|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington,
 D.C. 20549           
|                                  
|FORM 10-Q                         

(Mark One)

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

|                                |                | 
|------------------------------- | -------------- | 
|For the quarterly period
 ended | March 31, 2011 | 
|                                |                | 
|                                | or             | 

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

For the transition period
from _________________ to ___________________

|                        |           | 
|----------------------- | --------- | 
|Commission File Number: | 000-52585 | 
|                        |           | 

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

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

|                                                                                   
|-----------------------------------------------------------------------------------
|(804) 344-8121                                                                     
|                                                                                   
|(Registrants
 telephone number, including area code)                              
|                                                                                   
|                                                                                   
|(Former
 name, former address and former fiscal year, if changed since last report)

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

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 during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). o Yes o No

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

|                             |                        |                                                 |  |                               
|---------------------------- | ---------------------- | ----------------------------------------------- |  | ------------------------------
|Large accelerated
 filer   o | Accelerated
 filer   o | Non-accelerated filer   x                       |  | Smaller reporting
 company   o
|                             |                        | (Do
 not check if a smaller
 reporting company) |  |                               

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

As
of May 1, 2011 there were 91,318,025 outstanding shares of common stock, no par
value, of the registrant.

---



APPLE REIT SEVEN, INC.FORM 10-QINDEX

|                              |          |                                                                                        |    |             
|----------------------------- | -------- | -------------------------------------------------------------------------------------- | -- | ------------
|                              |          |                                                                                        |    | Page
 Number
|                              |          |                                                                                        |    |             
|PART I. FINANCIAL INFORMATION |          |                                                                                       
|                              |          |                                                                                        |    |             
|                              | Item 1.  | Financial Statements
 (Unaudited)                                                      |    |             
|                              |          |                                                                                        |    |             
|                              |          | Consolidated
 Balance Sheets - March 31, 2011 and December 31, 2010                    |    | 3           
|                              |          |                                                                                        |    |             
|                              |          | Consolidated
 Statements of Operations  Three months ended March 31, 2011 and 2010    |    | 4           
|                              |          |                                                                                        |    |             
|                              |          | Consolidated
 Statements of Cash Flows  Three months ended March 31, 2011 and 2010    |    | 5           
|                              |          |                                                                                        |    |             
|                              |          | Notes
 to Consolidated Financial Statements                                            |    | 6           
|                              |          |                                                                                        |    |             
|                              | Item
 2. | Managements
 Discussion and Analysis of Financial Condition and Results of Operations |    | 9           
|                              |          |                                                                                        |    |             
|                              | Item
 3. | Quantitative
 and Qualitative Disclosures About Market Risk                            |    | 16          
|                              |          |                                                                                        |    |             
|                              | Item
 4. | Controls
 and Procedures                                                               |    | 16          
|                              |          |                                                                                        |    |             
|PART II. OTHER INFORMATION    |          |                                                                                       
|                              |          |                                                                                        |    |             
|                              | Item
 2. | Unregistered
 Sales of Equity Securities and Use of Proceeds                           |    | 17          
|                              |          |                                                                                        |    |             
|                              | Item
 6. | Exhibits                                                                               |    | 18          
|                              |          |                                                                                        |    |             
|Signatures                    |          |                                                                                        | 19

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

2

---



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

|                                                                                                                                                |  |                 |          |                    |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | -------- | ------------------ | - | -------- | -
|                                                                                                                                                |  | March 31,
 2011 |          | December 31,
 2010 |  
|                                                                                                                                                |  |                 |          |                    |  
|                                                                                                                                                |  | (unaudited)     |          |                    |   |         
|ASSETS                                                                                                                                          |  |                 |          |                    |   |          |  
|Investment in real estate, net of
 accumulated depreciation of $122,463 and $114,097, respectively                                              |  | $               | 865,455  |                    | $ | 872,169  |  
|Restricted cash-furniture, fixtures and
 other escrows                                                                                          |  |                 | 7,419    |                    |   | 7,733    |  
|Due from third party managers                                                                                                                   |  |                 | 10,364   |                    |   | 5,829    |  
|Other assets, net                                                                                                                               |  |                 | 6,704    |                    |   | 6,236    |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|TOTAL ASSETS                                                                                                                                    |  | $               | 889,942  |                    | $ | 891,967  |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|LIABILITIES                                                                                                                                     |  |                 |          |                    |   |          |  
|Credit facility                                                                                                                                 |  | $               | 47,600   |                    | $ | 44,900   |  
|Mortgage debt                                                                                                                                   |  |                 | 112,784  |                    |   | 103,117  |  
|Accounts payable and accrued expenses                                                                                                           |  |                 | 10,566   |                    |   | 10,650   |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|TOTAL LIABILITIES                                                                                                                               |  |                 | 170,950  |                    |   | 158,667  |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|SHAREHOLDERS EQUITY                                                                                                                            |  |                 |          |                    |   |          |  
|Preferred stock, authorized 15,000,000
 shares; none issued and outstanding                                                                     |  |                 |         |                    |   |         |  
|Series A preferred shares, no par value,
 authorized 200,000,000 shares; issued and outstanding 91,859,872 and
 92,027,980 shares, respectively |  |                 |         |                    |   |         |  
|Series B convertible preferred stock, no
 par value, authorized 240,000 shares; issued and outstanding 240,000 shares                           |  |                 | 24       |                    |   | 24       |  
|Common stock, no par value, authorized
 200,000,000 shares; issued and outstanding 91,859,872 and 92,027,980 shares,
 respectively              |  |                 | 908,645  |                    |   | 910,484  |  
|Distributions greater than net income                                                                                                           |  |                 | (189,677 | )                  |   | (177,208 | )
|                                                                                                                                                |  |                 |          |                    |   |          |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                      |  |                 | 718,992  |                    |   | 733,300  |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|                                                                                                                                                |  |                 |          |                    |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                      |  | $               | 889,942  |                    | $ | 891,967  |  
|                                                                                                                                                |  |                 |          |                    |   |          |  

See notes to consolidated financial
statements.

