Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K



ý

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2009oro

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


Commission File Number 000-52585



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



VIRGINIA

20-2879175(State of Organization)

(I.R.S. Employer Identification Number)814 EAST MAIN STREET
RICHMOND, VIRGINIA(Address of principal executive offices)

23219(Zip Code)


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



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

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

Units (Each Unit is equal to one common share, no par value and one Series A preferred share)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o    No o

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

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 definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer oNon-accelerated filer ý(Do not check if a smaller reporting company)

Smaller reporting company o


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

There is currently no established public market on which the Company's common shares are traded. Based upon the price of Apple REIT Seven, Inc.'s common
equity last sold, which was $11, on June 30, 2009, the aggregate market value of the voting common equity held by non-affiliates of the registrant on such date was $1,030,087,000.
The Company does not have any non-voting common equity.

Number
of registrant's common shares outstanding as of February 28, 2010: 93,124,950

Documents Incorporated by Reference.

The
information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the registrant's definitive proxy statement for the
annual meeting of shareholders to be held on May 6, 2010.



---



Table of Contents

APPLE REIT SEVEN, INC.

FORM 10-K

Index



PagePart IItem 1.

Business


3Item 1A.

Risk Factors


7Item 1B.

Unresolved Staff Comments


10Item 2.

Properties


10Item 3.

Legal Proceedings


12Item 4.

(Removed and Reserved)Part IIItem 5.

Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities


13Item 6.

Selected Financial Data


15Item 7.

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


17Item 7A.

Quantitative and Qualitative Disclosures about Market Risk


29Item 8.

Financial Statements and Supplementary Data


30Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures


52Item 9A.

Controls and Procedures


52Item 9B.

Other Information


52Part IIIItem 10.

Directors, Executive Officers and Corporate Governance


53Item 11.

Executive Compensation


53Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters


53Item 13.

Certain Relationships and Related Transactions, and Director Independence


53Item 14.

Principal Accounting Fees and Services


53Part IVItem 15.

Exhibits, Financial Statement Schedules


54Signatures


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

2

---





Table of Contents

PART I

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

Item 1.    Business

Apple REIT Seven, Inc. is a Virginia corporation formed to invest in hotels and other selected real estate. Initial
capitalization occurred on May 26, 2005, with its first investor closing under its best efforts offering on March 15, 2006. The Company acquired its first property on April 27,
2006. As of December 31, 2009, the Company owned 51 hotel properties operating in eighteen states. The best efforts offering was completed in July 2007.

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

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

Website Access

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

3

---



Table of Contents

Business Objectives

The Company's acquisition strategy, substantially complete as of September 2008, included purchasing hotels in developed markets with
strong brand recognition, high levels of customer satisfaction and the potential for cash flow growth. The Company's primary objective is to enhance shareholder value by increasing funds from
operations and cash available for distributions through internal growth and selective hotel renovation. The internal growth strategy includes utilizing the Company's asset management expertise to
improve the quality of the Company's hotels by aggressively managing room rates, partnering with industry leaders in hotel management, thereby improving hotel revenue and operating performance, and
franchising the hotels with leading brands, thereby improving the performance of an individual hotel in its local market. When cost effective, the Company renovates its properties to increase its
ability to compete in particular markets. The Company believes its planned renovations and strong asset management of its portfolio will continue to improve each hotel's performance in their
individual market, although there can be no assurance of these results.

Financing

The Company has nine notes payable that were assumed with the acquisition of hotels. These notes have a total outstanding balance of
$103.8 million at December 31, 2009, maturity dates ranging from January 2013 to June 2016, and interest rates ranging from 5.85% to 6.95%. The Company also has an unsecured line of
credit facility for a maximum aggregate commitment by the lender, a commercial bank, of $30 million. The line of credit facility, which matures in April 2011, had an outstanding balance at
December 31, 2009 of $11.5 million, and its interest rate was 3.15%. The Company anticipates that cash flow from operations, credit availability and cash balances on hand will be
adequate to meet substantially all of its liquidity requirements, including capital expenditures, debt service and distributions to shareholders. The Company will pursue additional financing in 2010
so that it can make distributions in excess of distributions required to maintain its REIT status. Historically, the Company has maintained a relatively stable monthly dividend rate instead of raising
and lowering the distribution with varying economic cycles. With the depressed financial results of the Company and the lodging industry, the Company will attempt to utilize additional financing to
achieve this objective. Although the Company has relatively low levels of debt, there can be no assurances it will be successful with this strategy and may need to reduce its distribution to levels
required to maintain its REIT status. The Company's bylaws require board approval and review of any debt financing obtained by the Company.

Industry and Competition

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

Hotel Operating Performance

At December 31, 2009, the Company owned seven Hilton Garden Inn hotels, seven Residence Inn hotels, ten Courtyard hotels, twelve
Homewood Suites hotels, three Fairfield Inns, four SpringHill Suites, four TownePlace Suites, three Hampton Inn hotels, and one full-service Marriott hotel. They are

4

---



Table of Contents

located
in eighteen states and, in aggregate, consist of 6,424 rooms. The Company's portfolio of hotels is unchanged from December 31, 2008.

Room
revenue for these hotels totaled $174.0 million for the year ended December 31, 2009, and the hotels achieved average occupancy of 67%, ADR of $111 and RevPAR of $74.
Room revenue for the year ended December 31, 2008 totaled $195.4 million, and the Company's hotels achieved average occupancy of 71%, ADR of $120 and RevPAR of $86 for their period of
ownership by the Company during the year ended December 31, 2008. Hotel performance is impacted by many factors including the economic conditions in the United States as well as each locality.
Due to a general decline in economic conditions throughout the United States, the financial results of the Company's hotels did not meet expectations during 2009. It is anticipated the properties'
performance will continue to be below comparable pre-recession operating periods until general economic conditions improve. The Company will continue to aggressively pursue market
opportunities to improve revenue and aggressively pursue cost controls to improve results during and after the economic downturn. Although it is not possible to predict when economic conditions will
improve or their impact on the hotel industry, many industry analysts forecast 0-5% declines in RevPAR in 2010, as compared to 2009. While reflecting the impact of declining economic
activity, the Company's hotel performance as compared to other hotels within each individual market has generally met expectations for the
period held. The Company's 2009 average RevPAR index was 123.8 with the market average being 100. The RevPAR index compares an individual hotel's RevPAR to the average RevPAR of its local market and
is provided by Smith Travel Research, Inc.® an independent company that tracks historical hotel performance in most markets throughout the world.

During
the period from the Company's initial formation on May 20, 2005 through April 26, 2006, the Company owned no properties, had no revenue exclusive of interest income,
and was primarily engaged in capital formation activities. Operations commenced on April 27, 2006 with the Company's first property acquisition. A total of 18 hotels were purchased in 2006. The
Company purchased an additional 26 hotels during 2007, and seven hotels during 2008.

Management and Franchise Agreements

Each of the Company's 51 hotels are operated and managed, under separate management agreements, by affiliates of one of the following
companies: Marriott, Hilton, Western, LBA, Dimension, WLS, or Inn Ventures. The agreements provide for initial terms ranging from one to twenty years. Fees associated with the agreements generally
include the payment of base management fees, incentive management fees, accounting fees, and other fees for centralized services which are allocated among all of the hotels that receive the benefit of
such services. Base management fees are calculated as a percentage of gross revenues. Incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the
Company, as defined in the management agreements. The Company has the option to terminate the management agreements if specified performance thresholds are not satisfied. During the years ended
December 31, 2009, 2008 and 2007, the Company incurred approximately $6.1 million, $7.4 million and $4.8 million, respectively, in management fees.

Western,
LBA, WLS, Dimension and Inn Ventures are not affiliated with either Marriott or Hilton, and as a result, the hotels they manage (as well as the two hotels managed by Promus
Hotels, Inc., which is an affiliate of Hilton) were required to obtain separate franchise agreements with each respective franchisor. The Hilton franchise agreements provide for initial terms
ranging between 10 to 20 years. Fees associated with the Hilton agreements generally include the payment of royalty fees and program fees based on room revenues. The Marriott franchise
agreements provide for an initial term of between six and 20 years. Fees associated with the Marriott agreements include the payment of royalty fees, marketing fees, reservation fees and a
communications support fee based on

5

---



Table of Contents

room
revenues. During the years ended December 31, 2009, 2008 and 2007, the Company incurred approximately $7.8 million, $8.3 million and $5.3 million, respectively, in
franchise fees.

Maintenance and Renovation

The Company's hotels have an ongoing need for renovation and refurbishment. Under various hotel management agreements, the Company has
agreed to fund expenditures for periodic repairs, replacement or refurbishment of furniture, fixtures and equipment for the hotels in an amount equal to a certain percentage of gross revenues. In
addition, other capital improvement projects may be directly funded by the Company. During 2009 and 2008, the Company's capital expenditures were approximately $14.0 million and
$26.1 million, respectively.

Employees

During 2009, all employees involved in the day-to-day operation of the Company's hotels were employed by third
party management companies engaged pursuant to the hotel management agreements. The Company utilizes, through an advisory agreement for corporate and strategic support, Apple Seven
Advisors, Inc. ("ASA") to provide management of the Company and its assets. Since October 2007, ASA has utilized Apple REIT Six, Inc. to provide corporate and strategic support and
management services for the Company. From May 2007 through October 2007, ASA utilized Apple Hospitality Five, Inc. to provide these services. Prior to May 2007, ASA utilized Apple Hospitality
Two, Inc. to provide such services.

Environmental Matters

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

Related Parties

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

The
Company has a contract with Apple Suites Realty Group ("ASRG") to provide brokerage services for the acquisition and disposition of the Company's real estate assets. ASRG is wholly
owned by the Company's Chairman and Chief Executive Officer, Glade M. Knight. In accordance with the contract, ASRG is paid a fee of 2% of the gross purchase price of any acquisitions or gross sale
price of any dispositions of real estate investments, subject to certain conditions. As of December 31, 2008, payments to ASRG for services under the terms of this contract have totaled
approximately $18.0 million since inception, which were capitalized as a part of the purchase price of the hotels. No fees were incurred during 2009 under this contract.

The
Company is party to an advisory agreement with ASA pursuant to which ASA provides management services to the Company. An annual fee ranging from .1% to .25% of total equity proceeds
received by the Company, in addition to certain reimbursable expenses, are payable for these services. Prior to May 2007, ASA used Apple Hospitality Two, Inc. to provide such services. From May
2007 through October 2007, ASA utilized Apple Hospitality Five, Inc. to provide these services. Beginning in October 2007, ASA has utilized Apple REIT Six, Inc. to provide corporate and
strategic support and management services for the Company. During the years ended December 31, 2009, 2008

6

---



Table of Contents

and
2007, the Company incurred fees and expenses totaling approximately $3.0 million, $3.4 million and $2.3 million, respectively.

Through
similar contractual arrangements, Apple REIT Six, Inc. provides support services to ASRG, ASA, Apple Six Advisors, Inc. ("A6A"), Apple Eight Advisors, Inc.
("A8A"), Apple Nine Advisors, Inc. ("A9A"), Apple REIT Eight, Inc. and Apple REIT Nine, Inc. A6A provides day to day advisory and administrative functions for Apple REIT
Six, Inc. A8A provides day to day advisory and administrative functions for Apple REIT Eight, Inc. A9A provides day to day advisory and administrative functions for Apple REIT
Nine, Inc. ASRG, ASA, A6A, A8A and A9A are 100% owned by Glade Knight, the Company's Chairman and Chief Executive Officer.

Including
ASRG, ASA, A6A, A8A and A9A discussed above, Mr. Knight is also Chairman and CEO of Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT
Nine, Inc. Members of the Company's
Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

The
Company is a member of Apple Air Holding, LLC ("Apple Air") which owns two Lear jets. The other members of Apple Air are Apple REIT Six, Inc., Apple REIT
Eight, Inc. and Apple REIT Nine, Inc.



Item 1A.    Risk Factors

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

Hotel Operations

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



General Economic Conditions

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

Current General Economic Recession and Slowdown in the Lodging Industry

A recessionary environment, and uncertainty over its depth and duration, continues to have a negative impact on the lodging industry.
There is some general consensus among economists that the economy in the United States is emerging from the recessionary environment of 2009, but high

7

---



Table of Contents

unemployment
levels and sluggish business and consumer travel trends remain; as a result the Company continues to experience reduced demand for hotel rooms as compared to prior years. Accordingly,
financial results have been impacted by the economic slowdown, and future financial results and growth could be further harmed until a more expansive national economic environment is prevalent.

Hospitality Industry

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

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

Seasonality

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

Franchise Agreements

The Company's wholly-owned taxable REIT subsidiaries operate all of the properties pursuant to franchise or license agreements with
nationally recognized hotel brands. These franchise agreements contain specific standards for, and restrictions and limitations on, the operation and maintenance of the Company's properties in order
to maintain uniformity within the franchisor system. These standards could potentially conflict with the Company's ability to create specific business plans tailored to each property and to each
market.

Competition

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

Transferability of Shares

There is and will be no public trading market for the common shares and the Series A preferred shares for an indefinite period
of time, if ever. Therefore, the Units are and will be highly illiquid and

8

---



Table of Contents

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

Qualification as a REIT

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

Distributions to Shareholders

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

The
Company's 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. The Company anticipates that it may need to utilize debt, offering proceeds and cash from operations to meet this objective. The
Company evaluates the distribution rate on an ongoing basis and may make changes at any time if the Company feels the rate is not appropriate based on available cash resources.

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

Financing Risks

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

9

---





Table of Contents



Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

As of December 31, 2009, the Company owned 51 hotels with an aggregate of 6,424 rooms, consisting of the following:

Brand

Total by
Brand

Number of
RoomsHilton Garden Inn


7


892Homewood Suites


12


1,374Courtyard


10


1,255Residence Inn


7


923Hampton Inn


3


355Fairfield Inn


3


221SpringHill Suites


4


593TownePlace Suites


4


401Marriott


1


410Total


51


6,424


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

10

---



Table of Contents

Real Estate and Accumulated Depreciation
As of December 31, 2009
(dollars in thousands)

Subsequently
CapitalizedInitial CostBldg.
Imp. & FF&E

Total
Gross Cost



Date of
Construction

Date
Acquired

Depreciable
Life

# of
RoomsCity

State

Brand

Encumbrances

Land

Bldg./FF&E

Acc. Deprec.Montgomery

AL

Homewood Suites

$


$
978

$
10,032

$
268

$
11,278

$
(1,160
)

2004

Aug-06


3 - 39 yrs.


91Montgomery

AL

Hilton Garden Inn





765


9,960


459


11,184


(1,151
)

2003

Aug-06


3 - 39 yrs.


97Troy

AL

Hampton Inn





502


5,867


96


6,465


(713
)

2003

Aug-06


3 - 39 yrs.


82Auburn

AL

Hilton Garden Inn





643


9,879


1,437


11,959


(1,417
)

2001

Aug-06


3 - 39 yrs.


101Huntsville

AL

Hilton Garden Inn





740


9,887


94


10,721


(1,162
)

2005

Aug-06


3 - 39 yrs.


101Huntsville

AL

Homewood Suites





1,092


10,889


41


12,022


(1,244
)

2006

Oct-06


3 - 39 yrs.


107Prattville

AL

Courtyard





1,170


8,407


5


9,582


(814
)

2007

Apr-07


3 - 39 yrs.


84Dothan

AL

Fairfield Inn





570


4,243


30


4,843


(352
)

1993

May-07


3 - 39 yrs.


63Trussville

AL

Courtyard





1,088


8,744


1


9,833


(685
)

2007

Oct-07


3 - 39 yrs.


