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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

**(****Mark One)**

 

| **x**                                                   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                              | ** **                                                                                               |
| **For the quarterly period ended March 31,  2010** |
| ** **                                              |
| **or**                                                  |
|                                                    |                                                                                                     |
| **o**                                                   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition period from              to             **

** **

**Commission File Number: 000-52585**

 

**APPLE REIT SEVEN, INC**.

(Exact name ofregistrant 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’stelephone 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) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  x Yes  o No

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange 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 ashell company (as defined in Rule 12b-2 of the Exchange Act)  o Yes x No

 

As of May 1, 2010 there were 92,593,398outstanding shares of common stock, no par value, of the registrant.

 

 

 

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**APPLEREIT SEVEN, INC.****FORM 10-Q**

**INDEX**

 
| ** **                             | ** ** | ** **                                                                                            | **Page  Number** |
|----------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------------|
| **PART I. FINANCIAL INFORMATION** |       |
|                                   |       |                                                                                                  |             |
|                                   | Item 1.    | Financial Statements  (Unaudited)                                                                     |             |
|                                   |       |                                                                                                  |             |
|                                   |       | Consolidated Balance Sheets - March 31, 2010 and  December 31, 2009                         | 3                |
|                                   |       |                                                                                                  |             |
|                                   |       | Consolidated Statements of Operations — For the three  months ended March 31, 2010 and 2009 | 4                |
|                                   |       |                                                                                                  |             |
|                                   |       | Consolidated Statements of Cash Flows — For the three  months ended March 31, 2010 and 2009 | 5                |
|                                   |       |                                                                                                  |             |
|                                   |       | Notes to Consolidated Financial Statements                                                            | 6                |
|                                   |       |                                                                                                  |             |
|                                   | Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           | 10               |
|                                   |       |                                                                                                  |             |
|                                   | Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                           | 17               |
|                                   |       |                                                                                                  |             |
|                                   | Item 4.    | Controls and  Procedures                                                                              | 17               |
| ** **                             |       |
| **PART II. OTHER  INFORMATION**   |       |
|                                   |       |                                                                                                  |             |
|                                   | Item 1.    | Legal Proceedings (not  applicable)                                                                   |             |
|                                   |       |                                                                                                  |             |
|                                   | Item 1A.   | Risk Factors (not  applicable)                                                                        |             |
|                                   |       |                                                                                                  |             |
|                                   | Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                          | 18               |
|                                   |       |                                                                                                  |             |
|                                   | Item 3.    | Defaults Upon Senior  Securities (not applicable)                                                     |             |
|                                   |       |                                                                                                  |             |
|                                   | Item 4.    | (Removed and Reserved)                                                                                |             |
|                                   |       |                                                                                                  |             |
|                                   | Item 5.    | Other Information (not  applicable)                                                                   |             |
|                                   |       |                                                                                                  |             |
|                                   | Item 6.    | Exhibits                                                                                              | 19               |
|                                   |       |                                                                                                  |             |
| Signatures                             |       |                                                                                                  | 20               |

 

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

 

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**AppleREIT Seven, Inc.**

**Consolidated Balance Sheets**

**(Unaudited)**

**(Inthousands, except share data)**

 
| ** **                                                                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                           | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| **ASSETS**                                                                                                                                           |       |               |       |                  |       |
| Investment  in real estate, net of accumulated depreciation of $89,198 and $80,923,  respectively                                                    |       | $                  | 894,459    |                  | $          | 902,293 |   |
| Restricted  cash-furniture, fixtures and other escrows                                                                                               |       | 7,708              |       | 9,582                 |       |
| Due  from third party managers                                                                                                                       |       | 10,521             |       | 5,639                 |       |
| Other  assets, net                                                                                                                                   |       | 6,864              |       | 6,373                 |       |
|                                                                                                                                                 |       |               |       |                  |       |
| **TOTAL ASSETS**                                                                                                                                     |       | $                  | 919,552    |                  | $          | 923,887 |   |
|                                                                                                                                                 |       |               |       |                  |       |
| **LIABILITIES**                                                                                                                                      |       |               |       |                  |       |
| Notes  payable                                                                                                                                       |       | $                  | 128,806    |                  | $          | 117,787 |   |
| Accounts  payable and accrued expenses                                                                                                               |       | 12,970             |       | 13,843                |       |
|                                                                                                                                                 |       |               |       |                  |       |
| **TOTAL LIABILITIES**                                                                                                                                |       | 141,776            |       | 131,630               |       |
|                                                                                                                                                 |       |               |       |                  |       |
| **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 93,312,515 and 93,521,656 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  93,312,515 and 93,521,656 shares, respectively                   |       | 924,264            |       | 926,419               |       |
| Distributions  greater than net income                                                                                                               |       | (146,512           | )          | (134,186              | )          |
|                                                                                                                                                 |       |               |       |                  |       |
| **TOTAL SHAREHOLDERS’ EQUITY**                                                                                                                  |       | 777,776            |       | 792,257               |       |
|                                                                                                                                                 |       |               |       |                  |       |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                  |       | $                  | 919,552    |                  | $          | 923,887 |   |

 

**Seenotes to consolidated financial statements.**

 