3

---



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

|                                                                |  |                                     |        |                                     |   |        | 
|--------------------------------------------------------------- |  | ----------------------------------- | ------ | ----------------------------------- | - | ------ | 
|                                                                |  | Three months
 ended
 March 31, 2011 |        | Three months
 ended
 March 31, 2010 |  
|                                                                |  |                                     |        |                                     |  
|                                                               
|Revenues:                                                       |  |                                     |        |                                     |   |        | 
|Room revenue                                                    |  | $                                   | 44,705 |                                     | $ | 43,548 | 
|Other revenue                                                   |  |                                     | 4,738  |                                     |   | 4,688  | 
|                                                                |  |                                     |        |                                     |   |        | 
|Total revenue                                                   |  |                                     | 49,443 |                                     |   | 48,236 | 
|                                                                |  |                                     |        |                                     |   |        | 
|                                                                |  |                                     |        |                                     |   |        | 
|Expenses:                                                       |  |                                     |        |                                     |   |        | 
|Operating expense                                               |  |                                     | 13,635 |                                     |   | 12,767 | 
|Hotel administrative expense                                    |  |                                     | 3,879  |                                     |   | 3,755  | 
|Sales and marketing                                             |  |                                     | 3,802  |                                     |   | 3,621  | 
|Utilities                                                       |  |                                     | 2,117  |                                     |   | 2,138  | 
|Repair and maintenance                                          |  |                                     | 2,251  |                                     |   | 2,205  | 
|Franchise fees                                                  |  |                                     | 2,060  |                                     |   | 1,982  | 
|Management fees                                                 |  |                                     | 1,650  |                                     |   | 1,545  | 
|Taxes, insurance and other                                      |  |                                     | 3,094  |                                     |   | 3,324  | 
|General and administrative                                      |  |                                     | 1,119  |                                     |   | 1,206  | 
|Depreciation expense                                            |  |                                     | 8,366  |                                     |   | 8,275  | 
|                                                                |  |                                     |        |                                     |   |        | 
|Total expenses                                                  |  |                                     | 41,973 |                                     |   | 40,818 | 
|                                                                |  |                                     |        |                                     |   |        | 
|                                                                |  |                                     |        |                                     |   |        | 
|Operating income                                                |  |                                     | 7,470  |                                     |   | 7,418  | 
|                                                                |  |                                     |        |                                     |   |        | 
|Interest expense, net                                           |  |                                     | 2,281  |                                     |   | 1,804  | 
|                                                                |  |                                     |        |                                     |   |        | 
|                                                                |  |                                     |        |                                     |   |        | 
|Net income                                                      |  | $                                   | 5,189  |                                     | $ | 5,614  | 
|                                                                |  |                                     |        |                                     |   |        | 
|                                                                |  |                                     |        |                                     |   |        | 
|Basic and diluted net income per common
 share                  |  | $                                   | 0.06   |                                     | $ | 0.06   | 
|                                                                |  |                                     |        |                                     |   |        | 
|                                                                |  |                                     |        |                                     |   |        | 
|Weighted average common shares outstanding
 - basic and diluted |  |                                     | 91,764 |                                     |   | 93,198 | 

See notes to consolidated financial statements.

4

---



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

|                                                                                                   |  |                                     |         |                                      |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | ------------------------------------ | - | ------- | -
|                                                                                                   |  | Three months
 ended
 March 31, 2011 |         | Three months
 ended 
 March 31, 2010 |  
|                                                                                                   |  |                                     |         |                                      |  
|Cash flow from operating activities:                                                               |  |                                     |         |                                      |   |         |  
|Net income                                                                                         |  | $                                   | 5,189   |                                      | $ | 5,614   |  
|Adjustments to reconcile net income to cash provided by operating
 activities:                     |  |                                     |         |                                      |   |         |  
|Depreciation of real estate owned                                                                  |  |                                     | 8,366   |                                      |   | 8,275   |  
|Amortization of deferred financing costs, fair value adjustments and
 other non-cash expenses, net |  |                                     | 98      |                                      |   | 23      |  
|Changes in operating assets and liabilities:                                                       |  |                                     |         |                                      |   |         |  
|Increase in funds due from third party managers                                                    |  |                                     | (4,535  | )                                    |   | (4,882  | )
|Increase in other assets                                                                           |  |                                     | (515    | )                                    |   | (846    | )
|Increase in accounts payable and accrued expenses                                                  |  |                                     | 5       |                                      |   | 148     |  
|                                                                                                   |  |                                     |         |                                      |   |         |  
|Net cash provided by operating activities                                                          |  |                                     | 8,608   |                                      |   | 8,332   |  
|                                                                                                   |  |                                     |         |                                      |   |         |  
|Cash flow from investing activities:                                                               |  |                                     |         |                                      |   |         |  
|Capital improvements                                                                               |  |                                     | (1,843  | )                                    |   | (1,461  | )
|Net decrease in cash restricted for property improvements                                          |  |                                     | 349     |                                      |   | 2,056   |  
|                                                                                                   |  |                                     |         |                                      |   |         |  
|Net cash provided by (used in) investing activities                                                |  |                                     | (1,494  | )                                    |   | 595     |  
|                                                                                                   |  |                                     |         |                                      |   |         |  
|Cash flow from financing activities:                                                               |  |                                     |         |                                      |   |         |  
|Payment of mortgage notes payable                                                                  |  |                                     | (684    | )                                    |   | (642    | )
|Proceeds from mortgage note payable                                                                |  |                                     | 10,500  |                                      |   |        |  
|Net proceeds from current credit facility                                                          |  |                                     | 2,700   |                                      |   |        |  
|Net proceeds from extinguished credit facility                                                     |  |                                     |        |                                      |   | 11,810  |  
|Payment of financing costs related to borrowings                                                   |  |                                     | (133    | )                                    |   |        |  
|Redemptions of Units                                                                               |  |                                     | (7,999  | )                                    |   | (8,335  | )
|Net proceeds related to issuance of Units                                                          |  |                                     | 6,160   |                                      |   | 6,180   |  
|Cash distributions paid to common shareholders                                                     |  |                                     | (17,658 | )                                    |   | (17,940 | )
|                                                                                                   |  |                                     |         |                                      |   |         |  
|Net cash used in financing activities                                                              |  |                                     | (7,114  | )                                    |   | (8,927  | )
|                                                                                                  
|Net change in cash and cash equivalents                                                            |  |                                     |        |                                      |   |        |  
|Cash and cash equivalents, beginning of period                                                     |  |                                     |        |                                      |   |        |  
|                                                                                                   |  |                                     |         |                                      |   |         |  
|Cash and cash equivalents, end of period                                                           |  | $                                   |        |                                      | $ |        |  
|                                                                                                   |  |                                     |         |                                      |   |         |  

See notes to
consolidated financial statements.