84Huntsville

AL

TownePlace Suites





804


8,384


2


9,190


(609
)

2007

Dec-07


3 - 39 yrs.


86Dothan

AL

Residence Inn





821


9,097





9,918


(615
)

2008

Apr-08


3 - 39 yrs.


84Tucson

AZ

Residence Inn





998


15,960





16,958


(1,098
)

2008

Jan-08


3 - 39 yrs.


124San Diego

CA

Hilton Garden Inn





5,021


30,345


492


35,858


(3,626
)

2004

May-06


3 - 39 yrs.


200Rancho Bernardo

CA

Courtyard





4,669


32,271


202


37,142


(3,068
)

1987

Dec-06


3 - 39 yrs.


210Agoura Hills

CA

Homewood Suites





4,511


21,434


32


25,977


(1,787
)

2007

May-07


3 - 39 yrs.


125San Diego

CA

Residence Inn


14,898


7,354


26,215


267


33,836


(2,056
)

1999

Jun-07


3 - 39 yrs.


121San Diego

CA

Hampton Inn





5,694


37,938


2,139


45,771


(3,000
)

2001

Jul-07


3 - 39 yrs.


177Highlands Ranch

CO

Residence Inn


11,203


2,345


17,333


487


20,165


(1,476
)

1996

Feb-07


3 - 39 yrs.


117Highlands Ranch

CO

Hilton Garden Inn





2,518


18,545


82


21,145


(1,714
)

2007

Mar-07


3 - 39 yrs.


128Sarasota

FL

Homewood Suites





1,785


12,277


333


14,395


(1,437
)

2005

Sep-06


3 - 39 yrs.


100Miami

FL

Homewood Suites


9,199


3,215


22,152


1,972


27,339


(2,321
)

2000

Feb-07


3 - 39 yrs.


159Tallahassee

FL

Fairfield Inn


3,285


910


6,202


138


7,250


(510
)

2000

Apr-07


3 - 39 yrs.


79Lakeland

FL

Courtyard


3,957


1,557


8,836


147


10,540


(744
)

2000

Apr-07


3 - 39 yrs.


78Miami

FL

Courtyard








15,463


82


15,545


(754
)

2008

Sep-08


3 - 39 yrs.


118Columbus

GA

Fairfield Inn








7,620


16


7,636


(630
)

2003

Apr-07


3 - 39 yrs.


79Macon

GA

Hilton Garden Inn








10,115


25


10,140


(927
)

2007

Jun-07


3 - 39 yrs.


101Columbus

GA

SpringHill Suites





1,195


8,751


6


9,952


(585
)

2008

Mar-08


3 - 39 yrs.


85Columbus

GA

TownePlace Suites








8,643


10


8,653


(564
)

2008

May-08


3 - 39 yrs.


86Boise

ID

SpringHill Suites





2,024


19,580


405


22,009


(1,715
)

1992

Sep-07


3 - 39 yrs.


230New Orleans

LA

Homewood Suites


16,109


4,586


39,500


1,090


45,176


(3,697
)

2002

Dec-06


3 - 39 yrs.


166Hattiesburg

MS

Courtyard





877


8,914


2


9,793


(987
)

2006

Oct-06


3 - 39 yrs.


84Tupelo

MS

Hampton Inn


3,754


336


4,928


1,192


6,456


(718
)

1994

Jan-07


3 - 39 yrs.


96Omaha

NE

Courtyard


11,868


2,731


19,498


3,144


25,373


(2,123
)

1999

Nov-06


3 - 39 yrs.


181Cranford

NJ

Homewood Suites





2,618


11,364


1,860


15,842


(1,394
)

2000

Mar-07


3 - 39 yrs.


108Mahwah

NJ

Homewood Suites





3,676


16,470


2,148


22,294


(1,645
)

2001

Mar-07


3 - 39 yrs.


110Ronkonkoma

NY

Hilton Garden Inn





3,161


24,420


492


28,073


(2,297
)

2003

Dec-06


3 - 39 yrs.


164Cincinnati

OH

Homewood Suites





556


6,817


101


7,474


(785
)

2005

Dec-06


3 - 39 yrs.


76Memphis

TN

Homewood Suites





1,722


9,747


2,032


13,501


(1,248
)

1989

May-07


3 - 39 yrs.


140Houston

TX

Residence Inn





1,098


13,049


59


14,206


(1,719
)

2006

Apr-06


3 - 39 yrs.


129Brownsville

TX

Courtyard





1,135


7,739


8


8,882


(917
)

2006

Jun-06


3 - 39 yrs.


90Stafford

TX

Homewood Suites





501


7,575


61


8,137


(929
)

2006

Aug-06


3 - 39 yrs.


78San Antonio

TX

TownePlace Suites





703


11,522





12,225


(993
)

2007

Jun-07


3 - 39 yrs.


106Addison

TX

SpringHill Suites





1,545


11,312


65


12,922


(914
)

2003

Aug-07


3 - 39 yrs.


159San Antonio

TX

TownePlace Suites





1,130


13,089





14,219


(1,039
)

2007

Sep-07


3 - 39 yrs.


123El Paso

TX

Homewood Suites





1,174


14,651


6


15,831


(925
)

2008

Apr-08


3 - 39 yrs.


114Provo

UT

Residence Inn


5,234


1,358


10,388


2,761


14,507


(1,285
)

1996

Jun-07


3 - 39 yrs.


114Alexandria

VA

Courtyard





4,010


32,832


4,053


40,895


(2,588
)

1987

Jul-07


3 - 39 yrs.


176Richmond

VA

Marriott


24,276





59,614


14,815


74,429


(6,099
)

1984

Jan-08


3 - 39 yrs.


410Seattle

WA

Residence Inn








60,489


6,684


67,173


(7,311
)

1991

Sep-06


3 - 39 yrs.


234Vancouver

WA

SpringHill Suites





1,314


15,122


20


16,456


(1,410
)

2007

Jun-07


3 - 39 yrs.


119Kirkland

WA

Courtyard





3,514


28,500


32


32,046


(1,966
)

2006

Oct-07


3 - 39 yrs.


150$
103,783

$
90,714

$
842,609

$
49,893

$
983,216

$
(80,923
)









6,424


11

---





Table of Contents

Investment in hotels at December 31, 2009, consisted of the following (in thousands):

Land

$
90,714Building and Improvements


831,121Furniture, Fixtures and Equipment


61,381983,216Less Accumulated Depreciation


(80,923
)Investments in real estate, net

$
902,293


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



Item 3.    Legal Proceedings

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

12

---





Table of Contents

PART II



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

Common Shares

There is currently no established public market in which the Company's common shares are traded. As of December 31, 2009, there
were 93,521,656 Units outstanding (each Unit consists of one common share, no par value, and one Series A preferred share). The per share estimated market value of common stock is deemed to be
the offering price of the shares, which is currently $11.00 per share. This is supported by the fact that the Company is currently selling shares to the public at a price of $11.00 per share through
its Dividend Reinvestment Plan. As of December 31, 2009, the Units were held by approximately 20,300 beneficial shareholders.

Dividend Reinvestment Plan

In July 2007, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost
effective way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of proceeds from this plan may include purchasing Units
under the Company's Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring
hotels. As of December 31, 2009, approximately 5.6 million Units, representing $61.9 million in proceeds to the Company, have been issued under the plan since inception.

Unit Redemption Program

The Company's Board of Directors has approved a Unit Redemption Program to provide limited interim liquidity to shareholders who have
held their Units for at least one year. A shareholder may request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned less than three years or
100% of the price paid per Unit if the Units have been owned more than three years. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or
otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As of December 31, 2009, the Company has redeemed approximately 3.2 million Units in the amount of
$33.7 million under the program. The following is a summary of redemptions during the fourth quarter of 2009:

Issuer Purchases of Equity Securities

(a)

(b)

(c)

(d)Period

Total Number
of Units
Purchased

Average Price Paid
per Unit

Total Number of
Units Purchased as
Part of Publicly
Announced Plans
or Programs

Maximum Number
of Units that May
Yet Be Purchased
Under the Plans or
ProgramsOctober 2009


681,604

$
10.74


3,229,750


(1
)


---

13

---



Table of Contents

Series A Preferred Shares

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

Series B Convertible Preferred Shares

The Company currently has 240,000 Series B convertible preferred shares issued and outstanding, all owned by Glade M. Knight,
the Company's Chairman and Chief Executive Officer. There are no dividends payable on the Series B convertible preferred shares. Holders of more than two-thirds of the
Series B convertible preferred shares must approve any proposed amendment to the Articles of Incorporation that would adversely affect the Series B convertible preferred shares. Upon
liquidation, each holder of the Series B convertible preferred shares is entitled to a priority liquidation payment. However the priority liquidation payment of the holder of the
Series B convertible preferred shares is junior to the holders of the Series A preferred shares distribution rights. The holder of a Series B convertible preferred share is
entitled to a liquidation payment of $11 per number of common shares into which each Series B convertible preferred share would convert. In the event that the liquidation of the Company's
assets results in proceeds that exceed the distribution rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed
between the common shares and the Series B convertible preferred shares, on an as converted basis. The Series B convertible preferred shares are convertible into common shares upon and
for 180 days following the occurrence of any of the following events: (1) substantially all of the Company's assets, stock or business is sold or transferred through exchange, merger,
consolidation, lease, share exchange or otherwise, other than a sale of assets in liquidation, dissolution or winding up of the Company's business; or (2) the termination or expiration without
renewal of the advisory agreement with Apple Seven Advisors, Inc., or if the company ceases to use Apple Suites Realty Group, Inc. to provide property acquisition and disposition
services; or (3) the Company's common shares are listed on any securities exchange or quotation system or in any established market.

Preferred Shares

The Company's articles of incorporation authorize issuance of up to 15 million additional preferred shares. No preferred shares
other than the Series A preferred shares and the Series B convertible preferred shares (discussed above) have been issued. The Company believes that the authorization to issue additional
preferred shares benefits the Company and its shareholders by permitting flexibility in financing additional growth, giving the Company additional financing options in corporate planning and in
responding to developments in business, including financing of additional acquisitions and other general corporate purposes. Having authorized preferred shares available for issuance in the future
gives the Company the ability to respond to future developments and allows preferred shares to be issued without the expense and delay of a special shareholders' meeting. At present, the Company has
no specific financing or acquisition plans involving the issuance of additional preferred shares and the Company does not propose to fix the characteristics of any series of preferred shares in
anticipation of issuing preferred shares other than the Series A preferred shares and Series B convertible preferred shares discussed above. The Company cannot now predict whether or to
what extent, if any, additional preferred shares will be used or if so used what the characteristics of a particular series may be. The voting rights and rights to distributions of the holders of
common shares will be subject to the prior rights of the holders of any subsequently-issued preferred shares. Unless

14

---



Table of Contents

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

Distribution Policy

To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions totaled
$75.4 million in 2009, $81.4 million in 2008, and $60.2 million in 2007. Distributions from May 2009 through December 2009 were paid monthly at a rate of $0.064167 per common
share. Prior to the May 2009 distribution, distributions were paid monthly at a rate of $0.073334 per common share. The timing and amounts of distributions to shareholders are within the discretion of
the Company's Board of Directors. The amount and frequency of future distributions will depend on the Company's results of operations, cash flow from operations, economic conditions, working capital
requirements, cash requirements to fund investing and financing activities, capital expenditure requirements, including improvements to and expansions of properties and the
acquisition of additional properties, as well as the distribution requirements under federal income tax provisions for qualification as a REIT.

Non-Employee Directors Stock Option Plan and Incentive Plan

The Company's Board of Directors has adopted and the Company's shareholders have approved a Non-Employee Directors Stock
Option Plan and an Incentive Plan. The options issued under each plan convert upon exercise to Units. Each Unit consists of one common share and one Series A preferred share of the Company. As
of December 31, 2009, options to purchase 220,270 Units were outstanding with a weighted average exercise price of $11 per Unit. The following is a summary of securities issued under the plans
as of December 31, 2009:

Plan Category

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

Weighted-average
exercise price of
outstanding options,
warrants and rights

Number of securities
remaining available
for future issuance
under equity
compensation plansEquity Compensation plans approved by security holdersNon-Employee Directors Stock Option Plan


220,270

$
11.00


1,379,275Incentive Plan




$



4,029,318




Item 6.    Selected Financial Data

The following table sets forth selected financial data for the years ended December 31, 2009, 2008, 2007 and 2006, and the
period May 26, 2005 (initial capitalization) through December 31, 2005. Certain information in the table has been derived from the Company's audited financial statements and notes
thereto. This data should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 15(1), the Consolidated
Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. During the period from the Company's initial capitalization on May 26, 2005 to
April 26, 2006, the Company owned no

15

---



Table of Contents

properties,
had no revenue exclusive of interest income, and was primarily engaged in capital formation activities. Operations commenced on April 27, 2006 with the Company's first property
acquisition.

(in thousands except per share and statistical data)

For the
year ended
December 31,
2009

For the
year ended
December 31,
2008

For the
year ended
December 31,
2007

For the
year ended
December 31,
2006

For the period
May 26, 2005
(date of initial
capitalization)
through
December 31,
2005Revenues:Room revenue

$
174,042

$
195,414

$
129,467

$
18,800

$
Other revenue


17,673


18,877


9,097


1,545


Total revenue


191,715


214,291


138,564


20,345


Expenses:Hotel operating expenses


113,968


124,588


76,944


12,229


Taxes, insurance and other


13,717


13,559


8,571


1,472


General and administrative


4,600


5,881


3,823


1,988


40Depreciation


32,425


28,434


16,990


3,073


Debt extinguishment costs








1,391





Interest and other expenses, net


6,292


3,766


(2,388
)

(1,855
)

13Total expenses


171,002


176,228


105,331


16,907


53Net income (loss)

$
20,713

$
38,063

$
33,233

$
3,438

$
(53
)Per ShareNet income (loss) per common share

$
0.22

$
0.41

$
0.47

$
0.23

$
(5,251.30
)Distributions paid to common shareholders

$
0.81

$
0.88

$
0.88

$
0.66

$
Weighted-average common shares outstandingbasic and diluted


93,472


92,637


70,763


15,152


Balance Sheet Data (at end of period)Cash and cash equivalents

$


$
20,609

$
142,437

$
44,604

$
50Investment in hotels, net

$
902,293

$
920,688

$
786,765

$
347,092

$
Total assets

$
923,887

$
967,844

$
961,248

$
409,886

$
523Notes payable

$
117,787

$
109,275

$
84,705

$
49,292

$
400Shareholders' equity

$
792,257

$
845,753

$
868,531

$
354,122

$
(29
)Net book value per share

$
8.47

$
9.04

$
9.47

$
9.56

$
Other DataCash flow from:Operating activities

$
55,460

$
69,025

$
49,957

$
5,158

$
(11
)Investing activities

$
(10,926
)
$
(127,519
)
$
(394,301
)
$
(328,324
)
$
Financing activities

$
(65,143
)
$
(63,334
)
$
442,177

$
367,720

$
37Number of hotels owned at end of period


51


51


44


18


Average Daily Rate (ADR)(b)

$
111

$
120

$
120

$
116

$
Occupancy


67
%

71
%

74
%

65
%

Revenue Per Available Room (RevPAR)(c)

$
74

$
86

$
88

$
75

$
Funds From Operations CalculationNet income

$
20,713

$
38,063

$
33,233

$
3,438

$
(53
)Depreciation of real estate owned


32,425


28,434


16,990


3,073


Funds from operations(a)

$
53,138

$
66,497

$
50,223

$
6,511

$
(53
)


(a)Funds
from operations (FFO) is defined as net income (computed in accordance with generally accepted accounting principlesGAAP) excluding gains
and losses from sales of depreciable property, plus depreciation and amortization. The Company considers FFO in evaluating property acquisitions and its operating performance and believes that FFO
should be considered along with, but not as an alternative to, net income and cash flows as a measure of the Company's activities in accordance with GAAP and is not necessarily indicative of cash
available to fund cash needs.(b)Total
room revenue divided by number of rooms sold.(c)ADR
multiplied by occupancy percentage.