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**AppleREIT Seven, Inc.**

**Consolidated Statements of Operations**

**(Unaudited)**

**(Inthousands, except share data)**

** **
| ** **                                                      | ** ** | **Three  months**        | ** ** | **Three  months**        | ** ** |
|-----------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                      | ** ** | **ended**                | ** ** | **ended**                | ** ** |
| ** **                                                      | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
|                                                            |       |                     |       |                     |       |
| Revenues:                                                       |       |                     |       |                     |       |
| Room revenue                                               |       | $                        | 43,548     |                     | $          | 43,374 |   |
| Other  revenue                                                  |       | 4,688                    |       | 4,184                    |       |
| Total  revenue                                                  |       | 48,236                   |       | 47,558                   |       |
|                                                            |       |                     |       |                     |       |
| Expenses:                                                       |       |                     |       |                     |       |
| Operating  expense                                              |       | 12,767                   |       | 12,618                   |       |
| Hotel  administrative expense                                   |       | 3,755                    |       | 3,920                    |       |
| Sales  and marketing                                            |       | 3,621                    |       | 3,827                    |       |
| Utilities                                                       |       | 2,138                    |       | 2,242                    |       |
| Repair  and maintenance                                         |       | 2,205                    |       | 2,220                    |       |
| Franchise  fees                                                 |       | 1,982                    |       | 1,946                    |       |
| Management  fees                                                |       | 1,545                    |       | 1,533                    |       |
| Taxes,  insurance and other                                     |       | 3,324                    |       | 3,591                    |       |
| General  and administrative                                     |       | 1,206                    |       | 1,170                    |       |
| Depreciation  expense                                           |       | 8,275                    |       | 7,879                    |       |
| Total  expenses                                                 |       | 40,818                   |       | 40,946                   |       |
|                                                            |       |                     |       |                     |       |
| Operating  income                                               |       | 7,418                    |       | 6,612                    |       |
|                                                            |       |                     |       |                     |       |
| Interest  expense, net                                          |       | 1,804                    |       | 1,282                    |       |
|                                                            |       |                     |       |                     |       |
| Net  income                                                     |       | $                        | 5,614      |                     | $          | 5,330 |   |
|                                                            |       |                     |       |                     |       |
| Basic  and diluted net income per common share                  |       | $                        | 0.06       |                     | $          | 0.06 |   |
|                                                            |       |                     |       |                     |       |
| Weighted  average common shares outstanding - basic and diluted |       | 93,198                   |       | 93,482                   |       |
|                                                            |       |                     |       |                     |       |
| Distributions  declared and paid per common share               |       | $                        | 0.19       |                     | $          | 0.22 |   |

** **

**Seenotes to consolidated financial statements. **

 

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**AppleREIT Seven, Inc.**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

**(Inthousands)**

 
| ** **                                                                                          | ** ** | **Three  months**        | ** ** | **Three  months**        | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                          | ** ** | **ended**                | ** ** | **ended**                | ** ** |
| ** **                                                                                          | ** ** | **March 31,  2010** | ** ** | **March 31,  2009** | ** ** |
| **Cash flow provided by operating activities:**                                                     |       |                     |       |                     |       |
| Net  income                                                                                         |       | $                        | 5,614      |                     | $          | 5,330 |   |
| Adjustments  to reconcile net income to cash provided by operating activities:                      |       |                     |       |                     |       |
| Depreciation  of real estate owned                                                                  |       | 8,275                    |       | 7,879                    |       |
| Amortization  of deferred financing costs, fair value adjustments and other non-cash  expenses, net |       | 23                       |       | (99                      | )          |
| Changes  in operating assets and liabilities:                                                       |       |                     |       |                     |       |
| Increase  in funds due from third party managers                                                    |       | (4,882                   | )          | (2,909                   | )          |
| Increase  in other assets                                                                           |       | (846                     | )          | (845                     | )          |
| Increase  in accounts payable and accrued expenses                                                  |       | 148                      |       | 202                      |       |
| Net  cash provided by operating activities                                                          |       | 8,332                    |       | 9,558                    |       |
|                                                                                                |       |                     |       |                     |       |
| **Cash flow from investing activities:**                                                            |       |                     |       |                     |       |
| Capital  improvements                                                                               |       | (1,461                   | )          | (5,554                   | )          |
| Net  decrease in cash restricted for property improvements                                          |       | 2,056                    |       | 483                      |       |
| Redemptions  of ownership interest in non-hotel assets                                              |       | —                   |       | 3,240                    |       |
| Net  cash provided by (used in) investing activities                                                |       | 595                      |       | (1,831                   | )          |
|                                                                                                |       |                     |       |                     |       |
| **Cash flow from financing activities:**                                                            |       |                     |       |                     |       |
| Payment  of mortgage notes payable                                                                  |       | (642                     | )          | (603                     | )          |
| Net  proceeds from line of credit                                                                   |       | 11,810                   |       | —                   |       |
| Redemptions  of Units                                                                               |       | (8,335                   | )          | (4,844                   | )          |
| Net  proceeds from issuance of Units                                                                |       | 6,180                    |       | 7,083                    |       |
| Cash  distributions paid to common shareholders                                                     |       | (17,940                  | )          | (20,555                  | )          |
| Net  cash used in financing activities                                                              |       | (8,927                   | )          | (18,919                  | )          |
|                                                                                                |       |                     |       |                     |       |
| Decrease  in cash and cash equivalents                                                              |       | —                   |       | (11,192                  | )          |
|                                                                                                |       |                     |       |                     |       |
| Cash  and cash equivalents, beginning of period                                                     |       | —                   |       | 20,609                   |       |
| Cash  and cash equivalents, end of period                                                           |       | $                        | —     |                     | $          | 9,417 |   |

