Apple REIT Seven 10Q 2008 Q3 Quarterly report

Apple REIT Seven Inactive 10-Q2008 Q3 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008.

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

For the transition period from to

Commission File Number: 000-52585.

APPLE REIT SEVEN, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA

20-2879175

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


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

(804) 344-8121

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

As of November 1, 2008 there were 93,097,374 outstanding shares of common stock, no par value, of the registrant.

APPLE REIT SEVEN, INC.

FORM 10-Q

INDEX


			Page Number
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)

		Consolidated Balance Sheets - September 30, 2008 and December 31, 2007	3

		Consolidated Statements of Operations – For the three and nine months ended September 30, 2008 and 2007	4

		Consolidated Statements of Cash Flows – For the nine months ended September 30, 2008 and 2007	5

		Notes to Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

	Item 4.	Controls and Procedures	18

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	19

	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	20

Signatures			21

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

Apple REIT Seven, Inc.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)


	September 30, 2008			December 31, 2007
ASSETS
Investment in real estate, net of accumulated depreciation of $40,873 and $20,063, respectively	$	920,069		$	786,765
Cash and cash equivalents		26,333			142,437
Restricted cash-furniture, fixtures and other escrows		11,260			10,658
Due from third party managers		10,518			6,249
Other assets, net		11,372			15,139

TOTAL ASSETS	$	979,552		$	961,248

LIABILITIES
Notes payable	$	110,003		$	84,705
Accounts payable and accrued expenses		14,118			8,012

TOTAL LIABILITIES		124,121			92,717

SHAREHOLDERS’ EQUITY
Preferred stock, authorized 15,000,000 shares; none issued and outstanding		—			—
Series A preferred shares, no par value, authorized 200,000,000 shares; issued and outstanding 93,125,916 and 91,713,410 shares, respectively		—			—
Series B convertible preferred stock, no par value, authorized 240,000 shares; issued and outstanding 240,000 shares		24			24
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding 93,125,916 and 91,713,410 shares, respectively		920,625			904,649
Distributions greater than net income		(65,218	)		(36,142	)

TOTAL SHAREHOLDERS’ EQUITY		855,431			868,531

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	979,552		$	961,248

See notes to consolidated financial statements.

Apple REIT Seven, Inc.

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)


	Three months ended September 30, 2008			Three months ended September 30, 2007			Nine months ended September 30, 2008			Nine months ended September 30, 2007
Revenues:
Room revenue	$	52,552		$	40,235		$	151,031		$	91,299
Other revenue		4,696			2,635			13,852			6,395

Total revenue		57,248			42,870			164,883			97,694

Expenses:
Operating expense		14,805			10,368			42,728			23,594
Hotel administrative expense		4,240			2,977			13,323			6,835
Sales and marketing		4,228			3,231			12,433			7,602
Utilities		2,735			1,857			6,939			4,094
Repair and maintenance		2,592			1,777			7,291			4,025
Franchise fees		2,201			1,602			6,421			3,711
Management fees		1,927			1,546			5,765			3,373
Taxes, insurance and other		3,898			2,383			10,341			6,349
General and administrative		1,323			958			4,381			2,608
Depreciation expense		7,313			4,919			20,809			11,407

Total expenses		45,262			31,618			130,431			73,598

Operating income		11,986			11,252			34,452			24,096
Debt extinguishment costs		—			(1,386	)		—			(1,386	)
Interest income (expense), net		(1,250	)		1,663			(2,588	)		1,368

Net income	$	10,736		$	11,529		$	31,864		$	24,078

Basic and diluted net income per common share	$	0.12		$	0.13		$	0.34		$	0.38

Weighted average common shares outstanding; basic and diluted		92,865			90,728			92,428			63,793
Distributions declared and paid per common share	$	0.22		$	0.22		$	0.66		$	0.66

See notes to consolidated financial statements.

