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, 2007 |
| ¨ | 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 333-140548
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 ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of registrant’s common shares outstanding as of October 31, 2007: 57,155,809
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FORM 10-Q
INDEX
Page Number | ||||
| PART I. FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements (Unaudited) | |||
Consolidated Balance Sheets - September 30, 2007 and January 22, 2007 (initial capitalization) | 3 | |||
| 4 | ||||
| 5 | ||||
| 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 | 16 | ||
Item 4. | Controls and Procedures | 16 | ||
| 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 | 17 | ||
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 | 18 | ||
| Signatures | 20 | |||
This Form 10-Q includes references to certain trademarks or service marks. The SpringHill Suites® by Marriott, Fairfield Inn® by Marriott, Residence Inn® by Marriott and Courtyard® by 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 servicemark symbol has been omitted but will be deemed to be included wherever the above referenced terms are used.
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Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data)
| September 30, 2007 | January 22, 2007 (Initial Capitalization) | ||||||
Assets | |||||||
Cash | $ | 131,813 | $ | 24 | |||
Prepaid offering costs | — | 10 | |||||
Other assets | 4,260 | — | |||||
Total Assets | $ | 136,073 | $ | 34 | |||
Liabilities and Shareholders’ Equity | |||||||
Accrued expenses | $ | 197 | $ | 10 | |||
Total Liabilities | 197 | 10 | |||||
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 outstanding14,098,984 and 10 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 14,098,984 and 10 shares | 136,604 | — | |||||
Retained deficit | (752 | ) | — | ||||
Total Shareholders’ Equity | 135,876 | 24 | |||||
Total Liabilities and Shareholders’ Equity | $ | 136,073 | $ | 34 | |||
See notes to consolidated financial statements.
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Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
Three months ended 2007 | For the period January 22, 2007 (Initial Capitalization) through September 30, 2007 | |||||||
Revenue | $ | — | $ | — | ||||
Expenses: | ||||||||
General and Administrative | 241 | 309 | ||||||
Interest income, net | (663 | ) | (655 | ) | ||||
Net income | $ | 422 | $ | 346 | ||||
Basic and diluted earnings per common share | $ | 0.08 | $ | 0.17 | ||||
Weighted average shares outstanding - basic and diluted (000’s) | 5,491 | 2,013 | ||||||
Distributions declared and paid per common share | $ | 0.15 | $ | 0.15 | ||||
See notes to consolidated financial statements.
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Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
| For the period January 22, 2007 (Initial Capitalization) through September 30, 2007 | ||||
Cash flow from operating activities: | ||||
Net income | $ | 346 | ||
Adjustments to reconcile net income to cash provided by operating activities: | ||||
Stock option expense | 20 | |||
Changes in operating assets and liabilities: | ||||
Accrued expenses | 107 | |||
Net cash provided by operating activities | 473 | |||
Cash flow used in investing activities: | ||||
Deposits and other disbursements for potential acquisition of hotel properties | (4,260 | ) | ||
Net cash used in investing activities | (4,260 | ) | ||
Cash flow from financing activities: | ||||
Net proceeds related to issuance of common and preferred stock | 136,674 | |||
Cash distributions paid to shareholders | (1,098 | ) | ||
Net cash provided by financing activities | 135,576 | |||
Net increase in cash and cash equivalents | 131,789 | |||
Cash and cash equivalents, beginning of period | 24 | |||
Cash and cash equivalents, end of period | $ | 131,813 | ||
See notes to consolidated financial statements.
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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 instructions for 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 January 22, 2007 consolidated balance sheet included in the Company’s registration statement filed on Form S-11. Operating results for the period from January 22, 2007 (“Initial capitalization”) through September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.
Organization
Apple REIT Eight, Inc. (the “Company”) is a Virginia corporation that intends to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. The Company, which has no operating history, 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 shares of common stock and Series A preferred stock were purchased by Apple Eight Advisors, Inc. (“ASA”) and 240,000 Series B convertible shares were purchased by Glade M. Knight, the Company’s Chairman and Chief Executive Officer. The Company’s fiscal year end is December 31. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.