 

**Seenotes to consolidated financial statements.**

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1**

 

**Basis of Presentation**

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions for Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not includeall of the information required by accounting principles generally accepted inthe United States.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  These unaudited financial statements shouldbe read in conjunction with the Company’s audited financial statements includedin its 2009 Annual Report on Form 10-K. Operating results for the three month period ended March 31, 2010are not necessarily indicative of the results that may be expected for thetwelve month period ending December 31, 2010.

 

**General Information and Summary of Significant Accounting Policies**

 

Organization

 

Apple REIT Seven, Inc., together withits wholly-owned subsidiaries (the “Company”), is a Virginia corporation formedto invest in hotels and other selected real estate in select metropolitan areasin the United States.  The Company haselected to be treated as a real estate investment trust (“REIT”) for federalincome tax purposes.  Initialcapitalization 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 Unitconsists of one common share and one Series A preferred share) in July 2007.  The Company has no foreign operations orassets and its operations include only one segment. The consolidated financialstatements include the accounts of the Company and its subsidiaries. Allintercompany transactions and balances have been eliminated upon consolidation.

 

Earningsper Common Share

 

Basic earnings per common share is computed based upon the weightedaverage number of shares outstanding during the period. Diluted earnings pershare is calculated after giving effect to all potential common shares thatwere dilutive and outstanding for the period. There were no potential common shares with a dilutive effect for thethree months ended March 31, 2010 and 2009. As a result, basic anddilutive outstanding shares were the same. Series B convertible preferred shares are not included in earningsper common share until such time the Series B convertible preferred sharesare converted to common shares.

 

Use of Estimates

 

The preparation of the financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the amounts reported in the consolidated financialstatements and accompanying notes. Actual results could differ from thoseestimates.

 

RecentAccounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”)issued a pronouncement (Accounting Standards Update No. 2009-17) whichamends its guidance surrounding a company’s analysis to determine whether anyof its variable interests constitute controlling financial interests in avariable interest entity.  This analysisidentifies the primary beneficiary of a variable interest entity as theenterprise that has both of the following characteristics:  (a) the power to direct the activitiesof a variable interest entity that most significantly impact the entity’seconomic performance, and (b) the obligation to absorb losses of theentity that could potentially be significant to the variable interest entity orthe right to receive benefits from the entity that could potentially besignificant to the variable interest entity. Additionally, an enterprise is required to assess

 

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whetherit has an implicit financial responsibility to ensure that a variable interestentity operates as designed when determining whether it has the power to directthe activities of the variable interest entity that most significantly impactthe entity’s economic performance. The new pronouncement also requires ongoingassessments of whether an enterprise is the primary beneficiary of a variableinterest entity and enhanced disclosure about an enterprise’s involvement witha variable interest entity.  Thispronouncement was adopted by the Company in the first quarter of 2010.  The adoption of this standard did not have amaterial impact on the Company’s consolidated financial statements.

 

**Note2**

 

**Other Assets**

 

The Company has a 24% ownership interest inApple Air Holding, LLC (“Apple Air”). Through its ownership interest the Company has access to two corporateLear jets for asset management and hotel renovation purposes.  The Company’s ownership interest in Apple Air(approximately $2.7 million at March 31, 2010) is included in otherassets, net in the Company’s consolidated balance sheet.  The other members of Apple Air are Apple REITSix, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.  The Company records its share of income orloss of the entity under the equity method of accounting, adjusting itsinvestment accordingly.  For the threemonths ending March 31, 2010 and 2009, the Company recorded a loss ofapproximately $119 thousand and $107 thousand, respectively, as its share ofthe net loss of Apple Air which is included in general and administrativeexpense in the Company’s Consolidated Statements of Operations.  The losses relate primarily to thedepreciation of the aircraft.

 

**Note3**

 

**Related Parties**

 

The Company has, and is expected to continue to engage in, significanttransactions with related parties.  Thesetransactions cannot be construed to be at arm’s length, and the results of theCompany’s operations may be different than if conducted with non-relatedparties.

 

The Company is party to an advisory agreement with Apple SevenAdvisors, Inc. (“ASA”), pursuant to which ASA provides management services tothe Company. An annual fee ranging from .1% to .25% of total equity proceedsreceived by the Company, in addition to certain reimbursable expenses, arepayable for these services.  During eachof the three month periods ended March 31, 2010 and 2009, the Company incurredapproximately $253 thousand and $380 thousand in fees related to the advisoryagreement with ASA.  These fees arerecorded in general and administrative expense in the Company’s ConsolidatedStatements of Operations.

