Apple Hospitality Two 10Q 2003 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTERMBER 30, 2003

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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 000-49748

APPLE HOSPITALITY TWO, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA		54-2010305
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

10 SOUTH THIRD STREET RICHMOND, VIRGINIA		23219
(Address of principal executive offices)		(Zip Code)

(804) 344-8121

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At October 31, 2003, there were 41,925,065 outstanding shares of common stock, no par value, of the registrant.

APPLE HOSPITALITY TWO, INC.

FORM 10-Q

INDEX

		Page Number
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets – September 30, 2003 and December 31, 2002	3

	Consolidated Statements of Operations – three months and nine months ended September 30, 2003; and three months and nine months ended September 30, 2002	4

	Consolidated Statement of Shareholders’ Equity-nine months ended September 30, 2003	5

	Consolidated Statement of Cash Flows - nine months ended September 30, 2003; and nine months ended September 30, 2002	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	30

PART II.	OTHER INFORMATION:

Item 1.	Legal Proceedings (not applicable)

Item 2.	Changes in Securities and Use of Proceeds	31

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 and Reports on Form 8-K	32

Signatures		34

Certifications		35

Apple Hospitality Two, Inc

Consolidated Balance Sheets (Unaudited)

	September 30, 2003			December 31, 2002
ASSETS
Investment in hotels, net of accumulated depreciation of $22,262,515 and $8,646,478 respectively	$	631,557,740		$	388,033,707
Cash and cash equivalents		40,797,796			125,521,805
Restricted cash:
Furniture, fixtures & equipment escrows		11,559,092			18,640,007
Debt service & other escrows		8,521,382			7,350,048
Distributions held for prior limited partners		9,052,919			10,587,197
Due from third party manager, net		—			2,873,729
Deferred financing costs, net		1,098,576			1,192,122
Other assets		991,927			3,555,485

Total Assets	$	703,579,432		$	557,754,100

LIABILITIES
Notes payable-secured	$	364,828,397		$	269,296,791
Note payable-related party		3,559,068			156,124
Accounts payable and accrued expenses		7,414,980			5,438,794
Accounts payable-prior limited partners		9,052,919			10,587,197
Due to third party manger, net		163,190			—
Interest payable		2,182,704			1,319,411
Distributions payable		—			7,259,218
Deferred incentive management fees payable		714,865			714,865

Total Liabilities		387,916,122			294,772,400
SHAREHOLDERS’ EQUITY
Preferred stock, no par value, authorized 15,000,000 shares; none issued or outstanding		—			—
Series B preferred convertible stock, no par value, authorized 240,000 shares; issued and outstanding — and 240,000 shares, respectively		—			24,000
Series C preferred convertible stock, no par value, authorized 1,272,000 issued and outstanding 1,272,000 and — shares respectively		10,176,000			—
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding 41,132,131 shares, and 30,157,931 shares, respectively		347,264,985			268,131,348
Distributions greater than net income		(41,777,675	)		(5,173,648	)

Total Shareholders’ Equity		315,663,310			262,981,700

Total Liabilities and Shareholders’ Equity	$	703,579,432		$	557,754,100

See notes to consolidated financial statements.

Apple Hospitality Two, Inc

Consolidated Statements of Operations (Unaudited)

	Three months ended September 30, 2003			Three months ended September 30, 2002			Nine months ended September 30, 2003			Nine months ended September 30, 2002
REVENUES:
Suite revenue	$	51,258,073		$	24,017,280		$	142,486,072		$	57,399,212
Other revenue		1,484,427			465,272			3,900,119			1,970,888

Total revenues		52,742,500			24,482,552			146,386,191			59,370,100

EXPENSES:
Operating expenses		13,300,495			5,348,911			36,364,511			12,947,880
Hotel administrative expense		4,695,807			2,425,863			13,591,543			6,204,457
Sales and marketing		3,700,475			1,284,178			10,436,768			3,100,974
Utilities		2,791,142			1,092,630			7,362,967			2,487,517
Repair and maintenance		3,010,676			610,090			8,257,475			1,534,350
Franchise fees		1,821,667			937,386			5,507,065			2,272,663
Management fees		1,796,650			422,675			4,154,877			1,938,554
Chain services		824,063			346,774			2,408,171			885,108
Taxes, insurance and other		3,412,242			1,555,222			9,377,419			3,767,255
Merger expense-related party		—			—			15,914,000			—
General and administrative		589,222			615,076			1,469,223			1,298,401
Depreciation of real estate owned		5,469,424			2,264,311			13,616,037			4,903,596

Total expenses		41,411,863			16,903,116			128,460,056			41,340,755

Operating income		11,330,637			7,579,436			17,926,135			18,029,345
Interest income		121,553			782,667			772,697			801,659
Imputed interest expense		—			—			—			(450,000	)
Interest expense		(6,375,815	)		(3,795,060	)		(18,918,137	)		(8,297,661	)

Net income (loss)		5,076,375			4,567,043			(219,305	)		10,083,343

Basic and diluted income (loss) per common share	$	0.12		$	0.18		$	(0.01	)	$	0.52

Weighted average shares outstanding-basic and diluted		42,404,130			25,699,015			41,255,517			19,384,346
Distributions declared per common share	$	0.25		$	0.25		$	0.997		$	0.75

See notes to consolidated financial statements.

APPLE HOSPITALTIY TWO, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)

	Series B Preferred Convertible Stock					Series C Preferred Convertible Stock			Common Stock					Distributions Greater Than Net Income			Total Shareholders’ Equity
	Number of Shares		Amount			Number of Shares	Amount		Number of Shares		Amount			Distributions Greater Than Net Income			Total Shareholders’ Equity
Balance at December 31, 2002	240,000		$	24,000		—		—	30,157,931		$	268,131,348		$	(5,173,648	)	$	262,981,700

Repurchase of common shares	—			—		—		—	(387,854	)		(3,973,123	)		—			(3,973,123	)
Common shares issued through reinvestment of distributions	—			—		—		—	—			—			—			—
Common shares issued through merger with Apple Suites, Inc.	—			—		—		—	11,362,054			83,106,760			—			83,106,760

B shares issued through merger with Apple Suites, Inc.	(240,000	)		(24,000	)				—			—			—			(24,000	)

C shares issued through merger with Apple Suites, Inc.	—			—		1,272,000	$	10,176,000	—			—			—			10,176,000

Net income	—			—		—		—	—			—			(219,305	)		(219,305	)

Cash distributions declared and paid to shareholders	—			—		—		—	—			—			(36,384,722	)		(36,384,722	)

Balance at September 30, 2003	—		$	—		1,272,000	$	10,176,000	41,132,131		$	347,264,985		$	(41,777,675	)	$	315,663,310

See notes to consolidated financial statements.

Apple Hospitality Two, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	Nine months ended September 30, 2003			Nine months ended September 30, 2002
Cash flows from operating activities:
Net (loss) income	$	(219,305	)	$	10,083,343
Adjustments to reconcile to cash (used) provided by operating activities:
Depreciation of real estate owned		13,616,037			4,906,596
Imputed interest		—			450,000
Non-cash portion of merger related expense		13,576,000			—
Net accretion of fair value adjustment to mortgage notes payable		(2,386,266	)		—
Amortization of deferred financing costs		93,546			—
Changes in operating assets and liabilities, net of amounts acquired/assumed:
Due from third party manager		3,902,375			1,087,552
Deferred incentive management fee		—			274,875
Debt service and other escrows		(312,059	)		—
Other assets		2,851,017			(1,252,491	)
Accounts payable-affiliates		(54,229	)		(110,997	)
Accrued interest		863,293			772,362
Accrued expenses		570,610			(159,766	)

Net cash provided by operating activities		32,501,019			16,048,474
Cash flows from investing activities:
Net cash paid for hotel acquisitions		(12,550,000	)		(14,143,564	)
Net cash paid for acquisition of Apple Suites, Inc.		(17,967,987	)		—
Capital improvements		(37,497,219	)		(3,745,912	)
Deposit for potential acquisition		—			(3,000,000	)
Decrease (increase) in cash restricted for capital improvements		7,352,083			—

Net cash used in investing activities		(60,663,123	)		(20,889,476	)
Cash flows from financing activities:
Proceeds from mortgage notes payable		—			(83,000,000	)
Capital lease obligations principal amounts		(579,031	)		—
Repurchase of commons shares		(3,973,123	)		—
Repayment of unsecured line of credit		(3,000,000	)		—
Deposit for mortgage note refinancing		—			(1,390,624	)
Repayment of secured notes payable		(5,365,812	)		(92,784,906	)
Net proceeds from issuance of common stock		—			120,520,749
Cash distributions paid to shareholders		(43,643,939	)		(11,416,545	)

Net cash provided by financing activities		(56,561,905	)		97,928,674
Increase (decrease) in cash and cash equivalents		(84,724,009	)		93,087,672
Cash and cash equivalents, beginning of period		125,521,805			15,468,841

Cash and cash equivalents, end of period	$	40,797,796		$	108,556,513

Supplemental Information:
Interest paid, net of amounts capitalized	$	14,870,624		$	—
Non-cash transactions:
Other assets assumed in acquisitions	$	1,152,915			—
Escrows assumed in acquisitions	$	1,130,443			—
Assumption of mortgage notes payable	$	103,283,684		$	228,082,735
Deposit for acquisitions used for acquisition of hotels		—		$	35,000,000
Issuance of common stock	$	83,106,760			—
Conversion of Series B shares	$	24,000			—
Issuance of Series C shares	$	10,176,000			—
Liabilities assumed in acquisition	$	5,041,778		$	2,659,211
Payments of restricted cash to prior limited partners	$	1,534,278			—

Notes to Consolidated Financial Statements

Note 1

General Information and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financials should be read in conjunction with the Company’s audited consolidated financial statements.

Organization

Apple Hospitality Two, Inc. (the “Company”), a Virginia corporation, was formed on January 17, 2001, with the first investor closing on May 1, 2001.The Company merged with Apple Suites, Inc. on January 31, 2003 and balances are reflected accordingly. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.

The REIT Modernization Act, effective January 1, 2001, permits real estate investment trusts (“REIT”) to establish taxable businesses to conduct certain previously disallowed business activities. The Company has formed a wholly-owned taxable REIT subsidiary, Apple Hospitality Management, Inc., and has leased all of its hotels to Apple Hospitality Management, Inc. or its subsidiaries (collectively, the “Lessee”).

Stock Incentive Plans

The Company elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related Interpretations in accounting for its employee stock options. As discussed in Note 4, the alternative fair value accounting provided for under FASB Statement No. 123, “Accounting for Stock-Based Compensation,” (“FASB 123”) requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant and other criteria are met, no compensation expense is recognized.

Compensation expense related to issuance of 202,500 Series B convertible preferred shares to Mr. Knight was recognized at such time when the number of shares to be issued for conversion of the Series B shares could be reasonably estimated and the Merger, as defined in Note 2 below, which triggered the conversion of the Series B shares to shares was probable. The expense was measured as the difference between the fair value of the shares for which the Series B convertible preferred shares were converted and the amounts paid for the Series B convertible preferred shares.

The issuance of the Series B convertible preferred shares to other individuals not employed by the company is accounted for under FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Expense related to the issuance of the Series B convertible preferred shares was determined based on fair value of the Series B convertible preferred shares at grant date in excess of amounts paid by these individuals. Since the number of common shares to which the Series B convertible preferred shares could be converted was not known at grant date and ultimate convertibility to common shares is only allowed through a defined triggering event, the fair value of the Series B convertible preferred shares were remeasured and not recorded as expense until the Merger with Apple Suites triggered the conversion of the Series B convertible preferred shares.

Stock compensation expense included in the Statement of Operations for the nine months ended September 30, 2003 was $10,176,000, attributable to the conversion of all 240,000 B shares to common stock. The amount of stock compensation expense that would have been recognized had the fair value method prescribed under SFAS No. 123 been applied is also $10,176,000, as the Merger, defined in Note 2 below, triggered the conversion of the Class B convertible preferred shares under a known conversion ratio.

	Three months ended September 30, 2003		Three months ended September 30, 2002		Nine months ended September 30, 2003			Nine months ended September 30, 2002
Net income, as reported	$	5,076,375	$	4,567,043	$	(219,305	)	$	10,083,343
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		—		—		10,176,000			—
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect		—		—		(10,188,239	)		—
Pro forma net income as if the fair value had been applied to all option grants	$	5,076,375	$	4,567,043	$	(231,544	)	$	10,083,343
Earnings per share: Basic-as reported Diluted-pro forma	$	0.12	$	0.18	$	(0.01	)	$	0.52
Earnings per share: Diluted-as reported Diluted-pro forma	$	0.12	$	0.18	$	(0.01	)	$	0.52

Comprehensive Income

The Company recorded no comprehensive income for the three or nine months ended September 30, 2003.

Earnings per Common Share

Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the year. Diluted earnings per share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. During 2002 Series B preferred convertible shares were not included in basic and diluted earnings per common share calculations, as their conversion to common stock was not considered probable during those periods. Series C preferred convertible stock is included in basic and diluted earnings per common share as they are considered common stock equivalents.

Income Taxes

The Company is operated as, and will annually elect to be taxed as a REIT under Sections 856 to 860 of the Internal Revenue Code. Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from income reported for financial reporting purposes primarily due to the differences for federal income tax purposes in the estimated useful lives used to compute depreciation.

The Lessee, as a taxable REIT subsidiary of the Company, is subject to federal and state income taxes. The Lessee has a taxable loss during the three and nine months ended September 30, 2003 and 2002. No benefit has been recorded since realization of such benefit is not probable.

Use of Estimates

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

Reclassifications

Certain reclassifications have been made to amounts in prior years’ financial statements to conform to current year presentation.

During the third quarter of 2002, the Company recorded an extraordinary item of $273,789 related to the early extinguishment of debt. We have reclassified this amount from an extraordinary item to interest expense which is included in income from continuing operations, in accordance with FASB Statement #145, which became effective January 1, 2003 with retroactive application.

Note 2

Investment in Hotels

At September 30, 2003, the Company owned sixty-six hotels. Ten of the hotels (the “Crestline Portfolio” or “Res III Portfolio”) were acquired by the Company in September 2001 from Crestline Capital Corporation and certain of its subsidiaries. Fifteen of the Company’s hotels (the “Res I Portfolio”) were acquired effective February 22, 2002, and twenty-three (the “Res II Portfolio”) were acquired effective August 28, 2002. An additional hotel in Redmond, Washington was acquired effective January 3, 2003. Seventeen hotels were acquired in connection with the acquisition of Apple Suites, Inc on January 31, 2003.

Investment in hotels consisted of the following:

Land	$	138,677,416
Building and improvements		466,640,457
Furniture fixtures and equipment		48,502,382

		653,820,255

Less: accumulated depreciation		(22,262,515	)

Investment in hotels, net	$	631,557,740

Acquisition of Apple Suites, Inc.

The Company entered into a merger agreement with Apple Suites, Inc. (“Apple Suites”) on October 23, 2002. Effective January 31, 2003, Apple Suites merged with and into Hospitality Acquisition Company, the Company’s wholly-owned subsidiary. Apple Suites owned, either directly or through its subsidiaries, a total of 17 upper-end extended-stay hotels throughout the United States, which comprised a total of 1,922 suites, and all of which are operated as part of the Homewood Suites^® by Hilton^® franchise system. Mr. Glade M. Knight, Chairman and Chief Executive Officer of the Company was also the Chairman and Chief Executive Officer of Apple Suites, Inc.

Pursuant to the merger, each Apple Suites common share, issued and outstanding immediately prior to the effective time of the merger, was converted into the right to receive either: (i) one Unit of the Company, consisting of one common share of the Company and one Series A preferred share of the Company; or (ii) if the holder of an Apple Suites common share elected, $10.00 in cash per share, subject to a limit on the total amount of cash to be paid in the merger. As a result of the merger, holders of Apple Suites common shares received a total of 10,883,544 Units of the Company and approximately $17.8 million in cash. In addition, 480,000 Units related to the Series B shares were converted, as consideration for the merger. The Company funded the cash portion of the Merger consideration with available cash, and the Company assumed Apple Suites’ liability and paid certain merger costs.

In connection with acquisition of Apple Suites Inc. (Apple Suites), Company shareholders were paid a special distribution of $0.497 per share, totaling approximately $15 million.

In connection with the acquisition of Apple Suites, the Company paid total consideration of $185 million, including assumption of liabilities and transaction costs. Assets and liabilities of Apple Suites were recorded at fair value and no goodwill was recorded in connection with the transaction. The fair value of assets acquired and liabilities assumed were as follows:

Investment in hotels	$	182,699,187
Cash		2,626,696
Restricted cash		55,607
Other assets		4,961,959

Total assets		190,343,449

Accounts payable and accrued expenses		6,276,203
Notes payable		77,624,712

Total liabilities		83,900,915

Net assets acquired	$	106,442,534

Also, in connection with this transaction, the Company terminated its advisory contract with Apple Suites Advisors, Inc. (“ASA”) and became self advised with all employees of ASA becoming employees of the Company. To implement the termination of the advisory agreement, the Company purchased ASA. The Company acquired all of Mr. Glade M. Knight’s stock in ASA instead of paying a $6.48 million termination fee due ASA under the advisory agreement. Mr. Knight received a cash payment of $2 million and a non-interest-bearing promissory note, due four years after the merger, in a principal amount of $4.48 million. The Company recognized an expense of $5.5 million related to this transaction in the first quarter of 2003. Also in connection with the Company’s merger and the termination of the advisory agreement with ASA, the Company’s outstanding Series B convertible preferred shares were exchanged for 1,272,000 newly created Series C convertible preferred shares which have the same voting and dividend rights as if they had already been converted into 1,272,000 common shares (see Note 4). In connection with this transaction, the Company recognized expense of $10,152,000 in the consolidated statement of operations through September 30, 2003.

Other Acquisition

Effective January 3, 2003, the Company acquired a Residence Inn^® by Marriott^® hotel in Redmond, Washington, which contains 180 suites and was in operation when acquired. The hotel offers one and two room suites with the amenities generally offered by upscale extended-stay hotels. It is located in a developed area near Seattle, Washington.

The gross purchase price for the hotel was $32,550,000. This amount was satisfied at closing by cash payments and other adjustments in the approximate amount of $12,550,000 and the assumption of existing secured debt with an outstanding principal balance of $20,004,280.

AHT Redmond, Inc., which was formed to acquire the hotel, has assumed existing debt secured by the hotel. The lender is Wells Fargo Bank Minnesota, National Association, as Trustee for the registered holders of GMAC Commercial Mortgage Securities, Inc., Mortgage Pass Through Certificates, Series 2002-C3, as serviced by GMAC Commercial Mortgage Corporation.

During 2003, the Company began a major renovation program at its hotel properties. During this program, suites are taken out of service while renovations are completed. During the time period units are out of service, the Company capitalizes interest, taxes and insurance costs related to these units totaling approximately $1.1 million during 2003.

Note 3

Notes Payable

Total Notes Payable

The aggregate amounts of principal payable under all of the Company’s promissory notes, for the five years subsequent to September 30, 2003 are as follows:

	Total
2003	$	1,814,165
2004		6,916,154
2005		7,612,510
2006		127,654,864
2007		5,669,699
Thereafter		205,990,775

	$	355,658,167
Fair Value Adjustment of Assumed Debt		9,170,230

	$	364,828,397

Note 4

Shareholders’ Equity

The issuance of the Series B convertible preferred shares to other individuals not employed by the Company is accounted for under FASB Statement No. 123, “Accounting for Stock-Based Compensation.”

In January 2003, the shareholders of the Company and Apple Suites approved the acquisition of Apple Suites by the Company. In connection with this transaction, all of the Company’s 240,000 Series B convertible preferred shares converted to 1,272,000 Series C convertible preferred shares of the Company. Expense related to the issuance of the Series B convertible preferred shares was determined based on fair value of the Series B convertible preferred shares at grant date in excess of amounts paid by these individuals. The fair value was determined to be $8 at the date of the merger and was accordingly expensed under merger expense in the first quarter.

The newly created Series C convertible preferred shares were issued in exchange for Series B convertible preferred shares. Mr. Knight would have otherwise been entitled to receive 1,073,000 Units upon conversion of his Series B convertible preferred shares in connection with the termination of the Company’s advisory agreement with ASA and the Company’s property acquisition/distribution agreement with Apple Suites Realty Group, Inc. (“ASRG”). The new Series C convertible preferred shares will have a liquidation preference comparable to the Series B convertible preferred shares, in that holders of Series C convertible preferred shares will receive no payments in liquidation for their Series C convertible preferred

shares until holders of Units are paid in full for their Series A preferred shares. The Series C convertible preferred shares will also have the same voting rights and rights to receive dividend distributions as if they had already been converted to common shares.

Note 5

Management Agreements

Residence Inn Hotels

The Company’s forty-nine Residence Inn hotels are subject to management agreements under which Residence Inn by Marriott, Inc. (the “Manager”) manages the hotels, generally for an initial term of 15 to 20 years with renewal terms at the option of the Manager of up to an additional 50 years. The agreements generally provide for payment of base management fees, which are calculated annually and are generally 2% of sales, and incentive management fees, which are generally equal to 15% to 20% of operating profit (as defined in the management agreements) over a priority return (as defined in the management agreements) to us. Total incentive management fees may not exceed 20% of cumulative operating profit, or 20% of current year operating profit. Incentive management fees are currently payable only if and to the extent there is sufficient cash flow from the hotels after consideration of qualifying debt service and after consideration to a priority return on investment, including property improvements. Amounts not currently payable are deferred and are payable in future years only if and to the extent there is sufficient cash flow from future operations or upon sale or refinancing of the hotels after consideration to a priority return to us (as defined in the management agreements), which is generally 12%. In the event of early termination of the management agreements, the Manager will receive additional fees based on the unexpired term and expected future base and incentive management fees. The Company has the option to terminate the management agreements if specified performance thresholds are not satisfied.

Incentive fees are payable on a portfolio by portfolio basis. The Company has three portfolios of Residence Inn hotels with separate incentive management agreements which are subject to this calculation. The Company records incentive management fee exposure when it is considered probable that these fees will be paid. The Company has recorded the full amount of deferred incentive management fees on the Res III portfolio. The Company has not recorded any deferred incentive management fees for the Res I and Res II portfolios.

The Company has acquired its Residence Inn hotels in three separate transactions, (“Res I” – purchased February 2002, “Res II” – purchased August 28, 2002, and “Res III” – purchased September 2001). In the Res I and Res II purchases, the Company assumed the amended and restated management agreements in effect with the Manager by the prior owner and the Company assumed deferred incentive management fees totaling $6.7 million and $7.0 million, respectively, at the date of the respective acquisitions. Additionally, the Company assumed the cost basis of $187 and $243 million for Res I and Res II, respectively, and the holding period of the prior owner for purposes of calculating the priority returns upon sale of the properties. The Company paid approximately $132 and $161 million for Res I and Res II, respectively.

The following table summarizes deferred incentive management fees (“DIMF”) under the Residence Inn management agreements (dollars in millions).

	DIMF Assumed		IMF Accumulated Post- Acquisition		Total IMF		2003 IMF Paid		Total DIMF		Amount accrued in Consolidated Balance Sheet
Res I	$	6.7	$	4.4	$	11.1	$	0.0	$	11.1	$	0.0
Res II		7.0		2.0		9.0		0.0		9.0		0.0
Res III		0.0		0.7		0.7		0.0		0.7		0.7
Redmond		0.0		0.3		0.3		0.3		0.0		0.0

Total	$	13.7	$	7.4	$	21.1	$	0.3	$	20.8	$	0.7

Pursuant to the terms of the management agreements, the Manager also furnishes the hotels with certain chain services which are generally provided on a central or regional basis to all hotels in the Marriott International hotel system. Chain services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased by Marriott International or its subsidiaries on a fair and equitable basis. In addition, the Company’s hotels participate in the Marriott Rewards^® program. The cost of this program is charged to all hotels in the Marriott International hotel system.

The Lessees are obligated to provide the Manager with sufficient funds, generally 5% of revenue, to cover the cost of replacements and renewals to the hotels’ property and improvements. Under certain circumstances, the Lessees will be required to establish escrow accounts for such purposes under terms outlined in the agreements. To the extent the Lessees are not required to fund such amounts into escrow accounts, the Lessees remain liable to make such fundings in the future. The Lessees are obligated under these management agreements to fund FF&E requirements in excess of amounts placed in restricted cash accounts, which as of September 30, 2003 and December 31, 2002 had aggregate balances of $11.6 million and $18.6 million.

Homewood Suites Hotels

The Company’s seventeen Homewood Suites hotels are managed by Promus Hotels, Inc. (“Promus”), a wholly owned subsidiary of Hilton Hotels Corporation (“Hilton”) under the terms of a management agreement, as part of the Homewood Suites^® by Hilton franchise.

The Company is obligated to pay the costs of real estate and personal property taxes, property insurance and maintenance of the hotels. The Company is committed under management agreements to fund up to 5% of gross revenues for capital expenditures to include periodic replacement or refurbishment of furniture, fixtures, and equipment. At September 30, 2003 and 2002, Promus held $1,125,601 and $40,564, respectively, for these capital improvement reserves. In addition, in accordance with the franchise agreements, at September 30, 2003 and 2002, $65,871 and $109,368, respectively, were held for the Property Improvement Plan with a financial institution and treated as restricted cash.

Promus manages day-to-day operations of the Homewood Suites hotels. For the hotels acquired prior to 2001, Promus charges fees equal to 4% of total revenue for this function. For two of the hotels acquired in 2001, Promus charges a base management fee of 2% of total revenue and an incentive management fee calculated on the basis of operating profit of the hotels. No incentive management fees were earned in 2003 or 2002. For the other two hotels acquired in 2001, Promus charges 2% of total revenues for the first twelve months, 3% of total revenues for the second twelve months and 4% of total revenues thereafter. Promus also charges a fee of 4% of suite revenue for franchise licenses to operate as a Homewood Suites^® by Hilton^® hotel and to participate in its reservation system. Total expenses for these services were $2,506,257 and $2,760,165 for the nine months ending September 30, 2003 and 2002, respectively. These expenses are included in the hotel operating expenses mentioned above.

Note 6

Related Parties

Prior to January 31, 2003, the Company was externally-advised and had contracted with ASA to advise and provide day to day management services to the Company. In accordance with the contract, the Company paid ASA a fee equal to .1% to .25% of total equity contributions received by the Company in addition to certain reimbursable expenses. For the six months ended September 30, 2003 and 2002, ASA earned $62,500 and $390,332 under this agreement

Concurrent with the Company’s merger with Apple Suites on January 31, 2003, the Company terminated its advisory contract with ASA and became self-advised. To implement the termination of the advisory agreement, the Company purchased ASA. The Company acquired all of Mr. Glade M. Knight’s stock in ASA instead of paying a $6.48 million termination fee due ASA under the advisory agreement.

The Company is under an advisory agreement with Apple Hospitality Five, Inc. whereas the Company receives advisory fee revenue equal to .1% to .25% of total equity contributions received by Apple Hospitality Five, Inc., plus certain reimbursable expenses. As of September 30, 2003, the Company was reimbursed $386,200 in due diligence costs. The Company received advisory fee revenue in the amount of $170,205 under this agreement through September 30, 2003.

Mr. Knight received a cash payment of $2 million and a non-interest-bearing promissory note, due four years after the merger, in a principal amount of $4.48 million. The Company recognized an expense of approximately $5.5 million related to this transaction through September 30, 2003. Also in connection with the Company’s merger and the termination of the advisory agreement with ASA, the Company’s outstanding Series B convertible preferred shares were exchanged for 1,272,000 newly created Series C convertible preferred shares which have the same voting and dividend rights as if they had already been converted into 1,272,000 common shares (see note 2).

As of December 31, 2002, we had contracted with ASRG to provide brokerage services for the acquisition and disposition of our real estate assets. In accordance with the contract, ASRG is paid a fee of 2% of the gross purchase price of any acquisitions or gross sale price of any dispositions of real estate investments, subject to certain conditions. For the nine months ended September 30, 2003 and 2002, ASRG earned $644,000 and $8,246,784, respectively, under this agreement. ASRG is owned by Mr. Glade M. Knight, our Chairman. Concurrent with our merger with Apple Suites on January 31, 2003, our agreement with ASRG was terminated.

In addition, each Apple Suites Class B convertible share owned by Mr. Knight and two other individuals, issued and outstanding immediately prior to the effective time of the merger, was converted into a unit. As a result, holders of Apple Suites Class B received 480,000 common shares of Apple Suites. The 480,000 Apple Suites common shares converted into 480,000 Units of the Company. Apple Suites recognized expense of $3.8 million during the first quarter of 2003, before the consummation of the merger, related to this conversion.

Note 7

Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share in accordance with FAS 128:

	Three months ended September 30, 2003		Nine months ended September 30, 2003			Three months ended September 30, 2002		Nine months ended September 30, 2002
Numerator:
Net income (loss) and numerator for basic and diluted earnings	$	5,076,375	$	(219,305	)	$	4,567,043	$	10,083,343
Denominator:
Denominator for basic earnings per share-weighted-average shares		42,404,130		41,255,517			25,699,015		19,384,346
Effect of dilutive securities:		—		—			—		2,316
Stock options:
Denominator for basic and diluted earnings per share-adjusted weighted-average shares and assumed conversions		42,404,130		41,255,517			25,699,015		19,386,662
Basic and diluted earnings per common share	$	.12	$	(0.01	)	$	.18	$	.52

Note 8

Pro Forma Information

The following pro forma information for the nine months ended September 30, 2003 and 2002 is presented as if the acquisition of Apple Suites, Inc. as well as the Res I and Res II portfolios and Redmond acquisition, occurred on January 1, 2002. The pro forma information does not purport to represent what the Company’s results of operations would actually have been if such transactions, in fact, had occurred on January 1, 2002, nor does it purport to represent the results of operations for future periods.

	Three months ended September 30, 2003		Three months ended September 30, 2002		Nine months ended September 30, 2003		Nine months ended September 30, 2002
Hotel revenues	$	51,258,073	$	37,904,538	$	146,165,519	$	149,409,445
Net income	$	5,076,375	$	6,523,209	$	15,676,295	$	21,671,014
Net income per share basic and diluted	$	0.12	$	0.17	$	.35	$	0.62

The pro forma information reflects adjustments for actual revenues and expenses of the 38 hotels acquired in 2002 for the respective period in 2002 prior to acquisition by the Company. Net income has been adjusted as follows: (1) expense related to the issuance of Series C preferred convertible stock and expense related to the termination of the advisory contract have been eliminated since they are directly attributable to the Apple Suites acquisition and are not expected to have on-going impact; (2) depreciation has been adjusted based on the Company’s basis in the hotels; (3) advisory expenses have been adjusted based on the Company’s contractual arrangements; (4) interest expense has been adjusted to reflect the acquisition as of January 1, 2002; (5) common stock raised during 2002 to purchase these hotels has been adjusted to reflect issuances as of January 1, 2002, including issuance of Series C preferred convertible stock.

Note 9

Industry Segments

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

Note 10

Subsequent Events

In October 2003, the Company declared and distributed to its shareholders dividends in the amount of $10.7 million ($0.25 per share).

The Company instituted a Unit Redemption Program to provide limited interim liquidity to its shareholders. Redemption of Units, when requested, is made quarterly on a first-come, first-served basis. Shareholders may request redemption of Units for a purchase price equal to the lesser of: (1) the purchase price per unit that the shareholder actually paid for the unit (or the price that the shareholder actually paid for the Apple Suites, Inc. common shares, if the Units were acquired through the exchange of Apple Suites, Inc. common shares in the Company’s merger with Apple Suites, Inc.); or (2) $10.00 per unit. The Company reserves the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. During the month of October 2003, the Company redeemed 487,493 Units in the amount of $4,844,185.

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

General

We are a real estate investment trust (“REIT”) that owns upper-end, extended-stay hotels. We were formed on January 17, 2001, with the first investor closing commencing on May 1, 2001.

Hotels Owned

We own 66 hotels, with a total of 7,869 suites. Of our 66 hotels, we own 49 Residence Inn^® by Marriott^® properties consisting of 5,947 suites, and 17 Homewood Suites^® by Hilton^® consisting of 1,922 suites.

The following table summarizes the locations of and number of suites at these ten hotels (collectively, the “Crestline Portfolio”), all of which operate as part of the Residence Inn^® by Marriott^® franchise system:

Location of hotels		# of Suites
Montgomery, Alabama		94
Bakersfield, California		114
Concord, California		126
San Ramon, California		106
Meriden, Connecticut		106
Atlanta/Hapeville, Georgia		126
Boston, Massachusetts		130
Cincinnati, Ohio		118
Dallas, Texas		120
Houston, Texas		110

Total		1,150

Fifteen of our hotels were acquired effective February 22, 2002, in a transaction described below under “Recent Acquisition-Res I Portfolio.” The following table summarizes the location of and number of suites at these fifteen hotels (the “Res I Portfolio”), all of which operate as part of the Residence Inn^® by Marriott^® franchise system:

Location of hotels		# of Suites
Costa Mesa, California		144
La Jolla, California		288
Long Beach, California		216
Boulder, Colorado		128
Atlanta-Buckhead, Georgia		136
Atlanta-Cumberland, Georgia		130
Atlanta-Dunwoody, Georgia		144
Chicago, Illinois		144
Southfield, Michigan		144
Chesterfield, Missouri		104
St. Louis-Galleria, Missouri		152
Cincinnati, Ohio		144
Columbus, Ohio		96
Dayton-North, Ohio		64
Dayton-South, Ohio		96

Total		2,130

Twenty-three of our hotels were acquired in August 2002, in a transaction described below. The following table summarizes the location of and number of suites at these twenty-three hotels (the “Res II Portfolio”), all of which operate as part of the Residence Inn^® by Marriott^® franchise system:

Location of hotels		# of Suites
Akron, Ohio		112
Arcadia, California		120
Birmingham, Alabama		128
Boca Raton, Florida		120
Boston, Massachusetts		96
Charlotte, North Carolina		91
Chicago-Deerfield, Illinois		128
Placentia, California		112
Columbia, South Carolina		128
Greensboro, North Carolina		128
Irvine, California		112
Jackson, Mississippi		120
Jacksonville, Florida		112
Kalamazoo, Michigan		83
Las Vegas, Nevada		192
Lubbock, Texas		80
Memphis, Tennessee		105
Pensacola, Florida		64
Philadelphia, Pennsylvania		88
St. Petersburg, Florida		88
Santa Fe, New Mexico		120
Shreveport, Louisiana		72
Spartanburg, South Carolina		88

Total		2,487

Seventeen of our hotels were acquired as a result of the merger with Apple Suites, Inc. (“Apple Suites”) on January 31, 2003. The following table summarizes the location of and number of suites at these seventeen hotels, all of which are operated as part of Homewood Suites^® by Hilton^® franchise system:

Location of hotels		# of Suites
Boulder, Colorado		112
Clearwater, Florida		112
Atlanta-Buckhead, Georgia		92
Atlanta-Cumberland, Georgia		124
Atlanta-Peachtree, Georgia		92
Baltimore, Maryland		147
Detroit, Michigan		76
Jackson, Mississippi		91
St. Louis, Missouri		145
Portland, Oregon		123
Philadelphia, Pennsylvania		123
Dallas-Addison, Texas		120
Dallas-Las Colinas, Texas		136
Dallas-Plano, Texas		99
Salt Lake City, Utah		98
Herndon, Virginia		109
Richmond, Virginia		123

Total		1,922

Effective January 3, 2003, the company acquired one hotel. The following table summarizes the location of and number of suites at this hotel, which is operated as part of the Residence Inn^® by Marriott^® franchise system.

Location of hotel		# of Suites
Redmond, Washington		180

Total		180

Management Agreements

Our Residence Inn hotels are subject to management agreements under which Residence Inn^® by Marriott^®, Inc. (the “Manager”) manages our hotels, generally for an initial term of 15 to 20 years with renewal terms at the option of the Manager of up to an additional 50 years. The agreements generally provide for payment of base management fees, which are calculated annually and are generally 3% of sales, and incentive management fees, which are generally equal to 15% to 20% of operating profit (as defined in the management agreements) over a priority return (as defined in the management agreements) to us. Incentive fees are payable only to the extent of cash flow from the properties as described in the management agreement on a portfolio basis. We have three portfolios of multiple hotels and one other hotel with separate incentive management agreements which are subject to this calculation. We record incentive management fee exposure when it is considered probable that these fees will be paid. See “Expenses” under Results of Operations below for further discussion.

Promus manages day-to-day operations of our Homewood Suites hotels. For the hotels acquired prior to 2001, Promus charges fees equal to 4% of total revenue for this function. For two of the hotels acquired in 2001, Promus charges a base management fee of 2% of total revenue and an incentive management fee calculated on the basis of operating profit of the hotels. No incentive management fees were earned in 2002. For the two other hotels acquired in 2001, Promus charges 2% of total revenues for the first twelve months, 3% of total revenues for the second twelve months and 4% of total revenues thereafter. Promus also charges a fee of 4% of suite revenue for franchise licenses to operate as a Homewood Suites^® by Hilton^® and to participate in its reservation system. Total expenses for franchise fees, management fees, advertising expenses and other reimbursable services were $2,506,257 and $2,760,165 for the nine months ended September 30, 2003 and 2002, respectively. These expenses are included in the hotel operating expenses mentioned below.

Recent Acquisitions

Recent Acquisition – Res I Portfolio

During the first quarter of 2002, we acquired, through subsidiaries, Marriott Residence Inn Limited Partnership, which owns fifteen (15) extended-stay hotels. For simplicity, this entity will be referred to as the “Res I Partnership.” Although the acquisition was conducted through a merger in which our subsidiaries acquired the Res I Partnership, the purpose and result was acquisition of the hotels. Each hotel operates as part of the Residence Inn^® by Marriott^® franchise system.

The gross purchase price for the acquisition was approximately $133.4 million. The purchase price, as adjusted at closing, was paid through a combination of transactions. In November 2001, we made a deposit of $35 million, which was applied toward the purchase price at closing. In addition, we made a cash payment of approximately $7 million at closing. To satisfy the remainder of the purchase price, we received a credit at closing equal to the unpaid balance of existing loans, which were secured by the hotels. These secured loans have been subsequently refinanced and are an obligation of the Res I Partnership. Further details about the refinance are provided under “Notes Payable” section below and in Note 3 of the “Notes to Financial Statements” in Item 1. We also used the proceeds of our offerings to pay 2% of the total gross purchase price, which equals $2,667,052, as a commission to ASRG.

Recent Acquisition – Res II Portfolio

On August 28, 2002, we acquired, through subsidiaries, Marriott Residence Inn II Limited Partnership, which has direct or indirect ownership of 23 extended-stay hotels. For simplicity, this entity will be referred to as the “Res II Partnership.” Although the acquisition was conducted through a merger in which our subsidiaries acquired the Res II Partnership, the purpose and result was our acquisition of the hotels. Each hotel operates as part of the Residence Inn^® by Marriott^® franchise system.

The purchase price for the acquisition was approximately $136 million, net of cash acquired of $24 million. The purchase price, as subject to certain adjustments at closing, was satisfied through a combination of transactions. They included the assumption of the existing loan in the approximate amount of $132 million (representing outstanding principal and interest as of August 31, 2002), which is secured by the hotels owned directly by the Res II Partnership, together with a cash payment for the net balance of the purchase price (after credit for a deposit of $3 million, with interest, and certain other cash balances). The source for the cash payment was our second offering of Units, plus funds raised in our initial offering, which ended as of May 29, 2002. We also used the proceeds of our Offerings to pay 2% of the total base purchase price, which equals $3,199,732, as a commission to ASRG.

The secured loan continues to be an obligation of the Res II Partnership. Further details about the secured loans are provided under the “Notes Payable” section below and in Note 3 to “Notes to the Financial Statements” in Item 1 above.

Recent Acquisition – Redmond, Washington

Effective January 3, 2003, we acquired a Residence Inn^® by Marriott^® hotel in Redmond, Washington, which contains 180 suites and was in operation when acquired. The hotel offers one and two room suites with the amenities generally offered by upscale extended-stay hotels. It is located in a developed area near Seattle, Washington.

AHT Redmond, Inc., a subsidiary that was formed to acquire the hotel, has assumed existing debt secured by the hotel. The lender is Wells Fargo Bank Minnesota, National Association, as Trustee for the registered holders of GMAC Commercial Mortgage Securities, Inc., Mortgage Pass Through Certificates, Series 2002-C3, as serviced by GMAC Commercial Mortgage Corporation.

The principal balance of the assumed debt as of the closing date was approximately $20,000,000, which bore interest at 8.375%. The debt is evidenced by a promissory note, dated November 28, 2000, in the original principal amount of $20,500,000. The promissory note provides for a maturity date of December 1, 2025.

Acquisition of Apple Suites, Inc.

We also entered into a merger agreement with Apple Suites on October 23, 2002. Effective January 31, 2003, Apple Suites merged with and into Hospitality Acquisition Company, our wholly-owned subsidiary. Apple Suites owned, either directly or through its subsidiaries, a total of 17 upper-end extended-stay hotels throughout the United States, which comprised a total of 1,922 suites, and all of which are operated as part

of the Homewood Suites^® by Hilton^® franchise system. The merger did not change the management positions Mr. Glade M. Knight held with us prior to the merger nor did our boards of directors’ change as a result of the merger.

Pursuant to the merger, each Apple Suites common share, issued and outstanding immediately prior to the effective date of the merger, was converted into the right to receive either: (i) one unit of the Company, consisting of one common share of the Company and one Series A preferred share of the Company; or (ii) if the holder of a Apple Suites common share elected, $10.00 in cash, subject to a limit on the total amount of cash to be paid in the merger. As a result of the merger, holders of Apple Suites common shares received a total of 10,883,544 Units and approximately $17.8 million in cash, and the Company assumed Apple Suites’ liability and paid certain merger costs. We funded the cash portion of the merger consideration with available cash.

Also in connection with this transaction, the Company terminated its advisory contract with ASA and became self-advised. To implement the termination of the advisory agreement, we purchased ASA. We acquired all of Mr. Glade M. Knight’s stock in ASA instead of paying a $6.48 million termination fee due ASA under the advisory agreement. Mr. Knight received a cash payment of $2 million and a non-interest-bearing promissory note, due four years after the merger, in a principal amount of $4.48 million. The Company has recognized an expense related to this transaction of $5.5 million through September 30, 2003.

In addition, 1,272,000 newly created Series C convertible preferred shares were issued in exchange for outstanding Series B convertible preferred shares. Holders of Series B convertible preferred shares would have otherwise been entitled to receive 1,272,000 Units upon conversion of their Series B convertible preferred shares in connection with the termination of the advisory agreement with ASA and termination of the brokerage service agreement with ASRG. The new Series C convertible preferred shares have a liquidation preference comparable to the Series B convertible preferred shares, in that holders of Series C convertible preferred shares receive no payments in a liquidation for their Series C convertible preferred shares until holders of Units are paid in full for their Series A preferred shares. The Series C convertible preferred shares have the same voting rights and rights to receive dividend distributions as if they had already been converted to common shares. The company recognized expense related to this transaction of $10,152,000 through September 30, 2003.

In addition, each Apple Suites Class B convertible share owned by Mr. Knight and two other individuals, issued and outstanding immediately prior to the effective time of the merger, was converted into a unit. As a result, holders of Apple Suites Class B convertible shares received a total of 480,000 Units in the merger. Apple Suites recognized expense of approximately $3.8 million in its Income Statement through September 30, 2003 related to this conversion.

Related Party Transactions

We have significant transactions with related parties. These transactions cannot be construed to be arm’s length and the results of our operations could be different if these transactions were conducted with non-related parties.

Prior to January 31, 2003, we had contracted with ASRG to provide brokerage services for the acquisition and disposition of our real estate assets. In accordance with the contract, ASRG is paid a fee of 2% of the gross purchase price of any acquisitions or gross sale price of any dispositions of real estate investments, subject to certain conditions. For the nine months ended September 30, 2003 and 2002, ASRG earned $644,000 and $8,246,784, respectively, under this agreement. ASRG is owned by Mr. Glade M. Knight, our Chairman. Concurrent with our merger with Apple Suites on January 31, 2003, our agreement with ASRG was terminated.

We had contracted with ASA to advise and provide us day-to-day management services and due diligence services on acquisitions. In accordance with the contract, we paid ASA a fee equal to 0.1% to 0.25% of total equity contributions we received in addition to certain reimbursable expenses. For the nine months ended September 30, 2003 and 2002, ASA earned $62,500 and $390,332, respectively, under this agreement. Concurrent with our merger with Apple Suites on January 31, 2003, our advisory agreement

with ASA was terminated and no further advisory fees were due under that agreement. To implement the termination of the advisory agreement, we purchased ASA. We acquired all of Mr. Glade M. Knight’s stock in ASA instead of paying a $6.48 million termination fee due ASA under the advisory agreement. Mr. Knight received a cash payment of $2 million and a non-interest-bearing promissory note, due four years after the merger, in a principal amount of $4.48 million. Also in connection with our merger and the termination of the advisory agreement with ASA, our outstanding Series B convertible preferred shares were exchanged for 1,272,000 newly created Series C convertible preferred shares which have the same voting and dividend rights as if they had already been converted into 1,272,000 common shares.

We are under an advisory agreement with Apple Hospitality Five, Inc., whereas we receive advisory fee revenue equal to .1% to .25% of total equity contributions received by Apple Hospitality Five, Inc., plus certain reimbursable expenses. As of September 30, 2003, we were reimbursed $386,200 in due diligence costs. We received advisory fee revenue in the amount of $170,205 under this agreement as of September 30, 2003.

Mr. Knight also serves as the Chairman and Chief Executive Officer of Cornerstone Realty Income Trust, Inc., an apartment REIT. Mr. Knight was Chairman and Chief Executive Officer of Apple Suites prior to our merger with it. (Refer to the “Acquisition of Apple Suites, Inc.” section above for further information about the merger with Apple Suites).

Results of Operations

Revenues

Our principal source of revenue is hotel suite revenue. For the nine months ended September 30, 2003 and 2002, we had suite revenue and other revenue of $142,486,072 and $57,399,212 and $3,900,119 and $1,970,888, respectively, and for the three months ended September 30, 2003 and 2002 we had suite revenue and other revenue of $51,258,073 and $24,017,280 and $1,484,427 and $465,272, respectively. The increase in revenues is attributable to the acquisitions of 56 hotels as of September 30, 2003. For the nine months ended September 30, 2003 and 2002, the hotels achieved average occupancy of 75.6% and 77.8%, ADR, of $91 and $94 and REVPAR, of $69 and $73, respectively. For the three months ended September 30, 2003 and 2002, the hotels achieved average occupancy of 78.6% and 80.6%, ADR of $92 and $94 and REVPAR or $72 and $76, respectively. ADR, or average daily rate, is calculated as room revenue divided by number of rooms sold, and REVPAR, or revenue per available room, is calculated as occupancy multiplied by ADR. The decrease in occupancy, ADR and REVPAR for the nine months and three months ended September 30, 2003 is related to our major renovation program at our hotel properties. During this program, suites are taken out of service while renovations are completed.

For the nine months ended September 30, 2003 and 2002, the Company had interest income of $772,697 and $801,659, respectively. For the three months ended September 30, 2003 and 2002, the Company had interest income of $121,553 and $782,667, respectively. Interest income represents earnings on excess cash, invested in short term money market instruments.

Expenses

Interest expense was $18,918,137 and $8,297,661 for the nine months ended September 30, 2003 and 2002 respectively, and $6,375,815 and $3,795,060 for the three months ended September 30, 2003 and 2002, respectively. Interest expense for the nine and three months ended September 30, 2003, represents interest on the 8.08%, $53 million promissory note assumed in conjunction with the Crestline acquisition, interest expense on the refinance of the Res I Partnership acquisition debt in the amount of $83 million at a fixed interest rate of 7.4%, interest expense on the 8.85%, $130 million promissory note assumed in conjunction with the Res II Partnership acquisition, interest expense on the $20 million Redmond acquisition at 8.375% and Apple Suites debt of $76 million at 8.4%. Interest for the nine months and three months ended September 30, 2002 only represented the Crestline mortgage and Res I mortgages, as well as an adjustment for early extinguishment of debt related to the Res I mortgage. In addition, we have amortized approximately $2.4 million as a fair value premium to our mortgage notes payable. These premiums were recorded at the respective dates of assumptions of these notes to record these notes at their fair value based on market rates of interest for comparable debt.

Depreciation expense for the nine months ended September 30, 2003 and 2002 was $13,616,037 and $4,903,596, respectively. Depreciation expense for the three months ended September 30, 2003 and 2002 was $5,469,424 and $2,264,311, respectively. Depreciation expense for 2003 represents expense of our 66 hotels and related personal property, and expense for 2002 represents expense of the 25 hotels and related personal property owned at September 30, 2002.

Taxes, insurance and other expense for the nine months ended September 30, 2003 and 2002 was $9,377,419 or 7% of our suite revenue and $3,767,255 or 7% of our suite revenue, respectively. Taxes, insurance and other expense for the three months ended September 30, 2003 and 2002 was $3,412,242, or 7% of our suite revenue and $1,555,222, or 7% of our suite revenue, respectively.

General and administrative expenses for the nine months ended September 30, 2003 and 2002 were $1,469,222 or 1% of our suite revenue and $1,298,401 or 2.3% of our suite revenue, respectively. General and administrative expenses for the three months ended September 30, 2003 and 2002 were $589,221, or 1% of our suite revenue and $615,076, or 3% of our suite revenue, respectively. This percentage decreased as our asset base grew during 2003.

Hotel operating expenses totaled $36,364,511 or 26% of our suite revenue and $12,947,880 or 23% of our suite revenue for the nine months ended September 30, 2003 and 2002, respectively. Hotel operating expenses totaled $13,300,495 or 26% of suite revenue and $5,348,911 or 22% of suite revenue for the three months ended September 30, 2003 and 2002, respectively. The reduction of REVPAR has increased hotel operating expenses on a % of revenue basis due to fixed costs associated with operating a hotel.

For the nine months ended September 30, 2003, we capitalized interest of $1,081,879 related to suites out of service for renovations. No interest was capitalized in 2002.

Residence Inn Hotels

Our Residence Inn hotels are subject to management agreements under which the Manager manages our hotels, generally for an initial term of 15 to 20 years with renewal terms at the option of the Manager of up to an additional 50 years. The agreements generally provide for payment of base management fees, which are calculated annually and are generally 3% of sales, and incentive management fees, which are generally equal to 15% to 20% of operating profit (as defined in the management agreements) over a priority return (as defined in the management agreements) to us. Total incentive management fees may not exceed 20% of cumulative operating profit, or 20% of current year operating profit. Incentive management fees are currently payable only if and to the extent there is sufficient cash flow from the hotels after consideration of qualifying debt service and after consideration to a priority return on investment, including property improvements. Amounts not currently payable are deferred and are payable in future years only if and to the extent there is sufficient cash flow from future operations or upon sale or refinancing of the hotels after consideration to a priority return to us (as defined in the management agreements), which is generally 12%. In the event of early termination of the management agreements, the Manager will receive additional fees based on the unexpired term and expected future base and incentive management fees. We have the option to terminate the management agreements if specified performance thresholds are not satisfied.

Incentive fees are payable on a portfolio by portfolio basis for Residence Inn properties. We have three portfolios of multiple hotels and one other hotel with separate management agreements which are subject to this calculation. We record incentive management fee exposure when it is considered probable that these fees will be paid. We have recorded the full amount of deferred incentive management fees on the Res III portfolio and Redmond hotel. We have not recorded any deferred incentive management fees for the Res I and Res II portfolios.

We acquired our Residence Inn hotels in separate transactions, (“Res I” – purchased February 2002, “Res II” – purchased August 28, 2002, and “Res III” – purchased September 2001). In the Res I and Res II purchases, we assumed the amended and restated management agreements in effect with the Manager by the prior owner and we assumed deferred incentive management fees totaling $6.7 million and $7.0

million, respectively, at the date of the respective acquisitions. Additionally, we assumed the cost basis of $187 and $243 million for Res I and Res II, respectively, and the holding period of the prior owner for purposes of calculating the priority returns upon sale of the properties. We paid approximately $132 and $161 million for Res I and Res II, respectively.

The following table summarizes deferred incentive management fees (“DIMF”) under these management agreements (dollars in millions).

	DIMF Assumed		Accumulated Post- Acquisition		Total IMF		2003 IMF Paid		Total DIMF		IMF Amount accrued in Consolidated Balance Sheet
Res I	$	6.7	$	4.4	$	11.1	$	0.0	$	11.1	$	0.0
Res II		7.0		2.0		9.0		0.0		9.0		0.0
Res III		0.0		0.7		0.7		0.0		0.7		0.7
Redmond		0.0		0.3		0.3		0.3		0.0		0.0

Total	$	13.7	$	7.4	$	21.1	$	0.3	$	20.8	$	0.7

No amounts of DIMF were recorded upon the acquisition of Res I and Res II as the fair value of these amounts were not readily determinable and payment was not considered probable.

Pursuant to the terms of the management agreements, the Manager also furnishes the hotels with certain chain services which are generally provided on a central or regional basis to all hotels in the Marriott International hotel system. Chain services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased by Marriott International or its subsidiaries on a fair and equitable basis. In addition, our hotels participate in the Marriott Rewards program. The cost of this program is charged to all hotels in the Marriott International hotel system.

The lessees are obligated to provide the Manager with sufficient funds, generally 5% of revenue, to cover the cost of replacements and renewals to the hotels’ property and improvements. Under certain circumstances, the lessees will be required to establish escrow accounts for such purposes under terms outlined in the agreements. To the extent the lessees are not required to fund such amounts into escrow accounts, the lessees remain liable to make such fundings in the future. The lessees are obligated under these management agreements to fund FF&E requirements in excess of amounts placed in restricted cash accounts, which was $11,559,092 and $18,640,007, respectively, at September 30, 2003 and December 31, 2002.

In addition to management fees, we also pay each hotels’ pro rata share of the Manager’s actual costs and expenses incurred in providing certain chain services on a central or regional basis to all the hotels operated by the Manager or other Marriott affiliate. Chain services include central training and development; computerized payroll and accounting services; and such additional central or regional services performed on a centralized basis. For the nine months ended September 30, 2003 and 2002, respectively, we had incurred $2,408,171 and $885,108 in chain services. For the three months ended September 30, 2003 and 2002, we incurred $824,063 and $346,774, respectively, in chain services.

The management agreements also provide for payments of costs associated with certain system-wide advertising, promotional and public relations materials and programs and the operational costs of reservation systems. Each hotel pays two and one-half percent (2.5%) of suite revenues to this marketing fund. For the nine months ended September 30, 2003 and 2002, we incurred $3,553,428 and $1,434,980, respectively, in marketing fees. For the three months ended September 30, 2003 and 2002, we incurred $1,281,452 and $600,432, respectively, in marketing fees.

Homewood Suites Hotels

Our 17 Homewood Suites hotels are managed by Promus Hotels, Inc. (“Promus”), a wholly owned subsidiary of Hilton Hotels Corporation (“Hilton”) under the terms of a management agreement, as part of the Homewood Suites^® by Hilton^® franchise.

We are obligated to pay the costs of real estate and personal property taxes, property insurance and maintenance of the hotels. We are committed under management agreements to fund up to 5% of gross revenues for capital expenditures to include periodic replacement or refurbishment of furniture, fixtures, and equipment. At September 30, 2003 and 2002, Promus held $1,125,601 and $40,564, respectively, for these capital improvement reserves. In addition, in accordance with the franchise agreements, at September 30, 2003 and 2002, $65,871 and $109,368, respectively, were held for the Property Improvement Plan with a financial institution and treated as restricted cash.

Liquidity and Capital Resources

Cash and cash equivalents

Cash and cash equivalents totaled $40,797,796 at September 30, 2003 and $125,521,805 at December 31, 2002. We plan to use this cash for future acquisition costs, renovations, distributions to shareholders, debt service and to fund general corporate expenses.

Equity

From the initial closing under our first offering, and through our second offering and the period ended September 30, 2003, we sold 30,157,931 Units (3,157,895 Units at $9.50 per unit and 27,000,036 Units at $10 per unit) to our investors, including Units sold through the reinvestment of distributions. The total gross proceeds from the Units sold were $300,000,360 which netted us $268,131,348 after the payment of selling commissions and other offering costs.

We instituted a Unit Redemption Program to provide limited interim liquidity to our shareholders. Redemption of Units, when requested, is made quarterly on a first-come, first-served basis. Shareholders may request redemption of Units for a purchase price equal to the lesser of: (1) the purchase price per unit that the shareholder actually paid for the unit (or the price that the shareholder actually paid for the Apple Suites, Inc. common shares, if the Units were acquired through the exchange of Apple Suites, Inc. common shares in the Company’s merger with Apple Suites, Inc.); or (2) $10.00 per unit. We reserve the right to change the purchase price of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As of September 30, 2003, we redeemed 381,735 shares in the amount of $3,784,859.

Notes Payable

Total Notes Payable

The aggregate amounts of principal payable under all of the Company’s promissory notes, for the five years subsequent to September 30, 2003 are as follows:

	Total
2003	$	1,814,165
2004		6,916,154
2005		7,612,510
2006		127,654,864
2007		5,669,699
Thereafter		205,990,775

	$	355,658,167
Fair Value Adjustment of Assumed Debt		9,170,230

	$	364,828,397

Capital Requirements

Our distribution policy is at the discretion of the Board of Directors and depends on several factors. The distribution rate for the nine months ended September 30, 2003 and 2002 was at a rate of $0.25 per unit outstanding, respectively.

In January 2003, we declared a special distribution related to the acquisition of Apple Suites, of $0.497 per share to shareholders of record on January 20, 2003. The dividend, which approximated $15 million, was paid on February 3, 2003.

In April 2003, we declared and paid a distribution of $.25 per share to common and Series C preferred convertible share holders resulting in cash distributed of approximately $10.7 million.

In July 2003, we declared and paid a distribution of $.25 per share to common and Series C preferred convertible share holders resulting in cash distributed of approximately $10.7 million.

In October 2003, we declared and paid a distribution of $.25 per share to common and Series C preferred convertible share holders resulting in cash distributed of approximately $10.6 million.

In general, we expect capital resources to be adequate to meet our cash requirements in 2003.

We have ongoing capital commitments to fund our capital improvements. Through the lessee, we are required, under all three management agreements with the Manager, to make available to the lessee, for the repair, replacement, refurbishing of furniture, fixtures, and equipment, an amount of 5% of gross revenues provided that such amount may be used for our capital expenditures with respect to the hotels.

We expect that this amount will be adequate to fund required repair, replacement, and refurbishments and to maintain our hotels in a competitive condition. Year to date, we have capitalized approximately $37.4 million in capital improvements to the properties. Of that amount, approximately $30 million relates to our major renovation program and approximately $7.4 million relates to our normal furniture, fixtures and equipment expenditures.

It is anticipated that revenues generated from hotels and equity funds will be used to meet normal hotel operating expenses, make principal payments on the notes assumed with our acquisitions, and make payment of distributions.

Impact of Inflation

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

Seasonality

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

We believe our liquidity and capital resources are adequate to meet our cash requirements for the foreseeable future.

Recent Accounting Pronouncements

In June 2001, the FASB issued Statement for Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangibles,” effective for fiscal years beginning after December 15, 2001. Under new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. We adopted these new accounting standards beginning the first quarter of fiscal 2002. The adoption of these standards will not have a material impact on our financial statements.

In April 2002, the FASB issued Statement 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction” (“SFAS No. 145”). Statement 4, “Reporting Gains and Losses from Extinguishment of Debt” (“SFAS No. 4”), required that gains and losses from the extinguishment of debt that were included in the determination of net income be aggregated and, if material, classified as an extraordinary item. Apple Hospitality reported the early extinguishment of the Res I debt as an extraordinary item for 2002. The provisions of SFAS No. 145, related to the rescission of SFAS No. 4, required us to reclassify this item into continuing operations.

In November 2002, the FASB issued Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This statement requires that a liability for the fair value of a guarantee be recognized at the time the obligation is undertaken. The statement also requires that the liability be measured over the term of the related guarantee. This statement is effective for all guarantees entered into subsequent to December 31, 2002. For all guarantees entered into prior to December 31, 2002, there is to be no change in accounting; however, disclosure of management’s estimate of its future obligation under the guarantee is to be made. The company currently does not have any guarantee obligations to which Interpretation 45 applies.

In January 2003, the FASB issued Interpretation 46, “Consolidation of Variable Interest Entities.” This statement refines the identification process of variable interest entities and how an entity assesses its interest in a variable interest entity to decide whether to consolidate that entity. We have formed wholly-owned subsidiaries for financing purposes and such financing is reflected in the consolidated financial statements. Currently, we do not anticipate this Statement having a material impact on our consolidated financial statements.

In May 2003, the FASB issued Statement 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 impacts the accounting for certain minority interests in limited life subsidiaries and requires that those interests be reclassified to liabilities and measured at settlement value. The effective date of FAS 150 for these provisions has been deferred for an indefinite period. The application of FAS 150 effective July 1, 2003, except for the provisions mentioned above, did not have any impact on our consolidated financial statements as we do not currently have any limited life subsidiaries.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our market risk is exposure to changes in mortgage interest rates related to the assumption of the mortgage note and interest rates on short-term investments. The interest rates of the debt related to the Res III portfolio, Res II portfolio, Res I, Apple Suites and AHT Redmond portfolio are 8.08%, 8.85%, 7.4%, 8.48% and 8.375%, respectively. If market interest rates for fixed-rate debt were 100 basis points higher at September 30, 2003, the fair value of the fixed-rate debt for the Res III portfolio, Res II portfolio and Res I portfolio would have decreased from $50 million to $47.8 million, $133 million to $130.4 million, $82.3 million to $77.5 million, Apple Suites would have decreased from $80.8 million to $76.8 million and AHT Redmond portfolio would have decreased from $21.7 million to $19.9 million. If market interest rates for fixed-rate debt were 100 basis points lower at September 30, 2003, the fair value of the fixed-rate debt for the Res III portfolio, Res II portfolio and Res I portfolio would have increased from $50 million to $52.1million, $133 million to $136 million, $82.3 million to $87.8 million, Apple Suites would have increased from $80.8 million to $85 million, and AHT Redmond portfolio would have increased from $21.7 million to $23.6 million, respectively.

Item 4. Controls and Procedures

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

PART II OTHER INFORMATION:

Item 2 Changes in Securities and Use of Proceeds

In connection with the merger with Apple Suites, our advisory agreement and the advisory agreement of Apple Suites with ASA were terminated. No further advisory fees are due under those agreements. In addition, the property acquisition/distribution agreements that the companies had with ASRG also were terminated. As a result of the merger, the 240,000 Class B convertible preferred shares of Apple Suites held by Glade M. Knight and two business associates converted into 480,000 common shares of Apple Suites, which subsequently converted into 480,000 Units. Mr. Knight and the other holders of our Series B convertible preferred shares exchanged their Series B convertible preferred shares for 1,272,000 newly created Series C convertible preferred shares.

Series C Convertible Preferred Shares Dividend and Distribution Rights

The holders of our Series C convertible preferred shares will be entitled to receive, on an as converted basis, the same distributions as declared for the holders of our common shares, except for distributions in liquidation. If we liquidate our assets or dissolve entirely and our assets are sufficient to pay the distribution rights of the Series A preferred shares in full, the remaining assets will first be used to pay $10.00 per share to the holders of the Series C convertible preferred shares, on an as converted basis. Then, any remaining assets will be distributed pro rata to the holders of common shares and the holders of Series C convertible preferred shares, on an as converted basis.

Conversion

The Series C convertible preferred shares will be convertible into Units upon and for 180 days following the occurrence of either of the following events: (1) we transfer substantially all of our assets, stock or business as a going concern, whether through exchange, merger, consolidation, lease, share exchange or otherwise, other than a sale of assets in liquidation, dissolution or winding up of our business; or (2) we list our Units on a national securities exchange or quotation system or in any established market. Upon the occurrence of either triggering event, each Series C convertible preferred share will be convertible into one unit, subject to adjustment to reflect stock dividends on, or split, subdivision or combination of, our common shares.

Voting Rights

The holders of Series C convertible preferred shares are entitled to vote on all matters submitted to a vote of shareholders as if they were converted into our common shares, except as otherwise provided by law. The holders of our common shares and the holders of Series C convertible preferred shares, on an as converted basis, have exclusive voting power with respect to the election of directors, except as provided with respect to any other class or series of shares. There is no cumulative voting in the election of directors. Therefore the holders of a majority of the outstanding common shares and Series C convertible preferred shares, on an as converted basis, are able to elect all of the directors then standing for election and the holders of the remaining common shares and Series C convertible preferred shares are not able to elect any directors.

Item 6 Exhibits and Reports on Form 8-K

(a)Exhibit No.		Exhibit Description
2.1		Agreement and Plan of Merger among Apple Hospitality Two, Inc., Hospitality Acquisition Company and Apple Suites, Inc. dated October 24, 2002. (Incorporated herein by reference to Exhibit 2.1 to Current Report on Form 8-K filed October 25, 2002; SEC File No. 333-53984).

2.2		Agreement and Plan of Merger dated as of November 28, 2001 by and between Apple Hospitality Two, Inc., Marriott Residence Inn Limited Partnership, AHT Res Acquisition, L.P. and RIBM One LLC. (Incorporated herein by reference to Exhibit 2.1 to Current Report on Form 8-K filed on April 15, 2002; SEC File No. 333-53984).

2.3		Certificate of Merger dated March 28, 2002 (with effective date of March 29, 2002) for merger of AHT Res Acquisition, L.P. with and into Marriott Residence Inn Limited Partnership. (Incorporated herein by reference to Exhibit 2.2 to Current Report on Form 8-K filed on April 15, 2002; SEC File No. 333-53984).

2.4		Agreement and Plan of Merger dated as of April 30, 2002 by and among Apple -43 -Hospitality Two, Inc., AHT Res II Acquisition, L.P., RIBM Two LLC and Marriott Residence Inn II Limited Partnership. (Incorporated herein by reference to Exhibit 2.1 to Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).

2.5		Certificate of Merger dated August 28, 2002 for merger of AHT Res II Acquisition, L.P. with and into Marriott Residence Inn II Limited Partnership (as surviving entity). (Incorporated herein by reference to Exhibit 2.2 to Current Report on Form 8-K filed on September 12, 2002; SEC File No. 333-53984).

3.1		Articles of Incorporation of the Registrant. (Incorporated herein by reference to Exhibit 3.1 to Form S-11 filed by Apple Hospitality Two, Inc.; SEC File No. 333-77055).

3.2		Amended and Restated Bylaws of the Registrant. (Incorporated herein by reference to Exhibit 3.2 to Form S-11 filed by Apple Hospitality Two, Inc.; SEC File No. 333-77055).

31.1		Certification of the registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).

31.2		Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the sarbanes0Oxley Action of 2002 (FILED HEREWITH)

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

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

(b) Reports on Form 8-K

		We did not file any reports on Form 8-K during the quarter ended September 30, 2003.

SIGNATURES

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

APPLE HOSPITALITY TWO, INC.

By:	/s/ GLADE M. KNIGHT	Date: November 5, 2003
	Glade M. Knight,
	Chairman of the Board, Chief Executive Officer, and President

By:	/s/ DAVID S. MCKENNEY	Date: November 5, 2003
	David S. McKenney,
	Senior Vice President Chief Financial Officer and Treasurer

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Apple Hospitality Two Inactive 10-Q2003 Q3 Quarterly report

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