16

---



Table of Contents






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

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

General

The Company was initially capitalized on May 26, 2005, with its first investor closing on March 15, 2006. The Company
owned 51 hotels as of December 31, 2009, located within different markets in the United States. The Company is treated as a Real Estate Investment Trust ("REIT") for federal income tax
purposes. The Company's first hotel was acquired on April 27, 2006. An additional 17 hotels were purchased during 2006, 26 hotels were purchased during 2007, and seven hotels were acquired in
2008. Accordingly, the results of operations include only the results of operations of the hotels for the period owned. Exclusive of interest income, the Company had no operating revenues before the
first hotel acquisition in April 2006.

Although
hotel performance can be influenced by many factors including local competition, local and general economic conditions in the United States and the performance of individual
managers assigned to each hotel, performance of the hotels within their respective local markets, in general, has met the Company's expectations for the period owned. With the significant decline in
economic conditions throughout the United States, overall performance of the Company's hotels has not met expectations. Many industry analysts believe the hotel industry will see flat to single-digit
declines in hotel revenues in 2010 as compared to 2009. In evaluating financial condition and operating performance, the most important matters on which the Company focuses are revenue measurements,
such as average occupancy, average daily rate ("ADR"), revenue per available room ("RevPAR"), and Market Yield which compares an individual hotel's results to other hotels in its local market, and
expenses, such as hotel operating expenses, general and administrative and other expenses described below.

As
noted above, the Company owned 51 hotel properties at December 31, 2009 (consisting of 6,424 total rooms). Seven hotels were acquired in 2008. The following is a summary of
results for the years ended December 31, 2009 and 2008.

17

---



Table of Contents

(in thousands except statistical data)

Year ended
December 31, 2009

Percent of
Revenue

Year ended
December 31, 2008

Percent of
Revenue

Percent
ChangeTotal revenues

$
191,715


100
%
$
214,291


100
%

-11
%Hotel direct expenses


113,968


59
%

124,588


58
%

-9
%Taxes, insurance and other expense


13,717


7
%

13,559


6
%

1
%General and administrative expense


4,600


2
%

5,881


3
%

-22
%Depreciation


32,425





28,434





14
%Interest expense, net


6,292





3,766





67
%Average Market Yield(1)


123.8





119.7





3
%Average Daily Rate (ADR)

$
111




$
120





-8
%Occupancy


67
%




71
%




-6
%RevPAR

$
74




$
86





-14
%Number of Hotels


51





51






%


(1)Statistics
calculated from data provided by Smith Travel Research, Inc.®.


Hotels Owned

As of December 31, 2009, the Company owned 51 hotels, with a total of 6,424 rooms. As previously noted, seven hotels were
purchased in 2008, 26 hotels were purchased in 2007, and 18 were

18

---



Table of Contents

purchased
in 2006. The following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each hotel. All dollar amounts are in thousands.

Location

State

Brand

Manager

Date of
Purchase

Rooms

Gross
Purchase
PriceMontgomery

AL

Homewood Suites

LBA


8/17/06


91

$
10,660Montgomery

AL

Hilton Garden Inn

LBA


8/17/06


97


10,385Troy

AL

Hampton Inn

LBA


8/17/06


82


6,130Auburn

AL

Hilton Garden Inn

LBA


8/17/06


101


10,185Huntsville

AL

Hilton Garden Inn

LBA


8/17/06


101


10,285Huntsville

AL

Homewood Suites

LBA


10/27/06


107


11,606Prattville

AL

Courtyard

LBA


4/24/07


84


9,304Dothan

AL

Fairfield Inn

LBA


5/16/07


63


4,584Trussville

AL

Courtyard

LBA


10/4/07


84


9,510Huntsville

AL

TownePlace Suites

LBA


12/10/07


86


8,927Dothan

AL

Residence Inn

LBA


4/16/08


84


9,669Tucson

AZ

Residence Inn

Western


1/17/08


124


16,640San Diego

CA

Hilton Garden Inn

Inn Ventures


5/9/06


200


34,500Rancho Bernardo

CA

Courtyard

Dimension


12/12/06


210


36,000Agoura Hills

CA

Homewood Suites

Dimension


5/8/07


125


25,250San Diego

CA

Residence Inn

Dimension


6/13/07


121


32,500San Diego

CA

Hampton Inn

Dimension


7/19/07


177


42,000Highlands Ranch

CO

Residence Inn

Dimension


2/22/07


117


19,000Highlands Ranch

CO

Hilton Garden Inn

Dimension


3/9/07


128


20,500Sarasota

FL

Homewood Suites

Hilton


9/15/06


100


13,800Miami

FL

Homewood Suites

Dimension


2/21/07


159


24,300Tallahassee

FL

Fairfield Inn

LBA


4/24/07


79


6,647Lakeland

FL

Courtyard

LBA


4/24/07


78


9,805Miami

FL

Courtyard

Dimension


9/5/08


118


15,000Columbus

GA

Fairfield Inn

LBA


4/24/07


79


7,333Macon

GA

Hilton Garden Inn

LBA


6/28/07


101


10,660Columbus

GA

SpringHill Suites

LBA


3/6/08


85


9,675Columbus

GA

TownePlace Suites

LBA


5/22/08


86


8,428Boise

ID

SpringHill Suites

Inn Ventures


9/14/07


230


21,000New Orleans

LA

Homewood Suites

Dimension


12/15/06


166


43,000Hattiesburg

MS

Courtyard

LBA


10/5/06


84


9,455Tupelo

MS

Hampton Inn

LBA


1/23/07


96


5,245Omaha

NE

Courtyard

Marriott


11/4/06


181


23,100Cranford

NJ

Homewood Suites

Dimension


3/7/07


108


13,500Mahwah

NJ

Homewood Suites

Dimension


3/7/07


110


19,500Ronkonkoma

NY

Hilton Garden Inn

White


12/15/06


164


27,000Cincinnati

OH

Homewood Suites

White


12/1/06


76


7,100Memphis

TN

Homewood Suites

Hilton


5/15/07


140


11,100Houston

TX

Residence Inn

Western


4/27/06


129


13,600Brownsville

TX

Courtyard

Western


6/19/06


90


8,550Stafford

TX

Homewood Suites

Western


8/15/06


78


7,800San Antonio

TX

TownePlace Suites

Western


6/29/07


106


11,925Addison

TX

SpringHill Suites

Marriott


8/10/07


159


12,500San Antonio

TX

TownePlace Suites

Western


9/27/07


123


13,838El Paso

TX

Homewood Suites

Western


4/23/08


114


15,390Provo

UT

Residence Inn

Dimension


6/13/07


114


11,250Alexandria

VA

Courtyard

Marriott


7/13/07


176


36,997Richmond

VA

Marriott

White


1/25/08


410


53,300Seattle

WA

Residence Inn

Inn Ventures


9/1/06


234


56,173Vancouver

WA

SpringHill Suites

Inn Ventures


6/1/07


119


15,988Kirkland

WA

Courtyard

Inn Ventures


10/23/07


150


31,0006,424

$
901,594


19

---





Table of Contents

The Company leased all of its hotels to wholly-owned taxable REIT subsidiaries (collectively, the "lessee") under master hotel lease agreements. The Company also
used the proceeds of its ongoing offering to pay 2% of the gross purchase price for these hotels, which was approximately $18.0 million, as a commission to Apple Suites Realty
Group, Inc. ("ASRG"). ASRG is 100% owned by the Company's Chairman and Chief Executive Officer, Glade M. Knight.

With
the exception of assumed mortgage loans on some of its hotel properties, substantially all of the purchase price of the hotels was funded by the Company's best-efforts
offering of Units, which concluded in July 2007. The following table summarizes the hotel, interest rate, maturity date, principal amount assumed associated with each mortgage, and outstanding
principal balance as of December 31, 2009. All dollar amounts are in thousands.

Location

Brand

Interest
Rate

Maturity
Date

Principal
Assumed

Outstanding
Principal
Balance as of
December 31,
2009Omaha, NE

Courtyard


6.79
%

1/1/14

$
12,658

$
11,868New Orleans, LA

Homewood Suites


5.85
%

10/1/14


17,144


16,109Tupelo, MS

Hampton Inn


5.90
%

3/1/16


4,110


3,754Miami, FL

Homewood Suites


6.50
%

7/1/13


9,820


9,199Highlands Ranch, CO

Residence Inn


5.94
%

6/1/16


11,550


11,203Tallahassee, FL

Fairfield Inn


6.80
%

1/11/13


3,494


3,285Lakeland, FL

Courtyard


6.80
%

1/11/13


4,210


3,957San Diego, CA

Residence Inn


6.55
%

4/1/13


15,804


14,898Provo, UT

Residence Inn


6.55
%

4/1/13


5,553


5,234Richmond, VA

Marriott


6.95
%

9/1/14


25,298


24,276$
109,641

$
103,783


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

Management and Franchise Agreements

Each of the Company's 51 hotels are operated and managed, under separate management agreements, by affiliates of one of the following
companies: Marriott International, Inc. ("Marriott"), Hilton Worldwide ("Hilton"), Western International ("Western"), Larry Blumberg & Associates ("LBA"), Dimension Development Company
("Dimension"), White Lodging Services Corporation ("WLS"), or Inn Ventures, Inc. ("Inn Ventures"). The agreements provide for initial terms ranging from one to twenty years. Fees associated
with the agreements generally include the payment of base management fees, incentive management fees, accounting fees, and other fees for centralized services which are allocated among all of the
hotels that receive the benefit of such services. Base management fees are calculated as a percentage of gross revenues. Incentive management fees are calculated as a percentage of operating profit in
excess of a priority return to the Company, as defined in the management agreements. The Company has the option to terminate the management agreements if specified performance thresholds are not
satisfied. During the years ended December 31, 2009, 2008 and 2007 the Company incurred approximately $6.1 million, $7.4 million and $4.8 million, respectively, in
management fees.

Western,
LBA, WLS, Dimension and Inn Ventures are not affiliated with either Marriott or Hilton, and as a result, the hotels they manage (as well as the two hotels managed by Promus
Hotels, Inc., which is an affiliate of Hilton) were required to obtain separate franchise agreements with each respective franchisor. The Hilton franchise agreements provide for initial terms
ranging between 10 to 20 years. Fees associated with the Hilton agreements generally include the payment of royalty

20

---



Table of Contents

fees
and program fees based on room revenues. The Marriott franchise agreements provide for an initial term of between six and 20 years. Fees associated with the Marriott agreements include the
payment of royalty fees, marketing fees, reservation fees and a communications support fee based on room revenues. During the years ended December 31, 2009, 2008 and 2007 the Company incurred
approximately $7.8 million, $8.3 million and $5.3 million, respectively, in franchise fees.

Results of Operations

As of December 31, 2009, the Company owned 51 hotels with 6,424 rooms. The Company's portfolio of hotels is unchanged since
December 31, 2008. Seven hotels, with 1,012 rooms, were purchased during 2008, and 26 hotels, with a combined 3,112 rooms, were purchased during 2007. The Company's operations did not commence
until April 27, 2006, when the Company purchased its first hotel, located in Houston, Texas. During the remainder of 2006, the Company purchased an additional 17 hotel properties.

Hotel
performance is impacted by many factors including the economic conditions in the United States as well as each locality. Due to a general decline in economic conditions throughout
the United States, the financial results of the Company's hotels did not meet expectations during 2009. It is anticipated the properties' performance will continue to be below comparable
pre-recession operating periods until general economic conditions improve. The Company will continue to aggressively pursue market opportunities and cost controls to improve results during
and after the economic downturn. Although it is not possible to predict when economic conditions will improve or their impact on the hotel industry, many industry analysts forecast 0-5%
declines in RevPAR in 2010, as compared to 2009. While reflecting the impact of declining economic activity, the Company's hotel performance as compared to other hotels within each individual market
has generally met expectations for the period held.

Revenues

The Company's principal source of revenue is hotel room revenue and other related revenue. For the year ended December 31, 2009,
the Company had room revenue and other revenue of $174.0 million and $17.7 million, respectively. These revenues reflect hotel operations for the Company's 51 hotels owned during the
year ended December 31, 2009. For the year ended December 31, 2009, the hotels achieved average occupancy of 67%, ADR of $111 and RevPAR of $74. For the year ended December 31,
2008, the Company had room revenue and other revenue of $195.4 million and $18.9 million, respectively. These revenues reflect hotel operations for the 51 hotels acquired through
December 31, 2008 for their respective periods of ownership by the Company, seven of which were purchased during 2008. For the year ended December 31, 2008, the hotels achieved average
occupancy of 71%, ADR of $120 and RevPAR of $86. ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR. These rates are
consistent with industry and brand averages, given the Company's portfolio of hotels and the markets where the Company's hotels are located. However, because overall hotel room demand declined and
general economic conditions continued to weaken in 2009, the Company's revenue at most individual hotels experienced declines during 2009 as compared to 2008 results. While reflecting the impact of
declining economic activity, the Company continues to be a leader in its local markets. The Company's 2009 Average RevPAR Index was 123.8, an increase of 3% over 2008. The RevPAR index is a measure of
each hotel's RevPAR compared to the average in the market, with 100 being average.

Expenses

Expenses for the years ended December 31, 2009 and 2008 represent the expenses related to the 51 hotels acquired through
December 31, 2009 for their respective periods owned. For the years ended

21

---



Table of Contents

December 31,
2009 and 2008, hotel operating expenses totaled $114.0 million and $124.6 million, respectively, representing 59% of total revenue for 2009 and 58% of total hotel
revenue for 2008. Hotel operating expenses include direct operational expenses, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise
fees and management fees. Hotel operational expenses for 2009 reflect the impact of declining revenues at most of the Company's hotels, and the Company's efforts to control costs in such an economic
environment. However, certain operating costs such as management costs, certain utility costs and minimum supply and maintenance costs are relatively fixed in nature, and cannot be curtailed or
eliminated. The Company has been successful in reducing certain labor costs, food and supply costs and utility costs by continually monitoring and sharing utilization data across its hotels and
management companies. With the weakened economic conditions, the Company will continue to work with its management companies to reduce costs as aggressively as possible, however it is not anticipated
these reductions will offset revenue declines.

Hotel
operational expenses in 2008 were impacted by the Company's acquisition, in January 2008, of the 410 room full-service Marriott hotel in Richmond, Virginia ("MRV"). At
the time of purchase, the Company implemented a change from the predecessor owner's hotel management company to White Lodging Services Corporation. The Company incurred hotel staff recruiting,
training, travel and relocation costs associated with the installation of the new management company and related personnel resources at the MRV. In addition, expenditures for
non-capitalized items associated with improving the hotel's rooms, restaurant, and overall service levels, and addressing deferred maintenance and repair, were incurred. These transition
costs associated with the MRV hotel, incurred during 2008, were approximately $1.1 million.