 

Through a contractual arrangement with Apple REIT Six, Inc., ASAprovides the Company with support services. The Company reimburses ASA for the cost of the services provided byApple REIT Six, Inc.  ASA in turnreimburses Apple REIT Six, Inc.  Duringeach of the three month periods ended March 31, 2010 and 2009, the Companyincurred approximately $523 thousand and $460 thousand in costs paid to ASAthat were reimbursed to Apple REIT Six, Inc. These costs are recorded in general and administrative expense in theCompany’s Consolidated Statements of Operations.

 

ASA is 100% owned by Glade M. Knight, Chairman and Chief ExecutiveOfficer of the Company.  Mr. Knight isalso Chairman and Chief Executive Officer of Apple REIT Six, Inc., Apple REITEight, Inc. and Apple REIT Nine, Inc. Members of the Company’s Board of Directors are also on the boards ofApple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

 

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**Note 4**

 

**Line of Credit Facility**

 

On April 2, 2009, the Company entered into an unsecured line ofcredit facility, to be utilized for working capital, hotel renovations, orother general corporate funding purposes including the payment ofdistributions.  The credit facilityprovides 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 lineof credit is equal to LIBOR (the London Interbank Offered Rate for a one-monthterm, which was approximately 0.25% at March 31, 2010) plus 1.75%, subjectto a minimum interest rate floor on the line of credit of 3.15%.  Payments of interest only are due monthlyunder the terms of the credit agreement, and any amount borrowed by the Companymay be repaid before maturity with no penalty. The balance outstanding under the line of credit facility on March 31,2010 was approximately $23.3 million, at an annual interest rate of 3.15%.  The balance outstanding at December 31,2009 was $11.5 million.  Interest expenseincurred for borrowings under the line of credit facility during the threemonth period ending March 31, 2010 was approximately $178 thousand.

 

**Note 5**

 

**Shareholders’ Equity**

 

The Company has a Unit Redemption Program to providelimited interim liquidity to its shareholders who have held their Units for atleast one year.  Shareholders may requestredemption of Units for a purchase price equal to 92% of the price paid perUnit if the Units have been owned for less than three years, or 100% of theprice paid per Unit if the Units have been owned more than three years.  The maximum number of Units that may be redeemedin any 12-month period will be three percent of the weighted average number ofUnits outstanding during the 12-month period. The Company reserves the right to change the purchase price ofredemptions, reject any request for redemption, or otherwise amend the termsof, suspend, or terminate the Unit Redemption Program.  During the three months ended March 31, 2010,the Company redeemed approximately 771 thousand Units for approximately $8.3million under the program.  During thethree months ended March 31, 2009, the Company redeemed approximately 471thousand Units for approximately $4.8 million under the program.  Since the inception of the program throughMarch 31, 2010, the Company has redeemed approximately 4.0 million Units forapproximately $42.0 million.

 

In 2007, the Company instituted a DividendReinvestment Plan for its shareholders. The plan provides a convenient and costeffective way to increase shareholder investment in the Company by reinvestingdividends to purchase additional Units of the Company. The uses of the proceedsfrom this plan may include purchasing Units under the Company’s Unit RedemptionProgram, enhancing properties, satisfying financing obligations and otherexpenses, increasing working capital, funding various corporate operations, andacquiring hotels. During the three months ended March 31, 2010, approximately562 thousand Units, representing $6.2 million in proceeds to the Company, wereissued under the plan.  During the threemonths ended March 31, 2009, approximately 644 thousand Units, representing$7.1 million in proceeds to the Company, were issued under the plan.  Since the inception of the plan through March31, 2010, approximately 6.2 million Units, representing approximately $68.1million in proceeds to the Company, have been issued.

 

**Note 6**

 

**Fair Value of Financial Instruments**

 

The Company estimates the fair value of its fixed ratedebt and the credit spreads over variable market rates on its variable ratedebt by discounting the future cash flows of each instrument at estimatedmarket rates or credit spreads consistent with the maturity of the debtobligation with similar credit policies. Credit spreads

 

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take into consideration general market conditions and maturity. As ofMarch 31, 2010, the carrying value and estimated fair value of the Company’sdebt was $128.8 million and $127.8 million, respectively.  As of December 31, 2009, the carrying valueand estimated fair value of the Company’s debt was $117.8 million and $119.6million, respectively.  The carryingvalue of the Company’s other financial instruments approximates fair value dueto the short-term nature of these financial instruments.

 

**Note 7**

 

**Subsequent Events**

 

On April 15, 2010, the Company paid $0.064167 percommon share, totaling $6.0 million, in a dividend distribution to its commonshareholders.  Under the Company’sDividend Reinvestment Plan, $2.1 million were reinvested, resulting in theissuance of 186,977 Units.

 

In April 2010, the Company redeemed 906,094 Units forapproximately $9.8 million under its Unit Redemption Program.