Apple REIT Seven, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)


	Nine months ended September 30, 2008			Nine months ended September 30, 2007
Cash flow from operating activities:
Net income	$	31,864		$	24,078
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation of real estate owned		20,809			11,407
Amortization of deferred financing costs and fair value adjustments		(219	)		538
Changes in operating assets and liabilities:
Increase in funds due from third party managers		(3,887	)		(5,456	)
Decrease (increase) in other operating assets		(91	)		62
Increase in accounts payable and accrued expenses		2,773			2,608

Net cash provided by operating activities		51,249			33,237
Cash flow used in investing activities:
Cash paid for the acquisition of hotel properties		(102,991	)		(324,307	)
Deposits and other disbursements for potential acquisition of hotel properties		(126	)		(1,853	)
Capital improvements		(17,849	)		(3,871	)
Additions to other non-hotel assets		—			(3,700	)
Net decrease in cash restricted for property improvements		552			468

Net cash used in investing activities		(120,414	)		(333,263	)
Cash flow from financing activities:
Payment of notes payable		(1,613	)		(37,488	)
Payment of financing costs related to loan assumptions		(301	)		(1,091	)
Redemptions of common stock		(4,933	)		(640	)
Net proceeds related to issuance of common stock		20,848			536,512
Cash distributions paid to common shareholders		(60,940	)		(40,136	)

Net cash (used in) provided by financing activities		(46,939	)		457,157
Increase (decrease) in cash and cash equivalents		(116,104	)		157,131
Cash and cash equivalents, beginning of period		142,437			44,604

Cash and cash equivalents, end of period	$	26,333		$	201,735

Non-cash transactions:
Notes payable assumed in acquisitions	$	27,334		$	74,112

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements included in its 2007 Annual Report on Form 10-K. Operating results for the three and nine month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2008.

General Information and Summary of Significant Accounting Policies

Organization

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

Earnings per Common Share

Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. There were no potential common shares with a dilutive effect for the nine months ended September 30, 2008 and 2007. As a result, basic and dilutive outstanding shares were the same. Series B convertible preferred shares are not included in earnings per common share until such time the Series B convertible preferred shares are converted to common shares.

Use of Estimates

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

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157,Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. In February 2008, the FASB released FASB Staff Position (FSP) FAS 157-2 – Effective Date of FASB Statement No. 157, which defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities, except those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The effective date of the statement related to those items not covered by the deferral (all financial assets and liabilities or nonfinancial assets and liabilities recorded at fair value on a recurring basis) is for fiscal years beginning after November 15, 2007. The adoption of this statement did not have and is not anticipated to have a material impact on the Company’s results of operations or financial position.

In February 2007, FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of the guidance is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. SFAS is effective for the Company beginning January 1, 2008. The Company has elected not to use the fair value measurement provisions of SFAS 159 and therefore, adoption of this standard did not have an impact on the financial statements.

In March 2008, FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under SFAS 133. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not currently have any instruments that qualify within the scope of SFAS 133, and therefore the adoption of this statement is not anticipated to have a material impact on the Company’s financial statements.

Note 2

Investments in Real Estate

During the nine months ended September 30, 2008, the Company completed the purchase of seven hotels. The following table sets forth the location, brand, manager, gross purchase price, number of hotel rooms and date of purchase by the Company for each hotel acquired during this period (dollars in thousands).


Location	Brand	Manager	Gross Purchase Price		Rooms	Date of Purchase
Tucson, AZ	Residence Inn	Western	$	16,640	124	1/17/2008
Richmond, VA	Marriott	White		53,300	401	1/25/2008
Columbus, GA	SpringHill Suites	LBA		9,675	85	3/06/2008
Dothan, AL	Residence Inn	LBA		9,669	84	4/16/2008
El Paso, TX	Homewood Suites	Western		15,390	114	4/23/2008
Columbus, GA	TownePlace Suites	LBA		8,428	86	5/22/2008
Miami, FL	Courtyard	Dimension		15,000	118	9/05/2008

			$	128,102	1,012

In conjunction with the January 2008 acquisition of the full-service Marriott hotel in Richmond, Virginia (“MRV”), the Company assumed mortgage indebtedness in the principal amount of $25.3 million. The note bears interest at a rate of 6.95% per annum and has a stated maturity date of September 1, 2014. With the exception of the assumed mortgage note payable, substantially all of the purchase price of the seven hotels acquired in the first nine months of 2008 was funded by the Company’s cash balances on hand at December 31, 2007. Additionally, the Company used cash on hand to pay 2% of the gross purchase price for these hotels, which totaled $2.6 million, as a brokerage commission to Apple Suites Realty Group, Inc. (“ASRG”). This entity is wholly-owned by Glade M. Knight, who is one of the Company’s directors and its Chief Executive Officer. These costs have been capitalized to investment in real estate properties.

