

Total assets

 

 

$

 

605,861

 

 

 

$

 

471,222

 

 

 

$

 

992

 

Notes payable

 

 

$

 

81,963

 

 

 

$

 

69,636

 

 

 

$

 

400

 

Shareholders’ equity

 

 

$

 

517,730

 

 

 

$

 

395,915

 

 

 

$

 

17

 

Net book value per share

 

 

$

 

9.07

 

 

 

$

 

9.10

 

 

 

$

 

 

 

 

 

 

 

 

 

Other Data:

 

 

 

 

 

 

Cash Flow From (Used In):

 

 

 

 

 

 

Operating activities

 

 

$

 

11,521

 

 

 

$

 

821

 

 

 

$

 

(6

)

 

Investing activities

 

 

$

 

(30,056

)

 

 

 

$

 

(393,640

)

 

 

 

$

 

 

Financing activities

 

 

$

 

113,101

 

 

 

$

 

399,774

 

 

 

$

 

82

 

Number of hotels owned at end of period

 

 

 

29

 

 

 

 

26

 

 

 

 

 

Average Daily Rate (ADR)(a)

 

 

$

 

114

 

 

 

$

 

110

 

 

 

$

 

 

Occupancy

 

 

 

70

%

 

 

 

 

69

%

 

 

 

 

 

Revenue Per Available Room (RevPAR)(b)

 

 

$

 

80

 

 

 

$

 

76

 

 

 

$

 

 

Total rooms sold(c)

 

 

 

444,293

 

 

 

 

344,152

 

 

 

 

 

Total rooms available(d)

 

 

 

636,122

 

 

 

 

499,089

 

 

 

 

 

 

 

 

 

 

 

 

Modified Funds From Operations Calculation(e):

 

 

 

 

 

 

Net income (loss)

 

 

$

 

7,874

 

 

 

$

 

(5,134

)

 

 

 

$

 

(31

)

 

Depreciation of real estate owned

 

 

 

7,488

 

 

 

 

6,009

 

 

 

 

 

 

 

 

 

 

 

 

Funds from operations

 

 

 

15,362

 

 

 

 

875

 

 

 

 

(31

)

 

Acquisition related costs

 

 

 

934

 

 

 

 

11,265

 

 

 

 

 

 

 

 

 

 

 

 

Modified funds from operations

 

 

$

 

16,296

 

 

 

$

 

12,140

 

 

 

$

 

(31

)

 

 

 

 

 

 

 

 


 

 

(a)

 

 

 

Total room revenue divided by number of rooms sold.

 

(b)

 

 

 

ADR multiplied by occupancy percentage.

 

(c)

 

 

 

Represents the number of room nights sold during the period.

S-15


 

(d)

 

 

 

Represents the number of rooms owned by the Company multiplied by the number of nights in the period.

 

(e)

 

 

 

Funds from operations (FFO) is defined as net income (loss) (computed in accordance with generally accepted accounting principles—GAAP) excluding gains and losses from sales of depreciable property, plus depreciation and amortization. Modified FFO (MFFO) excludes costs associated with the acquisition of real estate. The Company considers FFO and MFFO in evaluating property acquisitions and its operating performance and believes that FFO and MFFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of the Company’s activities in accordance with GAAP. The Company considers FFO and MFFO as supplemental measures of operating performance in the real estate industry, and along with the other financial measures included in this Supplement, including net income, cash flow from operating activities, financing activities and investing activities, they provide investors with an indication of the performance of the Company. The Company’s definition of FFO and MFFO are not necessarily the same as such terms that are used by other companies. FFO and MFFO are not necessarily indicative of cash available to fund cash needs.

S-16


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

(for the six months ended June 30, 2012)

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations from our most recent Form 10-Q for the quarter ended June 30, 2012 has been incorporated by reference herein. See “Incorporation by Reference” on page S-6 of this prospectus supplement.

EXPERTS

The consolidated financial statements and financial statement schedule of Apple REIT Ten, Inc. listed in the Index at Item 15(2) appearing in the Company’s Annual Report (Form 10-K) for the year ended December 31, 2011 and for the period August 13, 2010 (initial capitalization) through December 31, 2010, have been audited by Ernst & Young, LLP, independent registered public accounting firm, as set forth in their report thereon included therein, and incorporated herein by reference. Such consolidated financial statements and schedule are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The financial statements of the Denver, Colorado-Hilton Garden Inn appearing on Form 8-K/A dated May 17, 2011 for the years ended December 31, 2010 and 2009, have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon included therein, and are incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The financial statements of the CN Hotel Portfolio (Winston-Salem, North Carolina Hampton Inn & Suites; Matthews, North Carolina Fairfield Inn & Suites; Columbia, South Carolina TownePlace Suites; and Jacksonville, North Carolina Home2 Suites) at December 31, 2010 and 2009 and for the years then ended, incorporated by reference herein, have been audited by Gerald O. Dry, PA, independent registered public accounting firm, as set forth in their report thereon, and are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The financial statements of the McKibbon Hotel Portfolio (Knoxville, Tennessee SpringHill Suites; Gainesville, Florida Hilton Garden Inn; Richmond, Virginia SpringHill Suites; Pensacola, Florida TownePlace Suites; Mobile, Alabama Hampton Inn & Suites; Knoxville, Tennessee TownePlace Suites; Knoxville, Tennessee Homewood Suites and Gainesville, Florida Homewood Suites) at December 31, 2010 and 2009 and for the years then ended, incorporated by reference herein, have been audited by Mauldin & Jenkins, LLC, independent registered public accounting firm, as set forth in their report thereon, and are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The financial statements of the Hawkeye Hotel Portfolio (Cedar Rapids, Iowa Homewood Suites; Cedar Rapids, Iowa Hampton Inn & Suites and Davenport, Iowa Hampton Inn & Suites) at December 31, 2010 and 2009 and for the years then ended, incorporated by reference herein, have been audited by Wade Stables P.C., independent registered public accounting firm, as set forth in their report thereon, and are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The financial statements of SASI, LLC (Mason, Ohio Hilton Garden Inn) at December 31, 2010 and for the year then ended, incorporated by reference herein, have been audited by Warren Averett, LLC (formerly Wilson, Price, Barranco, Blankenship & Billingsley, P.C.), independent registered public accounting firm, as set forth in their report thereon, and are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The financial statements of Omaha Downtown Lodging Investors II, LLC and Scottsdale Lodging Investors, LLC (Omaha, Nebraska Hilton Garden Inn and Scottsdale, Arizona Hilton Garden Inn) at December 31, 2010 and for the year then ended, incorporated by reference herein,

S-17


have been audited by Baker Tilly Virchow Krause, LLP, independent registered public accounting firm, as set forth in their report thereon, and are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The financial statements of the Chicago Hotel Portfolio (Des Plaines, Illinois Hilton Garden Inn and Skokie, Illinois Hampton Inn & Suites) at December 31, 2010 and 2009 and for the years then ended, incorporated by reference herein, have been audited by Warren Averett, LLC (formerly Wilson, Price, Barranco, Blankenship & Billingsley, P.C.), independent registered public accounting firm, as set forth in their report thereon, and are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The financial statements of Ascent Hospitality, Inc. (Merrillville, Indiana Hilton Garden Inn) at December 31, 2010 and for the year then ended, incorporated by reference herein, have been audited by Warren Averett, LLC (formerly Wilson, Price, Barranco, Blankenship & Billingsley, P.C.), independent registered public accounting firm, as set forth in their report thereon, and are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The financial statements of VHRMR Round Rock, LTD (Austin/Round Rock, Texas Homewood Suites) at December 26, 2010 and for the year then ended, incorporated by reference herein, have been audited by Pannell Kerr Forster of Texas, P.C., independent registered public accounting firm, as set forth in their report thereon, and are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The financial statements of KRG/White LS Hotel, LLC and Kite Realty/White LS Hotel Operators, LLC (South Bend, Indiana Fairfield Inn & Suites) at December 31, 2010 and for the year then ended, incorporated by reference herein, have been audited by Crowe Horwath LLP, independent registered public accounting firm, as set forth in their report thereon, and are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

S-18


APPLE REIT TEN, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Financial Statements of Company

 

 

 

 

 

Page

Apple REIT Ten, Inc.

 

 

(Audited)

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

*

 

Consolidated Balance Sheets—December 31, 2011 and December 2010

 

 

 

*

 

Consolidated Statements of Operations—Year Ended December 31, 2011 and For the Period August 13, 2010 (initial capitalization) through December 31, 2010

 

 

 

*

 

Consolidated Statements of Shareholders’ Equity—Year Ended December 31, 2011 and For the Period August 13, 2010 (initial capitalization) through December 31, 2010

 

 

 

*

 

Consolidated Statements of Cash Flows—Year Ended December 31, 2011 and For the Period August 13, 2010 (initial capitalization) through December 31, 2010

 

 

 

*

 

Notes to Consolidated Financial Statements

 

 

 

*

 

Financial Statement Schedule

 

 

 

*

 

(Unaudited)

 

 

Consolidated Balance Sheets—June 30, 2012 and December 31, 2011

 

 

 

*

 

Consolidated Statements of Operations—Three and Six Months Ended June 30, 2012 and 2011

 

 

 

*

 

Consolidated Statements of Cash Flows—Six Months Ended June 30, 2012 and 2011

 

 

 

*

 

Notes to Consolidated Financial Statements

 

 

 

*

 

Financial Statements of Businesses Acquired

 

 

Denver, Colorado—Hilton Garden Inn

 

 

(Audited)

 

 

Report of Independent Auditors

 

 

 

*

 

Balance Sheets—As of December 31, 2010 and 2009

 

 

 

*

 

Statements of Operations—Years Ended December 31, 2010 and 2009

 

 

 

*

 

Statements of Owners’ Equity—Years Ended December 31, 2010 and 2009

 

 

 

*

 

Statements of Cash Flows—Years Ended December 31, 2010 and 2009

 

 

 

*

 

Notes to Financial Statements

 

 

 

*

 

CN Hotel Portfolio

 

 

(Winston-Salem, North Carolina Hampton Inn & Suites; Matthews, North Carolina Fairfield Inn & Suites; Columbia, South Carolina TownePlace Suites; and Jacksonville, North Carolina Home2 Suites)

 

 

(Audited)

 

 

Independent Auditors’ Report

 

 

 

*

 

Combined Balance Sheets—December 31, 2010 and 2009

 

 

 

*

 

Combined Statements of Operations—For the Years Ended December 31, 2010 and 2009

 

 

 

*

 

Combined Statements of Cash Flows—For the Years Ended December 31, 2010 and 2009

 

 

 

*

 

Notes to Combined Financial Statements

 

 

 

*

 

F-1


 

 

 

 

 

Page

McKibbon Hotel Portfolio

 

 

(Knoxville, Tennessee SpringHill Suites; Gainesville, Florida Hilton Garden Inn; Richmond, Virginia SpringHill Suites; Pensacola, Florida TownePlace Suites; Mobile, Alabama Hampton Inn & Suites; Knoxville, Tennessee TownePlace Suites; Knoxville, Tennessee Homewood Suites and Gainesville, Florida Homewood Suites)

 

 

(Audited)

 

 

Independent Auditor’s Report

 

 

 

*

 

Combined Balance Sheets—As of December 31, 2010 and 2009

 

 

 

*

 

Combined Statements of Income—For the Years Ended December 31, 2010 and 2009

 

 

 

*

 

Combined Statements of Owner’s (Deficit)—For the Years Ended December 31, 2010 and 2009

 

 

 

*

 

Combined Statements of Cash Flows—For the Years Ended December 31, 2010 and 2009

 

 

 

*

 

Notes to Combined Financial Statements

 

 

 

*

 

(Unaudited)

 

 

Combined Balance Sheets—As of March 31, 2011 and 2010

 

 

 

*

 

Combined Statements of Income—For the Three Months Ended March 31, 2011 and 2010

 

 

 

*

 

Combined Statements of Owner’s (Deficit)—For the Three Months Ended March 31, 2011 and 2010

 

 

 

*

 

Combined Statements of Cash Flows—For the Three Months Ended March 31, 2011 and 2010

 

 

 

*

 

Hawkeye Hotel Portfolio

 

 

(Cedar Rapids, Iowa Homewood Suites; Cedar Rapids, Iowa Hampton Inn & Suites and Davenport, Iowa Hampton Inn & Suites)

 

 

(Audited)

 

 

Independent Auditors Report

 

 

 

*

 

Combined Balance Sheets—As of December 31, 2010 and 2009

 

 

 

*

 

Combined Statements of Operations—Years Ended December 31, 2010 and 2009

 

 

 

*

 

Combined Statements of Members’ Equity and Accumulated Comprehensive Loss—Years Ended December 31, 2010 and 2009

 

 

 

*

 

Combined Statements of Cash Flows—Years Ended December 31, 2010 and 2009

 

 

 

*

 

Notes to Combined Financial Statements

 

 

 

*

 

(Unaudited)

 

 

Combined Balance Sheets—As of March 31, 2011 and 2010

 

 

 

*

 

Combined Statements of Operations—For the Three Months Ended March 31, 2011 and 2010

 

 

 

*

 

Combined Statements of Members’ Equity and Accumulated Comprehensive Loss—For the Three Months Ended March 31, 2011 and 2010

 

 

 

*

 

Combined Statements of Cash Flows—For the Three Months Ended March 31, 2011 and 2010

 

 

 

*

 

SASI, LLC

 

 

(Mason, Ohio Hilton Garden Inn)

 

 

(Audited)

 

 

Independent Auditors’ Report

 

 

 

*

 

Balance Sheet—As of December 31, 2010

 

 

 

*

 

Statement of Income—For the Year Ended December 31, 2010

 

 

 

*

 

F-2


 

 

 

 

 

Page

Statement of Cash Flows—For the Year Ended December 31, 2010

 

 

 

*

 

Notes to Financial Statements

 

 

 

*

 

(Unaudited)

 

 

Balance Sheets—As of June 30, 2011 and 2010

 

 

 

*

 

Statements of Income—For the Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

Statements of Cash Flows—For the Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

Omaha Downtown Lodging Investors II, LLC and Scottsdale Lodging Investors, LLC

 

 

(Omaha, Nebraska Hilton Garden Inn and Scottsdale, Arizona Hilton Garden Inn)

 

 

(Audited)

 

 

Independent Auditors’ Report

 

 

 

*

 

Combined Balance Sheet—As of December 31, 2010

 

 

 

*

 

Combined Statement of Operations and Members’ Deficit—Year Ended December 31, 2010

 

 

 

*

 

Combined Statement of Cash Flows—Year Ended December 31, 2010

 

 

 

*

 

Notes to Combined Financial Statements

 

 

 

*

 

(Unaudited)

 

 

Combined Balance Sheets—As of June 30, 2011 and 2010

 

 

 

*

 

Combined Statements of Operations and Members’ Deficit—For the Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

Combined Statements of Cash Flows—For the Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

Chicago Hotel Portfolio

 

 

(Des Plaines, Illinois Hilton Garden Inn and Skokie, Illinois Hampton Inn & Suites)

 

 

(Audited)

 

 

Independent Auditors’ Report

 

 

 

*

 

Combined Balance Sheets—As of December 31, 2010 and 2009

 

 

 

*

 

Combined Statements of Income—For the Years Ended December 31, 2010 and 2009

 

 

 

*

 

Combined Statements of Cash Flows—For the Years Ended December 31, 2010 and 2009

 

 

 

*

 

Notes to Combined Financial Statements

 

 

 

*

 

(Unaudited)

 

 

Combined Balance Sheets—As of June 30, 2011 and 2010

 

 

 

*

 

Combined Statements of Income—For the Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

Combined Statements of Cash Flows—For the Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

Ascent Hospitality, Inc.

 

 

(Merrillville, Indiana Hilton Garden Inn)

 

 

(Audited)

 

 

Independent Auditors’ Report

 

 

 

*

 

Balance Sheet—As of December 31, 2010

 

 

 

*

 

Statement of Income—For the Year Ended December 31, 2010

 

 

 

*

 

Statement of Cash Flows—For the Year Ended December 31, 2010

 

 

 

*

 

Notes to Financial Statements

 

 

 

*

 

F-3


 

 

 

 

 

Page

(Unaudited)

 

 

Balance Sheets—As of June 30, 2011 and 2010

 

 

 

*

 

Statements of Income—For the Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

Statements of Cash Flows—For the Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

VHRMR Round Rock, LTD

 

 

(Austin/Round Rock, Texas Homewood Suites)

 

 

(Audited)

 

 

Independent Auditors’ Report

 

 

 

*

 

Balance Sheet—As of December 26, 2010

 

 

 

*

 

Statement of Operations—Year Ended December 26, 2010

 

 

 

*

 

Statement of Owners’ Equity—Year Ended December 26, 2010

 

 

 

*

 

Statement of Cash Flows—Year Ended December 26, 2010

 

 

 

*

 

Notes to Financial Statements

 

 

 

*

 

(Unaudited)

 

 

Balance Sheets—As of June 30, 2011 and 2010

 

 

 

*

 

Statements of Operations—Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

Statements of Cash Flows—Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

KRG/White LS Hotel, LLC and Kite Realty/White LS Hotel Operators, LLC

 

 

(South Bend, Indiana Fairfield Inn & Suites)

 

 

(Audited)

 

 

Report of Independent Auditors

 

 

 

*

 

Combined Balance Sheet—As of December 31, 2010

 

 

 

*

 

Combined Statement of Operations and Members’ Equity—Year Ended December 31, 2010

 

 

 

*

 

Combined Statement of Cash Flows—Year Ended December 31, 2010

 

 

 

*

 

Notes to Combined Financial Statements

 

 

 

*

 

(Unaudited)

 

 

Combined Balance Sheets—As of June 30, 2011 and 2010

 

 

 

*

 

Combined Statements of Operations—For the Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

Combined Statements of Cash Flows—For the Six Months Ended June 30, 2011 and 2010

 

 

 

*

 

Pro Forma Financial Information

 

 

Apple REIT Ten, Inc.

 

 

(Unaudited)

 

 

Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2012

 

 

 

*

 

Notes to Pro Forma Condensed Consolidated Balance Sheet

 

 

 

*

 

Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 2011 and Six Months Ended June 30, 2012

 

 

 

F-5

 

Notes to Pro Forma Condensed Consolidated Statements of Operations

 

 

 

F-8

 

 

*

 

 

  Incorporated by reference herein. See “Incorporation by Reference” on page S-6 of this prospectus supplement.

F-4


APPLE REIT TEN, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2011 AND
SIX MONTHS ENDED JUNE 30, 2012

(Unaudited)
(In thousands, except per share data)

The following unaudited Pro Forma Condensed Consolidated Statement of Operations of Apple REIT Ten, Inc. gives effect to the following hotel acquisition:

 

 

 

 

 

 

 

Franchise

 

Location

 

Gross
Purchase
Price
(millions)

 

Actual
Acquisition
Date

Hilton Garden Inn

 

Denver, CO

 

 

$

 

58.5

   

March 4, 2011

CN Hotel Portfolio (4 Hotels):

 

 

 

 

Hampton Inn & Suites

 

Winston-Salem, NC

 

 

 

11.0

   

March 15, 2011

Fairfield Inn & Suites

 

Matthews, NC

 

 

 

10.0

   

March 25, 2011

TownePlace Suites

 

Columbia, SC

 

 

 

10.5

   

March 25, 2011

Home2 Suites

 

Jacksonville, NC

 

 

 

12.0

   

May 4, 2012

McKibbon Hotel Portfolio (8 Hotels):

 

 

 

 

SpringHill Suites

 

Knoxville, TN

 

 

 

14.5

   

June 2, 2011

Hilton Garden Inn

 

Gainesville, FL

 

 

 

12.5

   

June 2, 2011

SpringHill Suites

 

Richmond, VA

 

 

 

11.0

   

June 2, 2011

TownePlace Suites

 

Pensacola, FL

 

 

 

11.5

   

June 2, 2011

Hampton Inn & Suites

 

Mobile, AL

 

 

 

13.0

   

June 2, 2011

Homewood Suites

 

Knoxville, TN

 

 

 

15.0

   

July 19, 2011

TownePlace Suites

 

Knoxville, TN

 

 

 

9.0

   

August 9, 2011

Homewood Suites

 

Gainesville, FL

 

 

 

14.6

   

January 27, 2012

Hawkeye Hotel Portfolio (3 Hotels):

 

 

 

 

Homewood Suites

 

Cedar Rapids, IA

 

 

 

13.0

   

June 8, 2011

Hampton Inn & Suites

 

Cedar Rapids, IA

 

 

 

13.0

   

June 8, 2011

Hampton Inn & Suites

 

Davenport, IA

 

 

 

13.0

   

July 19, 2011

Omaha and Scottsdale Hotel Portfolio (2 Hotels):

 

 

 

 

Hilton Garden Inn

 

Omaha, NE

 

 

 

30.0

   

September 1, 2011

Hilton Garden Inn

 

Scottsdale, AZ

 

 

 

16.3

   

October 3, 2011

Chicago Hotel Portfolio (2 Hotels):

 

 

 

 

Hilton Garden Inn

 

Des Plaines, IL

 

 

 

38.0

   

September 20, 2011

Hampton Inn & Suites

 

Skokie, IL

 

 

 

32.0

   

December 19, 2011

Hilton Garden Inn

 

Mason, OH

 

 

 

14.8

   

September 1, 2011

Hilton Garden Inn

 

Merrillville, IN

 

 

 

14.8

   

September 30, 2011

Homewood Suites

 

Austin/Round Rock, TX

 

 

 

15.5

   

October 3, 2011

Fairfield Inn & Suites

 

South Bend, IN

 

 

 

17.5

   

November 1, 2011

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

421.0

 

 

 

 

 

 

 

 

 

 

These Pro Forma Condensed Consolidated Statements of Operations also assume all of the hotels had been leased to our wholly-owned taxable REIT subsidiaries pursuant to master hotel lease arrangements. The hotels acquired will be managed by affiliates of LBAM Investor Group, L.L.C., MHH Management, LLC, Newport Hospitality Group, Inc., Raymond Management Company, Inc., Schulte Hospitality Group, Inc., Stonebridge Realty Advisors, Inc., Vista Host, Inc. and White Lodging Services Corporation under separate management agreements.

Such pro forma information is based in part upon the historical Consolidated Statements of Operations of Apple REIT Ten, Inc. and the historical Statements of Operations of the hotel properties.

The following unaudited Pro Forma Condensed Consolidated Statements of Operations of Apple REIT Ten, Inc. is not necessarily indicative of what the actual financial results would have been assuming such transactions had been completed on the latter of January 1, 2011, or the date the hotel began operations nor does it purport to represent the future financial results of Apple REIT Ten, Inc.

The unaudited Pro Forma Condensed Consolidated Statements of Operations should be read in conjunction with, and is qualified in its entirety by the historical Statements of Operations of the acquired hotels.

F-5


PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2011

(Unaudited)
(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company
Historical
Statement of
Operations

 

Denver, CO
Hilton
Garden Inn
(A)

 

CN Hotel
Portfolio
(A)

 

McKibbon
Hotel
Portfolio
(A)

 

Hawkeye
Hotel
Portfolio
(A)

 

Omaha
Downtown
Lodging
Investors II,
LLC and
Scottsdale
Lodging
Investors, LLC
(A)

 

Chicago
Hotel
Portfolio
(A)

 

SASI, LLC
Mason, OH
Hilton
Garden Inn
(A)

 

Ascent
Hospitality, Inc.
Merrillville, IN
Hilton
Garden Inn
(A)

 

VHRMR
Round Rock, LTD
Austin/Round
Rock, TX
Homewood Suites
(A)

 

KRG/White LS
Hotel, LLC & Kite
Realty/White LS
Hotel Operators, LLC
South Bend, IN
Fairfield Inn &
Suites
(A)

 

Pro forma
Adjustments

 

Total
Pro forma

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Room revenue

 

 

$

 

37,911

 

 

 

$

 

1,273

 

 

 

$

 

1,061

 

 

 

$

 

11,991

 

 

 

$

 

3,312

 

 

 

$

 

7,380

 

 

 

$

 

12,733

 

 

 

$

 

1,841

 

 

 

$

 

2,585

 

 

 

$

 

2,739

 

 

 

$

 

3,093

 

 

 

$

 

 

 

 

$

 

85,919

 

Other revenue

 

 

 

4,180

 

 

 

 

381

 

 

 

 

19

 

 

 

 

249

 

 

 

 

44

 

 

 

 

1,946

 

 

 

 

2,118

 

 

 

 

321

 

 

 

 

290

 

 

 

 

55

 

 

 

 

44

 

 

 

 

 

 

 

 

9,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

 

42,091

 

 

 

 

1,654

 

 

 

 

1,080

 

 

 

 

12,240

 

 

 

 

3,356

 

 

 

 

9,326

 

 

 

 

14,851

 

 

 

 

2,162

 

 

 

 

2,875

 

 

 

 

2,794

 

 

 

 

3,137

 

 

 

 

 

 

 

 

95,566

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

20,633

 

 

 

 

736

 

 

 

 

334

 

 

 

 

4,421

 

 

 

 

1,190

 

 

 

 

2,941

 

 

 

 

6,729

 

 

 

 

564

 

 

 

 

1,217

 

 

 

 

932

 

 

 

 

904

 

 

 

 

 

 

 

 

40,601

 

General and administrative

 

 

 

3,062

 

 

 

 

142

 

 

 

 

68

 

 

 

 

1,336

 

 

 

 

235

 

 

 

 

1,901

 

 

 

 

1,134

 

 

 

 

408

 

 

 

 

213

 

 

 

 

299

 

 

 

 

266

 

 

 

 

400

(B)

 

 

 

 

9,464

 

Management and franchise fees

 

 

 

3,104

 

 

 

 

224

 

 

 

 

96

 

 

 

 

1,062

 

 

 

 

447

 

 

 

 

751

 

 

 

 

1,250

 

 

 

 

164

 

 

 

 

255

 

 

 

 

250

 

 

 

 

110

 

 

 

 

 

 

 

 

7,713

 

Taxes, insurance and other

 

 

 

2,545

 

 

 

 

66

 

 

 

 

84

 

 

 

 

745

 

 

 

 

368

 

 

 

 

413

 

 

 

 

1,455

 

 

 

 

95

 

 

 

 

169

 

 

 

 

121

 

 

 

 

443

 

 

 

 

 

 

 

 

6,504

 

Acquisition related costs

 

 

 

11,265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

342

(H)

 

 

 

 

11,607

 

Depreciation of real estate owned

 

 

 

6,009

 

 

 

 

225

 

 

 

 

135

 

 

 

 

1,414

 

 

 

 

469

 

 

 

 

729

 

 

 

 

1,217

 

 

 

 

418

 

 

 

 

510

 

 

 

 

540

 

 

 

 

763

 

 

 

 

(6,420

)(C)

 

 

 

 

12,361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,352

(D)

 

 

 

Interest, net

 

 

 

607

 

 

 

 

128

 

 

 

 

137

 

 

 

 

2,247

 

 

 

 

662

 

 

 

 

863

 

 

 

 

1,937

 

 

 

 

298

 

 

 

 

305

 

 

 

 

218

 

 

 

 

400

 

 

 

 

(2,929

)(E)

 

 

 

 

4,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

 

 

47,225

 

 

 

 

1,521

 

 

 

 

854

 

 

 

 

11,225

 

 

 

 

3,371

 

 

 

 

7,598

 

 

 

 

13,722

 

 

 

 

1,947

 

 

 

 

2,669

 

 

 

 

2,360

 

 

 

 

2,886

 

 

 

 

(2,255

)

 

 

 

 

93,123

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(G)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

$

 

(5,134

)

 

 

 

$

 

133

 

 

 

$

 

226

 

 

 

$

 

1,015

 

 

 

$

 

(15

)

 

 

 

$

 

1,728

 

 

 

$

 

1,129

 

 

 

$

 

215

 

 

 

$

 

206

 

 

 

$

 

434

 

 

 

$

 

251

 

 

 

$

 

2,255

 

 

 

$

 

2,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per common share

 

 

$

 

(0.18

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

0.06

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted

 

 

 

29,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,371

(F)

 

 

 

 

37,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-6


PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2012

(Unaudited)
(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Company
Historical
Statement of
Operations

 

Gainesville, FL
Homewood
Suites Hotel
(A)

 

Pro forma
Adjustments

 

Total
Pro forma

Revenue:

 

 

 

 

 

 

 

 

Room revenue

 

 

$

 

50,795

 

 

 

$

 

128

 

 

 

$

 

 

 

 

$

 

50,923

 

Other revenue

 

 

 

5,149

 

 

 

 

2

 

 

 

 

 

 

 

 

5,151

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

 

55,944

 

 

 

 

130

 

 

 

 

 

 

 

 

56,074

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

26,844

 

 

 

 

84

 

 

 

 

 

 

 

 

26,928

 

General and administrative

 

 

 

2,322

 

 

 

 

49

 

 

 

 

 

 

 

 

2,371

 

Management and franchise fees

 

 

 

3,975

 

 

 

 

9

 

 

 

 

 

 

 

 

3,984

 

Taxes, insurance and other

 

 

 

4,185

 

 

 

 

10

 

 

 

 

 

 

 

 

4,195

 

Acquisition related costs

 

 

 

934

 

 

 

 

 

 

 

 

(342

)(H)

 

 

 

 

592

 

Depreciation of real estate owned

 

 

 

7,488

 

 

 

 

 

 

 

 

 

 

 

 

7,488

 

Interest, net

 

 

 

2,322

 

 

 

 

56

 

 

 

 

 

 

 

 

2,378

 

 

 

 

 

 

 

 

 

 

Total expenses

 

 

 

48,070

 

 

 

 

208

 

 

 

 

(342

)

 

 

 

 

47,936

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

(G)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

$

 

7,874

 

 

 

$

 

(78

)

 

 

 

$

 

342

 

 

 

$

 

8,138

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per common share

 

 

$

 

0.16

 

 

 

 

 

 

 

$

 

0.17

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted

 

 

 

48,713

 

 

 

 

 

 

 

 

 

 

48,713

 

 

 

 

 

 

 

 

 

 

F-7


NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited):

(A) Represents results of operations for the hotels on a pro forma basis as if the hotels were owned by the Company at January 1, 2011 for the respective period prior to acquisition by the Company. The Company was initially formed on August 13, 2010, and had no operations prior to that date. Additionally, Jacksonville, NC Home2 Suites opened on May 4, 2012 and therefore, this hotel had limited historical operational activity prior to its opening.