 

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**Item 2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

This quarterly report contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended.  Such statementsinvolve known and unknown risks, uncertainties, and other factors which maycause the actual results, performance, or achievements of the Company to bematerially different from future results, performance or achievements expressedor implied by such forward-looking statements.  Such factors include, butare not limited to, the ability of the Company to implement its acquisition strategyand operating strategy; the Company’s ability to manage planned growth; changesin economic cycles including the current economic recession throughout theUnited States, and competition within the hotel industry.  Although theCompany believes that the assumptions underlying the forward-looking statementscontained herein are reasonable, any of the assumptions could be inaccurate,and therefore there can be no assurance that such statements included in thequarterly report will prove to be accurate.  In light of the significantuncertainties inherent in the forward-looking statements included herein, theinclusion of such information should not be regarded as a representation by theCompany or any other person that the results or conditions described in suchstatements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a real estate investment trustinvolves the application of highly technical and complex provisions of theInternal Revenue Code.  Readers should carefully review the Company’sfinancial statements and the notes thereto, as well as the risk factorsdescribed in the Company’s filings with the Securities and ExchangeCommission.  Any forward-lookingstatement that the Company makes speaks only as of the date of thisreport.  The Company undertakes noobligation to publically update or revise any forward-looking statements orcautionary 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 investin hotels and other selected real estate in select metropolitan areas in theUnited States.  The Company was initiallycapitalized 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 31,2010, located within different markets in the United States. The Company istreated as a Real Estate Investment Trust (“REIT”) for federal income tax purposes.Although hotel performance can be influenced by many factors including localcompetition, local and general economic conditions in the United States and theperformance of individual managers assigned to each hotel, performance of thehotels as compared to other hotels within their respective local market, ingeneral, has met the Company’s expectations for the period owned.  With the significant economic downturn in theUnited States, the results of the overall lodging industry as well as theCompany have declined as compared to expectations when the properties wereacquired. There is no way to predict general economic conditions, however, theCompany does anticipate revenue and income to remain flat as compared to 2009levels, which represents a significant decline from pre-recession results.  The Company was initially impacted byrecessionary declines in corporate and individual travel, and therefore roomdemand, in the third and fourth quarters of 2008.  While there is some general consensus amongeconomists that the economy in the United States is emerging from therecessionary environment of 2008 and 2009, high unemployment levels andsluggish business and consumer travel trends remain.  Many industry analysts believe the hotelindustry will be stable for calendar 2010 as compared to 2009.

 

In evaluating financial condition and operatingperformance, the most important matters on which the Company focuses arerevenue measurements, such as average occupancy, average daily rate (“ADR”),revenue per available room (“RevPAR”) and market yield which compares anindividual hotel’s results to others in its local market, and expenses, such ashotel operating expenses, general and administrative and other expensesdescribed below.  The following is asummary of the Company’s results (in thousands, except statistical data):

 

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| ** **                             | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2010**                              | ** ** | **% of  Revenue** | ** ** | **2009** | ** ** | **% of  Revenue** | ** ** | **Percent  change** | ** ** |
| **Total revenues**                     |       | $                                     | 48,236     |   | 100 | % | $ | 47,558 |   | 100 | % | 1 | % |
| **Hotel operating expenses**           |       | 28,013                                |       | 58 | % | 28,306 |   | 60 | % | -1 | % |
| **Taxes, insurance and other expense** |       | 3,324                                 |       | 7 | % | 3,591 |   | 8 | % | -7 | % |
| **General and administrative expense** |       | 1,206                                 |       | 3 | % | 1,170 |   | 2 | % | 3 | % |
| **Depreciation**                       |       | 8,275                                 |       |   |   | 7,879 |   |   |   | 5 | % |
| **Interest expense, net**              |       | 1,804                                 |       |   |   | 1,282 |   |   |   | 41 | % |
| ** **                             |       |                                  |       |   |   |   |   |   |   |   |   |
| **Average Market Yield (1)**           |       | 124                                   |       |   |   | 124 |   |   |   | — |   |
| **Number of hotels**                   |       | 51                                    |       |   |   | 51 |   |   |   | — |   |
| **Average Daily Rate (ADR)**           |       | $                                     | 110        |   |   |   | $ | 116 |   |   |   | -5 | % |
| **Occupancy**                          |       | 69                                    | %          |   |   | 65 | % |   |   | 6 | % |
| **RevPAR**                             |       | $                                     | 75         |   |   |   | $ | 75 |   |   |   | — |   |

 

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

 

**HotelsOwned**

 

The following table summarizes the location, brand, manager, dateacquired, number of rooms and gross purchase price for each of the 51 hotelsthe Company owned at March 31, 2010 (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                      |       |
|                  |            |           |            |                    |            |               |            |                    |            |           |            |                            |            |  |

 

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| Lakeland     |   | FL     |   | Courtyard          |   | LBA           |   | 4/24/2007  |   | 78    |   | 9,805  |    |
|--------------|--------|--------|--------|--------------------|--------|---------------|--------|------------|--------|-------|--------|--------|---------|
| 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 |   |
|              |        |        |        |                    |        |               |        |            |        |       |        |        |         |  |

 

Withthe exception of assumed mortgage loans on certain hotel properties,substantially all of the purchase price of the hotels was funded by proceedsfrom the Company’s best-efforts offering of Units, completed in July 2007.  The Company also used the proceeds of itsoffering to pay 2% of the gross purchase price for these hotels, which wasapproximately $18.0 million, as a brokerage commission to Apple Suites RealtyGroup, Inc. (“ASRG”), wholly-owned by Glade M. Knight, the Company’sChairman and Chief Executive Officer. The Company leased all of its hotels to wholly-owned taxable REITsubsidiaries under master hotel lease agreements.  No hotels have been purchased since September 2008,and there are no outstanding purchase contracts for additional hotels as of March 31,2010.

