Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

** **

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2009**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

** **

**FOR THETRANSITION PERIOD FROM          TO        **

 

**Commission File Number 000-51270**

 

**APPLE REIT SIX, INC.**

(Exact name of registrant asspecified in its charter)

 

| **VIRGINIA**                      | ** ** | **20-0620523**      |
|-----------------------------------|------------|---------------------|
| (State or other jurisdiction      |       | (IRS Employer       |
| of incorporation or organization) |       | Identification No.) |

 

| **814  EAST MAIN STREET**                |       |       |
|------------------------------------------|------------|------------|
| **RICHMOND,  VIRGINIA**                  | ** ** | **23219**  |
| (Address of principal executive offices) |       | (Zip Code) |

 

**(804) 344-8121**

(Registrant’s telephonenumber, including area code)

 

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

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes o No o

 

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,” “acceleratedfiler” 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 ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Number ofregistrant’s common shares outstanding as of November 1, 2009: 90,940,208

 

 

 

----

Tableof Contents

 

**APPLE REIT SIX, INC.****FORM 10-Q**

**INDEX**

 
| ** **                                                         | ** **                                                                                                                                            | ** ** | **Page**   |
|--------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                         | ** **                                                                                                                                            | ** ** | **Number** |
| **PART I.**                                                   | **FINANCIAL INFORMATION**                                                                                                                             | ** ** | ** ** |
|                                                               |                                                                                                                                                  |       |       |
| Item 1.                                                            | Financial  Statements (Unaudited)                                                                                                                     |       |       |
|                                                               | Consolidated  Balance Sheets -  September 30, 2009 and December 31, 2008                                                                    |       | 3          |
|                                                               | Consolidated Statements of Operations -  Three and nine months ended September 30, 2009 and  Three and nine months ended September 30, 2008 |       | 4          |
|                                                               | Consolidated Statements of Cash Flows -  Nine months ended September 30, 2009 and  Nine months ended September 30, 2008                     |       | 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.                                                            | Submission  of Matters to a Vote of Security Holders (not applicable)                                                                                 |       |       |
| Item 5.                                                            | Other  Information (not applicable)                                                                                                                   |       |       |
| Item 6.                                                            | Exhibits                                                                                                                                              |       | 19         |
|                                                               |                                                                                                                                                  |       |       |
| Signatures                                                         |                                                                                                                                                  |       | 20         |

 

This Form 10-Q includes references to certaintrademarks 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 Suites® trademarks are the property ofMarriott International, Inc. or one of its affiliates. The Homewood Suites® by Hilton, Hilton Garden Inn®, Hampton Inn® andHampton Inn & Suites® trademarks are the property of HiltonWorldwide or one or more of its affiliates. For convenience, the applicabletrademark or servicemark symbol has been omitted but will be deemed to beincluded wherever the above-referenced terms are used.

 

2

----

Tableof Contents

 

**AppleREIT Six, Inc.**

**Consolidated Balance Sheets**

**(unaudited)**

**(inthousands, except share data)**

 
| ** **                                                                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                            | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                                            |       |                   |       |                  |       |
| Investment  in real estate, net of accumulated depreciation of $117,163 and $94,005,  respectively                                                    |       | $                      | 808,488    |                  | $          | 823,463 |   |
| Cash  and cash equivalents                                                                                                                            |       | —                 |       | 935                   |       |
| Restricted  cash-furniture, fixtures and other escrows                                                                                                |       | 4,406                  |       | 3,872                 |       |
| Due  from third party manager, net                                                                                                                    |       | 9,016                  |       | 7,804                 |       |
| Other  assets, net                                                                                                                                    |       | 3,535                  |       | 13,709                |       |
|                                                                                                                                                  |       |                   |       |                  |       |
| **TOTAL ASSETS**                                                                                                                                      |       | $                      | 825,445    |                  | $          | 849,783 |   |
|                                                                                                                                                  |       |                   |       |                  |       |
| **LIABILITIES**                                                                                                                                       |       |                   |       |                  |       |
| Notes  payable                                                                                                                                        |       | $                      | 48,335     |                  | $          | 29,097 |   |
| Other  liabilities                                                                                                                                    |       | 5,471                  |       | 11,304                |       |
|                                                                                                                                                  |       |                   |       |                  |       |
| **TOTAL LIABILITIES**                                                                                                                                 |       | 53,806                 |       | 40,401                |       |
|                                                                                                                                                  |       |                   |       |                  |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                         |       |                   |       |                  |       |
| Preferred  stock, authorized 15,000,000 shares; none issued and outstanding                                                                           |       | —                 |       | —                |       |
| Series A  preferred stock, no par value, authorized 200,000,000 shares; issued and  outstanding 91,333,554 and 91,761,828 shares, respectively   |       | —                 |       | —                |       |
| Series B  convertible preferred stock, no par value, authorized 240,000 shares; issued  and outstanding 240,000 and 240,000 shares, respectively |       | 24                     |       | 24                    |       |
| Common  stock, no par value, authorized 200,000,000 shares; issued and outstanding  91,333,554 and 91,761,828 shares, respectively                    |       | 900,655                |       | 905,260               |       |
| Distributions  greater than net income                                                                                                                |       | (129,040               | )          | (95,902               | )          |
|                                                                                                                                                  |       |                   |       |                  |       |
| **TOTAL SHAREHOLDERS’ EQUITY**                                                                                                                   |       | 771,639                |       | 809,382               |       |
|                                                                                                                                                  |       |                   |       |                  |       |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                   |       | $                      | 825,445    |                  | $          | 849,783 |   |

 

**Seenotes to consolidated financial statements.**

 

3

----

Tableof Contents

 