Significant Accounting Policies
Income Taxes
The Company intends to make an election to be treated, and expects to qualify, as a REIT under the Internal Revenue Code of 1986, as amended. As a REIT, the Company will be allowed a deduction for the amount of dividends paid to its shareholders, thereby subjecting the distributed net income of the Company to taxation only at the shareholder level. The Company’s continued qualification as a REIT will depend on its compliance with numerous requirements, including requirements as to the nature of its income and distribution of dividends.
The Company has established Apple Eight Hospitality Management, Inc. as a 100% owned taxable REIT subsidiary (“TRS”). The TRS will lease all hotels from the Company and be subject to income tax at regular corporate rates on any income that it would earn.
Start Up Costs
Start up costs are expensed as incurred.
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 financial statements and accompanying notes. Actual results could differ from those estimates.
Offering Costs
The Company is raising capital through a “best-efforts” offering of Units by David Lerner Associates, Inc. (the “Managing Dealer”), which receives a selling commission and a marketing expense allowance based
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on proceeds of the shares sold. Additionally, the Company has incurred other offering costs including legal, accounting and reporting services. These offering costs are recorded by the Company as a reduction of shareholders’ equity. Prior to the commencement of the Company’s offering, these costs were deferred and recorded as prepaid expense. As of September 30, 2007, the Company had sold 14,098,984 Units for gross proceeds of $152.7 million and proceeds net of offering costs of $136.6 million.
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 during the period January 22, 2007 through September 30, 2007. 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.
2. Summary of Potential Acquisitions
As of September 30, 2007, the Company had entered into purchase contracts for 15 hotels. Five of the hotels were under development as of September 30, 2007, with expected completion dates in 2008 and 2009. Ten of the hotels are expected to close within the next six months. Although the Company believes there is a reasonable probability that it will acquire these hotels, there can be no assurance that all of the conditions to closing will be satisfied. Contract deposits for these hotels are included in other assets in the Company’s consolidated balance sheet as of September 30, 2007 and in deposits and other disbursements for potential acquisition of hotel properties in the consolidated statement of cash flows. The following table summarizes the location, brand, gross purchase price, contract deposits, and number of rooms for each hotel. All dollar amounts are in thousands.
Location | Franchise/Brand | Gross Purchase Price | Deposits Paid | Number of Rooms | ||||||||
Port Wentworth, Georgia | Hampton Inn | $ | 10,000 | (b | ) | 106 | ||||||
Bowling Green, Kentucky | Hampton Inn | 18,000 | (b | ) | 131 | |||||||
Somerset, New Jersey | Courtyard | 16,000 | (b | ) | 162 | |||||||
Concord, North Carolina | Hampton Inn | 9,200 | (b | ) | 101 | |||||||
Greensboro, North Carolina | SpringHill Suites | 8,000 | (b | ) | 82 | |||||||
Warwick, Rhode Island | Hilton Garden Inn | 24,000 | (b | ) | 160 | |||||||
Columbia, South Carolina | Hilton Garden Inn | 21,200 | (b | ) | 143 | |||||||
Harrisonburg, Virginia | Courtyard | 22,500 | (b | ) | 125 | |||||||
Tulare, California | Hampton Inn | 10,331 | 5 | 86 | ||||||||
Memphis, Tennessee | Hilton Garden Inn | 17,150 | 250 | 120 | ||||||||
Matthews, North Carolina | Hampton Inn | 11,300 | 250 | 92 | ||||||||
Orlando, Florida | Fairfield Inn | (a | ) | (a | ) | 200 | ||||||
Orlando, Florida | SpringHill Suites | (a | ) | (a | ) | 200 | ||||||
Tulsa, Oklahoma | Hampton Inn & Suites | 10,000 | 100 | 102 | ||||||||
Chattanooga, Tennessee | Homewood Suites | 8,600 | 250 | 76 | ||||||||
| $ | 241,081 | $ | 3,855 | 1,886 | ||||||||
| (a) | These two hotels are covered by the same purchase contract, which provides for a combined gross purchase price of $54,800 and a deposit of $1 million. These amounts are reflected in the totals shown in the table. |
| (b) | The total deposit for these hotels was $2 million on a combined basis. This amount is reflected in the total for deposits shown in the table. |
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3. Related Parties
The Company has negotiated and entered into, a Property Acquisition and Disposition Agreement with Apple Suites Realty Group, Inc. (“ASRG”), to acquire and dispose of real estate assets for the Company. A fee of 2% of the gross purchase price or gross sale price in addition to certain reimbursable expenses will be payable for these services. The fees paid to ASRG will be capitalized as part of the purchase price of the properties.