Under terms of the purchase contract for the MRV hotel, the Company assumed an existing land lease with a third-party lessor. The land lease extends through December 2102. The lease is subject to payment adjustments, based on Consumer Price Index measurements, at stated intervals during its term. A fair value adjustment was recorded by the Company upon the assumption of the below market rate ground lease. This favorable lease asset will be amortized over the remaining term of the ground lease. The unamortized balance of the land lease’s fair value adjustment was approximately $0.9 million at September 30, 2008, and is included in other assets on the Company’s consolidated balance sheet. Upon assumption of the MRV land lease, the Company also assumed certain contingent responsibilities of the predecessor owner. Dependent on conditions which include the hotel exceeding stated revenue per available room (“REVPar”) thresholds for a trailing twelve month period (with such thresholds adjusting upward by 3% annually), the Company may be obligated to construct an addition to the MRV hotel containing a minimum of 209 rooms. As of September 30, 2008, there is no requirement to commence an expansion of the MRV hotel.

A fair value adjustment was recorded upon the assumption of the above market rate mortgage loan for the MRV hotel. The premium will be amortized over the remaining stated term of the mortgage note payable using a method approximating the effective interest rate method. The unamortized balance of the fair value adjustment for this mortgage loan payable was approximately $1.8 million at September 30, 2008; this balance is included in notes payable on the Company’s consolidated balance sheet. As noted above, the mortgage assumed has a stated maturity of September 1, 2014. As a condition of the mortgage loan, the maturity of the note payable may be accelerated by the lender should the Company be required to expand the MRV hotel as previously discussed.

The aggregate amounts of scheduled principal payments due under the MRV mortgage note, and the aggregate amounts of estimated minimum lease payments pertaining to the MRV land lease, for the periods subsequent to the January 25, 2008 acquisition of the MRV hotel, are as follows (in thousands):


	2008		2009		2010		2011		2012		After 2012		Total
MRV note payable	$	472	$	550	$	590	$	632	$	678	$	22,376	$	25,298
MRV land lease		92		200		200		200		200		43,000		43,892

Total	$	564	$	750	$	790	$	832	$	878	$	65,376	$	69,190

No goodwill was recorded in connection with any of these acquisitions.

The Company has leased all of its hotels to wholly-owned taxable REIT subsidiaries under master hotel lease arrangements.

At September 30, 2008, the Company’s investment in real estate consisted of the following (in thousands):


Land	$	90,718
Building and Improvements		816,042
Furniture, Fixtures and Equipment		54,182

		960,942
Less Accumulated Depreciation		40,873

Investment in Real Estate, net	$	920,069

Upon the completion of the purchase of the Miami, FL Courtyard hotel on September 5, 2008, the Company had no outstanding hotel purchase contracts.

Note 3

Related Parties

The Company has, and is expected to continue to engage in, significant transactions with related parties. These transactions cannot be construed to be at arms length, and the results of the Company’s operations may be different than if conducted with non-related parties.

The Company has a contract with ASRG, a related party, to provide brokerage services for the acquisition and disposition of the Company’s 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. As of September 30, 2008, payments to ASRG for services under the terms of this contract have totaled approximately $18.0 million since inception, which were capitalized as a part of the purchase price of the hotels.

The Company is party to an advisory agreement with Apple Seven Advisors, Inc. (“ASA”), pursuant to which ASA provides management services to the Company. An annual fee ranging from .1% to .25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable for these services. ASA utilizes Apple REIT Six, Inc. to provide these services. The total fees incurred under the agreement with ASA during each of the nine month periods ended September 30, 2008 and 2007 were approximately $2.6 million and $1.5 million, respectively.

ASRG and ASA are 100% owned by Glade M. Knight, Chairman, Chief Executive Officer and President of the Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Six, Inc. (a diversified REIT), Apple REIT Eight, Inc. (a diversified REIT) and Apple REIT Nine, Inc. (a newly formed company that intends to qualify as a diversified REIT). Members of the Company’s Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Eight, Inc. and Apple REIT Nine, Inc.

Note 4

Shareholders’ Equity

The Company has a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned for less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. The maximum number of Units that may be redeemed in any 12-month period will be three percent of the weighted average number of Units outstanding during the 12-month period. 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 nine months ended September 30, 2008, the Company redeemed approximately 483 thousand Units for approximately $4.9 million under the program. During the nine months ended September 30, 2007, the Company redeemed approximately 64 thousand Units in the amount of $0.6 million under the program.

In July 2007, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a convenient and cost effective way to increase shareholder investment in the Company by reinvesting dividends to purchase additional Units of the Company. The uses of the proceeds from this plan may include purchasing Units under the Company’s Unit Redemption Program, enhancing properties, satisfying financing obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring hotels. During the nine months ended September 30, 2008, approximately 1.9 million Units, representing $20.8 million in proceeds to the Company, were issued under the plan. During the nine months ended September 30, 2007, approximately 0.2 million Units, representing $1.8 million in proceeds to the Company, were issued under the plan.

Note 5

Pro Forma Information

The following unaudited pro forma information for the three month and nine month periods ended September 30, 2007 is presented as if the acquisitions of the Company’s 26 hotels acquired in 2007 had occurred on the latter of January 1, 2007 or the opening date of the hotel. The results of operations for the hotels acquired in the first nine months of 2008 for the period not owned were not significant compared to the Company’s total results of operations. 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 these applicable dates, nor does it purport to represent the results of operations for future periods.


(in thousands, except per share data)	For the three months ended September 30, 2007		For the nine months ended September 30, 2007
Hotel revenues	$	46,931	$	129,078
Net income	$	11,364	$	26,452
Net income per share - basic and diluted	$	0.12	$	0.38

The pro forma information reflects adjustments for actual revenues and expenses of the 26 hotels acquired during 2007 for the respective period owned prior to acquisition by the Company. Net income has been adjusted as follows: (1) interest income and expense has been adjusted to reflect the reduction in cash and cash equivalents required to fund the acquisitions, and where applicable, utilization of the Company’s line of credit borrowing facility; (2) interest expense related to prior owner’s debt which was not assumed has been eliminated; and (3) depreciation has been adjusted based on the Company’s basis in the hotels.

Note 6

Subsequent Events

On October 15, 2008, the Company paid $0.073334 per common share, totaling $6.8 million, in a dividend distribution to its common shareholders. Under the Company’s Dividend Reinvestment Plan, $2.4 million were reinvested, resulting in the issuance of 217,535 Units.

In October 2008, the Company redeemed 246,077 Units for approximately $2.5 million under its Unit Redemption Program.

Item 2.

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

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

Overview

The Company is a Virginia corporation formed to invest in hotels and other selected real estate in select metropolitan areas in the United States. The Company was initially capitalized on May 26, 2005, with its first investor closing on March 15, 2006. The best-efforts offering was completed in July 2007. The Company owned 51 hotels as of September 30, 2008, located within different markets in the United States. The Company is treated as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. The Company’s first hotel was acquired on April 27, 2006. An additional 17 hotels were purchased during 2006, 26 hotels were purchased during 2007, and seven hotels were purchased during the first nine months of 2008. Accordingly, the results of operations include only the results of operations of the hotels for the period owned. Although hotel performance can be influenced by many factors including local competition, local and general economic conditions in the United States and the performance of individual managers assigned to each hotel, performance of the hotels, in general, has met the Company’s expectations for the period owned. In evaluating financial condition and operating performance, the most important matters on which the Company focuses are revenue measurements, such as average occupancy, average daily rate and revenue per available room, and expenses, such as hotel operating expenses, general and administrative and other expenses described below. The following is a summary of the Company’s results (in thousands, except statistical data):


	Three months ended September 30,												Nine months ended September 30,
	2008			% of Revenue		2007			% of Revenue		Percent change		2008			% of Revenue		2007			% of Revenue		Percent change
Total hotel revenue	$	57,248		100	%	$	42,870		100	%	34	%	$	164,883		100	%	$	97,694		100	%	69	%

Hotel operating expenses		32,728		57	%		23,358		54	%	40	%		94,900		58	%		53,234		54	%	78	%
Taxes, insurance and other expense		3,898		7	%		2,383		6	%	64	%		10,341		6	%		6,349		6	%	63	%

General and administrative expense		1,323		2	%		958		2	%	38	%		4,381		3	%		2,608		3	%	68	%
Depreciation		7,313					4,919				49	%		20,809					11,407				82	%

Interest (expense) income, net		(1,250	)				1,663				NA			(2,588	)				1,368				NA

Number of hotels		51					41				24	%		51					41				24	%
ADR	$	121				$	121				0	%	$	121				$	121				0	%
Occupancy		75	%				78	%			-4	%		74	%				77	%			-4	%
RevPAR	$	91				$	94				-3	%	$	90				$	93				-3	%

Hotels Owned

The following table summarizes the location, brand, manager, date acquired, number of rooms and gross purchase price for each of the 51 hotels the Company owned at September 30, 2008:

City

State

Brand

Manager

Date Acquired

Rooms

Gross
Purchase
Price

Montgomery

Homewood Suites

LBA

8/17/2006

10,660

Montgomery

Hilton Garden Inn

LBA

8/17/2006

10,385

Troy

Hampton Inn

LBA

8/17/2006

6,130

Auburn

Hilton Garden Inn

LBA

8/17/2006

101

10,185

Huntsville

Hilton Garden Inn

LBA

8/17/2006

101

10,285

Huntsville

Homewood Suites

LBA

10/27/2006

107

11,606

Prattville

Courtyard

LBA

4/24/2007

9,304

Dothan

Fairfield Inn

LBA

5/16/2007

4,584

Trussville

Courtyard

LBA

10/4/2007

9,510

Huntsville

TownePlace Suites

LBA

12/10/2007

8,927

Dothan

Residence Inn

LBA

4/16/2008

9,669

Tucson

Residence Inn

Western

1/17/2008

124

16,640

San Diego

Hilton Garden Inn

Inn Ventures

5/9/2006

200

34,500

Rancho Bernardo

Courtyard

Dimension

12/12/2006

210

36,000

Agoura Hills

Homewood Suites

Dimension

5/8/2007

125

25,250

San Diego

Residence Inn

Dimension

6/13/2007

121

32,500

San Diego

Hampton Inn

Dimension

7/19/2007

177

42,000

Highlands Ranch

Residence Inn

Dimension

2/22/2007

117

19,000

Highlands Ranch

Hilton Garden Inn

Dimension

3/9/2007

128

20,500

Sarasota

Homewood Suites

Hilton

9/15/2006

100

13,800

Miami

Homewood Suites

Dimension

2/21/2007

159

24,300

Tallahassee

Fairfield Inn

LBA

4/24/2007

6,647

Lakeland

Courtyard

LBA

4/24/2007

9,805

Miami

Courtyard

Dimension

9/5/2008

118

15,000

Columbus

Fairfield Inn

LBA

4/24/2007

7,333

Macon

Hilton Garden Inn

LBA

6/28/2007

101

10,660

Columbus

SpringHill Suites

LBA

3/6/2008

9,675

Columbus

TownePlace Suites

LBA

5/22/2008

8,428

Boise

SpringHill Suites

Inn Ventures

9/14/2007

230

21,000

New Orleans

Homewood Suites

Dimension

12/15/2006

166

43,000

Hattiesburg

Courtyard

LBA

10/5/2006

9,455

Tupelo

Hampton Inn

LBA

1/23/2007

5,245

Omaha

Courtyard

Marriott

11/4/2006

181

23,100

Cranford

Homewood Suites

Dimension

3/7/2007

108

13,500

Mahwah

Homewood Suites

Dimension

3/7/2007

110

19,500

Ronkonkoma

Hilton Garden Inn

White

12/15/2006

164

27,000

Cincinnati

Homewood Suites

White

12/1/2006

7,100

Memphis

Homewood Suites

Hilton

5/15/2007

140

11,100

Houston

Residence Inn

Western

4/27/2006

129

13,600

Brownsville

Courtyard

Western

6/19/2006

8,550

Stafford

Homewood Suites

Western

8/15/2006

7,800

San Antonio

TownePlace Suites

Western

6/29/2007

106

11,925

Addison

SpringHill Suites

Marriott

8/10/2007

159

12,500

San Antonio

TownePlace Suites

Western

9/27/2007

123

13,838

El Paso

Homewood Suites

Western

4/23/2008

114

15,390

Provo

Residence Inn

Dimension

6/13/2007

114

11,250

Alexandria

Courtyard

Marriott

7/13/2007

176

36,997

Richmond

Marriott

White

1/25/2008

401

53,300

Seattle

Residence Inn

Inn Ventures

9/1/2006

234

56,173

Vancouver

SpringHill Suites

Inn Ventures

6/1/2007

119

15,988

Kirkland

Courtyard

Inn Ventures

10/23/2007

150

31,000

Total

6,415

901,594

With the exception of assumed mortgage loans (approximately $130 million of principal was assumed, secured by 10 hotels) on certain hotel properties, substantially all of the purchase price of the hotels was funded by proceeds from the Company’s best-efforts offering of Units, completed in July 2007. The Company also used the proceeds of its offering to pay 2% of the gross purchase price for these hotels, which was approximately $18.0 million, as a brokerage commission to Apple Suites Realty Group, Inc. (“ASRG”), wholly-owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer. The Company leased all of its hotels to wholly-owned taxable REIT subsidiaries under master hotel lease agreements.

Of the Company’s 51 hotels owned at September 30, 2008, one was purchased during the third quarter of 2008. The total gross purchase price for the Miami, FL Courtyard hotel, with a total of 118 rooms, was approximately $15.0 million. For the nine month period ended September 30, 2008, the Company completed the purchase of seven hotels, with a total of 1,012 rooms, for a combined gross purchase price of approximately $128.1 million.

Results of Operations

The Company was initially capitalized in May 2005 and began operations on April 27, 2006, with the Company’s first property acquisition. As of September 30, 2008, the Company owned 51 hotels (seven of which were purchased during the first nine months of 2008), compared to 41 hotels owned at September 30, 2007 (23 of which were purchased during the first nine months of 2007). As a result of this activity, a comparison of operations for the three month and nine month periods ended September 30, 2008 to the prior

year is not meaningful. Hotel performance is impacted by many factors including economic conditions in the United States, as well as each locality. Due to a general decline in economic conditions throughout the United States, the Company expects results of the Company’s hotels to range from minimal growth to declines until general economic conditions improve. As a result, there can be no assurance that the Company’s operating performance will continue to meet expectations in the future.

Revenues

The Company’s principal source of revenue is hotel room revenue and other related revenue. Hotel operations included in the consolidated statement of operations are for the Company’s hotels acquired through September 30, 2008, for the respective period of ownership for each property. The Company owned 51 hotels as of September 30, 2008, compared to 41 hotels owned as of September 30, 2007. For the three months ended September 30, 2008 and 2007, the Company had total revenue of $57.2 and $42.9 million, respectively, with average occupancy of 75% and 78%, average daily rate (“ADR”) of $121 and $121, and revenue per available room (“RevPAR”) of $91 and $94. For the nine month periods ended September 30, 2008 and 2007, the Company had total revenue of $164.9 and $97.7 million, respectively, with average occupancy of 74% and 77%, ADR of $121 and $121, and RevPAR of $90 and $93. ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR. These rates are comparable with industry and brand averages, given the Company’s portfolio of hotels and the markets where the Company’s hotels are located. However, as supply of hotel rooms in markets that the Company serves has begun to meet demand, and general economic conditions have weakened, the Company’s revenue at some individual hotels has experienced declines compared to prior year results. The Company expects this trend to continue for the remainder of 2008 and into 2009. As a result, the Company does not anticipate improvement in occupancy levels, ADR and RevPAR for the next several quarters, versus comparable periods in the previous year.

Expenses

For the three month periods ended September 30, 2008 and 2007, hotel direct expenses totaled $32.7 and $23.4 million, or 57% and 54% of total revenue, respectively. For the nine month periods ended September 30, 2008 and 2007, hotel direct expenses were $94.9 and $53.2 million, or 58% and 54% of total revenue for each applicable period. Hotel direct expenses consist of operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. At the time of purchase of the 401 room full-service Marriott hotel in Richmond, Virginia (“MRV”) on January 25, 2008, the Company implemented a change from the predecessor owner’s prior hotel management company to White Lodging Services Corporation. The Company incurred hotel staff recruiting, training, travel and relocation costs associated with the installation of the new management company and related personnel resources at the MRV. In addition, expenditures for non-capitalized items associated with improving the hotel’s rooms, restaurant, and overall service levels, and addressing deferred maintenance and repair, were incurred. These transition costs associated with the MRV hotel were approximately $0.2 and $1.1 million for the three and nine month periods ended September 30, 2008, respectively. Excluding the results of operations of the MRV hotel, the Company’s hotel direct expenses were 55% of total revenue for both the third quarter of 2008 and the nine months ended September 30, 2008.

Taxes, insurance, and other expense for the three months ended September 30, 2008 and 2007 were $3.9 and $2.4 million, or 7% and 6% of total revenue for the applicable period. For the nine month periods ended September 30, 2008 and 2007, taxes, insurance, and other expense totaled $10.3 and $6.3 million, or 6% of total revenue for each applicable period. General and administrative expense for the three months ended September 30, 2008 and 2007 were $1.3 and $1.0 million, representing 2% of total revenue. For the nine month periods ended September 30, 2008 and 2007, general and administrative expense totaled $4.4 and $2.6 million, or 3% of total revenue for each period.

Depreciation expense for the three months ended September 30, 2008 and 2007 was $7.3 million and $4.9 million. For the nine month periods ended September 30, 2008 and 2007, depreciation expense totaled $20.8 and $11.4 million. These amounts represent depreciation expense of the Company’s hotel buildings and related improvements, and associated furniture, fixtures and equipment, for the respective periods owned.

For the three months ended September 30, 2008 and 2007, the Company recognized interest income of $0.3 and $3.5 million, respectively. For the nine month periods ended September 30, 2008 and 2007, interest income totaled $1.7 and $5.2 million, respectively. Interest income represents earnings on excess cash invested in short term money market instruments. The Company’s average balances of invested cash have decreased since completion of the Company’s Unit offering in July 2007, due to the Company’s hotel acquisition and renovation activity. Since completion of the Unit offering in July 2007, the Company has acquired 14 hotel properties. Interest expense during the three months ended September 30, 2008 and 2007 totaled $1.6 and $1.8 million, respectively. For the nine month periods ended September 30, 2008 and 2007, interest expense totaled $4.3 and $3.9 million. Interest expense primarily represents interest incurred on mortgage loans assumed on acquired hotels. As of September 30, 2008, mortgage loans were outstanding on ten of the Company’s hotel properties, totaling $110.0 million. Interest expense in 2008 is net of capitalized interest, of approximately $0.7 million, associated with several significant renovations occurring in the first nine months of 2008. During the third quarter of 2007, the Company incurred debt extinguishment costs of $1.4 million, primarily related to the extinguishment of debt related to two hotel properties.

Liquidity and Capital Resources

The Company’s cash on hand ($26.3 million at September 30, 2008) and operating cash flow from the properties owned are the Company’s principal source of liquidity. In addition, the Company may borrow funds, subject to limitations set forth in its bylaws. The Company anticipates that cash flow, cash on hand and credit availability will be adequate to cover substantially all of its operating expenses and to permit the Company to meet substantially all of its anticipated liquidity requirements, including distributions to shareholders, capital expenditures and debt service. With the purchase of the Miami, FL Courtyard hotel in September 2008, the Company no longer has any purchase contracts outstanding relating to property acquisitions.

To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions in the first nine months of 2008 totaled $60.9 million and were paid monthly at a rate of $0.073334 per common share. For the same period, the Company’s cash generated from operations was approximately $51.2 million. Due to the inherent delay between raising capital and investing that same capital in income producing real estate, the Company has had significant amounts of cash earning interest at short term money market rates. As a result, the difference between distributions paid and cash generated from operations has been funded from proceeds from the Company’s completed initial public offering of Units (completed in July 2007), and this portion of distributions is expected to be treated as a return of capital for federal income tax purposes. The Company intends to continue paying dividends on a monthly basis at an annualized rate of $0.88 per common share. Since a portion of distributions has to date been funded with proceeds from the offering of Units, the Company’s ability to maintain its current intended rate of distribution will be primarily based on its ability to increase cash flow from operations from its hotel properties. Since there can be no assurance that the Company’s properties acquired will provide income at this level, there can be no assurance as to the classification or duration of distributions at the current rate. Proceeds of the Company’s Unit offering which are distributed are not available for investment in properties.

The Company has on-going capital commitments to fund its capital improvements. The Company is required, under all of the hotel management agreements, to make available, for the repair, replacement, refurbishing of furniture, fixtures, and equipment, an amount between 2% to 5% of gross revenues of the applicable hotel, provided that such amount may be used for the Company’s capital expenditures with respect to the applicable hotel. The Company expects that this amount will be adequate to fund required repair, replacement, and refurbishments and to maintain the Company’s hotels in a competitive condition. As of September 30, 2008, the Company also held $9.5 million in restricted cash accounts for capital improvement purposes required by certain loan or hotel management agreements. The Company substantially completed significant renovations on six hotel properties during the first nine months of 2008. In addition, major renovations were continuing on two other hotel properties at the end of the third quarter of 2008. An additional two properties are expected to begin major renovations during the fourth quarter of 2008. Total capital expenditures incurred in the first nine months of 2008 were approximately $17.8 million. Additional capital expenditures are anticipated to be approximately $6 million over the remaining three month period in 2008.

The Company has a Unit Redemption Program to provide limited interim liquidity to its shareholders who have held their Units for at least one year. Shareholders may request redemption of Units for a purchase price equal to 92% of the price paid per Unit if the Units have been owned for less than three years, or 100% of the price paid per Unit if the Units have been owned more than three years. The maximum number of Units that may be redeemed in any 12-month period will be three percent of the weighted average number of Units outstanding during the 12-month period. 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 nine months ended September 30, 2008, the Company redeemed approximately 483 thousand Units in the amount of $4.9 million under the program. During the nine months ended September 30, 2007, the Company redeemed approximately 64 thousand Units in the amount of $0.6 million under the program.

Related Party Transactions

Subsequent Events

In October 2008, the Company redeemed 246,077 Units for approximately $2.5 million under its Unit Redemption Program.

Impact of Inflation

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

Business Interruption

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

Seasonality

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

Recent Accounting Pronouncements

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of September 30, 2008, the Company’s financial instruments were not exposed to significant market risk due to interest rate risk, foreign currency exchange risk, commodity price risk or equity price risk. The Company will be exposed to changes in short term money market rates as it invests its cash. Based on the Company’s cash invested at September 30, 2008 of $26.3 million, every 100 basis points change in interest rates will impact the Company’s annual net income by $263 thousand, all other factors remaining the same.

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.

Unregistered Sales of Equity Securities and Use of Proceeds

Unit Redemption Program

The Company has instituted a Unit Redemption Program to provide its shareholders who have held their Units for at least one year with the benefit of limited interim liquidity, by presenting for redemption all or any portion of their Units. If Units are held for the required one-year period, the Units may be redeemed for a purchase price equal to 92% of the price paid per Unit if the Units have been owned less than three years, or 100% of the price paid per Unit if the Units have been owned for three years or more. The board of directors reserves the right, in its sole discretion, at any time and from time to time, to waive the one-year holding period, reject any request for redemption, change the purchase price for redemptions or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. The following is a summary of redemptions during the third quarter of 2008:


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 2008	264,171	$	10.21	621,012	⁽¹⁾

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

Item 6.

Exhibits


Exhibit Number		Description
3.1		Amended and Restated Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.3 to amendment no. 3 to the Registrant’s registration statement on Form S-11 (SEC File No. 333-125546) effective March 3, 2006).

3.2		Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the Registrant’s registration statement on Form S-11 (SEC File No. 333-125546) effective March 3, 2006).

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

31.2		Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).

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

SIGNATURES

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


APPLE REIT SEVEN, INC.

By:	/s/ GLADE M. KNIGHT	Date: November 3, 2008
	Glade M. Knight,
	Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer)

By:	/s/ BRYAN PEERY	Date: November 3, 2008
	Bryan Peery,
	Chief Financial Officer (Principal Financial and Principal Accounting Officer)

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