(B) Represents adjustments to level of administrative and other costs associated with being a public company and owning additional properties, including the advisory fee, accounting and legal expenses, net of cost savings derived from owning multiple operating properties.

(C) Represents elimination of historical depreciation and amortization expense of the acquired properties.

(D) Represents the depreciation on the hotels acquired based on the purchase price allocation to depreciable property and the dates the hotels began operation. The weighted average lives of the depreciable assets are 39 years for building and seven years for furniture, fixtures and equipment (FF&E). These estimated useful lives are based on management’s knowledge of the properties and the hotel industry in general.

(E) Interest expense related to prior owner’s debt which was not assumed has been eliminated.

(F) Represents the weighted average number of shares required to be issued to generate the purchase price of each hotel, net of any debt assumed. The calculation assumes all properties were acquired on the latter of January 1, 2011, or the dates the hotels began operations.

(G) Estimated income tax expense of our wholly owned taxable REIT subsidiaries is zero based on the contractual agreement put in place between the Company and our lessees, based on a combined tax rate of 40% of taxable income. Based on the terms of the lease agreements, our taxable subsidiaries would have incurred a loss during these periods. No operating loss benefit has been recorded as realization is not certain.

(H) Represents costs incurred to complete acquisitions, including, title, legal, accounting and other related costs, as well as the commission paid to Apple Suites Realty Group totaling 2% of purchase price per contract. These costs have been adjusted for hotel acquisitions on the latter of January 1, 2011 or the dates the hotels began operations.

F-8


 

 

 

PROSPECTUS

 

AN OFFERING OF UNITS
(EACH UNIT CONSISTS OF ONE COMMON SHARE
AND ONE SERIES A PREFERRED SHARE)
 MINIMUM OFFERING:     9,523,810 UNITS
MAXIMUM OFFERING: 182,251,082 UNITS

We plan to acquire hotels and other income-producing real estate. We plan to qualify as a real estate investment trust.

We are currently offering up to 182,251,082 Units in this offering. Of our 182,251,082 Units, we offered 9,523,810 Units at $10.50 per Unit. The minimum offering of 9,523,810 was completed on January 27, 2011. We will offer the remaining 172,727,272 Units at $11.00 per Unit. As of March 31, 2012, 133,099,563 Units remained unsold. Purchasers must purchase a minimum of $5,000 in Units except that specified benefit plans may purchase a minimum of $2,000 in Units.

Each Unit consists of one common share and one Series A preferred share. The Series A preferred shares will have no voting rights and no conversion rights. The only right associated with the Series A preferred shares will be a priority distribution upon the sale of our assets in liquidation or other event of liquidation. Moreover, the Series A preferred shares will not be separately tradable from the common shares to which they relate and will terminate on conversion of our Series B convertible preferred shares. The Units are being offered on a best efforts, minimum offering basis through David Lerner Associates, Inc., an unaffiliated broker-dealer. The minimum offering amount was reached on January 27, 2011. None of our affiliates purchased Units for the purpose of meeting the minimum offering amount. Any Units purchased by David Lerner Associates, Inc. were not counted to reach the minimum offering amount.

We expect to terminate the offering when all of the Units offered by this prospectus have been sold or January 19, 2013 (whichever occurs sooner), unless extended by us for up to an additional year, in order to achieve the maximum offering of 182,251,082 Units.

We intend to qualify and elect to be taxed as a real estate investment trust, or REIT, for federal income tax purposes commencing with our taxable year ending December 31, 2011. The securities offered by this prospectus are subject to restrictions on ownership and transfer that are intended, among other purposes, to assist us in qualifying and maintaining our qualification as a REIT. Our bylaws, subject to certain exceptions, limit direct and indirect ownership to no more than 9.8% of the total number of the issued and outstanding Units. See “Description of Capital Stock—Restrictions On Transfer.”

Consider carefully the Risk Factors beginning on Page 16 of this prospectus. This offering involves material risks and investment considerations including:

 

 

 

 

No public trading market for our Units currently exists, and no such public market is expected to develop any time in the future. Therefore, the Units will be highly illiquid and very difficult to trade.

 

 

 

 

We pay a fee of 2% of the gross purchase price and 2% of the gross sale price associated with property acquisitions and dispositions to Apple Suites Realty Group, Inc. and an annual fee ranging from 0.1% to 0.25% of total equity proceeds to Apple Ten Advisors, Inc., both of which are owned by Glade M. Knight our chairman and chief executive officer. In addition, Apple Ten Advisors will be reimbursed for specified costs and expenses incurred on our behalf.

 

 

 

 

There are conflicts between us and Glade M. Knight because he owns the companies with which we will enter into contracts for services. Also, Mr. Knight is a principal in other real estate investment programs which may compete with us.

 

 

 

 

We issued to Glade M. Knight all of our 480,000 Series B convertible preferred shares at a purchase price of $0.10 per share. The Series B convertible preferred shares are convertible into common shares under certain circumstances. Mr. Knight can cause the conversion of the Series B convertible shares into common shares. Shareholders’ interests will be diluted upon conversion of these shares.

 

 

 

 

We are subject to a securities class action lawsuit and governmental regulatory oversight, which could have a material adverse effect on our financial condition, results of operations and cash flows.

 

 

 

 

We commenced operations in March 2011 and have a limited operating history. This offering is a “blind pool” offering because we have not yet identified all of the properties we will acquire with future proceeds of this offering.

 

 

 

 

We may be unable to generate sufficient cash for distributions. If our properties do not generate sufficient revenue to meet operating expenses, our cash flow and our ability to make distributions to shareholders may be adversely affected. Our distributions to our shareholders may not be sourced from cash generated from operations but from offering proceeds or the proceeds of indebtedness and this will decrease our distributions in the future. There is no limit on the amount of distributions that can be funded from offering or financing proceeds.

 

 

 

 

We have no restriction on changes in our investment and financing policies. Our board of directors may, in its sole discretion, determine the amount of our aggregate debt. Therefore, our properties may be highly leveraged and subject to a greater risk of default. In addition, since Apple Suites Realty’s commission is based on gross purchase price, it may have an incentive to encourage us to purchase highly-leveraged properties in order to maximize commissions.

 

 

 

 

 

 

 

 

 

 

Price To Public

 

Commissions &
Marketing Expenses

 

Proceeds To Apple
REIT Ten, Inc.

 

Per Unit

 

$11.00

 

$1.10

 

$9.90

 

Total Minimum offering (completed)

 

$100,000,000

 

$10,000,000

 

$90,000,000

 

Total Maximum offering

 

$2,000,000,000

 

$200,000,000

 

$1,800,000,000

 

We will comply with the provisions of Securities and Exchange Commission Rule 10b-9 under the Securities Exchange Act of 1934, as amended.

Neither the Securities and Exchange Commission nor any State Securities Commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The Attorney General of the State of New York has not passed on or endorsed the merits of this offering. Any representation to the contrary is unlawful.

All proceeds of this offering will be held in trust and used only for the purposes set forth in this prospectus.

The date of this prospectus is May 2, 2012.


SUITABILITY STANDARDS

Except for the states specifically described below, each purchaser of Units must certify that he has either (1) a minimum annual gross income of $45,000 and a net worth (exclusive of equity in home, home furnishings and personal automobiles) of at least $45,000, or (2) a net worth (similarly defined) of at least $150,000.

Each North Carolina, Pennsylvania, Virginia and Washington purchaser must certify that he has either (1) a minimum annual gross income of $70,000 and a net worth (similarly defined) of at least $70,000, or (2) a net worth (similarly defined) of at least $250,000.

Each California purchaser must certify that (i) the purchaser has annual gross income of at least $75,000 with a net worth (exclusive of home, home furnishings and automobiles) of at least $150,000, or a net worth (exclusive of home, home furnishings and automobiles) of at least $250,000; and (ii) units purchased do not exceed 10% of the purchaser’s net worth (exclusive of home, home furnishings and automobiles). The exemption from registration provided under Section 25104(h) of the California Corporations Code will not be available for resales of Units purchased in this offering.

Pennsylvania investors must have a net worth of at least 10 times their investment in Apple REIT Ten.

No dealer, salesman or other person has been authorized to give any information or to make any representations other than those contained in this prospectus in connection with the offering made by this prospectus, and, if given or made, any other information or representations must not be relied upon. This prospectus does not constitute an offer in any state in which an offer may not legally be made. The delivery of this prospectus at any time does not imply that information contained in this prospectus has not changed as of any time after its date.

*  *  *

“Courtyard by Marriott,” “Fairfield Inn,” “Fairfield Inn & Suites,” “TownePlace Suites,” “Marriott,” “SpringHill Suites” and “Residence Inn” are each a registered trademark of Marriott International, Inc. or one of its affiliates. All references below to “Marriott” mean Marriott International, Inc. and all of its affiliates and subsidiaries, and their respective officers, directors, agents, employees, accountants and attorneys. Marriott is not responsible for the content of this prospectus, whether relating to hotel information, operating information, financial information, Marriott’s relationship with Apple REIT Ten, Inc., or otherwise. Marriott is not involved in any way, whether as an “issuer” or “underwriter” or otherwise, in the offering by Apple REIT Ten, Inc. and receives no proceeds from the offering. Marriott has not expressed any approval or disapproval regarding this prospectus or the offering related to this prospectus, and the grant by Marriott of any franchise or other rights to Apple REIT Ten, Inc. shall not be construed as any expression of approval or disapproval. Marriott has not assumed, and shall not have, any liability in connection with this prospectus or the offering related to this prospectus.

“Hampton Inn,” “Hampton Inn & Suites,” “Homewood Suites,” “Embassy Suites,” “Hilton Garden Inn” and “Home2 Suites by Hilton” are each a registered trademark of Hilton Worldwide or one of its affiliates. All references below to “Hilton” mean Hilton Worldwide and all of its affiliates and subsidiaries, and their respective officers, directors, agents, employees, accountants and attorneys. Hilton is not responsible for the content of this prospectus, whether relating to hotel information, operating information, financial information, Hilton’s relationship with Apple REIT Ten, Inc., or otherwise. Hilton is not involved in any way, whether as an “issuer” or “underwriter” or otherwise, in the offering by Apple REIT Ten, Inc. and receives no proceeds from the offering. Hilton has not expressed any approval or disapproval regarding this prospectus or the offering related to this prospectus, and the grant by Hilton of any franchise or other rights to Apple REIT Ten, Inc. shall not be construed as any expression of approval or disapproval. Hilton has not assumed, and shall not have, any liability in connection with this prospectus or the offering related to this prospectus.

The foregoing disclaimers do not apply to our own officers when they serve as members of Marriott or Hilton Owners Advisory Boards. As of the date of this prospectus, Mr. Justin Knight, our President, and Ms. Kristian Gathright, our Executive Vice President and Chief Operating Officer, both serve as members on such Boards, which are owner-representative advisory groups.


TABLE OF CONTENTS

 

 

 

 

 

Page

SUMMARY

 

 

 

1

 

Apple REIT Ten, Inc.  

 

 

 

1

 

Hotels

 

 

 

1

 

Other Real Estate

 

 

 

1

 

Loan Assumptions

 

 

 

2

 

Apple Ten Advisors and Apple Suites Realty

 

 

 

2

 

Other Apple Entities

 

 

 

4

 

Risk Factors

 

 

 

4

 

The Status of the Offering

 

 

 

6

 

Net Book Value Per Share

 

 

 

8

 

Use of Proceeds

 

 

 

8

 

Conflicts of Interest

 

 

 

9

 

Liquidity

 

 

 

10

 

Investment and Distribution Policy

 

 

 

10

 

Borrowing Policy

 

 

 

11

 

Compensation

 

 

 

11

 

Unit Redemption Program

 

 

 

14

 

RISK FACTORS

 

 

 

16

 

General Risk Factors

 

 

 

16

 

We were incorporated in August 2010 and have a limited operating history; therefore, there is no assurance that we will be able to achieve our investment objectives

 

 

 

16

 

The past performance of programs sponsored or affiliated with Glade M. Knight is not an indicator of our future performance

 

 

 

16

 

Our distributions to our shareholders may not be sourced from our cash generated from operations but from offering proceeds or indebtedness and this will decrease our distributions in the future; furthermore, we cannot guarantee that investors will receive any specific return on their investment

 

 

 

16

 

There would be significant adverse consequences of our failure to qualify as a REIT, including our ability to make distributions to shareholders

 

 

 

17

 

We will not obtain a tax ruling on our REIT status or any other tax matters

 

 

 

17

 

There is no public market for our common shares, so investors may be unable to dispose of their investment

 

 

 

17

 

There will never be a public market for our Series A preferred shares separate from any market that may develop for our common shares and investors are not able to separately dispose of their Series A preferred shares without disposing of the common shares to which the Series A preferred shares relate

 

 

 

18

 

We will not attempt to calculate our net asset value on a regular basis

 

 

 

18

 

There is a “dilutive” effect to investors who purchase our Units at $11.00 rather than at the initial offering price of $10.50 per Unit

 

 

 

18

 

Our Board of Directors will decide when and whether we list our Units, engage in a merger or similar sale transaction or dissolve, and we are under no obligation to take any of these actions at any particular time; therefore, our shares may be illiquid for an indefinite period of time

 

 

 

18

 

The compensation to Apple Ten Advisors, Apple Suites Realty Group and David Lerner Associates will decrease our net proceeds and the cash available for acquisitions and for distributions to shareholders. This will tend to reduce the return on our shareholders’ investment

 

 

 

19

 

i


 

 

 

 

 

Page

There were no arms-length negotiations for our agreements with Apple Ten Advisors and Apple Suites Realty and the terms of those agreements may be more favorable to those entities and more to our detriment than had the negotiations been arms-length with third parties

 

 

 

19

 

Since neither Apple Ten Advisors nor Apple Suites Realty currently has employees, they must use the services of other employees to fulfill their duties and there is no complete assurance that other employees will be available for such purpose

 

 

 

20

 

The compensation to Apple Ten Advisors and Apple Suites Realty is variable and cannot be stated with certainty;

 

 

 

20

 

There are conflicts of interest with our chairman and chief executive officer because he has duties as an officer and director to companies with which we contract or with which we may compete for properties

 

 

 

20

 

There may be conflicts of interest because of interlocking boards of directors with affiliated companies

 

 

 

21

 

There are conflicts of interest with our advisor and broker because it could be financially advantageous for them to recommend certain actions that may be disadvantageous to us

 

 

 

21

 

There are conflicts of interest for our management personnel because they are required to spend time on activities with other entities, and these other entities may compete with us in our business activity

 

 

 

21

 

Since neither Apple Ten Advisors nor Apple Suites Realty is required to maintain any minimum assets or net worth, we may not as a practical matter be able to sue them for money damages for breach of their agreements with us

 

 

 

22

 

Apple Ten Advisors may terminate the Advisory Agreement, which would require us to find a new advisor or become self-advised

 

 

 

22

 

There will be dilution of shareholders’ interests upon conversion of the Series B convertible preferred shares

 

 

 

22

 

The Series A preferred shares will terminate and have no liquidation preference upon the conversion of the Series B convertible preferred shares and there will be dilution of the common shares

 

 

 

23

 

The Series B convertible preferred shares will have a liquidation preference before any distribution of liquidation proceeds on the common shares

 

 

 

23

 

A merger or similar sale transaction by us or listing our Units on a securities exchange would likely cost more in transaction fees than a liquidation

 

 

 

24

 

If we lose Glade M. Knight or are unable to attract and retain the talent required for our business, our acquisition of suitable properties and future operating results could suffer

 

 

 

24

 

We are not diversified and are dependent on our investment in only a few industries

 

 

 

24

 

There is a possible lack of diversification and our shareholders may recognize a lower return due to the minimum size of our offering

 

 

 

24

 

Since this is a “best-efforts” offering of Units, there is neither any requirement, nor any assurance, that more than the current amount raised will be raised

 

 

 

25

 

There may be delays in investment in real property, and this delay may decrease the return to shareholders

 

 

 

25

 

Our board may, in its sole discretion, determine the amount and nature of our aggregate debt and as a result may achieve a debt ratio that decreases shareholder returns

 

 

 

25

 

Certain loans are and may be secured by mortgages on our properties and if we default under our loans, we may lose properties through foreclosure

 

 

 

25

 

The per-Unit offering prices have been established arbitrarily by us and may not reflect the true value of the Units; therefore, investors may be paying more for a Unit than the Unit is actually worth

 

 

 

26

 

We may be unable to make distributions to our shareholders

 

 

 

26

 

Our real estate investments are relatively illiquid and may adversely affect returns to our shareholders

 

 

 

26

 

ii


 

 

 

 

 

Page

We may be subject to certain fixed costs that will not decrease if revenues decrease, and this may decrease distributions to shareholders

 

 

 

27

 

We have no restriction on changes in our investment and financing policies and our board may change these policies without shareholder approval

 

 

 

27

 

Our shareholders’ interests may be diluted in various ways, which may result in lower returns to our shareholders

 

 

 

27

 

You will be limited in your ability to sell your Units pursuant to the Unit redemption program

 

 

 

27

 

We may be required to indemnify Apple Ten Advisors against losses in various circumstances

 

 

 

28

 

Our rights and the rights of our shareholders to recover claims against our officers and directors are limited, which could reduce your and our recovery against them if they cause us to incur losses

 

 

 

28

 

Virginia law and certain provisions under our articles of incorporation and bylaws may impede attempts to acquire control of us and may deter or prevent our shareholders’ ability to change our management

 

 

 

29

 

Possible lack of diversification increases the risk of investment

 

 

 

29

 

We may become subject to environmental liabilities, which may decrease profitability and shareholders’ return

 

 

 

29

 

We may incur significant costs complying with the Americans with Disabilities Act and similar laws, which may decrease profitability and shareholder return

 

 

 

30

 

We may not have control over properties under construction

 

 

 

30

 

We depend in part on leasing space to tenants on economically favorable terms and collecting rent from our tenants, who may not be able to pay

 

 

 

30

 

Our real properties are subject to property taxes that may increase in the future, which could adversely affect our cash flows

 

 

 

30

 

We may invest in joint ventures, which could adversely affect our ability to control decisions and increase our costs or liability

 

 

 

31

 

We may not be able to use debt to meet our cash requirements

 

 

 

31

 

Technology is used in operations, and any material failure, inadequacy, interruption or security failure of that technology could harm the business

 

 

 

31

 

Hotel Risk Factors

 

 

 

31

 

Our probable lack of diversification in property type increases the risk of investment

 

 

 

31

 

Adverse trends in the hotel industry may impact our properties

 

 

 

32

 

The impact of the current economic environment on the lodging industry may harm the Company’s future financial results and growth

 

 

 

32

 

An economic downturn and concern about terrorist activities could adversely affect the travel and lodging industries and may affect hotel operations for the hotels we own and acquire

 

 

 

32

 

The hotel industry is seasonal

 

 

 

33

 

There may be operational limitations associated with management and franchise agreements affecting our properties and these limitations may prevent us from using these properties to their best advantage for our shareholders

 

 

 

33

 

We face competition in the hotel industry, which may limit our profitability and return to our shareholders

 

 

 

33

 

Additional Risk Factors

 

 

 

34

 

The value of real estate fluctuates depending on conditions in the general economy and the real estate business. These conditions may also limit our revenues and available cash

 

 

 

34

 

We are subject to a securities class action lawsuit and governmental regulatory oversight, which could have a material adverse effect on our financial condition, results of operations and cash flows

 

 

 

34

 

USE OF PROCEEDS

 

 

 

34

 

iii


 

 

 

 

 

Page

COMPENSATION

 

 

 

37

 

Conflicts of Interest as a Result of Fees

 

 

 

39

 

Specific Amounts of Compensation Payable to Apple Ten Advisors and Apple Suites Realty

 

 

 

39

 

Property Acquisition/Disposition Agreement

 

 

 

39

 

Advisory Agreement

 

 

 

40

 

Reimbursement Compensation under the Advisory Agreement and Property Acquisition/Disposition Agreement

 

 

 

40

 

Certain Other Reimbursements to Apple Ten Advisors and Apple Suites Realty

 

 

 

41

 

Account Maintenance Services to Shareholders

 

 

 

41

 

Allocation of Reimbursements between Operating Expenses and Acquisition Expenses

 

 

 

41

 

Limitation on Operating Expenses

 

 

 

41

 

Limitation on Acquisition Fees and Acquisition Expenses

 

 

 

42

 

Limitation on Organizational and Offering Expenses

 

 

 

42

 

Series B Convertible Preferred Shares

 

 

 

42

 

Cost-Sharing Arrangements and Reimbursements to Apple Fund Management

 

 

 

43

 

Property Management

 

 

 

46

 

Share Incentive Awards

 

 

 

46

 

CONFLICTS OF INTEREST

 

 

 

46

 

General

 

 

 

46

 

Conflicts Related to Fees, Compensation and Economic Benefits Paid or Incurred by us to Apple Ten Advisors, Apple Suites Realty and Glade M. Knight

 

 

 

47

 

Series B Convertible Preferred Shares

 

 

 

47

 

Policies to Address Conflicts

 

 

 

48

 

Transactions with Affiliates and Related Parties

 

 

 

48

 

Interlocking Boards of Directors

 

 

 

49

 

Competition Between Us and Glade M. Knight and Other Companies Organized by Mr. Knight

 

 

 

49

 

Competition for Management Services

 

 

 

52

 

INVESTMENT OBJECTIVES AND POLICIES

 

 

 

53

 

Investments in Real Estate or Interests in Real Estate

 

 

 

53

 

Borrowing Policies

 

 

 

54

 

Reserves

 

 

 

55

 

Sale Policies

 

 

 

55

 

Underwriting Policy

 

 

 

56

 

Changes in Objectives and Policies

 

 

 

57

 

DISTRIBUTIONS POLICY

 

 

 

58

 

DESCRIPTION OF REAL ESTATE AND OPERATING DATA

 

 

 

59

 

States in which Our Hotels are Located

 

 

 

59

 

Number of Guest Rooms by State

 

 

 

60

 

Type and Number of Hotel Franchises

 

 

 

60

 

Potential Acquisitions

 

 

 

61

 

Summary of Contracts for our Properties

 

 

 

61

 

Financial and Operating Information for our Properties

 

 

 

65

 

BUSINESS

 

 

 

70

 

General

 

 

 

70

 

Business Strategies

 

 

 

70

 

iv


 

 

 

 

 

Page

Legal Proceedings and Related Matters

 

 

 

72

 

Broker Dealer

 

 

 

72

 

Regulation

 

 

 

72

 

Americans With Disabilities Act

 

 

 

73

 

Environmental Matters

 

 

 

73

 

Insurance

 

 

 

74

 

Seasonality

 

 

 

74

 

Available Information

 

 

 

74

 

MANAGEMENT

 

 

 

75

 

Board of Directors

 

 

 

77

 

Committees of the Board

 

 

 

77

 

Corporate Governance

 

 

 

77

 

Indemnification and Insurance

 

 

 

78

 

Executive Officers

 

 

 

78

 

COMPENSATION DISCUSSION AND ANALYSIS

 

 

 

81

 

Executive Compensation

 

 

 

81

 

Director Compensation

 

 

 

84

 

Directors’ Plan

 

 

 

84

 

Stock Option Grants

 

 

 

85

 

APPLE TEN ADVISORS AND APPLE SUITES REALTY

 

 

 

87

 

General

 

 

 

87

 

The Advisory Agreement

 

 

 

87

 

Apple Suites Realty

 

 

 

90

 

Property Management

 

 

 

91

 

Prior Performance of Programs Sponsored by Glade M. Knight

 

 

 

91

 

Prior REITS

 

 

 

91

 

Apple Hospitality Two

 

 

 

91

 

Apple Hospitality Five

 

 

 

92

 

Apple REIT Six

 

 

 

92

 

Apple REIT Seven

 

 

 

92

 

Apple REIT Eight

 

 

 

93

 

Apple REIT Nine

 

 

 

93

 

Additional Information on Apple REIT Nine

 

 

 

94

 

Additional Information on Prior Programs

 

 

 

94

 

PRINCIPAL AND MANAGEMENT SHAREHOLDERS

 

 

 

95

 

FEDERAL INCOME TAX CONSIDERATIONS

 

 

 

97

 

General

 

 

 

97

 

Tax Status of Our Company

 

 

 

98

 

REIT Qualification

 

 

 

99

 

Taxation as a REIT

 

 

 

104

 

Failure to Qualify as a REIT

 

 

 

105

 

Taxation of U.S. Shareholders

 

 

 

106

 

Backup Withholding

 

 

 

107

 

Taxation of Foreign Investors

 

 

 

107

 

State and Local Taxes

 

 

 

108

 

ERISA CONSIDERATIONS

 

 

 

108

 

v


 

 

 

 

 

Page

Prohibited Transaction Considerations

 

 

 

108

 

Additional Considerations for Insurance Company General Accounts

 

 

 

110

 

CAPITALIZATION

 

 

 

111

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

112

 

PLAN OF DISTRIBUTION

 

 

 

112

 

DESCRIPTION OF CAPITAL STOCK

 

 

 

115

 

Common Shares

 

 

 

116

 

Series A Preferred Shares

 

 

 

117

 

Series B Convertible Preferred Shares

 

 

 

117

 

Preferred Shares

 

 

 

119

 

Restrictions On Transfer

 

 

 

120

 

Facilities for Transferring Common Shares

 

 

 

120

 

Unit Redemption Program

 

 

 

121

 

SUMMARY OF ORGANIZATIONAL DOCUMENTS

 

 

 

124

 

Board of Directors

 

 

 

124

 

Responsibility of Board of Directors, Officers and Employees

 

 

 

124

 

Issuance of Securities

 

 

 

126

 

Redemption and Restrictions on Transfer

 

 

 

128

 

Amendment

 

 

 

128

 

Shareholder Liability

 

 

 

128

 

Restrictions on Roll-Up Transactions

 

 

 

128

 

Antitakeover Provisions

 

 

 

129

 

Virginia Antitakeover Statutes

 

 

 

130

 

SALES LITERATURE

 

 

 

130

 

REPORTS TO SHAREHOLDERS

 

 

 

130

 

LEGAL MATTERS

 

 

 

131

 

EXPERTS

 

 

 

131

 

INCORPORATION BY REFERENCE

 

 

 

132

 

EXPERIENCE OF PRIOR PROGRAMS

 

 

 

135

 

TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS

 

 

 

137

 

TABLE II: COMPENSATION TO SPONSOR AND ITS AFFILIATES

 

 

 

138

 

TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS

 

 

 

139

 

TABLE IV: RESULTS OF COMPLETED PROGRAMS

 

 

 

143

 

TABLE V: SALES OR DISPOSALS OF PROPERTIES

 

 

 

144

 

SELECTED FINANCIAL DATA

 

 

 

145

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

F-1

 

vi


SUMMARY

The following information is a summary about this offering and may not contain all of the detailed information that is important to you. Accordingly, we urge you to read this summary together with the information contained in this prospectus.