5

---



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The
accompanying unaudited consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information required by
accounting principles generally accepted in the United States. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. These
unaudited financial statements should be read in conjunction with the Companys
audited financial statements included in its 2010 Annual Report on Form 10-K.
Operating results for the three month period ended March 31, 2011 are not necessarily
indicative of the results that may be expected for the twelve month period
ending December 31, 2011.

General Information and Summary of Significant Accounting
Policies

Organization

Apple
REIT Seven, Inc., together with its wholly-owned subsidiaries (the Company),
is a Virginia corporation formed to invest in hotels and other selected real
estate in select metropolitan areas in the United States. The Company has
elected to be treated as a real estate investment trust (REIT) for federal
income tax purposes. Initial capitalization occurred on May 26, 2005 and
operations began on April 27, 2006 when the Company acquired its first hotel.
The Company concluded its best-efforts offering of Units (each Unit consists of
one common share and one Series A preferred share) in July 2007. The Company
has no foreign operations or assets and its operations include only one
segment. The consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany transactions and balances have
been eliminated upon consolidation.

Earnings
per Common Share

Basic
earnings per common share is computed based upon the weighted average number of
shares outstanding during the period. Diluted earnings per share is calculated
after giving effect to all potential common shares that were dilutive and
outstanding for the period. There were no potential common shares with a
dilutive effect for the three months ended March 31, 2011 and 2010. As a
result, basic and dilutive outstanding shares were the same. Series B
convertible preferred shares are not included in earnings per common share
until such time the Series B convertible preferred shares are eligible to be
converted to common shares.

Use
of Estimates

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

2. Related Parties

The
Company has, and is expected to continue to engage in, significant transactions
with related parties. These transactions cannot be construed to be at arms
length, and the results of the Companys operations may be different than if
conducted with non-related parties. The Companys independent members of the
Board of Directors oversee and annually review the Companys related party
relationships (which include the relationships discussed in this section) and
are required to approve any significant modifications to these contracts, as
well as any new significant related party transactions. There were no changes
to the contracts discussed in this section and no new significant related party
transactions during the three months ended March 31, 2011. The Board of
Directors is not required to approve each individual transaction that falls
under a

6

---



related party relationship,
however under the direction of the Board of Directors, at least one member of
the Companys senior management team approves each related party transaction.

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. Total advisory fees incurred by the Company under the advisory
agreement are included in general and administrative expenses and totaled
approximately $0.3 million for both the three months ended March 31, 2011 and
2010.

In
addition to the fees payable to ASA, the Company reimbursed ASA or paid
directly to Apple REIT Six, Inc. (AR6) on behalf of ASA approximately $0.4
million and $0.5 million for the three months ended March 31, 2011 and 2010,
respectively. The costs are included in general and administrative expenses and
are for the Companys proportionate share of the staffing and related costs
provided by AR6. The costs are actual costs with no markup or profit to AR6.
Also, as part of this arrangement, the day to day transactions may result in
amounts due to or from the noted related parties. To efficiently manage cash disbursements,
the individual companies may make payments for any or all of the related
companies. The amounts due to or from the related individual companies are
reimbursed or collected and are not significant in amount.

ASA
is 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the
Company. Mr. Knight is also Chairman and Chief Executive Officer of AR6, Apple
REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc. Members of the
Companys Board of Directors are also on the boards of AR6, Apple REIT Eight,
Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

Included
in other assets, net on the Companys consolidated balance sheet, is a 26%
ownership interest in Apple Air Holding, LLC (Apple Air). The other members
of Apple Air are Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT
Nine, Inc. Through its ownership interest the Company has access to Apple Airs
aircraft for asset management and renovation purposes. The Companys ownership
interest was approximately $2.1 million at March 31, 2011, and $2.0 million at
December 31, 2010. The Company has recorded its share of income or losses of
the entity under the equity method of accounting and adjusted its investment in
Apple Air accordingly. For the three months ended March 31, 2011 and 2010, the
Company recorded a loss of approximately $53,000 and $119,000, respectively, as
its share of the net loss of Apple Air, which primarily relates to the
depreciation of the aircraft, and is included in general and administrative
expense in the Companys consolidated statements of operations. Apple Air owned
two aircraft during 2010, but reduced its ownership to one aircraft during the
first quarter of 2011.

3. Notes Payable and Credit Agreements

The
Company has an unsecured revolving credit facility, originated in October 2010,
that is utilized for working capital, hotel renovations, and other general
corporate funding purposes, including the payment of redemptions and
distributions. The syndicated credit facility provides for a maximum aggregate
commitment by the lenders, three commercial banks, of $85 million, and has a
scheduled maturity in October 2012. The applicable interest rate under the
unsecured revolving credit facility is, at the Companys option, equal to
either a) LIBOR (the London Interbank Offered Rate for a one-month period) plus
3.5%, subject to a minimum LIBOR interest rate floor of 1.5%, or b) the banks
commercial prime rate plus 3.5%. Payments of interest are due monthly under the
terms of the credit agreement; the Company may make voluntary prepayments in
whole or in part, at any time. The Company is required to pay a quarterly fee
at an annual rate of 0.5% on the average unused balance of the credit facility.
The balance outstanding under the credit facility on March 31, 2011 was
approximately $47.6 million, at an applicable interest rate of 5.0%. The credit
facility contains representations, financial and other covenants typical for
this type of commercial credit facility. The Company was in compliance with
these covenants at March 31, 2011.

