Apple REIT Eight 10-Q 2010 Q3 Quarterly report

UNITED STATES
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 SEPTEMBER 30, 2010

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________

Commission File Number 000-53175

Apple REIT Eight, Inc.

(Exact name of registrant as specified in its charter)

Virginia	20- 8268625
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
814 East Main Street Richmond, Virginia	23219
(Address of principal executive offices)	(Zip Code)

(804) 344-8121

(Registrant’s telephone number, including 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  o

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

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:

Large accelerated filero	Accelerated filero
Non-accelerated filerx	Smaller reporting companyo

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

Number of registrant’s common shares outstanding as of November 1, 2010: 94,221,139

Apple REIT Eight, Inc.
FORM 10-Q
INDEX

		Page Number
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets –September 30, 2010 and December 31, 2009	3
	Consolidated Statements of Operations and Comprehensive Income – Three and nine months ended September 30, 2010 and 2009	4
	Consolidated Statements of Cash Flows – Nine months ended September 30, 2010 and 2009	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II. OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 6.	Exhibits	22
Signatures		23

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, Residence Inn^® by Marriott, Courtyard^® by Marriott, Marriott^®, and Renaissance^® 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 Worldwide 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.

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Apple REIT Eight, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)

	September 30, 2010			December 31, 2009
ASSETS
Investment in hotels, net of accumulated depreciation of $81,472 and $55,282	$	953,643		$	974,773
Cash and cash equivalents		501			—
Restricted cash-furniture, fixtures and other escrows		10,178			12,268
Due from third party managers, net		6,597			3,919
Other assets, net		4,452			7,891
TOTAL ASSETS	$	975,371		$	998,851
LIABILITIES
Accounts payable and accrued expenses	$	16,597		$	14,465
Intangible liabilities, net		10,816			11,112
Notes payable		192,668			184,175
TOTAL LIABILITIES		220,081			209,752
SHAREHOLDERS’ EQUITY
Preferred stock, authorized 15,000,000 shares; none issued and outstanding		—			—
Series A preferred stock, no par value, authorized 200,000,000 shares; issued and outstanding 94,619,378 and 93,643,430 shares		—			—
Series B convertible preferred stock, no par value, authorized 240,000 shares; issued and outstanding 240,000 shares		24			24
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding 94,619,378 and 93,643,430 shares		938,693			927,269
Distributions greater than net income		(183,427	)		(140,598	)
Accumulated other comprehensive income		—			2,404
TOTAL SHAREHOLDERS’ EQUITY		755,290			789,099
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	975,371		$	998,851

See notes to consolidated financial statements.

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Apple REIT Eight, Inc.

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(In thousands, except per share data)

	Three months ended September 30, 2010			Three months ended September 30, 2009			Nine months ended September 30, 2010			Nine months ended September 30, 2009
Revenues:
Room revenue	$	48,418		$	44,953		$	131,057		$	121,472
Other revenue		3,519			3,396			9,557			9,373
Total revenue		51,937			48,349			140,614			130,845
Expenses:
Operating expense		12,940			12,591			36,293			34,787
Hotel administrative expense		4,024			4,064			11,747			12,210
Sales and marketing		3,795			3,367			10,646			9,699
Utilities		2,441			2,274			6,228			6,058
Repair and maintenance		2,686			2,412			7,292			6,779
Franchise fees		2,093			1,974			5,565			5,348
Management fees		1,864			1,729			4,918			4,652
Taxes, insurance and other		2,558			2,596			7,844			7,615
Land lease expense		1,597			1,596			4,791			4,777
General and administrative		1,164			1,033			3,900			3,393
Depreciation expense		8,791			8,355			26,190			24,330
Total expenses		43,953			41,991			125,414			119,648
Operating income		7,984			6,358			15,200			11,197
Investment income, net		5			16			3,028			33
Interest expense		(2,328	)		(1,873	)		(6,767	)		(5,283	)
Net income	$	5,661		$	4,501		$	11,461		$	5,947
Unrealized gain on investments		—			618			—			2,195
Comprehensive income	$	5,661		$	5,119		$	11,461		$	8,142
Basic and diluted net income per common share	$	0.06		$	0.05		$	0.12		$	0.06
Weighted average common shares outstanding - basic and diluted		94,381			93,105			94,075			92,812

See notes to consolidated financial statements.

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Apple REIT Eight, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine months ended September 30, 2010			Nine months ended September 30, 2009
Cash flow from operating activities:
Net income	$	11,461		$	5,947
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		26,190			24,330
Amortization of deferred financing costs, fair value adjustments and other non-cash expenses, net		268			(461	)
Net realized gain on sale of investments		(3,011	)		—
Changes in operating assets and liabilities:
(Increase)/decrease in other assets		(1,054	)		2,264
Increase in funds due from third party managers		(2,678	)		(3,202	)
Increase in accounts payable and accrued expenses		2,956			7,145
Net cash provided by operating activities		34,132			36,023
Cash flow from investing activities:
Decrease/(increase) in capital improvement reserves		2,788			(1,056	)
Proceeds from sale of equity securities - available for sale		3,804			—
Investment in other assets		—			(3,240	)
Capital improvements		(5,884	)		(22,404	)
Net cash provided by (used in) investing activities		708			(26,700	)
Cash flow from financing activities:
Net proceeds related to issuance of Units		19,576			20,334
Redemptions of Units		(8,271	)		(10,193	)
Cash distributions paid to common shareholders		(54,290	)		(56,955	)
Net proceeds from line of credit		10,320			39,055
Payments of notes payable		(1,674	)		(1,564	)
Net cash used in financing activities		(34,339	)		(9,323	)
Net change in cash and cash equivalents		501			—
Cash and cash equivalents, beginning of period		—			—
Cash and cash equivalents, end of period	$	501		$	—

See notes to consolidated financial statements.

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APPLE REIT EIGHT, INC.

Notes to Consolidated Financial Statements

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 rules and regulations for reporting on Form 10-Q. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States for complete financial statements. 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 2009 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the period ending December 31, 2010.

Organization

Apple REIT Eight, Inc., together with its wholly owned subsidiaries, (the “Company”) is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The Company was formed to invest in hotels, residential apartment communities and other income-producing real estate assets in selected metropolitan areas in the United States. Initial capitalization occurred on January 22, 2007, when 10 Units, each Unit consisting of one common share and one Series A preferred share, were purchased by Apple Eight Advisors, Inc. (“A8A”), owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer, and 240,000 Series B convertible shares were also purchased individually by Glade M. Knight. The Company began operations on November 9, 2007 when it acquired its first hotels. The Company completed its best efforts offering of Units in April 2008. The Company’s fiscal year end is December 31. As of September 30, 2010, the Company owned 51 hotels. 45 of the hotels were acquired in 2008 and six in late 2007. The Company has no foreign operations or assets and its operating structure includes two segments. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.

Distributions

The Company’s annual distribution rate as of September 30, 2010 was $0.77 per common share payable monthly. For the nine months ended September 30, 2010 and 2009 the Company made distributions of $0.58 and $0.61 per common share for a total $54.3 million and $57.0 million. For the three months ended September 30, 2010 and 2009 the Company made distributions of $0.19 and $0.19 per common share for a total $18.2 million and $17.9 million.

Significant Accounting Policies

Use of Estimates

The preparation of the financial statements in conformity with United States 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.

Earnings Per Common Share

Basic earnings per common share is computed as net income divided by the weighted average number of common 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 shares with a dilutive effect for the three and nine months ended September 30, 2010 or 2009. As a result, basic and

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dilutive outstanding shares were the same. Series B convertible preferred shares are not included in earnings per common share calculations until such time the Series B convertible preferred shares are converted to common shares.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued a pronouncement (Accounting Standards Update No. 2009-17) which amends its guidance surrounding a company’s analysis to determine whether any of its variable interests constitute controlling financial interests in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. The new pronouncement also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and enhanced disclosure about an enterprise’s involvement with a variable interest entity. This pronouncement was adopted by the Company in the first quarter of 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

2. Other Assets

Included in Other assets, net on the Company’s consolidated balance sheet is a 24% ownership interest in Apple Air Holding, LLC (“Apple Air”), purchased by the Company for $3.2 million in cash in 2009. The other members of Apple Air are Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc. The interest was purchased to allow the Company access to two Lear jets for asset management and renovation purposes. The Company has recorded its share of income and losses of the entity under the equity method of accounting and adjusted its investment in Apple Air accordingly. The Company’s ownership interest was $2.4 million at September 30, 2010 and $2.8 million at December 31, 2009. For the three months ended September 30, 2010 and 2009, the Company recorded a loss of approximately $0.1 million in each period as its share of the net loss of Apple Air. For the nine months ended September 30, 2010 and 2009, the Company recorded a loss of approximately $0.3 million in each period as its share of the net loss of Apple Air. This loss primarily relates to depreciation of the aircraft, and is included in General and Administrative expense on the Company’s consolidated statements of operations.

At December 31, 2009 the Company held equity securities classified as available-for-sale, in accordance with the FASB’s pronouncement for accounting for certain investments in debt and equity securities. These securities were included in Other assets, net on the Company’s consolidated balance sheet at December 31, 2009 at fair value of $3.2 million. Unrealized gains were reported as accumulated other comprehensive income, $2.4 million at December 31, 2009. In the first quarter of 2010, the Company sold these equity securities, resulting in a realized gain of $3.0 million which is recorded in Investment income, net on the Company’s consolidated statement of operations.

3. Notes Payable

In November 2008, the Company entered into a $75 million unsecured line of credit with a commercial bank. The applicable interest rate is equal to LIBOR (the London Interbank Offered Rate, 0.26% at September 30, 2010) plus 1.75% annually. Interest payments are due monthly. The principal must be paid by the maturity date of November 2010, and may be prepaid without penalty. At September 30, 2010, the credit line had an outstanding principal balance of $68.7 million. At December 31, 2009, the credit line had an outstanding principal balance of $58.3 million. The line of credit is unsecured, however does contain a negative pledge agreement that requires approval from the lender to materially change the Company’s investment in 10 properties including using those 10 properties as security for additional financing.

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4. Fair Value of Financial Instruments

The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of the debt obligation with similar credit policies. Market rates take into consideration general market conditions and maturity. As of September 30, 2010, the carrying value and estimated fair value of the Company’s debt was $192.7 million and $197.6 million. As of December 31, 2009, the carrying value and estimated fair value of the Company’s debt was $184.2 million and $186.0 million. The carrying value of the Company’s other financial instruments approximates fair value due to the short-term nature of these financial instruments.

5. Related Parties

The Company has significant transactions with related parties. These transactions cannot be construed to be arm’s length, and the results of the Company’s operations may be different if these transactions were conducted with non-related parties.

The Company is party to an advisory agreement with A8A, pursuant to which A8A provides management services to the Company. An annual fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable for these services. A8A utilizes Apple REIT Six, Inc. to provide these services. Total expenses related to this agreement totaled $2.3 million for the first nine months of 2010 and $2.1 million for the same period in 2009. Of these total expenses, $0.8 million were fees paid to A8A for each of the nine months ended September 30, 2010 and 2009 and $1.5 million and $1.4 million were expenses reimbursed by A8A to Apple REIT Six, Inc. for the nine months ended September 30, 2010 and 2009. These expenses are recorded in General and Administrative expense.

A8A is 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc. (a newly formed REIT). Members of the Company’s Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

6. Shareholder’s Equity

In the second quarter of 2008, 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. The Company has registered 10 million Units for potential issuance under the plan. During the first nine months of 2010, approximately 1.8 million Units were issued under the plan representing approximately $19.6 million. For the nine months ending September 30, 2009, approximately 1.8 million Units were issued under the plan representing approximately $20.3 million. Since inception of the plan through September 30, 2010, the Company has issued approximately 5.7 million Units representing approximately $62.4 million.

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 is three percent of the weighted average number of Units outstanding during the 12-month period immediately prior to the date of redemption. The Company reserves the right to change the purchase price for 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, 2010, the Company redeemed approximately 804 thousand Units in the amount of $8.3 million under the program. For the first nine months of 2009, the Company redeemed

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approximately 989 thousand Units in the amount of $10.2 million. Since inception of the program through September 30, 2010, the Company has redeemed approximately 2.2 million Units representing approximately $22.5 million.

7. Segments

The Company has two reportable segments (the New York hotel and all other hotels). The Company does not allocate corporate-level accounts to its operating segments, including corporate general and administrative expenses, non-operating interest income and interest expense. Dollar amounts are in thousands.

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	For the three months ended September 30, 2010
	New York, New York Hotel			All Other Hotels			Corporate			Consolidated
Total revenue	$	4,555		$	47,382		$	—		$	51,937
Hotel operating expenses		4,541			29,457			—			33,998
General and administrative expense		—			—			1,164			1,164
Depreciation expense		1,627			7,164			—			8,791
Operating income/(loss)		(1,613	)		10,761			(1,164	)		7,984
Investment income, net		—			—			5			5
Interest expense		—			(1,939	)		(389	)		(2,328	)
Net income/(loss)	$	(1,613	)	$	8,822		$	(1,548	)	$	5,661
Total assets	$	119,231		$	853,057		$	3,083		$	975,371
	For the nine months ended September 30, 2010
	New York, New York Hotel			All Other Hotels			Corporate			Consolidated
Total revenue	$	13,363		$	127,251		$	—		$	140,614
Hotel operating expenses		13,023			82,301			—			95,324
General and administrative expense		—			—			3,900			3,900
Depreciation expense		4,822			21,368			—			26,190
Operating income/(loss)		(4,482	)		23,582			(3,900	)		15,200
Investment income, net		—			—			3,028			3,028
Interest expense		—			(5,672	)		(1,095	)		(6,767	)
Net income/(loss)	$	(4,482	)	$	17,910		$	(1,967	)	$	11,461
Total assets	$	119,231		$	853,057		$	3,083		$	975,371
	For the three months ended September 30, 2009
	New York, New York Hotel			All Other Hotels			Corporate			Consolidated
Total revenue	$	3,929		$	44,420		$	—		$	48,349
Hotel operating expenses		4,351			28,252			—			32,603
General and administrative expense		—			—			1,033			1,033
Depreciation expense		1,536			6,819			—			8,355
Operating income/(loss)		(1,958	)		9,349			(1,033	)		6,358
Investment income, net		—			—			16			16
Interest (expense)/income		168			(1,782	)		(259	)		(1,873	)
Net income/(loss)	$	(1,790	)	$	7,567		$	(1,276	)	$	4,501
Total assets	$	123,119		$	876,348		$	6,288		$	1,005,755
	For the nine months ended September 30, 2009
	New York, New York Hotel			All Other Hotels			Corporate			Consolidated
Total revenue	$	8,901		$	121,944		$	—		$	130,845
Hotel operating expenses		11,470			80,455			—			91,925
General and administrative expense		—			—			3,393			3,393
Depreciation expense		4,279			20,051			—			24,330
Operating income/(loss)		(6,848	)		21,438			(3,393	)		11,197
Investment income, net		—			—			33			33
Interest (expense)/income		809			(5,455	)		(637	)		(5,283	)
Net income/(loss)	$	(6,039	)	$	15,983		$	(3,997	)	$	5,947
Total assets	$	123,119		$	876,348		$	6,288		$	1,005,755

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8. Subsequent Events

In October 2010 the following events occurred:

The Company declared and paid approximately $6.1 million in distributions to its common shareholders, or $0.064167 per outstanding common share. Under the Company’s Dividend Reinvestment Plan, $2.2 million were reinvested, resulting in the issuance of approximately 198,000 Units.

The Company redeemed approximately 596,000 Units in the amount of $6.5 million under its Unit Redemption Program.

The Company refinanced its mortgage note payable on its Westford Residence Inn property. The new mortgage note has a principal balance of $7.0 million with an interest rate of 5.3%. The loan calls for monthly payments of principal and interest of approximately $40,000, with the balance of $6.3 million due at maturity (October 1, 2015).

The Company effectively renewed its $75 million unsecured line of credit with Branch Banking and Trust Company (“BB&T”), extending the term for 2 years to October 2012. The interest rate on the loan increased to LIBOR plus 2.25% with a floor of 3.5%. Additionally, the Company entered into a secured $25 million term loan with BB&T. The loan is secured by two properties and matures in October 2012. The loan requires interest only payments monthly at LIBOR plus 2.25% with a floor of 3.5%. Both loans have financial covenants requiring a minimum consolidated net worth and debt service charge and a maximum debt to equity and distribution to income ratio.

Apple REIT Nine, Inc. purchased from the Company’s third party lender, the note payable secured by the Columbia Hilton Garden Inn. The purchase of the note by Apple REIT Nine, Inc. had no financial effect on the Company.

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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, including the current economic recession throughout the United States, 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. Any forward-looking statement that the Company makes speaks only as of the date of this report. The Company undertakes no obligation to publically update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law.

Overview

Apple REIT Eight, Inc. together with its wholly owned subsidiaries (the “Company”) is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The Company, which owned 51 properties as of September 30, 2010 and has a limited operating history with its first hotel acquired on November 9, 2007, was formed to invest in hotels, residential apartment communities and other real estate in select metropolitan areas in the United States. Initial capitalization occurred on January 22, 2007, when 10 Units, each Unit consisting of one share of common stock and one share of Series A preferred stock were purchased by Apple Eight Advisors, Inc. (“A8A”) and 240,000 shares of Series B Preferred shares were purchased by Mr. Glade M. Knight, the Company’s Chairman and Chief Executive Officer. The Company completed its best-efforts offering of Units in April 2008. The Company’s fiscal year end is December 31. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

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 as compared to other hotels within their respective local market, in general, has met the Company’s expectations for the period owned. With the significant decline in economic conditions throughout the United States, overall performance of the Company’s hotels since acquisition have not met expectations. Although there is no way to predict future general economic conditions, the Company’s and industry’s revenues and income are improving as compared to 2009, with industry estimates for the full year 2010 for revenue percentage increases in the low single digits as compared to 2009. Additionally, industry analysts are forecasting 2011 revenue percentage growth in the mid-single digits as compared to 2010.

In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, average daily rate (“ADR”), revenue per available room (“RevPAR”), and Market Yield which compares an individual hotel’s results to other hotels in its local market, and expenses, such as hotel operating expenses, general and administrative and other expenses described below. Although it is not possible to predict if or how quickly general economic conditions will improve or their impact on the hotel industry, with the significant number of

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renovations (15) of existing properties by the Company in 2009, the number of hotels that were new (9) when acquired by the Company, and the expected industry improvement, the Company anticipates moderate growth for the remainder of 2010 as compared to 2009 for the Company’s hotels and continued growth in 2011. Additionally, with the overall economic declines, the Company continues to focus on improving market share. The Company’s properties overall are revenue leaders in their respective markets with an Average RevPAR Index (a comparison of a property’s RevPAR to the market average) of 132 for the first nine months of 2010, a 3% increase from the same period in 2009 for comparable hotels.

The following is a summary of the Company’s results:

	Three months ended															Nine months ended
(in thousands, except statistical data)	9/30/10			Percent of Revenue			9/30/09			Percent of Revenue			Percent Change			9/30/10			Percent of Revenue			9/30/09			Percent of Revenue			Percent Change
Total revenues	$	51,937			100	%	$	48,349			100	%		7	%	$	140,614			100	%	$	130,845			100	%		7	%
Hotel direct expenses		29,843			57	%		28,411			59	%		5	%		82,689			59	%		79,533			61	%		4	%
Taxes, insurance and other expense		2,558			5	%		2,596			5	%		-1	%		7,844			6	%		7,615			6	%		3	%
Land lease expense		1,597			3	%		1,596			3	%		—	%		4,791			3	%		4,777			4	%		—	%
General and administrative expense		1,164			2	%		1,033			2	%		13	%		3,900			3	%		3,393			3	%		15	%
Depreciation		8,791						8,355						5	%		26,190						24,330						8	%
Investment income, net		5						16						-69	%		3,028						33						N/A
Interest expense		(2,328	)					(1,873	)					24	%		(6,767	)					(5,283	)					28	%
Average RevPAR Index(1)		131						131						—	%		132						128						3	%
Number of hotels		51						51						—	%		51						51						—	%
Average Daily Rate (ADR)	$	117					$	116						1	%	$	112					$	112						—	%
Occupancy		76	%					71	%					7	%		72	%					67	%					7	%
RevPAR	$	89					$	82						9	%	$	81					$	75						8	%
Total Rooms Sold(2)		408,262						381,769						7	%		1,155,759						1,073,603						8	%
Total Rooms Available(3)		539,516						539,524						—	%		1,602,300						1,602,321						—	%

⁽¹⁾Statistics calculated from data provided by Smith Travel Research, Inc.® and excludes new properties open less than 2 years or under renovation during the applicable period.

⁽²⁾Represents the number of room nights sold during the period.

⁽³⁾Represents the number of rooms owned by the Company multiplied by the number of nights in the period.

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, 2010. All dollar amounts are in thousands.

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Location	State	Brand	Manager	Date Acquired	Rooms	Gross Purchase Price
Birmingham	AL	Homewood Suites	McKibbon	5/23/2008	95	$	16,500
Rogers	AR	Fairfield Inn & Suites	Intermountain	2/29/2008	99		8,000
Rogers	AR	Residence Inn	Intermountain	2/29/2008	88		11,744
Springdale	AR	Residence Inn	Intermountain	3/14/2008	72		5,606
Sacramento	CA	Hilton Garden Inn	Dimension	3/7/2008	154		27,630
Cypress	CA	Courtyard	Dimension	4/30/2008	180		31,164
Burbank	CA	Residence Inn	Marriott	5/13/2008	166		50,500
Oceanside	CA	Residence Inn	Marriott	5/13/2008	125		28,750
Tulare	CA	Hampton Inn & Suites	Inn Ventures	6/26/2008	86		10,331
San Jose	CA	Homewood Suites	Dimension	7/2/2008	140		21,862
Tallahassee	FL	Hilton Garden Inn	LBA	1/25/2008	85		13,200
Sanford	FL	SpringHill Suites	LBA	3/14/2008	105		11,150
Jacksonville	FL	Homewood Suites	McKibbon	6/17/2008	119		23,250
Tampa	FL	TownePlace Suites	McKibbon	6/17/2008	95		11,250
Port Wentworth	GA	Hampton Inn	Newport	1/2/2008	106		10,780
Savannah	GA	Hilton Garden Inn	Newport	7/31/2008	105		12,500
Overland Park	KS	SpringHill Suites	True North	3/17/2008	102		8,850
Overland Park	KS	Residence Inn	True North	4/30/2008	120		15,850
Wichita	KS	Courtyard	Intermountain	6/13/2008	90		8,874
Overland Park	KS	Fairfield Inn & Suites	True North	8/20/2008	110		12,050
Bowling Green	KY	Hampton Inn	Newport	12/6/2007	130		18,832
Marlborough	MA	Residence Inn	True North	1/15/2008	112		20,200
Westford	MA	Hampton Inn & Suites	True North	3/6/2008	110		15,250
Westford	MA	Residence Inn	True North	4/30/2008	108		14,850
Annapolis	MD	Hilton Garden Inn	White	1/15/2008	126		25,000
Kansas City	MO	Residence Inn	True North	4/30/2008	106		17,350
Greensboro	NC	SpringHill Suites	Newport	11/9/2007	82		8,000
Matthews	NC	Hampton Inn	Newport	1/15/2008	92		11,300
Dunn	NC	Hampton Inn	McKibbon	1/24/2008	120		12,500
Concord	NC	Hampton Inn	Newport	3/7/2008	101		9,200
Fayetteville	NC	Residence Inn	Intermountain	5/9/2008	92		12,201
Winston-Salem	NC	Courtyard	McKibbon	5/19/2008	122		13,500
Carolina Beach	NC	Courtyard	Crestline	6/5/2008	144		24,214
Wilmington	NC	Fairfield Inn & Suites	Crestline	12/11/2008	122		14,800
Somerset	NJ	Courtyard	Newport	11/9/2007	162		16,000
New York	NY	Renaissance	Marriott	1/4/2008	200		99,000
Tulsa	OK	Hampton Inn & Suites	Western	12/28/2007	102		10,200
Greenville	SC	Residence Inn	McKibbon	5/19/2008	78		8,700
Hilton Head	SC	Hilton Garden Inn	McKibbon	5/29/2008	104		13,500
Columbia	SC	Hilton Garden Inn	Newport	9/22/2008	143		21,200
Chattanooga	TN	Homewood Suites	LBA	12/14/2007	76		8,600
Texarkana	TX	Courtyard	Intermountain	3/7/2008	90		12,924
Texarkana	TX	TownePlace Suites	Intermountain	3/7/2008	85		9,057
Harrisonburg	VA	Courtyard	Newport	11/16/2007	125		23,219
Charlottesville	VA	Courtyard	Crestline	6/5/2008	137		27,900
Virginia Beach	VA	Courtyard	Crestline	6/5/2008	141		27,100
Virginia Beach	VA	Courtyard	Crestline	6/5/2008	160		39,700
Suffolk	VA	Courtyard	Crestline	7/2/2008	92		12,500
Suffolk	VA	TownePlace Suites	Crestline	7/2/2008	72		10,000
Chesapeake	VA	Marriott	Crestline	10/21/2008	226		38,400
Tukwila	WA	Homewood Suites	Dimension	7/2/2008	106		15,707
					5,908	$	950,745

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With the exception of assumed mortgage loans in 2008 on 15 of its hotel properties, substantially all of the purchases were funded with proceeds of the Company’s best-efforts offering of Units, which was completed in April 2008. The Company leases all of its hotels to its wholly-owned taxable REIT subsidiaries under hotel lease agreements. The Company also used the proceeds of its offering to pay $19.0 million, representing 2% of the gross purchase price for these hotels, as a commission to Apple Suites Realty Group, Inc. (“ASRG”), 100% owned by Glade M. Knight, the Company’s Chairman and Chief Executive Officer. No hotels have been purchased since December 2008, and there are no outstanding purchase contracts for additional hotels as of September 30, 2010.

Of the Company’s 51 hotels owned at September 30, 2010, six were purchased in 2007 and 45 were purchased in 2008.

Results of Operations

As of September 30, 2010, the Company owned 51 hotels with 5,908 rooms. The Company’s portfolio of hotels owned is unchanged since 2008. Hotel performance is impacted by many factors, including economic conditions in the United States, as well as each locality. During the past two years, the overall weakness in the U.S. economy has had a considerable negative impact on both consumer and business travel. As a result, lodging demand in most markets in the United States has declined as compared to pre-recession levels. Although economic conditions have begun to improve, the Company expects demand for the industry as a whole to improve modestly and be below pre-recession levels until general economic conditions become more stable. The Company does anticipate moderate revenue and income improvements for the remainder of the year as compared to 2009 due to industry improvements, the significant number of renovations (15) in 2009 and the significant number of newly opened properties acquired by the Company in 2008 (9) which were in a ramp up stage in 2009. This improvement is expected to continue into 2011. The Company’s hotels have shown results consistent with industry and brand averages for the period of ownership.

Revenues

The Company’s principal source of revenue is hotel room revenue and other related revenue. For the three months ended September 30, 2010 and 2009, the Company had total revenue of $51.9 million and $48.3 million. Revenue for the hotel located in New York, New York (the “New York hotel”) was $4.6 million or 9% of total revenue for the third quarter of 2010 and $3.9 million or 8% of total revenue for the third quarter of 2009. For the three months ended September 30, 2010, the hotels achieved combined average occupancy of approximately 76%, ADR of $117 and RevPAR of $89. The New York hotel had average occupancy of 82%, ADR of $257 and RevPAR of $211. For the three months ended September 30, 2009, the hotels achieved combined average occupancy of approximately 71%, ADR of $116 and RevPAR of $82. For the same period, the New York hotel had average occupancy of 80%, ADR of $221 and RevPAR of $176.

For the nine months ended September 30, 2010 and 2009, the Company had total revenue of $140.6 million and $130.8 million. Revenue for the New York hotel was $13.4 million or 10% of total revenue for the nine months of 2010 and $8.9 million or 7% of total revenue for the first nine months of 2009. For the nine months ended September 30, 2010, the hotels achieved combined average occupancy of approximately 72%, ADR of $112 and RevPAR of $81. The New York hotel had average occupancy of 85%, ADR of $244 and RevPAR of $207. For the nine months ended September 30, 2009, the hotels achieved combined average occupancy of approximately 67%, ADR of $112 and RevPAR of $75. For the same period, the New York hotel had average occupancy of 67%, ADR of $190 and RevPAR of $128.

As reflected in the Company’s occupancy increase (the Company has seen year over year occupancy improvement every month since November 2009), the industry is beginning to realize an overall increase in demand as compared to 2009. The increase is a result of reduced room rates and the sense that the overall economy is stabilizing, generating more business and leisure travelers. While ADR still trails pre-recession levels, it has stabilized, and increased in the third quarter, as compared to 2009. As a result, the Company’s RevPAR has increased 8% year to date as compared to the same period in 2009. The Company anticipates

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similar continued RevPAR improvement throughout the remainder of 2010 and mid-single digit percentage increases in 2011.

While the revenue rates earned by the Company are consistent with industry and brand averages, the Company continues to focus on improving market share. The Company’s properties overall lead their respective markets with an Average RevPAR Index (a comparison of a property’s RevPAR to the market average, 100) of 132 year-to-date, a 3% increase from 2009 for comparable properties.

During the first half of 2009, the Company was in the process of completing its conversion of the New York hotel from an unbranded hotel to a Renaissance hotel. Consequently, the hotel had an average of 32 rooms out of service each night for the first half of 2009 and experienced other disruptions to its common areas. As a result of the conversion effort and declines in economic conditions, revenue at the hotel was unusually low for the first half of 2009. The Company completed the conversion to a Renaissance in late April 2009. The RevPAR Index for the New York hotel was 112 for the nine months ending September 30, 2010, an increase of 43% from 78 for the first nine months of 2009. Although the hotel’s revenue has increased 50% in the first nine months of 2010 as compared to the same period in 2009, the Company believes there continues to be opportunity for market penetration and continues to work with Marriott management to increase the RevPAR Index for the New York hotel.

Expenses

For the three months ended September 30, 2010, hotel direct expenses of the Company’s hotels totaled $29.8 million or 57% of total revenue (the New York hotel had direct expenses of $2.9 million or 60% of its total revenue for the quarter) and for the three months ended September 30, 2009 direct expenses were $28.4 million or 59% of total revenue (the New York hotel had direct expenses of $2.8 million or 72% of its total revenue for the quarter). For the nine months ended September 30, 2010 and 2009, hotel direct expenses of the Company’s hotels totaled $82.7 million or 59% of total revenue, and 79.5 million or 61% of total revenue (the New York hotel had direct expenses of $8.1 million or 60% of its total revenue for the 2010 nine-month period and direct expenses of $6.8 million or 77% of its total revenue for the first nine months of 2009). 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. Operating expenses in 2009 were negatively impacted due to the significant number of renovations and the ramp up of newly opened hotels in late 2008.

The Company continues its efforts to control costs, however, certain operating costs such as management costs, certain utility costs and minimum supply and maintenance costs are relatively fixed in nature, and cannot be curtailed or eliminated. The Company has been successful in reducing, relative to revenues, certain labor costs, food and supply costs and utility costs by continually monitoring and sharing utilization data across its hotels and management companies.

Taxes, insurance, and other expense for the three months ended September 30, 2010 and 2009 totaled $2.6 million, or 5% of total revenues in both years (of which approximately $186 thousand and $46 thousand related to the New York hotel). For the nine months ended September 30, 2010 and 2009, taxes, insurance, and other expenses were $7.8 million and $7.6 million, or 5% of total revenues (of which approximately $531 thousand and $221 thousand related to the New York hotel).

Land lease expense was $1.6 million for the three months ended September 30, 2010 and September 30, 2009 and was $4.8 million for the nine months ended September 30, 2010 and 2009. This expense represents the expense incurred by the Company to lease land for five hotel properties. Land lease expense for the New York hotel was $1.5 million for the third quarters of 2010 and 2009 and was $4.4 million for the nine months ended September 30, 2010 and 2009.

General and administrative expense for the three months ended September 30, 2010 and 2009 was $1.2 million and $1.0 million. For the nine months ended September 30, 2010 and 2009, general and administrative expense was $3.9 million and $3.4 million. The principal components of general and administrative expense are advisory fees, legal fees, accounting fees, reporting expense, and the Company’s share of loss from its investment in Apple Air Holding LLC.

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Depreciation expense was $8.8 million for the third quarter of 2010 and $8.4 million for the third quarter of 2009. For the nine months ended September 30, 2010 and 2009, depreciation expense was $26.2 million and $24.3 million. These expenses include $1.6 million and $1.5 million for the New York hotel for the quarterly periods and $4.8 million and $4.3 million for the nine month periods ended September 30, 2010 and 2009. Depreciation expense represents depreciation expense of the Company’s hotel buildings and related improvements, and associated furniture, fixtures and equipment, for the respective periods owned. The increase is a result of capital improvements made by the Company in 2009 of approximately $25 million to complete 12 renovations.

In the first quarter of 2010, the Company sold its equity securities in a publicly traded real estate investment trust, resulting in realized gains and other investment income of $3.0 million.

Interest expense for the third quarter and nine months ended September 30, 2010 was $2.3 million and $6.8 million. Interest expense for both periods includes interest expense on 15 mortgages assumed in 2008 and the Company’s line of credit offset by capitalized interest of $101 thousand in the first quarter of 2010 related to the renovation of 2 hotels. Interest expense for the same periods in 2009 was $1.9 million and $5.3 million, which is offset by capitalized interest of $275 thousand for the three months of 2009 related to five hotels under renovation and $1.2 million for the nine month period in 2009, related to the renovation of 12 hotel properties.

Liquidity and Capital Resources

In November 2008, the Company entered into a $75.0 million revolving line of credit with an original term expiring in November 2010 (see Subsequent Events). The line of credit was obtained to meet short-term cash needs as the Company planned on completing a significant number of hotel renovations, and newly opened properties have a period of ramp up to normal operating status. Through September 30, 2010, substantially all of the planned renovation work was completed. With the availability of this line of credit,the Company maintains little cash on hand, accessing the line as necessary. Cash on hand was $0.5 million at September 30, 2010. The outstanding balance on the line of credit was $68.7 million at September 30, 2010 and its interest rate was 2.01%. The Company anticipates that cash flow from operations and the revolving line of credit will be adequate to meet its liquidity requirements, including required distributions to shareholders (the Company is not required to make any distributions at this time), capital expenditures and debt service. As discussed further in Subsequent Events, the Company has extended its existing line of credit and entered into a $25 million term loan so that it can make distributions in excess of required amounts to maintain its REIT status. The Company intends to maintain a relatively stable distribution rate instead of raising and lowering the distribution rate with varying economic cycles. With the depressed financial results of the Company and the lodging industry as compared to pre-recession levels, the Company will attempt to utilize additional financing to achieve this objective. Although the Company has relatively low levels of debt, there can be no assurances it will be successful with this strategy and may need to reduce its distributions to required levels. If the Company were unsuccessful in extending its maturing debt in 2011 or if it were to default on its debt, it may be unable to make distributions.

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 2010 totaled $54.3 million and were paid monthly at a rate of $0.064167 per common share. For the same nine month period, the Company’s cash generated from operations was approximately $34.1 million. This shortfall includes a return of capital and was funded primarily by additional borrowings under the Company’s line of credit facility. The Company intends to continue paying distributions on a monthly basis. However, since there can be no assurance of the ability of the Company’s properties to provide income at this level, there can be no assurance as to the classification or duration of distributions at the current monthly rate. In consideration of the weakness in economic conditions throughout the United States, the Board of Directors monitors the Company’s distribution rate relative to the performance of the hotels on an ongoing basis and may make adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company. In April 2009, the Board of Directors approved a reduction in the Company’s annual distribution rate from $0.88 to $0.77 per common share. The reduction of the distribution was effective beginning with the May 15, 2009 distribution.

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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, a percentage of gross revenues provided that such amount may be used for the Company’s capital expenditures with respect to the hotels. As of September 30, 2010, the Company held $8.5 million in reserve for capital expenditures. Total capital expenditures in the first nine months of 2010 were $5.1 million. Total capital expenditures for 2010 are anticipated to be approximately $6-8 million. The Company completed 12 renovations throughout 2009. In 2010 the Company anticipates the completion of three renovations, thus substantially reducing capital expenditures as compared to 2009.

In the second quarter of 2008, 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 distributions 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. The Company has registered 10 million Units for potential issuance under the plan. During the first nine months of 2010, approximately 1.8 million Units were issued under the plan representing approximately $19.6 million. For the nine months ending September 30, 2009, approximately 1.8 million Units were issued under the plan representing approximately $20.3 million. Since inception of the plan through September 30, 2010, the Company has issued approximately 5.7 million Units representing approximately $62.4 million.

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 is three percent of the weighted average number of Units outstanding during the 12-month period immediately prior to the date of redemption. The Company reserves the right to change the purchase price for 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, 2010, the Company redeemed approximately 804 thousand Units in the amount of $8.3 million under the program. For the first nine months of 2009, the Company redeemed approximately 989 thousand Units in the amount of $10.2 million. Since inception of the program through September 30, 2010, the Company has redeemed approximately 2.2 million Units representing approximately $22.5 million.

Related Party Transactions

The Company has significant transactions with related parties. These transactions cannot be construed to be arm’s length, and the results of the Company’s operations may be different if these transactions were conducted with non-related parties.

The Company has a contract with Apple Suites Realty Group (“ASRG”), 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, 2010 payments to ASRG for services under the terms of this contract have totaled $19.0 million since inception, which were capitalized as a part of the purchase price of the hotels. No brokerage services were provided by ASRG in the first nine months of 2010 or in 2009.

The Company is party to an advisory agreement with A8A, pursuant to which A8A provides management services to the Company. An annual fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable for these services. A8A utilizes Apple REIT Six, Inc. to provide these services. Total expenses related to this agreement totaled $2.3

18

million for the first nine months of 2010 and $2.1 million for the same period in 2009. Of these total expenses, $0.8 million were fees paid to A8A for each of the nine months ended September 30, 2010 and 2009 and $1.5 million and $1.4 million were expenses reimbursed by A8A to Apple REIT Six, Inc. for the nine months ended September 30, 2010 and 2009. These expenses are recorded in General and Administrative expense.

ASRG and A8A are 100% owned by Glade M. Knight, Chairman and Chief Executive Officer of the Company. Mr. Knight is also Chairman and Chief Executive Officer of Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc. (a newly formed REIT). Members of the Company’s Board of Directors are also on the boards of Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

Subsequent Events

In October 2010 the following events occurred:

The Company declared and paid approximately $6.1 million in distributions to its common shareholders, or $0.064167 per outstanding common share. Under the Company’s Dividend Reinvestment Plan, $2.2 million were reinvested, resulting in the issuance of approximately 198,000 Units.

The Company redeemed approximately 596,000 Units in the amount of $6.5 million under its Unit Redemption Program.

The Company refinanced its mortgage note payable on its Westford Residence Inn property. The new mortgage note has a principal balance of $7.0 million with an interest rate of 5.3%. The loan calls for monthly payments of principal and interest of approximately $40,000, with the balance of $6.3 million due at maturity (October 1, 2015).

The Company effectively renewed its $75 million unsecured line of credit with Branch Banking and Trust Company (“BB&T”), extending the term for 2 years to October 2012. The interest rate on the loan increased to LIBOR plus 2.25% with a floor of 3.5%. Additionally, the Company entered into a secured $25 million term loan with BB&T. The loan is secured by two properties and matures in October 2012. The loan requires interest only payments monthly at LIBOR plus 2.25% with a floor of 3.5%. Both loans have financial covenants requiring a minimum consolidated net worth and debt service charge and a maximum debt to equity and distribution to income ratio.

Apple REIT Nine, Inc. purchased from the Company’s third party lender, the note payable secured by the Columbia Hilton Garden Inn. The purchase of the note by Apple REIT Nine, Inc. had no financial effect on the Company.

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

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The hotel industry historically has been seasonal in nature. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. As a result, there may be quarterly fluctuations in results of operations. 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 or available credit to make distributions.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board issued a pronouncement (Accounting Standards Update No. 2009-17) which amends its guidance surrounding a company’s analysis to determine whether any of its variable interests constitute controlling financial interests in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: (a) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. The new pronouncement also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and enhanced disclosure about an enterprise’s involvement with a variable interest entity. This pronouncement was adopted by the Company in the first quarter of 2010. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of September 30, 2010, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk or commodity price risk. The Company will be exposed to interest rate risk due to possible changes in short term interest rates as it invests its cash or borrows on its line of credit and due to its variable interest rate mortgage on its Columbia, South Carolina hotel. The Company had an outstanding balance of $68.7 million on its $75 million line of credit at September 30, 2010, and to the extent it utilizes the line of credit, the Company will be exposed to changes in short-term interest rates. The outstanding balance of the Company’s variable rate mortgage was $10.9 million at September 30, 2010. Based on these outstanding balances at September 30, 2010, every 100 basis point change in interest rates will impact the Company’s annual net income by $0.8 million, all other factors remaining the same. The Company’s cash balance at September 30, 2010 was $0.5 million.

Item 4. Controls and Procedures

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

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PART II. OTHER INFORMATION

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

Unit Redemption Program

The Company 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 is three percent of the weighted average number of Units outstanding during the 12-month period immediately prior to the date of redemption. The Company reserves the right to change the purchase price for redemptions, reject any request for redemption, 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 2010 (no redemption occurred in August and September 2010).

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 2010		274,454		$10.26		2,179,497		(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.

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Item 6. Exhibits

Exhibit Number	Description of Documents
3.1	Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.1 to the registrant’s registration statement on Form S-11 (SEC File No. 333-140548) effective July 19, 2007)
3.2	Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.2 to amendment no. 1 to the registrant’s registration statement on Form S-11 (SEC File No. 333-140548) effective July 19, 2007)
31.1	Certification of the Company’s Chief Executive Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act, as amended(FILED HEREWITH).
31.2	Certification of the Company’s Chief Financial Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act, as amended(FILED HEREWITH).
32.1	Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(FILED HEREWITH).

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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 Eight, Inc.
By:	/s/ GLADE M. KNIGHT	Date: November 5, 2010
	Glade M. Knight, Chairman of the Board, and Chief Executive Officer (Principal Executive Officer)
By:	/s/ BRYAN PEERY	Date: November 5, 2010
	Bryan Peery, Chief Financial Officer (Principal Financial and Principal Accounting Officer)

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