Apple REIT Ten, Inc.

Apple REIT Ten, Inc. was formed on August 11, 2010 for the purpose of acquiring and owning hotels and other income-producing real estate. Glade M. Knight, our chairman and chief executive officer, is our only promoter. His business address is 814 East Main Street, Richmond, Virginia 23219. We are located at 814 East Main Street, Richmond, Virginia and our telephone number is (804) 344-8121 and our website is http://www.applereitten.com.

We began operations on March 4, 2011. Since beginning our operations, we have complied with the requirements for making an election and we plan to elect to be treated as a real estate investment trust for federal income tax purposes beginning with our taxable year ending December 31, 2011. As a real estate investment trust, we will generally not be subject to federal income tax. We will, however, be subject to a number of organizational and operational requirements and limitations. We have created two wholly-owned subsidiaries to hold our acquisitions: Apple Ten Hospitality, Inc. and Apple Ten Ventures, Inc. We refer to Apple Ten Hospitality, Inc. as Apple Ten Hospitality and Apple Ten Ventures, Inc. as Apple Ten Ventures in this prospectus. These types of properties and entities are described below.

Hotels

As of March 31, 2012, we have acquired 28 select-service or extended-stay hotels and have entered into purchase contracts for six additional select-service or extended-stay hotels. Although to date we do not own any full-service hotels, we may acquire full-service hotels in the future. Full-service hotels generally provide a full complement of guest amenities including restaurants, concierge and room service, porter service or valet parking. Select-service hotels typically do not include these amenities. Extended-stay hotels offer upscale, high-quality, residential style lodging with a comprehensive package of guest services and amenities for extended-stay business and leisure travelers. We have no limitation as to the brand of franchise or license with which our hotels are associated. We may continue to acquire hotels. Apple Ten Hospitality, or one of its wholly-owned subsidiaries, will own all of the hotels we acquire.

As a real estate investment trust, we are prohibited under federal tax laws from operating our hotel properties directly. The provisions of the Internal Revenue Code, however, allow us to enter into leases for each of our hotels, which will in turn be operated by third-party hotel operators and franchisers. All our hotels are leased to Apple Ten Hospitality Management, Inc., our wholly owned, taxable REIT subsidiary, or one of its wholly-owned subsidiaries. We refer to Apple Ten Hospitality Management, Inc. as Apple Ten Hospitality Management in this prospectus.

Other Real Estate

Even though we intend primarily to acquire hotels, we may use a significant portion of the offering proceeds to purchase other income-producing real estate. This real estate will be owned by Apple Ten Ventures, or one of its wholly-owned subsidiaries. Apple Ten Ventures has no significant assets. We believe that approximately 20% of the net proceeds raised in this offering will be used to acquire real estate other than hotels and apartment communities. However, we may use more or less than 20% of the proceeds from this offering to acquire real estate other than hotels and are not bound to that limit. Real estate we acquire may include but will not be limited to retail and office space.

1


Loan Assumptions

The purchase contracts for six of our hotels required us to assume loans secured by these hotels. The total outstanding principal balance of the assumed loans as of the purchase date was $82.5 million. Each of the assumed loans has a non-recourse structure, which means that the lender generally must rely on the property, rather than the borrower, as the lender’s source of repayment in any collection action. There are exceptions to the non-recourse structure in certain situations, such as misappropriation of funds and environmental liabilities. In these situations, the lender would be permitted to seek repayment from the guarantor or indemnitor of the loan, which is one of our indirect wholly-owned subsidiaries.

Apple Ten Advisors and Apple Suites Realty

We do not have any employees. Apple Ten Advisors, Inc. provides us with our day-to-day management. We refer to Apple Ten Advisors, Inc. as Apple Ten Advisors in this prospectus. Apple Ten Advisors does not have any significant assets. Apple Suites Realty Group, Inc. provides us with property acquisition and disposition services. We refer to Apple Suites Realty Group, Inc. as Apple Suites Realty in this prospectus. Apple Suites Realty has no significant assets. Neither Apple Ten Advisors nor Apple Suites Realty currently has employees. We pay fee compensation and reimbursement compensation to Apple Ten Advisors and Apple Suites Realty. Glade M. Knight owns all of the outstanding capital stock of Apple Ten Advisors and Apple Suites Realty. Apple Ten Advisors and Apple Suites Realty use the services of certain officers and employees of Apple Fund Management, LLC (a subsidiary of Apple REIT Six, Inc. and indirectly controlled by Glade M. Knight). We refer to Apple Fund Management, LLC as Apple Fund Management in this prospectus.

Under the Advisory Agreement, we pay Apple Ten Advisors fee compensation and under the Property Acquisition/Disposition Agreement, we pay Apple Suites Realty fee compensation. In addition, under each such agreement, and in exchange for the services rendered under each such agreement, we pay each of Apple Ten Advisors and Apple Suites Realty reimbursement compensation for payments it makes to Apple Fund Management. More specifically, since they have no employees of their own, Apple Ten Advisors and Apple Suites Realty use the personnel and office space of Apple Fund Management to satisfy their respective obligations under the Advisory Agreement and Property Acquisition/Disposition Agreement, and are required to reimburse Apple Fund Management for such expense. They use the reimbursement compensation received from us under the Advisory Agreement and the Property Acquisition/Disposition Agreement to pay Apple Fund Management. Apple Fund Management is a subsidiary of Apple REIT Six, Inc. and indirectly controlled by Glade M. Knight. Alternatively, we may elect that reimbursement amounts otherwise payable to Apple Ten Advisors and Apple Suites Realty shall instead be paid directly by us to Apple REIT Six, Inc., the parent of Apple Fund Management.

Each of our properties is managed by a third-party manager or operator, who is paid a management fee. These property-level management fees to third-party managers or operators are in addition to the fee compensation and reimbursement compensation payable to Apple Ten Advisors and Apple Suites Realty under the Advisory Agreement and Property Acquisition/Disposition Agreement.

2


The following chart illustrates the relationships among us, our subsidiaries, Apple Ten Advisors, Apple Suites Realty and Apple Fund Management.


 

 

(1)

 

 

 

Purchasers of Units are our shareholders. Upon our formation, Apple Ten Advisors (which is wholly-owned by Glade M. Knight, our chairman and chief executive officer) acquired 10 Units for $110 in the aggregate. In addition, Mr. Knight acquired 480,000 Series B convertible preferred shares for $0.10 per Series B convertible preferred share or an aggregate of $48,000.

 

(2)

 

 

 

We have entered into an Advisory Agreement with Apple Ten Advisors.

 

(3)

 

 

 

We have entered into a Property Acquisition/Disposition Agreement with Apple Suites Realty.

 

(4)

 

 

 

Wholly-owned by Glade M. Knight, our chairman and chief executive officer.

 

(5)

 

 

 

Apple Ten Advisors and Apple Suites Realty have no employees of their own. Thus, Apple Ten Advisors and Apple Suites Realty use the personnel of Apple Fund Management to satisfy their respective obligations under the Advisory Agreement and Property Acquisition/Disposition Agreement. Apple Ten Advisors and Apple Suites Realty pay Apple Fund Management the reimbursement compensation they receive from us under the Advisory Agreement and Property Acquisition/Disposition Agreement, respectively.

 

(6)

 

 

 

Wholly-owned by Apple REIT Six, Inc. and indirectly controlled by Glade M. Knight.

3


Other Apple Entities

Our chairman and chief executive officer, Glade M. Knight, is also chairman and chief executive officer of Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc and Apple REIT Nine, Inc. Mr. Knight is and will be a principal in other real estate investment transactions or programs that may compete with us. In addition, our other executive officers serve as officers of, and devote time to, Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. and may serve as officers of, and devote time to, other companies which may be organized by Mr. Knight in the future. Neither Mr. Knight nor any of these other persons is required to devote any minimum amount of time and attention to us as opposed to the other companies.

Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. currently own a total of 256 hotels. We currently own and intend to acquire hotels and other property in select metropolitan areas throughout the United States. Thus, there may be instances where our hotels will be in the same markets as Apple REIT Nine, Inc., Apple REIT Eight, Inc., Apple REIT Seven, Inc. or Apple REIT Six, Inc.

Our offering of Units did not begin until the offering of Apple REIT Nine was completed. Therefore, as a general proposition, we do not seek to acquire properties or compete for property acquisitions with other programs sponsored by Glade M. Knight. Furthermore, although Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. were organized and acquired their properties at different times—and are thus in different stages of their “business cycles”—we could still compete with them in the sale or other disposition of our properties or business.

Risk Factors

We urge you to consider carefully the matters discussed under “Risk Factors” beginning on Page 16 before you decide to purchase our Units. An investment in our securities involves a number of risks including:

 

 

 

 

We commenced operations in March 2011 and have a limited operating history; therefore there is no assurance that we will be successful in our operations. Our shareholders should not assume that our performance will be similar to the past performance of other real estate investment programs sponsored by Glade M. Knight, including Cornerstone Realty Income Trust, Inc., Apple Hospitality Two, Inc., Apple Hospitality Five, Inc., Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. or Apple REIT Nine, Inc.

 

 

 

 

No public trading market for the common shares and the Series A preferred shares currently exists, and no such public market is expected to develop at any time in the future. Therefore, the Units are highly illiquid and very difficult to trade. In addition, there are restrictions on the transfer of our common shares. In order to qualify as a REIT, our shares must be beneficially owned by 100 or more persons and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals. Therefore, our bylaws provide that no person may own more than 9.8% of the total number of the issued and outstanding Units. Any purported transfer of our shares that would result in a violation of either of these limits will be declared null and void.

 

 

 

 

We have paid and are obligated to pay a fee to Apple Suites Realty of 2% of the gross purchase price and 2% of the gross sale price associated with property acquisitions and dispositions, whether these dispositions are dispositions of individual properties or of interests in us, the purpose or effect of which is to dispose of some or all of our properties. We also have paid and are obligated to pay an annual fee ranging from 0.1% to 0.25% of total equity proceeds received to Apple Ten Advisors. In addition, Apple Ten Advisors and Apple Suites Realty are reimbursed for specified costs and expenses incurred on our behalf. These compensation arrangements have been established without the benefit of arms-length

4


 

 

 

 

negotiation. Glade M. Knight, our chairman and chief executive officer, is the sole shareholder of Apple Suites Realty and Apple Ten Advisors.

 

 

 

 

There are conflicts of interest between us and our chairman and chief executive officer, Glade M. Knight, because he is the chief executive officer and sole shareholder of companies with which we will enter into contracts for services for day-to-day operations and for the purchase or sale of real estate. Mr. Knight is the chief executive officer and sole shareholder of Apple Ten Advisors and Apple Suites Realty. In addition, Mr. Knight is a principal in other real estate investment programs, and he may in the future organize additional programs, which may compete with us. Mr. Knight is the chairman and chief executive officer of Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. currently own hotels. Mr. Knight was also the chairman and chief executive officer of Apple Hospitality Five, Inc. and Apple Hospitality Two, Inc., which owned hotels. We refer to Apple REIT Nine, Inc. as Apple REIT Nine, Apple REIT Eight, Inc. as Apple REIT Eight, Apple REIT Seven, Inc. as Apple REIT Seven, Apple REIT Six, Inc. as Apple REIT Six, Apple Hospitality Five, Inc. as Apple Hospitality Five and Apple Hospitality Two, Inc. as Apple Hospitality Two in this prospectus. In addition, our other executive officers serve as officers of, and devote time to Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine and may serve as officers of, and devote time to, other companies which may be organized by Mr. Knight in the future. Neither Mr. Knight nor any of these other persons is required to devote any minimum amount of time and attention to us as opposed to the other companies.

 

 

 

 

We have issued to our chairman and chief executive officer, Glade M. Knight, 480,000 Series B convertible preferred shares at a purchase price of $0.10 per share. Shareholders’ interests will be diluted upon conversion of the Series B convertible preferred shares. The number of common shares into which the Series B convertible preferred shares are convertible as a result of this offering ranges from approximately .92 to 24.17 per Series B convertible preferred share or from 4.45% to 5.98% of the total number of common shares then outstanding following the conversion. Additional common shares will be issuable on conversion of the Series B convertible preferred shares if we sell common shares in additional public offerings after we complete this offering. Upon liquidation, Mr. Knight, as the holder of the Series B convertible preferred shares, has a junior right to our assets after distributions to the holders of the Series A preferred shares. However, Mr. Knight can cause the conversion of the Series B convertible preferred shares and the resulting dilution of shareholders’ interests. Upon conversion of the Series B convertible preferred shares, the Series A preferred shares will terminate and will no longer have the priority distribution on liquidation associated with the Series A preferred shares.

 

 

 

 

This offering is a “blind pool” offering because we have not yet identified all of the properties we will acquire with future proceeds from this offering.

 

 

 

 

We may be unable to generate sufficient cash for distributions. If our properties do not generate sufficient revenue to meet operating expenses, our cash flow and our ability to make distributions to shareholders will be adversely affected. We might make distributions in some circumstances in part from financing proceeds or other sources, such as proceeds from our offering of Units. Our distributions may include a return of capital. There is no limit on the amount of distributions that may be funded with offering proceeds or proceeds from debt, as opposed to cash from operations. If we make distributions from offering proceeds or from financing proceeds, the return to investors on invested capital will be lower than if distributions are made from cash generated from operations.

 

 

 

 

There may be a “lag” or delay between the raising of offering proceeds and their investment in real estate properties. Persons who acquired Units relatively early in our offering, as compared with later investors, may have received a greater return of offering proceeds as part of the earlier distributions. If investors received different amounts of returns of offering

5


 

 

 

 

proceeds as distributions based upon when they acquired Units, the investors experienced different rates of return on their invested capital and some investors may have less net cash per Unit invested after distributions than other investors. Further, offering proceeds that are returned to investors as part of distributions to them will not be available for investments in properties. The payment of distributions from sources other than cash generated from operations will decrease the cash available to invest in properties and will reduce the amount of distributions we may make in the future.

 

 

 

 

We have no restrictions on changes in our investment and financing policies. This lack of restrictions on changes in our policies could result in those policies being changed without Unit holder approval. Further, our board may, in its sole discretion, determine the amount of our aggregate debt. Therefore, our properties may be highly leveraged and thereby subject to a greater risk of default. In addition, since Apple Suites Realty’s commission is based on gross purchase price, it may have an incentive to encourage us to purchase highly-leveraged properties in order to maximize commissions.

 

 

 

 

Apple Ten Advisors receives an asset management fee based on the ratio of our funds from operations to the amount raised in this offering. In order to increase this fee, Apple Ten Advisors could have an incentive to recommend riskier or more speculative investments.

 

 

 

 

Due to federal income tax restrictions, we cannot operate our hotels directly. Our hotels are managed pursuant to franchise or license agreements with nationally recognized hotel brands. These agreements contain limitations on the operation and maintenance of our properties. Our other real estate may be managed by third-party managers.

 

 

 

 

Neither Apple Ten Advisors nor Apple Suites Realty currently has employees. Each company must make arrangements with third-parties to provide services for day-to-day operations and for the purchase or sale of real estate. These third-parties may compete with us and may be affiliated with Glade M. Knight.

 

 

 

 

There may be conflicts of interest because of interlocking boards of directors with our affiliated companies.

 

 

 

 

General economic and financial downturns could adversely affect our operations and our business objectives.

 

 

 

 

We are subject to a securities class action lawsuit and governmental regulatory oversight, which could have a material adverse effect on our financial condition, results of operations and cash flows.

The Status of the Offering

We initially offered Units at $10.50 per Unit until the minimum of 9,523,810 Units were sold. As of January 27, 2011, we completed the minimum offering. We are continuing the offering at $11 per Unit until a maximum of 182,251,082 Units are sold. As of March 31, 2012, 133,099,563 Units remained unsold. Purchasers must purchase a minimum of $5,000 in Units except that certain benefit plans may purchase a minimum of $2,000 in Units. The Units are being offered through David Lerner Associates, Inc, an unaffiliated broker-dealer.

This offering of Units will continue until all the Units offered under this prospectus have been sold or until January 19, 2013, unless the offering is extended for up to an additional year, provided that the offering will be terminated if all the Units are sold before then. The States of Colorado, Delaware, New York and Virginia will allow us to extend the offering without taking any further action. In all of the other states where we plan to sell the Units, we may be required to make certain filings, including the filing of new applications, with the state administrators to extend the offering.

This is an on-going best-efforts offering. Purchasers will be sold Units at one or more closings. An initial closing occurred after the minimum offering of 9,523,810 Units was achieved on

6


January 27, 2011. Thereafter, additional closings have occurred and are expected to continue to occur on a monthly basis as Units are sold during the offering period.

With each purchase of a Unit you will receive one common share and one Series A preferred share. The Series A preferred shares will have no voting rights and no conversion rights. The only right associated with the Series A preferred shares will be a priority distribution upon the sale of our assets or other event of liquidation. The priority will 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. In the event we pay special dividends, the amount of the $11.00 priority will be reduced by the amount of any special dividends approved by our board. The Series A preferred shares will not be separately tradable from the common shares to which they relate. The Series A preferred shares will terminate and no longer have a priority distribution right upon conversion of the Series B convertible preferred shares.

As of March 31, 2012, we had closed on the following sales of Units in the offering:

 

 

 

 

 

 

 

Price Per Unit

 

Number of Units Sold

 

Gross Proceeds

 

Proceeds Net of Selling Commissions
and Marketing Expense Allowance

$

 

10.50

 

 

 

 

9,523,810

 

 

 

$

 

100,000,000

 

 

 

$

 

90,000,000

 

 

$

 

11.00

 

 

 

 

39,627,709

 

 

 

 

435,904,799

 

 

 

 

392,314,319

 
 

 

 

 

 

 

 

 

Total

 

 

 

 

49,151,519

 

 

 

$

 

535,904,799

 

 

 

$

 

482,314,319

 
 

 

 

 

 

 

 

Our distributions since initial capitalization through December 31, 2011 totaled approximately $23.6 million and were paid at a monthly rate of $0.06875 per common share beginning in February 2011. For the same period, our net cash generated from operations was approximately $0.8 million. Due to the inherent delay between raising capital and investing that same capital in income producing real estate, we have had significant amounts of cash earning interest at short term money market rates. As a result, a portion of distributions paid through December 31, 2011 have been funded from proceeds from our on-going best-efforts offering of Units, and are expected to be treated as a return of capital for federal income tax purposes. The following is a summary of the distributions and net cash from (used in) operations.

 

 

 

 

 

 

 

 

 

Period

 

Total
Distributions
Declared and
Paid per Share

 

Total
Distributions
Declared and
Paid

 

Net Cash From/
(Used in)
Operations
(a)

 

Net Income/
(Loss)
(a)

For the period Aug. 13, 2010 (initial capitalization) through Dec. 31, 2010

 

 

$

 

 

 

 

$

 

 

 

 

$

 

(6,000

)

 

 

 

$

 

(31,000

)

 

1st Quarter 2011

 

 

 

0.13750

 

 

 

 

1,855,000

 

 

 

 

(2,488,000

)

 

 

 

 

(2,390,000

)

 

2nd Quarter 2011

 

 

 

0.20625

 

 

 

 

5,753,000

 

 

 

 

(1,059,000

)

 

 

 

 

(1,179,000

)

 

3rd Quarter 2011

 

 

 

0.20625

 

 

 

 

7,596,000

 

 

 

 

846,000

 

 

 

 

(473,000

)

 

4th Quarter 2011

 

 

 

0.20625

 

 

 

 

8,390,000

 

 

 

 

3,522,000

 

 

 

 

(1,092,000

)

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

0.75625

 

 

 

$

 

23,594,000

 

 

 

$

 

815,000

 

 

 

$

 

(5,165,000

)

 

 

 

 

 

 

 

 

 

 


Note for Table:

 

(a)

 

 

 

See complete consolidated statement of cash flows and consolidated statement of operations for the 12 months ending December 31, 2011 included in our most recent Form 10-K for the year ended December 31, 2011.

In February 2011, our Board of Directors established a policy for an annualized distribution rate of $0.825 per common share, payable in monthly distributions. We intend to continue paying distributions on a monthly basis, consistent with the annualized distribution rate established by our Board of Directors. Our objective in setting a distribution rate is to project a rate that will provide consistency over the life of the Company taking into account acquisitions and capital improvements, ramp up of new properties and varying economic cycles. To meet this objective, we may require the use of debt or offering proceeds in addition to cash from operations. Since a portion of distributions to date have been funded with proceeds from our offering of Units, our ability to maintain our

7


current intended rate of distribution will be based on our ability to fully invest our offering proceeds and thereby increase its cash generated from operations. As there can be no assurance of our 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. See “Risk Factors—We may be unable to make distributions to our shareholders,” on page 26 of this prospectus.

Net Book Value Per Share

In connection with this on-going offering of Units, we are providing information about our net book value per share. Net book value per share is calculated as total book value of assets minus total liabilities. It assumes that the value of real estate assets diminishes predictably over time as shown through the depreciation and amortization of real estate investments. Real estate values have historically risen or fallen with market conditions. Net book value does not reflect value per share upon an orderly sale or liquidation of the Company in accordance with our investment objectives. Our net book value reflects dilution in the value of our Units from the issue price as a result of (i) operating losses, which reflect accumulated depreciation and amortization of real estate investments as well as the fees and expenses paid to acquire real estate including commissions to Apple Suites Realty Group, (ii) the funding of distributions from sources other than cash flow from operations, and (iii) fees paid in connection with our on-going best-efforts offering, including selling commissions and marketing fees. As of December 31, 2011, our net book value per share was $9.10. We calculated our net book value by subtracting total liabilities from total assets and dividing by the total number of Units outstanding at December 31, 2011.

The offering price of shares under our on-going best-efforts offering at March 31, 2012 was $11.00. Our offering price was not established on an independent basis and bears no relationship to the net book value of our assets. There is currently no established public market in which our common shares or Units are traded, however as discussed above in the Status of the Offering section of this prospectus, 39.6 million Units have been purchased at $11 per Unit. As discussed in the prospectus the Units will be illiquid for an indefinite period of time. We will continue to use the $11 per Unit price as the offering price until such time as buyers are not available, or until we have an orderly sale or liquidation in accordance with our investment objectives outlined in the prospectus.

Use of Proceeds

The proceeds of the offering will be used:

 

 

 

 

to pay organizational expenses;

 

 

 

 

to pay expenses and fees of selling the Units;

 

 

 

 

to repay interim borrowings used to fund acquisitions;

 

 

 

 

to invest in properties;

 

 

 

 

to pay expenses and fees associated with acquiring properties; and

 

 

 

 

to establish a working capital reserve for distributions and other operating uses.

If the maximum offering of $2 billion is sold, we expect to acquire approximately 100 to 125 properties, if we have little or no debt. If the properties purchased are encumbered by debt equal to 50% of their fair market values, we expect to acquire approximately 200 to 250 properties with the proceeds of the maximum offering.

At the inception of the Company, we obtained an unsecured line of credit in the amount of $400,000 to fund initial offering expenses. This line of credit was guaranteed by Glade M. Knight. Mr. Knight did not receive any compensation for providing this guarantee. The line of credit was repaid and extinguished upon closing on the minimum offering.

8


Conflicts of Interest

We may be subject to conflicts of interest arising from our relationship with Apple Ten Advisors, Apple Suites Realty, and Glade M. Knight, our chairman and chief executive officer. More specifically:

 

 

 

 

Apple Ten Advisors, Apple Suites Realty and Glade M. Knight are not restricted from engaging for their own account in business activities of the type conducted by us.

 

 

 

 

There may be conflicts with respect to commissions we pay to Apple Suites Realty because its compensation will increase in proportion to the number of properties purchased and sold by us and the properties’ purchase and sale prices. In addition, since Apple Suites Realty’s commission is based on gross purchase price, it may have an incentive to encourage us to purchase highly leveraged properties in order to maximize commissions.

 

 

 

 

There may be conflicts with respect to the asset management fee we pay to Apple Ten Advisors since its compensation is a percentage of total proceeds received from time to time by us from the sales of our Units.

 

 

 

 

Glade M. Knight is also the chairman and chief executive officer of Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six, all of which own extended-stay, select-service and other hotels. There may be times when he may owe certain duties to those entities which conflict with his duties to us. Mr. Knight may in the future organize additional programs which may compete with us and may, as a director and officer of those programs, owe duties to those programs.

 

 

 

 

We issued 480,000 Series B convertible preferred shares to Glade M. Knight in exchange for $0.10 per share. Under limited circumstances, the Series B convertible preferred shares may be converted into common shares, thereby resulting in dilution of the shareholders’ interest in us. As chairman of our board and chief executive officer, Mr. Knight can influence the conversion of the Series B convertible preferred shares. As owner of the advisory company, Mr. Knight could terminate the Advisory Agreement, and thereby cause the conversion of the Series B convertible preferred shares. Under a merger transaction or listing our Units on a securities exchange, the Series B convertible preferred shares would be converted into Units. In the event we were to liquidate, the Series B convertible preferred shares would not be converted. The possibility of this conversion may influence Mr. Knight’s judgment when recommending (or not recommending) to our board a merger, the timing of listing, a disposition of our assets or liquidation.

 

 

 

 

Glade M. Knight also serves as a director for Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six. Mr. Knight is chairman and chief executive officer of Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six. There are instances where our hotels are in the same markets as hotels owned by these other entities. Even though the hotels are managed by third-party management companies and neither our board nor the boards of Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six are engaged in the management of the hotels, having one or more directors of the board of directors who are also directors of the board of directors of Apple REIT Eight, Apple REIT Seven or Apple REIT Six or having hotels in some of the same markets as Apple REIT Nine, Apple REIT Eight, Apple REIT Seven or Apple REIT Six may, at times, present a conflict of interest.

 

 

 

 

Officers and other employees of Apple Fund Management serve as officers of and devote time to us, Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine, and may serve as officers of, and devote time to, other companies which have been or may be organized by Glade M. Knight, including Apple Ten Advisors and Apple Suites Realty. Neither Mr. Knight nor any of these other persons is required to devote any minimum amount of time and attention to us as opposed to the other companies.

9


Liquidity

Before this offering there has been no public market for the Units and we do not expect a market to develop for the common shares or the Series A preferred shares at any time in the future. Prospective shareholders should view the Units as illiquid and must be prepared to hold their investment for an indefinite length of time.