On
February 28, 2011, the Company entered into a mortgage loan agreement, secured
by the Companys Houston, Texas Residence Inn property, for $10.5 million.
Scheduled payments of interest and principal are due monthly. The loan has a
fixed annual interest rate of 5.71%, and a stated maturity of March 1,

7

---



2016, at which time the
principal balance due will be approximately $9.5 million. Funds from the
mortgage loan were used for general corporate purposes, including the reduction
in the outstanding balance of the Companys revolving credit facility. The
Company incurred approximately $133,000 in loan origination costs related to
the term loan agreement.

4. Shareholders Equity

The
Companys annual distribution rate as of March 31, 2011 was $0.77 per common
share. For the three months ended March 31, 2011 and 2010 the Company made
distributions of $0.19 per common share, for a total of $17.7 million and $17.9
million, respectively.

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; the program was initiated in 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
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. During the three months ended March 31, 2011, the
Company redeemed approximately 728,000 Units in the amount of $8.0 million. As
contemplated in the program, the Company redeemed Units on a pro-rata basis;
the January 2011 redemption was approximately 63% of the requested redemption
amount. Since the inception of the program through March 31, 2011, the Company
has redeemed approximately 7.7 million Units in the amount of $82.4 million.

In
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 distributions to purchase additional
Units of the Company. The uses of the proceeds from this plan may include
purchasing Units under the Companys Unit Redemption Program, enhancing
properties, satisfying financing obligations and other expenses, increasing
working capital, funding various corporate operations, and acquiring hotels.
During the three months ended March 31, 2011, approximately 560,000 Units,
representing $6.2 million in proceeds to the Company, were issued under the
plan. During the three months ended March 31, 2010, approximately 562,000
Units, representing $6.2 million in proceeds to the Company, were issued under
the plan. Since the inception of the plan through March 31, 2011, approximately
8.4 million Units, representing approximately $92.7 million in proceeds to the
Company, have been issued.

5. Fair Value of Financial Instruments

The
Company estimates the fair value of its fixed rate debt and the credit spreads
over variable market rates on its variable rate debt by discounting the future
cash flows of each instrument at estimated market rates or credit spreads
consistent with the maturity of the debt obligation with similar credit terms
and characteristics. Market rates and credit spreads take into consideration
general market conditions and maturity. As of March 31, 2011, the carrying
value and estimated fair value of the Companys debt was $160.4 million and
$162.0 million, respectively. As of December 31, 2010, the carrying value and
estimated fair value of the Companys debt was $148.0 million and $150.1
million, respectively. The carrying value of the Companys other financial
instruments approximates fair value due to the short-term nature of these
financial instruments.

6. Subsequent Events

On
April 15, 2011, the Company paid $0.064167 per common share, totaling $5.9
million, in a distribution to its common shareholders. Under the Companys
Dividend Reinvestment Plan, $2.1 million were reinvested, resulting in the
issuance of 187,037 Units.

In
April 2011, under the guidelines of the Companys Unit Redemption Program,
728,883 Units were repurchased from shareholders at a cost of $8.0 million. As
contemplated in the program, the Company redeemed Units on a pro-rata basis.
This redemption was approximately 56% of the requested redemption amount.

8

---



|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of
 Financial Condition and Results of Operations

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

Overview

The
Company is a Virginia corporation formed to invest in hotels and other selected
real estate in select metropolitan areas in the United States. The Company was
initially capitalized on May 26, 2005, with its first investor closing on March
15, 2006. The best-efforts offering was completed in July 2007. The Company
owned 51 hotels as of March 31, 2011, located within different markets in the
United States. The Company is treated as a Real Estate Investment Trust
(REIT) for federal income tax purposes. 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 as compared to other
hotels within their respective local market, in general, has met the Companys
expectations for the period owned. With the significant decline in economic
conditions throughout the United States since 2008, overall performance of the
Companys hotels have not met expectations since acquisition. Although slightly
behind industry averages, the Companys revenue increased in the first quarter
of 2011 as compared to the first quarter of 2010 by approximately 3% and
operating income was flat. There is no way to predict future general economic
conditions, however the Company anticipates mid single digit percentage revenue
increases for the remainder of 2011 as compared to 2010.

In
evaluating financial condition and operating performance, the most important
indicators 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
others in its local market, and expenses, such as hotel operating expenses,
general and administrative and other expenses described below. The following is
a summary of the Companys results (in thousands, except statistical data):

9

---



|                                       |  |                               |        |                     |  |      |   |                     |        |                 |  |     |   |  |    |  
|-------------------------------------- |  | ----------------------------- | ------ | ------------------- |  | ---- | - | ------------------- | ------ | --------------- |  | --- | - |  | -- | -
|                                       |  | Three
 months ended March 31, |       
|                                       |  |                               |       
|(in thousands except statistical data) |  | 2011                          |        | Percent of
 Revenue |  | 2010 |   | Percent of
 Revenue |        | Percent
 Change | 
|                                       |  |                               |        |                     |  |      |   |                     |        |                 | 
|Total revenues                         |  | $                             | 49,443 |                     |  | 100  | % | $                   | 48,236 |                 |  | 100 | % |  | 3  | %
|Hotel operating expenses               |  |                               | 29,394 |                     |  | 59   | % |                     | 28,013 |                 |  | 58  | % |  | 5  | %
|Taxes, insurance and other expense     |  |                               | 3,094  |                     |  | 6    | % |                     | 3,324  |                 |  | 7   | % |  | -7 | %
|General and administrative expense     |  |                               | 1,119  |                     |  | 2    | % |                     | 1,206  |                 |  | 3   | % |  | -7 | %
|Depreciation                           |  |                               | 8,366  |                     |  |      |   |                     | 8,275  |                 |  |     |   |  | 1  | %
|Interest expense, net                  |  |                               | 2,281  |                     |  |      |   |                     | 1,804  |                 |  |     |   |  | 26 | %
|                                       |  |                               |        |                     |  |      |   |                     |        |                 |  |     |   |  |    |  
|Average Market Yield (1)               |  |                               | 127    |                     |  |      |   |                     | 127    |                 |  |     |   |  |   |  
|Number of Hotels                       |  |                               | 51     |                     |  |      |   |                     | 51     |                 |  |     |   |  |   |  
|Average Daily Rate (ADR)               |  | $                             | 111    |                     |  |      |   | $                   | 110    |                 |  |     |   |  | 1  | %
|Occupancy                              |  |                               | 70     | %                   |  |      |   |                     | 69     | %               |  |     |   |  | 1  | %
|RevPAR                                 |  | $                             | 77     |                     |  |      |   | $                   | 75     |                 |  |     |   |  | 3  | %
|Total Rooms Sold (000s) (2)            |  |                               | 400    |                     |  |      |   |                     | 395    |                 |  |     |   |  | 1  | %
|Total Rooms Available (000s) (3)       |  |                               | 576    |                     |  |      |   |                     | 576    |                 |  |     |   |  |   |  