**Apple REIT Six, Inc.**

**ConsolidatedStatements of Operations**

**(unaudited)**

**(in thousands, except per share data)**

 
| ** **                                                      | ** ** | **Three months**                 | ** ** | **Three months**                 | ** ** | **Nine Months**                  | ** ** | **Nine Months**                  | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **ended**                        | ** ** | **ended**                        | ** ** | **ended**                        | ** ** | **ended**                        | ** ** |
| ** **                                                      | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| ** **                                                      | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** **                       | ** ** |
| Revenues:                                                       |       |                             |       |                             |       |                             |       |                             |       |
| Room revenue                                               |       | $                                | 54,434     |                             | $          | 65,629                           |       | $                                | 154,083    |   | $ | 188,737 |   |
| Other revenue                                                   |       | 3,567                            |       | 4,860                            |       | 11,040                           |       | 15,068                           |       |
| Reimbursed expenses                                             |       | 1,311                            |       | 1,121                            |       | 3,931                            |       | 3,309                            |       |
| Total revenue                                                   |       | 59,312                           |       | 71,610                           |       | 169,054                          |       | 207,114                          |       |
|                                                            |       |                             |       |                             |       |                             |       |                             |       |
| Expenses:                                                       |       |                             |       |                             |       |                             |       |                             |       |
| Operating expense                                               |       | 15,092                           |       | 16,880                           |       | 43,031                           |       | 50,011                           |       |
| Hotel administrative expense                                    |       | 4,861                            |       | 5,376                            |       | 14,268                           |       | 16,261                           |       |
| Sales and marketing                                             |       | 4,389                            |       | 4,964                            |       | 13,165                           |       | 14,916                           |       |
| Utilities                                                       |       | 2,845                            |       | 3,147                            |       | 7,550                            |       | 8,187                            |       |
| Repair and maintenance                                          |       | 2,708                            |       | 3,006                            |       | 7,860                            |       | 8,898                            |       |
| Franchise fees                                                  |       | 2,454                            |       | 2,945                            |       | 6,908                            |       | 8,291                            |       |
| Management fees                                                 |       | 1,749                            |       | 2,856                            |       | 5,269                            |       | 8,379                            |       |
| Taxes, insurance and other                                      |       | 3,397                            |       | 3,406                            |       | 10,365                           |       | 10,390                           |       |
| Reimbursed expenses                                             |       | 1,311                            |       | 1,121                            |       | 3,931                            |       | 3,309                            |       |
| General and administrative                                      |       | 1,057                            |       | 1,360                            |       | 3,559                            |       | 4,218                            |       |
| Depreciation expense                                            |       | 7,765                            |       | 7,809                            |       | 23,157                           |       | 22,995                           |       |
| Total expenses                                                  |       | 47,628                           |       | 52,870                           |       | 139,063                          |       | 155,855                          |       |
|                                                            |       |                             |       |                             |       |                             |       |                             |       |
| Operating income                                                |       | 11,684                           |       | 18,740                           |       | 29,991                           |       | 51,259                           |       |
|                                                            |       |                             |       |                             |       |                             |       |                             |       |
| Interest expense, net                                           |       | (660                             | )          | (512                             | )          | (1,470                           | )          | (1,352                           | )          |
|                                                            |       |                             |       |                             |       |                             |       |                             |       |
| Net income                                                      |       | $                                | 11,024     |                             | $          | 18,228                           |       | $                                | 28,521     |   | $ | 49,907 |   |
|                                                            |       |                             |       |                             |       |                             |       |                             |       |
| Basic and diluted net income per common share                   |       | $                                | 0.12       |                             | $          | 0.20                             |       | $                                | 0.31       |   | $ | 0.55 |   |
|                                                            |       |                             |       |                             |       |                             |       |                             |       |
| Weighted average common shares outstanding - basic  and diluted |       | 91,097                           |       | 91,092                           |       | 91,165                           |       | 90,712                           |       |
|                                                            |       |                             |       |                             |       |                             |       |                             |       |
| Distributions declared per common share                         |       | $                                | 0.23       |                             | $          | 0.23                             |       | $                                | 0.68       |   | $ | 0.67 |   |

 

**See notes to consolidated financial statements.**

 

4

----

Tableof Contents

 

**AppleREIT Six, Inc.**

**Consolidated Statements of Cash Flows**

**(unaudited)**

**(inthousands)**

 
| ** **                                                                     | ** ** | **Nine months ended**       | ** ** | **Nine months ended**       | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                     | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| ** **                                                                     | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **Cash flow provided by operating activities:**                                |       |                        |       |                        |       |
| Net  income                                                                    |       | $                           | 28,521     |                        | $          | 49,907 |   |
| Adjustments  to reconcile net income to cash provided by operating activities: |       |                        |       |                        |       |
| Depreciation                                                                   |       | 23,157                      |       | 22,995                      |       |
| Other  non-cash expenses, net                                                  |       | 51                          |       | (118                        | )          |
| Changes  in operating assets and liabilities, net of amounts acquired/assumed: |       |                        |       |                        |       |
| Due  from third party manager                                                  |       | (1,212                      | )          | (3,729                      | )          |
| Other  assets                                                                  |       | 155                         |       | (72                         | )          |
| Other  liabilities                                                             |       | 1,333                       |       | (78                         | )          |
| Net  cash provided by operating activities                                     |       | 52,005                      |       | 68,905                      |       |
|                                                                           |       |                        |       |                        |       |
| **Cash flow used in investing activities:**                                    |       |                        |       |                        |       |
| Cash  paid in acquisition of hotel                                             |       | —                      |       | (18,159                     | )          |
| Acquisition  of other assets                                                   |       | —                      |       | (325                        | )          |
| Capital  improvements                                                          |       | (8,663                      | )          | (10,929                     | )          |
| Redemption  of investment interest in non-hotel assets                         |       | 3,240                       |       | —                      |       |
| Net  increase in cash restricted for property improvements                     |       | (380                        | )          | (2                          | )          |
| Other  investing activities, net                                               |       | —                      |       | 389                         |       |
| Net  cash used in investing activities                                         |       | (5,803                      | )          | (29,026                     | )          |
|                                                                           |       |                        |       |                        |       |
| **Cash flow used in financing activities:**                                    |       |                        |       |                        |       |
| Net  proceeds from line of credit                                              |       | 19,980                      |       | —                      |       |
| Payment  of financing costs                                                    |       | (175                        | )          | (225                        | )          |
| Repayment  of secured notes payable                                            |       | (587                        | )          | (17,295                     | )          |
| Net  proceeds from issuance of common stock                                    |       | 26,268                      |       | 26,635                      |       |
| Redemptions  of common stock                                                   |       | (30,964                     | )          | (14,059                     | )          |
| Cash  distributions paid to shareholders                                       |       | (61,659                     | )          | (61,141                     | )          |
| Net  cash used in financing activities                                         |       | (47,137                     | )          | (66,085                     | )          |
|                                                                           |       |                        |       |                        |       |
| Decrease  in cash and cash equivalents                                         |       | (935                        | )          | (26,206                     | )          |
|                                                                           |       |                        |       |                        |       |
| Cash  and cash equivalents, beginning of period                                |       | 935                         |       | 33,261                      |       |
|                                                                           |       |                        |       |                        |       |
| Cash  and cash equivalents, end of period                                      |       | $                           | —     |                        | $          | 7,055 |   |

 

**Seenotes to consolidated financial statements.**

 

5

----

Tableof Contents

** **

**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 2008 Annual Report on Form 10-K. Operating results for the period ended September 30, 2009 are notnecessarily indicative of the results that may be expected for the periodending December 31, 2009.

 

**Note 2**

 

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

 

*Organization*

 

Apple REIT Six, Inc. (the “Company”) is aVirginia corporation formed to invest in hotels and other selected real estatein select metropolitan areas in the United States. The Company has elected tobe treated as a real estate investment trust (“REIT”) for federal income taxpurposes. Initial capitalization occurred on January 20, 2004 andoperations began on May 28, 2004 when the Company acquired its firsthotel. On March 3, 2006, the Company concluded its best-efforts offeringof Units (each Unit consists of one common share and one Series Apreferred share). The Company has no foreign operations or assets and itsoperating structure includes only one segment. The consolidated financial statements include the accounts of theCompany and its subsidiaries. All intercompany transactions and balances havebeen eliminated upon consolidation.

 

*Earnings per Common Share*

 

Basic earnings per common share are computed basedupon the weighted average number of shares outstanding during the year. Dilutedearnings per share are calculated after giving effect to all potential commonshares that were dilutive and outstanding for the year. There were no potentialcommon shares with a dilutive effect during the three and nine months ended September 30,2009 or 2008. Series B convertible preferred shares are not included inearnings per common share calculations until such time as the Series Bconvertible preferred shares are converted to common shares.

 

*Use of Estimates*

 

The preparation of the financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Actual results could differ fromthose estimates.

 

*Recent Accounting Pronouncements*

 

Accounting Standards Codification

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued a pronouncement establishing the FASBAccounting Standards CodificationTM as the source of authoritative accountingprinciples recognized by the FASB to be applied in the preparation of financialstatements in conformity with United States generally accepted accountingprinciples (“GAAP”).  The standardexplicitly recognizes rules and interpretive releases of the SecuritiesExchange Commission (“SEC”) under federal securities laws as authoritative GAAPfor SEC registrants. This standard is effective for financial statements issued

 

6

----

Tableof Contents

 

forinterim and annual periods ending after September 15, 2009. The adoptionof this standard did not have a material impact on the Company’s consolidatedfinancial statements.