The Company has negotiated and entered into, an advisory agreement with ASA to provide management of the Company and its assets. An annual fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company in addition to certain reimbursable expenses will be payable for these services. Advisory fees and other reimbursable expenses incurred by the Company under the ASA advisory agreement during the three months ended September 30, 2007 were $82 thousand. For the period January 22, 2007 through September 30, 2007, the Company incurred $149 thousand for these expenses. These expenses are recorded in General and Administrative expense.
ASRG and ASA are 100% owned by Glade M. Knight, chairman and president of the Company. Mr. Knight is also chairman and chief executive officer of Apple REIT Six, Inc. and Apple REIT Seven, Inc. Members of the Company’s Board of Directors are also on the Board of Directors of Apple REIT Six, Inc. and Apple REIT Seven, Inc.
4. Stock Incentive Plans
The Company has adopted two stock incentive plans (the “Incentive Plan” and “Directors’ Plan”) to provide incentives to attract and retain directors, officers and key employees. The plans provide for the grant of options to purchase a specified number of shares of common stock (“Options”) or grants of restricted shares of common stock (“Restricted Stock”) to selected employees and directors of the Company. A Compensation Committee (“Committee”) will implement and administer the plans. The Committee will be responsible for granting Options and shares of Restricted Stock and for establishing the exercise price of Options and the terms and conditions of Restricted Stock. In the third quarter of 2007, the Company issued 22,000 options under the Directors’ Plan and recorded $20 thousand in compensation expense.
5. Series B Convertible Preferred Stock
The Company has authorized 240,000 shares of Series B convertible preferred stock. The Company has issued 240,000 Series B convertible preferred shares to Glade M. Knight, chairman, chief executive officer and president of the Company, in exchange for the payment by him of $0.10 per Series B convertible preferred share, or an aggregate of $24,000. The Series B convertible preferred shares are convertible into common shares pursuant to the formula and on the terms and conditions set forth below.
There are no dividends payable on the Series B convertible preferred shares. Holders of more than two-thirds of the Series B convertible preferred shares must approve any proposed amendment to the articles of incorporation that would adversely affect the Series B convertible preferred shares.
Upon the Company’s liquidation, the holder of the Series B convertible preferred shares is entitled to a priority liquidation payment before any distribution of liquidation proceeds to the holders of the common shares. However, the priority liquidation payment of the holder of the Series B convertible preferred shares is junior to the holders of the Series A preferred shares distribution rights. The holder of a Series B convertible preferred share is entitled to a liquidation payment of $11 per number of common shares each Series B convertible preferred share would be convertible into according to the formula described below. In the event that the liquidation of the Company’s assets results in proceeds that exceed the distribution rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed between the common shares and the Series B convertible preferred shares, on an as converted basis.
8
Each holder of outstanding Series B convertible preferred shares shall have the right to convert any of such shares into Common Shares of the Company upon and for 180 days following the occurrence of any of the following events:
(1) substantially all of the Company’s assets, stock or business is sold or transferred through exchange, merger, consolidation, lease, share exchange, sale or otherwise, other than a sale of assets in liquidation, dissolution or winding up of the Company;
(2) the termination or expiration without renewal of the advisory agreement, or if the Company ceases to use ASRG to provide property acquisition and disposition services; or
(3) the Company’s common shares are listed on any securities exchange or quotation system or in any established market.
Upon the occurrence of any conversion event, each Series B convertible preferred share may be converted into a number of common shares based upon the gross proceeds raised through the date of conversion in the Company’s $1 billion offering according to the following table:
Gross Proceeds Raised from Sales of Units through Date of Conversion | Number of Common Shares through Conversion of One Series B Convertible Preferred Share | ||
| $ | 150 million | 3.19885 | |
| $ | 200 million | 4.83721 | |
| $ | 250 million | 6.11068 | |
| $ | 300 million | 7.29150 | |
| $ | 350 million | 8.49719 | |
| $ | 400 million | 9.70287 | |
| $ | 450 million | 10.90855 | |
| $ | 500 million | 12.11423 | |
| $ | 550 million | 13.31991 | |
| $ | 600 million | 14.52559 | |
| $ | 650 million | 15.73128 | |
| $ | 700 million | 16.93696 | |
| $ | 750 million | 18.14264 | |
| $ | 800 million | 19.34832 | |
| $ | 850 million | 20.55400 | |
| $ | 900 million | 21.75968 | |
| $ | 950 million | 22.96537 | |
| $ | 1 billion | 24.17104 | |
In the event that after raising gross proceeds of $1 billion, the Company raises additional gross proceeds in a subsequent public offering, each Series B convertible preferred share may be converted into an additional number of common shares based on the additional gross proceeds raised through the date of conversion in a subsequent public offering according to the following formula: (X/50 million) x 1.20568, where X is the additional gross proceeds rounded down to the nearest 50 million.
No additional consideration is due upon the conversion of the Series B convertible preferred shares. The conversion into common shares of the Series B convertible preferred shares will result in dilution of the shareholders’ interests.
Expense related to the issuance of 240,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B shares to common shares occurs. The expense will be measured as the difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares.
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Although the fair market value cannot be determined at this time, expense if the maximum offering is achieved could range from $0 to in excess of $63 million (assumes $11 per unit fair market value).
6. Line of Credit
Prior to the commencement of the Company’s Unit offering, the Company obtained an unsecured line of credit in a principal amount of $400,000 to fund some of the offering expenses. The lender was Wachovia Bank, N.A. The line of credit was fully paid during August 2007.
7. Subsequent Events
In October 2007, the Company paid approximately $4.5 million in dividend distributions to its common shareholders, or $0.11 per outstanding common share.
On October 9, 2007, the Company entered into a purchase contract for the potential acquisition of a Hilton Garden Inn hotel in Annapolis, Maryland. The gross purchase price for the 126 room hotel is $24.9 million, and a refundable deposit of $250 thousand was paid by the Company in connection with the contract.
On October 25, 2007, the Company entered into a purchase contract for the potential acquisition of a Residence Inn hotel in Marlborough, Massachusetts. The gross purchase price for the 112 room hotel is $20.2 million, and a refundable deposit of $250 thousand was paid by the Company in connection with the contract.
During October 2007, the Company closed on the issuance of 43.1 million Units, representing gross proceeds to the Company of $473.6 million and proceeds net of selling and marketing costs of $426.3 million.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation |
This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include the ability of the Company to implement its acquisition strategy and operating strategy; the Company’s ability to manage planned growth; changes in economic cycles and competition within the 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
Apple REIT Eight, Inc. together with its wholly owned subsidiaries (the “Company”) is a Virginia corporation that intends to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. The Company, which owns no properties and has no operating history, was formed to invest in hotels, residential apartment communities and other selected real estate in selected metropolitan areas in the United States. Initial capitalization occurred on January 22, 2007, when 10 shares of common stock and Series A preferred stock were purchased by Apple Eight Advisors, Inc. (“ASA”) and 240,000 shares of Series B Preferred shares were purchased by Mr. Glade M. Knight, the Company’s Chairman, Chief Executive Officer and President. The Company’s fiscal year end is December 31. The consolidated financial statements include the accounts of the Company and its subsidiaries Apple Eight Hospitality, Apple Eight Residential, Apple Eight Ventures and Apple Eight Hospitality Management. All intercompany accounts and transactions have been eliminated.
Results of Operations (January 22, 2007 through September 30, 2007)
During the period from the Company’s initial formation on January 22, 2007 through September 30, 2007, the Company owned no properties, had no revenue exclusive of interest income, and was primarily engaged in capital formation activities.