(1) Calculated from data provided by Smith Travel Research, Inc. ®. Excludes properties under renovations during the applicable periods.

(2) Represents actual number of room nights sold during the
period.

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

Hotels Owned

The following
table summarizes the location, brand, manager, date acquired, number of rooms
and gross purchase price for each of the 51 hotels the Company owned at March
31, 2011 (all dollar amounts are in thousands):

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

10

---



|            |  |    |  |                   |  |              |  |            |  |       |  |   |         | 
|----------- |  | -- |  | ----------------- |  | ------------ |  | ---------- |  | ----- |  | - | ------- | 
|Miami       |  | FL |  | Courtyard         |  | Dimension    |  | 9/5/2008   |  | 118   |  |   | 15,000  | 
|Columbus    |  | GA |  | Fairfield Inn     |  | LBA          |  | 4/24/2007  |  | 79    |  |   | 7,333   | 
|Macon       |  | GA |  | Hilton Garden Inn |  | LBA          |  | 6/28/2007  |  | 101   |  |   | 10,660  | 
|Columbus    |  | GA |  | SpringHill Suites |  | LBA          |  | 3/6/2008   |  | 85    |  |   | 9,675   | 
|Columbus    |  | GA |  | TownePlace Suites |  | LBA          |  | 5/22/2008  |  | 86    |  |   | 8,428   | 
|Boise       |  | ID |  | SpringHill Suites |  | Inn Ventures |  | 9/14/2007  |  | 230   |  |   | 21,000  | 
|New Orleans |  | LA |  | Homewood Suites   |  | Dimension    |  | 12/15/2006 |  | 166   |  |   | 43,000  | 
|Hattiesburg |  | MS |  | Courtyard         |  | LBA          |  | 10/5/2006  |  | 84    |  |   | 9,455   | 
|Tupelo      |  | MS |  | Hampton Inn       |  | LBA          |  | 1/23/2007  |  | 96    |  |   | 5,245   | 
|Omaha       |  | NE |  | Courtyard         |  | Marriott     |  | 11/4/2006  |  | 181   |  |   | 23,100  | 
|Cranford    |  | NJ |  | Homewood Suites   |  | Dimension    |  | 3/7/2007   |  | 108   |  |   | 13,500  | 
|Mahwah      |  | NJ |  | Homewood Suites   |  | Dimension    |  | 3/7/2007   |  | 110   |  |   | 19,500  | 
|Ronkonkoma  |  | NY |  | Hilton Garden Inn |  | White        |  | 12/15/2006 |  | 164   |  |   | 27,000  | 
|Cincinnati  |  | OH |  | Homewood Suites   |  | White        |  | 12/1/2006  |  | 76    |  |   | 7,100   | 
|Memphis     |  | TN |  | Homewood Suites   |  | Hilton       |  | 5/15/2007  |  | 140   |  |   | 11,100  | 
|Houston     |  | TX |  | Residence Inn     |  | Western      |  | 4/27/2006  |  | 129   |  |   | 13,600  | 
|Brownsville |  | TX |  | Courtyard         |  | Western      |  | 6/19/2006  |  | 90    |  |   | 8,550   | 
|Stafford    |  | TX |  | Homewood Suites   |  | Western      |  | 8/15/2006  |  | 78    |  |   | 7,800   | 
|San Antonio |  | TX |  | TownePlace Suites |  | Western      |  | 6/29/2007  |  | 106   |  |   | 11,925  | 
|Addison     |  | TX |  | SpringHill Suites |  | Marriott     |  | 8/10/2007  |  | 159   |  |   | 12,500  | 
|San Antonio |  | TX |  | TownePlace Suites |  | Western      |  | 9/27/2007  |  | 123   |  |   | 13,838  | 
|El Paso     |  | TX |  | Homewood Suites   |  | Western      |  | 4/23/2008  |  | 114   |  |   | 15,390  | 
|Provo       |  | UT |  | Residence Inn     |  | Dimension    |  | 6/13/2007  |  | 114   |  |   | 11,250  | 
|Alexandria  |  | VA |  | Courtyard         |  | Marriott     |  | 7/13/2007  |  | 178   |  |   | 36,997  | 
|Richmond    |  | VA |  | Marriott          |  | White        |  | 1/25/2008  |  | 410   |  |   | 53,300  | 
|Seattle     |  | WA |  | Residence Inn     |  | Inn Ventures |  | 9/1/2006   |  | 234   |  |   | 56,173  | 
|Vancouver   |  | WA |  | SpringHill Suites |  | Inn Ventures |  | 6/1/2007   |  | 119   |  |   | 15,988  | 
|Kirkland    |  | WA |  | Courtyard         |  | Inn Ventures |  | 10/23/2007 |  | 150   |  |   | 31,000  | 
|            |  |    |  |                   |  |              |  |            |  |       |  |   |         | 
|            |  |    |  |                   |  |              |  | Total      |  | 6,426 |  | $ | 901,594 | 
|            |  |    |  |                   |  |              |  |            |  |       |  |   |         | 

Results of Operations

As
of March 31, 2011, the Company owned 51 hotels with 6,426 rooms. The Companys
portfolio of hotels owned is unchanged since 2008. Hotel performance is
impacted by many factors including economic conditions in the United States, as
well as each locality. During the period from the second half of 2008 through
2010, the overall weakness in the U.S. economy has had a considerable negative
impact on both consumer and business travel. As a result, revenue in most
markets in the United States has declined from levels of 2007 and the first
half of 2008. Economic conditions are showing evidence of improvement. While
the Company expects 2011 revenue and operating income for the industry and the
Company to improve over 2010 results, it is not expected that revenue and
operating income will reach pre-recession levels. Although slightly below overall
industry averages for the first quarter of 2011, the Companys hotels in
general have shown results consistent with industry and brand averages for the
period of ownership.

Revenues

The
Companys principal source of revenue is hotel room revenue and other related
revenue. For the three months ended March 31, 2011 and 2010, the Company had
total revenue of $49.4 and $48.2 million, respectively, with average occupancy
of 70% and 69%, ADR of $111 and $110, and RevPAR of $77 and $75 for each period.
ADR is calculated as room revenue divided by the number of rooms sold, and
RevPAR is calculated as occupancy multiplied by ADR. Since the beginning of
2010 the Company has experienced an increase in demand as demonstrated by the
slight improvement in average occupancy. In addition, also signifying a
stabilizing economy, the Company experienced a modest increase in average room
rates versus the

11

---



same period of
2010. As reflected in the three percent increase in RevPAR during the first
quarter of 2011, as compared to the first quarter of 2010, the Company believes
room rate has stabilized and should continue to improve in the coming months.
With demand improvement and expected rate improvement, the Company and industry
anticipate percentage revenue growth for the remainder of 2011 in the mid
single digits, as compared to 2010. Although overall the Company was slightly
behind the industry revenue growth rate in the first quarter of 2011 as
compared to the same period in 2010, the Company does expect to approximate the
industry revenue growth rate for the full year of 2011. While reflecting the
impact of post-recessionary levels of single-digit growth in national economic
activity, the Companys hotels also continue to be leaders in their respective
markets. The Companys average Market Yield for the first three months of 2011
and 2010 was 127. The Market Yield is a measure of each hotels RevPAR compared
to the average (100) in its local market (the index excludes hotels under
renovation).

Expenses

For
the three month periods ended March 31, 2011 and 2010, hotel operating expenses
totaled $29.4 and $28.0 million, or 59% and 58% of total revenue, respectively.
Hotel direct expenses consist of operating expense, hotel administrative
expense, sales and marketing expense, utilities expense, repair and maintenance
expense, franchise fees and management fees. Results for the three month
periods ended March 31, 2011 reflect the impact of modest increases in revenues
and occupancy at most of the Companys hotels, and the Companys efforts to
control costs in a challenging economic environment. Certain operating costs
such as management costs, certain utility costs and minimum supply and
maintenance costs are relatively fixed in nature. The Company has been
successful in reducing, relative to revenue increases, certain labor costs,
hotel supply costs and utility costs by continually monitoring and sharing
utilization data across its hotels and management companies. Although operating
expenses will increase as occupancy and revenue increases, the Company has and
will continue to work with its management companies to reduce costs as a
percentage of revenue as aggressively as possible while maintaining quality and
service levels at each property.

Taxes,
insurance, and other expense for the three months ended March 31, 2011 and 2010
were $3.1 and $3.3 million, or 6% and 7% of total revenue for the applicable
periods. Decreases in these expenses for the comparable three month periods
ending March 31, 2011 and 2010 reflect lower real estate property tax
assessments at selected hotels, including the results of successful appeals of
assessments for some locations. In addition, the Company has experienced lower
property insurance expense for most hotel properties, in comparison to
insurance rates in effect during 2010.

General
and administrative expense for the three months ended March 31, 2011 and 2010
were approximately $1.1 and $1.2 million. The components of general and
administrative expense include advisory fees and reimbursable expenses, legal
fees, accounting fees, reporting expenses and the Companys share of the loss
from its investment in Apple Air Holding, LLC.

Depreciation
expense for the three months ended March 31, 2011 and 2010 was $8.4 million and
$8.3 million. These amounts represent depreciation expense of the Companys
hotel buildings and related improvements, and associated furniture, fixtures
and equipment, for the respective periods owned.

Interest
expense, net during the three months ended March 31, 2011 and 2010 totaled $2.3
and $1.8 million, respectively. Interest expense primarily represents interest
incurred on mortgage loans and interest on the Companys credit facility. As of
March 31, 2011, mortgage loans were outstanding on eleven of the Companys
hotel properties, totaling $112.8 million, and the outstanding balance of the
credit facility was $47.6 million.

Liquidity and Capital Resources

The
Companys operating cash flow from the hotel properties owned and borrowings
under its $85 revolving credit facility are the Companys principal sources of
liquidity. With the availability of the Companys credit facility, the Company
generally maintains little cash on hand, accessing the credit facility as
necessary. As a result, cash on hand was $0 at March 31, 2011 and December 31,
2010. The outstanding

12

---



balance on the line of
credit was approximately $47.6 million at March 31, 2011 and its interest rate
was 5.00%. The Company anticipates that cash flow from operations and the
credit facility will be adequate to meet its liquidity requirements in 2011,
including required distributions to shareholders (the Company is not required
to make distributions at its current rate for REIT purposes), capital
expenditures and debt service. During the first quarter of 2011, the Company
obtained additional financing to increase its credit facility availability. A
mortgage loan of $10.5 million was originated in February 2011 with a
commercial bank, secured by the Companys Houston, Texas Residence Inn
property. The loan has a fixed annual interest rate of 5.71% and matures in
March 2016. Scheduled payments of interest and principal are due monthly, with
a principal balance of $9.5 million due at maturity. The Company intends to
maintain a relatively stable distribution 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 as compared to
pre-recession levels, the Company will utilize 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 distributions to required levels. If the Company was unsuccessful in the
extension of debt maturing in future periods, or if it were to default on its
debt, it may be unable to make distributions. The Companys bylaws require
board review and approval of any debt financing obtained by the Company.

To
maintain its REIT status the Company is required to distribute at least 90% of
its ordinary income. Distributions in the first three months of 2011 totaled
$17.7 million and were paid monthly at a rate of $0.064167 per common share.
For the same three month period, the Companys cash generated from operations
was approximately $8.6 million. This shortfall includes a return of capital and
was funded primarily by increases in the Companys total borrowings, including
the Companys revolving credit facility. The Company intends to continue paying
distributions on a monthly basis. However, since there can be no assurance of
the ability of the Companys properties to provide income at this level, there
can be no assurance as to the classification or duration of distributions at
the current monthly rate. The Board of Directors monitors the Companys
distribution rate relative to the performance of the hotels on an ongoing basis
and may make adjustments to the distribution rate as determined to be prudent
in relation to other cash requirements of the Company.

The
Company has on-going capital commitments to fund its capital improvements. The
Company is required, under all of the hotel management agreements, to make
available, for the repair, replacement, refurbishing of furniture, fixtures,
and equipment, an amount between 2% to 5% of gross revenues of the applicable
hotel, provided that such amount may be used for the Companys capital
expenditures with respect to the applicable hotel. The Company expects that
this amount will be adequate to fund required repair, replacement, and
refurbishments and to maintain the Companys hotels in a competitive condition.
As of March 31, 2011, the Company held $6.0 million in restricted cash accounts
for capital improvement purposes as required by certain loan or hotel
management agreements. Total capital expenditures incurred in the first three months
of 2011 were approximately $1.7 million. Two major renovation projects were in
progress at March 31, 2011 and are expected to be completed within the next six
months. The Company anticipates total capital expenditures for 2011 to be in
the range of approximately $10 million to $15 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; the program was initiated in 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 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. During the three months ended March 31,
2011, the Company redeemed approximately 728,000 Units in the amount of $8.0
million. As contemplated in the program, the Company redeemed Units on a
pro-rata basis; the March 2011 redemption was approximately 63% of the
requested redemption amount. Since the inception of the program through March
31, 2011, the Company has redeemed approximately 7.7 million Units in the
amount of $82.4 million.

In
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 distributions to purchase additional
Units of the Company. The uses of the proceeds from this plan may include
purchasing Units under the Companys Unit Redemption Program, enhancing
properties, satisfying financing

13

---



obligations
and other expenses, increasing working capital, funding various corporate
operations, and acquiring hotels. During the three months ended March 31, 2011,
approximately 560,000 Units, representing $6.2 million in proceeds to the
Company, were issued under the plan. During the three months ended March 31,
2010, approximately 562,000 Units, representing $6.2 million in proceeds to the
Company, were issued under the plan. Since the inception of the plan through
March 31, 2011, approximately 8.4 million Units, representing approximately
$92.7 million in proceeds to the Company, have been issued.

Related Party Transactions

The
Company has, and is expected to continue to engage in, significant transactions
with related parties. These transactions cannot be construed to be at arms
length, and the results of the Companys operations may be different than if
conducted with non-related parties. The Companys independent members of the
Board of Directors oversee and annually review the Companys related party
relationships (which include the relationships discussed in this section) and
are required to approve any significant modifications to these contracts, as
well as any new significant related party transactions. There were no changes
to the contracts discussed in this section and no new significant related party
transactions during the three months ended March 31, 2011. The Board of
Directors is not required to approve each individual transaction that falls
under a related party relationship, however under the direction of the Board of
Directors, at least one member of the Companys senior management team approves
each related party transaction.

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. Total advisory fees incurred by the Company under the advisory
agreement are included in general and administrative expenses and totaled
approximately $0.3 million for both the three months ended March 31, 2011 and
2010.

In
addition to the fees payable to ASA, the Company reimbursed ASA or paid
directly to Apple REIT Six, Inc. (AR6) on behalf of ASA approximately $0.4
million and $0.5 million for the three months ended March 31, 2011 and 2010,
respectively. The costs are included in general and administrative expenses and
are for the Companys proportionate share of the staffing and related costs
provided by AR6. The costs are actual costs with no markup or profit to AR6.
Also, as part of this arrangement, the day to day transactions may result in
amounts due to or from the noted related parties. To efficiently manage cash
disbursements, the individual companies may make payments for any or all of the
related companies. The amounts due to or from the related individual companies
are reimbursed or collected and are not significant in amount.

ASA
is 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the
Company. Mr. Knight is also Chairman and Chief Executive Officer of AR6,
Apple REIT Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc. Members
of the Companys Board of Directors are also on the boards of AR6, Apple REIT
Eight, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

Included in other assets, net on the
Companys consolidated balance sheet, is a 26% ownership interest in Apple Air
Holding, LLC (Apple Air). The other members of Apple Air are Apple REIT Six,
Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc. Through its ownership
interest the Company has access to Apple Airs aircraft for asset management
and renovation purposes. The Companys ownership interest was approximately
$2.1 million at March 31, 2011, and $2.0 million at December 31, 2010. The
Company has recorded its share of income or losses of the entity under the
equity method of accounting and adjusted its investment in Apple Air
accordingly. For the three months ended March 31, 2011 and 2010, the Company
recorded a loss of approximately $53,000 and $119,000, respectively, as its
share of the net loss of Apple Air, which primarily relates to the depreciation
of the aircraft, and is included in general and administrative expense in the
Companys consolidated statements of operations. Apple Air owned two aircraft
during 2010, but reduced its ownership to one aircraft during the first quarter
of 2011.

14

---



Subsequent Events

On
April 15, 2011, the Company paid $0.064167 per common share, totaling $5.9
million, in a distribution to its common shareholders. Under the Companys
Dividend Reinvestment Plan, $2.1 million were reinvested, resulting in the
issuance of 187,037 Units.

In
April 2011, under the guidelines of the Companys Unit Redemption Program,
728,883 Units were repurchased from shareholders at a cost of $8.0 million. As
contemplated in the program, the Company redeemed Units on a pro-rata basis.
This redemption was approximately 56% of the requested redemption amount.

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 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. The Company may utilize short-term borrowings in certain periods in
order to offset these fluctuations in revenues and to make distributions to
shareholders.

15

---



Item 3. Quantitative and Qualitative Disclosures About
Market Risk

The
Company does not engage in transactions in derivative financial instruments or
derivative commodity instruments. As of March 31, 2011, 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 under its variable rate revolving
credit facility. The Company had an outstanding balance of approximately $47.6
million on its $85 million revolving credit facility at March 31, 2011. To the
extent the Company utilizes the credit facility, the Company will be exposed to
changes in short term interest rates. Based on the outstanding balances at
March 31, 2011 under the variable rate credit facility, every 100 basis point
change in interest rates can potentially impact the Companys annual net income
by $476,000, subject to the conditions of the interest rate floor provisions of
the revolving credit facility, and with all other factors remaining the same.
The Companys cash balance at March 31, 2011 was $0.

Item 4. Controls and Procedures

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

16

---



|         |                  
|-------- | -----------------
|PART II. | OTHER INFORMATION

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

Unit Redemption Program

The
Company has instituted a Unit Redemption Program to provide its shareholders
who have held their Units for at least one year with the benefit of limited
interim liquidity, by presenting for redemption all or any portion of their
Units. As of March 31, 2011, 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 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. In January 2011, the
first scheduled redemption date of 2011, the Company redeemed in accordance
with the Unit Redemption Program on a pro-rata basis approximately 63% of the
requested redemptions, or a total of $8.0 million. Although the Program allows
for up to 5% of the weighted average shares to be redeemed on an annual basis,
the Company plans to redeem approximately 3% of weighted average shares during
2011. See the Companys complete Consolidated Statements of Cash Flows for the
three months ended March 31, 2011 and 2010 included in the Companys interim
financial statements in Item 1 of this Form 10-Q for a description of sources
and uses of the Companys cash flows. The following is a summary of redemptions
during the first quarter of 2011 (no redemptions occurred in February and March
2011):

Issuer Purchases of Equity Securities


|              |  |                                     |  |                               |  |                                                                                       |  |                                                                                    
|------------- |  | ----------------------------------- |  | ----------------------------- |  | ------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------
|              |  | (a)                                 |  | (b)                           |  | (c)                                                                                   |  | (d)                                                                                
|Period        |  | Total Number 
 of Units 
 Purchased |  | Average Price Paid 
 per Unit |  | Total Number of 
 Units Purchased as 
 Part of Publicly Announced Plans 
 or Programs |  | Maximum Number 
 of Units that May 
 Yet Be Purchased Under the Plans 
 or Programs
|              |  |                                     |  |                               |  |                                                                                       |  |                                                                                    
|January
 2011 |  | 728,135                             |  | $10.99                        |  | 7,690,534                                                                             |  | (1)                                                                                

(1) The maximum number of Units that may be
redeemed in any 12 month period is limited to up to five percent (5.0%) of the
weighted average number of Units outstanding from the beginning of the 12 month
period, subject to the Companys right to change the number of Units to be
redeemed.

17

---



Item 6. Exhibits

|                |  |                                                                                                                                                                                                                                              
|--------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 Number |  | Description                                                                                                                                                                                                                                  
|                |  |                                                                                                                                                                                                                                              
|                |  |                                                                                                                                                                                                                                              
|3.1             |  | Amended and
 Restated Articles of Incorporation of the Registrant. (Incorporated by
 reference to Exhibit 3.3 to amendment no. 3 to the Registrants registration
 statement on Form S-11 (SEC File No. 333-125546) effective March 3, 2006).
|                |  |                                                                                                                                                                                                                                              
|3.2             |  | Bylaws of
 the Registrant. (Incorporated by reference to Exhibit 3.2 to the Registrants
 registration statement on Form S-11 (SEC File No. 333-125546) effective March
 3, 2006).                                                           
|                |  |                                                                                                                                                                                                                                              
|31.1            |  | Certification
 of the Companys Chief Executive Officer pursuant to Section 302 of the
 Sarbanes-Oxley Act of 2002 (FILED HEREWITH).                                                                                                         
|                |  |                                                                                                                                                                                                                                              
|31.2            |  | Certification
 of the Companys Chief Financial Officer pursuant to Section 302 of the
 Sarbanes-Oxley Act of 2002 (FILED HEREWITH).                                                                                                         
|                |  |                                                                                                                                                                                                                                              
|32.1            |  | Certification
 of the Companys Chief Executive Officer and Chief Financial Officer pursuant
 to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
 Sarbanes-Oxley Act of 2002 (FILED HEREWITH).                              

18

---



SIGNATURES

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

|                       |                                                        |  |                   | 
|---------------------- | ------------------------------------------------------ |  | ----------------- | 
|APPLE REIT SEVEN, INC. |                                                        |  |                   | 
|                       |                                                        |  |                   | 
|By:                    | /s/ GLADE M. KNIGHT                                    |  | Date: May 6, 2011 | 
|                       |                                                        |  |                   | 
|                       | Glade M. Knight,                                       |  |                   | 
|                       | Chairman of the Board and                              |  |                   | 
|                       | Chief Executive Officer                                |  |                   | 
|                       | (Principal Executive Officer)                          |  |                   | 
|                       |                                                        |  |                   | 
|By:                    | /s/ BRYAN PEERY                                        |  | Date: May 6, 2011 | 
|                       |                                                        |  |                   | 
|                       | Bryan Peery,                                           |  |                   | 
|                       | Chief Financial Officer                                |  |                   | 
|                       | (Principal Financial and Principal Accounting Officer) |  |                   | 

19

---