Taxes,
insurance, and other expenses for the period ended December 31, 2009 and 2008 were $13.7 and $13.6 million, or 7% and 6% of total revenue for each respective period.
Increases in these expenses for 2009 versus the prior year reflect higher real estate and personal property tax assessments at selected hotels, including some of the Company's hotels that were newly
constructed during 2007 and 2008. The Company anticipates property tax and insurance rates to show modest declines in 2010 as compared to 2009 rates.

General
and administrative expense for the years ended December 31, 2009 and 2008 was $4.6 and $5.9 million, or 2% and 3% of total revenue for each respective period. The
components of general and administrative expense include advisory fees, legal fees, accounting fees, reporting expenses and the Company's share of the loss from its investment in Apple Air
Holding, LLC. Reduction in this loss for 2009, as compared to the prior year, reflects a reduction (from 50% to 26% in January 2009) in the Company's investment in Apple Air
Holding, LLC. The Company recorded a loss in 2009 of approximately $0.5 million, and a loss in 2008 of approximately $1.0 million in its investment, primarily due to depreciation
expense on the two aircraft owned by the entity. Additionally, the Company's advisory fees declined by $0.5 million due to lower earnings.

Depreciation
expense for the years ended December 31, 2009 and 2008 was $32.4 and $28.4 million, respectively. Depreciation expense represents the expense of the Company's
hotels and related personal property (furniture, fixtures and equipment) for their respective periods owned.

Interest
expense for the twelve month periods ended December 31, 2009 and 2008 was $6.4 million and $5.7 million, respectively. Interest expense primarily arose from
mortgage debt assumed with the acquisition of ten of the Company's hotels, in addition to interest on borrowings under the Company's line of credit facility (originated in April 2009). Interest
expense is net of capitalized interest, of approximately $0.4 million in 2009 and $1.0 million in 2008, associated with several significant capital renovations during each year. As of
December 31, 2009, the Company had mortgage debt outstanding of $103.8 million, representing mortgage loans outstanding on ten of the Company's 51 hotel properties and associated fair
value adjustments. The Company also had borrowings outstanding of $11.5 million

22

---



Table of Contents

at
December 31, 2009 under the unsecured line of credit facility. During 2009 and 2008, the Company recognized $0.1 million and $1.9 million, respectively, in interest income,
representing interest on excess cash invested in short-term money market instruments. Interest income earned by the Company declined as cash raised from the Company's Unit offering was
utilized for the purchase of seven hotel properties in 2008, and the renovation of several hotel locations during both 2008 and 2009.

Related Party Transactions

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

The
Company has a contract with ASRG, a related party, to provide brokerage services for the acquisition and disposition of the Company's real estate assets. In accordance with the
contract, ASRG
is paid a fee of 2% of the gross purchase price of any acquisitions or gross sale price of any dispositions of real estate investments, subject to certain conditions. Payments to ASRG for services
under the terms of this contract have totaled approximately $18.0 million since inception, which were capitalized as a part of the purchase price of the hotels. No such fees were incurred
during the year ended December 31, 2009.

The
Company is party to an advisory agreement with Apple Seven Advisors, Inc. ("ASA"), pursuant to which ASA provides management services to the Company. An annual fee ranging
from .1% to .25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable for these services. During the years ended December 31, 2009, 2008
and 2007, the Company incurred approximately $1.0 million, $1.5 million, and $1.1 million in fees related to the advisory agreement with ASA.

Through
a contractual arrangement with Apple REIT Six, Inc., ASA provides the Company with support services. The Company reimburses ASA for the cost of the services provided by
Apple REIT Six, Inc. ASA in turn reimburses Apple REIT Six, Inc. Through similar contractual arrangements, Apple REIT Six, Inc. provides support services to ASRG, Apple Six
Advisors, Inc. ("A6A"), Apple Eight Advisors, Inc. ("A8A"), Apple Nine Advisors, Inc. ("A9A"), Apple REIT Eight, Inc. and Apple REIT Nine, Inc. A6A provides day to
day advisory and administrative functions for Apple REIT Six, Inc., A8A provides day to day advisory and administrative functions for Apple REIT Eight, Inc., and A9A provides day to day
advisory and administrative functions for Apple REIT Nine, Inc. ASRG, ASA, A6A, A8A and A9A are 100% owned by Glade Knight, the Company's Chairman and Chief Executive Officer. During the years
ended December 31, 2009, 2008 and 2007 the Company incurred approximately $2.0 million, $1.9 million and $1.2 million in costs paid to ASA that were reimbursed to Apple
REIT Six, Inc.

The
Company has a partial ownership interest in Apple Air Holdings, LLC ("Apple Air"). A 50% interest was originally purchased by the Company for approximately $7.5 million
in 2007 to allow the Company access to two corporate Lear jets for asset management and hotel renovation purposes. In January 2009, the Company's ownership interest in Apple Air was reduced from 50%
to 26% through the redemption of a 24% ownership interest by Apple Air. The Company received approximately $3.2 million for the ownership interest redeemed, which approximated the Company's
carrying value of the 24% ownership interest at the date of redemption. No gain or loss from the redemption was recognized by the Company. The Company's ownership interest in Apple Air is included in
other assets, net on the Company's consolidated balance sheet, and was approximately $2.8 million and $6.6 million at December 31, 2009 and 2008, respectively. The other members
of Apple Air are Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. The Company records its share of income or loss of the entity under the equity method of
accounting, adjusting its investment in Apple Air accordingly. For the years ended December 31, 2009 and 2008, the Company recorded a loss of

23

---



Table of Contents

approximately
$0.5 million and $1.0 million, respectively. The loss relates primarily to the depreciation of the aircraft.

Including
ASRG, ASA, A6A, A8A and A9A discussed above, Mr. Knight is also Chairman and CEO of Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT
Nine, Inc. Members of the Company's Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

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

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

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

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



Upon
the occurrence of any conversion event, each Series B convertible preferred share may be converted into 24.17104 common shares. In the event that after raising gross proceeds
of $1 billion, the Company raises additional gross proceeds in a subsequent public offering, each Series B convertible preferred share may be converted into an additional number of
common shares based on the additional gross proceeds raised through the date of conversion in a subsequent public offering according to the following formula:
(X/50 million) × 1.20568, where X is the additional gross proceeds rounded down to the nearest 50 million.

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

24

---



Table of Contents

Expense
related to issuance of 240,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for
conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B shares to common shares occurs. The expense will be measured as the
difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares. If a conversion event had occurred at
December 31, 2009, expense would have ranged from $0 to $63.8 million (assumes $11 per common share fair market value) which represents approximately 5.8 million shares of common
stock.

Liquidity and Capital Resources

The following table presents the Company's commercial commitments, relating to principal and interest payments on debt outstanding, and
contractual obligations under land lease commitments, as of December 31, 2009. The Company had no property purchase commitments as of December 31, 2009. See "Capital Requirements and
Resources" for a discussion of the Company's liquidity and available capital resources as of December 31, 2009.

Amount of Commitments expiring per periodCommercial Commitments (000's)

Total

Less than
1 Year

2-3 Years

4-5 Years

Over
5 YearsDebt (including interest of $28.7 million)

$
143,965

$
9,651

$
30,177

$
89,698

$
14,439Land Lease Commitments


95,994


932


1,868


2,163


91,031Total Commercial Commitments

$
239,959

$
10,583

$
32,045

$
91,861

$
105,470


Capital Requirements and Resources

In April 2009 the Company entered into a $30 million unsecured line of credit facility, which expires in April 2011. The line of
credit bears interest based on LIBOR, subject to a minimum interest rate floor of 3.15%. The line of credit was obtained to be utilized for working capital, hotel renovations or other general
corporate funding purposes including the payment of distributions. With the availability of this line of credit, the Company maintains little cash on hand, accessing the line as necessary. As a
result, cash on hand was $0 at December 31, 2009. The outstanding balance on the line of credit as of December 31, 2009 was $11.5 million and its interest rate was 3.15%. The
Company anticipates that cash flow from operations and its line of credit will be adequate to meet its anticipated liquidity requirements, including required distributions to shareholders, capital
expenditures and debt service. The Company will pursue additional financing in 2010 so that it can make distributions in excess of required amounts to maintain its REIT status. The Company intends to
maintain a relatively stable dividend rate instead of raising and lowering the distribution rate with varying economic cycles. With the depressed financial results of the Company and the lodging
industry, the Company will attempt to utilize additional financing to achieve this objective. Although the Company has relatively low levels of debt, there can be no assurances it will be successful
with this strategy and may need to reduce its distribution to required levels.

To
maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. The Company's 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, capital improvements, ramp-up of new properties and varying economic cycles. Distributions in 2009
totaled $75.4 million and were paid monthly at a rate of $0.064167 per common share from May 2009 through December 2009, and at a prior monthly rate of $0.073334 per common share from January
2009 through April 2009. Total 2009 dividends paid equaled $0.806672 per common share and included a return of capital. For the same period the Company's cash generated from operations was
approximately $55.5 million. Due to the inherent delay between raising capital and investing that same capital in income producing real

25

---



Table of Contents

estate
(including hotel renovations), the Company began 2009 with approximately $20.6 million in cash on hand, which was primarily earning interest at short term money market rates. As a
result, the difference between distributions paid and cash generated from operations has been funded from remaining proceeds from the Company's initial public offering of Units (completed in July
2007) and borrowings under its line of credit. This portion of distributions is expected to be treated as a return of capital for federal income tax purposes. Since a portion of distributions has to
date been funded with proceeds from the offering of Units, the Company's ability to maintain its current intended rate of distribution will be primarily based on the ability of the Company's
properties to generate cash from operations at this level, and the Company's ability to obtain additional financing until general economic conditions improve. Since there can be no assurance of the
Company's ability to obtain additional financing or that the properties owned by the Company will provide income at this level, there can be no assurance as to the classification or duration of
distributions at the current rate. Additionally, in light of the weakness in economic conditions throughout the United States, the Board of Directors monitors the Company's distribution rate relative
to the performance of the hotels on an ongoing basis
and may make additional adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company. Effective with the common stock dividend paid in May
2009, the Company's annual dividend distribution rate was reduced to $0.77 per share (or $0.064167 monthly per share) from the prior $0.88 annual distribution rate per share (or
$0.073334 monthly per share).

The
Company has on-going capital commitments to fund its capital improvements. The Company is required, under all of the hotel management agreements, to make available, for
the repair, replacement, refurbishing of furniture, fixtures, and equipment, an amount between 2% to 5% of gross revenues of the applicable hotel, provided that such amount may be used for the
Company's capital expenditures with respect to the applicable hotel. The Company expects that this amount will be adequate to fund required repair, replacement, and refurbishments and to maintain the
Company's hotels in a competitive condition. Also, as of December 31, 2009, the Company held $8.4 million in reserve for capital expenditures. The Company completed three major
renovations in 2009 and at December 31, 2009, the Company had one major hotel renovation in progress, which is expected to be completed during the first quarter of 2010. Total capital
expenditures in 2009 were approximately $14.0 million. With the depressed economic environment, the Company will only complete the most cost effective projects. The Company anticipates 2010
capital improvements to be approximately $5 million.

The
Company's Board of Directors has approved the Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year.
Beginning in April 2007, shareholders may request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned less than three years or 100% of the
price per Unit if the Units have been owned more than three years. The maximum number of Units that may be redeemed in any given year will be three percent of the weighted average number of Units
outstanding for the year. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit
Redemption Program. As of December 31, 2009, the Company has redeemed approximately 3.2 million Units in the amount of $33.7 million under the program, representing approximately
2,363,000 Units redeemed for $24.8 million in 2009, 729,000 Units redeemed for $7.5 million in 2008, and 138,000 Units redeemed for $1.4 million in 2007.

In
July 2007 the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the
Company by reinvesting dividends to purchase additional Units of the Company. The uses of proceeds from this plan may include purchasing Units under the Company's Unit Redemption Program, enhancing
properties, satisfying financing obligations and other expenses, increasing working capital, funding

26

---



Table of Contents

various
corporate operations, and acquiring hotels. As of December 31, 2009, approximately 5.6 million Units, representing $61.9 million in proceeds to the Company, have been
issued under the plan, consisting of approximately 2.4 million Units issued in 2009 for $25.9 million, 2.5 million Units issued in 2008 for $28.0 million, and 726,000 Units
issued in 2007 for $8.0 million in proceeds to the Company.

Subsequent Events

In January 2010, the Company declared and paid $6.0 million or $.064167 per common share, in a distribution to its common
shareholders. Under the Company's Dividend Reinvestment Plan, $2.1 million were reinvested, resulting in the issuance of 186,818 Units.

On
January 20, 2010, under the guidelines of the Company's Unit Redemption Program, 770,996 Units were repurchased from shareholders at a cost of $8.3 million.

In
February 2010, the Company declared and paid $6.0 million or $.064167 per common share, in a distribution to its common shareholders. Under the Company's Dividend Reinvestment
Plan, $2.1 million were reinvested, resulting in the issuance of 187,472 Units.

Impact of Inflation

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

Business Interruption

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

Seasonality

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

Critical Accounting Policies

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

Capitalization Policy

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

27

---



Table of Contents

repairs
to a single asset, the repair must be at least $2,500 and the useful life of the asset must be substantially extended.

Impairment Losses Policy

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

Recently Adopted or Issued Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board ("FASB") issued a pronouncement establishing the FASB Accounting Standards
Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with United States
generally accepted accounting principles ("GAAP"). The standard explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission ("SEC") under federal securities laws as
authoritative GAAP for SEC registrants. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard
did not have a material impact on the Company's consolidated financial statements.

In
June 2009, the FASB issued a pronouncement which amends its guidance surrounding a company's analysis to determine whether any of its variable interests constitute controlling
financial interests in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:
(a) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance, and (b) the obligation to absorb losses of the
entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.
Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the
power to direct the activities of the variable interest entity that most significantly impact the entity's economic performance. The new pronouncement also requires ongoing assessments of whether an
enterprise is the primary beneficiary of a variable interest entity and enhanced disclosure about an enterprise's involvement with a variable interest entity. This pronouncement is effective for
interim and annual reporting periods beginning after November 15, 2009. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial
statements.

In
May 2009, the FASB issued a pronouncement which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial
statements are issued or available to be issued. Although there is new terminology, this pronouncement is based on
the same principles as those that previously existed in the auditing standards. This pronouncement was effective for the Company beginning June 30, 2009. The adoption of this standard did not
have a material impact on the Company's consolidated financial statements.

In
April 2009, the FASB issued a pronouncement which amends its guidance for all assets acquired and all liabilities assumed in a business combination that arise from contingencies. This
pronouncement states that the acquirer will recognize such an asset or liability if the acquisition-date fair value of that asset or liability can be determined during the measurement
period. If it cannot be determined during the measurement period, then the asset or liability should be recognized at the acquisition date if the following criteria are met: (1) information
available before the end of the measurement period

28

---



Table of Contents

indicates
that it is probable that an asset existed or that a liability had been incurred at the acquisition date, and (2) the amount of the asset or liability can be reasonably estimated. This
pronouncement was adopted by the Company in the first quarter of 2009. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

Item 7A.    Quantitative and Qualitative Disclosure About Market Risk

The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of
December 31, 2009, the Company's financial instruments were not exposed to significant market risk due to foreign currency exchange risk, commodity price risk or equity price risk. The Company
will be exposed to interest rate risk due to possible changes in short term interest rates as it invests its cash or borrows on its line of credit. The Company had an outstanding balance of
$11.5 million on its $30 million line of credit at December 31, 2009, and to the extent it utilizes the line of credit, the Company will be exposed to changes in short term
interest rates. Based on the outstanding balance at December 31, 2009, every 100 basis point change in interest rates can potentially impact the Company's annual net income by
$115 thousand, subject to conditions of the interest rate floor provisions of the line of credit facility, and with all other factors remaining the same. The Company's cash balance at
December 31, 2009 was not material.