We do not plan to cause the common shares or the Series A preferred shares to be listed on any securities exchange or quoted on any system or in any established market either immediately or at any definite time in the future. We may cause the common shares to be listed or quoted if the board of directors determines this action to be prudent. However, there can be no assurance that this event will ever occur. We expect that within approximately seven years from the initial closing, which occurred January 27, 2011, we will:

 

 

 

 

cause the common shares to be listed on a national securities exchange;

 

 

 

 

dispose of all of our properties in a manner which will permit distributions to shareholders of cash; or

 

 

 

 

merge, consolidate or otherwise combine with a real estate investment trust or similar investment vehicle.

However, we are under no obligation to take any of these actions, and these actions, if taken, might be taken after seven years from the initial closing. In the event we merge, consolidate or otherwise combine with a real estate investment trust or similar investment vehicle, there can be no assurance that such event will result in liquidity for the common shares.

There are restrictions on the transfer of our common shares. In order to qualify as a REIT, our shares must be beneficially owned by 100 or more persons and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals. Therefore, our bylaws provide that no person may own more than 9.8% of the total number of the issued and outstanding Units. Any purported transfer of our shares that would result in a violation of either of these limits will be declared null and void.

If we undertake a transaction of the type described above, we would report on and explain the transaction to the extent required by applicable securities laws and regulations. However, we are under no legal obligation to undertake any transaction of the type described above at any particular time. Thus, we would not expect to disclose in a formal way our not taking an action of the type described above unless required at that time by law. As a practical matter, however, we communicate with our shareholders through quarterly and annual reports to shareholders and we keep our shareholders informed of our decisions and reasons with respect to not taking any action of the type described above if that course of action is deemed by us to be appropriate to us and the shareholders.

Investment and Distribution Policy

We intend to seek to maximize shareholder value by acquiring hotels and other real estate for long-term ownership. We generally intend to acquire fee ownership of our properties. We will seek opportunities, through the direct ownership of our properties, that provide acceptable investment returns and growth in cash distributions to our shareholders. As a REIT, we are required to make dividend distributions to our shareholders. We began making monthly distributions commencing after the first full month following the closing of the minimum offering of 9,523,810 Units on January 27, 2011. While we will seek generally to make distributions from our cash generated from operations, we might make distributions (although there is no obligation to do so) in certain circumstances in part from proceeds from our offering of Units or from proceeds of borrowings. While distributions from such sources would result in the shareholder receiving cash, the consequences to us and the shareholder would differ from a distribution out of our cash generated from operations. The payment of distributions from sources other than cash generated from operations will decrease the cash available to invest in properties and will reduce the amount of distributions we may make in the future. We will depreciate our fixed assets on a straight-line basis over their expected useful

10


lives. These factors will cause a portion of the distribution to be treated as a return of capital for tax purposes.

To maintain REIT status, we generally must distribute to our shareholders in each taxable year at least 90% of our net ordinary income. More precisely, we must distribute an amount equal to the sum of 90% of our REIT taxable income before deduction of dividends paid and excluding any net capital gain and 90% of any net income from foreclosure property less the tax on that income, minus limited categories of excess non-cash income including, cancellation of indebtedness and original issue discount income.

The voting rights and rights to distributions of the holders of common shares will be subject to the prior rights of the holders of any subsequently-issued preferred shares. Unless otherwise required by applicable law or regulation, the preferred shares would be issuable without further authorization by holders of the common shares and on the terms and for the consideration as may be determined by the board of directors. The preferred shares could be issued in one or more series having varying voting rights, redemption and conversion features, distribution (including liquidation distribution) rights and preferences, and other rights, including rights of approval of specified transactions. A series of preferred shares could be given rights that are superior to rights of holders of common shares and a series having preferential distribution rights could limit common share distributions and reduce the amount holders of common shares would otherwise receive on dissolution.

Borrowing Policy

We generally intend to purchase our properties using cash and interim borrowings. We will endeavor to repay any interim borrowings with proceeds from the sale of Units. However, we may not necessarily hold our properties on an unleveraged basis. When advisable, we may incur medium or long- term debt secured by our properties. We expect borrowings to come from third-party, non-affiliated lenders. As of March 31, 2012, six of our properties have mortgages that pre-dated our purchase, are secured by the hotels, and were assumed by one of our purchasing subsidiaries.

Our bylaws prohibit us from incurring debt if the debt would result in our total debt exceeding 100% of the value of our net assets, before subtracting any liabilities. The value of our net assets means the value of our total tangible assets at cost before deducting depreciation or other non-cash reserves. However, our bylaws allow us to incur debt in excess of this limitation when the excess borrowing is approved by a majority of our independent directors and disclosed to the shareholders. The bylaws also prohibit us from allowing total borrowings to exceed 50% of the fair market value of our assets, before subtracting liabilities, subject to the same exception described in the previous sentence. The two limitations on debt described in this paragraph are applied separately and independently. For example, it is possible that incurring debt may require approval by a majority of the directors under one limitation even though the other limitation on debt does not apply. In addition, the bylaws provide that our borrowings must be reasonable in relation to our net assets and must be reviewed quarterly by the directors. Subject to these limitations on the permitted maximum amount of debt, there is no limitation on the number of mortgages or deeds of trust that may be placed against any particular property.

Assuming the directors approve, we may borrow in excess of the debt limitations described in the previous paragraph in order to acquire a portfolio of properties.

Compensation

Glade M. Knight is our sole promoter. We do not expect to pay a material salary to Mr. Knight. However, Mr. Knight is currently the sole shareholder of Apple Ten Advisors and Apple Suites Realty, which are entitled to receive fees for advisory services as well as operational and managerial services rendered by them to us. On our behalf and pursuant to the terms of the Advisory Agreement and the Property Acquisition/Disposition Agreement, Apple Ten Advisors and Apple Suites Realty utilize the services of certain officers and employees of Apple Fund Management (a subsidiary of Apple REIT Six and indirectly controlled by Glade M. Knight) to

11


provide the advisory, operational and managerial services they are obligated to perform for us since neither Apple Ten Advisors nor Apple Suites Realty has any employees. From reimbursement compensation received from us by Apple Ten Advisors and Apple Suites Realty under the Advisory Agreement and Property Acquisition/Disposition Agreement, Apple Ten Advisors and Apple Suites Realty reimburse Apple Fund Management for a portion of the compensation paid by Apple Fund Management to its senior managers and staff, based on the estimated amount of time they devote to activities required by Apple Ten Advisors and Apple Suites Realty. Such payments are not based on any formal record keeping regarding the time these employees devote to Apple Ten Advisors and Apple Suites Realty but are based on a good faith estimate by the employee and/or his or her supervisor of the time devoted by the employee to such companies. Reimbursement amounts are in addition to the advisory fees and commissions we are contractually obligated to pay Apple Ten Advisors and Apple Suites Realty.

The compensation and reimbursements payable to Apple Ten Advisors and Apple Suites Realty are listed below. Except as indicated, we cannot determine the maximum dollar amount of this compensation and reimbursement. We also show compensation payable to David Lerner Associates, Inc. David Lerner Associates is not related to, nor an affiliate of, either Apple Ten Advisors or Apple Suites Realty.

 

 

 

 

 

Person Receiving
Compensation

 

Type of Compensation

 

Amount of Compensation

 

 

Offering Phase

 

 

David Lerner Associates

 

Selling Commissions

 

7.5% of the purchase price of the Units. If the maximum offering of $2 billion is sold, the selling commissions would be $150,000,000.

David Lerner Associates

 

Marketing Expense Allowance

 

2.5% of the purchase price of the Units. If the maximum offering of $2 billion is sold, the marketing expense allowance would be $50,000,000.

 

 

Acquisition Phase

 

 

Apple Suites Realty

 

Commission for acquiring our properties and real estate acquisition expenses

 

2% of the gross purchase price of the properties purchased by us—estimated at $34.8 million if the maximum offering is sold (assuming no debt is incurred). If debt is incurred in each acquisition to the maximum permitted by our bylaws, and the maximum offering is sold, the amount of compensation would be $69.6 million. In addition, typical real estate acquisition expenses are estimated to be $10,000,000 if the maximum offering is sold.

12


 

 

 

 

 

Person Receiving
Compensation

 

Type of Compensation

 

Amount of Compensation

 

 

Operational Phase

 

 

Apple Ten Advisors

 

Asset management fee for managing our day-to-day operations

 

Annual fee payable quarterly based upon a ratio of our funds from operations to the amount raised in this offering ranging from 0.1% to 0.25% of the amount raised in this offering—a maximum of $5,000,000 per year if the maximum offering is sold.

Apple Ten Advisors and Apple Suites Realty

 

Reimbursement for compensation incurred on our behalf

 

Estimated to be $2,000,000 (per year) if the maximum offering is sold. See below under “Reimbursement Compensation under the Advisory Agreement and the Property/Acquisition Disposition Agreement.”

Apple Ten Advisors and Apple Suites Realty

 

Reimbursement for certain deposits and costs incurred on our behalf

 

Not Estimable, but subject to the limits described below under “Reimbursements to Apple Ten Advisors and Apple Suites Realty.”

David Lerner Associates

 

Fee for Account Maintenance Services to Shareholders

 

Not Estimable, but based on the number of shareholder accounts, as described below under “Account Maintenance Services to Shareholders.”

 

 

Disposition Phase

 

 

Apple Suites Realty

 

Commission for selling our properties

 

Up to 2% of the gross sales prices of the properties sold by us.

Glade M. Knight

 

Series B convertible preferred shares (or common shares, if Series B is converted)

 

If we sell our assets in liquidation, each Series A preferred share receives a liquidation preference of $11. Amounts in excess of this are paid as described below under “Compensation—Series B Convertible Preferred Shares.” If the Series B convertible preferred shares are converted into common shares, their value is estimated to be up to $127 million (if maximum offering is sold) (these estimates assume a common share is worth $11).

As described above, and as shown on the table below, we pay certain fees and expenses as they are incurred, while others accrue and will be paid in future periods, subject in some cases to the achievement of performance criteria. We did not incur any amounts in connection with our disposition phase through December 31, 2011.

13


Cumulative through December 31, 2011

 

 

 

 

 

 

 

 

 

Incurred

 

Paid

 

Accrued

Offering Phase

 

 

 

 

 

 

Selling commissions paid to David Lerner Associates, Inc. in connection with the offering

 

 

$

 

35,532,000

 

 

 

$

 

35,532,000

 

 

 

$

 

 

Marketing expense allowance paid to David Lerner Associates, Inc. in connection with the offering

 

 

 

11,844,000

 

 

 

 

11,844,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47,376,000

 

 

 

 

47,376,000

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition Phase

 

 

 

 

 

 

Acquisition commission paid to Apple Suites Realty Group, Inc.

 

 

 

9,165,000

 

 

 

 

9,165,000

 

 

 

 

 

Reimbursement of costs paid to Apple Suites Realty Group, Inc.

 

 

 

700,000

 

 

 

 

700,000

 

 

 

 

 

Reimbursement of certain deposits to Apple Suites Realty Group, Inc.

 

 

 

102,500

 

 

 

 

102,500

 

 

 

 

 

Operations Phase

 

 

 

 

 

 

Asset management fee paid to Apple Ten Advisors, Inc.

 

 

 

318,000

 

 

 

 

318,000

 

 

 

 

 

Reimbursement of costs paid to Apple Ten Advisors, Inc.

 

 

 

725,000

 

 

 

 

725,000

 

 

 

 

 

Fees for Account Maintenance Services to Shareholders paid to David Lerner Associates, Inc.

 

 

 

171,000

 

 

 

 

131,000

 

 

 

 

40,000

 

Unit Redemption Program

We may use proceeds received from the sale of Units from the offering and our dividend reinvestment plan which we plan to implement following the conclusion of this offering to redeem your Units. Our Unit redemption program began in April 2012, which was more than one year after our initial closing of this offering. After you have held your Units for a minimum of one year, our Unit redemption program will provide an opportunity for you to redeem all or a portion of your Units, subject to certain restrictions and limitations, for a purchase price equal to: (1) for redemptions made during the first five (5) years from the date of your purchase of the Units to be redeemed, 92.5% of the price you paid for your Units to be redeemed, and (2) for redemptions made after the first five (5) years from the date of your purchase of the Units to be redeemed, 100% of the price you paid for your Units to be redeemed. In the case of redemption of Units following the death of all shareholders in one account, the purchase price will equal 100% of the price paid by the deceased shareholders for the Units.

We reserve the right to determine the number of Units redeemed under our Unit redemption program. 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 in the event of the death of a shareholder, a shareholder’s disability or need for long-term care, other involuntary exigent circumstances such as bankruptcy, or a mandatory distribution requirement under a shareholder’s IRA;

 

 

 

 

reject any request for redemption;

 

 

 

 

change the purchase price for redemptions; or

 

 

 

 

otherwise amend the terms of, suspend or terminate our Unit redemption program.

If the board of directors amends, suspends or terminates the Unit redemption program or reduces the number of Units purchased under the Unit redemption program, we will provide shareholders with thirty (30) days advance written notice by means of either (1) an annual or quarterly report or (2) a separate mailing accompanied by disclosure in a current or periodic report under the Securities Exchange Act of 1934.

Redemption of Units, when requested, will be made quarterly. If we do not have sufficient funds to accommodate all redemption requests, Units will be redeemed as follows: first, pro rata as to redemptions upon the death or disability of a shareholder; next pro rata as to redemptions to

14


shareholders who demonstrate, in the discretion of our board of directors, another involuntary exigent circumstance, such as bankruptcy; next pro rata as to redemptions to shareholders subject to a mandatory distribution requirement under such shareholder’s IRA; next, pro rata as to shareholders seeking redemption of all Units owned by them who own beneficially or of record fewer than 100 Units; and, finally, pro rata as to all other redemption requests. We will limit the number of Units redeemed pursuant to our Unit redemption program to the lesser of as follows: (1) during any 12-month period, we will not redeem in excess of three percent (3.0%) of the weighted average number of Units outstanding during the 12-month period immediately prior to the date of redemption; and (2) funding for the redemption of Units will come exclusively from the net proceeds we receive from the sale of Units under this offering or our dividend reinvestment plan which we plan to implement following the conclusion of the offering so that in no event will the aggregate amount of redemptions under our Unit redemption program exceed aggregate net proceeds received by us from the sale of Units (after commissions), pursuant to this offering or our dividend reinvestment plan.

We cannot guarantee that the funds set aside for the Unit redemption program will be sufficient to accommodate all requests made in any year. If we do not have such funds available at the time when redemption is requested, you can withdraw your request for redemption by submitting a written request to withdraw your request for redemption to David Lerner Associates. If no withdrawal is requested, we will honor your request at such time, if any, when sufficient funds become available. You may withdraw your request for redemption at any time up until the time at which Units are redeemed.

If your redemption request is granted, you will receive the redemption amount within 30 days following the end of the quarter in which your redemption request is granted. We will not reject a request for redemption unless you have not held the units for one year or you have failed to fill out a redemption request form completely. You will have no right to request redemption of your Units after the Units are listed on any securities exchange or quoted on any system or in any established market. If you redeem Units under the Unit redemption program you will not be permitted to purchase additional Units in this offering for a period of one year from the date of redemption.

The Units we purchase under the Unit redemption program will be cancelled, and will have the status of authorized, but unissued shares. We will not reissue such Units unless they are first registered with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933 and under appropriate state securities laws or otherwise issued in compliance with such laws.

In the unlikely event that the Series B convertible preferred shares are converted and there is no related liquidity event with respect to the Units, the Unit redemption program will be reformulated or modified by the board of directors at that time.

15


RISK FACTORS

An investment in Units involves a number of risks. We urge you to carefully consider the following information describing the material risks inherent in investing in Units, together with the other information in this prospectus, before making a decision to purchase our Units

General Risk Factors

We were incorporated in August 2010 and have a limited operating history; therefore, there is no assurance that we will be able to achieve our investment objectives. We only own a limited number of properties at this time and must rely on Glade M. Knight and his affiliates to purchase appropriate properties for us. This offering is a “blind pool” offering because we have not yet identified all of the properties we will acquire with the future proceeds from this offering.

We were incorporated in August 2010 and have a limited operating history and a limited number of assets. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives as described in this prospectus and that the value of your investment could decline substantially. This offering is a “blind pool” offering because we have not yet identified all of the properties we will acquire with future proceeds from this offering and, therefore, investors will have to rely upon the ability of Glade M. Knight and his affiliates to acquire a suitable portfolio of properties. As of the date of this prospectus, we have only 28 hotel properties. We will continue to use the proceeds of this offering to acquire additional properties and the investors will be unable to review the terms of the purchase, financing and management of these properties before we enter into these arrangements. However, when at any time during the offering period we enter into a contract for and/or contemplate the purchase of a specific property, this prospectus will be supplemented to provide a description of the property and the anticipated terms of its purchase and financing. A prospective shareholder will only be able to evaluate information as to properties that are disclosed in a prospectus supplement issued before the prospective shareholder makes its investment. See “Business” and “Investment Objectives and Policies.” In addition, we have no employees and will be dependent upon Apple Ten Advisors and Apple Suites Realty. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Apple Ten Advisors and Apple Suites Realty.”

The past performance of programs sponsored or affiliated with Glade M. Knight is not an indicator of our future performance.

You should not rely upon the past performance of other programs sponsored or affiliated with Glade M. Knight as an indicator of our future performance.

Our distributions to our shareholders may not be sourced from our cash generated from operations but from offering proceeds or indebtedness and this will decrease our distributions in the future; furthermore, we cannot guarantee that investors will receive any specific return on their investment.

In February 2011, our Board of Directors established a policy for an annualized distribution rate of $0.825 per common share, payable in monthly distributions. We intend to continue paying distributions on a monthly basis, consistent with the annualized distribution rate established by our Board of Directors. As a result, we may be more likely to have a return of capital as a part of distributions to shareholders early in our operations. This is because as proceeds are raised in the offering, it is not always possible immediately to invest them in real estate properties that generate our desired return on investment. There may be a “lag” or delay between the raising of offering proceeds and their investment in real estate properties. Persons who acquire Units relatively early in our offering, as compared with later investors, may receive a greater return of offering proceeds as part of the earlier distributions. If investors receive different amounts of returns of offering proceeds as distributions based upon when they acquire Units, the investors will experience different rates of

16


return on their invested capital and some investors may have less net cash per Unit invested after distributions than other investors. Further, offering proceeds that are returned to investors as part of distributions to them will not be available for investments in properties. The payment of distributions from sources other than operating cash flow will decrease the cash available to invest in properties and will reduce the amount of distributions we may make in the future. See “Plan of Distribution.” We cannot and do not guarantee that investors will receive any specific return on their investment. Further, there is no limitation on the amount of distributions that can be funded from offering proceeds or financing proceeds.

There would be significant adverse consequences of our failure to qualify as a REIT, including our ability to make distributions to shareholders.

Qualification as a real estate investment trust, or REIT, involves the application of highly technical and complex Internal Revenue Code provisions for which there are limited judicial or administrative interpretations. If we were to fail to qualify as a REIT for any taxable year, and the relief provisions discussed under “Material Federal Income Tax Considerations” do not apply, we would be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to our shareholders because of the additional tax liability. In addition, distributions to our shareholders would no longer qualify for the dividends paid deduction and we would no longer be required to make distributions. To the extent we have made distributions in anticipation of qualifying as a REIT, we might be required to borrow funds or liquidate investments in order to pay the applicable tax. See “Federal Income Tax Considerations—Failure to Qualify as a REIT.”

We will not obtain a tax ruling on our REIT status or any other tax matters.

Our legal counsel, McGuireWoods LLP, has rendered to us an opinion to the effect that commencing with our first taxable year, we were organized as a corporation in conformity with the requirements for qualification and taxation as a REIT under the Code and our proposed method of operations described in this prospectus will enable us to satisfy the requirements for qualification as a REIT. However, the opinion of McGuireWoods LLP is not binding on the IRS. We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT (or concerning any other tax matter), and the legal opinion and statements in this prospectus are not binding on the IRS or any court. See “Federal Income Tax Considerations—General.”

There is no public market for our common shares, so investors may be unable to dispose of their investment.

Prospective shareholders should view the common shares, issued as part of each Unit sold, as illiquid and must be prepared to hold their common shares for an indefinite length of time. There is no public market for our common shares, and we do not expect a market to develop at any time in the future. We have no current plans to cause our common shares to be listed on any securities exchange or quoted on any system or in any established market either immediately or at any definite time in the future. While we, acting through our board of directors, may cause the common shares to be listed or quoted if the board of directors determines this action to be prudent, there can be no assurance that this event will ever occur. Shareholders may be unable to resell their common shares at all, or may be able to resell them only at a later date at a substantial discount from the purchase price. Thus, the common shares should be considered a long-term investment. In addition, there are restrictions on the transfer of our common shares. In order to qualify as a REIT, our shares must be beneficially owned by 100 or more persons and no more than 50% of the value of our issued and outstanding shares may be owned directly or indirectly by five or fewer individuals. Therefore, our bylaws provide that no person may own more than 9.8% of the total number of the issued and outstanding Units. Any purported transfer of our shares that would result in a violation of either of these limits will be declared null and void. See “Description of Capital

17


Stock—Restrictions on Transfer,” and “Description of Capital Stock—Facilities for Transferring Common Shares.”

There will never be a public market for our Series A preferred shares separate from any market that may develop for our common shares and investors are not able to separately dispose of their Series A preferred shares without disposing of the common shares to which the Series A preferred shares relate.

Prospective shareholders should view the Series A preferred shares as illiquid and must be prepared to hold those shares for as long as they hold the common shares to which each Series A preferred share relates. No public market for our Series A preferred shares will exist separate from any public market that may exist for our common shares. Each Series A preferred share will not trade separately from each common share to which it relates. Our Series A preferred shares will never trade separately from our common shares nor ever be listed on any securities exchange or quoted on any system or in any established market. Shareholders will be unable to resell their Series A preferred shares without selling the common shares to which they relate. See “Description of Capital Stock—Series A Preferred Shares.”

We will not attempt to calculate our net asset value on a regular basis.

We will not attempt to calculate our net asset value on a regular basis. Accordingly, investors will not have reliable information on the net fair value of the assets owned by us.

There is a “dilutive” effect to investors who purchase our Units at $11.00 rather than at the initial offering price of $10.50 per Unit.

Investors who purchased our Units at $10.50 received a discounted price compared to investors who purchase after the minimum offering of Units was achieved. Investors who purchase our Units at $11.00 experience “dilution” because the sale of some of our Units at $10.50 results in the average per Unit price being less than $11.00 per Unit. The Units are identical in terms of rights to distributions, voting and other rights, but the purchasers who acquire Units at $11.00 per Unit are paying a comparative premium over the $10.50 per Unit purchasers.

Our Board of Directors will decide when and whether we list our Units, engage in a merger or similar sale transaction or dissolve, and we are under no obligation to take any of these actions at any particular time; therefore, our shares may be illiquid for an indefinite period of time.

We expect that within approximately seven years from the closing of the minimum offering of 9,523,810 Units, which occurred January 27, 2011, we will:

 

 

 

 

cause our common shares to be listed on a national securities exchange;

 

 

 

 

dispose of all of our properties in a manner which will permit distributions to our shareholders of cash; or

 

 

 

 

merge, consolidate or otherwise combine with a real estate investment trust or similar investment vehicle.

If we liquidate all of our assets, the Series A preferred shares would have a priority distribution followed by a priority distribution to the Series B convertible preferred shares, on an as converted basis. In the event that the liquidation of our assets resulted in proceeds that exceeded the distribution rights of the Series A preferred shares and Series B convertible preferred shares, the remaining proceeds would be distributed between the common shares and the Series B convertible preferred shares, on an as converted basis. Upon conversion of the Series B convertible preferred shares, the Series A preferred shares will terminate and will no longer have the priority distribution on liquidation associated with the Series A preferred shares. Certain of these transactions, such as a merger or sale of all of our assets, or our dissolution, will require shareholder approval. See “Investment Objectives and Policies—Sale Policies” and “Description of Capital Stock—Series B Convertible Preferred Shares.”

18


Any of these actions will be conditioned on the board of directors determining the action to be prudent and in the best interests of our shareholders. However, we are under no obligation to take any of these actions, and any action, if taken, might be taken after the seven-year period mentioned above. Therefore, our shares may be illiquid for an indefinite period of time.

The compensation to Apple Ten Advisors, Apple Suites Realty Group and David Lerner Associates will decrease our net proceeds and the cash available for acquisitions and for distributions to shareholders. This will tend to reduce the return on our shareholders’ investment.

The investment return to our shareholders likely is less than could be obtained by a shareholder’s direct acquisition and ownership of the same properties. We pay to David Lerner Associates, an unaffiliated third-party, substantial fees to sell our Units, which reduces the net proceeds available for investment in properties. These fees include selling commissions on all sales made in an amount equal to 7.5% of the purchase price of the Units or $0.7875 per Unit purchased at $10.50 per Unit and $0.825 per Unit purchased at $11.00 per Unit. We also pay to David Lerner Associates a marketing expense allowance equal to 2.5% of the purchase price of the Units, as a non-accountable reimbursement for expenses incurred by it in connection with the offer and sale of the Units. The marketing expense allowance will equal $0.2625 per Unit purchased at $10.50 per Unit and $0.275 per Unit purchased at $11.00 per Unit. The maximum selling commission payable to David Lerner Associates is $150,000,000. The maximum marketing expense allowance payable to David Lerner Associates is $50,000,000. The selling commissions and marketing expense allowance are payable to David Lerner Associates as we issue Units to purchasers.

We pay to Apple Suites Realty a fee of 2% of the gross purchase price and 2% of the gross sale price (subject to the sale price exceeding 110% of the original cost) associated with property acquisitions and dispositions, whether these dispositions are dispositions of individual properties or of interests in us, the purpose or effect of which is to dispose of some or all of our properties. We pay an annual fee ranging from 0.1% to 0.25% of total equity proceeds received plus reimbursement of certain expenses to Apple Ten Advisors. The payment of compensation to Apple Ten Advisors, Apple Suites Realty and David Lerner Associates (an unaffiliated third-party) from proceeds of the offering and property revenues reduces the amount of proceeds available for investment in properties, or the cash available for distribution, and will therefore tend to reduce the return on our shareholders’ investments. Since these commissions and fees reduce the gross proceeds of the offering available for investment in properties, the revenues we obtain may be reduced compared to the revenues we might have achieved in the absence of these fees. In addition, this compensation is payable in most instances regardless of our profitability, and is payable prior to distributions and without regard to whether we have sufficient cash for distributions. See “Compensation.”

There were no arms-length negotiations for our agreements with Apple Ten Advisors and Apple Suites Realty and the terms of those agreements may be more favorable to those entities and more to our detriment than had the negotiations been arms-length with third parties.

Apple Ten Advisors and Apple Suites Realty receive substantial compensation from us in exchange for management/investment and brokerage services they render to us. This compensation has been established without the benefits of arms-length negotiation. The terms of those agreements may be more favorable to those entities and to our detriment than had the negotiations been arms-length with third parties. Apple Ten Advisors supervises and arranges for the day-to-day management of our operations and assists us in maintaining a continuing and suitable property investment program. Apple Suites Realty acts as a real estate broker in connection with our purchase and sales of properties. See “Compensation” and “Conflicts of Interests—Conflicts with Respect to Fees Paid by us to Apple Ten Advisors and Apple Suites Realty.”

19


Since neither Apple Ten Advisors nor Apple Suites Realty currently has employees, they must use the services of other employees to fulfill their duties and there is no complete assurance that other employees will be available for such purpose.

Instead of retaining their own employees, each of Apple Ten Advisors and Apple Suites Realty must make arrangements with third-parties to provide services for day-to-day operations and for the purchase or sale of real estate. These companies use the services of persons who are employed by Apple Fund Management. These third-parties (and specifically Apple Fund Management) compete with us and are affiliated with Glade M. Knight our chairman and chief executive officer. There is no complete assurance that the employees of Apple Fund Management, or other employees, will continue to be available for such purposes. If such employees are not available for such purposes, Apple Ten Advisors and Apple Suites Realty might be unable to fulfill their obligations to us. See “Apple Ten Advisors and Apple Suites Realty—General.”