 

**Resultsof Operations**

 

As of March 31,2010, the Company owned 51 hotels with 6,426 rooms.  The Company’s portfolio of hotels owned isunchanged since 2008.  Hotel performanceis impacted by many factors including economic conditions in the United States,as well as each locality.  Due to acontinuing recessionary economic environment throughout the United States, thefinancial results of the Company’s hotels were below pre-recessionary levels,however did slightly exceed results for the same period in 2009.  It is anticipated the properties’ performancewill continue to be below comparable pre-recession operating periods untilgeneral economic conditions improve.  TheCompany will continue to aggressively pursue market opportunities to improverevenue and aggressively pursue cost controls to improve results during andafter the economic downturn.  Although itis not possible to predict when economic conditions will improve or theirimpact on the

 

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hotel industry, many analysts forecast RevPAR tostabilize in 2010, as compared to 2009. While reflecting the impact of declining economic activity, theCompany’s hotel performance as compared to other hotels within each individualmarket has generally met expectations for the period held.

 

Revenues

 

TheCompany’s principal source of revenue is hotel room revenue and other relatedrevenue.  For the three months ended March 31,2010 and 2009, the Company had total revenue of $48.2 and $47.6 million,respectively, with average occupancy of 69% and 65%, ADR of $110 and $116, andRevPAR of $75 for each period.  ADR iscalculated as room revenue divided by the number of rooms sold, and RevPAR iscalculated as occupancy multiplied by ADR. As reflected in the Company’s occupancy increase, the industry isbeginning to realize an increase in demand. The increase is a result of reduced room rates and the sense that theoverall economy is stabilizing, generating more business and leisure travelers.

 

Whilethe revenue rates earned by the Company are comparable with industry and brandaverages, the Company continues to focus on improving market share andcontinues to be a leader in its local markets. The Company’s Market Yield for the first three months of 2010 and 2009was 124.  The Market Yield is a measureof each hotel’s RevPAR compared to the average (100) in its local market.

 

Expenses

 

Forthe three month periods ended March 31, 2010 and 2009, hotel direct expensestotaled $28.0 and $28.3 million, or 58% and 60% of total revenue,respectively.  Hotel direct expensesconsist of operating expense, hotel administrative expense, sales and marketingexpense, utilities expense, repair and maintenance expense, franchise fees andmanagement fees.

 

Resultsfor the three months periods ended March 31, 2010 reflect the impact of acontinuing recessionary climate at most of the Company’s hotels, and theCompany’s efforts to control costs in such an economic environment.  However, certain operating costs such asmanagement costs, certain utility costs and minimum supply and maintenancecosts are relatively fixed in nature, and cannot be curtailed oreliminated.  The Company has been successfulin reducing certain labor costs, food and supply costs and utility costs bycontinually monitoring and sharing utilization data across its hotels andmanagement companies.  With the weakenedeconomic conditions, the Company has and will continue to work with itsmanagement companies to reduce costs as aggressively as possible whilemaintaining quality and service levels at each property, however it is notanticipated these reductions will offset revenue declines from pre-recessionaryperiods of operation.

 

Taxes,insurance, and other expense for the three months ended March 31, 2010 and2009 were $3.3 and $3.6 million, or 7% and 8% of total revenue for theapplicable period.  Decreases in theseexpenses for the comparable three month periods ending March 31, 2010 and2009 reflect lower real estate property tax assessments at selected hotels,including the results of successful appeals of initial assessments for somelocations.  In addition, the Company hasexperienced slightly lower property insurance expense for its hotel properties,in comparison to insurance rates in effect during 2009.

 

Generaland administrative expense for the three months ended March 31, 2010 and2009 were approximately $1.2 million for each period.  The components of general and administrativeexpense include advisory fees, legal fees, accounting fees, reporting expensesand the Company’s share of the loss from its investment in Apple Air Holding,LLC.

 

Depreciationexpense for the three months ended March 31, 2010 and 2009 was $8.3million and $7.9 million.  These amountsrepresent depreciation expense of the Company’s hotel buildings and relatedimprovements, and associated furniture, fixtures and equipment, for therespective periods owned.

 

Interestexpense during the three months ended March 31, 2010 and 2009 totaled $1.8and $1.4 million, respectively.  Interestexpense primarily represents interest incurred on mortgage loans assumed onacquired hotels and interest on the Company’s line of credit (originated in April 2009).  As of March 31, 2010, mortgage loans wereoutstanding on ten of the Company’s hotel properties, totaling $105.5 million,and the

 

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outstandingbalance of the line of credit was $23.3 million.  Interest expense for the three month periodended March 31, 2009 is net of capitalized interest of approximately $0.3million, associated with hotel renovations. No capitalized interest was recorded during the three month period endedMarch 31, 2010.

 

**Liquidity and Capital Resources**

 

The Company’s operatingcash flow from the hotel properties owned and borrowings under its line ofcredit facility are the Company’s principal sources of liquidity.  To minimize its outstanding balance on itsline of credit, the Company maintains minimal cash balances.  The Company anticipates that cash flow fromoperations and credit availability will be adequate to meet substantially allof its anticipated liquidity requirements, including distributions toshareholders, capital expenditures and debt service.  The Company is pursuing additional financingso that it can make distributions in excess of distributions required tomaintain its REIT status.  Historically,the Company has maintained a relatively stable monthly dividend rate instead ofraising and lowering the distribution with varying economic cycles.  With the depressed financial results of theCompany and the lodging industry, the Company will attempt to utilizeadditional financing to achieve this objective. Although the Company has relatively low levels of debt, there can be noassurances it will be successful with this strategy and may need to reduce itsdistribution to levels required to maintain its REIT status.  The Company’s bylaws require board review andapproval of any debt financing obtained by the Company.