In
addition to its $11.5 million outstanding balance under its line of credit facility at December 31, 2009, the Company has also assumed fixed interest rate notes payable
to lenders under permanent financing arrangements. The following table summarizes the annual maturities and average interest rates of the Company's variable rate and fixed rate notes payable
outstanding at December 31, 2009.

(000's)

2010

2011

2012

2013

2014

Thereafter

Total

Fair
Market
ValueMaturities

$
2,563

$
14,247

$
2,909

$
35,281

$
46,989

$
13,304

$
115,293

$
119,648Average Interest Rate


6.1
%

6.4
%

6.5
%

6.5
%

6.3
%

5.9
%


29

---





Table of Contents



Item 8.    Financial Statements and Supplementary Data

Report of Management
on Internal Control Over Financial Reporting

March 5,
2010
To the Shareholders
Apple REIT Seven, Inc.

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

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

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

In
connection with the preparation of the Company's annual consolidated financial statements, management has undertaken an assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO Framework). Management's assessment included an evaluation of the design of the Company's internal control over financial reporting and testing of the operational
effectiveness of those controls.

Based
on this assessment, management has concluded that as of December 31, 2009, the Company's internal control over financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

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

/s/ GLADE M. KNIGHT Glade M. Knight
Chairman and Chief Executive Officer

/s/ BRYAN PEERY Bryan Peery
Chief Financial Officer
(Principal Accounting Officer)


30

---



Table of Contents

Report of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting

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

We
have audited Apple REIT Seven, Inc.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Apple REIT Seven, Inc.'s management is responsible
for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of
Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

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

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

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

In
our opinion, Apple REIT Seven, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO
criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2009 consolidated financial statements of Apple REIT
Seven, Inc. and our report dated March 5, 2010 expressed an unqualified opinion thereon.



Richmond,
Virginia
March 5, 2010

31

---



Table of Contents

Report of Independent Registered Public Accounting Firm

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

We
have audited the accompanying consolidated balance sheets of Apple REIT Seven, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index
at Item 15(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Apple REIT Seven, Inc. at
December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Apple REIT Seven, Inc.'s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 5, 2010 expressed an unqualified opinion thereon.



Richmond,
Virginia
March 5, 2010

32

---





Table of Contents

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

December 31,
2009

December 31,
2008ASSETSInvestment in real estate, net of accumulated depreciation of $80,923 and $48,497, respectively

$
902,293

$
920,688Cash and cash equivalents





20,609Restricted cash-furniture, fixtures and other escrows


9,582


9,421Due from third party managers


5,639


6,548Other assets, net


6,373


10,578TOTAL ASSETS

$
923,887

$
967,844LIABILITIESNotes payable

$
117,787

$
109,275Accounts payable and accrued expenses


13,843


12,816TOTAL LIABILITIES


131,630


122,091SHAREHOLDERS' EQUITYPreferred stock, authorized 15,000,000 shares; none issued and outstanding





Series A preferred stock, no par value, authorized 200,000,000 shares: issued and outstanding 93,521,656 and 93,530,188 shares,
respectively





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


24


24Common stock, no par value, authorized 200,000,000 shares; issued and outstanding 93,521,656 and 93,530,188 shares, respectively


926,419


925,248Distributions greater than net income


(134,186
)

(79,519
)TOTAL SHAREHOLDERS' EQUITY


792,257


845,753TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$
923,887

$
967,844


See notes to consolidated financial statements.Note: The Company was initially capitalized on May 26, 2005 and commenced operations on April 27, 2006.

33

---





Table of Contents

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

For the
Year ended
December 31,
2009

For the
Year ended
December 31,
2008

For the
Year ended
December 31,
2007Revenues:Room revenue

$
174,042

$
195,414

$
129,467Other revenue


17,673


18,877


9,097Total revenue


191,715


214,291


138,564Expenses:Operating expense


51,524


56,382


34,140Hotel administrative expense


15,548


17,216


9,980Sales and marketing


15,084


16,410


11,068Utilities


8,833


9,124


5,752Repair and maintenance


9,002


9,711


5,990Franchise fees


7,832


8,331


5,264Management fees


6,145


7,414


4,750Taxes, insurance and other


13,717


13,559


8,571General and administrative


4,600


5,881


3,823Depreciation expense


32,425


28,434


16,990Total expenses


164,710


172,462


106,328Operating income


27,005


41,829


32,236Interest income


127


1,934


7,310Debt extinguishment costs








(1,391
)Interest expense


(6,419
)

(5,700
)

(4,922
)Net income

$
20,713

$
38,063

$
33,233Basic and diluted net income per common share

$
0.22

$
0.41

$
0.47Weighted average common shares outstandingbasic and diluted


93,472


92,637


70,763Distributions declared per common share

$
0.81

$
0.88

$
0.88


See notes to consolidated financial statements.Note: The Company was initially capitalized on May 26, 2005 and commenced operations on April 27, 2006.

34

---





Table of Contents

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

Common Stock

Class B Convertible
Preferred StockNumber of
Shares

Amount

Number of
Shares

Amount

Distributions
Greater than
Net Income

Total
Shareholders'
EquityBalance at December 31, 2006


37,045

$
363,239


240

$
24

$
(9,141
)
$
354,122Net proceeds from the sale of common shares


54,806


542,799











542,799Common shares redeemed


(138
)

(1,389
)










(1,389
)Net income














33,233


33,233Cash distributions declared and paid to shareholders ($.88 per share)














(60,234
)

(60,234
)Balance at December 31, 2007


91,713


904,649


240


24


(36,142
)

868,531Net proceeds from the sale of common shares


2,546


28,061











28,061Common shares redeemed


(729
)

(7,462
)










(7,462
)Net income














38,063


38,063Cash distributions declared and paid to shareholders ($.88 per share)














(81,440
)

(81,440
)Balance at December 31, 2008


93,530


925,248


240


24


(79,519
)

845,753Net proceeds from the sale of common shares


2,355


26,014











26,014Common shares redeemed


(2,363
)

(24,843
)










(24,843
)Net income














20,713


20,713Cash distributions declared and paid to shareholders ($.81 per share)














(75,380
)

(75,380
)Balance at December 31, 2009


93,522

$
926,419


240

$
24

$
(134,186
)
$
792,257


See notes to consolidated financial statements.Note: The Company was initially capitalized on May 26, 2005 and commenced operations on April 27, 2006.

35

---





Table of Contents

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

For the
Year ended
December 31,
2009

For the
Year ended
December 31,
2008

For the
Year ended
December 31,
2007Cash flow from operating activities:Net income

$
20,713

$
38,063

$
33,233Adjustments to reconcile net income to cash provided by operating activities:Depreciation of real estate owned


32,425


28,434


16,990Amortization of deferred financing costs, fair value adjustments and other non-cash expenses, net


114


(382
)

904Changes in operating assets and liabilities, net of amounts acquired/assumed:Increase (decrease) in funds due from third party managers


909


82


(3,575
)Decrease in other assets


530


852


685Increase in accounts payable and accrued expenses


769


1,976


1,720Net cash provided by operating activities


55,460


69,025


49,957Cash flow from investing activities:Capital improvements


(13,777
)

(26,541
)

(7,815
)Cash paid for the acquisition of hotel properties





(103,048
)

(375,930
)Deposits and other disbursements for the potential acquisition of hotel properties








(2,888
)Redemptions of (additions to) ownership interest in non-hotel assets


3,240





(7,482
)Net decrease (increase) in cash restricted for property improvements


(389
)

2,070


(186
)Net cash used in investing activities


(10,926
)

(127,519
)

(394,301
)Cash flow from financing activities:Payment of mortgage notes payable


(2,401
)

(2,192
)

(19,909
)Net proceeds (payments) related to corporate lines of credit


11,510





(18,000
)Payment of financing costs related to borrowings


(43
)

(301
)

(1,090
)Redemptions of common stock


(24,843
)

(7,462
)

(1,389
)Net proceeds related to issuance of Units


26,014


28,061


542,799Cash distributions paid to common shareholders


(75,380
)

(81,440
)

(60,234
)Net cash (used in) provided by financing activities


(65,143
)

(63,334
)

442,177Increase (decrease) in cash and cash equivalents


(20,609
)

(121,828
)

97,833Cash and cash equivalents, beginning of period


20,609


142,437


44,604Cash and cash equivalents, end of period

$


$
20,609

$
142,437Supplemental information:Interest paid

$
7,168

$
6,794

$
4,391Non-cash transactions:Notes payable assumed in acquisitions

$


$
27,334

$
72,276


See notes to consolidated financial statements.Note: The Company was initially capitalized on May 26, 2005 and commenced operations on April 27, 2006.

36

---





Table of Contents

Notes to Consolidated Financial Statements

Note 1

General Information and Summary of Significant Accounting Policies

Organization

Apple REIT Seven, Inc. (the "Company") is a Virginia corporation formed to invest in real estate in select metropolitan areas in
the United States. Initial capitalization occurred on May 26, 2005 and operations began on April 27, 2006 when the Company acquired its first hotel. The Company has no foreign operations
or assets and its operations include only one segment. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have
been eliminated upon consolidation.

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

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The fair market value of
cash and cash equivalents approximates their carrying value. All cash and cash equivalents are currently held at two institutions, Wachovia Bank N.A. (a subsidiary of Wells Fargo & Company) and
BB&T Bank, and the balances may at times exceed federal depository insurance limits.

Investment in Hotels and Related Depreciation

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

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

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

37

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 1 (Continued)

Other Assets

The Company has a partial ownership interest in Apple Air Holdings, LLC ("Apple Air"). A 50% interest was originally purchased
by the Company for approximately $7.5 million in 2007 to allow the Company access to two corporate Lear jets for asset management and hotel renovation purposes. In January 2009, the Company's
ownership interest in Apple Air was reduced from 50% to 26% through the redemption of a 24% ownership interest by Apple Air. The Company received approximately $3.2 million for the ownership
interest redeemed, which approximated the Company's carrying value of the 24% ownership interest at the date of redemption. No gain or loss from the redemption was recognized by the Company. The
Company's ownership interest in Apple Air is included in other assets, net on the Company's consolidated balance sheet, and was approximately $2.8 million and $6.6 million at
December 31, 2009 and 2008, respectively. The other members of Apple Air are Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. The Company records its
share of income or loss of the entity under the equity method of accounting, adjusting its investment accordingly. For the years ended December 31, 2009 and 2008, the Company recorded a loss of
approximately $0.5 million and $1.0 million, respectively, as its share of the net loss of Apple Air which is included in general and administrative expense. The losses relate primarily
to the depreciation of the aircraft.

Revenue Recognition

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

Comprehensive Income

The Company recorded no comprehensive income other than net income during the periods reported.

Earnings Per Common Share

Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the year. Diluted
earnings per share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. There were no dilutive shares outstanding at December 31,
2009, 2008 or 2007. As a result, basic and dilutive outstanding shares were the same. Series B preferred convertible shares are not included in earnings per common share calculations until such
time the Series B preferred convertible shares are converted to common shares.

Federal Income Taxes

The Company is operated as, and has elected to be taxed as, a REIT under Sections 856 to 860 of the Internal Revenue Code.
Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from income reported for financial reporting purposes primarily due to the differences for
federal income tax purposes in the estimated useful lives used to compute depreciation. The characterization of 2009 distributions of $0.81 per share for tax purposes was 47% ordinary income and 53%
return of capital (unaudited). The characterization of 2008 distributions of $0.88 per share for tax purposes was 56% ordinary income and 44% return of capital (unaudited). The characterization of
2007 distributions of $0.88 per share for tax purposes was 63% ordinary income and 37% return of capital (unaudited).

38

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 1 (Continued)

The
Lessee, as a taxable REIT subsidiary of the Company, is subject to federal and state income taxes. The taxable REIT subsidiary incurred a loss for the years ended December 31,
2009, 2008 and 2007, and therefore did not have any federal tax expense. No operating loss benefit has been recorded in the consolidated balance sheet since realization is uncertain. Total net
operating loss carry forward for federal income tax purposes was approximately $17.0 million as of December, 31, 2009. The net operating loss carry forwards will expire beginning in 2026. There
are no material differences between the book and tax cost basis of the Company's assets.

Sales and Marketing Costs

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

Use of Estimates

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

Recently Adopted or Issued Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board ("FASB") issued a pronouncement establishing the FASB Accounting Standards
Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with United States
generally accepted accounting principles ("GAAP"). The standard explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission ("SEC") under federal securities laws as
authoritative GAAP for SEC registrants. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard
did not have a material impact on the Company's consolidated financial statements.

In
June 2009, the FASB issued a pronouncement which amends its guidance surrounding a company's analysis to determine whether any of its variable interests constitute controlling
financial interests in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:
(a) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance, and (b) the obligation to absorb losses of the
entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.
Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the
power to direct the activities of the variable interest entity that most significantly impact the entity's economic performance. The new pronouncement also requires ongoing assessments of whether an
enterprise is the primary beneficiary of a variable interest entity and enhanced disclosure about an enterprise's involvement with a variable interest entity. This pronouncement, applied
prospectively, is effective for interim and annual reporting periods beginning

39

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 1 (Continued)

after
November 15, 2009. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

In
May 2009, the FASB issued a pronouncement which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial
statements are issued or available to be issued. Although there is new terminology, this pronouncement is based on the same principles as those that previously existed in the auditing standards. This
pronouncement was effective for the Company beginning June 30, 2009. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

In
April 2009, the FASB issued a pronouncement which amends its guidance for all assets acquired and all liabilities assumed in a business combination that arise from contingencies. This
pronouncement states that the acquirer will recognize such an asset or liability if the acquisition-date fair value of that asset or liability can be determined during the measurement
period. If it cannot be determined during the measurement period, then the asset or liability should be recognized at the acquisition date if the following criteria are met: (1) information
available before the end of the measurement period indicates that it is probable that an asset existed or that a liability had been incurred at the acquisition date, and (2) the amount of the
asset or liability can be reasonably estimated. This pronouncement was adopted by the Company in the first quarter of 2009. The adoption of this standard did not have a material impact on the
Company's consolidated financial statements.

Note 2

Investments in Real Estate

As of December 31, 2009, the Company owned 51 hotels consisting of seven Hilton Garden Inn hotels, seven Residence Inn hotels,
ten Courtyard hotels, twelve Homewood Suites hotels, three Fairfield Inn hotels, four SpringHill Suites hotels, four TownePlace Suites hotels, three Hampton Inn hotels and one Marriott hotel. The
hotels are located in 18 states and, in aggregate, consist of 6,424 rooms.

Investment
in real estate consisted of the following (in thousands):

December 31, 2009

December 31, 2008Land

$
90,714

$
90,719Building and Improvements


831,121


822,693Furniture, Fixtures and Equipment


61,381


55,773983,216


969,185Less Accumulated Depreciation


(80,923
)

(48,497
)Investments in Real Estate, net

$
902,293

$
920,688


40

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 2 (Continued)

The
following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each hotel. All dollar amounts are in thousands.