Liquidity and Capital Resources
The Company is raising capital through a “best-efforts” offering of shares by David Lerner Associates, Inc. (the “Managing Dealer”), which receives selling commissions and a marketing expense allowance based on proceeds of the shares sold. The minimum offering of 4,761,905 Units at $10.50 per Unit was sold as of July 27, 2007, with proceeds net of commissions and marketing expenses totaling $45 million. Subsequent to the minimum offering and through September 30, 2007, an additional 9.3 million Units, at $11 per Unit, were sold, with the Company receiving proceeds, net of commissions, marketing expenses and other offering costs of approximately $91.6 million. The Company is continuing its offering at $11.00 per Unit.
Each Unit consists of one common share and one Series A preferred share. The Series A preferred shares will have no voting rights, no conversion rights and no distribution rights. The only right associated with the Series A preferred shares will be a priority distribution upon the sale of the Company’s assets. The priority would be equal to $11.00 per Series A preferred share, and no more, before any distributions are made to the holders of any other shares. The Series A preferred shares will not be separately tradable from the common shares to which they relate.
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As of September 30, 2007, the Company had cash and cash equivalents totaling $131.8 million, primarily as a result of its sale of Units through that date. The Company intends to use funds generated from its “best-efforts” offering to invest in hotels, residential apartment communities and other commercial real estate. As of September 30, 2007, the Company has entered into purchase contracts for 15 hotels. Ten of these hotels are expected to close within the next six months. Five of the hotels are under development and are expected to close in 2008 and 2009. Although the Company believes there is a reasonable probability that it will acquire these hotels, there can be no assurance that all of the conditions to closing will be satisfied. Contract deposits for these hotels are included in other assets in the Company’s consolidated balance sheet as of September 30, 2007.
The following table summarizes the location, brand, gross purchase price, contract deposits, and number of rooms for each hotel. All dollar amounts are in thousands.
Location | Franchise/Brand | Gross Purchase Price | Deposits Paid | Number of Rooms | ||||||||
Port Wentworth, Georgia | Hampton Inn | $ | 10,000 | (b | ) | 106 | ||||||
Bowling Green, Kentucky | Hampton Inn | 18,000 | (b | ) | 131 | |||||||
Somerset, New Jersey | Courtyard | 16,000 | (b | ) | 162 | |||||||
Concord, North Carolina | Hampton Inn | 9,200 | (b | ) | 101 | |||||||
Greensboro, North Carolina | SpringHill Suites | 8,000 | (b | ) | 82 | |||||||
Warwick, Rhode Island | Hilton Garden Inn | 24,000 | (b | ) | 160 | |||||||
Columbia, South Carolina | Hilton Garden Inn | 21,200 | (b | ) | 143 | |||||||
Harrisonburg, Virginia | Courtyard | 22,500 | (b | ) | 125 | |||||||
Tulare, California | Hampton Inn | 10,331 | 5 | 86 | ||||||||
Memphis, Tennessee | Hilton Garden Inn | 17,150 | 250 | 120 | ||||||||
Matthews, North Carolina | Hampton Inn | 11,300 | 250 | 92 | ||||||||
Orlando, Florida | Fairfield Inn | (a | ) | (a | ) | 200 | ||||||
Orlando, Florida | SpringHill Suites | (a | ) | (a | ) | 200 | ||||||
Tulsa, Oklahoma | Hampton Inn & Suites | 10,000 | 100 | 102 | ||||||||
Chattanooga, Tennessee | Homewood Suites | 8,600 | 250 | 76 | ||||||||
| $ | 241,081 | $ | 3,855 | 1,886 | ||||||||
| (a) | These two hotels are covered by the same purchase contract, which provides for a combined gross purchase price of $54,800 and a deposit of $1 million. These amounts are reflected in the totals shown in the table. |
| (b) | The total deposit for these hotels was $2 million on a combined basis. This amount is reflected in the total for deposits shown in the table. |
To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Although the Company owns no real estate, distributions since the initial capitalization through September 30, 2007 totaled $1.1 million and were paid at a monthly rate of $0.073334 per common share beginning in August 2007. For the same period the Company’s cash generated from operations was $473 thousand. 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 offering of Units, 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 dividend 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 based on its ability to fully invest its offering proceeds and thereby increase its cash generated from operations. Since there can be no assurance of the Company’s ability to acquire properties that 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 offering which are distributed are not available for investment in properties.
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Related Party Transactions
The Company has negotiated and entered into, a Property Acquisition and Disposition Agreement with Apple Suites Realty Group, Inc. (“ASRG”), to acquire and dispose of real estate assets for the Company. A fee of 2% of the gross purchase price or gross sale price in addition to certain reimbursable expenses will be payable for these services. The fees paid to ASRG will be capitalized as part of the purchase price of the properties.
The Company has negotiated and entered into, an advisory agreement with ASA to provide management of the Company and its assets. An annual fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company in addition to certain reimbursable expenses will be payable for these services. Advisory fees and other reimbursable expenses incurred by the Company under the ASA advisory agreement during the three months ended September 30, 2007 were $82 thousand. For the period January 22, 2007 through September 30, 2007, the Company incurred $149 thousand for these expenses. These expenses are recorded in General and Administrative expense.
ASRG and ASA are 100% owned by Glade M. Knight, chairman and president of the Company.
Mr. Knight is also chairman and chief executive officer of Apple REIT Six, Inc. and Apple REIT Seven, Inc., other REITs. Members of the Company’s Board of Directors are also on the Board of Directors of Apple REIT Six, Inc. and Apple REIT Seven, Inc.
Series B Convertible Preferred Stock
The Company has authorized 240,000 shares of Series B convertible preferred stock. The Company has issued 240,000 Series B convertible preferred shares to Glade M. Knight, chairman, chief executive officer and president of the Company, in exchange for the payment by him of $0.10 per Series B convertible preferred share, or an aggregate of $24,000. The Series B convertible preferred shares are convertible into common shares pursuant to the formula and on the terms and conditions set forth below.
There are no dividends payable on the Series B convertible preferred shares. Holders of more than two-thirds of the Series B convertible preferred shares must approve any proposed amendment to the articles of incorporation that would adversely affect the Series B convertible preferred shares.
Upon the Company’s liquidation, the holder of the Series B convertible preferred shares is entitled to a priority liquidation payment before any distribution of liquidation proceeds to the holders of the common shares. However, the priority liquidation payment of the holder of the Series B convertible preferred shares is junior to the holders of the Series A preferred shares distribution rights. The holder of a Series B convertible preferred share is entitled to a liquidation payment of $11 per number of common shares each Series B convertible preferred share would be convertible into according to the formula described below. In the event that the liquidation of the Company’s assets results in proceeds that exceed the distribution rights of the Series A preferred shares and the Series B convertible preferred shares, the remaining proceeds will be distributed between the common shares and the Series B convertible preferred shares, on an as converted basis.
Each holder of outstanding Series B convertible preferred shares shall have the right to convert any of such shares into Common Shares of the Company upon and for 180 days following the occurrence of any of the following events:
(1) substantially all of the Company’s assets, stock or business is sold or transferred through exchange, merger, consolidation, lease, share exchange, sale or otherwise, other than a sale of assets in liquidation, dissolution or winding up of the Company;
(2) the termination or expiration without renewal of the advisory agreement, or if the Company ceases to use ASRG to provide property acquisition and disposition services; or
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(3) the Company’s common shares are listed on any securities exchange or quotation system or in any established market.
Upon the occurrence of any conversion event, each Series B convertible preferred share may be converted into a number of common shares based upon the gross proceeds raised through the date of conversion in the Company’s $1 billion offering according to the following table:
Gross Proceeds Raised from Sales of Units through Date of Conversion | Number of Common Shares through Conversion of One Series B Convertible Preferred Share | ||
| $ | 150 million | 3.19885 | |
| $ | 200 million | 4.83721 | |
| $ | 250 million | 6.11068 | |
| $ | 300 million | 7.29150 | |
| $ | 350 million | 8.49719 | |
| $ | 400 million | 9.70287 | |
| $ | 450 million | 10.90855 | |
| $ | 500 million | 12.11423 | |
| $ | 550 million | 13.31991 | |
| $ | 600 million | 14.52559 | |
| $ | 650 million | 15.73128 | |
| $ | 700 million | 16.93696 | |
| $ | 750 million | 18.14264 | |
| $ | 800 million | 19.34832 | |
| $ | 850 million | 20.55400 | |
| $ | 900 million | 21.75968 | |
| $ | 950 million | 22.96537 | |
| $ | 1 billion | 24.17104 | |
In the event that after raising gross proceeds of $1 billion, the Company raises additional gross proceeds in a subsequent public offering, each Series B convertible preferred share may be converted into an additional number of common shares based on the additional gross proceeds raised through the date of conversion in a subsequent public offering according to the following formula: (X/50 million) x 1.20568, where X is the additional gross proceeds rounded down to the nearest 50 million.
No additional consideration is due upon the conversion of the Series B convertible preferred shares. The conversion into common shares of the Series B convertible preferred shares will result in dilution of the shareholders’ interests.
Expense related to the issuance of 240,000 Series B convertible preferred shares to Mr. Knight will be recognized at such time when the number of common shares to be issued for conversion of the Series B shares can be reasonably estimated and the event triggering the conversion of the Series B shares to common shares occurs. The expense will be measured as the difference between the fair value of the common stock for which the Series B shares can be converted and the amounts paid for the Series B shares. Although the fair market value cannot be determined at this time, expense if the maximum offering is achieved could range from $0 to in excess of $63 million (assumes $11 per unit fair market value).
Subsequent Events
In October 2007, the Company paid approximately $4.5 million in dividend distributions to its common shareholders, or $0.11 per outstanding common share.
On October 9, 2007, the Company entered into a purchase contract for the potential acquisition of a Hilton Garden Inn hotel in Annapolis, Maryland. The gross purchase price for the 126 room hotel is $24.9 million, and a refundable deposit of $250 thousand was paid by the Company in connection with the contract.
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On October 25, 2007, the Company entered into a purchase contract for the potential acquisition of a Residence Inn hotel in Marlborough, Massachusetts. The gross purchase price for the 112 room hotel is $20.2 million, and a refundable deposit of $250 thousand was paid by the Company in connection with the contract.
During October 2007, the Company closed on the issuance of 43.1 million Units, representing gross proceeds to the Company of $473.6 million and proceeds net of selling and marketing costs of $426.3 million.
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| 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, 2007, 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 the proceeds from sale of Units pending use in acquisitions and renovations. Based on the Company’s cash invested at September 30, 2007, of $131.8 million, every 100 basis points change in interest rates will impact the Company’s annual net income by $1.3 million, 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.
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PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following tables set forth information concerning the Offering and the use of proceeds from the Offering as of September 30, 2007:
Units Registered:
| 4,761,905 | Units | $10.50 per Unit | $ | 50,000,000 | |||||
| 86,363,636 | Units | $11 per Unit | 950,000,000 | ||||||
Totals: | 91,125,541 | Units | $ | 1,000,000,000 | |||||
| Units Sold: | |||||||||
| 4,761,905 | Units | $10.50 per Unit | $ | 50,000,000 | |||||
| 9,337,070 | Units | $11 per Unit | 102,707,766 | ||||||
Totals: | 14,098,975 | Units | $ | 152,707,766 | |||||
Expenses of Issuance and Distribution of Units
1. Underwriting discounts and commission | $ | 15,270,777 | |
2. Expenses of underwriters | — | ||
3. Direct or indirect payments to directors or officers of the Company or their associates, to ten percent shareholders, or to affiliates of the Company | — | ||
4. Fees and expenses of third parties | 853,595 | ||
Total Expenses of Issuance and Distribution of Common Shares | 16,124,372 | ||
Net Proceeds to the Company | $ | 136,583,394 | |
1. Deposits and other costs associated with potential real estate acquisitions | $ | 4,259,643 | |
2. Repayment of other indebtedness, including interest expense paid | 260,026 | ||
3. Investment and working capital | 131,915,192 | ||
4. Fees to the following (all affiliates of officers of the Company): | |||
a. Apple Eight Advisors, Inc. | 148,533 | ||
a. Apple Suites Realty Group, Inc. | — | ||
5. Fees and expenses of third parties | — | ||
6. Other | — | ||
Total of Application of Net Proceeds to the Company | $ | 136,583,394 | |
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PART II. OTHER INFORMATION
Exhibit Number | Description of Documents | |
| 1.1 | Agency Agreement between the Registrant and David Lerner Associates, Inc. with form of selected Dealer Agreement attached as Exhibit A thereto. (Incorporated by reference to Exhibit 1.1 to amendment no. 2 to the registrant’s registration statement on Form S-11 (SEC File No. 333-140548) effective July 19, 2007) | |
| 1.2 | Escrow Agreement. (Incorporated by reference to Exhibit 1.2 to amendment no. 2 to the registrant’s registration statement on Form S-11 (SEC File No. 333-140548) effective July 19, 2007) | |
| 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) | |
| 10.1 | Advisory Agreement between the Registrant and Apple Eight Advisors, Inc. (Incorporated by reference to Exhibit 10.1 to amendment no. 2 to the registrant’s registration statement on Form S-11 (SEC File No. 333-140548) effective July 19, 2007) | |
| 10.2 | Property Acquisition/Disposition Agreement between the Registrant and Apple Suites Realty Group, Inc. (Incorporated by reference to Exhibit 10.2 to amendment no. 2 to the registrant’s registration statement on Form S-11 (SEC File No. 333-140548) effective July 19, 2007) | |
| 10.3 | Apple REIT Eight, Inc. 2007 Incentive Plan. (Incorporated by reference to Exhibit 10.3 to amendment no. 1 to the registrant’s registration statement on Form S-11 (SEC File No. 333-140548) effective July 19, 2007) | |
| 10.4 | Apple REIT Eight, Inc. 2007 Non-Employee Directors Stock Option Plan. (Incorporated by reference to Exhibit 10.4 to amendment no. 1 to the registrant’s registration statement on Form S-11 (SEC File No. 333-140548) effective July 19, 2007) | |
| 10.5 | Purchase Contract dated as of September 4, 2007 among Apple Eight Hospitality Ownership, Inc. and the parties named therein(FILED HEREWITH) | |
| 10.6 | Purchase Contract dated as of September 4, 2007 between Memphis Development A, LLC and Apple Eight Hospitality Ownership, Inc.(FILED HEREWITH) | |
| 10.7 | Purchase Contract dated as of September 4, 2007 between Grand Shangrila International, Inc. and Apple Eight Hospitality Ownership, Inc.(FILED HEREWITH) | |
| 10.8 | Purchase Contract dated as of September 17, 2007 between SNS Brothers, LLC and Apple Eight Hospitality Ownership, Inc.(FILED HEREWITH) | |
| 10.9 | Purchase Contract dated as of September 26, 2007 between Grove Street Orlando, LLC and Apple Eight Hospitality, Inc.(FILED HEREWITH) | |
| 10.10 | Purchase Contract dated as of September 27, 2007 between Tom Christopoulos and Apple Eight Hospitality Ownership, Inc.(FILED HEREWITH) | |
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| 10.11 | Purchase Contract dated as of September 27, 2007 between Amtel Associates, LLC and Apple Eight Hospitality Ownership, Inc.(FILED HEREWITH) | |
| 10.12 | Purchase Contract dated as of October 9, 2007 among Columbia Hospitality, Inc., Riva Hospitality, LLC and Apple Eight Hospitality Ownership, Inc.(FILED HEREWITH) | |
| 10.13 | Purchase Contract dated as of October 25, 2007 between Marlborough Lodging Partners LLC and Apple Eight Hospitality Ownership, Inc.(FILED HEREWITH) | |
| 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 registrant’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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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 2, 2007 | ||||||
Glade M. Knight, Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer) | ||||||||
| By: | /s/ BRYAN PEERY | Date: November 2, 2007 | ||||||
Bryan Peery, Chief Financial Officer (Principal Financial and Principal Accounting Officer) | ||||||||
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