The compensation to Apple Ten Advisors and Apple Suites Realty is variable and cannot be stated with certainty; therefore, our expectations on how such compensation will affect our operating costs may not be accurate.

Apple Suites Realty and Apple Ten Advisors receive compensation for services rendered by them to us that cannot be determined with certainty. Apple Ten Advisors receives an asset management fee that may range from $536,000 to $5,000,000 per year. The asset management fee is based upon the ratio of our funds from operations to the amount raised in this offering. Apple Suites Realty receives a commission for each property purchased or sold based upon the gross purchase price of the properties we purchase. The total compensation to Apple Suites Realty is therefore dependent upon (1) the number of properties we purchase or sell and (2) the gross purchase or sale price of each property purchased or sold. Because the commission payable to Apple Suites Realty is determined by the gross purchase price of each property purchased, Apple Suites Realty may encourage us to purchase highly- leveraged properties in order to maximize those commissions. In addition, Apple Ten Advisors is reimbursed for certain of their costs incurred on our behalf and is entitled to compensation for other services and property we may request that they provide to us. The dollar amount of the cost and the compensation cannot now be determined. The real estate commissions payable to Apple Suites Realty equal 2% of the gross purchase price of the properties acquired. If debt is incurred in each acquisition to the maximum permitted by our bylaws, and the maximum offering is sold, we estimate that the amount of these real estate commissions would be $69.6 million. See “Compensation” and “Apple Ten Advisors and Apple Suites Realty—The Advisory Agreement” and “—Apple Suites Realty.”

There are conflicts of interest with our chairman and chief executive officer because he has duties as an officer and director to companies with which we contract or with which we may compete for properties.

Generally, conflicts of interest between Glade M. Knight and us arise because he is the sole shareholder, sole director and president of Apple Ten Advisors and Apple Suites Realty. These companies entered into contracts with us to provide us with asset management, property acquisition and disposition services. Mr. Knight does not receive a material salary from us but receives benefit from fees paid to Apple Ten Advisors and Apple Suites Realty.

In addition, Glade M. Knight is and will be a principal in other real estate investment transactions or programs that may compete with us. Currently, Mr. Knight is the chairman and chief executive officer of Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six, which are real estate investment trusts. Mr. Knight has economic interests in these other transactions or programs by virtue of his positions in those companies. Mr. Knight is also a minority shareholder in Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six. In addition, Mr. Knight is a shareholder of Colonial Properties Trust.

20


There may be conflicts of interest because of interlocking boards of directors with affiliated companies.

Kent W. Colton serves as a director on our board and concurrently serves as a director for Apple REIT Eight and Apple REIT Seven. Glade M. Knight is chairman and chief executive officer of Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six and was chairman and chief executive officer of Apple Hospitality Five and Apple Hospitality Two. There may be instances where our hotels are in the same markets as hotels owned by Apple REIT Nine, Apple REIT Eight, Apple REIT Seven or Apple REIT Six. See “Conflicts of Interest—Interlocking Boards of Directors.”

There are conflicts of interest with our advisor and broker because it could be financially advantageous for them to recommend certain actions that may be disadvantageous to us.

We pay Apple Suites Realty an acquisition commission in connection with each acquisition of a property and a disposition commission in connection with property dispositions. As a consequence, Apple Suites Realty may have an incentive to recommend the purchase or disposition of a property in order to receive a commission. In addition, since Apple Suites Realty’s commission is based on gross purchase price, it may have an incentive to encourage us to purchase highly-leveraged properties in order to maximize commissions. In addition, because Apple Ten Advisors receives a fee which is a percentage of the total consideration we receive from the sale of Units, it could have an incentive to see that sales of Units are closed as rapidly as possible.

There are conflicts of interest for our management personnel because they are required to spend time on activities with other entities, and these other entities may compete with us in our business activity.

Glade M. Knight, the sole executive officer and director of Apple Ten Advisors and Apple Suites Realty, also serves as an officer and/or director of entities that engage in the ownership of hotels and other properties. These entities are Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six. These entities share similar investment objectives and policies and may compete for properties against us. Because Mr. Knight is required to spend time on other activities, there may be instances when he may not be able to assist us with certain matters and, as a result, we may be negatively impacted.

In addition, our other executive officers serve as officers of, and devote time to, other companies previously organized by Glade M. Knight (including Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine), and may serve as officers of, and devote time to, other companies which may be organized by Mr. Knight in the future. Neither Mr. Knight nor any of these other executive officers is required to devote any minimum amount of time and attention to us as opposed to the other companies. Although Mr. Knight believes that, collectively, he and our other executive officers will have sufficient time to provide management and other services both to us and to the other companies Mr. Knight has organized, or may in the future, organize, there can be no assurance that such persons will have sufficient time. If it became necessary, Mr. Knight could seek to hire additional personnel to provide management and other services to us, but there can be no assurance that he would be successful in hiring additional personnel, if necessary.

Glade M. Knight may form additional REITs, limited partnerships and other entities, and such companies may engage in activities similar to ours. Companies organized by Mr. Knight in the future could have fees and other benefits payable to him (or to companies owned by him) which are more favorable than the fees and benefits payable by us to him (or to companies owned by him). The effect of this could be that Mr. Knight would spend more time on the activities of these other companies than on our activities, and/or prefer one or more of these companies to us with respect to actions such as the sale of properties. See “Conflicts of Interest—Competition Between Us and Mr. Knight and Other Companies Organized by Mr. Knight.”

21


Since neither Apple Ten Advisors nor Apple Suites Realty is required to maintain any minimum assets or net worth, we may not as a practical matter be able to sue them for money damages for breach of their agreements with us.

Neither Apple Ten Advisors nor Apple Suites Realty is required to maintain any minimum assets or minimum net worth. Thus, our ability to recover money damages from either of them in the event of their breach of their agreements with us may be limited. The Advisory Agreement between us and Apple Ten Advisors is terminable by us on 60 days’ notice. Thus, our most effective remedy in the event of a breach by Apple Ten Advisors of the Advisory Agreement between us and Apple Ten Advisors could be to terminate the Advisory Agreement.

Apple Ten Advisors may terminate the Advisory Agreement, which would require us to find a new advisor or become self-advised.

Our management advisor, Apple Ten Advisors, may terminate the Advisory Agreement entered into with us upon 60-days written notice. We do not have any employees. Apple Ten Advisors provides us with supervisory and day-to-day management services and assists us in maintaining a continuing and suitable property investment program. If Apple Ten Advisors were to terminate the Advisory Agreement, we would need to find another advisor to provide us with these services or hire employees to provide these services directly to us.

Additionally, if we hire our own employees, while we would no longer bear the costs of the various fees and expenses we pay to Apple Ten Advisors and Apple Suites Realty, our direct expenses could include correspondingly increased costs, including legal, accounting, other expenses related to corporate governance, Commission reporting and compliance, and brokerage or other real estate acquisition costs. We could also be subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances as well as incur 100% of the compensation and benefits costs of our officers and other employees and consultants. We might issue equity awards to officers, employees and consultants, which awards would decrease net income and funds from operations and may further dilute your investment. We cannot reasonably estimate the amount of fees and reimbursements to Apple Ten Advisors and Apple Suites Realty we would save or the costs we would incur if we became self-managed. If the expenses we assume as a result of an internalization are higher than the expenses we avoid paying to Apple Ten Advisors and Apple Suites Realty, our earnings per share and funds from operations per share would be lower as a result of the internalization than they otherwise would have been, potentially decreasing the amount of funds available to distribute to our shareholders and the value of our shares.

There can be no assurance that we would be able to find another advisor or hire employees to provide us these services or that we could enter into an Advisory Agreement with a new advisor on terms as favorable to us. See “Apple Ten Advisors and Apple Suites Realty—The Advisory Agreement.”

There will be dilution of shareholders’ interests upon conversion of the Series B convertible preferred shares.

Glade M. Knight, who is our chairman and chief executive officer, holds 480,000 Series B convertible preferred shares that are convertible into common shares, as described under “Principal and Management Shareholders”. The Series B convertible preferred shares are convertible into common shares upon the occurrence of certain specified events, as specifically described elsewhere in this prospectus. The conversion of the Series B convertible preferred shares into common shares will result in dilution of the shareholders’ interests.

22


The following chart shows the number of common shares into which the 480,000 Series B convertible preferred shares may be converted based on the number of Units we sell in this offering:

 

 

 

 

 

 

 

 

 

Amount of Proceeds
Raised in the Offering

 

Units Sold

 

Number of Common Shares
into which 480,000
Series B convertible
preferred shares convert
(a)

 

Percentage of
Common Shares

 

$ Amount of
Converted Shares
Assuming an $11
Share Price

$

 

100,000,000

 

 

 

 

9,523,810

 

 

 

 

443,141

 

 

 

 

4.45

%

 

 

 

$

 

4,874,551

 

 

$

 

1,000,000,000

 

 

 

 

91,341,991

 

 

 

 

5,814,830

 

 

 

 

5.98

%

 

 

 

$

 

63,963,130

 

$

 

2,000,000,000

 

 

 

 

182,251,082

 

 

 

 

11,602,099

 

 

 

 

5.98

%

 

 

 

$

 

127,623,089

 


Note for Table:

 

(a)

 

 

 

Upon conversion of the Series B convertible preferred shares the Series A preferred shares terminate and only common shares will remain outstanding.

Mr. Knight, as our chairman and chief executive officer, can influence both the conversion of the Series B convertible preferred shares issued to him and the resulting dilution of other shareholders’ interests. See “Compensation—Series B Convertible Preferred Shares.”

The Series A preferred shares will terminate and have no liquidation preference upon the conversion of the Series B convertible preferred shares and there will be dilution of the common shares.

The Series B convertible preferred shares are convertible into common shares upon and for 180 days following the occurrence of specific triggering events described elsewhere in this prospectus. Upon the conversion of the Series B convertible preferred shares, the Series A preferred shares will terminate and Unit holders will lose the liquidation preference associated with such shares. The Series A preferred shares terminate upon such a conversion event, even if the value of any consideration received in the conversion event, or the value of our common shares at that time, is less than the $11.00 priority distribution on liquidation associated with the Series A preferred shares.

Glade M. Knight, who is our chairman and chief executive officer, holds all of the outstanding 480,000 Series B convertible preferred shares and would receive significant value upon their conversion. If the maximum offering is achieved, for the consideration of $48,000, the potential value of Mr. Knight’s holdings at $11.00 per Unit would exceed $127 million upon conversion. As a board member and as our chief executive officer, Mr. Knight can influence whether we engage in an event that would trigger such a conversion. However, before we can take any such action it must be approved by the board.

Once the Series B convertible preferred shares are converted into common shares, a Unit holder will only hold common shares, and there will be dilution of the common shares. See “Compensation—Series B Convertible Preferred Shares.”

The Series B convertible preferred shares will have a liquidation preference before any distribution of liquidation proceeds on the common shares.

Glade M. Knight, who is our chairman and chief executive officer, holds all of the outstanding 480,000 Series B convertible preferred shares which have a liquidation preference upon our liquidation, as described under “Principal and Management Shareholders.” Upon our liquidation, the holders of the Series B convertible preferred shares are entitled to a priority liquidation payment before any distribution of liquidation proceeds to the holders of the common shares. However, priority liquidation payments to the holders of the Series B convertible preferred shares are junior to the holders of the Series A preferred shares distribution rights. The holders of the Series B convertible preferred shares are entitled to a liquidation payment of $11.00 per number of common shares each Series B convertible preferred share would be convertible into according to the formula described under “Principal and Management Shareholders.”

Although the liquidation preference of the Series A preferred shares has priority over the liquidation preference of the Series B convertible preferred shares, Glade M. Knight can effectively

23


eliminate that priority by influencing whether substantially all of our assets, stock or business is transferred or influencing whether our common shares are listed or quoted, resulting in the conversion of the Series B convertible preferred shares into Units. The effect of the conversion of the Series B convertible preferred shares is that Mr. Knight would own approximately 4.45% to 5.98% of the total number of Units outstanding following the conversion, depending on the conversion ratio applicable to the Series B convertible preferred shares, in exchange for an aggregate payment of $48,000. See “Compensation—Series B Convertible Preferred Shares” and “Principal and Management Shareholders.”

A merger or similar sale transaction by us or listing our Units on a securities exchange would likely cost more in transaction fees than a liquidation.

A merger or similar sale transaction by us or listing our Units on a securities exchange would likely cost us more in fees and transaction costs than a liquidation. However, notwithstanding the higher fees and transaction costs, we expect to either engage in a merger or similar sale transaction at a suitable future time or as an alternative, list our Units on a securities exchange, but it is unlikely that we would merely liquidate.

Since a merger or similar sale transaction by us, or our listing of our Units on a securities exchange, would result in the Series B convertible preferred shares being converted into common shares (while a simple liquidation by us would not result in the conversion of the Series B convertible preferred shares into common shares, although it might result in the payment of a sales commission of 2% to Apple Suites Realty), Glade M. Knight, as holder of the Series B convertible preferred shares, could have an incentive to recommend to us to engage in a merger or similar sale transaction or cause the listing of our Units on a securities exchange. It is likely that a merger or similar sale transaction would require the affirmative vote of our shareholders, and if our Units were listed on a securities exchange, shareholders would be able to dispose of their Units, if they so desired, on the securities exchange. Notwithstanding the considerations discussed herein, however, we would expect to pursue whatever liquidation alternative is in the overall best interest of the shareholders. See “Conflicts of Interest.”

If we lose Glade M. Knight or are unable to attract and retain the talent required for our business, our acquisition of suitable properties and future operating results could suffer.

Our future success depends to a significant degree on the skills, experience and efforts of Glade M. Knight, our chairman and chief executive officer. We do not carry key-man life insurance on Mr. Knight or any other executive officer. The loss of the services of Mr. Knight or the inability to retain the talent required for our businesses would negatively impact our ability to acquire suitable properties and could cause our future operating results to suffer.

We are not diversified and are dependent on our investment in only a few industries.

Our current strategy is to acquire interests primarily in hotels and other income-producing real estate in metropolitan areas throughout the United States. As a result, we are subject to the risks inherent in investing in only a few industries. A downturn in the hotel industry may have more pronounced effects on the amount of cash available to us for distribution or on the value of our assets than if we had diversified our investments. See “Investment Objectives and Policies.”

There is a possible lack of diversification and our shareholders may recognize a lower return due to the minimum size of our offering.

Our profitability could be affected if we do not sell more Units than we have sold as of the date of this prospectus. In the event we sell less than the maximum number of Units, we will invest in fewer properties. The fewer properties purchased, the greater the potential adverse effect of a single unproductive property upon our profitability since a reduced degree of diversification will exist among our properties. In addition, the returns on the Units sold will be reduced as a result of allocating our expenses among the smaller number of Units. We cannot say with certainty how many

24


properties we would purchase if we do not sell more than the Units sold as of the date of this prospectus. Except by the amount of proceeds raised in this offering, we are not limited in the number or the size of any properties we may purchase. Neither are we limited in the percentage of the proceeds we may invest on any single property. See “Investment Objectives and Policies.”

Since this is a “best-efforts” offering of Units, there is neither any requirement, nor any assurance, that more than the current amount raised will be raised.

This is a “best-efforts,” as opposed to a “firm commitment” offering of Units. This means that the managing dealer (David Lerner Associates) is not obligated to purchase any Units, but has only agreed to use its “best efforts” to sell Units to investors. There is no requirement that any additional Units be sold, and there is no assurance that any Units above the Units sold as of the date of this prospectus will be sold. Thus, based on the number of Units sold as of the date of this prospectus, aggregate gross proceeds from the offering made by this prospectus could be as low as $536 million. In such event, we estimate that less than $466 million would be available for investment in properties after the payment of offering and organizational fees and expenses and the establishment of a working capital reserve. This amount of net offering proceeds available for investment would limit flexibility in implementation of our business plans and result in less diversification in property ownership.

As a general matter, there can be no assurance that more Units will be sold than have already been sold. Accordingly, investors purchasing Units should not assume that the number of Units sold, or gross offering proceeds received, by us will be greater than the number of Units sold or the gross offering proceeds received by us to that point in time. No investor should assume that we will sell the maximum offering made by this prospectus, or any other particular offering amount. See “Plan of Distribution” and “Use of Proceeds.”

There may be delays in investment in real property, and this delay may decrease the return to shareholders.

We may experience delays in finding suitable properties to acquire. Pending investment of any of the proceeds of this offering in real estate, and to the extent any proceeds are not invested in real estate, the proceeds may be invested in permitted temporary investments such as U.S. government securities, certificates of deposit, or commercial paper. The rate of return on those investments has fluctuated in recent years and most likely will be less than the return obtainable from real property or other investments. See “Plan of Distribution” and “Use of Proceeds.”

Our board may, in its sole discretion, determine the amount and nature of our aggregate debt and as a result may achieve a debt ratio that decreases shareholder returns.

Subject to the limitations in our bylaws on the permitted maximum amount of debt, there is no limitation on the number of mortgages or deeds of trust that may be placed against any particular property. Our bylaws prohibit us from incurring debt if the debt would result in our total debt exceeding 100% of the value of our assets at cost. The bylaws also prohibit us from allowing total borrowing to exceed 50% of the fair market value of our assets. However, our bylaws allow us to incur debt in excess of these limitations when the excess borrowing is approved by a majority of the directors and disclosed to the shareholders. In addition, the bylaws provide that our borrowings must be reasonable in relation to our net assets and must be reviewed quarterly by the directors. See “Investment Objectives and Policies—Borrowing Policies.”

Certain loans are and may be secured by mortgages on our properties and if we default under our loans, we may lose properties through foreclosure.

We have obtained loans that are secured by mortgages on our properties, and we may obtain additional loans evidenced by promissory notes secured by mortgages on our properties. As a general policy, we seek to obtain mortgages securing indebtedness which encumber only the particular property to which the indebtedness relates, but recourse on these loans may include all of

25


our assets. If recourse on any loan incurred by us to acquire or refinance any particular property includes all of our assets, the equity in other properties could be reduced or eliminated through foreclosure on that loan. If a loan is secured by a mortgage on a single property, we could lose that property through foreclosure if we default on that loan. In addition, if we default under a loan, it is possible that we could become involved in litigation related to matters concerning the loan, and such litigation could result in significant costs to us which could affect distributions to shareholders or lower our working capital reserves or our overall value. See “Investment Objectives and Policies—Borrowing Policies.”

The per-Unit offering prices have been established arbitrarily by us and may not reflect the true value of the Units; therefore, investors may be paying more for a Unit than the Unit is actually worth.

If we listed our Units on a national securities exchange, the Unit price might drop below our shareholder’s original investment. Neither prospective investors nor shareholders should assume that the per-Unit prices reflect the intrinsic or realizable value of the Units or otherwise reflect our value, earnings or other objective measures of worth. The increase in the per-Unit offering price from $10.50 to $11.00 that occurred once the minimum offering was achieved is also not based upon or reflective of any meaningful measure of our share value or in any increase in the share value. In addition, while investors who purchased at a price of $10.50 per Unit paid less than investors who purchase at a price of $11.00 per Unit, they had to make an investment decision more quickly and had less information about us, our properties and our operations than if they purchased later. See “Plan of Distribution.”

We may be unable to make distributions to our shareholders.

If our properties do not generate sufficient revenue to meet operating expenses, our cash flow and our ability to make distributions to shareholders may be adversely affected. We are subject to all operating risks common to hotels. These risks might adversely affect occupancy or room rates. Increases in operating costs due to inflation and other factors may not necessarily be offset by increased room rates. The local, regional and national hotel markets may limit the extent to which room rates may be increased to meet increased operating expenses without decreasing occupancy rates. There can be no assurance that we will be able to make distributions at any particular time or rate, or at all. Further, there is no assurance that a distribution rate achieved for a particular period will be maintained in the future.

We might make distributions (although there is no obligation to do so) in certain circumstances in part from financing proceeds or other sources, such as proceeds from our offering of Units. While distributions from such sources would result in the shareholder receiving cash, the consequences to us would differ from a distribution out of our cash generated from operations. For example, if financing is the source of a distribution, that financing would have to be repaid, and if proceeds from the offering of Units are distributed, those proceeds would not then be available for other uses (such as property acquisitions or improvements). See “Distributions Policy.”

Our real estate investments are relatively illiquid and may adversely affect returns to our shareholders.

Real estate investments are, in general, relatively difficult to sell. This illiquidity will tend to limit our ability to promptly vary our portfolio in response to changes in economic or other conditions. In addition, provisions of the Internal Revenue Code relating to REITs limit our ability to sell properties held for fewer than four years. This limitation may affect our ability to sell properties without adversely affecting returns to our shareholders. See “Business—Business Strategies.”

26


We may be subject to certain fixed costs that will not decrease if revenues decrease, and this may decrease distributions to shareholders.

The rents we receive and the occupancy levels at the properties we acquire may decline as a result of various adverse changes affecting the properties, or our tenants, including an economic recession or an increase in unemployment rates. If the rental revenue from the properties we acquire declines, we generally would expect to have less cash available to distribute to our shareholders. In addition, some of the major expenses we may incur, including expenses like mortgage payments, real estate taxes and maintenance costs, generally do not decline when the related rents decline. If rent from the properties we acquire declines while costs remain the same, our income and funds available for distribution to our shareholders would decline.

We have no restriction on changes in our investment and financing policies and our board may change these policies without shareholder approval.

Our board of directors approves our investment and financing policies, including our policies with respect to growth, debt, capitalization and payment of distributions. The board of directors could at any time amend or waive our current investment or financing policies, or from time to time, at its discretion without a vote of our shareholders. For example, our board could determine without shareholders’ approval that it is in the best interests of the shareholders to cease all investments in hotels, to make investments primarily in other types of assets or to dissolve the business. Further, our board may in its sole discretion determine the amount and nature of our aggregate debt. See “Investment Objectives and Policies—Changes in Objectives and Policies.”

Our shareholders’ interests may be diluted in various ways, which may result in lower returns to our shareholders.

The board of directors is authorized, without shareholder approval, to cause us to issue additional common shares and, therefore, additional Series A preferred shares, or to raise capital through the issuance of preferred shares, options, warrants and other rights, on terms and for consideration as the board of directors in its sole discretion may determine. Any such issuance could result in dilution of the equity of the shareholders. The board of directors may, in its sole discretion, authorize us to issue common shares or other equity or debt securities, to persons from whom we purchase property, as part or all of the purchase price of the property, or to Apple Ten Advisors or Apple Suites Realty in lieu of cash payments required under the Advisory Agreement or other contract or obligation. The board of directors, in its sole discretion, may determine the value of any common shares or other equity or debt securities issued in consideration of property or services provided, or to be provided, to us, except that while common shares are offered by us to the public, the public offering price of the shares shall be deemed their value.

We have adopted a stock incentive plan for the benefit of our directors. The effect of the exercise of those options could be to dilute the value of the shareholders’ investments to the extent of any difference between the exercise price of an option and the value of the shares purchased at the time of the exercise of the option.

In addition, we expressly reserve the right to implement a dividend reinvestment plan involving the issuance of additional shares by us, at an issue price determined by the board of directors. See “Description of Capital Stock—Series B Convertible Preferred Shares” and “—Preferred Shares.”

You will be limited in your ability to sell your Units pursuant to the Unit redemption program.

Even though after you have held your Units for at least one year our Unit redemption program may provide you with the opportunity to redeem your Units (for a purchase price equal to: (1) for redemptions made during the first five (5) years from the date of your purchase of the Units to be redeemed, 92.5% of the price you paid for your Units to be redeemed, and (2) for redemptions made after the first five (5) years from the date of your purchase of the Units to be redeemed, 100% of the price you paid for your Units to be redeemed.), you should be fully aware that our Unit redemption program will contain certain restrictions and limitations. Redemption of Units,

27


when requested, will be made quarterly, and there are specific limits placed on the number of Units we may redeem at any specific time.

The board of directors, in its sole discretion, may choose to suspend or terminate the Unit redemption program or to reduce the number of Units purchased under the Unit redemption program if it determines the funds otherwise available to fund our Unit redemption program are needed for other purposes. In addition, the board of directors reserves the right to reject any request for redemption or to amend or terminate the Unit redemption program at any time. In making a decision to purchase Units, you should not assume that you will be able to sell any of your Units back to us pursuant to our Unit redemption program. In addition, if you redeem Units under the Unit redemption program, you will not be permitted to purchase additional Units in this offering for a period of one year from the date of redemption. In the unlikely event that the Series B convertible preferred shares are converted and there is no related liquidity event with respect to the Units, the Unit redemption program could be reformulated or modified by the board of directors at that time. Any such reformation or modification by the board of directors may include a reduction in the redemption price. See “Description of Capital Stock—Unit Redemption Program.”

We may be required to indemnify Apple Ten Advisors against losses in various circumstances.

Under the terms of the Advisory Agreement, we have agreed to indemnify Apple Ten Advisors if:

 

 

 

 

our directors have determined in good faith that the course of conduct which caused the liability or loss was undertaken in good faith within what the advisor reasonably believed to be the scope of its employment or authority and for a purpose which it reasonably believed to be in our best interests;

 

 

 

 

our directors have determined in good faith that the liability or loss was not the result of willful misconduct, bad faith, reckless disregard of duties or violation of the criminal law on the part of the advisor; and

 

 

 

 

the indemnified amount is recoverable only out of our assets and not from the shareholders.

See “Apple Ten Advisors and Apple Suites Realty—The Advisory Agreement—Limits of Responsibility.”

Our rights and the rights of our shareholders to recover claims against our officers and directors are limited, which could reduce your and our recovery against them if they cause us to incur losses.

Virginia law provides that a director has no liability in that capacity if he or she performs his or her duties in accordance with his or her good faith business judgment of the best interests of the corporation. In addition, subject to certain limitations set forth in our articles of incorporation or under Virginia law, our articles of incorporation provide that no director or officer will be liable to us or to our shareholders for monetary damages, and require us to indemnify and advance expenses to our present and former directors and officers, and permit us to indemnify and advance expenses to our employees and agents. However, our articles of incorporation provide that we may not indemnify a director for any loss or liability suffered by him or her or hold harmless such indemnitee for any loss or liability suffered by him or her unless: (1) the indemnitee determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests, (2) the indemnitee was acting on behalf of or performing services for us, (3) the loss or liability was not the result of (A) negligence or misconduct in the case of a director who is not an independent director, or (B) gross negligence or willful misconduct, in the case of an independent director, and (4) the indemnification or agreement to hold harmless is recoverable only out of our net assets and not from our shareholders. As a result, we and our shareholders may have more limited rights against our directors, officers, employees and agents than might otherwise exist under common law, which could reduce your and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents which would decrease the

28


cash otherwise available for distribution to you. See “Summary of Organizational Documents—Responsibility of Board of Directors, Apple Ten Advisors, Officers and Employees.”

Virginia law and certain provisions under our articles of incorporation and bylaws may impede attempts to acquire control of us and may deter or prevent our shareholders’ ability to change our management.

Some provisions of our articles of incorporation and bylaws may have the effect of delaying, deferring or preventing a change in control. These provisions may make it more difficult for other persons, without the approval of our board, to make a tender offer or otherwise acquire substantial amounts of our shares or to launch other takeover attempts that a shareholder might consider to be in such shareholder’s best interest. These provisions include a prohibition on ownership, either directly or indirectly, of more than 9.8% of the outstanding Units by any shareholder, the ability of our board to issue a new class of preferred shares with voting or other rights senior to any existing class of stock, the ability of our board to increase the size of the board and install directors opposed to the takeover attempt, and procedural conditions and requirements that make it difficult for a shareholder to nominate a candidate for election to the board or to raise business matters at a meeting of shareholders. See “Summary of Organizational Documents—Anti-Takeover Provisions.”