Location

Brand

Manager

Date of
Purchase

Rooms

Gross
Purchase PriceHouston, TX

Residence Inn

Western


4/27/06


129

$
13,600San Diego, CA

Hilton Garden Inn

Inn Ventures


5/9/06


200


34,500Brownsville, TX

Courtyard

Western


6/19/06


90


8,550Stafford, TX

Homewood Suites

Western


8/15/06


78


7,800Auburn, AL

Hilton Garden Inn

LBA


8/17/06


101


10,185Huntsville, AL

Hilton Garden Inn

LBA


8/17/06


101


10,285Montgomery, AL

Homewood Suites

LBA


8/17/06


91


10,660Montgomery, AL

Hilton Garden Inn

LBA


8/17/06


97


10,385Troy, AL

Hampton Inn

LBA


8/17/06


82


6,130Seattle, WA

Residence Inn

Inn Ventures


9/1/06


234


56,173Sarasota, FL

Homewood Suites

Hilton


9/15/06


100


13,800Hattiesburg, MS

Courtyard

LBA


10/5/06


84


9,455Huntsville, AL

Homewood Suites

LBA


10/27/06


107


11,606Omaha, NE

Courtyard

Marriott


11/4/06


181


23,100Cincinnati, OH

Homewood Suites

White


12/1/06


76


7,100Rancho Bernardo, CA

Courtyard

Dimension


12/12/06


210


36,000New Orleans, LA

Homewood Suites

Dimension


12/15/06


166


43,000Ronkonkoma, NY

Hilton Garden Inn

White


12/15/06


164


27,000Tupelo, MS

Hampton Inn

LBA


1/23/07


96


5,245Miami, FL

Homewood Suites

Dimension


2/21/07


159


24,300Highlands Ranch, CO

Residence Inn

Dimension


2/22/07


117


19,000Cranford, NJ

Homewood Suites

Dimension


3/7/07


108


13,500Mahwah, NJ

Homewood Suites

Dimension


3/7/07


110


19,500Highlands Ranch, CO

Hilton Garden Inn

Dimension


3/9/07


128


20,500Prattville, AL

Courtyard

LBA


4/24/07


84


9,304Lakeland, FL

Courtyard

LBA


4/24/07


78


9,805Tallahassee, FL

Fairfield Inn

LBA


4/24/07


79


6,647Columbus, GA

Fairfield Inn

LBA


4/24/07


79


7,333Agoura Hills, CA

Homewood Suites

Dimension


5/8/07


125


25,250Memphis, TN

Homewood Suites

Hilton


5/15/07


140


11,100Dothan, AL

Fairfield Inn

LBA


5/16/07


63


4,584Vancouver, WA

SpringHill Suites

Inn Ventures


6/1/07


119


15,988San Diego, CA

Residence Inn

Dimension


6/13/07


121


32,500Provo, UT

Residence Inn

Dimension


6/13/07


114


11,250Macon, GA

Hilton Garden Inn

LBA


6/28/07


101


10,660San Antonio, TX

TownePlace Suites

Western


6/29/07


106


11,925Alexandria, VA

Courtyard

Marriott


7/13/07


176


36,997San Diego, CA

Hampton Inn

Dimension


7/19/07


177


42,000Addison, TX

SpringHill Suites

Marriott


8/10/07


159


12,500Boise, ID

SpringHill Suites

Inn Ventures


9/14/07


230


21,000San Antonio, TX

TownePlace Suites

Western


9/27/07


123


13,838Trussville, AL

Courtyard

LBA


10/4/07


84


9,510Kirkland, WA

Courtyard

Inn Ventures


10/23/07


150


31,000Huntsville, AL

TownePlace Suites

LBA


12/10/07


86


8,927Tucson, AZ

Residence Inn

Western


1/17/08


124


16,640Richmond, VA

Marriott

White


1/25/08


410


53,300Columbus, GA

SpringHill Suites

LBA


3/6/08


85


9,675Dothan, AL

Residence Inn

LBA


4/16/08


84


9,669El Paso, TX

Homewood Suites

Western


4/23/08


114


15,390Columbus, GA

TownePlace Suites

LBA


5/22/08


86


8,428Miami, FL

Courtyard

Dimension


9/5/08


118


15,0006,424

$
901,594


41

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 2 (Continued)

The Company leased all of its hotels to wholly-owned taxable REIT subsidiaries under master hotel lease agreements. The Company also used the proceeds of its Unit offering to pay 2% of
the gross purchase price for these hotels, which equaled approximately $18.0 million, as a commission to ASRG.

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

Note 3

Notes Payable and Credit Agreements

In April 2009, the Company entered into an unsecured line of credit facility, to be utilized for working capital, hotel renovations, or
other general corporate funding purposes, including the payment of dividends. The credit facility provides for a maximum aggregate commitment by the lender, a commercial bank, of $30 million,
and has a scheduled maturity in April 2011. The applicable interest rate under the line of credit is equal to LIBOR (the London Interbank Offered Rate for a one-month term) plus 1.75%,
subject to a minimum interest rate floor of 3.15%. The applicable LIBOR rate was approximately 0.23% at December 31, 2009. Payments of interest only are due monthly under the terms of the line
of credit agreement, and any amount borrowed by the Company may be repaid before maturity with no penalty. The balance outstanding under the line of credit facility on December 31, 2009 was
$11.5 million, at an annual interest rate of 3.15%. Interest expense incurred in 2009 under the line of credit facility was approximately $105 thousand.

In
conjunction with the acquisition of several hotel properties, the Company assumed mortgage notes payable outstanding, secured by the applicable hotel property. The following table
summarizes the hotel, interest rate, maturity date and the principal amount assumed associated with each note payable outstanding as of December 31, 2009 and 2008. All dollar amounts are in
thousands.

Location

Brand

Interest
Rate

Maturity
Date

Principal
Assumed

Outstanding
balance as of
Dec. 31, 2009

Outstanding
balance as of
Dec. 31, 2008Omaha, NE

Courtyard


6.79
%

1/1/14

$
12,658

$
11,868

$
12,143New Orleans, LA

Homewood Suites


5.85
%

10/1/14


17,144


16,109


16,476Tupelo, MS

Hampton Inn


5.90
%

3/1/16


4,110


3,754


3,883Miami, FL

Homewood Suites


6.50
%

7/1/13


9,820


9,199


9,431Highlands Ranch, CO

Residence Inn


5.94
%

6/1/16


11,550


11,203


11,350Tallahassee, FL

Fairfield Inn


6.80
%

1/11/13


3,494


3,285


3,368Lakeland, FL

Courtyard


6.80
%

1/11/13


4,210


3,957


4,058San Diego, CA

Residence Inn


6.55
%

4/1/13


15,804


14,898


15,280Provo, UT

Residence Inn


6.55
%

4/1/13


5,553


5,234


5,369Richmond, VA

Marriott


6.95
%

9/1/14


25,298


24,276


24,826$
109,641

$
103,783

$
106,184


42

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 3 (Continued)

The
aggregate amounts of principal payable under the Company's line of credit facility and mortgage obligations, for the five years subsequent to December 31, 2009 and thereafter
are as follows (in thousands):

Total2010

$
2,5632011


14,2472012


2,9092013


35,2812014


46,989Thereafter


13,304115,293Fair Value Adjustment of Assumed Debt


2,494Total

$
117,787


A
fair value adjustment was recorded upon the assumption of above market rate mortgage loans in connection with several of the Company's hotel acquisitions. These premiums will be
amortized into interest expense over the remaining term of the related indebtedness using a method approximating the effective interest rate method. The effective interest rates on the applicable debt
obligations assumed ranged from 5.40% to 6.24% at the date of assumption. The total adjustment to interest expense was $597 thousand in 2009, $571 thousand in 2008 and
$232 thousand in 2007. The unamortized balance of the fair value adjustment was $2.5 million at December 31, 2009 and $3.1 million at December 31, 2008.

The
Company incurred loan origination costs related to the assumption of the mortgage obligations on purchased hotels, and upon the origination of its current corporate line of credit
facility and a former corporate line of credit facility extinguished in 2007. Such costs are amortized over the period to maturity of the applicable mortgage loan, or to termination of the applicable
credit agreement, as an
addition to interest expense. Amortization of such costs totaled $212 thousand in 2009, $189 thousand in 2008 and $878 thousand in 2007, and are included in interest expense. The
unamortized balance of loan origination costs was $0.8 million at December 31, 2009 and $1.0 million at December 31, 2008.

The
mortgage loan assumed on the Richmond, Virginia Marriott hotel has a stated maturity date of September 1, 2014. As a condition of the mortgage loan, the maturity date of the
note payable may be accelerated by the lender should the Company be required to expand the hotel, under terms of the ground lease on the hotel property. The Company is under no such requirement as of
December 31, 2009.

During
2007, the Company paid off two loans assumed, and defeased one mortgage loan assumed. The Company had no remaining obligations related to these loans at December 31, 2007.
Costs related to the extinguishment of these three loans and a former bank line of credit facility (extinguished in 2007) totaled $1.4 million for the year ended December 31, 2007. No
debt extinguishment costs were incurred during 2009 and 2008.

The
Company estimates the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of the debt obligation
with similar credit policies. Market rates take into consideration general market conditions and maturity. As of

43

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 3 (Continued)

December 31,
2009, the carrying value and estimated fair value of the Company's debt was $117.8 million and $119.6 million. As of December 31, 2008, the carrying value and
estimated fair value of the Company's debt was $109.3 million and $116.3 million.

The
Company's Interest expense in its Consolidated Statements of Operations is net of capitalized interest of $0.4 million, $1.0 million and $0.3 million for the
years ended December 31, 2009, 2008 and 2007. The interest was capitalized in conjunction with hotel renovations.

Note 4

Shareholders' Equity

The Company concluded its best-efforts offering of Units (each Unit consists of one common share, no par value, and one
Series A preferred share) on July 17, 2007. The Company registered its Units on Registration Statement Form S-11 (File No. 333-125546) filed
March 3, 2006. The Company began its best-efforts offering (the "Offering") of Units on March 15, 2006, the same day the Registration Statement was declared effective by the
Securities and Exchange Commission.

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

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

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

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

44

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 4 (Continued)

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



Upon
the occurrence of any conversion event, each Series B convertible preferred share may be converted into 24.17104 common shares. In the event that after raising gross proceeds
of $1 billion, the Company raises additional gross proceeds in a subsequent public offering, each Series B convertible preferred share may be converted into an additional number of
common shares based on the additional
gross proceeds raised through the date of conversion in a subsequent public offering according to the following formula: (X/50 million) × 1.20568, where X is the
additional gross proceeds rounded down to the nearest 50 million.

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

Expense
related to issuance of 240,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for
conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B shares to common shares occurs. The expense will be measured as the
difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares. If a conversion event had occurred at
December 31, 2009, expense would have ranged from $0 to $63.8 million (assumes $11 per common share fair market value) which represents approximately 5.8 million shares of common
stock.

The
Company's Board of Directors has approved the Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year.
Beginning in April 2007, shareholders may request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned less than three years or 100% of the
price per Unit if the Units have been owned more than three years. The maximum number of Units that may be redeemed in any given year will be three percent of the weighted average number of Units
outstanding for the year. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit
Redemption Program. As of December 31, 2009, the Company has redeemed approximately 3.2 million Units in the amount of $33.7 million under the program, representing approximately
2,363,000 Units redeemed for $24.8 million in 2009, 729,000 Units redeemed for $7.5 million in 2008 and 138,000 Units redeemed for $1.4 million in 2007.

45

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 4 (Continued)

In
July 2007 the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the
Company by reinvesting dividends to purchase additional Units of the Company. The uses of proceeds from this plan may include purchasing Units under the Company's Unit Redemption Program, enhancing
properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. As of December 31, 2009, approximately
5.6 million Units, representing $61.9 million in proceeds to the Company, have been issued under the plan, consisting of approximately 2,354,000 Units issued in 2009 for
$25.9 million, 2,546,000 Units issued in 2008 for $28.0 million, and 726,000 Units issued in 2007 for $8.0 million in proceeds to the Company.

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

Note 5

Stock Incentive Plans

In 2006 the Board of Directors approved a Non-Employee Directors Stock Option Plan (the "Directors Plan") whereby
directors, who are not employees of the Company or affiliates, automatically receive the option to purchase Units. Under the Directors Plan, the number of Units authorized for issuance is equal to
45,000 plus 1.8% of the number of Units sold in excess of the minimum offering of 4,761,905 Units. This plan currently relates to the initial public offering of 91,125,541 Units. The maximum number of
Units authorized under the Directors Plan as of December 31, 2009 is 1,599,545.

Also
in 2006, the Board of Directors approved an Incentive Stock Option Plan (the "Incentive Plan") whereby incentive awards may be granted to certain employees of the Company or
affiliates.

46

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 5 (Continued)

Under
the Incentive Plan, the number of Units authorized for issuance is equal to 35,000 plus 4.625% of the number of Units sold in the initial offering in excess of 4,761,905. This plan also
currently relates to the initial public offering of 91,125,541 Units. The maximum number of Units that can be issued under the Incentive Plan as of December 31, 2009 is 4,029,318.

Both
plans generally provide, among other things, that options be granted at exercise prices not lower than the market value of the Units on the date of grant. The options expire
10 years from the date of the grant. During 2009, 2008 and 2007, the Company granted options to purchase 74,796, 74,024 and 55,816 Units, respectively, under the Directors Plan. All of the
options issued vested at the date of issuance, and have an exercise price of $11 per Unit. The Company has granted no options under the Incentive Plan as of December 31, 2009. Activity in the
Company's stock option plans during 2009, 2008 and 2007 is summarized in the following table:

Year ended
December 31, 2009

Year ended
December 31, 2008

Year ended
December 31, 2007Outstanding, beginning of year:


145,474


71,450


15,634Granted


74,796


74,024


55,816Exercised








Expired or canceled








Outstanding, end of year:


220,270


145,474


71,450Exercisable, end of year:


220,270


145,474


71,450The weighted-average exercise price:

$
11.00

$
11.00

$
11.00


Compensation
expense associated with the issuance of stock options was approximately $119 thousand in 2009, $61 thousand in 2008 and $53 thousand in 2007.

Note 6

Management and Franchise Agreements

Each of the Company's 51 hotels owned at December 31, 2009 are operated and managed, under separate management agreements, by
affiliates of one of the following companies (indicates the number of hotels managed): Marriott International, Inc. ("Marriott") (3), Dimension Development Company ("Dimension") (12), Hilton
Worldwide ("Hilton") (2), Western International ("Western") (7), Larry Blumberg & Associates ("LBA") (19), White Lodging Services Corporation ("WLS") (3), or Inn Ventures, Inc. ("Inn
Ventures") (5). The agreements provide for initial terms ranging from one to twenty years. Fees associated with the agreements generally include the payment of base management fees, incentive
management fees, accounting fees, and other fees for centralized services which are allocated among all of the hotels that receive the benefit of such services. Base management fees are calculated as
a percentage of gross revenues. Incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements. The
Company has the option to terminate the management agreements if specified performance thresholds are not satisfied. During the years ended December 31, 2009, 2008 and 2007, the Company
incurred approximately $6.1 million, $7.4 million and $4.8 million, respectively, in management fee expense.

Dimension,
Western, LBA, WLS, and Inn Ventures are not affiliated with either Marriott or Hilton, and as a result, these hotels (as well as the two hotels managed by Promus
Hotels, Inc., which

47

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 6 (Continued)

is
an affiliate of Hilton) were required to obtain separate franchise agreements with each respective franchisor. The Hilton franchise agreements generally provide for initial terms ranging between 10
to 20 years. Fees associated with the Hilton agreements generally include the payment of royalty fees and program fees based on room revenues. The Marriott franchise agreements provide for an
initial term of between six and 20 years. Fees associated with the Marriott agreements include the payment of royalty fees, marketing fees, reservation fees and a communications support fee
based on room revenues. During the years ended December 31, 2009, 2008 and 2007 the Company incurred approximately $7.8 million, $8.3 million and $5.3 million,
respectively, in franchise fee expense.