 

Noncontrolling Interests

 

In June 2009, the FASB issued a pronouncementwhich amends its guidance surrounding a company’s analysis to determine whetherany of 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 whether it has animplicit financial responsibility to ensure that a variable interest entityoperates as designed when determining whether it has the power to direct theactivities of the variable interest entity that most significantly impact theentity’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 will be applied prospectively and will be effective for interimand annual reporting periods beginning after November 15, 2009.  The adoption of this standard is notanticipated to have a material impact on the Company’s consolidated financialstatements.

 

Subsequent Events

 

In May 2009, the FASB issued a pronouncementwhich sets forth general standards of accounting for and disclosure of eventsthat occur after the balance sheet date but before financial statements areissued or available to be issued. Although there is new terminology, this pronouncement is based on thesame principles as those that currently exist in the auditing standards.  This pronouncement, which includes a requireddisclosure of the date through which an entity has evaluated subsequent events,was effective for the Company beginning June 30, 2009.  The adoption of this standard did not have amaterial impact on the Company’s consolidated financial statements.

 

Assets Acquired or Liabilities Assumed in a BusinessCombination

 

In April 2009, theFASB issued a pronouncement which amends its guidance for all assets acquired and all liabilitiesassumed in a business combination that arise from contingencies.  This pronouncement states that the acquirerwill recognize such an asset or liability if the acquisition-date fair value ofthat asset or liability can be determined during the measurement period.  If it cannot be determined during themeasurement period, then the asset or liability should be recognized as of theacquisition date if the following criteria are met: (1) informationavailable before the end of the measurement period indicates that it isprobable that an asset existed or that a liability had been incurred at theacquisition date, and (2) the amount of the asset or liability can bereasonably estimated.  This pronouncementwas adopted by the Company in the first quarter of 2009. The adoption of thisstandard did not have a material impact on the Company’s consolidated financialstatements.

 

Interim Disclosures about Fair Value of FinancialInstruments

 

In April 2009, theFASB issued a pronouncement which requires fair value disclosures for financial instruments that are notreflected in the condensed consolidated balance sheets at fair value. Prior tothe issuance of this pronouncement, the fair values of those assets andliabilities were disclosed only once each year. With the issuance of this pronouncement, this information will berequired to be disclosed on a quarterly basis, providing quantitative andqualitative information about fair value estimates for all financialinstruments not measured in the condensed consolidated balance sheets at fairvalue.  This pronouncement was adopted bythe Company in the second quarter of 2009 and did not have a material impact onthe Company’s consolidated financial statements.

 

7

----

Tableof Contents

 

**Note3**

 

**Sale of Ownership Interest**

 

In January 2009, the Company’s ownership interest in Apple Air Holding,LLC (Apple Air), was reduced from 50% to 26% through the redemption of a 24%ownership interest by Apple Air. The Company received approximately $3.2 millionfor the ownership interest redeemed. No gain or loss from the redemption wasrecognized by the Company. Due to the reduction in ownership the Companydeconsolidated Apple Air and now records its ownership interest ofapproximately $2.6 million at September 30, 2009 in “Other assets, net”. TheCompany records its share of income or loss of Apple Air under the equitymethod of accounting, adjusting its investment accordingly. The other membersof Apple Air are Apple REIT Seven, Inc., Apple REIT Eight, Inc. and Apple REITNine, Inc.

 

**Note4**

 

**Lineof Credit**

 

In March 2008, the Company entered into a $20million unsecured line of credit with a commercial bank. The applicableinterest rate is equal to LIBOR (the London Interbank Offered Rate) plus 2%.Interest payments are due monthly. Effective August 31, 2009, the Companymodified this agreement, increasing its capacity to $40 million. The principalmust be paid by the maturity date of March 2011, and may be prepaidwithout penalty. The Company has an option to extend the line of credit oneyear, subject to a fee and certain conditions. Under the modified agreement,the new applicable interest rate is equal to LIBOR (the London InterbankOffered Rate) plus 3.5%, with a minimum interest rate of 5.0%.  The line of credit also has an unused fee of0.5%. At September 30, 2009, the credit line had an outstanding principalbalance of $20.0 million. At December 31, 2008, the credit line had nooutstanding principal balance.

 

**Note5**

 

**FairValue of Financial Instruments**

 

The Company estimates the fair value of its fixed rate debt and thecredit spreads over variable market rates on its variable rate debt bydiscounting the future cash flows of each instrument at estimated market ratesor credit spreads consistent with the maturity of the debt obligation withsimilar credit policies. Credit spreads take into consideration general marketconditions and maturity. As of September 30, 2009, the carrying value andestimated fair value of the Company’s debt was $48.3 and $49.6 million. As ofDecember 31, 2008, the carrying value and estimated fair value of the Company’sdebt was $29.1 and $31.2 million. The carrying value of the Company’s otherfinancial instruments approximates fair value due to the short-term nature ofthese financial instruments.

 

**Note6**

 

**Related Parties**

 

The Company has significant transactions withrelated parties.  These transactionscannot be construed to be arm’s length, and the results of the Company’soperations may be different if these transactions were conducted withnon-related parties.

 

The Company is party to an advisory agreement withApple Six Advisors, Inc. (“A6A”), pursuant to which A6A providesmanagement services to the Company. An annual fee ranging from .1% to .25% oftotal equity proceeds received by the Company, in addition to certainreimbursable expenses, is payable for these services. During the first ninemonths of 2009 and 2008, A6A utilized Apple Fund Management, LLC, a subsidiaryof the Company, to provide these services. The advisory fees incurred under theagreement with A6A for the nine months ended September 30, 2009 and 2008,totaled approximately $1.1 and $1.9 million for each period and are included ingeneral and administrative expense in the Company’s consolidated statements ofoperations.

 

8

----

Tableof Contents

 

Through its wholly-owned subsidiary, Apple FundManagement, LLC, the Company provides support services to Apple Suites RealtyGroup, Inc. (“ASRG”), A6A, Apple Seven Advisors, Inc. (“A7A”), AppleREIT Seven, Inc., Apple Eight Advisors, Inc. (“A8A”), Apple REITEight, Inc., Apple Nine Advisors, Inc. (“A9A”) and Apple REIT Nine, Inc.A7A provides day to day advisory and administrative functions for Apple REITSeven, Inc. A8A provides day to day advisory and administrative functionsfor Apple REIT Eight, Inc. A9A provides day to day advisory andadministrative functions for Apple REIT Nine, Inc. ASRG provides realestate brokerage services to Apple REIT Seven, Inc., Apple REIT Eight, Inc.and Apple REIT Nine, Inc. Each of these companies has agreed to reimbursethe Company for its costs in providing these services. For the nine monthsended September 30, 2009 and 2008, the Company received reimbursement ofits costs totaling approximately $3.9 and $3.3 million. ASRG, A6A, A7A, A8A andA9A are 100% owned by Glade Knight, the Company’s Chairman and Chief ExecutiveOfficer.

 

Including ASRG, A6A, A7A, A8A and A9A discussedabove, Mr. Knight is also Chairman and Chief Executive Officer of AppleREIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.Members of the Company’s Board of Directors are also on the boards of AppleREIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

 

**Note 7**

 

**Shareholders’ Equity**

 

In July 2005, the Company instituted a UnitRedemption Program to provide limited interim liquidity to its shareholders whohave held their Units for at least one year. Shareholders may requestredemption of Units for a purchase price equal to the lesser of: (1) thepurchase price per Unit that the shareholder actually paid for the Unit; or (2) $11.00per Unit. 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 nine monthsended September 30, 2009, the Company redeemed approximately 2.8 millionUnits in the amount of $31.0 million under the program. During the nine monthsended September 30, 2008, the Company redeemed approximately 1.3 millionUnits in the amount of $14.1 million.

 

In February 2006, the Company instituted aDividend Reinvestment 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 nine months ended September 30, 2009,approximately 2.4 million Units, representing $26.3 million in proceeds to theCompany, were issued under the plan. During the nine months ended September 30,2008, approximately 2.4 million Units, representing $26.6 million in proceedsto the Company, were issued under the plan.

 

**Note 8**

 

**Subsequent Events**

 

The Company has evaluatedsubsequent events through November 4, 2009, the date these financialstatements were filed with the Securities and Exchange Commission.

 

In October 2009, theCompany declared and paid approximately $6.9 million, or $.075 per share, indistributions to its common shareholders of which $2.9 million or 264,098 Unitswere reinvested under the Company’s Dividend Reinvestment Plan.

 

On October 20, 2009, the Companyredeemed 657,444 Units in the amount of $7.2 million under its Unit RedemptionProgram.

 

9

----

Tableof Contents

 

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

 

This quarterly report contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, 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 fromfuture results, performance or achievements expressed or implied by suchforward-looking statements.  Such factors include, but are not limited to,the ability of the Company to implement its acquisition strategy and operatingstrategy; the Company’s ability to manage planned growth; changes in economiccycles, including the current economic recession throughout the United States;and competition within the hotel industry.  Although the Company believesthat the assumptions underlying the forward-looking statements contained hereinare reasonable, any of the assumptions could be inaccurate, and therefore therecan be no assurance that such statements included in the quarterly report willprove to be accurate.  In light of the significant uncertainties inherentin the forward-looking statements included herein, the inclusion of such informationshould not be regarded as a representation by the Company or any other personthat the results or conditions described in such statements or the objectivesand plans of the Company will be achieved.  In addition, the Company’squalification as a real estate investment trust involves the application ofhighly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the Company’s financial statements and thenotes thereto, as well as the risk factors described in the Company’s filingswith the Securities and Exchange Commission.

 

*Overview*

 

Apple REIT Six, Inc. (together with its whollyowned subsidiaries, the “Company”) was formed and initially capitalized on January 20,2004, with its first investor closing on April 23, 2004. The Company owns68 hotels within different markets in the United States. The Company is treatedas a Real Estate Investment Trust (“REIT”) for federal income tax purposes. TheCompany’s first hotel was acquired on May 28, 2004. Although hotel performancecan be influenced by many factors including local competition, local andgeneral economic conditions in the United States and the performance ofindividual managers assigned to each hotel, performance of the hotels withintheir respective markets, in general, has met the Company’s expectations forthe period owned. However, with the decline in economic conditions throughoutthe United States, the Company has experienced a significant decline in revenueas compared to the prior year. Although there is no way to predict generaleconomic conditions, the Company anticipates revenue and income declines ascompared to the same period in 2008 throughout the remainder of 2009 and into2010. The Company is aggressively working with its management companies to reducecosts to offset revenue declines as much as possible. In evaluating financialcondition and operating performance, the most important matters on which theCompany focuses are revenue measurements, such as average occupancy, averagedaily rate, revenue per available room 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:

 
| ** **                                 | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands except statistical data)** | ** ** | **2009**                                   | ** ** | **Percent of  Hotel  Revenue**       | ** ** | **2008** | ** ** | **Percent of  Hotel  Revenue** | ** ** | **Percent  Change** | ** ** | **2009** | ** ** | **Percent of  Hotel  Revenue** | ** ** | **2008** | ** ** | **Percent of  Hotel  Revenue** | ** ** | **Percent  Change** | ** ** |
|                                       |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  hotel revenue                       |       | $                                          | 58,001     |                                      | 100        | % | $ | 70,489 |   | 100 | % | -18 | % | $ | 165,123 |   | 100 | % | $ | 203,805 |   | 100 | % | -19 | % |
| Hotel  operating expenses                  |       | 34,098                                     |       | 59                                        | %          | 39,174 |   | 56 | % | -13 | % | 98,051 |   | 59 | % | 114,943 |   | 56 | % | -15 | % |
| Taxes,  insurance and other expense        |       | 3,397                                      |       | 6                                         | %          | 3,406 |   | 5 | % | — | % | 10,365 |   | 6 | % | 10,390 |   | 5 | % | — | % |
| General  and administrative expense        |       | 1,057                                      |       | 2                                         | %          | 1,360 |   | 2 | % | -22 | % | 3,559 |   | 2 | % | 4,218 |   | 2 | % | -16 | % |
|                                       |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                               |       | 7,765                                      |       |                                      |       | 7,809 |   |   |   | -1 | % | 23,157 |   |   |   | 22,995 |   |   |   | 1 | % |
| Interest  expense, net                     |       | 660                                        |       |                                      |       | 512 |   |   |   | 29 | % | 1,470 |   |   |   | 1,352 |   |   |   | 9 | % |
|                                       |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number  of Hotels                          |       | 68                                         |       |                                      |       | 68 |   |   |   | — | % | 68 |   |   |   | 68 |   |   |   | — | % |
| Average  RevPAR Market Yield (1)           |       | 121                                        |       |                                      |       | 119 |   |   |   | 2 | % | 122 |   |   |   | 121 |   |   |   | 1 | % |
|                                       |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ADR                                        |       | $                                          | 108        |                                      |       |   | $ | 120 |   |   |   | -10 | % | $ | 108 |   |   |   | $ | 118 |   |   |   | -8 | % |
| Occupancy                                  |       | 70                                         | %          |                                      |       | 75 | % |   |   | -7 | % | 66 | % |   |   | 74 | % |   |   | -11 | % |
| RevPAR                                     |       | $                                          | 75         |                                      |       |   | $ | 90 |   |   |   | -17 | % | $ | 72 |   |   |   | $ | 87 |   |   |   | -17 | % |

 

----

(1) Includeshotels owned for the entire period presented. Data is calculated frominformation provided by Smith Travel Research, Inc.

 

10

----

Tableof Contents

 

*Hotels Owned*

 

As of September 30, 2009, the Company owned 68hotels, with a total of 7,897 rooms. The following table summarizes thelocation, brand, manager, date acquired, number of rooms and gross purchaseprice for each hotel. All dollar amounts are in thousands.

 
| **City**          | ** ** | **State**      | ** ** | **Brand**                               | ** ** | **Manager**       | ** ** | **Date  Acquired** | ** ** | **Rooms** | ** ** | **Gross  Purchase  Price** | ** ** |
|-------------------|------------|----------------|------------|-----------------------------------------|------------|-------------------|------------|--------------------|------------|-----------|------------|----------------------------|------------|
| Birmingham        |       | Alabama        |       | Fairfield Inn                           |       | LBA               |       | 8/25/05            |       | 63        |       | $                          | 2,176      |   |
| Dothan            |       | Alabama        |       | Courtyard                               |       | LBA               |       | 8/11/05            |       | 78        |       | 8,016                      |       |
| Dothan            |       | Alabama        |       | Hampton Inn & Suites |       | LBA               |       | 6/24/05            |       | 85        |       | 8,673                      |       |
| Huntsville        |       | Alabama        |       | Fairfield Inn                           |       | LBA               |       | 9/30/05            |       | 79        |       | 4,954                      |       |
| Huntsville        |       | Alabama        |       | Residence Inn                           |       | LBA               |       | 6/24/05            |       | 78        |       | 8,288                      |       |
| Montgomery        |       | Alabama        |       | SpringHill Suites                       |       | LBA               |       | 9/30/05            |       | 79        |       | 6,835                      |       |
| Tuscaloosa        |       | Alabama        |       | Courtyard                               |       | LBA               |       | 8/25/05            |       | 78        |       | 7,551                      |       |
| Tuscaloosa        |       | Alabama        |       | Fairfield Inn                           |       | LBA               |       | 8/25/05            |       | 63        |       | 3,982                      |       |
| Anchorage         |       | Alaska         |       | Hampton Inn                             |       | Stonebridge       |       | 3/14/05            |       | 101       |       | 11,500                     |       |
| Anchorage         |       | Alaska         |       | Hilton Garden Inn                       |       | Stonebridge       |       | 10/12/04           |       | 125       |       | 18,900                     |       |
| Anchorage         |       | Alaska         |       | Homewood Suites                         |       | Stonebridge       |       | 10/12/04           |       | 122       |       | 13,200                     |       |
| Phoenix           |       | Arizona        |       | Hampton Inn                             |       | Stonebridge       |       | 10/12/04           |       | 99        |       | 6,700                      |       |
| Tempe             |       | Arizona        |       | SpringHill Suites                       |       | Western           |       | 6/30/05            |       | 121       |       | 8,060                      |       |
| Tempe             |       | Arizona        |       | TownePlace Suites                       |       | Western           |       | 6/30/05            |       | 119       |       | 8,128                      |       |
| Arcadia           |       | California     |       | Hilton Garden Inn                       |       | Stonebridge       |       | 10/12/04           |       | 124       |       | 12,000                     |       |
| Arcadia           |       | California     |       | SpringHill Suites                       |       | Stonebridge       |       | 10/12/04           |       | 86        |       | 8,100                      |       |
| Bakersfield       |       | California     |       | Hilton Garden Inn                       |       | Hilton            |       | 3/18/05            |       | 120       |       | 11,500                     |       |
| Folsom            |       | California     |       | Hilton Garden Inn                       |       | Inn Ventures |       | 11/30/05           |       | 100       |       | 18,028                     |       |
| Foothill  Ranch   |       | California     |       | Hampton Inn                             |       | Stonebridge       |       | 4/21/05            |       | 84        |       | 7,400                      |       |
| Lake  Forest      |       | California     |       | Hilton Garden Inn             |       | Stonebridge       |       | 10/12/04           |       | 103       |       | 11,400                     |       |
| Milpitas          |       | California     |       | Hilton Garden Inn                       |       | Inn Ventures      |       | 11/30/05           |       | 161       |       | 18,600                     |       |
| Roseville         |       | California     |       | Hilton Garden Inn                       |       | Inn Ventures      |       | 11/30/05           |       | 131       |       | 20,759                     |       |
| San  Francisco    |       | California     |       | Hilton Garden Inn                       |       | Inn Ventures      |       | 1/30/06            |       | 169       |       | 12,266                     |       |
| Boulder           |       | Colorado       |       | Marriott                                |       | WLS               |       | 5/9/05             |       | 157       |       | 30,000                     |       |
| Glendale          |       | Colorado       |       | Hampton Inn &  Suites     |       | Stonebridge       |       | 10/12/04           |       | 133       |       | 14,700                     |       |
| Lakewood          |       | Colorado       |       | Hampton Inn                             |       | Stonebridge       |       | 10/12/04           |       | 170       |       | 10,600                     |       |
| Farmington        |       | Connecticut    |       | Courtyard                               |       | WLS               |       | 10/20/05           |       | 119       |       | 16,330                     |       |
| Rocky  Hill       |       | Connecticut    |       | Residence Inn                           |       | WLS               |       | 8/1/05             |       | 96        |       | 12,070                     |       |
| Wallingford       |       | Connecticut    |       | Homewood Suites                         |       | WLS               |       | 7/8/05             |       | 104       |       | 12,780                     |       |
| Clearwater        |       | Florida        |       | SpringHill Suites                       |       | LBA               |       | 2/17/06            |       | 79        |       | 6,923                      |       |
| Lake  Mary        |       | Florida        |       | Courtyard                               |       | LBA               |       | 3/18/05            |       | 86        |       | 6,000                      |       |
| Lakeland          |       | Florida        |       | Residence Inn                           |       | LBA               |       | 6/24/05            |       | 78        |       | 9,886                      |       |
| Orange  Park      |       | Florida        |       | Fairfield Inn                           |       | LBA               |       | 11/8/05            |       | 83        |       | 7,221                      |       |
| Panama  City      |       | Florida        |       | Courtyard                               |       | LBA               |       | 4/26/06            |       | 84        |       | 9,245                      |       |
| Pensacola         |       | Florida        |       | Courtyard                               |       | LBA               |       | 8/25/05            |       | 90        |       | 11,369                     |       |
| Pensacola         |       | Florida        |       | Fairfield Inn                           |       | LBA               |       | 8/25/05            |       | 63        |       | 4,858                      |       |
| Pensacola         |       | Florida        |       | Hampton Inn &  Suites          |       | LBA               |       | 7/21/05            |       | 85        |       | 9,279                      |       |
| Tallahassee       |       | Florida        |       | Hilton Garden Inn                       |       | Hilton            |       | 3/18/05            |       | 99        |       | 10,850                     |       |
| Albany            |       | Georgia        |       | Courtyard                               |       | LBA               |       | 6/24/05            |       | 84        |       | 8,597                      |       |
| Columbus          |       | Georgia        |       | Residence Inn                           |       | LBA               |       | 6/24/05            |       | 78        |       | 7,888                      |       |
| Savannah          |       | Georgia        |       | SpringHill Suites                       |       | LBA               |       | 9/30/05            |       | 79        |       | 5,407                      |       |
| Valdosta          |       | Georgia        |       | Courtyard                               |       | LBA               |       | 10/3/05            |       | 84        |       | 8,284                      |       |
| Mt.  Olive        |       | New Jersey     |       | Residence Inn                           |       | WLS               |       | 9/15/05            |       | 123       |       | 12,070                     |       |
| Somerset          |       | New Jersey     |       | Homewood Suites                         |       | WLS               |       | 8/17/05            |       | 123       |       | 17,750                     |       |
| Saratoga  Springs |       | New York       |       | Hilton Garden Inn                       |       | WLS               |       | 9/29/05            |       | 112       |       | 17,750                     |       |
| Roanoke  Rapids   |       | North Carolina |       | Hilton Garden Inn                       |       | Newport           |       | 3/10/08            |       | 147       |       | 17,764                     |       |
| Hillsboro         |       | Oregon         |       | Courtyard                               |       | Inn Ventures      |       | 3/9/06             |       | 155       |       | 11,000                     |       |
| Hillsboro         |       | Oregon         |       | Residence Inn                           |       | Inn Ventures      |       | 3/9/06             |       | 122       |       | 15,500                     |       |
| Hillsboro         |       | Oregon         |       | TownePlace Suites                       |       | Inn Ventures      |       | 12/19/05           |       | 136       |       | 11,500                     |       |
| Portland          |       | Oregon         |       | Residence Inn                           |       | Inn Ventures      |       | 12/19/05           |       | 258       |       | 42,000                     |       |
| Pittsburgh        |       | Pennsylvania   |       | Residence Inn                           |       | WLS               |       | 9/2/05             |       | 156       |       | 11,000                     |       |
| Myrtle  Beach     |       | South Carolina |       | Courtyard                               |       | Marriott          |       | 6/8/04             |       | 135       |       | 9,200                      |       |
| Nashville         |       | Tennessee      |       | Homewood Suites                         |       | Hilton            |       | 5/24/05            |       | 121       |       | 8,103                      |       |
| Arlington         |       | Texas          |       | SpringHill Suites                       |       | Western           |       | 6/30/05            |       | 122       |       | 7,486                      |       |
| Arlington         |       | Texas          |       | TownePlace Suites                       |       | Western           |       | 6/30/05            |       | 95        |       | 7,148                      |       |
| Dallas            |       | Texas          |       | SpringHill Suites                       |       | Western           |       | 12/9/05            |       | 147       |       | 19,500                     |       |
| Ft.  Worth        |       | Texas          |       | Homewood Suites                    |       | Hilton            |       | 5/24/05            |       | 137       |       | 9,097                      |       |
| Ft.  Worth        |       | Texas          |       | Residence Inn                           |       | Western           |       | 5/6/05             |       | 149       |       | 17,000                     |       |
| Ft.  Worth        |       | Texas          |       | SpringHill Suites                       |       | Marriott          |       | 5/28/04            |       | 145       |       | 13,340                     |       |
| Laredo            |       | Texas          |       | Homewood Suites                         |       | Western           |       | 11/30/05           |       | 106       |       | 10,500                     |       |
| Laredo            |       | Texas          |       | Residence Inn                           |       | Western           |       | 9/12/05            |       | 109       |       | 11,445                     |       |
| Las  Colinas      |       | Texas          |       | TownePlace Suites                       |       | Western           |       | 6/30/05            |       | 136       |       | 7,178                      |       |
| McAllen           |       | Texas          |       | Hilton Garden Inn                       |       | Western           |       | 7/19/05            |       | 104       |       | 9,000                      |       |
| Fredericksburg    |       | Virginia       |       | Hilton Garden Inn                       |       | Hilton            |       | 12/20/05           |       | 148       |       | 16,600                     |       |
| Kent              |       | Washington     |       | TownePlace Suites                       |       | Inn Ventures      |       | 12/19/05           |       | 152       |       | 12,000                     |       |
| Mukilteo          |       | Washington     |       | TownePlace Suites                       |       | Inn Ventures      |       | 12/19/05           |       | 128       |       | 12,000                     |       |
| Redmond           |       | Washington     |       | Marriott                                |       | Marriott          |       | 7/7/04             |       | 262       |       | 64,000                     |       |
| Renton            |       | Washington     |       | Hilton Garden Inn                       |       | Inn Ventures      |       | 11/30/05           |       | 150       |       | 16,096                     |       |
|              |       |           |       |                                    |       |              |       | Total              |       | 7,897     |       | $                          | 845,330    |   |

 

11

----

Tableof Contents

 

The Company leased all of its hotels to wholly-ownedtaxable REIT subsidiaries (collectively, the “lessee”) under hotel lease agreements.The Company also used the proceeds from its “best-efforts” offering to pay 2%of the gross purchase price for these hotels, which equals approximately $16.9million, as a commission to Apple Six Realty Group, Inc. (“A6RG”). A6RG iswholly-owned by the Company’s Chairman and Chief Executive Officer, Glade M.Knight.

 

No goodwill or intangible assets were recorded inconnection with any of the acquisitions.

 

*Results ofOperations*

 

Hotel performance isimpacted by many factors including the economic conditions in the UnitedStates, as well as each locality. Due to a general decline in economicconditions throughout the United States, results from operations did not meetexpectations. The Company experienced a decline in net income in the first ninemonths of 2009 as compared to the first nine months of 2008. The decline isexpected to continue until general economic conditions improve. Based onindustry analysts, a moderate decline to stable revenue as compared to 2009 isexpected for 2010.

 

*Revenues*

 

The Company’s principal source of revenue is hotelroom revenue and other related revenue. Hotel operations are for the 68 hotelsacquired through September 30, 2009 for their respective periods owned.For the three months ended September 30, 2009 and 2008, the Company hadtotal hotel revenue of $58.0 and $70.5 million, respectively, with averageoccupancy of 70% and 75%, average daily rate (“ADR”) of $108 and $120 andrevenue per available room (“RevPAR”) of $75 and $90. For the nine months endedSeptember 30, 2009 and 2008, the Company had total hotel revenue of $165.1and $203.8 million, respectively, with average occupancy of 66% and 74%, ADR of$108 and $118 and RevPAR of $72 and $87. ADR is calculated as room revenuedivided by the number of rooms sold, and RevPAR is calculated as occupancymultiplied by ADR. These rates are consistent with industry and brand averages.The Company continually works with the hotel managers to maximize rates andoccupancy. As a result, although RevPAR has declined, the Company hasmaintained its average market share as compared to the first nine months of2008. As supply of hotel rooms in markets that the Company serves has metdemand and general economic conditions have deteriorated, the Company’s revenuehas declined as compared to previous years. In the nine months of 2009, RevPARwas down approximately 17% compared to the first nine months of 2008. TheCompany anticipates this trend to continue throughout the rest of 2009.Although it is not possible to predict when economic conditions will improve ortheir impact on the hotel industry, many industry analysts forecast 15-20%declines in RevPAR for the full calendar year of 2009 as compared to 2008rates.  Analysts currently forecast 0 —5% declines in RevPAR for 2010 as compared to 2009.

 

*Expenses*

 

With the Company’s revenue decline, the Company andits managers are aggressively reducing expenses where possible while stillmaintaining the quality and service levels of its properties. While certaincosts of a hotel are fixed in nature, such as management costs, certain utilitycosts, minimum maintenance and supply costs, the Company has been successful inreducing overall payroll costs, food and supplies, and utilities by continuallymonitoring and sharing utilization data across its hotels and managementcompanies. For the three months ended September 30, 2009 and 2008, hoteloperating expenses totaled $34.1 and $39.2 million, respectively, or 59% and56% of total hotel revenue. For the nine months ended September 30, 2009and 2008, hotel operating expenses totaled $98.1 and $114.9 million,respectively, or 59% and 56% of total hotel revenue. The Company will continueto aggressively work with its managers to reduce operating costs as revenuedeclines; however, declines in costs are not expected to offset declines inrevenue.

 

12

----

Tableof Contents

 

Taxes, insurance, and other expenses for the threemonths ended September 30, 2009 and 2008 were $3.4 million, or 6% and 5%of total hotel revenue. For the nine months ended September 30, 2009 and2008, taxes, insurance, and other expenses were $10.4 million, or 6% and 5% oftotal hotel revenue. The Company expects property insurance and property taxesto continue to remain consistent with 2008 expenses for the remainder of 2009.

 

General and administrative expenses for the threemonths ended September 30, 2009 and 2008 were $1.1 and $1.4 million, or 2%of total hotel revenue for each period. For the nine months ended September 30,2009 and 2008, general administrative expenses were $3.6 and $4.2 million, or2% of hotel revenue for each period. The principal components of general andadministrative expense are advisory fees, legal fees, accounting fees andreporting expense.

 

Depreciation expense was $7.8 million each periodfor the three months ended September 30, 2009 and 2008. For the ninemonths ended September 30, 2009 and 2008, depreciation expense was $23.2and $23.0 million. Depreciation expense represents expense of the Company’s 68hotels and related personal property for their respective periods owned. Theincrease in depreciation expense from the first nine months of 2008 to thefirst nine months of 2009 results from renovations completed throughout 2008and during the first nine months of 2009.

 

Interest expense, net was $0.7 and $0.5 million forthe three months ended September 30, 2009 and 2008, and $1.5 and $1.4million for the nine months ended September 30, 2009 and 2008. Interestexpense relates to debt assumed with certain properties acquired, as well asborrowings on the Company’s line of credit. During the nine months ended September 30,2009 and 2008, the Company capitalized approximately $0.3 and $0.4 million ofinterest associated with renovation activities.

 

*Liquidity and Capital Resources*

 

Operating cash flow from the properties owned and a$40 million line of credit are the Company’s principal source of liquidity. Inaddition, the Company may also borrow additional funds, subject to limitationsset forth in its bylaws. The Company anticipates that cash flow and availablecredit will be adequate to cover its operating expenses and to permit theCompany to meet its anticipated liquidity requirements, includingdistributions, capital expenditures and debt service.

 

To maintain its REIT status the Company is requiredto distribute at least 90% of its ordinary income. Distributions in the firstnine months of 2009 totaled $61.7 million. For the same period the Company’scash generated from operations was $52.0 million. The shortfall was funded byborrowings on the line of credit and cash on hand. Any shortfall for the fullyear will include a return of capital, and will be funded from cash on hand orborrowings on the credit line. Beginning in February 2008, the monthlydividend rate was raised from $0.073 per common share to $0.075 per commonshare. The Company intends to continue paying distributions on a monthly basis.However, since there can be no assurance of the ability of the Company’sproperties to provide income at this level, there can be no assurance as to theclassification or duration of distributions at the current rate. Additionally,in light of the weakness in economic conditions throughout the United States,the Board of Directors monitors the Company’s distribution rate relative to theperformance of the hotels on an ongoing basis and may make adjustments to thedistribution rate as determined to be prudent in relation to other cashrequirements of the Company.

 

The Company has on-going capital commitments to fundits capital improvements. The Company is required, under all of the hotelmanagement agreements, to make available, for the repair, replacement,refurbishing of furniture, fixtures, and equipment, an amount of 3% to 5% ofgross revenues provided that such amount may be used for the Company’s capitalexpenditures with respect to the hotels. The Company expects that this amountwill be adequate to fund required repair, replacement, and refurbishments andto maintain the Company’s hotels in a competitive condition. During the firstnine months of 2009, the Company completed seven hotel renovations. Totalcapital expenditures for the period were approximately $9 million. Due to thedeterioration in income the Company has reduced its capital expenditure plansfor the remainder of 2009. Total 2009 capital expenditures are expected to beapproximately $10 million.

 

13

----

Tableof Contents

 

In February 2006, the Company instituted aDividend Reinvestment Plan for its shareholders. The plan provides a convenientand cost effective way to increase shareholder investment in the Company byreinvesting dividends to purchase additional Units of the Company. The uses ofthe proceeds from this plan may include purchasing Units under the Company’sUnit Redemption Program, enhancing properties, satisfying financing obligationsand other expenses, increasing working capital, funding various corporateoperations, and acquiring hotels. During the nine months ended September 30,2009, approximately 2.4 million Units, representing $26.3 million in proceedsto the Company, were issued under the plan. During the nine months ended September 30,2008, approximately 2.4 million Units, representing $26.6 million in proceedsto the Company, were issued under the plan.

 

In July 2005, the Company instituted a UnitRedemption Program to provide limited interim liquidity to its shareholders whohave held their Units for at least one year. Shareholders may requestredemption of Units for a purchase price equal to the lesser of: (1) thepurchase price per Unit that the shareholder actually paid for the Unit; or (2) $11.00per Unit. 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 nine monthsended September 30, 2009, the Company redeemed approximately 2.8 millionUnits in the amount of $31.0 million under the program. During the nine monthsended September 30, 2008, the Company redeemed approximately 1.3 millionUnits in the amount of $14.1 million.

 

*Related Party Transactions*

 

The Company has significant transactions withrelated parties.  These transactionscannot be construed to be arm’s length, and the results of the Company’soperations may be different if these transactions were conducted withnon-related parties.

 

The Company is party to an advisory agreementwith Apple Six Advisors, Inc. (“A6A”), pursuant to which A6A providesmanagement services to the Company. An annual fee ranging from .1% to .25% oftotal equity proceeds received by the Company, in addition to certainreimbursable expenses, is payable for these services. During the first ninemonths of 2009 and 2008, A6A utilized Apple Fund Management, LLC, a subsidiaryof the Company, to provide these services. The advisory fees incurred under theagreement with A6A for the nine months ended September 30, 2009 and 2008,totaled approximately $1.1 and $1.9 million for each period and areincluded in general and administrative expense in the Company’s consolidatedstatements of operations.

 

Through its wholly-owned subsidiary, Apple FundManagement, LLC, the Company provides support services to Apple Suites RealtyGroup, Inc. (“ASRG”), A6A, Apple Seven Advisors, Inc. (“A7A”), AppleREIT Seven, Inc., Apple Eight Advisors, Inc. (“A8A”), Apple REITEight, Inc., Apple Nine Advisors, Inc. (“A9A”) and Apple REIT Nine, Inc.A7A provides day to day advisory and administrative functions for Apple REITSeven, Inc. A8A provides day to day advisory and administrative functionsfor Apple REIT Eight, Inc. A9A provides day to day advisory andadministrative functions for Apple REIT Nine, Inc. ASRG provides realestate brokerage services to Apple REIT Seven, Inc., Apple REIT Eight, Inc.and Apple REIT Nine, Inc. Each of these companies has agreed to reimbursethe Company for its costs in providing these services. For the nine monthsended September 30, 2009 and 2008, the Company received reimbursement ofits costs totaling approximately $3.9 and $3.3 million. ASRG, A6A, A7A, A8A andA9A are 100% owned by Glade Knight, the Company’s Chairman and Chief ExecutiveOfficer.

 

Including ASRG, A6A, A7A, A8A and A9A discussedabove, Mr. Knight is also Chairman and Chief Executive Officer of AppleREIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.Members of the Company’s Board of Directors are also on the boards of AppleREIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

 

In January 2009, the Company’s ownershipinterest in Apple Air Holding, LLC (Apple Air), was reduced from 50% to 26% throughthe redemption of a 24% ownership interest by Apple Air. The Company receivedapproximately $3.2 million for the ownership interest redeemed. No gain or lossfrom the redemption was recognized by the Company. Due to the reduction inownership the Company deconsolidated Apple Air and now records its ownershipinterest of approximately $2.6 million at 

 

14

----

Tableof Contents

 

September 30, 2009 in “Other assets, net”. The Company records itsshare of income or loss of Apple Air under the equity method of accounting,adjusting its investment accordingly. The other members of Apple Air are AppleREIT Seven, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

 

*Impact of Inflation*

 

Operators of hotels, in general, possess the abilityto adjust room rates daily to reflect the effects of inflation. Competitivepressures may, however, limit the operators’ ability to raise room rates. Currentlythe Company is not experiencing any material impact from inflation.

 

*Business Interruption*

 

Being in the real estate industry, the Company isexposed to natural disasters both locally and nationally, and althoughmanagement believes there is adequate insurance to cover this exposure, therecan be no assurance that such events will not have a material adverse effect onthe Company’s financial position or results of operations.

 

*Seasonality*

 

The hotel industry historically has been seasonal innature. Generally, occupancy rates and hotel revenues are greater in the secondand third quarters than in the first and fourth quarters. As a result, theremay be quarterly fluctuations in results of operations. To the extent that cashflow from operations is insufficient during any quarter, due to temporary orseasonal fluctuations in revenue, the Company expects to utilize cash on handand available credit to make distributions.

 

*Recent Accounting Pronouncements*

 

Accounting Standards Codification

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued a pronouncement establishing the FASBAccounting Standards CodificationTM as the source of authoritative accountingprinciples recognized by the FASB to be applied in the preparation of financialstatements in conformity with United States generally accepted accountingprinciples (“GAAP”).  The standardexplicitly recognizes rules and interpretive releases of the SecuritiesExchange Commission (“SEC”) under federal securities laws as authoritative GAAPfor SEC registrants. This standard is effective for financial statements issuedfor interim and annual periods ending after September 15, 2009. Theadoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

Noncontrolling Interests

 

In June 2009, the FASB issued a pronouncementwhich amends its guidance surrounding a company’s analysis to determine whetherany of 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 whether it has animplicit financial responsibility to ensure that a variable interest entityoperates as designed when determining whether it has the power to direct theactivities of the variable interest entity that most significantly impact theentity’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 will be applied prospectively and will be effective for interimand annual reporting periods beginning after November 15, 2009.  The adoption of this standard is not anticipatedto have a material impact on the Company’s consolidated financial statements.

 

15

----

Tableof Contents

 

Subsequent Events

 

In May 2009, the FASB issued a pronouncementwhich sets forth general standards of accounting for and disclosure of eventsthat occur after the balance sheet date but before financial statements areissued or available to be issued. Although there is new terminology, this pronouncement is based on thesame principles as those that currently exist in the auditing standards.  This pronouncement, which includes a requireddisclosure of the date through which an entity has evaluated subsequent events,was effective for the Company beginning June 30, 2009.  The adoption of this standard did not have amaterial impact on the Company’s consolidated financial statements.

 

Assets Acquired or Liabilities Assumed in a BusinessCombination

 

In April 2009, theFASB issued a pronouncement which amends its guidance for all assets acquired and all liabilitiesassumed in a business combination that arise from contingencies.  This pronouncement states that the acquirerwill recognize such an asset or liability if the acquisition-date fair value ofthat asset or liability can be determined during the measurement period.  If it cannot be determined during themeasurement period, then the asset or liability should be recognized as of theacquisition date if the following criteria are met: (1) informationavailable before the end of the measurement period indicates that it isprobable that an asset existed or that a liability had been incurred at theacquisition date, and (2) the amount of the asset or liability can bereasonably estimated.  This pronouncementwas adopted by the Company in the first quarter of 2009. The adoption of thisstandard did not have a material impact on the Company’s consolidated financialstatements.

 

Interim Disclosures about Fair Value of FinancialInstruments

 

In April 2009, theFASB issued a pronouncement which requires fair value disclosures for financial instruments that are notreflected in the condensed consolidated balance sheets at fair value. Prior tothe issuance of this pronouncement, the fair values of those assets andliabilities were disclosed only once each year. With the issuance of this pronouncement, this information will berequired to be disclosed on a quarterly basis, providing quantitative andqualitative information about fair value estimates for all financialinstruments not measured in the condensed consolidated balance sheets at fairvalue.  This pronouncement was adopted bythe Company in the second quarter of 2009 and did not have a material impact onthe Company’s consolidated financial statements.

 

*Subsequent Events*

 

In October 2009, theCompany declared and paid approximately $6.9 million, or $.075 per share, indistributions to its common shareholders of which $2.9 million or 264,098 Unitswere reinvested under the Company’s Dividend Reinvestment Plan.

 

On October 20, 2009, the Companyredeemed 657,444 Units in the amount of $7.2 million under its Unit RedemptionProgram.

 

16

----

Tableof Contents

 

**Item 3.    Quantitative and Qualitative DisclosuresAbout Market Risk**

 

The Company does not engage in transactions inderivative financial instruments or derivative commodity instruments. As of September 30,2009, the Company’s financial instruments were not exposed to significantmarket risk due to interest rate risk, foreign currency exchange risk,commodity price risk or equity price risk. The Company is exposed to changes inshort term interest rates paid on its line of credit. Based on the balance ofthe Company’s line of credit at September 30, 2009, of $20.0 million,every 100 basis points change in interest rates will impact the Company’sannual net income by $200,000, all other factors remaining the same. TheCompany’s cash balance at September 30, 2009 was $0.

 

**Item 4.    Controlsand 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, there have been no significant changes in internal controls or in other factors that could significantly affect these controls.

 

17

----

Tableof Contents

 

**PART II.                         OTHER INFORMATION**

 

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

 

*Unit Redemption Program*

 

In July 2005, the Company instituted a Unitredemption program to provide its shareholders who have held their Units for atleast one year with the benefit of limited interim liquidity, by presenting forredemption all or any portion of their Units at any time and in accordance withcertain procedures. Once this time limitation has been met, the Company may,subject to certain conditions and limitations, redeem the Units presented forredemption for cash, to the extent that the Company has sufficient fundsavailable to fund the redemption. If Units are held for the required one-yearperiod, the Units may be redeemed for a purchase price equal to the lesser of: (1) $11.00per Unit; or (2) the purchase price per Unit that was actually paid forthe Units. The board of directors reserves the right, in its sole discretion,at any time and from time to time, to waive the one-year holding period, rejectany request for redemption, change the purchase price for redemptions orotherwise amend the terms of, suspend, or terminate the Unit redemptionprogram.  The following is a summary ofredemptions during the third quarter of 2009:

 

**Issuer Purchases of Equity Securities**

 
| ** **     | ** ** | **(a)**                               | ** ** | **(b)**                          | ** ** | **(c)**                                                                                      | ** ** | **(d)**                                                                               | ** ** |
|----------------|------------|---------------------------------------|------------|----------------------------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **Period**     | ** ** | **Total Number  of Units  Purchased** | ** ** | **Average Price Paid  per Unit** | ** ** | **Total Number of  Units Purchased as  Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  of Units that May  Yet Be Purchased  Under the Plans or  Programs** | ** ** |
| July 2009 |       | 758,092                               |       | $                                | 10.95      |                                                                                         | 10,451,951 |                                                                                  | (1)        |   |
|                |            |                                       |            |                                  |            |                                                                                              |            |                                                                                       |            |  |

 

----

(1)    The maximum number of Units that may be redeemed in any 12 month period is limited to five percent (5.0%) of the weighted average number of Units outstanding from the beginning of the 12 month period.

 

18

----

Tableof Contents

 

**Item 6.    Exhibits**

** **
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                    |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                               |
| 3.1                 |       | Articles of Incorporation  of the Company. (Incorporated by reference to Exhibit 3.1 to the  Company’s registration statement on Form S-11 (SEC File  No. 333-112169) effective April 23, 2004).          |
|                |       |                                                                                                                                                                                                                               |
| 3.2                 |       | Bylaws of the Company.  (Incorporated by reference to Exhibit 3.2 to the Company’s  Post-Effective Amendment No. 4 to Form S-11 (SEC File  No. 333-112169) effective June 14, 2005).                 |
|                |       |                                                                                                                                                                                                                               |
| 31.1                |       | Certification of the  Company’s Chief Executive Officer pursuant to Rule 13a – 14(a) and  Rule 15d – 14(a) of the Securities Exchange Act, as amended (**FILED HEREWITH**).                     |
|                |       |                                                                                                                                                                                                                               |
| 31.2                |       | Certification of the  Company’s Chief Financial Officer pursuant to Rule 13a – 14(a) and  Rule 15d – 14(a) of the Securities Exchange Act, as amended (**FILED HEREWITH**).                     |
|                |       |                                                                                                                                                                                                                               |
| 32.1                |       | Certification of the  Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18  U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (**FILED HEREWITH**). |

 

19

----

Tableof Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| **A****PPLE****R****EIT****S****IX****, I****NC****.** | ** **                                                                              | ** ** |
|--------------------------------------------------------|-----------------------------------------------------------------------------------------|------------|
|                                                   |                                                                                    |       |   |
| By:                                                    | /s/    GLADE M. KNIGHT                                              |       | Date: November 4,  2009 |
|                                                   | **Glade M. Knight,**                                                                    |       |   |
|                                                   | **Chairman of the Board and****Chief Executive Officer  (Principal Executive Officer)** |       |   |
|                                                   |                                                                                    |       |   |
| By:                                                    | /s/    BRYAN PEERY                                                  |       | Date: November 4,  2009 |
|                                                   | **Bryan Peery,**                                                                        |       |   |
|                                                   | **Chief Financial Officer****(Principal Financial and Principal Accounting  Officer)**  |       |   |

 

20

----