Similarly, we are subject to certain provisions of the Virginia Stock Corporation Act which, in general, are designed to protect Virginia corporations from the adverse effects of hostile corporate takeovers. These provisions prevent an interested shareholder (i.e., a holder of more than 10% of any class of a corporation’s outstanding voting shares) from engaging in specified affiliated transactions with the corporation without the approval of at least two-thirds of the shareholders not including the interested shareholder. Affiliated transactions requiring this two-thirds approval include mergers, share exchanges, material dispositions of corporate assets, or dissolution proposed by the interested shareholder. The Virginia Stock Corporation Act also contains provisions regarding certain control share acquisitions, which are transactions causing the voting strength of shares of any person acquiring beneficial ownership of shares to meet or exceed certain threshold voting percentages (20%, 331/3%, or 50%). Shares acquired in a control share acquisition have no voting rights unless the voting rights are granted by a majority vote of all outstanding shares other than those held by the acquiring person or any officer or employee-director of the corporation. These provisions of Virginia corporate law may delay, impede or prevent attempts to acquire control of us (including attempts to acquire control of us to change management personnel, policies or objectives) including attempts which are (or perceived to be) in the best interests of our shareholders. See ‘Summary of Organizational Documents—Virginia Antitakeover Statutes.”

Possible lack of diversification increases the risk of investment.

There is no limit on the number of properties in a particular area which we may acquire. The board reviews our properties and investments in terms of geographic diversification. Our profitability and our ability to diversify our investments, both geographically and by type of properties purchased, is limited by the amount of further funds at our disposal. If our assets become geographically concentrated, an economic downturn in one or more of the markets in which we have invested could have an adverse effect on our financial condition and our ability to make distributions.

We may become subject to environmental liabilities, which may decrease profitability and shareholders’ return.

Although we subject our properties to an environmental assessment prior to acquisition, we may not be made aware of all the environmental liabilities associated with a property prior to its purchase. There may be hidden environmental hazards that may not be discovered prior to acquisition. The costs of investigation, remediation or removal of hazardous substances may be substantial. In addition, the presence of hazardous substances on one of our properties, or the failure to properly remediate a contaminated property, could adversely affect our ability to sell or rent the property or to borrow using the property as collateral.

29


Various federal, state and local environmental laws impose responsibilities on an owner or operator of real estate and subject those persons to potential joint and several liabilities. Typical provisions of those laws include:

 

 

 

 

Responsibility and liability for the costs of removal or remediation of hazardous substances released on or in real property, generally without regard to knowledge of or responsibility for the presence of the contaminants.

 

 

 

 

Liability for the costs of removal or remediation of hazardous substances at disposal facilities for persons who arrange for the disposal or treatment of those substances.

 

 

 

 

Potential liability under common law claims by third parties based on damages and costs of environmental contaminants.

See “Business—Environmental Matters.”

We may incur significant costs complying with the Americans with Disabilities Act and similar laws, which may decrease profitability and shareholder return.

Our properties are required to meet federal requirements related to access and use by disabled persons as a result of the Americans with Disabilities Act of 1990. In addition, a number of additional federal, state and local laws may require modifications to any properties we purchase, or may restrict further renovations thereof, with respect to access by disabled persons. Noncompliance with these laws or regulations could result in the imposition of fines or an award of damages to private litigants. Additional legislation could impose additional financial obligations or restrictions with respect to access by disabled persons. If required changes involve greater expenditures than we currently anticipate, or if the changes must be made on a more accelerated basis, our ability to make expected distributions could be adversely affected. See “Business—Americans With Disabilities Act.”

We may not have control over properties under construction.

We currently own properties that require renovation. Additionally, we may acquire sites under development, as well as sites which have existing properties, including properties which require renovation. Regarding such properties, we may be subject to certain risks in connection with a developer’s ability to control construction or renovation costs and the timing of completion of construction or a developer’s ability to build in conformity with plans, specifications and timetables.

We depend in part on leasing space to tenants on economically favorable terms and collecting rent from our tenants, who may not be able to pay.

Our financial results depend in part on leasing space in the properties we own to tenants on economically favorable terms. In addition, because much of our income comes from rentals of real property, our income and funds available for distribution to our shareholders will decrease if a significant number of our tenants cannot pay their rent. If a tenant does not pay its rent, we might not be able to enforce our rights as landlord without delays and might incur substantial legal costs. See “Business—Business Strategies.”

Our real properties are subject to property taxes that may increase in the future, which could adversely affect our cash flows.

Our real properties are subject to property taxes that may increase as tax rates change and as the real properties are assessed or reassessed by taxing authorities. As the owner of the properties, we are ultimately responsible for payment of the taxes to the applicable government authorities. If property taxes increase, a reduction of our cash flows will occur.

30


We may invest in joint ventures, which could adversely affect our ability to control decisions and increase our costs or liability.

We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in, or sharing responsibility for, managing the affairs of a property, partnership, joint venture or other entity. In that event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present when a third-party is not involved, including the possibility that partners or co- venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also lead to impasses, for example, as to whether to sell a property, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our day-to-day business. Consequently, actions by or disputes with partners or co-venturers may subject properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers which may exceed our investment in a particular partnership or joint venture. See “Investment Objectives and Policies—Investments in Real Estate or Interests in Real Estate.”

We may not be able to use debt to meet our cash requirements.

Due to the current economic events in the United States, there has been a contraction in available credit in the marketplace. As a result, we may not be able to use debt to meet our cash requirements.

Technology is used in operations, and any material failure, inadequacy, interruption or security failure of that technology could harm the business.

We and our hotel managers and franchisors rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. Some of the information technology is purchased from vendors, on whom the systems depend. We and our hotel managers and franchisors rely on commercially available and internally developed systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential operator and other customer information, such as individually identifiable information, including information relating to financial accounts. Although we and our hotel managers and franchisors have taken steps necessary to protect the security of our information systems and the data maintained in those systems, it is possible that the safety and security measures taken will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of information systems could interrupt operations, damage reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations.

Hotel Risk Factors

Our probable lack of diversification in property type increases the risk of investment.

One of our primary areas of investment is hotels. There is no limit on the number of properties of a particular hotel brand which we may acquire. As of March 31, 2012 all of our hotels are

31


franchised with Marriott International, Inc. or Hilton Worldwide or their affiliates. The board reviews our properties and investments in terms of geographic and hotel brand diversification. Our profitability and our ability to diversify our investments, both geographically and by type of properties purchased, is limited by the amount of further funds at our disposal. If our assets become geographically concentrated, an economic downturn in one or more of the markets in which we have invested could have an adverse effect on our financial condition and our ability to make distributions.

Adverse trends in the hotel industry may impact our properties.

Our hotels are subject to all the risks and trends common to the hotel industry. Adverse trends in the hotel industry could adversely affect hotel occupancy and the rates that can be charged for hotel rooms. The success of our properties depends largely on the property operators’ ability to adapt to dominant trends in the hotel industry. These trends include greater competitive pressures, increased consolidation, a supply of hotel rooms that exceeds demand due to industry overbuilding, dependence on consumer spending patterns and changing demographics, the introduction of new concepts and products, availability of labor, price levels and general economic conditions. The success of a particular hotel brand, the ability of a hotel brand to fulfill any obligations to operators of its business, and trends in the hotel industry may affect our income and the funds we have available to distribute to our shareholders.

The impact of the current economic environment on the lodging industry may harm our future financial results and growth.

The United States continues to be in a post-recessionary low-growth environment which has experienced historically high levels of unemployment. Uncertainty over the depth and duration of this economic environment continues to have a negative impact on the lodging industry. There is some general consensus among economists that the economy in the United States emerged from a recessionary environment in 2009, but high unemployment levels and sluggish business and consumer travel trends were evident in both 2010 and 2011. Accordingly, our future financial results and growth could be harmed until a more expansive national economic environment is prevalent. A weaker than anticipated economic recovery, or a return to a recessionary national economic environment, could result in low or decreased levels of business and consumer travel, negatively impacting the lodging industry. Such an economic outcome could also negatively impact our future growth prospects and results of operations.

An economic downturn and concern about terrorist activities could adversely affect the travel and lodging industries and may affect hotel operations for the hotels we own and acquire.

Due to an economic downturn or an increase in energy costs and other travel related expenses, the lodging industry could experience a significant decline in business due to a reduction in travel for both business and pleasure. Consistent with the rest of the lodging industry, the hotels we own and acquire may experience declines in occupancy and average daily rates due to a decline in travel. Any kind of terrorist activity within the United States, including terrorist acts against public institutions or buildings or modes of public transportation (including airlines, trains or buses) could lessen travel by the public, which could have a negative effect on any of our hotel operations. Any terrorist act directly against or affecting any of our properties would also negatively affect our operations. Our property insurance will typically cover losses for property damage to our properties if there are terrorist attacks against our properties. However, we will not be insured for losses arising from terrorist attacks against other properties or against modes of public transportation (such as airlines, trains or buses), even though such terrorist attacks may curtail travel generally and negatively affect our hotel operations.

Aggressive cost containment and a significant slowdown in the construction of new hotels could occur. In addition, continued U.S. military operations abroad or other significant military or possible terrorist activity could have additional adverse effects on the economy, including the travel and lodging industry. It is possible that these factors could have a material adverse effect on the value of

32


the assets we acquire. Any hotels we acquire and the business of the managers with which we contract, may be affected, including hotel occupancy and revenues and, as a result, the revenues for the hotels we acquire may be at reduced levels to the extent that rents and other revenues received by us are calculated as a percentage of hotel revenues. Additionally, if the managers with which we contract default in their obligations to us, our revenues and cash flows may decline or be at reduced levels for extended periods. Operating with reduced revenues would have a negative impact on our cash available for distributions to shareholders.

The hotel industry is seasonal.

The hotel industry is seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. As a result of the seasonality of the hotel industry, there may be quarterly fluctuations in results of operations of properties leased to subsidiaries. Quarterly financial results may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may need to enter into short-term borrowing in certain periods in order to offset these fluctuations in revenues and to make distributions to our shareholders.

There may be operational limitations associated with management and franchise agreements affecting our properties and these limitations may prevent us from using these properties to their best advantage for our shareholders.

Apple Ten Hospitality Management, Inc., our wholly-owned taxable REIT subsidiary (or another subsidiary), operates all of our properties pursuant to franchise or license agreements with nationally recognized hotel brands. These franchise agreements may contain specific standards for, and restrictions and limitations on, the operation and maintenance of our properties in order to maintain uniformity within the franchiser system. We do not know whether those limitations may conflict with our ability to create specific business plans tailored to each property and to each market.

The standards are subject to change over time, in some cases at the direction of the franchisor, and may restrict Apple Ten Hospitality Management’s ability, as franchisee, to make improvements or modifications to a property without the consent of the franchisor. In addition, compliance with the standards could require us or Apple Ten Hospitality Management, as franchisee, to incur significant expenses or capital expenditures. Action or inaction on our part or by Apple Ten Hospitality Management could result in a breach of those standards or other terms and conditions of the franchise agreements and could result in the loss or cancellation of a franchise license.

In connection with terminating or changing the franchise affiliation of a property, we may be required to incur significant expenses or capital expenditures. Moreover, the loss of a franchise license could have a material adverse effect upon the operations or the underlying value of the property covered by the franchise because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor.

We face competition in the hotel industry, which may limit our profitability and return to our shareholders.

The hotel industry is highly competitive. This competition could reduce occupancy levels and rental revenues at our properties, which would adversely affect our operations. We face competition from many sources. We face competition from other hotels both in the immediate vicinity and the geographic market where our hotels are located. Over-building in the hotel industry will increase the number of rooms available and may decrease occupancy and room rates. In addition, increases in operating costs due to inflation may not be offset by increased room rates. We also face competition from nationally recognized hotel brands with which we are not associated.

We also face competition for investment opportunities. These competitors include other real estate investment trusts, national hotel chains and other entities that may have substantially greater

33


financial resources than we do. We also face competition for investors from other real estate investment trusts and real estate entities.

See “Business—Business Strategies—Hotels.”

Additional Risk Factors

We have not currently identified any additional ventures, however, real estate we acquire may include but will not be limited to retail and office space.

The value of real estate fluctuates depending on conditions in the general economy and the real estate business. These conditions may also limit our revenues and available cash.

The types of risks to which we may be subject if we acquire other types of real estate include our ability to attract and maintain tenants which pay their rents when due, our ability to increase rents over time, competition from similar real estate owned by other persons (including an increase in supply from new construction of such real estate), changes in governmental regulations, including zoning laws, and potential liability under environmental or other laws or regulations. Any of these factors could decrease our cash generated from operations and our distributions to shareholders.

See “Business—Business Strategies—Other Real Estate.”

We are subject to a securities class action lawsuit and governmental regulatory oversight, which could have a material adverse effect on our financial condition, results of operations and cash flows.

As a result of regulatory inquiries or other regulatory actions, or as a result of being publicly held, we may become subject to lawsuits. We are currently subject to one securities class action lawsuit and other suits may be filed against us in the future. Due to the preliminary status of the lawsuit and uncertainties related to litigation, we are unable at this time to evaluate the likelihood of either a favorable or unfavorable outcome or to estimate the range of potential exposure. If the outcome is unfavorable, we may be required to pay damages and/or change our business practices, any of which could have a material adverse effect on our financial condition, results of operations and cash flows.

We have been and may continue to be subject to regulatory inquiries, which have resulted in and which could continue to result in costs and personnel time commitment to respond. We may also be subject to action by governing regulatory agencies, as a result of our activities, which could result in costs to respond and fines or changes in our business practices, any of which could have a material adverse effect on our financial condition, results of operations and cash flows.

For more information about our legal proceedings, please see the “Legal Proceedings and Related Matters” section below.

USE OF PROCEEDS

We have and intend to invest the net proceeds of this offering in equity ownership interests in hotels and other income-producing real estate in metropolitan areas throughout the United States. Pending investment in real estate, the proceeds may be invested in temporary investments consistent with our bylaws and the Internal Revenue Code. These temporary investments include U.S. government securities, certificates of deposit or commercial paper. The proceeds of this offering will be received and held in trust for the benefit of investors in compliance with applicable securities laws, to be used only for the purposes set forth in this prospectus.

Our bylaws prohibit our total organizational and offering expenses from exceeding 15% of the amount raised in this offering. Organizational and offering expenses are all expenses incurred in organizing us and offering and selling the Units, including: selling commissions and fees, legal fees and accounting fees, and federal, state and other regulatory filing fees. The bylaws also prohibit the total of all acquisition fees and acquisition expenses paid in connection with an acquisition of a property from exceeding 6% of the contract price for the property unless these excess fees or

34


expenses are approved by the board of directors. Acquisition fees are all fees and commissions paid by any party in connection with our purchase of real property. Acquisition expenses are all expenses related to the selection or acquisition of properties by us. Any organizational and offering expenses or acquisition fees and acquisition expenses incurred by us in excess of the permitted limits will be payable by Apple Ten Advisors or Apple Suites Realty to us immediately upon our demand.

At the inception of the Company, we obtained an unsecured line of credit in the amount of $400,000 to fund initial offering expenses. This line of credit was guaranteed by Glade M. Knight. Mr. Knight did not receive any compensation for providing this guarantee. The line of credit was repaid and extinguished upon closing on the minimum offering.

As indicated below, if the maximum offering is completed, 86.76% of the gross offering proceeds received would be available for investment in properties and 0.5% would be allocated to our working capital reserve. However, the percentage of gross offering proceeds available for investment could be less if the offering expenses or the acquisition fees are greater than the amounts indicated or if we feel it prudent to establish a larger working capital reserve. For example, we might feel it prudent to establish a larger working capital reserve to cover possible unanticipated costs or liabilities. If we do not receive additional proceeds, we will invest in fewer properties than if we were to receive the proceeds from the maximum offering of 182,251,082 Units. The following table reflects the intended application of the proceeds from the sale of the Units.

 

 

 

 

 

 

 

Maximum Offering

 

Gross Amount

 

% of Proceeds

Gross Proceeds(1)(8)

 

 

$

 

2,000,000,000

 

 

 

 

100.00

%

 

Less Offering Expenses(2)

 

 

 

10,000,000

 

 

 

 

0.50

%

 

Selling Commissions(3)

 

 

 

150,000,000

 

 

 

 

7.50

%

 

Marketing Expense Allowance(3)

 

 

 

50,000,000

 

 

 

 

2.50

%

 

Net Proceeds after Offering Costs

 

 

 

1,790,000,000

 

 

 

 

89.50

%

 

Less Acquisition Fees(4)

 

 

 

34,800,000

 

 

 

 

1.74

%

 

Less Acquisition Expenses(5)

 

 

 

10,000,000

 

 

 

 

0.50

%

 

Proceeds Available for Investment and Working Capital

 

 

 

1,745,200,000

 

 

 

 

87.26

%

 

Less Working Capital Reserve(6)

 

 

 

10,000,000

 

 

 

 

0.50

%

 

Net Amount Available for Investment in Properties(7)

 

 

 

1,735,200,000

 

 

 

 

86.76

%

 


 

 

(1)

 

 

 

The Units are being offered on a “best-efforts” basis.

 

(2)

 

 

 

These amounts reflect our estimate of offering expenses, exclusive of the selling commissions and the marketing expense allowance payable to David Lerner Associates, such as filing and registration fees, legal, accounting and financial printing fees. If the offering expenses are greater than the amounts indicated, the amount of proceeds available for investment will decrease, and if these expenses are less, the amount available for investment will increase. However, the longer our offering continues, the more likely it is that we will incur increased printing, legal and accounting costs. This is because the longer the offering continues, the more prospectus supplements and post-effective amendments to our registration statement will have to be prepared by us. There will be an additional incremental printing, legal and accounting cost each time we prepare and (as applicable) file a prospectus supplement or post-effective amendment to our registration statement.

 

(3)

 

 

 

Payable to David Lerner Associates, an unaffiliated third-party.

 

(4)

 

 

 

These amounts include our estimate of real estate commissions payable to Apple Suites Realty in an amount equal to 2% of the gross purchase price of each property acquired. These amounts assume that we acquire our properties without debt. These amounts would be higher if we acquire properties with debt. If debt is incurred in each acquisition to the maximum permitted by our bylaws, and the maximum offering is sold, the amount of compensation would be $69.6 million.

35


 

(5)

 

 

 

These amounts include our estimate of acquisition expenses such as title insurance, surveys, environmental examination fees, recording costs, transfer taxes and other routine real estate transactional expenses incurred on our behalf in connection with property acquisitions.

 

(6)

 

 

 

Until used for operating expenses, amounts in our working capital reserve, together with any other proceeds not invested in properties or used for other company purposes, will be invested in permitted temporary investments such as U.S. Government securities or similar liquid instruments.

 

(7)

 

 

 

We expect the investment properties to be hotels and other income-producing real estate located in metropolitan areas throughout the United States.

 

(8)

 

 

 

We may use proceeds of the offering to fund distributions to our shareholders. There is no limit on the amount of proceeds that may be used for such purposes.

36


COMPENSATION

The tables below describes all the compensation, fees, reimbursement and other benefits which we pay to, or which may be realized by, Apple Ten Advisors, Apple Suites Realty and Mr. Glade M. Knight. Currently, Mr. Knight is the sole shareholder of Apple Ten Advisors and Apple Suites Realty. As sole shareholder of Apple Ten Advisors and Apple Suites Realty, Mr. Knight will receive income from Apple Ten Advisors and Apple Suites Realty.

We also show compensation payable to David Lerner Associates, Inc. David Lerner Associates is not related to, nor an affiliate of, either Apple Ten Advisors or Apple Suites Realty.

Each member of the senior management team and certain staff members provide certain services to us (as well as to other companies organized by Glade M. Knight). For administrative convenience, these persons are all employed by Apple Fund Management, which is a subsidiary of Apple REIT Six and indirectly controlled by Glade M. Knight. From the reimbursement compensation received by Apple Ten Advisors and Apple Suites Realty under the Advisory Agreement and Property Acquisition/Disposition Agreement, Apple Ten Advisors and Apple Suites Realty reimburse Apple Fund Management for a portion of the compensation paid to its senior managers and staff, based on the amount of time they devote to activities required by Apple Ten Advisors and Apple Suites Realty. Alternatively, Apple Ten Advisors and Apple Suites Realty may direct that reimbursement amounts otherwise payable to them shall instead be paid directly by us to Apple REIT Six, the parent of Apple Fund Management.

 

 

 

 

 

Person Receiving
Compensation

 

Type of Compensation

 

Amount of Compensation

 

 

Offering Phase

 

 

David Lerner Associates

 

Selling Commissions.

 

7.5% of the purchase price of the Units. If the maximum offering of $2 billion is sold, the selling commissions would be $150,000,000.

 

 

Marketing Expense Allowance

 

2.5% of the purchase price of the Units. If the maximum offering of $2 billion is sold, the marketing expense allowance would be $50,000,000.

 

 

Acquisition Phase

 

 

Apple Suites Realty

 

Commission for acquiring our properties and real estate acquisition expenses

 

2% of the gross purchase price of the properties purchased by us—estimated to be $34.8 million if the maximum offering is sold (assuming no debt is incurred). If debt is incurred in each acquisition to the maximum permitted by our bylaws, and the maximum offering is sold, the amount of compensation would be $69.6 million. In addition, real estate acquisition expenses have been estimated to be $10,000,000 if the maximum offering is sold.

 

 

Operational Phase

 

 

Apple Ten Advisors

 

Asset management fee for managing our day-to-day operations

 

Annual fee payable quarterly based upon a ratio of our funds from operations to the amount raised in this offering ranging from 0.1% to 0.25% of the amount raised in this offering—a maximum of $5,000,000 per year if the maximum offering is sold.

 

 

 

 

37


 

 

 

 

 

Person Receiving
Compensation

 

Type of Compensation

 

Amount of Compensation

Apple Ten Advisors and Apple Suites Realty

 

Reimbursement for compensation and overhead costs of Apple Fund Management

 

Reimbursement is estimated to be $2,000,000 (per year) if the maximum offering is sold. See below under “Reimbursement Compensation under the Advisory Agreement and the Property/Acquisition Disposition Agreement.”

Apple Ten Advisors and Apple Suites Realty

 

Reimbursement for certain deposits and costs incurred on our behalf

 

Future reimbursements are not estimable, but are subject to the limits described below under “Reimbursements to Apple Ten Advisors and Apple Suites Realty.”

David Lerner Associates

 

Fee for Account Maintenance Services to Shareholders

 

Future fees for account maintenance are not estimable, but are based on the number of shareholder accounts, as described below under “Account Maintenance Services to Shareholders”

 

 

Disposition Phase

 

 

Apple Suites Realty

 

Commission for selling our properties

 

Up to 2% of the gross sales prices of the properties sold by us.

Glade M. Knight

 

Series B convertible preferred shares (or common shares, if Series B is converted)

 

If we sell our assets in liquidation, each Series A preferred share receives a liquidation preference of $11.00. Amounts in excess of this are paid as described below under “Series B Convertible Preferred Shares.” If the Series B convertible preferred shares are converted into common shares, their value is estimated to be up to $127 million (if maximum offering is sold) (these estimates assume a common share is worth $11.00).

As described above, and as shown on the table below, we pay certain fees and expenses as they are incurred, while others accrue and will be paid in future periods, subject in some cases to the achievement of performance criteria. We did not incur any amounts in connection with our disposition phase through December 31, 2011.

38


Cumulative through December 31, 2011

 

 

 

 

 

 

 

 

 

Incurred

 

Paid

 

Accrued

Offering Phase

 

 

 

 

 

 

Selling commissions paid to David Lerner Associates, Inc. in connection with the offering

 

 

$

 

35,532,000

 

 

 

$

 

35,532,000

 

 

 

$

 

 

Marketing expense allowance paid to David Lerner Associates, Inc. in connection with the offering

 

 

 

11,844,000

 

 

 

 

11,844,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47,376,000

 

 

 

 

47,376,000

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition Phase

 

 

 

 

 

 

Acquisition commission paid to Apple Suites Realty Group, Inc.

 

 

 

9,165,000

 

 

 

 

9,165,000

 

 

 

 

 

Reimbursement of costs paid to Apple Suites Realty Group, Inc.

 

 

 

700,000

 

 

 

 

700,000

 

 

 

 

 

Reimbursement of certain deposits to Apple Suites Realty Group, Inc.

 

 

 

102,500

 

 

 

 

102,500

 

 

 

 

 

Operations Phase

 

 

 

 

 

 

Asset management fee paid to Apple Ten Advisors, Inc.

 

 

 

318,000

 

 

 

 

318,000

 

 

 

 

 

Reimbursement of costs paid to Apple Ten Advisors, Inc.

 

 

 

725,000

 

 

 

 

725,000

 

 

 

 

 

Fees for Account Maintenance Services to Shareholders paid to David Lerner Associates, Inc.

 

 

 

171,000

 

 

 

 

131,000

 

 

 

 

40,000

 

Conflicts of Interest as a Result of Fees

Apple Ten Advisors and Apple Suites Realty receive different types of compensation for services rendered in connection with the acquisition and disposition of our properties, as well as the management of our day-to-day operations. As discussed under “Conflicts of Interest,” the receipt of these fees could result in potential conflicts of interest for persons who participate in decision making on behalf of both our Company and these other entities.

Specific Amounts of Compensation Payable to Apple Ten Advisors and Apple Suites Realty

Except as otherwise indicated in the table, the specific future amounts of compensation or reimbursement payable to Apple Ten Advisors and Apple Suites Realty are not now known and generally will depend upon factors determinable only at the time of payment. Compensation payable to these entities may be shared or reallocated among them or their affiliates in their sole discretion as they may agree. However, compensation and reimbursements which would exceed specified limits or ceilings cannot be recovered by them or their affiliates through reclassification into a different category.

Property Acquisition/Disposition Agreement

Under a Property Acquisition/Disposition Agreement with us, Apple Suites Realty has agreed to serve as the real estate advisor in connection with both our purchases and sales of properties. In exchange for these services, Apple Suites Realty will be entitled to a fee from us of 2% of the gross purchase price of each property purchased (including any debt assumed or incurred in connection with the purchase of the property) by us not including amounts budgeted for repairs and improvements. Under our bylaws, the maximum leverage initially permitted is equal to half of the purchase price of all properties bought by us. If the person from whom we purchase or to whom we sell a property pays any fee to Apple Suites Realty, that amount will decrease the amount of our obligation to Apple Suites Realty. Real estate acquisition expenses, such as title insurance, surveys, environmental examination fees, recording costs, transfer taxes and other routine real estate transactional expenses have totaled approximately $2.1 million as of December 31, 2011. If the maximum offering is sold, we estimate these typical real estate expenses will total approximately $10,000,000.

Under the Property Acquisition/Disposition Agreement, Apple Suites Realty also is entitled to a fee from us in connection with the disposition of some or all of our properties equal to 2% of the

39


gross sales price whether these dispositions are dispositions of individual properties or of interests in us, the purpose or effect of which is to dispose of some or all of our properties, if and only if, the sales price exceeds the sum of our cost basis in the property consisting of the original purchase price plus any and all capitalized costs and expenditures connected with the property plus 10% of the cost basis. For purposes of this calculation, our cost basis will not be reduced by depreciation.

Under the Property Acquisition/Disposition Agreement, Apple Suites Realty is not entitled to any real estate commission upon our sale of a property to, or purchase of a property from, Apple Suites Realty or an affiliate of Apple Suites Realty (including any other program organized by Glade M. Knight), but Apple Suites Realty will, in such case, be entitled to payment by us of its direct costs in performing services pertaining to any such purchase or sale. Direct costs are costs incurred to third parties by Apple Suites Realty on our behalf, not including any “mark-up” of such costs. No company owned by Mr. Knight is entitled to a commission on any sale of a property by us to any other program organized by Mr. Knight.