 

To maintain its REITstatus the Company is required to distribute at least 90% of its ordinaryincome.  Distributions in the first threemonths of 2010 totaled $17.9 million and were paid monthly at a rate of$0.064167 per common share.  For the samethree month period, the Company’s cash generated from operations wasapproximately $8.3 million.  This shortfall includes a return of capitaland was funded primarily by additional borrowings under the Company’s line ofcredit facility.  The Company intends tocontinue paying distributions on a monthly basis.  However, since there can be no assurance ofthe ability of the Company’s properties to provide income at this level, therecan be no assurance as to the classification or duration of distributions atthe current monthly rate.  Inconsideration of the weakness in economic conditions throughout the UnitedStates, the Board of Directors monitors the Company’s distribution raterelative to the performance of the hotels on an ongoing basis and may makeadjustments to the distribution rate as determined to be prudent in relation toother cash requirements of the Company. In April 2009, the Board of Directors approved a reduction in theCompany’s annual distribution rate from $0.88 to $0.77 per common share.  The reduction of the dividend was effectivebeginning with the May 15, 2009 distribution.

 

TheCompany has on-going capital commitments to fund its capital improvements. TheCompany is required, under all of the hotel management agreements, to makeavailable, for the repair, replacement, refurbishing of furniture, fixtures,and equipment, an amount between 2% to 5% of gross revenues of the applicablehotel, provided that such amount may be used for the Company’s capitalexpenditures with respect to the applicable hotel. The Company expects thatthis amount will be adequate to fund required repair, replacement, andrefurbishments and to maintain the Company’s hotels in a competitive condition.As of March 31, 2010, the Company held $6.3 million in restricted cashaccounts for capital improvement purposes as required by certain loan or hotelmanagement agreements.  The Companysubstantially completed significant renovations to one hotel property duringthe first three months of 2010.  No majorrenovation projects were in progress at March 31, 2010.  With the depressed economic environment, theCompany will only complete the most cost effective renovation projects.  Total capital expenditures incurred in thefirst three months of 2010 were approximately $0.4 million; the Company expectstotal 2010 capital improvements to be approximately $5 million.

 

TheCompany has a Unit Redemption Program to provide limited interim liquidity toits shareholders who have held their Units for at least one year.  Shareholders may request redemption of Unitsfor a purchase price equal to 92% of the price paid per Unit if the Units havebeen owned for less than three years, or 100% of the price paid per Unit if theUnits have been owned more than three years. The maximum number of Units that may be redeemed in any 12-month periodwill be three percent of the weighted average number of Units outstanding duringthe 12-month period.  The Company reservesthe right to change the purchase price of redemptions, reject any request forredemption, or otherwise amend the terms of, suspend, or terminate the UnitRedemption Program.  During the threemonths ended March 31, 2010, the Company redeemed approximately

 

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771thousand Units for approximately $8.3 million under the program.  During the three months ended March 31,2009, the Company redeemed approximately 471 thousand Units for approximately$4.8 million under the program.  Sincethe inception of the program through March 31, 2010, the Company hasredeemed approximately 4.0 million Units for approximately $42.0 million.

 

In2007, the Company instituted a Dividend Reinvestment Plan for its shareholders.The plan provides a convenient and cost effective way to increase shareholderinvestment in the Company by reinvesting dividends to purchase additional Unitsof the Company. The uses of the proceeds from this plan may include purchasingUnits under the Company’s Unit Redemption Program, enhancing properties,satisfying financing obligations and other expenses, increasing workingcapital, funding various corporate operations, and acquiring hotels. During thethree months ended March 31, 2010, approximately 562 thousand Units,representing $6.2 million in proceeds to the Company, were issued under theplan.  During the three months ended March 31,2009, approximately 644 thousand Units, representing $7.1 million in proceedsto the Company, were issued under the plan. Since the inception of the plan through March 31, 2010,approximately 6.2 million Units, representing approximately $68.1 million inproceeds to the Company, have been issued.

 

**RelatedParty Transactions**

 

The Company has, and isexpected to continue to engage in, significant transactions with relatedparties.  These transactions cannot beconstrued to be at arm’s length, and the results of the Company’s operationsmay be different than if conducted with non-related parties.

 

TheCompany is party to an advisory agreement with Apple Seven Advisors, Inc.(“ASA”), pursuant to which ASA provides management services to theCompany.  An annual fee ranging from .1%to .25% of total equity proceeds received by the Company, in addition tocertain reimbursable expenses, are payable for these services.  During each of the three month periods ended March 31,2010 and 2009, the Company incurred approximately $253 thousand and $380thousand, respectively, in fees related to the advisory agreement withASA.  These fees are recorded in generaland administrative expense in the Company’s Consolidated Statements ofOperations.

