Table of Contents

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THE QUARTERLY PERIOD ENDEDSEPTEMBER 30, 2009**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**FOR THE TRANSITION PERIOD FROM             TO**

 

**CommissionFile Number 000-53175**

 

**AppleREIT Eight, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Virginia**                                                    | ** ** | **20-  8268625**                   |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or other jurisdiction

of incorporation or organization) |       | (IRS Employer

Identification No.) |
|                                                            |       |                               |
| **814  East Main Street**                                       | ** ** | ** **                         |
| **Richmond,  Virginia**                                         | ** ** | **23219**                          |
| (Address of principal executive offices)                        |       | (Zip Code)                         |

 

**(804) 344-8121**

(Registrant’s telephone number, including areacode)

 

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

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act:

 
| Large  accelerated filer o | Accelerated  filer o         |
|----------------------------|------------------------------|
|                       |                         |
| Non-accelerated  filer x   | Smaller  reporting company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes o  Nox

 

Number of registrant’scommon shares outstanding as of November 1, 2009: 93,249,112

 

 

 

----

Table ofContents

 

**AppleREIT Eight, 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 and  Comprehensive Income — Three and nine months ended September 30, 2009  and 2008 |       | 4                      |
|                                                            |       | Consolidated Statements of Cash Flows — Nine months  ended September 30, 2009 and 2008                                     |       | 5                      |
|                                                            |       | Notes to Consolidated Financial Statements                                                                                           |       | 6                      |
| Item 2.                                                         |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                          |       | 12                     |
| Item 3.                                                         |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                          |       | 21                     |
| Item 4.                                                         |       | Controls and  Procedures                                                                                                             |       | 21                     |
|                                                            |       |                                                                                                                                 |       |                   |
| **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                                                                         |       | 22                     |
| 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                                                                                                                             |       | 23                     |
|                                                            |       |                                                                                                                                 |       |                   |
| Signatures                                                      |       |                                                                                                                                 |       | 24                     |
|                                                                 |            |                                                                                                                                      |            |                        |  |  |

 

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

 

2

----

Table ofContents

 

**Apple REITEight, Inc.**

**ConsolidatedBalance Sheets**

**(Unaudited)**

**(Inthousands, except share data)**

 
| ** **                                                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                            | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **ASSETS**                                                                                                                            |       |                   |       |                  |       |
| Investment in hotels, net of accumulated  depreciation of $46,704 and $22,377                                                         |       | $                      | 978,143    |                  | $          | 982,886 |   |
| Cash and cash equivalents                                                                                                             |       | —                 |       | —                |       |
| Restricted cash-furniture, fixtures and other  escrows                                                                                |       | 12,163                 |       | 10,720                |       |
| Due from third party managers, net                                                                                                    |       | 7,144                  |       | 3,942                 |       |
| Other assets, net                                                                                                                     |       | 8,305                  |       | 5,500                 |       |
| **TOTAL ASSETS**                                                                                                                      |       | $                      | 1,005,755  |                  | $          | 1,003,048 |   |
|                                                                                                                                  |       |                   |       |                  |       |
| **LIABILITIES**                                                                                                                       |       |                   |       |                  |       |
| Accounts payable and accrued expenses                                                                                                 |       | $                      | 14,535     |                  | $          | 10,126 |   |
| Intangible liabilities, net                                                                                                           |       | 11,313                 |       | 11,914                |       |
| Notes payable                                                                                                                         |       | 176,157                |       | 138,704               |       |
| **TOTAL LIABILITIES**                                                                                                                 |       | 202,005                |       | 160,744               |       |
|                                                                                                                                  |       |                   |       |                  |       |
| **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 93,337,402 and  92,478,078 shares |       | —                 |       | —                |       |
| Series B convertible preferred stock, no par  value, authorized 240,000 shares; issued and outstanding 240,000 shares            |       | 24                     |       | 24                    |       |
| Common stock, no par value, authorized 200,000,000  shares; issued and outstanding 93,337,402 and 92,478,078 shares                   |       | 923,718                |       | 913,459               |       |
| Distributions greater than net income                                                                                                 |       | (122,187               | )          | (71,179               | )          |
| Accumulated other comprehensive income                                                                                                |       | 2,195                  |       | —                |       |
| **TOTAL SHAREHOLDERS’ EQUITY**                                                                                                   |       | 803,750                |       | 842,304               |       |
| **TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                  |       | $                      | 1,005,755  |                  | $          | 1,003,048 |   |

 

**See notes to consolidated financial statements.**

 

Note:  The Company was initially capitalized on January 22,2007 and commenced operations November 9, 2007.

 

3

----

Table of Contents

 

**Apple REIT Eight, Inc.**

**ConsolidatedStatements of Operations and Comprehensive Income**

**(Unaudited)**

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

 
| ** **                                                      | ** ** | **Three months**       | ** ** | **Three months**       | ** ** | **Nine months**        | ** ** | **Nine months**        | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | **ended**              | ** ** | **ended**              | ** ** | **ended**              | ** ** | **ended**              | ** ** |
| ** **                                                      | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                      | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009**               | ** ** | **2008**               | ** ** |
| Revenues:                                                       |       |                   |       |                   |       |                   |       |                   |       |
| Room revenue                                               |       | $                      | 44,953     |                   | $          | 46,011                 |       | $                      | 121,472    |   | $ | 87,895 |   |
| Other revenue                                                   |       | 3,396                  |       | 3,107                  |       | 9,373                  |       | 6,053                  |       |
| Total revenue                                                   |       | 48,349                 |       | 49,118                 |       | 130,845                |       | 93,948                 |       |
|                                                            |       |                   |       |                   |       |                   |       |                   |       |
| Expenses:                                                       |       |                   |       |                   |       |                   |       |                   |       |
| Operating expense                                               |       | 12,591                 |       | 11,987                 |       | 34,787                 |       | 23,073                 |       |
| Hotel administrative expense                                    |       | 4,064                  |       | 3,738                  |       | 12,210                 |       | 7,316                  |       |
| Sales and marketing                                             |       | 3,367                  |       | 3,050                  |       | 9,699                  |       | 5,693                  |       |
| Utilities                                                       |       | 2,274                  |       | 2,153                  |       | 6,058                  |       | 3,880                  |       |
| Repair and maintenance                                          |       | 2,412                  |       | 2,228                  |       | 6,779                  |       | 4,339                  |       |
| Franchise fees                                                  |       | 1,974                  |       | 1,966                  |       | 5,348                  |       | 3,653                  |       |
| Management fees                                                 |       | 1,729                  |       | 1,944                  |       | 4,652                  |       | 3,421                  |       |
| Taxes, insurance and other                                      |       | 2,596                  |       | 2,372                  |       | 7,615                  |       | 4,500                  |       |
| Land lease expense                                              |       | 1,596                  |       | 1,583                  |       | 4,777                  |       | 4,674                  |       |
| General and administrative                                      |       | 1,033                  |       | 1,023                  |       | 3,393                  |       | 3,438                  |       |
| Depreciation expense                                            |       | 8,355                  |       | 6,825                  |       | 24,330                 |       | 14,467                 |       |
| Total expenses                                                  |       | 41,991                 |       | 38,869                 |       | 119,648                |       | 78,454                 |       |
|                                                            |       |                   |       |                   |       |                   |       |                   |       |
| Operating income                                                |       | 6,358                  |       | 10,249                 |       | 11,197                 |       | 15,494                 |       |
|                                                            |       |                   |       |                   |       |                   |       |                   |       |
| Investment income, net                                          |       | 16                     |       | 963                    |       | 33                     |       | 9,274                  |       |
| Interest expense                                                |       | (1,873                 | )          | (1,752                 | )          | (5,283                 | )          | (2,494                 | )          |
|                                                            |       |                   |       |                   |       |                   |       |                   |       |
| Net income                                                      |       | $                      | 4,501      |                   | $          | 9,460                  |       | $                      | 5,947      |   | $ | 22,274 |   |
|                                                            |       |                   |       |                   |       |                   |       |                   |       |
| Unrealized gain/(loss) on investments                           |       | 618                    |       | (1,136                 | )          | 2,195                  |       | (3,473                 | )          |
|                                                            |       |                   |       |                   |       |                   |       |                   |       |
| Comprehensive income                                            |       | $                      | 5,119      |                   | $          | 8,324                  |       | $                      | 8,142      |   | $ | 18,801 |   |
|                                                            |       |                   |       |                   |       |                   |       |                   |       |
| Basic and diluted net income per common share                   |       | $                      | 0.05       |                   | $          | 0.10                   |       | $                      | 0.06       |   | $ | 0.26 |   |
|                                                            |       |                   |       |                   |       |                   |       |                   |       |
| Weighted average common shares outstanding - basic  and diluted |       | 93,105                 |       | 91,604                 |       | 92,812                 |       | 85,627                 |       |
|                                                            |       |                   |       |                   |       |                   |       |                   |       |
| Distributions declared and paid per common share                |       | $                      | 0.19       |                   | $          | 0.22                   |       | $                      | 0.61       |   | $ | 0.66 |   |

 

**See notes to consolidated financial statements.**

 

Note:  The Company was initiallycapitalized on January 22, 2007 and commenced operations November 9,2007.

 

4

----

Table of Contents

** **

**Apple REIT Eight, Inc.**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

**(In thousands)**

 
| ** **                                                                                         | ** ** | **Nine months**             | ** ** | **Nine months**             | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                         | ** ** | **ended**                   | ** ** | **ended**                   | ** ** |
| ** **                                                                                         | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| ** **                                                                                         | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **Cash flow from operating  activities:**                                                          |       |                        |       |                        |       |
| Net income                                                                                         |       | $                           | 5,947      |                        | $          | 22,274 |   |
| Adjustments to reconcile net income to cash  provided by operating activities:                     |       |                        |       |                        |       |
| Depreciation                                                                                       |       | 24,330                      |       | 14,467                      |       |
| Amortization of deferred financing costs, fair  value adjustments and other non-cash expenses, net |       | (461                        | )          | (490                        | )          |
| Net realized gain on sale of investments                                                           |       | —                      |       | (2,545                      | )          |
| Changes in operating assets and liabilities:                                                       |       |                        |       |                        |       |
| Decrease/(increase) in other assets                                                                |       | 2,264                       |       | (1,033                      | )          |
| Decrease/(increase) in funds due from third party  managers                                        |       | (3,202                      | )          | (6,250                      | )          |
| Increase in accounts payable and accrued expenses                                                  |       | 7,145                       |       | 4,660                       |       |
| Net cash provided by operating activities                                                          |       | 36,023                      |       | 31,083                      |       |
|                                                                                               |       |                        |       |                        |       |
| **Cash flow used in investing  activities:**                                                       |       |                        |       |                        |       |
| Increase in capital improvement reserves                                                           |       | (1,056                      | )          | (1,040                      | )          |
| Cash paid for the acquisition of hotel properties                                                  |       | —                      |       | (694,041                    | )          |
| Deposits and other disbursements for the potential  acquisition of hotel properties                |       | —                      |       | (378                        | )          |
| Purchase of investments in equity securities -  available for sale                                 |       | —                      |       | (30,562                     | )          |
| Proceeds from sale of equity securities -  available for sale                                      |       | —                      |       | 22,692                      |       |
| Investment in other assets                                                                         |       | (3,240                      | )          | —                      |       |
| Capital improvements                                                                               |       | (22,404                     | )          | (3,836                      | )          |
| Net cash used in investing activities                                                              |       | (26,700                     | )          | (707,165                    | )          |
|                                                                                               |       |                        |       |                        |       |
| **Cash flow from financing  activities:**                                                          |       |                        |       |                        |       |
| Net proceeds related to issuance of common stock                                                   |       | 20,334                      |       | 227,879                     |       |
| Redemptions of common stock                                                                        |       | (10,193                     | )          | —                      |       |
| Cash distributions paid to common shareholders                                                     |       | (56,955                     | )          | (56,123                     | )          |
| Net proceeds from line of credit                                                                   |       | 39,055                      |       | —                      |       |
| Payments of notes payable                                                                          |       | (1,564                      | )          | (497                        | )          |
| Deferred financing costs                                                                           |       | —                      |       | (1,722                      | )          |
| Net cash provided by (used in) financing  activities                                               |       | (9,323                      | )          | 169,537                     |       |
|                                                                                               |       |                        |       |                        |       |
| Net decrease in cash and cash equivalents                                                          |       | —                      |       | (506,545                    | )          |
|                                                                                               |       |                        |       |                        |       |
| Cash and cash equivalents, beginning of period                                                     |       | —                      |       | 562,009                     |       |
|                                                                                               |       |                        |       |                        |       |
| Cash and cash equivalents, end of period                                                           |       | $                           | —     |                        | $          | 55,464 |   |
|                                                                                               |       |                        |       |                        |       |
| Non-cash transactions:                                                                             |       |                        |       |                        |       |
| Notes payable assumed in acquisitions                                                              |       | $                           | —     |                        | $          | 128,924 |   |
| Intangible liabilities assumed in acquisition                                                      |       | $                           | —     |                        | $          | 12,685 |   |

 

**See notes to consolidated financial statements.**

 

Note:  The Company was initially capitalized on January 22,2007 and commenced operations November 9, 2007.

 

5

----

Table ofContents

 

**APPLE REIT EIGHT, INC.**

 

**Notes to Consolidated FinancialStatements**

 

**1.  General Information and Summary ofSignificant Accounting Policies**

 

*Basisof Presentation*

 

The accompanyingunaudited consolidated financial statements have been prepared in accordancewith the instructions for Article 10 of Regulation S-X. Accordingly, theydo not include all of the information required by accounting principlesgenerally accepted in the United States. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. These unaudited financials should beread in conjunction with the Company’s audited financial statements included inits 2008 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30,2009 are not necessarily indicative of the results that may be expected for theperiod ending December 31, 2009.

 

*Organization*

 

Apple REIT Eight, Inc.(the “Company”) is a Virginia corporation that has elected to be treated as areal estate investment trust (“REIT”) for federal income tax purposes. TheCompany was formed to invest in hotels, residential apartment communities andother income-producing real estate assets in selected metropolitan areas in theUnited States. Initial capitalization occurred on January 22, 2007, when10 Units, each Unit consisting of one share of common stock and one share of Series Apreferred stock, were purchased by Apple Eight Advisors, Inc. (“A8A”),owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer,and 240,000 Series B convertible shares were also purchased individuallyby Glade M. Knight. The Company began operations on November 9, 2007 whenit acquired its first hotels.  TheCompany’s fiscal year end is December 31. As of September 30, 2009,the Company owned 51 hotels.  45 of thehotels were acquired in 2008 and six in late 2007.  The Company has no foreign operations orassets and its operating structure includes two segments. The consolidatedfinancial statements include the accounts of the Company and its subsidiaries.All intercompany accounts and transactions have been eliminated.

 

**SignificantAccounting Policies**

 

*Useof Estimates*

 

The preparation of thefinancial statements in conformity with United States generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates.

 

*Investmentin Equity Securities*

 

In 2008, the Companypurchased equity securities that are classified as available-for-sale, inaccordance with the Financial Accounting Standards Board’s (“FASB”)pronouncement for accounting for certain investments in debt and equitysecurities, and are included in Other assets, net in the Company’s ConsolidatedBalance Sheets at fair value, with unrealized gains and losses reported as accumulatedother comprehensive income or loss. Under the FASB’s pronouncement, the investments are classified as Level1 as the fair value is determined based on quoted prices of identicalinvestments.  Realized gains and losseson the sale of investments, as well as declines in value of a securityconsidered to be other than temporary, are recognized in operations on thespecific identification basis.  As of September 30,2009, the Company owned marketable securities with a cost of $1.1 million and afair value of approximately $3.3 million. As of September 30, 2008, the Company’s marketable securities had acost of $10.4 million and a fair value of approximately $6.9 million.  During the first nine months of 2008, theCompany realized gains on the sale of equity securities of $2.5 million whichare included in Investment income, net in the Company’s Consolidated Statementsof Operations.

 

6

----

Table ofContents

 

The Company reviews thestatus of each security quarterly to determine whether an other-than-temporaryimpairment has occurred.  Based on thisreview, the Company has concluded none of the available-for-sale securitieshave experienced an other-than-temporary impairment during the first ninemonths of 2009.  The Company willcontinue to review the investment for impairment on a quarterly basis.

 

*EarningsPer Common Share*

 

Basic earnings per commonshare is computed based upon the weighted average number of shares outstandingduring the period. Diluted earnings per share is calculated after giving effectto all potential common shares that were dilutive and outstanding for theperiod. There were no potential common shares with a dilutive effect for thenine months ended September 30, 2009 or 2008.  Series B convertible preferred sharesare not included in earnings per common share calculations until such time the Series Bconvertible preferred shares are converted to common shares.

 

*RecentAccounting Pronouncements*

 

Accounting StandardsCodification

 

In June 2009, theFASB issued a pronouncement establishing the *FASBAccounting Standards Codification**TM* as the source of authoritativeaccounting principles recognized by the FASB to be applied in the preparationof financial statements in conformity with United States generally acceptedaccounting principles (“GAAP”).  Thestandard explicitly recognizes rules and interpretive releases of theSecurities Exchange Commission (“SEC”) under federal securities laws asauthoritative GAAP for SEC registrants. This standard is effective forfinancial statements issued for interim and annual periods ending after September 15,2009. The adoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

Noncontrolling Interests

 

In June 2009, theFASB issued a pronouncement which amends its guidance surrounding a company’sanalysis to determine whether any of its variable interests constitutecontrolling financial interests in a variable interest entity.  This analysis identifies the primarybeneficiary of a variable interest entity as the enterprise that has both ofthe following characteristics:  (a) thepower to direct the activities of a variable interest entity that mostsignificantly impact the entity’s economic performance, and (b) theobligation to absorb losses of the entity that could potentially be significantto the variable interest entity or the right to receive benefits from theentity that could potentially be significant to the variable interestentity.  Additionally, an enterprise isrequired to assess whether it has an implicit financial responsibility toensure that a variable interest entity operates as designed when determiningwhether it has the power to direct the activities of the variable interestentity that most significantly impact the entity’s economic performance. Thenew pronouncement also requires ongoing assessments of whether an enterprise isthe primary beneficiary of a variable interest entity and enhanced disclosureabout an enterprise’s involvement with a variable interest entity.  This pronouncement will be appliedprospectively and will be effective for interim and annual reporting periodsbeginning after November 15, 2009.  Theadoption of this standard is not anticipated to have a material impact on theCompany’s consolidated financial statements.

 

Subsequent Events

 

In May 2009, theFASB issued a pronouncement which sets forth general standards of accountingfor and disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or available to be issued.  Although there is new terminology, thispronouncement is based on the same principles as those that currently exist inthe auditing standards.  Thispronouncement, which includes a required disclosure of the date through whichan entity has evaluated subsequent events, was effective for the Companybeginning June 30, 2009.  Theadoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

7

----

Table ofContents

 

Assets Acquired orLiabilities Assumed in a Business Combination

 

In April 2009, theFASB issued a pronouncement which amends its guidance for all assets acquiredand all liabilities assumed in a business combination that arise fromcontingencies.  This pronouncement statesthat the acquirer will recognize such an asset or liability if theacquisition-date fair value of that asset or liability can be determined duringthe measurement period.  If it cannot bedetermined during the measurement period, then the asset or liability should berecognized as of the acquisition 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 aboutFair Value of Financial Instruments

 

In April 2009, theFASB issued a pronouncement which requires fair value disclosures for financialinstruments that are not reflected in the condensed consolidated balance sheetsat fair value. Prior to the issuance of this pronouncement, the fair values ofthose assets and liabilities were disclosed only once each year.  With the issuance of this pronouncement, thisinformation will be required to be disclosed on a quarterly basis, providingquantitative and qualitative information about fair value estimates for allfinancial instruments not measured in the condensed consolidated balance sheetsat fair value.  This pronouncement wasadopted by the Company in the second quarter of 2009 and did not have amaterial impact on the Company’s consolidated financial statements.

 

**2.  Line of Credit**

 

In November 2008,the Company entered into a $75 million unsecured line of credit with acommercial bank. The applicable interest rate is equal to LIBOR (the LondonInterbank Offered Rate, 0.25% at September 30, 2009) plus 1.75%. Interestpayments are due monthly. The principal must be paid by the maturity date of November 2010,and may be prepaid without penalty. At September 30, 2009, the credit linehad an outstanding principal balance of $49.3 million. At December 31,2008, the credit line had an outstanding principal balance of $10.3 million.

 

**3.  Fair Value of Financial Instruments**

 

The Company estimates thefair value of its fixed rate debt and the credit spreads over variable marketrates on its variable rate debt by discounting the future cash flows of eachinstrument at estimated market rates or credit spreads consistent with thematurity of the debt obligation with similar credit policies. Credit spreadstake into consideration general market conditions and maturity. As of September 30,2009, the carrying value and estimated fair value of the Company’s debt was$176.2 million and $180.0 million.  As ofDecember 31, 2008, the carrying value and estimated fair value of the Company’sdebt was $138.7 million and $148.4 million. The carrying value of the Company’sother financial instruments approximates fair value due to the short-termnature of these financial instruments.

 

**4.**** ****Other Assets**

 

In January 2009, theCompany purchased a 24% ownership interest in Apple Air Holding, LLC (“AppleAir”), for $3.2 million in cash. The Company has recorded its share of incomeand losses of the entity under the equity method of accounting and adjusted itsinvestment in Apple Air accordingly.  Theother members of Apple Air are Apple REIT Six, Inc., Apple REIT Seven, Inc.and Apple REIT Nine, Inc.  Theinterest was purchased to allow the Company access to two Lear jets for assetmanagement and renovation purposes. The investment is included in Other assets,net in the Company’s Consolidated Balance Sheet.

 

8

----

Table ofContents

 

**5.   Related Parties**

 

The Company hassignificant transactions with related parties. These transactions cannot be construed to be arm’s length, and theresults of the Company’s operations may be different if these transactions wereconducted with non-related parties.

 

The Company has acontract with Apple Suites Realty Group (“ASRG”), to provide brokerage servicesfor the acquisition and disposition of the Company’s real estate assets. Inaccordance with the contract, ASRG is paid a fee of 2% of the gross purchaseprice of any acquisitions or gross sale price of any dispositions of realestate investments, subject to certain conditions.  As of September 30, 2009 payments toASRG for services under the terms of this contract have totaled $19.0 millionsince inception, which were capitalized as a part of the purchase price of thehotels.  No brokerage services wereprovided by ASRG in 2009.

 

The Company is party toan advisory agreement with A8A, pursuant to which A8A provides managementservices to the Company. An annual fee ranging from 0.1% to 0.25% of totalequity proceeds received by the Company, in addition to certain reimbursableexpenses, are payable for these services. A8A utilizes Apple REIT Six, Inc.to provide these services.  Advisory feesand other reimbursable expenses incurred by the Company under the A8A advisoryagreement during the nine months ended September 30, 2009 and 2008 were$2.1 million and $2.0 million.  Theseexpenses are recorded in General and Administrative expense.

 

ASRG and A8A are 100%owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company. Mr. Knightis also Chairman and Chief Executive Officer of Apple REIT Six, Inc.,Apple REIT Seven, Inc. and Apple REIT Nine, Inc.  Members of the Company’s Board of Directorsare also on the boards of Apple REIT Six, Inc., Apple REIT Seven, Inc.and Apple REIT Nine, Inc.

 

**6.  Shareholder’s Equity**

 

In the second quarter of2008, the Company instituted a Dividend Reinvestment Plan for its shareholders.The plan provides a convenient and cost effective way to increase shareholderinvestment in the Company by reinvesting dividends to purchase additional Unitsof the Company. The uses of the proceeds from this plan may include purchasingUnits under the Company’s Unit Redemption Program, enhancing properties,satisfying financing obligations and other expenses, increasing workingcapital, funding various corporate operations, and acquiring hotels. TheCompany has registered 10 million Units for potential issuance under theplan. During the first nine months of 2009, approximately 1.8 million Unitswere issued under the plan representing approximately $20.3 million.  For the nine months ending September 30,2008, approximately 0.8 million Units were issued under the plan representingapproximately $8.7 million.

 

The Company has a UnitRedemption Program to provide limited interim liquidity to its shareholders whohave held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equalto 92% of the price paid per Unit if the Units have been owned for less thanthree years, or 100% of the price paid per Unit if the Units have been ownedmore than three years.  The maximumnumber of Units that may be redeemed in any 12-month period will be threepercent of the weighted average number of Units outstanding during the 12-monthperiod immediately prior to the date of redemption.  The Company reserves the right to change thepurchase price for redemptions, reject any request for redemption, or otherwiseamend the terms of, suspend, or terminate the Unit Redemption Program.  During the nine months ended September 30,2009, the Company redeemed approximately 989 thousand Units in the amount of$10.2 million under the program.  Noshares were redeemed in the nine months ending September 30, 2008 as October 2008was the initial redemption date.

 

**7.  Segments**

 

The Company has tworeportable segments (the New York hotel and all other hotels).  The Company does not allocate corporate-levelaccounts to its operating segments, including corporate general andadministrative expenses, non-operating interest income and interestexpense.  Dollar amounts are inthousands.

 

9

----

Tableof Contents

 
| ** **                          | ** ** | **For the three months ended September 30, 2009**                               | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **New York,**                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **New York**                                                                         | ** ** | **All Other** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Hotel**                                                                            | ** ** | **Hotels** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| Total  revenue                      |       | $                                                                                    | 3,929      |   | $ | 44,420 |   | $ | — |   | $ | 48,349 |   |
| Hotel  operating expenses           |       | 4,351                                                                                |       | 28,252 |   | — |   | 32,603 |   |
| General  and administrative expense |       | —                                                                               |       | — |   | 1,033 |   | 1,033 |   |
| Depreciation  expense               |       | 1,536                                                                                |       | 6,819 |   | — |   | 8,355 |   |
| Operating  income/(loss)            |       | (1,958                                                                               | )          | 9,349 |   | (1,033 | ) | 6,358 |   |
| Investment  income, net             |       | —                                                                               |       | — |   | 16 |   | 16 |   |
| Interest  (expense)/income          |       | 168                                                                                  |       | (1,782 | ) | (259 | ) | (1,873 | ) |
| Net  income/(loss)                  |       | $                                                                                    | (1,790     | ) | $ | 7,567 |   | $ | (1,276 | ) | $ | 4,501 |   |
|                                |       |                                                                                 |       |   |   |   |   |   |   |
| Total  assets                       |       | $                                                                                    | 123,119    |   | $ | 876,348 |   | $ | 6,288 |   | $ | 1,005,755 |   |
|                                |       |                                                                                 |       |   |   |   |   |   |   |
| ** **                          | ** ** | **For the nine months ended September 30, 2009**  | ** ** |
| ** **                          | ** ** | **New York,**                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **New York**                                                                    | ** ** | **All Other** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Hotel**                                                                            | ** ** | **Hotels** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| Total  revenue                      |       | $                                                                                    | 8,901      |   | $ | 121,944 |   | $ | — |   | $ | 130,845 |   |
| Hotel  operating expenses           |       | 11,470                                                                               |       | 80,455 |   | — |   | 91,925 |   |
| General  and administrative expense |       | —                                                                               |       | — |   | 3,393 |   | 3,393 |   |
| Depreciation  expense               |       | 4,279                                                                                |       | 20,051 |   | — |   | 24,330 |   |
| Operating  income/(loss)            |       | (6,848                                                                               | )          | 21,438 |   | (3,393 | ) | 11,197 |   |
| Investment  income, net             |       | —                                                                               |       | — |   | 33 |   | 33 |   |
| Interest  (expense)/income          |       | 809                                                                                  |       | (5,455 | ) | (637 | ) | (5,283 | ) |
| Net  income/(loss)                  |       | $                                                                                    | (6,039     | ) | $ | 15,983 |   | $ | (3,997 | ) | $ | 5,947 |   |
|                                |       |                                                                                 |       |   |   |   |   |   |   |
| Total  assets                       |       | $                                                                                    | 123,119    |   | $ | 876,348 |   | $ | 6,288 |   | $ | 1,005,755 |   |
|                                |       |                                                                                 |       |   |   |   |   |   |   |
| ** **                          | ** ** | **For the three months ended September 30, 2008** | ** ** |
| ** **                          | ** ** | **New York,**                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **New York**                                                                    | ** ** | **All Other** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Hotel**                                                                            | ** ** | **Hotels** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| Total  revenue                      |       | $                                                                                    | 3,710      |   | $ | 45,408 |   | $ | — |   | $ | 49,118 |   |
| Hotel  operating expenses           |       | 3,708                                                                                |       | 27,313 |   | — |   | 31,021 |   |
| General  and administrative expense |       | —                                                                               |       | — |   | 1,023 |   | 1,023 |   |
| Depreciation  expense               |       | 1,059                                                                                |       | 5,766 |   | — |   | 6,825 |   |
| Operating  income/(loss)            |       | (1,057                                                                               | )          | 12,329 |   | (1,023 | ) | 10,249 |   |
| Investment  income, net             |       | —                                                                               |       | — |   | 963 |   | 963 |   |
| Interest  (expense)/income          |       |                                                                                 |       | (1,923 | ) | 171 |   | (1,752 | ) |
| Net  income/(loss)                  |       | $                                                                                    | (1,057     | ) | $ | 10,406 |   | $ | 111 |   | $ | 9,460 |   |
|                                |       |                                                                                 |       |   |   |   |   |   |   |
| Total  assets                       |       | $                                                                                    | 113,490    |   | $ | 833,225 |   | $ | 62,494 |   | $ | 1,009,209 |   |
|                                |       |                                                                                 |       |   |   |   |   |   |   |
| ** **                          | ** ** | **For the nine months ended September 30, 2008**  | ** ** |
| ** **                          | ** ** | **New York,**                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **New York**                                                                    | ** ** | **All Other** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Hotel**                                                                            | ** ** | **Hotels** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| Total  revenue                      |       | $                                                                                    | 11,192     |   | $ | 82,756 |   | $ | — |   | $ | 93,948 |   |
| Hotel  operating expenses           |       | 11,170                                                                               |       | 49,379 |   | — |   | 60,549 |   |
| General  and administrative expense |       | —                                                                               |       | — |   | 3,438 |   | 3,438 |   |
| Depreciation  expense               |       | 3,058                                                                                |       | 11,409 |   | — |   | 14,467 |   |
| Operating  income/(loss)            |       | (3,036                                                                               | )          | 21,968 |   | (3,438 | ) | 15,494 |   |
| Investment  income, net             |       | —                                                                               |       | — |   | 9,274 |   | 9,274 |   |
| Interest  (expense)/income          |       | —                                                                               |       | (2,665 | ) | 171 |   | (2,494 | ) |
| Net  income/(loss)                  |       | $                                                                                    | (3,036     | ) | $ | 19,303 |   | $ | 6,007 |   | $ | 22,274 |   |
|                                |       |                                                                                 |       |   |   |   |   |   |   |
| Total  assets                       |       | $                                                                                    | 113,490    |   | $ | 833,225 |   | $ | 62,494 |   | $ | 1,009,209 |   |

 

10

----

Table ofContents

 

**8.  Pro Forma Information (unaudited)**

 

The following unauditedpro forma information for the three and nine months ended September 30,2008 is presented as if the acquisitions of the Company’s hotels acquired afterDecember 31, 2007 had occurred on the latter of January 1, 2008 orthe opening date of the hotel. The pro forma information does not purport torepresent what the Company’s results of operations would actually have been ifsuch transactions, in fact, had occurred on these applicable dates, nor does itpurport to represent the results of operations for future periods.   Amounts are in thousands, except per sharedata.

 
| ** **                                | ** ** | **Three months**            | ** ** | **Nine months**             | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **ended**                        | ** ** | **ended**                        | ** ** |
| ** **                                | ** ** | **September 30, 2008** | ** ** | **September 30, 2008** | ** ** |
|                                      | ** ** | ** **                       | ** ** | ** **                       | ** ** |
| Hotel  revenues                           |       | $                                | 50,494     |                             | $          | 140,941 |   |
| Net  income                               |       | $                                | 9,370      |                             | $          | 24,970 |   |
| Net  income per share - basic and diluted |       | $                                | 0.10       |                             | $          | 0.28 |   |

 

The pro forma informationreflects adjustments for actual revenues and expenses of the 45 hotels acquiredduring 2008 for the respective period owned prior to acquisition by theCompany.  Net income has been adjusted asfollows: (1) interest income and expense have been adjusted to reflect thereduction in cash and cash equivalents required to fund the acquisitions; (2) interestexpense related to prior owners’ debt which was not assumed has beeneliminated; and (3) depreciation has been adjusted based on the Company’sbasis in the hotels.

 

**9.  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 $6.0 million in distributions to itscommon shareholders, or $0.064167 per outstanding common share.  Under the Company’s Dividend ReinvestmentPlan, $2.2 million were reinvested, resulting in the issuance of approximately197,000 Units.

 

In October 2009, theCompany redeemed 285,000 Units in the amount of $2.9 million under its UnitRedemption Program.

 

11

----

Table ofContents

 

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

 

This quarterly reportcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. Such statements involve known andunknown risks, uncertainties, and other factors which may cause the actualresults, performance, or achievements of the Company to be materially differentfrom future 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 suchinformation should not be regarded as a representation by the Company or anyother person that the results or conditions described in such statements or theobjectives and plans of the Company will be achieved. In addition, theCompany’s qualification as a real estate investment trust involves theapplication of highly technical and complex provisions of the Internal RevenueCode. Readers should carefully review the Company’s financial statementsand the notes thereto, as well as the risk factors described in the Company’sfilings with the Securities and Exchange Commission.

 

**Overview**

 

Apple REIT Eight, Inc.together with its wholly owned subsidiaries (the “Company”) is a Virginiacorporation that has elected to be treated as a real estate investment trust (“REIT”)for federal income tax purposes. The Company, which owned 51 properties as of September 30,2009 and has a limited operating history with its first hotel acquired on November 9,2007, was formed to invest in hotels, residential apartment communities andother real estate in selected metropolitan areas in the United States. Initialcapitalization occurred on January 22, 2007, when 10 Units, each Unitconsisting of one share of common stock and one share of  Series A preferred stock were purchasedby Apple Eight Advisors, Inc. (“A8A”) and 240,000 shares of Series BPreferred shares were purchased by Mr. Glade M. Knight, the Company’sChairman and Chief Executive Officer. The Company’s fiscal year end is December 31.The consolidated financial statements include the accounts of the Company andits subsidiaries.   All intercompanytransactions and balances have been eliminated upon consolidation.

 

Although hotelperformance can be influenced by many factors including local competition,local and general economic conditions in the United States and the performanceof individual managers assigned to each hotel, performance of the hotels withintheir respective markets, in general, has met the Company’s expectations forthe period owned.  Due to the significanteconomic decline in the United States, overall results for the Company’s hotelsand the hotel industry, in general, have been worse than expected.  Although there is no way to predict generaleconomic conditions, the Company anticipates revenue and income declines forcomparable hotels for the remainder of 2009 as compared to the same periods in2008.  Current industry forecasts for2010 predict 0% - 5% revenue declines as compared to comparable periods in2009.  Due to the significant renovationsof existing properties and the ramp up of new properties owned by the Companyin 2009, the Company anticipates modest revenue growth in 2010 for the Company’shotels.  The Company is working with itsmanagement companies to reduce costs to offset revenue declines as much aspossible.  In evaluating financialcondition and operating performance, the most important matters on which theCompany focuses are revenue measurements, such as average occupancy, averagedaily rate (“ADR”), revenue per available room (“RevPAR”), and Market Yieldwhich compares an individual hotel’s results to other hotels in its localmarket, and expenses, such as hotel operating expenses, general andadministrative and other expenses described below.

 

The following is asummary of the Company’s results:

 

12

----

Table of Contents

 
| ** **                                  | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                 | ** ** | **%  of**                                 | ** ** | ** ** | ** ** | **%  of** | ** ** | **Percent** | ** ** | ** ** | ** ** | **%  of** | ** ** | ** ** | ** ** | **%  of** | ** ** | **Percent** | ** ** |
| **(in thousands, except statistical data)** | ** ** | **2009**                                   | ** ** | **Revenue**                               | ** ** | **2008** | ** ** | **Revenue** | ** ** | **Change** | ** ** | **2009** | ** ** | **Revenue** | ** ** | **2008** | ** ** | **Revenue** | ** ** | **Change** | ** ** |
| Total  revenues                             |       | $                                          | 48,349     |                                      | 100        | % | $ | 49,118 |   | 100 | % | -2 | % | $ | 130,845 |   | 100 | % | $ | 93,948 |   | 100 | % | 39 | % |
| Hotel  direct expenses                      |       | 28,411                                     |       | 59                                        | %          | 27,066 |   | 55 | % | 5 | % | 79,533 |   | 61 | % | 51,375 |   | 55 | % | 55 | % |
| Taxes,  insurance and other expense         |       | 2,596                                      |       | 5                                         | %          | 2,372 |   | 5 | % | 9 | % | 7,615 |   | 6 | % | 4,500 |   | 5 | % | 69 | % |
| Land  lease expense                         |       | 1,596                                      |       | 3                                         | %          | 1,583 |   | 3 | % | 1 | % | 4,777 |   | 4 | % | 4,674 |   | 5 | % | 2 | % |
| General  and administrative expense         |       | 1,033                                      |       | 2                                         | %          | 1,023 |   | 2 | % | 1 | % | 3,393 |   | 3 | % | 3,438 |   | 4 | % | -1 | % |
| Depreciation                                |       | 8,355                                      |       |                                      |       | 6,825 |   |   |   | 22 | % | 24,330 |   |   |   | 14,467 |   |   |   | 68 | % |
| Investment  income, net                     |       | 16                                         |       |                                      |       | 963 |   |   |   | N/A |   | 33 |   |   |   | 9,274 |   |   |   | N/A |   |
| Interest  expense                           |       | (1,873                                     | )          |                                      |       | (1,752 | ) |   |   | 7 | % | (5,283 | ) |   |   | (2,494 | ) |   |   | 112 | % |
|                                        |       |                                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number  of hotels                           |       | 51                                         |       |                                      |       | 49 |   |   |   | 4 | % | 51 |   |   |   | 49 |   |   |   | 4 | % |
| Average  Daily Rate (ADR)                   |       | $                                          | 116        |                                      |       |   | $ | 125 |   |   |   | -7 | % | $ | 112 |   |   |   | $ | 123 |   |   |   | -9 | % |
| Occupancy                                   |       | 71                                         | %          |                                      |       | 75 | % |   |   | -5 | % | 67 | % |   |   | 74 | % |   |   | -9 | % |
| RevPAR                                      |       | $                                          | 82         |                                      |       |   | $ | 94 |   |   |   | -13 | % | $ | 75 |   |   |   | $ | 91 |   |   |   | -18 | % |

 

**HotelsOwned**

 

The following tablesummarizes the location, brand, manager, date acquired, number of rooms andgross purchase price for each of the 51 hotels the Company owned at September 30,2009.  All dollar amounts are inthousands.

 

13

----

Table of Contents

 
| ** **      | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **   | ** ** | ** ** | ** ** | **Gross**    | ** ** |
|-----------------|------------|------------|------------|----------------------------------|------------|---------------|------------|--------------|------------|------------|------------|--------------|------------|
| ** **      | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **    | ** ** | **Date**     | ** ** | ** ** | ** ** | **Purchase** | ** ** |
| **Location**    | ** ** | **State**  | ** ** | **Brand**                        | ** ** | **Manager**   | ** ** | **Acquired** | ** ** | **Rooms**  | ** ** | **Price**    | ** ** |
| Birmingham      |       | AL         |       | Homewood Suites                  |       | McKibbon      |       | 5/23/2008    |       | 95         |       | $            | 16,500     |   |
| Rogers          |       | AR         |       | Fairfield  Inn & Suites |       | Intermountain |       | 2/29/2008    |       | 99         |       | 8,000        |       |
| Rogers          |       | AR         |       | Residence Inn                    |       | Intermountain |       | 2/29/2008    |       | 88         |       | 11,744       |       |
| Springdale      |       | AR         |       | Residence Inn                    |       | Intermountain |       | 3/14/2008    |       | 72         |       | 5,606        |       |
| Sacramento      |       | CA         |       | Hilton Garden Inn                |       | Dimension     |       | 3/7/2008     |       | 154        |       | 27,630       |       |
| Cypress         |       | CA         |       | Courtyard                        |       | Dimension     |       | 4/30/2008    |       | 180        |       | 31,164       |       |
| Burbank         |       | CA         |       | Residence Inn                    |       | Marriott      |       | 5/13/2008    |       | 166        |       | 50,500       |       |
| Oceanside       |       | CA         |       | Residence Inn                    |       | Marriott      |       | 5/13/2008    |       | 125        |       | 28,750       |       |
| Tulare          |       | CA         |       | Hampton Inn &  Suites   |       | Inn Ventures  |       | 6/26/2008    |       | 86         |       | 10,331       |       |
| San Jose        |       | CA         |       | Homewood Suites                  |       | Dimension     |       | 7/2/2008     |       | 140        |       | 21,862       |       |
| Tallahassee     |       | FL         |       | Hilton Garden Inn                |       | LBA           |       | 1/25/2008    |       | 85         |       | 13,200       |       |
| Sanford         |       | FL         |       | SpringHill Suites                |       | LBA           |       | 3/14/2008    |       | 105        |       | 11,150       |       |
| Jacksonville    |       | FL         |       | Homewood Suites                  |       | McKibbon      |       | 6/17/2008    |       | 119        |       | 23,250       |       |
| Tampa           |       | FL         |       | TownePlace Suites                |       | McKibbon      |       | 6/17/2008    |       | 95         |       | 11,250       |       |
| Port Wentworth  |       | GA         |       | Hampton Inn                      |       | Newport       |       | 1/2/2008     |       | 106        |       | 10,780       |       |
| Savannah        |       | GA         |       | Hilton Garden Inn                |       | Newport       |       | 7/31/2008    |       | 105        |       | 12,500       |       |
| Overland Park   |       | KS         |       | SpringHill Suites                |       | True North    |       | 3/17/2008    |       | 102        |       | 8,850        |       |
| Overland Park   |       | KS         |       | Residence Inn                    |       | True North    |       | 4/30/2008    |       | 120        |       | 15,850       |       |
| Wichita         |       | KS         |       | Courtyard                        |       | Intermountain |       | 6/13/2008    |       | 90         |       | 8,874        |       |
| Overland Park   |       | KS         |       | Fairfield  Inn & Suites |       | True North    |       | 8/20/2008    |       | 110        |       | 12,050       |       |
| Bowling Green   |       | KY         |       | Hampton Inn                      |       | Newport       |       | 12/6/2007    |       | 131        |       | 18,832       |       |
| Marlborough     |       | MA         |       | Residence Inn                    |       | True North    |       | 1/15/2008    |       | 112        |       | 20,200       |       |
| Westford        |       | MA         |       | Hampton Inn &  Suites   |       | True North    |       | 3/6/2008     |       | 110        |       | 15,250       |       |
| Westford        |       | MA         |       | Residence Inn                    |       | True North    |       | 4/30/2008    |       | 108        |       | 14,850       |       |
| Annapolis       |       | MD         |       | Hilton Garden Inn                |       | White         |       | 1/15/2008    |       | 126        |       | 25,000       |       |
| Kansas City     |       | MO         |       | Residence Inn                    |       | True North    |       | 4/30/2008    |       | 106        |       | 17,350       |       |
| Greensboro      |       | NC         |       | SpringHill Suites                |       | Newport       |       | 11/9/2007    |       | 82         |       | 8,000        |       |
| Matthews        |       | NC         |       | Hampton Inn                      |       | Newport       |       | 1/15/2008    |       | 92         |       | 11,300       |       |
| Dunn            |       | NC         |       | Hampton Inn                      |       | McKibbon      |       | 1/24/2008    |       | 120        |       | 12,500       |       |
| Concord         |       | NC         |       | Hampton Inn                      |       | Newport       |       | 3/7/2008     |       | 101        |       | 9,200        |       |
| Fayetteville    |       | NC         |       | Residence Inn                    |       | Intermountain |       | 5/9/2008     |       | 92         |       | 12,201       |       |
| Winston-Salem   |       | NC         |       | Courtyard                        |       | McKibbon      |       | 5/19/2008    |       | 122        |       | 13,500       |       |
| Carolina Beach  |       | NC         |       | Courtyard                        |       | Crestline     |       | 6/5/2008     |       | 144        |       | 24,214       |       |
| Wilmington      |       | NC         |       | Fairfield  Inn & Suites |       | Crestline     |       | 12/11/2008   |       | 122        |       | 14,800       |       |
| Somerset        |       | NJ         |       | Courtyard                        |       | Newport       |       | 11/9/2007    |       | 162        |       | 16,000       |       |
| New York        |       | NY         |       | Renaissance                      |       | Marriott      |       | 1/4/2008     |       | 200        |       | 99,000       |       |
| Tulsa           |       | OK         |       | Hampton Inn &  Suites   |       | Western       |       | 12/28/2007   |       | 102        |       | 10,200       |       |
| Greenville      |       | SC         |       | Residence Inn                    |       | McKibbon      |       | 5/19/2008    |       | 78         |       | 8,700        |       |
| Hilton Head     |       | SC         |       | Hilton Garden Inn                |       | McKibbon      |       | 5/29/2008    |       | 104        |       | 13,500       |       |
| Columbia        |       | SC         |       | Hilton Garden Inn                |       | Newport       |       | 9/22/2008    |       | 143        |       | 21,200       |       |
| Chattanooga     |       | TN         |       | Homewood Suites                  |       | LBA           |       | 12/14/2007   |       | 76         |       | 8,600        |       |
| Texarkana       |       | TX         |       | Courtyard                        |       | Intermountain |       | 3/7/2008     |       | 90         |       | 12,924       |       |
| Texarkana       |       | TX         |       | TownePlace Suites                |       | Intermountain |       | 3/7/2008     |       | 85         |       | 9,057        |       |
| Harrisonburg    |       | VA         |       | Courtyard                        |       | Newport       |       | 11/16/2007   |       | 125        |       | 23,219       |       |
| Charlottesville |       | VA         |       | Courtyard                        |       | Crestline     |       | 6/5/2008     |       | 137        |       | 27,900       |       |
| Virginia Beach  |       | VA         |       | Courtyard                        |       | Crestline     |       | 6/5/2008     |       | 141        |       | 27,100       |       |
| Virginia Beach  |       | VA         |       | Courtyard                        |       | Crestline     |       | 6/5/2008     |       | 160        |       | 39,700       |       |
| Suffolk         |       | VA         |       | Courtyard                        |       | Crestline     |       | 7/2/2008     |       | 92         |       | 12,500       |       |
| Suffolk         |       | VA         |       | TownePlace Suites                |       | Crestline     |       | 7/2/2008     |       | 72         |       | 10,000       |       |
| Chesapeake      |       | VA         |       | Marriott                         |       | Crestline     |       | 10/21/2008   |       | 226        |       | 38,400       |       |
| Tukwila         |       | WA         |       | Homewood Suites                  |       | Dimension     |       | 7/2/2008     |       | 106        |       | 15,707       |       |
|            |       |       |       |                             |       |          |       |         |       | 5,909      |       | $            | 950,745    |   |

 

14

----

Table of Contents

 

With the exception ofassumed mortgage loans in 2008 on 15 of its hotel properties, substantially allof the purchases were funded with proceeds of the Company’s best-effortsoffering of Units, which was completed in April 2008.  The Company leases all of its hotels to itswholly-owned taxable REIT subsidiaries under hotel lease agreements. TheCompany also used the proceeds of its offering to pay $19.0 million,representing 2% of the gross purchase price for these hotels, as a commissionto Apple Suites Realty Group, Inc. (“ASRG”), 100% owned by Glade M.Knight, the Company’s Chairman and Chief Executive Officer.  No hotels have been purchased since December 2008,and there are no outstanding purchase contracts for additional hotels as of September 30,2009.

 

Of the Company’s 51hotels owned at September 30, 2009, six were purchased in 2007 and 45 werepurchased in 2008, with 43 of these acquired during the first nine months of2008.

 

**Resultsof Operations**

 

During the period fromthe Company’s initial formation on January 22, 2007 to November 8,2007, the company owned no properties, had no revenue exclusive of interestincome, and was primarily engaged in capital formation activities. Operationscommenced on November 9, 2007 with the Company’s first propertyacquisition.  As of September 30,2009, the Company owned 51 hotels with 5,909 rooms.  At September 30, 2008 the Company owned49 hotels (43 of which were purchased during the first nine months of 2008),with a total of 5,561 rooms.  As a resultof this activity, a comparison of operations for the three and nine month periodsended September 30, 2009 is not representative of the results that wouldhave occurred if all hotels had been owned for the entire periods presented.

 

Hotel performance isimpacted by many factors including local hotel competition, and local andnational economic conditions in the United States.  Due to a general decline in economicconditions throughout the United States, the financial results of the Company’shotels did not meet expectations during the first nine months of 2009.  The Company’s hotels’ performance as comparedto other hotels within each individual market has met expectations for theperiod held.  It is anticipated theproperties’ financial performance will be below original expectations untilgeneral economic conditions improve.  TheCompany will continue to aggressively pursue market opportunities to improverevenue and cost controls to improve results during and after the economicdownturn.

 

Revenues

 

The Company’s principalsource of revenue is hotel room revenue and other related revenue.  For the three months ended September 30,2009 and 2008, the Company had total revenue of $48.3 million and $49.1million. Revenue for the hotel located in New York, New York (the “New Yorkhotel”) was $3.9 million or 8% of total revenue for the third quarter of 2009and $3.7 million or 8% of total revenue for the third quarter of 2008.

 

For the three monthsended September 30, 2009, the hotels achieved combined average occupancyof approximately 71%, ADR of $116 and RevPAR of $82.  The New York hotel had average occupancy of80%, ADR of $221 and RevPAR of $176.  Forthe three months ended September 30, 2008, the hotels achieved combinedaverage occupancy of approximately 75%, ADR of $125 and RevPAR of $94.  For the same period, the New York hotel hadaverage occupancy of 73%, ADR of $247 and RevPAR of $180.

 

For the nine months endedSeptember 30, 2009 and 2008, the Company had total revenue of $130.8million and $93.9 million.  Revenue forthe New York hotel was $8.9 million or 7% of total revenue for the first ninemonths of 2009 and $11.2 million for the first nine months of 2008.  For the nine months ended September 30,2009, the hotels achieved combined average occupancy of approximately 67%, ADRof $112 and RevPAR of $75.  The New Yorkhotel had average occupancy of 67%, ADR of $190 and RevPAR of $128.  For the nine months ended September 30,2008, the hotels achieved combined average occupancy of approximately 74%, ADRof $123 and RevPAR of $91.  For the sameperiod, the New York hotel had average occupancy of 72%, ADR of $244 and RevPARof $175.

 

The revenue rates earnedby the Company are consistent with industry and brand averages.  As supply of hotel rooms in the markets theCompany serves met demand, and general economic conditions weakened in

 

15

----

Table of Contents

 

late 2008, the Company’srevenues at some individual hotels have experienced declines from anticipatedresults.  The Company expects this trendto continue for the remainder of 2009. The Company expects the declines in occupancy levels, ADR and RevPAR tomoderate in 2010 and turn slightly positive versus comparable periods in 2009.  Although it is not possible to predict wheneconomic conditions will improve or their impact on the hotel industry, withthe significant number of renovations (12) by the Company and the number ofhotels that were new (9) when acquired by the Company, the Companyanticipates slight revenue growth in 2010 as compared to an anticipated slightdecline for the industry as a whole. Additionally, with the overall economic declines, the Company continuesto focus on improving market share.  TheCompany’s properties overall lead their respective markets with an AverageRevPAR Index (a comparison of a property’s RevPAR to the market average) of 129year-to-date, a 4% increase from 2008.

 

During the majority of2009, the Company was in the process of completing its conversion of the NewYork hotel from an unbranded hotel to a Renaissance hotel.  Consequently, the hotel had an average of 26rooms out of service each night for the first nine months of the year andexperienced other disruptions to its common areas.  As a result of the conversion effort anddeclines in economic conditions, revenue at the hotel was unusually low for thenine months ended September 30, 2009. The Company completed the conversion to a Renaissance in late April 2009,and although there are certain additional renovation requirements to complete,the Company anticipates improvement in revenue over the remainder of the year,subject to general economic conditions in the United States and New York.  The RevPAR Index for the New York hotel was79 for the nine months ending September 30, 2009.  The Company is aggressively working withMarriott management to increase the RevPAR Index and realized an index of 100for the three months ending September 30, 2009.

 

Expenses

 

For the three monthsended September 30, 2009 and 2008, hotel direct expenses of the Company’shotels totaled $28.4 million or 59% of total revenue (the New York hotel haddirect expenses of $2.8 million or 72% of its total revenue for the quarter)and $27.1 million or 55% of total revenue (the New York hotel had directexpenses of $2.1 million or 56% of its total revenue for the quarter).

 

For the nine months endedSeptember 30, 2009, hotel direct expenses were $79.5 million or 61% oftotal revenue (the New York hotel had direct expenses of $6.8 million or 77% ofits total revenue).  For the nine monthsended September 30, 2008, hotel direct expenses were $51.4 million or 55%of total revenue (the New York hotel had direct expenses of $6.3 million or 56%of its revenue for this period).  Hoteldirect expenses consist of operating expense, hotel administrative expense,sales and marketing expense, utilities expense, repair and maintenance expense,franchise fees and management fees.

 

Operating expenses as apercentage of revenue have been negatively impacted by the ramp up of severalhotels that opened in the second half of 2008 and by renovations in 2009.  The Company has had approximately 23,000 roomnights out of service due to renovations in 2009.  The Company has been successful in reducingcertain labor costs, food and supply costs and utility costs by continuallymonitoring and sharing utilization data across its hotels and managementcompanies.  While the Company continuesto aggressively work with its managers to reduce operating costs of its hotelswhere possible, it is not anticipated that cost reductions will offset revenuedecline in the short term.

 

Taxes, insurance, andother expense for the three months ended September 30, 2009 and 2008totaled $2.6 million, or 5% of total revenues, and $2.4 million, or 5% of totalrevenues (of which approximately $46 thousand and $149 thousand related to theNew York hotel).  For the nine monthsended September 30, 2009 and 2008, taxes, insurance, and other expensetotaled $7.6 million, or 6% of total revenues, and $4.5 million, or 5% of totalrevenues (of which approximately $221 thousand and $493 thousand related to theNew York hotel).

 

Land lease expense was$1.6 million for both three months ended September 30, 2009 and 2008.  For the nine months ended September 30,2009 and 2008, land lease expense was $4.8 million and $4.7 million.  This expense represents the expense incurredby the Company to lease land for five hotel properties.   Land lease expense for the New York hotelwas $1.5 million for both the third quarter of 2009 and 2008 and $4.4 millionfor the first nine months of both 2009 and 2008.

 

16

----

Table of Contents

 

General andadministrative expense for the three months ended September 30, 2009 and2008 was $1.0 million in both periods. The expense for the nine months in both periods was $3.4 million.  The principal components of general andadministrative expense are advisory fees, legal fees, accounting fees andreporting expense.

 

Depreciation expense was$8.4 million for the third quarter of 2009 and $6.8 million for the thirdquarter of 2008.  These expenses include$1.5 million and $1.1 million for the New York hotel.  For the first nine months of 2009 and 2008,depreciation expense was $24.3 million and $14.5 million. These expensesinclude $4.3 million and $3.1 million for the New York hotel.  Depreciation expense represents depreciationexpense of the Company’s hotel buildings and related improvements, andassociated furniture, fixtures and equipment, for the respective periods owned.

 

For the nine months endedSeptember 30, 2009, the Company recognized investment income of $33thousand.  For the same period in 2008,the Company had investment income of $9.3 million.  In the first nine months of 2008, the Companyacquired and sold equity securities in several publicly traded Real EstateInvestment Trusts, resulting in realized gains and other investment income of$3.3 million.  Additionally, the Companyrecognized interest income of $6.0 million for the same period of 2008 fromexcess cash invested in short term money market instruments and certificates ofdeposit.

 

Interest expense for thethird quarter of 2009 and the nine months ended September 30, 2009 was$1.9 million and $5.3 million.  Interestexpense for the quarter includes $2.2 million of interest expense on 15mortgages assumed in 2008 and the Company’s line of credit, offset bycapitalized interest of $275 thousand, related to the renovation of five hotelproperties.   Interest for the nine monthperiod includes $6.5 million of interest on the 15 mortgages and the line ofcredit, offset by capitalized interest of $1.2 million related to therenovation of 12 hotel properties. Interest expense for the same periods in 2008 was for interest expenseon 15 mortgages, $1.8 million for the quarter ended September 30, 2008,and $2.5 million for the nine months ended September 30, 2008.

 

**Liquidityand Capital Resources**

 

In November 2008,the Company entered into a $75.0 million revolving line of credit which expiresin November 2010.  The line ofcredit was obtained to meet short-term cash needs as the Company plans oncompleting approximately 12 renovations in 2009, and newly opened propertieswill have a period of ramp up to normal operating status.  During the first nine months of the year, allof the planned renovations were in progress or completed.  With the availability of this line of credit,the Company maintains little cash on hand, accessing the line asnecessary.  As a result, cash on hand was$0 at September 30, 2009.  Theoutstanding balance on the line of credit was $49.3 million at September 30,2009.  The Company anticipates that cashflow from operations and the revolving line of credit will be adequate to meetits anticipated liquidity requirements, including anticipated distributions toshareholders, capital expenditures and debt service.

 

To maintain its REITstatus the Company is required to distribute at least 90% of its ordinaryincome. Distributions during the first nine months of 2009 totaled $57.0million, included a return of capital, and were paid monthly at a rate of$0.073334 per common share for the first four months of the year, and weresubsequently reduced to a monthly rate of $0.064167 per common share. For thesame period the Company’s cash generated from operations was approximately$36.0 million.  The reduction in thedistribution rate came as a result of the weakness in economic conditionsthroughout the United States and its impact on the Company.  In April 2009, the Company’s Board ofDirectors approved the reduction in the annual distribution rate from $0.88 to$0.77 per common share.  Since there canbe no assurance of the ability of the Company’s properties to provide income atthis level, there can be no assurance as to the classification or duration ofdistributions at the new monthly rate of $0.064167 per common share.

 

The Company has on-goingcapital commitments to fund its capital improvements. The Company is required,under all of the hotel management agreements, to make available, for therepair, replacement, refurbishing of furniture, fixtures, and equipment, apercentage of gross revenues provided that such

 

17

----

Table of Contents

 

amount may be used forthe Company’s capital expenditures with respect to the hotels.  As of September 30, 2009, the Companyheld $10.6 million in reserve for capital expenditures.

 

Additionally, the Companycompleted the conversion of the hotel in New York to a Renaissance franchisedhotel in April 2009.  Through September 30,2009, the Company had spent approximately $19 million on the conversion.  The Company also had other renovations inprocess during the first nine months of 2009. Total capital expenditures in the first nine months of 2009 for allrenovations and items recurring in nature were $19.6 million.  Total capital expenditures for 2009 areanticipated to be approximately $27 million.

 

In January 2009, theCompany purchased a 24% ownership interest in Apple Air Holding, LLC (“AppleAir”), for $3.2 million in cash. The Company has recorded its share of incomeand losses of the entity under the equity method of accounting and adjusted itsinvestment in Apple Air accordingly.  Theother members of Apple Air are Apple REIT Six, Inc., Apple REIT Seven, Inc.and Apple REIT Nine, Inc.  Theinterest was purchased to allow the Company access to two Lear jets for assetmanagement and renovation purposes. The investment is included in Other assets,net on the Company’s Consolidated Balance Sheet.

 

In the second quarter of2008, the Company instituted a Dividend Reinvestment Plan for its shareholders.The plan provides a convenient and cost effective way to increase shareholderinvestment in the Company by reinvesting dividends to purchase additional Unitsof the Company. The uses of the proceeds from this plan may include purchasingUnits under the Company’s Unit Redemption Program, enhancing properties,satisfying financing obligations and other expenses, increasing workingcapital, funding various corporate operations, and acquiring hotels. TheCompany has registered 10 million Units for potential issuance under theplan. During the first nine months of 2009,approximately 1.8 million Units were issued under theplan representing approximately $20.3 million. For the nine months ending September 30, 2008, approximately 0.8million Units were issued under the plan representing approximately $8.7million.

 

The Company has a UnitRedemption Program to provide limited interim liquidity to its shareholders whohave held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equalto 92% of the price paid per Unit if the Units have been owned for less thanthree years, or 100% of the price paid per Unit if the Units have been ownedmore than three years.  The maximumnumber of Units that may be redeemed in any 12-month period will be threepercent of the weighted average number of Units outstanding during the 12-monthperiod immediately prior to the date of redemption.  The Company reserves the right to change thepurchase price for redemptions, reject any request for redemption, or otherwiseamend the terms of, suspend, or terminate the Unit Redemption Program.  During the nine months ended September 30,2009, the Company redeemed approximately 989 thousand Units in the amount of$10.2 million under the program.  Noshares were redeemed in the nine months ending September 30, 2008 as October 2008was the initial redemption date.

 

**RelatedParty Transactions**

 

The Company hassignificant transactions with related parties. These transactions cannot be construed to be arm’s length, and theresults of the Company’s operations may be different if these transactions wereconducted with non-related parties.

 

The Company has acontract with Apple Suites Realty Group (“ASRG”), to provide brokerage servicesfor the acquisition and disposition of the Company’s real estate assets. Inaccordance with the contract, ASRG is paid a fee of 2% of the gross purchaseprice of any acquisitions or gross sale price of any dispositions of realestate investments, subject to certain conditions.  As of September 30, 2009 payments toASRG for services under the terms of this contract have totaled $19.0 millionsince inception, which were capitalized as a part of the purchase price of thehotels.  No brokerage services wereprovided by ASRG in 2009.

 

The Company is party toan advisory agreement with A8A, pursuant to which A8A provides managementservices to the Company. An annual fee ranging from 0.1% to 0.25% of totalequity proceeds received by the Company, in addition to certain reimbursableexpenses, are payable for these services. A8A utilizes Apple REIT Six, Inc.to provide these services.  Advisory feesand other reimbursable expenses incurred by the Company under the A8A advisoryagreement during the nine months ended September 30, 2009 and

 

18

----

Table of Contents

 

2008 were $2.1 millionand $2.0 million.  These expenses arerecorded in General and Administrative expense.

 

ASRG and A8A are 100%owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company. Mr. Knightis also Chairman and Chief Executive Officer of Apple REIT Six, Inc.,Apple REIT Seven, Inc. and Apple REIT Nine, Inc.  Members of the Company’s Board of Directorsare also on the boards of Apple REIT Six, Inc., Apple REIT Seven, Inc.and Apple REIT Nine, Inc.

 

**SubsequentEvents**

 

In October 2009, theCompany declared and paid approximately $6.0 million in distributions to itscommon shareholders, or $0.064167 per outstanding common share.  Under the Company’s Dividend ReinvestmentPlan, $2.2 million were reinvested, resulting in the issuance of approximately197,000 Units.

 

In October 2009, theCompany redeemed 285,000 Units in the amount of $2.9 million under its UnitRedemption Program.

 

**Impact of Inflation**

 

Operators of hotels, ingeneral, possess the ability to adjust room rates daily to reflect the effectsof inflation.  Competitive pressures may,however, limit the operators’ ability to raise room rates.  Currently the Company is not experiencing anymaterial impact from inflation.

 

**BusinessInterruption**

 

Being in the real estateindustry, the Company is exposed to natural disasters on both a local andnational scale.  Although managementbelieves there is adequate insurance to cover this exposure, there can be noassurance that such events will not have a material adverse effect on theCompany’s financial position or results of operations.

 

**Seasonality**

 

The hotel industryhistorically has been seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the secondand third quarters than in the first and fourth quarters.  As a result, there may be quarterlyfluctuations in results of operations. To the extent that cash flow from operations is insufficient during anyquarter, due to temporary or seasonal fluctuations in revenue, the Companyexpects to utilize cash on hand or available credit to make distributions.

 

**RecentAccounting Pronouncements**

 

Accounting StandardsCodification

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued a pronouncementestablishing the *FASB Accounting StandardsCodification**TM* as the source of authoritativeaccounting principles recognized by the FASB to be applied in the preparationof financial statements in conformity with United States generally acceptedaccounting principles (“GAAP”).  Thestandard explicitly recognizes rules and interpretive releases of theSecurities Exchange Commission (“SEC”) under federal securities laws asauthoritative GAAP for SEC registrants. This standard is effective forfinancial statements issued for interim and annual periods ending after September 15,2009. The adoption of this standard did not have a material impact on theCompany’s consolidated financial statements.

 

Noncontrolling Interests

 

In June 2009, theFASB issued a pronouncement which amends its guidance surrounding a company’sanalysis to determine whether any of its variable interests constitutecontrolling financial interests in a

 

19

----

Table of Contents

 

variable interestentity.  This analysis identifies theprimary beneficiary of a variable interest entity as the enterprise that hasboth of the following characteristics:  (a) thepower to direct the activities of a variable interest entity that mostsignificantly impact the entity’s economic performance, and (b) theobligation to absorb losses of the entity that could potentially be significantto the variable interest entity or the right to receive benefits from theentity that could potentially be significant to the variable interestentity.  Additionally, an enterprise isrequired to assess whether it has an implicit financial responsibility toensure that a variable interest entity operates as designed when determiningwhether it has the power to direct the activities of the variable interestentity that most significantly impact the entity’s economic performance. Thenew pronouncement also requires ongoing assessments of whether an enterprise isthe primary beneficiary of a variable interest entity and enhanced disclosureabout an enterprise’s involvement with a variable interest entity.  This pronouncement will be appliedprospectively and will be effective for interim and annual reporting periodsbeginning after November 15, 2009. The adoption of this standard is not anticipated to have a materialimpact on the Company’s consolidated financial statements.

 

Subsequent Events

 

In May 2009, the FASBissued a pronouncement which sets forth general standards of accounting for anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued or available to be issued.  Although there is new terminology, thispronouncement is based on the same principles as those that currently exist inthe auditing standards.  Thispronouncement, which includes a required disclosure of the date through whichan entity has evaluated subsequent events, was effective for the Companybeginning June 30, 2009.  Theadoption of this standard did not have a material impact on the Company’sconsolidated financial statements.

 

Assets Acquired orLiabilities Assumed in a Business Combination

 

In April 2009, theFASB issued a pronouncement which amends its guidance for all assets acquiredand all liabilities assumed in a business combination that arise fromcontingencies.  This pronouncement statesthat the acquirer will recognize such an asset or liability if theacquisition-date fair value of that asset or liability can be determined duringthe measurement period.  If it cannot bedetermined during the measurement period, then the asset or liability should berecognized as of the acquisition 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 aboutFair Value of Financial Instruments

 

In April 2009, theFASB issued a pronouncement which requires fair value disclosures for financialinstruments that are not reflected in the condensed consolidated balance sheetsat fair value. Prior to the issuance of this pronouncement, the fair values ofthose assets and liabilities were disclosed only once each year.  With the issuance of this pronouncement, thisinformation will be required to be disclosed on a quarterly basis, providingquantitative and qualitative information about fair value estimates for allfinancial instruments not measured in the condensed consolidated balance sheetsat fair value.  This pronouncement wasadopted by the Company in the second quarter of 2009 and did not have amaterial impact on the Company’s consolidated financial statements.

 

20

----

Table of Contents

 

**Item 3.****                                   ****Quantitative andQualitative Disclosures About Market Risk**

 

The Company does notengage in transactions in derivative financial instruments or derivative commodityinstruments. As of September 30, 2009, the Company’s financial instrumentswere not exposed to significant market risk due to foreign currency exchangerisk or commodity price risk.  TheCompany will be exposed to interest rate risk due to possible changes in shortterm interest rates as it invests its cash or borrows on its line of credit anddue to its variable interest rate mortgage on its Columbia, South Carolinahotel.  The Company had an outstanding balanceof $49.3 million on its $75 million line of credit at September 30, 2009,and to the extent it utilizes the line of credit, the Company will be exposedto changes in short-term interest rates. The outstanding balance of the Company’s variable rate mortgage was$11.3 million at September 30, 2009. Based on these outstanding balances at September 30, 2009, every100 basis point change in interest rates will impact the Company’s annual netincome by $0.6 million, all other factors remaining the same.  The Company’s cash balance at September 30,2009 was $0.

 

As of September 30,2009, the Company was exposed to market risk due to equity price risk.  At September 30, 2009, the Company ownedmarketable equity securities, classified as available-for-sale, with a carryingvalue of $1.1 million and a market value of $3.3 million, resulting in anunrealized gain of $2.2 million in the first nine months of 2009.  These equity securities were comprised of onepublicly traded Real Estate Investment Trust. There is no assurance that future declines in values will not have anadverse impact on the Company’s future results of operations.

 

**Item 4.****                                   ****Controls and Procedures**

 

Senior management,including the Chief Executive Officer and Chief Financial Officer, evaluatedthe effectiveness of the Company’s disclosure controls and procedures as of theend of the period covered by this report. Based on this evaluation process, theChief Executive Officer and Chief Financial Officer have concluded that theCompany’s disclosure controls and procedures are effective and that there havebeen no changes in the Company’s internal control over financial reporting thatoccurred during the last fiscal quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.   Since thatevaluation process was completed there have been no significant changes ininternal controls or in other factors that could significantly affect thesecontrols.

 

21

----

Table of Contents

 

**PART II. OTHER INFORMATION**

 

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

 

*Unit Redemption Program*

 

The Company has a UnitRedemption Program to provide limited interim liquidity to its shareholders whohave held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equalto 92% of the price paid per Unit if the Units have been owned for less thanthree years, or 100% of the price paid per Unit if the Units have been ownedmore than three years.  The maximumnumber of Units that may be redeemed in any 12-month period will be threepercent of the weighted average number of Units outstanding during the 12-monthperiod immediately prior to the date of redemption.  The Company reserves the right to change thepurchase price for redemptions, reject any request for redemption, or otherwiseamend the terms of, suspend, or terminate the Unit Redemption Program.  The following is a summary of redemptionsduring 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 |       | 293,475                                         |       | $                                               | 10.37      |                                                                                                                            | 1,090,982  |                                                                                                                               | (1)        |   |
|                |            |                                                 |            |                                                 |            |                                                                                                                                 |            |                                                                                                                                    |            |  |

 

----

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

 

22

----

Table of Contents

 

**Item6.  Exhibits**

 
| **Exhibit  Number** | ** ** | **Description  of Documents**                                                                                                                                                                                                             |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                      |
| 3.1                 |       | Articles of  Incorporation of the Registrant. (Incorporated by reference to  Exhibit 3.1 to the registrant’s registration statement on Form S-11  (SEC File No. 333-140548) effective July 19, 2007)             |
|                |       |                                                                                                                                                                                                                                      |
| 3.2                 |       | Bylaws of the  Registrant, as amended. (Incorporated by reference to Exhibit 3.2 to  amendment no. 1 to the registrant’s registration statement on Form S-11  (SEC File No. 333-140548) effective July 19, 2007) |
|                |       |                                                                                                                                                                                                                                      |
| 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**).        |

 

23

----

Table of Contents

 

SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
| Apple REIT  Eight, Inc. |                                                                                   |   |
|------------------------------|----------------------------------------------------------------------------------------|--------|
|                         |                                                                                   |   |   |
| 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)**    |   |   |

 

24

----