Advisory Agreement

Under the Advisory Agreement with Apple Ten Advisors we are obligated to pay an asset management fee which is a percentage of the cumulative gross offering proceeds which have been received from time to time from the sale of the Units. The percentage used to calculate the asset management fee is based on the return ratio, calculated on a per annum basis, for the calendar year. The return ratio for a calendar year is the ratio of our funds from operations for that year to the cumulative amount raised through all of our offerings through and including the year in question. Funds from operations is defined by the National Association of Real Estate Investment Trusts (NAREIT) as net income, computed in accordance with generally accepted accounting principles (GAAP), excluding gains or losses on sales of depreciable property, plus depreciation and amortization of real estate property used in operations, less preferred dividends and after adjustments for unconsolidated partnerships and joint ventures. The calculation will be based on the NAREIT definition of funds from operations. Funds from operations does not represent cash flow from operating, investing or financing activities in accordance with GAAP and is not indicative of cash available to fund all of our cash needs. Funds from operations should not be considered as an alternative to net income or any other GAAP measure as an indicator of performance and should not be considered as an alternative to cash flow as a measure of liquidity or the ability to service debt or to pay distributions. In the future, the Securities and Exchange Commission or NAREIT may decide to modify the definition of funds from operations and we would have to adjust the calculation and characterization of this non-GAAP measure for purposes of calculating the asset management fee. The per annum asset management fee is equal to the following with respect to each calendar year: 0.1% of the amount raised in this offering if the return ratio for the calendar year or pro rata for a partial year is 6% or less; 0.15% of the amount raised in this offering if the return ratio for the calendar year or pro rata for a partial year is more than 6% but not more than 8%; and 0.25% of the amount raised in this offering if the return ratio for the calendar year or pro rata for a partial year is above 8%. Assuming the maximum offering of $2,000,000,000 is sold, the annual asset management fee would be between $2,000,000 and $5,000,000.

Reimbursement Compensation under the Advisory Agreement and Property Acquisition/Disposition Agreement

Under the Advisory Agreement, we pay Apple Ten Advisors fee compensation and under the Property Acquisition/Disposition Agreement, we pay Apple Suites Realty fee compensation. In addition, under each such agreement, and in exchange for the services rendered under each such agreement, we pay each of Apple Ten Advisors and Apple Suites Realty reimbursement compensation for payments it makes to Apple Fund Management. More specifically, since they have no employees of their own, Apple Ten Advisors and Apple Suites Realty use the personnel and office space of Apple Fund Management to satisfy their respective obligations under the Advisory Agreement and Property Acquisition/Disposition Agreement, and are required to reimburse Apple Fund Management for such expense. They use the reimbursement compensation received from us

40


under the Advisory Agreement and the Property Acquisition/Disposition Agreement to pay Apple Fund Management. Apple Fund Management is a subsidiary of Apple REIT Six and indirectly controlled by Glade M. Knight. Alternatively, we may elect that reimbursement amounts otherwise payable to Apple Ten Advisors and Apple Suites Realty shall instead be paid directly by us to Apple REIT Six, the parent of Apple Fund Management.

Certain Other Reimbursements to Apple Ten Advisors and Apple Suites Realty

Apple Ten Advisors and Apple Suites Realty are reimbursed for certain direct costs incurred on our behalf for acquiring and operating our properties and for goods and materials used for or by us and obtained from entities that are not affiliated with Apple Ten Advisors or Apple Suites Realty, although whenever possible we and Apple Ten Advisors and Apple Suites Realty attempt to have costs incurred on our behalf to be charged to us, rather than charged to Apple Ten Advisors or Apple Suites Realty and thereafter reimbursed by us. Possible reimbursable costs and expenses include, but are not limited to, interest and other costs for money borrowed on our behalf, taxes on our property or business, fees for legal counsel and independent auditors engaged for us, expenses relating to shareholder communications, costs of appraisals, non-refundable option payments on property not acquired, title insurance. These expenses also include ongoing accounting, reporting and filing obligations of ours that are provided to us by Apple Ten Advisors or Apple Suites Realty and payments made to third-parties that are made by Apple Ten Advisors or Apple Suites Realty on our behalf. These expenses do not include any amounts for overhead of Apple Ten Advisors or Apple Suites Realty. In addition, there is no “mark-up” of these expenses by either of these entities. Operating expenses reimbursable to Apple Ten Advisors are subject to the overall limitation on operating expenses discussed under “Apple Ten Advisors and Apple Suites Realty—The Advisory Agreement,” but the amount of reimbursement is not otherwise limited.

Apple Ten Advisors and Apple Suites Realty may provide other services to us and be entitled under certain conditions to compensation or payment for those services. Those conditions, which are summarized under “Conflicts of Interest—Transactions with Affiliates and Related Parties,” include the requirement that each transaction be approved by the affirmative vote of a majority of the directors. Currently, there are no arrangements or proposed arrangements between us, on the one hand, and these two entities, on the other hand, for the provision of other services to us or the payment of compensation or reimbursement. If any other arrangements arise in the future, the terms of the arrangements, including the compensation or reimbursement payable, will be subject to the restrictions in our bylaws. The compensation, reimbursement or payment could take the form of cash or property, including Units.

Account Maintenance Services to Shareholders

We pay David Lerner Associates $5.00 per new customer account and $10.00 per year for each active customer account which holds our Units, as a fee for David Lerner Associates maintaining information about the account and its owner(s).

Allocation of Reimbursements between Operating Expenses and Acquisition Expenses

The reimbursement amounts paid by us are allocated by us between Operating Expenses and Acquisition Expenses (as each of those terms is defined in our bylaws). Such allocation is used to determine whether either of the limitations described below under “Limitation on Operating Expenses” or “Limitation on Acquisition Fees and Acquisition Expenses” has been exceeded. On our financial statements, we allocate reimbursement amounts between those associated with operations and those associated with acquisitions only if such amounts are material, or if so required by GAAP, or applicable law.

Limitation on Operating Expenses

Our total operating expenses, including fees paid to Apple Ten Advisors, may not exceed in any year the greater of 2% of our “Average Invested Assets” or 25% of our “Company Net Income” for such year. Pursuant to our bylaws and our Advisory Agreement, the Advisor is required to reimburse us at least annually for the amount by which our operating expenses exceed these

41


limitations. Average Invested Assets means, generally, the monthly average of the aggregate book value of assets invested in real estate, before deducting depreciation. Company Net Income means, generally, the revenues for any period, less expenses other than depreciation or similar non-cash items. The limitations on our operating expenses are further discussed under “Apple Ten Advisors and Apple Suites Realty—The Advisory Agreement.” The amount of compensation and reimbursement is not otherwise limited.

Limitation on Acquisition Fees and Acquisition Expenses

Our total of all acquisition fees and acquisition expenses paid in connection with an acquisition of a property may not exceed 6% of the contract price for the property unless these excess fees or expenses are approved by the board of directors. Acquisition fees are all fees and commissions paid by any party in connection with our purchase of real property. Acquisition expenses are all expenses related to the selection or acquisition of properties by us. Any acquisition fees and acquisition expenses incurred by us in excess of the permitted limits are payable by Apple Ten Advisors to us immediately upon our demand. The limitations on our acquisition fees and acquisition expenses are further discussed under “Apple Ten Advisors and Apple Suites Realty—The Advisory Agreement.”

Limitation on Organizational and Offering Expenses

Our total organizational and offering expenses paid in connection with our formation or this offering of our Units may not exceed an amount equal to 15% of the gross proceeds raised in this offering. Organizational and offering expenses are all expenses incurred in organizing us and offering and selling the Units, including: selling commissions and fees, legal fees and accounting fees, and federal, state and other regulatory filing fees. Any organizational and offering expenses incurred by us in excess of the permitted limits are payable by Apple Ten Advisors or Apple Suites Realty to us immediately upon our demand. The limitations on our organizational and offering expenses are further discussed under “Apple Ten Advisors and Apple Suites Realty—The Advisory Agreement.”

Series B Convertible Preferred Shares

Glade M. Knight receives no compensation directly from us, except that as described in various places throughout this prospectus (including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Series B Convertible Preferred Shares”), the issuance to Mr. Knight of his Series B convertible preferred shares will result in us recognizing compensation expense for accounting purposes if certain events occur. Consistent with the accounting treatment, the Series B convertible preferred shares will constitute an economic benefit to Mr. Knight measured by the difference between the purchase price for the Series B convertible preferred shares and the value of common shares into which they are converted. The conversion rate of the Series B convertible preferred shares varies from .92 to 24.17 depending upon the number of Units sold in this offering, and Mr. Knight’s ownership position as a result of the conversion of the Series B convertible preferred shares will remain relatively constant between 4 and 6% of the outstanding common shares at any given time. If the maximum offering is achieved, for the consideration of $48,000, the potential value of Mr. Knight’s holdings at $11.00 per common share would exceed $127 million upon conversion.

The holder of outstanding Series B convertible preferred shares has the right to convert any of such shares into common shares upon and for 180 days following the occurrence of any of the following conversion events:

 

 

 

 

substantially all of our assets, stock or business, is transferred through exchange, merger, consolidation, lease, share exchange or otherwise, other than a sale of assets in liquidation, dissolution or winding up of our business;

 

 

 

 

the termination or expiration without renewal of the Advisory Agreement, or if we cease to use Apple Suites Realty to provide property acquisition and disposition services; or

 

 

 

 

our common shares are listed on any securities exchange or quotation system or in any established market.

42


The Series A preferred shares terminate on conversion of the Series B convertible preferred shares even if the value of any consideration received in the transaction resulting in conversion, or the value of our common shares at that time, is less than the $11.00 priority distribution on liquidation associated with the Series A preferred shares.

There are no dividends payable on the Series B convertible preferred shares. On liquidation, the holder of the Series B convertible preferred shares will be entitled to a liquidation payment of $11.00 per number of common shares into which the Series B convertible preferred shares would be convertible, before any distributions of liquidation proceeds to 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. In the event that the liquidation of our assets results in proceeds that exceed the distribution rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed between the common shares and the Series B convertible preferred shares on an as converted basis.

The Series B convertible preferred shares were issued to Glade M. Knight upon our formation, at a time when we had no material assets. Accordingly, the Series B shares are in the nature of “founder’s shares” with no substantial value as of the date of issuance. For financial reporting, tax and other purposes, the issuance of the Series B shares has not and will not prior to conversion be treated as compensation to Mr. Knight. Rather, expense related to issuance of the Series B shares to Mr. Knight will be recognized only at such time as the number of common shares to be issued for conversion of the Series B shares can be reasonably estimated and the event triggering conversion of the Series B shares to common shares occurs. The expense at that time will be measured as the difference between the fair value of the common shares for which the Series B shares can be converted and the amount paid for the Series B shares.

Cost-Sharing Arrangements and Reimbursements to Apple Fund Management

We have entered into contracts with Apple Ten Advisors and Apple Suites Realty to provide us with advisory services and also to provide for the day to day operational and managerial functions of our Company. The strategic planning, general industry expertise and advisory services are primarily provided to us by Glade M. Knight through Apple Ten Advisors and Apple Suites Realty in exchange for the advisory fees and commissions we pay to both of these companies. However, since neither of these companies has any employees of its own, Apple Ten Advisors and Apple Suites Realty have made arrangements with Apple Fund Management to provide the employees necessary to perform operational and managerial services they are required to provide to us. Many of the senior employees of Apple Fund Management have been providing similar services for various REIT companies organized by Glade M. Knight for over 10 years. We reimburse Apple Ten Advisors and Apple Suites Realty for their costs incurred in using employees of Apple Fund Management. We pay such reimbursement amounts directly to Apple Fund Management, or its parent company, Apple REIT Six, in the interest of efficiency. There is no additional “mark-up” of such costs by Apple Ten Advisors, Apple Suites Realty or Apple Management Fund. We have contracted with Apple Ten Advisors and Apple Suites Realty and they are contractually obligated to fulfill their responsibilities. We do not have a direct contractual relationship with Apple Fund Management.

Neither Apple Ten Advisors nor Apple Suites Realty is required to maintain any minimum assets or minimum net worth. Thus, our ability to recover money damages from either of them in the event of their breach of their agreements with us may be limited. The Advisory Agreement between us and Apple Ten Advisors is terminable by us on 60 days’ notice. Thus, our most effective remedy in the event of a breach by Apple Ten Advisors of the Advisory Agreement between us and Apple Ten Advisors could be to terminate the Advisory Agreement.

Each member of the senior management team performs similar advisory, operational and managerial functions for us, Apple REIT Six, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine, Apple Suites Realty Group (ASRG), Apple Six Realty Group (A6RG), Apple Six Advisors, Inc. (A6A), Apple Seven Advisors, Inc. (A7A), Apple Eight Advisors, Inc (A8A), Apple Nine

43


Advisors (A9A) and Apple Ten Advisors (A10A). Each senior manager is employed by, and each senior manager’s compensation is paid by, Apple Fund Management, which is a subsidiary of Apple REIT Six and indirectly controlled by Glade M. Knight. The compensation paid by Apple Fund Management is allocated among the various companies organized by Mr. Knight in a manner that is proportionate to the estimated amount of time devoted to the activities associated with each such individual company. In the initial stages of an entity the allocation is lower than once the company is more established. The allocation is made by the management of the several REITs and is reviewed by the Compensation Committees of the several REITs. There is a potential conflict of interests among the companies using the employees of Apple Fund Management in making the cost allocation. However, historically with the other Apple REIT programs, this conflict has not presented a material issue. Although there is a potential conflict on time allocation of employees due to the fact that a senior manager, officer or staff member provides services to more than one company, we believe that our executives and staff compensation sharing arrangement allows the companies to share costs yet attract and retain superior executives and staff. The cost sharing structure also allows each entity to maintain a much more cost effective structure than having separate staffing arrangements. Amounts reimbursed to Apple Fund Management include both compensation for personnel and “overhead” (office rent, utilities, employee benefits, office supplies, etc.) utilized by the companies.

Apple Ten Advisors and Apple Suites Realty are obligated to perform certain services for us. There is a written Advisory Agreement between us and Apple Ten Advisors and a written Property Acquisition/Disposition Agreement between us and Apple Suites Realty. However, Apple Ten Advisors and Apple Suites Realty have no employees, and instead use the services of another entity to fulfill their obligations to us. Apple Ten Advisors and Apple Suites Realty use (and will likely continue to use for the life of the program) the services of the employees of Apple Fund Management There is no written contract between either Apple Ten Advisors and Apple Suites Realty, on the one hand, and us, on the other hand that documents this arrangement. However, we believe that this “cost-sharing” and “employee sharing” arrangement results in significant efficiencies and cost savings for us, since Apple Ten Advisors and Apple Suites Realty are not required to maintain and pay a fixed set of personnel employed by them.

Our officers are also the officers of Apple Fund Management. Other than Glade M. Knight, the officers of Apple Fund Management, and of us, will not be compensated by us, except through compensation payable by us to Apple Ten Advisors and Apple Suites Realty.

Pursuant to our Advisory Agreement with Apple Ten Advisors and under the Property Acquisition/Disposition Agreement with Apple Suites Realty, we reimburse the costs of the employees of Apple Fund Management and other overhead costs (office rent, utilities, employee benefits, office supplies, etc.) used by Apple Ten Advisors and Apple Suites Realty, based on the amount of time such employees spend performing services for Apple Ten Advisors and Apple Suites Realty on our behalf. Thus, as indicated below, Apple Ten Advisors and Apple Suites Realty receive both “fee compensation” and “reimbursement compensation” from us. These companies use the “reimbursement compensation” paid by us to reimburse Apple Fund Management. As noted, Apple Fund Management employs our management team (under a “common paymaster” arrangement), but we bear the expenses (through such reimbursement arrangement) of the portion of each employee’s compensation, based on the amount of time devoted to Apple Ten Advisors and Apple Suites Realty on our behalf. As indicated, the “cost-sharing” and “employee sharing” arrangement results, we believe, in both substantial operational efficiency and cost savings to us.

The Advisory Agreement and the Property Acquisition/ Disposition Agreement enumerate the costs that are reimbursable by us to Apple Ten Advisors and Apple Suites Realty. Employees of Apple Fund Management do not maintain hourly time sheets to record the exact time spent on the affairs of each company. The “reimbursement compensation” payable by us to such entities equals each employee’s total compensation from Apple Fund Management times a percentage that reflects the percentage of estimated time expended by that employee to Apple Ten Advisors and Apple Suites Realty, on our behalf. The estimated time expended by an employee on our behalf to Apple Ten Advisors or Apple Suites Realty is determined in good faith by the employee and/or his or her supervisor. The reimbursement compensation also includes our allocable share of office “overhead”

44


expenses attributable to services rendered to us. The percentage used in determining the portion so allocated is approved by our Compensation Committee annually. In making such an evaluation, the Compensation Committee, with the assistance of our officers, considers all relevant facts related to our level of business activity and the extent to which we require the services of particular employees of Apple Fund Management. Additionally, each of the Apple Company’s compensation committees review annually the salaries of Apple Fund Management included in the allocation of employee costs.

The total amount paid to Apple Ten Advisors and Apple Suite Realty is in essence a cost plus a fee arrangement where we pay all direct costs of the services plus a fee for the services. The result of our payments to Apple Ten Advisors and Apple Suites Realty is income before their expenses not directly related to our Company. However, to the extent (based on time allocation of employees) that Apple Ten Advisors or Apple Suites Realty performs services for persons other than us, such as for Glade M. Knight individually, that person (such as Glade M. Knight individually or companies owned by him) is also required to reimburse Apple Fund Management and we do not bear any of those costs. Also, Apple Ten Advisors and Apple Suites Realty themselves bear (and we do not pay) a portion of the office “overhead” expenses, properly allocable to them or to Glade M. Knight, and these companies also incur direct costs for the operation of their business such as legal, accounting and travel costs, and which are not associated with their services on our behalf.

Thus, in summary, under the Advisory Agreement, we pay Apple Ten Advisors fee compensation and under the Property Acquisition/Disposition Agreement, we pay Apple Suites Realty fee compensation. In addition, under each such agreement, and in exchange for the services rendered under each such agreement, we pay each of Apple Ten Advisors and Apple Suites Realty reimbursement compensation for payments it makes to Apple Fund Management. More specifically, since they have no employees of their own, Apple Ten Advisors and Apple Suites Realty use the personnel and office space of Apple Fund Management to satisfy their respective obligations under the Advisory Agreement and Property Acquisition/Disposition Agreement, and are required to reimburse Apple Fund Management for such expense. They use the reimbursement compensation received from us under the Advisory Agreement and the Property Acquisition/Disposition Agreement to pay Apple Fund Management. Apple Fund Management is a subsidiary of Apple REIT Six and indirectly controlled by Glade M. Knight. Alternatively, we may elect that reimbursement amounts otherwise payable to Apple Ten Advisors and Apple Suites Realty shall instead be paid directly by us to Apple REIT Six, the parent of Apple Fund Management.

Glade M. Knight is chairman of the board of directors, chief executive officer and owner of ASRG, A6RG, A6A, A7A, A8A, A9A and A10A each of which have various agreements with us and Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine. During 2006, ASRG, A6RG, A6A and A7A received fee compensation of approximately $10.7 million from Apple REIT Six and Apple REIT Seven, and Apple REIT Six and Apple REIT Seven also paid approximately $2.3 million in reimbursement compensation on behalf of the previously mentioned companies. During 2007, ASRG, A6RG, A6A, A7A and A8A received fee compensation of approximately $14.2 million from Apple REIT Six, Apple REIT Seven and Apple REIT Eight, and Apple REIT Six, Apple REIT Seven and Apple REIT Eight also paid approximately $3.1 million in reimbursement compensation on behalf of the previously mentioned companies. During 2008, ASRG, A6RG, A6A, A7A, A8A and A9A received fee compensation of $32.2 million from Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine, and Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine also paid approximately $6.0 million in reimbursement compensation on behalf of the previously mentioned companies. During 2009, ASRG, A6RG, A6A, A7A, A8A and A9A received fee compensation of $11.0 million from Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine, and Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine also paid approximately $7.6 million in reimbursement compensation on behalf of the previously mentioned companies. During 2010, ASRG, A6RG, A6A, A7A, A8A, A9A and A10A received fee compensation of $20.6 million from Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine, and Apple REIT Six, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine and the Company also paid approximately $7.4 million in reimbursement compensation on behalf of the previously mentioned

45


companies. During 2011, ASRG, A6RG, A6A, A7A, A8A, A9A and A10A received fee compensation of approximately $20.0 million from Apple REIT Six, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine and the Company and Apple REIT Six, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine and the Company also paid approximately $8.4 million in reimbursement compensation on behalf of the previously mentioned companies.

The Compensation Committee of the board of directors will consider these agreements when developing the CEO’s compensation. As a result, our CEO may not be otherwise materially compensated by us through reimbursements to Apple Fund Management.

Property Management

Each of our properties is managed by a third-party manager or operator, who is paid a management fee. These property-level management fees to third-party managers or operators are in addition to the fee compensation and reimbursement compensation payable to Apple Ten Advisors and Apple Suites Realty under the Advisory Agreement and Property Acquisition/Disposition Agreement.

Share Incentive Awards

Our directors have received grants of options under the Director’s Plan. See “Compensation Discussions and Analysis—Stock Option Grants” for more information regarding these grants.

CONFLICTS OF INTEREST

General

We may be subject to various conflicts of interest arising from our relationship with Apple Ten Advisors, Apple Suites Realty and Glade M. Knight, our chairman and chief executive officer. Mr. Knight is currently the sole shareholder of Apple Ten Advisors and Apple Suites Realty. In addition, Mr. Knight, and our other executive officers, may have conflicts of interest in allocating time and attention among us, other programs previously organized by Mr. Knight (including Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine), and other programs which may be organized by Mr. Knight in the future. These prior programs have, and other ongoing programs organized by Mr. Knight in the future may have, investment objectives, policies and management and personnel needs similar or identical to ours.

Apple Ten Advisors and Apple Suites Realty and Glade M. Knight are not restricted from engaging for their own account in business activities of the type conducted by us. Occasions may arise when our interests conflict with those of one or more of Mr. Knight, Apple Ten Advisors, Apple Suites Realty, or other programs organized by Mr. Knight. Subject to certain limitations in our articles of organization and the Advisory Agreement, Apple Ten Advisors, Apple Suites Realty, Mr. Knight, and our other officers are accountable to us and our shareholders as fiduciaries, and consequently must exercise good faith and integrity in handling our affairs.

Apple Ten Advisors and Apple Suites Realty assist us in acquisition, organization, servicing, management and disposition of investments.

Although we do not currently anticipate entering into joint ventures with other entities, including Apple Ten Advisors or Apple Suites Realty, we may do so in order to obtain an interest in properties. These joint ventures may have divergent interests or goals which may be inconsistent with our goals. In addition, we are represented by the same legal counsel that represents Glade M. Knight, Apple Ten Advisors and Apple Suites Realty. To the extent a conflict arises regarding legal representation, Mr. Knight, Apple Ten Advisors and Apple Suites Realty will obtain separate independent counsel.

46


Conflicts Related to Fees, Compensation and Economic Benefits Paid or Incurred by us to Apple Ten Advisors, Apple Suites Realty and Glade M. Knight

The receipt of various fees and other economic benefits from us by Apple Ten Advisors, Apple Suites Realty or Glade M. Knight may result in potential conflicts of interest for persons, particularly Mr. Knight, who participate in decision making on behalf of both us and these other entities (or, in the case of Mr. Knight, on behalf of himself individually).

Conflicts With Respect To Commissions. For example, Apple Suites Realty receives a 2% commission upon each purchase by us of a property, and a commission of 2% upon each sale by us of a property. Therefore, its compensation will increase in proportion to the number of properties purchased and sold by us and the properties’ gross purchase and sale prices. Apple Suites Realty has an incentive to see that multiple properties are purchased and sold by us. In addition, since Apple Suites Realty’s commission is based on gross purchase price, it has an incentive to encourage us to purchase highly- leveraged properties in order to maximize commissions.

Under the Property Acquisition/Disposition Agreement, Apple Suites Realty is not entitled to a real estate commission upon our sale of a property to, or purchase of a property from, Apple Suites Realty or an affiliate of Apple Suites Realty (including any other program organized by Glade M. Knight), but Apple Suites Realty may, in such case, be entitled to payment by us of its direct costs in performing services pertaining to any such purchase or sale.

Conflicts With Respect To Asset Management Fees. Apple Ten Advisors’ asset management fee is a percentage of total proceeds received from time to time by us from the sales of our Units. Accordingly, it has an incentive to see that sales of Units are closed as quickly as possible by us.

Conflicts With Respect To Series B Convertible Preferred Shares. As discussed in the following subsection of this section and elsewhere in this prospectus, we have issued to Glade M. Knight all of the 480,000 outstanding Series B convertible preferred shares. Under certain circumstances, these Series B convertible preferred shares are convertible into common shares, and the Series A preferred shares terminate on conversion of the Series B convertible preferred shares (even if the value of any consideration received in the transaction resulting in conversion is less than the $11.00 priority distribution on liquidation associated with the Series A preferred shares). Events permitting conversion of the Series B convertible preferred shares include our sale or transfer of substantially all of our assets, stock or business, including a transfer through merger or similar business combination, and this includes a merger or similar business combination with another program organized (either previously or in the future) by Mr. Knight (although no such transaction is now contemplated), subject to required shareholder approval of the transaction. Thus, a merger or other business combination with another program organized by Mr. Knight could permit him to convert his Series B convertible preferred shares into common shares and cause the termination of the Series A preferred shares (and termination of the priority distribution in liquidation associated with the Series A preferred shares), subject to required shareholder approval of the transaction.

Series B Convertible Preferred Shares

We issued to Glade M. Knight all of the 480,000 outstanding Series B convertible preferred shares. Each Series B convertible preferred share was issued in exchange for $0.10 per share. There are no dividends payable on the Series B convertible preferred shares. Under limited circumstances these shares may be converted into common shares thereby resulting in dilution of the shareholders’ interest in us. If the Series B convertible preferred shares were converted into common shares, Mr. Knight would own approximately 4.45% to 5.98% of the total number of common shares outstanding following the conversion in exchange for an aggregate payment of $48,000. Upon conversion of the Series B convertible preferred shares into common shares, the Series A preferred shares will terminate and will no longer have the priority distribution in liquidation associated with the Series A preferred shares. Glade M. Knight is our chairman of the board and chief executive officer. As chairman of our board, Mr. Knight will chair meetings of the board and vote with our other directors. As chief executive officer, Mr. Knight also has in-depth knowledge of our day-to-day operations. In these roles Mr. Knight can influence both the timing and conversion of the Series B convertible preferred shares and the resulting dilution of our other shareholders; however any of these actions would require board approval.

47


As sole owner of Apple Ten Advisors, Glade M. Knight could terminate our Advisory Agreement at any time and without cause upon 60 days’ prior written notice. If the Advisory Agreement were terminated, no additional asset management fees would be payable by us to Apple Ten Advisors which, as noted, is wholly-owned by Glade M. Knight. In the unlikely event Mr. Knight were to terminate the agreement as the owner of Apple Ten Advisors, it would trigger the conversion of the Series B convertible preferred shares pursuant to our articles of incorporation. For a description of the Series B convertible shares see “Principal and Management Shareholders” and “Description of Capital Stock.”

Policies to Address Conflicts

The board of directors, our officers, Apple Ten Advisors and Apple Suites Realty are subject to the various conflicts of interest described below. Our board of directors does not have a conflicts committee. However, policies and procedures have been implemented to try to ameliorate the effect of potential conflicts of interest. By way of illustration, the bylaws place limitations on the terms of contracts between us and Apple Ten Advisors or Apple Suites Realty designed to ensure that these contracts are not less favorable to us than would be available from an unaffiliated party. Although some potential conflicts of interest are not easily susceptible to resolution, we expect conflicts of interest to be resolved through our bylaws and, if necessary, the consent of a majority of the independent directors.

Subject to certain limitations in our articles of incorporation and the Advisory Agreement, prospective shareholders are entitled to rely on the general fiduciary duties of the directors, our officers, Apple Ten Advisors and Apple Suites Realty as well as the specific policies and procedures designed to ameliorate potential conflicts of interest. Glade M. Knight, Apple Ten Advisors and Apple Suites Realty believe that general legal principles dealing with fiduciary and similar duties of corporate officers and directors, combined with specific contractual provisions in the agreements between us, on the one hand, and Apple Ten Advisors and Apple Suites Realty, on the other hand, will provide substantial protection for the interests of the shareholders. We do not believe that the potential conflicts of interests described in this prospectus have a material adverse effect upon our ability to realize our investment objectives.