 

Througha contractual arrangement with Apple REIT Six, Inc., ASA provides theCompany with support services.  TheCompany reimburses ASA for the cost of the services provided by Apple REIT Six, Inc.  ASA in turn reimburses Apple REIT Six, Inc.  During each of the three month periods ended March 31,2010 and 2009, the Company incurred approximately $523 thousand and $460thousand, respectively, in costs paid to ASA that were reimbursed to Apple REITSix, Inc.  These reimbursed costsare recorded in general and administrative expense in the Company’s ConsolidatedStatements of Operations.

 

ASAis 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of theCompany.  Mr. Knight is alsoChairman and Chief Executive Officer of Apple REIT Six, Inc., Apple REITEight, Inc. and Apple REIT Nine, Inc. Members of the Company’s Board of Directors are also on the boards ofApple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

 

**Subsequent Events**

 

OnApril 15, 2010, the Company paid $0.064167 per common share, totaling $6.0million, in a dividend distribution to its common shareholders.  Under the Company’s Dividend ReinvestmentPlan, $2.1 million were reinvested, resulting in the issuance of 186,977 Units.

 

InApril 2010, the Company redeemed 906,094 Units for approximately $9.8million under its Unit Redemption Program.

 

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**Impactof Inflation**

 

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

 

**BusinessInterruption**

 

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

 

**Seasonality**

 

Thehotel industry is seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the secondand third quarters than in the first and fourth quarters.  As a result, there may be quarterlyfluctuations in results of operations. The Company may utilize short-term borrowings in certain periods inorder to offset these fluctuations in revenues and to make distributions toshareholders.

 

**Recent Accounting Pronouncements**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued a pronouncement(Accounting Standards Update No. 2009-17) which amends its guidancesurrounding a company’s analysis to determine whether any of its variable interestsconstitute controlling financial interests in a variable interest entity.  This analysis identifies the primarybeneficiary of a variable interest entity as the enterprise that has both ofthe following characteristics:  (a) thepower to direct the activities of a variable interest entity that mostsignificantly impact the entity’s economic performance, and (b) theobligation to absorb losses of the entity that could potentially be significantto the variable interest entity or the right to receive benefits from theentity that could potentially be significant to the variable interestentity.  Additionally, an enterprise isrequired to assess whether it has an implicit financial responsibility toensure that a variable interest entity operates as designed when determiningwhether it has the power to direct the activities of the variable interestentity that most significantly impact the entity’s economic performance. Thenew pronouncement also requires ongoing assessments of whether an enterprise isthe primary beneficiary of a variable interest entity and enhanced disclosureabout an enterprise’s involvement with a variable interest entity.  This pronouncement was adopted by the Companyin the first quarter of 2010.  Theadoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

TheCompany does not engage in transactions in derivative financial instruments orderivative commodity instruments. As of March 31, 2010, the Company’sfinancial instruments were not exposed to significant market risk due tointerest rate risk, foreign currency exchange risk, commodity price risk orequity price risk. The Company will be exposed to interest rate risk due topossible changes in short term interest rates as it invests its cash or borrowsunder its line of credit facility.  TheCompany had an outstanding balance of $23.3 million on its $30 million line ofcredit at March 31, 2010, and to the extent it utilizes the line ofcredit, the Company will be exposed to changes in short term interestrates.  Based on the outstanding balanceat March 31, 2010, every 100 basis point change in interest rates canpotentially impact the Company’s annual net income by $233 thousand, subject tothe 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 March 31, 2010 was not material.

 

**Item 4. Controls and Procedures**

 

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

 

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**PART II.                OTHER INFORMATION**

 

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

 

*Unit Redemption Program*

 

The Company hasinstituted a Unit Redemption Program to provide its shareholders who have heldtheir Units for at least one year with the benefit of limited interimliquidity, by presenting for redemption all or any portion of their Units.  If Units are held for the required one-yearperiod, the Units may be redeemed for a purchase price equal to 92% of theprice paid per Unit if the Units have been owned less than three years, or 100%of the price paid per Unit if the Units have been owned for three years ormore.  The board of directors reservesthe right, in its sole discretion, at any time and from time to time, to waivethe one-year holding period, reject any request for redemption, change thepurchase price for redemptions or otherwise amend the terms of, suspend, orterminate the Unit Redemption Program. The following is a summary of redemptions during the first quarter of2010:

 

**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 2010 |       | 770,996                               |       | $                                | 10.81      |                                                                                         | 4,000,746  |                                                                                  |       | (1) |
|                   |            |                                       |            |                                  |            |                                                                                              |            |                                                                                       |            |  |

 

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

 

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**Item 6.  Exhibits**

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

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| APPLE REIT SEVEN, INC. |
|------------------------|
|                   |   |   |   |
| By:                    | /s/    GLADE M. KNIGHT |   | Date: May 5, 2010 |
|                   | **Glade M. Knight,** |   |   |
|                   | **Chairman of the Board and****Chief Executive Officer****(Principal Executive Officer)** |   |   |
|                   |   |   |   |
| By:                    | /s/    BRYAN PEERY |   | Date: May 5, 2010 |
|                   | **Bryan Peery,** |   |   |
|                   | **Chief Financial Officer****(Principal Financial and Principal Accounting  Officer)** |   |   |

 

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