Note 7

Related Parties

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

The
Company has a contract with ASRG, a related party, to provide brokerage services for the acquisition and disposition of the Company's real estate assets. In accordance with the
contract, ASRG is paid a fee of 2% of the gross purchase price of any acquisitions or gross sale price of any dispositions of real estate investments, subject to certain conditions. Payments to ASRG
for services
under the terms of this contract have totaled approximately $18.0 million since inception, which were capitalized as a part of the purchase price of the hotels. No such fees were incurred
during the year ended December 31, 2009.

The
Company is party to an advisory agreement with Apple Seven Advisors, Inc. ("ASA"), pursuant to which ASA provides management services to the Company. An annual fee ranging
from .1% to .25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable for these services. During the years ended December 31, 2009, 2008
and 2007, the Company incurred approximately $1.0 million, $1.5 million, and $1.1 million in fees related to the advisory agreement with ASA.

Through
a contractual arrangement with Apple REIT Six, Inc., ASA provides the Company with support services. The Company reimburses ASA for the cost of the services provided by
Apple REIT Six, Inc. ASA in turn reimburses Apple REIT Six, Inc. Through similar contractual arrangements, Apple REIT Six, Inc. provides support services to ASRG, Apple Six
Advisors, Inc. ("A6A"), Apple Eight Advisors, Inc. ("A8A"), Apple Nine Advisors, Inc. ("A9A"), Apple REIT Eight, Inc., and Apple REIT Nine, Inc. A6A provides day to
day advisory and administrative functions for Apple REIT Six, Inc., A8A provides day to day advisory and administrative functions for Apple REIT Eight, Inc., and A9A provides day to day
advisory and administrative functions for Apple REIT Nine, Inc. ASRG, ASA, A6A, A8A and A9A are 100% owned by Glade Knight, the Company's Chairman and Chief Executive Officer. During the years
ended December 31, 2009, 2008 and 2007 the Company incurred approximately $2.0 million, $1.9 million and $1.2 million in costs paid to ASA that were reimbursed to Apple
REIT Six, Inc.

Including
ASRG, ASA, A6A, A8A and A9A discussed above, Mr. Knight is also Chairman and CEO of Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT
Nine, Inc. Members of the Company's Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

48

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 8

Pro Forma Information (Unaudited)

The following unaudited pro forma information for the year ended December 31, 2007 is presented as if the acquisitions of the
Company's 44 hotels owned at December 31, 2007 had occurred on the latter of January 1, 2007 or the opening date of the hotel. The Company acquired seven hotels in 2008; the results of
operations of those hotels for the period not owned were not significant compared to the Company's results of operations. The pro forma information does not purport to represent what the Company's
results of operations would actually have been if such transactions, in fact, had occurred on these applicable dates, nor does it purport to represent the results of operations for future periods.
Amounts are in thousands except per share.

Year ended
December 31, 2007Hotel revenues

$
170,380Net income

$
35,949Net income per share-basic and diluted

$
0.48


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

Note 9

Commitments

The Company leases the underlying land for six hotel properties as of December 31, 2009. These land leases have remaining terms
available to the Company ranging from 18 to 93 years, excluding any potential option periods to extend the initial lease term.

The
initial term for the land lease for the Residence Inn in Seattle, Washington extends through February 2049, with an additional three consecutive 10-year extensions
available to the Company (the lessee under the assumed lease). The lease is subject to various payment adjustments during the lease term, including potential periodic increases in lease payments based
on the appraised market value of the underlying land at time of adjustment. Based on an assessment of the fair value of the assumed land lease at the date of the hotel acquisition, the Company
recorded an initial land lease liability. This liability will be amortized over the life of the lease, and is included in accrued expenses on the Company's consolidated balance sheet; the amount of
the liability at December 31, 2009 was approximately $2.2 million.

The
initial term for the land lease for the full-service Marriott hotel in Richmond, Virginia ("MRV") extends through December 2102. The lease is subject to payment
adjustments, based on the Consumer Price Index, at stated intervals during its term. A fair value adjustment was recorded by the Company upon the assumption of the below market rate ground lease. This
favorable lease asset will be amortized over the remaining term of the ground lease. The unamortized balance of the land lease's fair value adjustment was approximately $0.9 million at
December 31, 2009, and is included in other assets on the Company's consolidated balance sheet. Upon assumption of the MRV land lease, the

49

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 9 (Continued)

Company
also assumed certain contingent responsibilities of the hotel's predecessor owner, with respect to the third-party lessor of the land. Dependent on conditions which include the hotel exceeding
stated revenue per available room ("RevPAR") thresholds for a trailing twelve month period (with thresholds adjusting upward by 3% annually), the Company may be obligated to construct an addition to
the MRV hotel containing a minimum of 209 rooms. As of December 31, 2009, there is no requirement to commence an expansion of the MRV hotel.

The
Company has also assumed land leases pertaining to the Columbus, GA Fairfield Inn; Macon, GA Hilton Garden Inn; Columbus, GA TownePlace Suites; and the Miami, FL Courtyard hotel
properties. Based on an assessment of each of these leases, no material land lease liability, or favorable lease asset, was assumed at date of acquisition.

The
aggregate amounts of the estimated minimum lease payments pertaining to the Company's land leases, for the five years subsequent to December 31, 2009 and thereafter are as
follows (in thousands):

Total2010

$
9322011


9342012


9342013


1,0372014


1,126Thereafter


91,031Total

$
95,994


Note 10

Industry Segments

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

Note 11

Quarterly Financial Data (unaudited)

The following is a summary of quarterly results of operations for the years ended December 31, 2009 and 2008. Income per share
for the four quarters in 2008 is non-additive in comparison to income

50

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

Note 11 (Continued)

per
share for the year ended December 31, 2008 due to the timing and size of the Company's Unit issuances.

2009 (in thousands except per share data)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterRevenues

$
47,558

$
50,583

$
49,423

$
44,151Net income

$
5,330

$
6,889

$
6,250

$
2,244Basic and diluted income per common share

$
0.06

$
0.07

$
0.07

$
0.02Distributions declared and paid per share

$
0.220

$
0.202

$
0.193

$
0.193




2008 (in thousands except per share data)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterRevenues

$
50,456

$
57,179

$
57,248

$
49,408Net income

$
9,708

$
11,420

$
10,736

$
6,199Basic and diluted income per common share

$
0.11

$
0.12

$
0.12

$
0.07Distributions declared and paid per share

$
0.220

$
0.220

$
0.220

$
0.220


Note 12

Subsequent Events

In January 2010, the Company declared and paid $6.0 million or $.064167 per common share, in a distribution to its common
shareholders. Under the Company's Dividend Reinvestment Plan, $2.1 million were reinvested, resulting in the issuance of 186,818 Units.

On
January 20, 2010, under the guidelines of the Company's Unit Redemption Program, 770,996 Units were repurchased from shareholders at a cost of $8.3 million.

In
February 2010, the Company declared and paid $6.0 million or $.064167 per common share, in a distribution to its common shareholders. Under the Company's Dividend Reinvestment
Plan, $2.1 million were reinvested, resulting in the issuance of 187,472 Units.

51

---





Table of Contents



Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.

None.

Item 9A.    Controls and Procedures

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

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

Item 9B.    Other Information

None.

52

---



Table of Contents

PART III



Item 10.    Directors, Executive Officers and Corporate Governance

The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K will be
set forth in the Company's 2010 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 10, the 2010 Proxy
Statement is incorporated herein by this reference.

Item 11.    Executive Compensation

The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K will be set forth in the
Company's 2010 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 11, the 2010 Proxy Statement is incorporated herein by this reference.

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

The information required by Items 201(d) and 403 of Regulation S-K will be set forth in the Company's 2010
Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 12, the 2010 Proxy Statement is incorporated herein by this reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by Items 404 and 407(a) of Regulation S-K will be set forth in the Company's 2010
Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 13, the 2010 Proxy Statement is incorporated herein by this reference.

Item 14.    Principal Accounting Fees and Services

The information required by Item 9(e) of Schedule 14A will be set forth in the Company's 2010 Proxy Statement. For the
limited purpose of providing the information necessary to comply with this Item 14, the 2010 Proxy Statement is incorporated herein by this reference.

53

---





Table of Contents

PART IV



Item 15.    Exhibits, Financial Statement Schedules

1.     Financial
Statements of Apple REIT Seven, Inc.



2.     Financial
Statement Schedules



3.     Exhibits



54

---





Table of Contents

SCHEDULE III

Real Estate and Accumulated Depreciation

As of December 31, 2009

(dollars in thousands)

Initial Cost

Subsequently CapitalizedCity

State

Brand

Encumbrances

Land

Bldg./FF&E

Bldg.
Imp. & FF&E

Total
Gross Cost(1)

Acc. Deprec.

Date of
Construction

Date
Acquired

Depreciable
Life

# of
RoomsMontgomery

AL

Homewood Suites

$


$
978

$
10,032

$
268

$
11,278

$
(1,160
)

2004

Aug-06


3 - 39 yrs.


91Montgomery

AL

Hilton Garden Inn





765


9,960


459


11,184


(1,151
)

2003

Aug-06


3 - 39 yrs.


97Troy

AL

Hampton Inn





502


5,867


96


6,465


(713
)

2003

Aug-06


3 - 39 yrs.


82Auburn

AL

Hilton Garden Inn





643


9,879


1,437


11,959


(1,417
)

2001

Aug-06


3 - 39 yrs.


101Huntsville

AL

Hilton Garden Inn





740


9,887


94


10,721


(1,162
)

2005

Aug-06


3 - 39 yrs.


101Huntsville

AL

Homewood Suites





1,092


10,889


41


12,022


(1,244
)

2006

Oct-06


3 - 39 yrs.


107Prattville

AL

Courtyard





1,170


8,407


5


9,582


(814
)

2007

Apr-07


3 - 39 yrs.


84Dothan

AL

Fairfield Inn





570


4,243


30


4,843


(352
)

1993

May-07


3 - 39 yrs.


63Trussville

AL

Courtyard





1,088


8,744


1


9,833


(685
)

2007

Oct-07


3 - 39 yrs.


84Huntsville

AL

TownePlace Suites





804


8,384


2


9,190


(609
)

2007

Dec-07


3 - 39 yrs.


86Dothan

AL

Residence Inn





821


9,097





9,918


(615
)

2008

Apr-08


3 - 39 yrs.


84Tucson

AZ

Residence Inn





998


15,960





16,958


(1,098
)

2008

Jan-08


3 - 39 yrs.


124San Diego

CA

Hilton Garden Inn





5,021


30,345


492


35,858


(3,626
)

2004

May-06


3 - 39 yrs.


200Rancho Bernardo

CA

Courtyard





4,669


32,271


202


37,142


(3,068
)

1987

Dec-06


3 - 39 yrs.


210Agoura Hills

CA

Homewood Suites





4,511


21,434


32


25,977


(1,787
)

2007

May-07


3 - 39 yrs.


125San Diego

CA

Residence Inn


14,898


7,354


26,215


267


33,836


(2,056
)

1999

Jun-07


3 - 39 yrs.


121San Diego

CA

Hampton Inn





5,694


37,938


2,139


45,771


(3,000
)

2001

Jul-07


3 - 39 yrs.


177Highlands Ranch

CO

Residence Inn


11,203


2,345


17,333


487


20,165


(1,476
)

1996

Feb-07


3 - 39 yrs.


117Highlands Ranch

CO

Hilton Garden Inn





2,518


18,545


82


21,145


(1,714
)

2007

Mar-07


3 - 39 yrs.


128Sarasota

FL

Homewood Suites





1,785


12,277


333


14,395


(1,437
)

2005

Sep-06


3 - 39 yrs.


100Miami

FL

Homewood Suites


9,199


3,215


22,152


1,972


27,339


(2,321
)

2000

Feb-07


3 - 39 yrs.


159Tallahassee

FL

Fairfield Inn


3,285


910


6,202


138


7,250


(510
)

2000

Apr-07


3 - 39 yrs.


79Lakeland

FL

Courtyard


3,957


1,557


8,836


147


10,540


(744
)

2000

Apr-07


3 - 39 yrs.


78Miami

FL

Courtyard








15,463


82


15,545


(754
)

2008

Sep-08


3 - 39 yrs.


118Columbus

GA

Fairfield Inn








7,620


16


7,636


(630
)

2003

Apr-07


3 - 39 yrs.


79Macon

GA

Hilton Garden Inn








10,115


25


10,140


(927
)

2007

Jun-07


3 - 39 yrs.


101Columbus

GA

SpringHill Suites





1,195


8,751


6


9,952


(585
)

2008

Mar-08


3 - 39 yrs.


85Columbus

GA

TownePlace Suites








8,643


10


8,653


(564
)

2008

May-08


3 - 39 yrs.


86Boise

ID

SpringHill Suites





2,024


19,580


405


22,009


(1,715
)

1992

Sep-07


3 - 39 yrs.


230New Orleans

LA

Homewood Suites


16,109


4,586


39,500


1,090


45,176


(3,697
)

2002

Dec-06


3 - 39 yrs.


166Hattiesburg

MS

Courtyard





877


8,914


2


9,793


(987
)

2006

Oct-06


3 - 39 yrs.


84Tupelo

MS

Hampton Inn


3,754


336


4,928


1,192


6,456


(718
)

1994

Jan-07


3 - 39 yrs.


96Omaha

NE

Courtyard


11,868


2,731


19,498


3,144


25,373


(2,123
)

1999

Nov-06


3 - 39 yrs.


181Cranford

NJ

Homewood Suites





2,618


11,364


1,860


15,842


(1,394
)

2000

Mar-07


3 - 39 yrs.


108Mahwah

NJ

Homewood Suites





3,676


16,470


2,148


22,294


(1,645
)

2001

Mar-07


3 - 39 yrs.


110Ronkonkoma

NY

Hilton Garden Inn





3,161


24,420


492


28,073


(2,297
)

2003

Dec-06


3 - 39 yrs.


164Cincinnati

OH

Homewood Suites





556


6,817


101


7,474


(785
)

2005

Dec-06


3 - 39 yrs.


76Memphis

TN

Homewood Suites





1,722


9,747


2,032


13,501


(1,248
)

1989

May-07


3 - 39 yrs.


140Houston

TX

Residence Inn





1,098


13,049


59


14,206


(1,719
)

2006

Apr-06


3 - 39 yrs.


129Brownsville

TX

Courtyard





1,135


7,739


8


8,882


(917
)

2006

Jun-06


3 - 39 yrs.


90Stafford

TX

Homewood Suites





501


7,575


61


8,137


(929
)

2006

Aug-06


3 - 39 yrs.


78San Antonio

TX

TownePlace Suites





703


11,522





12,225


(993
)

2007

Jun-07


3 - 39 yrs.


106Addison

TX

SpringHill Suites





1,545


11,312


65


12,922


(914
)

2003

Aug-07


3 - 39 yrs.


159San Antonio

TX

TownePlace Suites





1,130


13,089





14,219


(1,039
)

2007

Sep-07


3 - 39 yrs.


123El Paso

TX

Homewood Suites





1,174


14,651


6


15,831


(925
)

2008

Apr-08


3 - 39 yrs.


114Provo

UT

Residence Inn


5,234


1,358


10,388


2,761


14,507


(1,285
)

1996

Jun-07


3 - 39 yrs.


114Alexandria

VA

Courtyard





4,010


32,832


4,053


40,895


(2,588
)

1987

Jul-07


3 - 39 yrs.


176Richmond

VA

Marriott


24,276





59,614


14,815


74,429


(6,099
)

1984

Jan-08


3 - 39 yrs.


410Seattle

WA

Residence Inn








60,489


6,684


67,173


(7,311
)

1991

Sep-06


3 - 39 yrs.


234Vancouver

WA

SpringHill Suites





1,314


15,122


20


16,456


(1,410
)

2007

Jun-07


3 - 39 yrs.


119Kirkland

WA

Courtyard





3,514


28,500


32


32,046


(1,966
)

2006

Oct-07


3 - 39 yrs.


150$
103,783

$
90,714

$
842,609

$
49,893

$
983,216

$
(80,923
)









6,424


55

---



Table of Contents

SCHEDULE III

Real Estate and Accumulated Depreciation (Continued)

As of December 31, 2009

(dollars in thousands)

2009

2008

2007



2009

2008

2007Real estate owned:










Accumulated depreciation:Balance as of January 1

$
969,185

$
806,828

$
350,165

Balance as of January 1

$
(48,497
)
$
(20,063
)
$
(3,073
)Acquisitions


23


136,296


446,920

Depreciation expense


(32,425
)

(28,434
)

(16,990
)Improvements


14,011


26,061


9,743

Disposals


(1
)




Disposals


(3
)






Balance at December 31

$
(80,923
)
$
(48,497
)
$
(20,063
)Balance at December 31

$
983,216

$
969,185

$
806,828


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


56

---





Table of Contents



SIGNATURES

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

APPLE
REIT SEVEN, INC.

By:

/s/ GLADE M. KNIGHT Glade M. Knight,
Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Date: March 5, 2010By:

/s/ BRYAN PEERY Bryan Peery,
Chief Financial Officer (Principal Financial and Principal Accounting Officer)

Date: March 5, 2010


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

By:

/s/ GLADE M. KNIGHT Glade M. Knight, Director

Date: March 5, 2010By:

/s/ GLENN W. BUNTING Glenn W. Bunting, Director

Date: March 5, 2010By:

/s/ KENT W. COLTON Kent W. Colton, Director

Date: March 5, 2010By:

/s/ LISA B. KERN Lisa B. Kern, Director

Date: March 5, 2010By:

/s/ BRUCE H. MATSON Bruce H. Matson, Director

Date: March 5, 2010


57

---





Table of Contents

EXHIBIT INDEX

Exhibit
Number

Description of Documents3.1

Amended and Restated Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.3 to the amendment no. 3 to the registrant's registration statement on Form S-11 (SEC File
No. 333-125546) effective March 3, 2006)3.2

Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the registrant's registration statement on Form S-11 (SEC File No. 333-125546) effective March 3, 2006)10.1

Advisory Agreement between the Registrant and Apple Seven Advisors, Inc. (Incorporated by reference to Exhibit 10.1 to the registrant's quarterly report on Form 10-Q (SEC File No. 333-125546) filed
April 28, 2006)10.2

Property Acquisition/Disposition Agreement between the Registrant and Apple Suites Realty Group, Inc. (Incorporated by reference to Exhibit 10.2 to the registrant's quarterly report on Form 10-Q (SEC File
No. 333-125546) filed April 28, 2006)10.3

Apple REIT Seven, Inc. 2005 Incentive Plan. (Incorporated by reference to Exhibit 10.3 to the registrant's quarterly report on Form 10-Q (SEC File No. 333-125546) filed April 28, 2006)
*10.4

Apple REIT Seven, Inc. 2005 Non-Employee Directors Stock Option Plan. (Incorporated by reference to Exhibit 10.4 to the registrant's quarterly report on Form 10-Q (SEC File No. 333-125546) filed
April 28, 2006)*10.5

Guaranty and Reimbursement Agreement made by Glade M. Knight. (Incorporated by reference to Exhibit 10.5 to the registrant's registration statement on Form S-11 (SEC File No. 333-125546) effective
March 3, 2006)10.6

Purchase Contract dated as of September 29, 2004 between Midway Eldridge Hotel Partners, L.P. and Apple Six Hospitality, Inc. (Incorporated by reference to Exhibit 10.6 to the registrant's
Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.7

Assignment of Contract dated as of April 25, 2006 between Apple Six Hospitality, Inc., and Apple Seven Hospitality Texas, L.P. (Incorporated by reference to Exhibit 10.7 to the registrant's
Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.8

Management Agreement dated as of April 26, 2006 between Texas Western Management Partners, L.P. and Apple Seven Services, L.P. (Incorporated by reference to Exhibit 10.8 to the registrant's
Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.9

Residence Inn by Marriott Relicensing Agreement dated as of April 26, 2006 between Marriott International, Inc. and Apple Seven Services, L.P. (Incorporated by reference to Exhibit 10.9 to the
registrant's Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.10

Hotel Lease Agreement effective as of April 26, 2006 between Apple Seven Hospitality Texas, L.P. and Apple Seven Services, L.P. (Incorporated by reference to Exhibit 10.10 to the registrant's
Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.11

Purchase Contract dated as of April 27, 2006 between Briggs Renewal Limited Partnership and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.11 to the registrant's
Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)


58

---



Table of Contents

Exhibit
Number

Description of Documents10.12

Purchase Contract dated as of March 6, 2006 between Hospitality Ventures DMCY, LLC and Apple Six Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.12 to the registrant's
Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.13

Assignment of Contract dated as of April 27, 2006 between Apple Six Hospitality Ownership, Inc. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.13 to the
registrant's Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.14

Agreement of Purchase and Sale and Joint Escrow Instructions Hilton Garden Inn, Rancho Bernardo dated as of March 9, 2006 between Bernardo Ventures and Apple Suites Realty Group, Inc. (Incorporated by reference
to Exhibit 2.1 to the registrant's quarterly report on Form 10-Q (SEC File No. 333-125546) filed April 28, 2006)10.15

Assignment of Purchase and Sale and Joint Escrow Instructions Hilton Garden Inn, Rancho Bernardo dated as of April 11, 2006 between Apple Suites Realty Group, Inc. and Apple Seven Hospitality Ownership,
 Inc. (Incorporated by reference to Exhibit 2.2 to the registrant's quarterly report on Form 10-Q (SEC File No. 333-125546) filed April 28, 2006)10.16

Management Agreement dated as of May 9, 2006 between Inn Ventures, Inc. and Apple Seven Hospitality Management, Inc. (Incorporated by reference to Exhibit 10.16 to the registrant's Post-Effective
Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.17

Franchise License Agreement dated as of May 9, 2006 between Hilton Hotels Corporation and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.17 to the registrant's
Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.18

Schedule of information for an additional and substantially identical Hotel Lease Agreement dated as of May 9, 2006 (substantially identical to Exhibit 10.10 listed above) (Incorporated by reference to
Exhibit 10.18 to the registrant's Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.19

Purchase Contract dated as of June 21, 2005 between BMC Hotel Property, LTD and Apple Six Hospitality Texas, L.P. (Incorporated by reference to Exhibit 10.19 to the registrant's Post-Effective
Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.20

Assignment of Contract dated as of June 6, 2006 between Apple Six Hospitality Texas, L.P. and Apple Seven Hospitality Texas, L.P. (Incorporated by reference to Exhibit 10.20 to the registrant's
Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.21

Management Agreement dated as of June 6, 2006 between Texas Western Management Partners, L.P. and Apple Seven Services, L.P. (Incorporated by reference to Exhibit 10.21 to the registrant's
Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.22

Schedule of information for an additional and substantially identical Hotel Lease Agreement effective as of June 6, 2006 (substantially identical to Exhibit 10.10 listed above) (Incorporated by reference to
Exhibit 10.22 to the registrant's Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)


59

---



Table of Contents

Exhibit
Number

Description of Documents10.23

Courtyard by Marriott Relicensing Agreement dated as of June 19, 2006 between Marriott International, Inc. and Apple Seven Services, L.P. (Incorporated by reference to Exhibit 10.23 to the registrant's
Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.24

Purchase Contract dated as of June 27, 2006 between Napstak II, LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.24 to the registrant's Post-Effective Amendment
No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.25

Purchase Contract dated as of June 27, 2006 between Lake Union Hotel Associates Limited Partnership and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.25 to the
registrant's Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.26

Purchase Contract dated as of June 29, 2006 among Montgomery Hotels LLC; Montgomery Hotels II, LLC; Troy Hotels, LLC; Auburn Hotels, L.L.C.; Huntsville Hotel I, LLC; HoPo/Tupelo Hotels LLC
and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.26 to the registrant's Post-Effective Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.27

Purchase Contract dated as of June 29, 2006 between IRNM Hotel Investors, L.L.C and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.27 to the registrant's Post-Effective
Amendment No. 1 to Form S-11 (SEC File No. 333-125546) filed July 26, 2006)10.28

Master Purchase Agreement dated as of September 27, 2006 among Apple Seven Hospitality Ownership, Inc. and the parties named therein. (Incorporated by reference to Exhibit 10.28 to the registrant's
Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.29

Purchase Contract dated as of September 27, 2006 between Sunbelt-CTR, L.L.C. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.29 to the registrant's Post-Effective
Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.30

Purchase Contract dated as of September 27, 2006 between Sunbelt-CPA, L.L.C. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.30 to the registrant's Post-Effective
Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.31

Purchase Contract dated as of September 27, 2006 between Sunbelt-CHM, L.L.C. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.31 to the registrant's Post-Effective
Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.32

Agreement of Purchase and Sale dated October 17, 2006 by and between RGT-HB San Diego, L.P. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.32 to the registrant's
Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.33

Agreement of Purchase and Sale dated October 17, 2006 by and between Barrone Hotel Investors, L.L.C. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.33 to the
registrant's Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)


60

---



Table of Contents

Exhibit
Number

Description of Documents10.34

Agreement of Purchase and Sale dated October 17, 2006 by and between RT-Rancho B. Associates, L.P. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.34 to the
registrant's Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.35

Agreement of Purchase and Sale dated October 17, 2006 by and between RT-SD Provo, L.P. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.35 to the registrant's
Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.36

Agreement of Purchase and Sale dated October 17, 2006 by and between FTRC Hotel Partners, L.P. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.36 to the
registrant's Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.37

Agreement of Purchase and Sale dated October 17, 2006 by and between Coachman Hotel, LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.37 to the registrant's
Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.38

Agreement of Purchase and Sale dated October 17, 2006 by and between RT-HR Hotel Partners, LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.38 to the
registrant's Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.39

Agreement of Purchase and Sale dated October 17, 2006 by and between RT-BL Associates, L.C. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.39 to the registrant's
Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.40

Agreement of Purchase and Sale dated October 17, 2006 by and between Mahwah Hotel, LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.40 to the registrant's
Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.41

Agreement of Purchase and Sale dated October 17, 2006 by and between RT-CO Hotel Partners, LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.41 to the
registrant's Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.42

Agreement of Purchase and Sale dated October 17, 2006 by and between RT-AH Associates, L.P. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.42 to the registrant's
Post-Effective Amendment No. 2 to Form S-11 (SEC File No. 333-125546) filed October 26, 2006)10.43

Purchase Contract dated October 30, 2006 by and between Linchris Hotel Partners of L.I., LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.43 to the registrant's
Post-Effective Amendment No. 3 to Form S-11 (SEC File No. 333-125546) filed January 26, 2007)10.44

Purchase Contract dated November 3, 2006 by and between Tucairri Property, L.P. and Apple Seven Hospitality, Inc. (Incorporated by reference to Exhibit 10.44 to the registrant's Post-Effective
Amendment No. 3 to Form S-11 (SEC File No. 333-125546) filed January 26, 2007)


61

---



Table of Contents

Exhibit
Number

Description of Documents10.45

Purchase Contract dated November 3, 2006 by and between HWELP Property, L.P. and Apple Seven Hospitality, Inc. (Incorporated by reference to Exhibit 10.45 to the registrant's Post-Effective Amendment
No. 3 to Form S-11 (SEC File No. 333-125546) filed January 26, 2007)10.46

Purchase Contract dated November 3, 2006 by and between SATX-TPS-NW Property, L.P. and Apple Seven Hospitality, Inc. (Incorporated by reference to Exhibit 10.46 to the registrant's Post-Effective
Amendment No. 3 to Form S-11 (SEC File No. 333-125546) filed January 26, 2007)10.47

Purchase Contract dated November 3, 2006 by and between SAT-TPS-AIR Property, L.P. and Apple Seven Hospitality, Inc. (Incorporated by reference to Exhibit 10.47 to the registrant's Post-Effective
Amendment No. 3 to Form S-11 (SEC File No. 333-125546) filed January 26, 2007)10.48

Loan Agreement dated December 14, 2006 by and between Wachovia Bank, N.A. and Apple REIT Seven Inc. (Incorporated by reference to Exhibit 10.48 to the registrant's Post-Effective Amendment No. 3 to
Form S-11 (SEC File No. 333-125546) filed January 26, 2007)10.49

Purchase Contract dated January 16, 2007 by and between Sunbelt-Columbus, L.L.C. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.49 to the registrant's Post-Effective
Amendment No. 3 to Form S-11 (SEC File No. 333-125546) filed January 26, 2007)10.50

Purchase Contract dated January 16, 2007 by and between Blumberg-Dothan Motel, L.L.C. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.50 to the registrant's
Post-Effective Amendment No. 3 to Form S-11 (SEC File No. 333-125546) filed January 26, 2007)10.51

Purchase Contract dated January 16, 2007 by and between Sunbelt-Lakeland., L.L.C. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.51 to the registrant's Post-Effective
Amendment No. 3 to Form S-11 (SEC File No. 333-125546) filed January 26, 2007)10.52

Purchase Contract dated January 16, 2007 by and between Sunbelt-Tallahassee, L.L.C. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.52 to the registrant's Post-Effective
Amendment No. 3 to Form S-11 (SEC File No. 333-125546) filed January 26, 2007)10.53

Agreement of Purchase and Sale dated April 4, 2007 by and between Hampton Inns, Inc. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.53 to the registrant's
Post-Effective Amendment No. 4 to Form S-11 (SEC File No. 333-125546) filed April 26, 2007)10.54

Purchase Contract dated May 4, 2007 by and between Alexandria Hotel and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.54 to the registrant's quarterly report on
Form 10-Q (SEC File 000-52585) filed August 3, 2007)10.55

Purchase Contract dated June 19, 2007 by and between Sunbelt-SCG, LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.55 to the registrant's quarterly report on
Form 10-Q (SEC File 000-52585) filed August 3, 2007)10.56

Purchase Contract dated June 19, 2007 by and between Sunbelt-TCG, LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.56 to the registrant's quarterly report on
Form 10-Q (SEC File 000-52585) filed August 3, 2007)


62

---



Table of Contents

Exhibit
Number

Description of Documents10.57

Purchase Contract dated June 19, 2007 by and between Sunbelt-RDA, LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.57 to the registrant's quarterly report on
Form 10-Q (SEC File 000-52585) filed August 3, 2007)10.58

Purchase Contract dated June 19, 2007 by and between Sunbelt-THA, LLC and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.58 to the registrant's quarterly report on
Form 10-Q (SEC File 000-52585) filed August 3, 2007)10.59

Purchase Contract dated September 24, 2007 by and between PRVA II, L.P. and Apple Seven Hospitality Ownership, Inc. (Incorporated by reference to Exhibit 10.59 to the registrant's quarterly report on
Form 10-Q (SEC File 000-52585) filed November 2, 2007)21.1

Subsidiaries of the Registrant(FILED HEREWITH).23.1

Consent of Ernst & Young LLP(FILED HEREWITH).31.1

Certification of the Company's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(FILED HEREWITH).31.2

Certification of the Company's Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(FILED HEREWITH).32.1

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


*Denotes
Compensation Plan.


63

---