Transactions with Affiliates and Related Parties

Under the bylaws, transactions between us and Apple Ten Advisors or Apple Suites Realty must be in all respects fair and reasonable to our shareholders. If any proposed transaction involves the purchase of property, the purchase must be on terms not less favorable to us than those prevailing for arms-length transactions concerning comparable property, and at a price to us no greater than the cost of the asset to the seller unless a majority of the directors determines that substantial justification for the excess exists. Examples of substantial justification might include, without limitation, an extended holding period or capital improvements by the seller which would support a higher purchase price.

Under the Property Acquisition/Disposition Agreement, Apple Suites Realty is not entitled to any real estate commission upon our sale of a property to, or purchase of a property from, Apple Suites Realty or an affiliate of Apple Suites Realty, but Apple Suites Realty will, in such case, be entitled to payment by us of its direct costs in performing services pertaining to any such purchase or sale.

Apple Ten Advisors and Apple Suites Realty receive compensation from us for providing many different services. The fees payable and expenses reimbursable are subject to the general limitation on operation expenses. The board of directors has oversight responsibility with respect to our relationships with Apple Ten Advisors and Apple Suites Realty and attempts to ensure that they are structured to be no less favorable to us than our relationships with unrelated persons or entities and are consistent with our objectives and policies. Otherwise, there are no limitations on the reimbursements we may make to Apple Ten Advisors or Apple Suites Realty for expenses they incur on our behalf.

48


Our board of directors has adopted a policy that requires a majority of the disinterested directors serving on our board of directors to review and approve in advance certain related party transactions. All of our executive officers, directors and employees are required to report to the board of directors any related party transaction prior to its implementation where the amount involved exceeds $120,000.

In addition, our board of directors has adopted a policy that requires any material agreement or arrangement between, or transaction that involves, our company, on the one hand, and our affiliates, on the other hand, be approved by a majority of the disinterested directors serving on our board of directors.

Any arrangement or agreement between us and any related parties described in this prospectus, including but not limited to the Advisory Agreement, Property Acquisition/Disposition Agreement and the issuance and conversion of the Series B convertible preferred shares, is not subject to approval by the independent directors of the Company. See “Compensation” for a discussion of the foregoing matters.

Interlocking Boards of Directors

Glade M. Knight and Kent W. Colton serve as directors on our board and concurrently serve as directors for Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and/or Apple REIT Six. In 2011, the aggregate director fees paid (including value of stock options issued in the respective company) to interlocking directors were (i) $— by Apple REIT Six; (ii) $65,372 by Apple REIT Seven; (iii) $63,674 by Apple REIT Eight; (iv) $— by Apple REIT Nine and $48,408 by the Company. Mr. Knight is chairman and chief executive officer of Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six and was chairman and chief executive officer of Apple Hospitality Five and Apple Hospitality Two. There may be instances where our properties are in the same markets as properties owned by Apple REIT Nine, Apple REIT Eight, Apple REIT Seven or Apple REIT Six. However, because the hotels are managed by third-party management companies and none of our directors plays a direct role in the management of the hotels for any of the companies, we do not believe that any director’s service as a director in these companies or these companies being in the same markets will present a material conflict of interest. The board endeavors to act in the best interests of each company.

Competition Between Us and Glade M. Knight and Other Companies Organized by Mr. Knight

Glade M. Knight or other companies organized by him, may form additional REITs, limited partnerships and other entities to engage in activities similar to ours. We have no contractual rights with Mr. Knight, such as a right of first refusal, that obligates him to sell any property to us or specifies a minimum standard of time and attention that he is required to devote to us.

The competing activities of Apple Ten Advisors and Apple Suites Realty and Glade M. Knight may involve conflicts of interest. For example, Mr. Knight is interested in the continuing success of previously formed ventures because he has existing fiduciary responsibilities to investors in those ongoing ventures, he may be personally liable on obligations of those ventures and he has equity and incentive interests in those ventures. Those ventures are Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six. All of these entities have similar investment objectives as we do and, in addition, may compete against us for properties.

Glade M. Knight, our chairman and chief executive officer, may from time to time become aware of properties of different types available for sale that could be purchased by us, Apple REIT Nine, Apple REIT Eight, Apple REIT Seven or Apple REIT Six. Mr. Knight would expect to recommend the possible acquisition of a particular property that might be available for purchase to one company or another company based upon their respective business plans, the markets in which the companies already own properties, the type of property involved and other relevant considerations, but there can be no assurance that these types of considerations will eliminate any potential conflict of interest presented by this situation.

We, Apple REIT Nine, Apple REIT Eight, Apple REIT Seven, Apple REIT Six and other companies that may in the future be formed by Glade M. Knight, may in certain circumstances

49


compete with one another in seeking to dispose of properties. This could occur when a potential purchaser of properties has an interest in properties or types of properties owned by more than one of these companies. Mr. Knight believes that the magnitude of this potential risk will be lessened by certain factors, including that the companies will differ in certain aspects in the types and locations of the assets they hold and will often, at any given time, be in different stages of their business or development plans. However, there is no assurance that a prospective purchaser would not make an attractive offer to more than one of these companies. The boards of directors of the companies to whom such a potential offer might be made would have to carefully evaluate all terms of the offer in light of the particular company’s overall business plan, including possible future alternative disposition or liquidation options.

While Mr. Knight does not expect that our offering of Units and our property acquisition phase will coincide with the offerings of interests in or the property acquisition activities of any other similar company organized by him, it is not possible to provide the same protection against potential conflicts of interest with respect to the sale or other disposition of properties by us and other companies organized by Mr. Knight.

As noted above, notwithstanding Glade M. Knight’s proposal that our offering of Units and our property acquisition phase will not coincide with the offering of interests in or the property acquisition activities of any other similar company organized by him, it is not possible to provide the same protection against potential conflicts of interest with respect to the sale or other disposition of properties by us and other companies organized by Mr. Knight. Mr. Knight believes that our ultimate property portfolio will be distinguishable to a degree from the property portfolios of Apple REIT Six, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine and other companies that may in the future be organized by Mr. Knight. In addition to the differences in the actual assets these various companies own, they may own different mixes of types of assets (for example, the distribution of assets within the categories of hotels, office buildings, and other broad property types) or may differ as to the mix of properties within subcategories of particular property types (such as extended-stay hotels as compared with full-service hotels) and/or the identity of the business franchise involved, and there may be differences in the mix of locations of the assets of the various companies. In addition, since we and each of the other companies will be, or were, organized at a different time, we and the other companies will, at any point, be in different stages of our business and development plans. Mr. Knight believes that, as a general rule, companies organized earlier will tend to seek to dispose of their properties earlier than companies organized later. However, there can be no assurance that this principle would always apply, and there can be no assurance that a potential purchaser of properties might not express an interest in properties owned by more than one of the companies organized by Mr. Knight. As noted, the boards of directors of the companies involved would have to carefully evaluate all terms of any offer in light of the companies’ overall business and development plans, but potential conflicts with respect to the possible disposition of properties by us and other companies that may be organized by Mr. Knight may not be subject to complete elimination.

Although our operational phase will overlap with the operational phases of other programs organized by Glade M. Knight (including, in particular, Apple REIT Nine), and it is possible that our disposition and liquidation phase could coincide or partially overlap with the disposition and liquidation phase of Apple REIT Nine or other programs organized by Mr. Knight, certain factors will tend to ameliorate the effect of the resulting potential conflicts of interest associated with these factors. First, both we and the advisor will endeavor to make certain that we and the advisor have sufficient personnel to devote time and attention to our needs, apart from the needs of any other related programs. Second, we expect that a large proportion (and perhaps most, or substantially all) of our properties will be managed by third-party management companies which are unaffiliated with Mr. Knight or the advisor. To the extent we engage third-party management companies, these companies will provide their own personnel who do not have the potential conflicts of interest in operational matters that may be experienced by Mr. Knight and our other executive officers. It is impossible to predict when other programs organized by Mr. Knight may seek to engage in a merger or similar sale transaction, or alternatively list their Units on a securities exchange. Apple Ten Advisors and our management and board of directors (as well as the advisory companies and

50


management and boards for the other programs) continually assess the feasibility and desirability of a merger or similar sale transaction, listing, or other action. However, many conditions and factors, including general economic conditions and the state of the economic sector(s) in which we and other such companies are engaged, make it impossible to estimate any specific time frames for any such action. Thus, as disclosed under “Prior REITs,” both Apple Hospitality Two and Apple Hospitality Five engaged in merger transactions in the same year (2007), which likely would not have been predicted in advance. Apple REIT Six reached its initial closing on April 29, 2004. Apple REIT Seven reached its initial closing on March 16, 2006. Apple REIT Eight reached its initial closing on July 27, 2007. Apple REIT Nine reached its initial closing on May 14, 2008. In each prospectus, Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine stated that within approximately seven years from the initial closing it may: (i) cause its common shares to be listed on a national securities exchange or quoted on the NASDAQ National Market System; (ii) dispose of all of its properties in a manner which will permit distributions to it shareholders of cash; or (iii) merge, consolidate or otherwise combine with a real estate investment trust or similar investment vehicle. As stated in the prospectuses of Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine, there is no assurance that any of such events will occur with the stated time period.

With respect to our disposition and liquidation phase, and the disposition and liquidation phases of other related programs, insofar as such matters are within our control, we would expect to take steps and implement procedures to minimize potential conflicts between us and other programs. Thus, for example, we would expect to engage third-party investment advisors to recommend when and how we or another program should seek to dispose of its properties or engage in some other liquidation or “exit” strategy. We would endeavor to avoid having a situation where we and another program are simultaneously engaged in an attempted disposition or liquidation strategy at the same time if this would present a potential conflict of interest. This might mean, for example, that we would defer disposition of our properties or other “exit” strategy until after another previously-organized program had implemented its disposition or exit strategy. However, depending upon the facts, the amelioration of potential conflicts of interest could take other forms. For example, if our board and management deemed it advisable, it is possible that we and another program could simultaneously be offered for sale in a proposed single transaction. This could occur, for example, if our ultimate size is relatively small and simultaneous sale of the company and another program to a single purchaser could maximize benefits to the shareholders of both programs.

If we undertake a stock exchange listing of the Units or a disposition of our properties, or a merger or similar business combination involving us, or a similar transaction, we would report on and explain the transaction to the extent required by applicable securities laws and regulations. However, we are under no legal obligation to undertake any transaction of the type described at any particular time. Thus, we would not expect to disclose in a formal way our not taking an action of the type described, unless required at that time by law. As a practical matter, however, we communicate with our shareholders through quarterly and annual reports to shareholders and we would expect to keep our shareholders informed of our decisions and reasons with respect to not taking an action of the type described if that course of action is deemed by us to be appropriate to us and the shareholders.

Our board and management are sensitive to the various potential conflicts of interest associated with the simultaneous operation of multiple programs with similar investment objectives, policies and strategies. In analyzing potential conflict of interests, our board and management considers factors of the type discussed in this section of the prospectus, their legal obligations to our shareholders, and the advice of independent experts, including investment advisors and legal counsel. However, shareholders must assume that not every potential conflict of interest can be eliminated. For example, we do not necessarily control our disposition or “exit” phase. A third-party purchaser could make unsolicited offers for us and another program at the same time. In such event, as noted, the boards of directors of the companies involved would have to carefully evaluate all terms of any offer in light of the respective companies’ overall business and development plans, including the stage of development of the company, its current plans for ongoing continued operations, the likelihood of alternative exit strategies in the future, the advice of third-party advisors and other

51


factors. Management believes that the policies and procedures described in this section to ameliorate potential conflicts of interest are sufficient to adequately safeguard the interests of our shareholders, but our shareholders must be aware that there exist these other programs, and there may be organized in the future additional programs, that are substantially similar to us and that are under related management.

In connection with evaluating potential conflicts of interest involving us and our officers and directors, prospective investors should also note that use of the same management personnel for us and other programs may result in certain cost-efficiencies and advantages in management experience and expertise that might not be present if we and each other program organized or owned by Glade M. Knight had its own distinct set of officers and other management personnel. This is because our officers and management personnel have experience working for several different companies involved in similar businesses, and the cost of employing these persons is spread among multiple companies.

Glade M. Knight, and companies owned by him, are entitled to certain fees and other economic benefits in connection with the ultimate sale or other disposition of properties. Mr. Knight may be entitled to fees and benefits from future companies that he may organize when those future companies dispose of their properties. The fee and benefit structure offered by our Company to Mr. Knight is the same in format to the fee and benefit structure in place with respect to Mr. Knight (and companies owned by him) from Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine.

Although our fee structure is the same as the fee structure with respect to Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine, it is possible that based upon our ultimate size relative to these other companies or the perceived profitability upon the sale of our properties as compared with the sale of the properties of the other companies, Glade M. Knight could have a personal interest in seeking to dispose of the properties of another company organized by him in preference to the disposition of our properties. It is also possible that Mr. Knight may organize other companies in the future and that he may have a personal interest in having one of those companies dispose of its properties in preference to our disposition of our properties either based on the same sort of consideration, or because the fee structure with respect to a company formed after us is more favorable to Mr. Knight than the fee structure afforded to him and companies owned by him by our Company. We have no agreement with Mr. Knight limiting his ability to form other companies in the future that may be similar to ours or that limit the type and amount of compensation payable to him (or companies owned by him) by any future companies that he may organize.

Competition for Management Services

Glade M. Knight is, and in the future will be, an officer or director of one or more entities, which engage in the brokerage, sale, operation, or management of real estate. These entities include Apple REIT Nine, Apple REIT Eight, Apple REIT Seven and Apple REIT Six. Accordingly, Mr. Knight may have conflicts of interest in allocating management time and services between us and those entities. None of the organizational documents for us, Apple REIT Nine, Apple REIT Eight, Apple REIT Seven, or Apple REIT Six specify a minimum standard of time and attention that Mr. Knight is required to provide to each of those entities.

In addition, our other executive officers serve as officers of, and devote time to, other companies previously organized by Glade M. Knight (including Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine), and may serve as officers of, and devote time to, other companies which may be organized by Mr. Knight in the future. None of these persons is required to devote any minimum amount of time and attention to us as opposed to the other companies.

Glade M. Knight believes that, collectively, he and our other executive officers will have sufficient time to provide management and other services both to us and to other companies Mr. Knight has organized, or may in the future organize. If it became necessary, Mr. Knight could seek to hire additional personnel to provide management and other services, but there can be no assurance that he would be successful in hiring additional personnel, if necessary.

52


INVESTMENT OBJECTIVES AND POLICIES

The following is a discussion of our current policies with respect to investments, financing and other activities. These policies have been established by our management. These policies may be amended or waived from time to time at the discretion of our board of directors without a vote of our shareholders. No assurance can be given that our investment objectives will be attained.

Investments in Real Estate or Interests in Real Estate

Our primary business objective is to maximize shareholder value by achieving long-term growth in cash distributions to our shareholders. We are pursuing this objective by acquiring hotels and other income-producing real estate in metropolitan areas throughout the United States for long-term ownership. We generally intend to acquire fee ownership of our properties. We seek to maximize current and long-term net income and the value of our assets. Our policy is to acquire assets where we believe opportunities exist for acceptable investment returns. We expect to pursue our objectives primarily through the direct ownership of hotels and other income-producing real estate assets in metropolitan areas throughout the United States.

Although we are not currently doing so, we also may participate with other entities in property ownership, through joint ventures or other types of common ownership. We will only enter into joint ventures to the extent that such ventures are consistent with our goal of acquiring hotels and other income-producing real estate, which we believe will provide acceptable investment returns. Equity investments may be subject to existing mortgage financing and other indebtedness which have priority over our equity interests. We do not anticipate investing in the securities of other issuers for the purpose of exercising control. It is our policy that we will not offer securities in exchange for property.

It is possible that we may purchase properties from affiliates. We have no limitation on the portion of our portfolio that may be purchased from our affiliates. However, we have no present plan or intention to purchase properties from any affiliates.

It is our policy that we will not sell, transfer or lend any assets or property to any of our affiliates, including without limitation Apple Ten Advisors, Apple Suites Realty, Apple REIT Six, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine and Glade Knight, or purchase, borrow or otherwise acquire any assets or property from any of our affiliates, including Apple Ten Advisors, Apple Suites Realty, Apple REIT Six, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine and Glade Knight, directly or indirectly, unless the transaction comes within one of the following exceptions:

 

 

 

 

the transaction consists of the acquisition of property or assets at our formation or shortly thereafter, and is fully disclosed in this prospectus; or

 

 

 

 

the transaction is a borrowing or lending of money by us on terms not less favorable than those then prevailing for comparable arms-length borrowings; or

 

 

 

 

the transaction consists of the acquisition by us of federally insured or guaranteed mortgages at prices not exceeding the currently quoted prices at which the Federal National Mortgage Association is purchasing comparable mortgages; or

 

 

 

 

the transaction consists of the acquisition of other mortgages if an appraisal is obtained concerning the underlying property and on terms not less favorable to us than similar transactions involving unaffiliated parties; or

 

 

 

 

the transaction consists of the acquisition by us of other property at prices not exceeding the fair value thereof as determined by an independent appraisal.

All of the above transactions and all other transactions (other than the entering into, and the initial term under, the Advisory Agreement and the property acquisition/disposition agreement, each of which agreement is specifically disclosed in this prospectus), whether the transaction involves the transfer of property, the lending of money or the rendition of any services, in which any persons have any direct or indirect interest will be permitted only if:

53


 

 

 

 

the transaction has been approved by the affirmative vote of the majority of the independent directors; and

 

 

 

 

if the transaction involves the purchase or acquisition of property, the purchase or acquisition from any person is on terms not less favorable to us than those then prevailing for arms-length transactions concerning comparable property (based upon a determination of a majority of the directors, including a majority of the independent directors); and

 

 

 

 

each transaction is in all respects on the terms at the time of the transaction and under the circumstances then prevailing, fair and reasonable to our shareholders and, in the case of a purchase or acquisition of property, at a price to us no greater than the cost of the asset to other persons (based upon a determination of a majority of the directors, including a majority of the independent directors) or, if the price to us is in excess of such cost, then substantial justification for such excess must exist and such excess is not unreasonable (based upon a determination of a majority of the directors, including a majority of the independent directors).

However, notwithstanding any of the preceding conditions (which are set forth in our bylaws), we may both make and accept assignments of purchase agreements or other contracts to or from any of our affiliates, without the need to comply with any of the provisions set forth above, so long as there is no consideration for the assignment other than the reimbursement to the assigning party of the assigning party’s direct costs related to the agreement or contract. The intention of this provision is to allow us to either make or accept the assignments of contracts where we or an affiliate of ours initially enters into such contract and it is later determined that the contract should be assigned to (or by) us without any payment of compensation or profit for the assignment, other than reimbursement of actual direct costs.

We will not invest in joint ventures with either Apple Ten Advisors or any affiliate of Apple Ten Advisors, unless:

 

 

 

 

the transaction has been approved by the affirmative vote of a majority of the independent directors;

 

 

 

 

the transaction is on terms not less favorable to us than those then prevailing for comparable arms-length transactions (based upon a determination of a majority of the directors, including a majority of the independent directors); and

 

 

 

 

each such transaction is in all respects on such terms at the time of the transaction and under the circumstances then prevailing, fair and reasonable to our shareholders and on substantially the same terms and conditions as those received by other joint venturers (based upon a determination of a majority of the directors, including a majority of the independent directors).

We reserve the right to dispose of any property if we determine the disposition of a property is in our best interests and the best interests of our shareholders.

Borrowing Policies

We intend to purchase our properties using cash from the proceeds of this offering. In certain circumstances, we may purchase properties using interim borrowings, to be repaid from the proceeds of this offering, if we believe that such action is in the best interest of us and our shareholders. However, at this time, we have no specific plans to use interim borrowings to purchase properties. Prospective investors should assume that the rate at which proceeds from this offering are raised will generally correspond to the rate at which we will acquire properties.

However, we are not required by our articles of incorporation or bylaws to hold our properties on an unleveraged basis. When advisable, we may incur medium or long-term debt secured by our properties. One purpose of borrowing could be to permit our acquisition of additional properties through the “leveraging” of shareholders’ equity contributions. Alternatively, we might find it necessary to borrow to permit the payment of operating deficits at properties we already own. Furthermore, properties may be financed or refinanced if the board of directors deems it in the best interests of shareholders because, for example, indebtedness can be incurred on favorable terms and

54


the incurring of indebtedness is expected to improve the shareholders’ after-tax cash return on invested capital.

Loans we obtain may be evidenced by promissory notes secured by mortgages on our properties. As a general policy, we would seek to obtain mortgages securing indebtedness which encumber only the particular property to which the indebtedness relates, but recourse on these loans may include all of our assets. If recourse on any loan incurred by us to acquire or refinance any particular property includes all of our assets, the equity in other properties could be reduced or eliminated through foreclosure on that loan. As of March 31, 2012, six of our properties have mortgages that pre-dated our purchase, are secured by the hotels, and were assumed by our purchasing subsidiary.

Subject to the approval of the board of directors, we may borrow from Apple Ten Advisors or Apple Suites Realty. Those entities are under no obligation to make any loans, however. Any loans made by Apple Ten Advisors or Apple Suites Realty must be approved by a majority of the directors as being fair, competitive and commercially reasonable and no less favorable to us than loans between unaffiliated lenders and borrowers under the same circumstances.

Our bylaws prohibit us from incurring debt if the debt would result in aggregate debt exceeding 100% of “Net Assets,” defined generally to mean assets at cost, before subtracting liabilities, unless the excess borrowing is approved by a majority of the directors and disclosed to the shareholders as required by the bylaws. The bylaws also prohibit us from allowing aggregate borrowings to exceed 50% of our “Adjusted Net Asset Value,” defined generally to mean assets at fair market value, before subtracting liabilities, subject to the same exception described in the previous sentence. In addition, the bylaws provide that the aggregate borrowings must be reasonable in relation to our Net Assets and must be reviewed quarterly by the directors. Subject to the limitations on the permitted maximum amount of debt, there is no limitation on the number of mortgages or deeds of trust which may be placed against any particular property.

Assuming the directors approve, we may borrow in excess of the debt limitations described in the previous paragraph in order to acquire a portfolio of properties. If attainable, the acquisition of a portfolio of properties early in our existence would, in the opinion of our management, provide us with greater ability to acquire other properties in the future as proceeds from the sale of Units are received and provide us with economies of scale from the outset. We have no current plan or intention to make loans to other persons or entities.

Reserves

A portion of the proceeds of this offering will be reserved to meet working capital needs and contingencies associated with our operations. We will initially allocate not less than 0.5% of the proceeds of the offering to our working capital reserve. As long as we own any properties, we will retain as working capital reserves an amount equal to at least 0.5% of the proceeds of the offering, subject to review and re-evaluation by the board of directors. If reserves and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties.

Sale Policies

We are under no obligation to sell our properties, and we currently anticipate that we will hold our properties for a minimum of seven years. However, a sale of one or more properties may occur at any time if Apple Ten Advisors deems it advisable for us based upon current economic considerations, and the board of directors concurs with the decision. In deciding whether to sell a property, Apple Ten Advisors will also take into consideration factors such as: the amount of appreciation in value, if any, to be realized; federal, state and local tax consequences; the possible risks of continued ownership; and the anticipated advantages to be gained for the shareholders from sale of a property versus continuing to hold property.

Currently, we expect that within approximately seven years from the initial closing, which occurred January 27, 2011, we will:

55


 

 

 

 

cause the common shares to be listed on a national securities exchange;

 

 

 

 

dispose of all of our properties in a manner which will permit distributions to our shareholders of cash; or

 

 

 

 

merge, consolidate or otherwise combine with a real estate investment trust or similar investment vehicle.

The taking of any of these actions would be conditioned on the board of directors determining the action to be prudent and in the best interests of the shareholders. Virginia law and our articles of incorporation state that a majority of the common shares then outstanding and entitled to vote is required to approve the sale of all or substantially all our assets. However, we are under no obligation to take any of these actions, and these actions, if taken, might be taken after the seven-year period mentioned above.

If we undertake a transaction of the type described above, we would report on and explain the transaction to the extent required by applicable securities laws and regulations. However, since we are under no legal obligation to undertake any such transaction, we would not expect to disclose in a formal way our not taking any action of the type described above, unless required at that time by law. As a practical matter, however, we communicate with our shareholders through quarterly and annual reports to shareholders and we would expect to keep our shareholders informed of our decisions and reasons with respect to not taking an action of the type described above if that course of action is deemed by us to not be appropriate to us and the shareholders.

Underwriting Policy

We do not intend to underwrite securities of other issuers, including securities of Apple REIT Six, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine, or any of our affiliates.

Our bylaws place certain restrictions on the type of activities we conduct. Specifically, our bylaws state that we will not:

 

 

 

 

invest more than 10% of our total assets in unimproved real property or mortgage loans on unimproved real property;

 

 

 

 

invest in commodities or commodity future contracts or effect short sales of commodities or securities, except when done solely for hedging purposes;

 

 

 

 

invest in or make mortgage loans on property unless we obtain a mortgagee’s or owner’s title insurance policy or commitment as to the priority of the mortgage or the condition of the title;

 

 

 

 

invest in contracts for the sale of real estate unless they are recordable in the chain of title;

 

 

 

 

make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans outstanding on the property (at the time we make or invest in our mortgage loan), including our loans, would exceed 85% of the appraised value of the property;

 

 

 

 

make or invest in junior mortgage loans, provided that this and the preceding limitation will not apply to us taking back secured debt in connection with the sale of any property;

 

 

 

 

issue debt securities unless the historical debt service coverage (in the most recently completed fiscal year) as adjusted for known changes is sufficient to properly service the higher level of debt or unless our cash flow (for the last fiscal year) excluding extraordinary, nonrecurring items, is sufficient to cover the debt service on all debt securities to be outstanding;

 

 

 

 

invest more than 20% of our total assets in the equity securities of any non-governmental issuer, including other REITs or limited partnerships for a period in excess of 18 months;

 

 

 

 

issue equity securities on a deferred payment basis or other similar arrangement;

 

 

 

 

incur any indebtedness, secured or unsecured, which would result in an aggregate amount of indebtedness in excess of 100% of Net Assets (before subtracting any liabilities), unless any excess borrowing over such 100% level shall be approved by a majority of the independent

56


 

 

 

 

directors and disclosed to the shareholders in our next quarterly report, along with justification for such excess;

 

 

 

 

allow our aggregate borrowings to exceed 50% of our adjusted Net Asset Value (before subtracting any liabilities), unless any excess borrowing over the 50% level is approved by a majority of the independent directors and disclosed to the shareholders in our next quarterly report, along with justification for the excess;

 

 

 

 

invest in single-family residential homes, secondary homes, nursing homes, gaming facilities or mobile home parks;

 

 

 

 

engage in any short sale, underwrite or distribute, as an agent, securities issued by others, or engage in trading, as compared with investment activities; and

 

 

 

 

acquire securities in any company holding investments or engaging in activities prohibited by the Internal Revenue Code of 1986, as amended, or Virginia law.

Changes in Objectives and Policies

Subject to the limitations in the articles of incorporation, the bylaws and the Virginia Stock Corporation Act, the powers of our Company will be exercised by or under the authority of, and the business and affairs of our Company will be controlled by, the board of directors. The board of directors also has the right and power to establish policies concerning investments and the right, power and obligation to monitor our procedures, investment operations and performance of our Company.

In general, the articles of incorporation and the bylaws can be amended only with the affirmative vote of a majority of the outstanding common shares, except that the bylaws may be amended by the board of directors if necessary to comply with the real estate investment trust provisions of the Internal Revenue Code or with other applicable laws, regulations or requirements of any state securities regulator. The bylaws can also be amended by the board of directors to: