Apple REIT Eight, Inc. - FORM 10-Q

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EX-32.1 - Apple REIT Eight, Inc.	ex32-1.htm
EX-31.1 - Apple REIT Eight, Inc.	ex31-1.htm
EX-31.2 - Apple REIT Eight, Inc.	ex31-2.htm

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, 2012

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	(IRS Employer
of incorporation or organization)	Identification No.)

814 East Main Street	23219
Richmond, Virginia	(Zip Code)
(Address of principal executive offices)

(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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Large accelerated filer ¨		Accelerated filer ¨		Non-accelerated filer x		Smaller reporting company ¨
				(Do not check if a smaller reporting company)

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 November 1, 2012: 92,688,430

Index

APPLE REIT EIGHT, INC.

FORM 10-Q

INDEX

			Page Number
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets – September 30, 2012 and December 31, 2011	3
		Consolidated Statements of Operations – Three and nine months ended September 30, 2012 and 2011	4
		Consolidated Statements of Cash Flows – Nine months ended September 30, 2012 and 2011	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
	Item 4.	Controls and Procedures	24
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	25
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
	Item 6.	Exhibits	26
Signatures			27

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.

Index

PART I. FINANCIAL INFORMATION

Item I. Financial Statements

Apple REIT Eight, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

	September 30,			December 31,
	2012			2011
	(unaudited)
ASSETS
Investment in real estate, net of accumulated depreciation of $153,861 and $126,248, respectivelly	$	897,071		$	914,594
Restricted cash-furniture, fixtures and other escrows		14,978			11,822
Due from third party managers, net		7,819			4,449
Other assets, net		5,473			4,844
TOTAL ASSETS	$	925,341		$	935,709

LIABILITIES
Credit facilities	$	37,800		$	73,213
Mortgage debt		219,419			163,044
Accounts payable and accrued expenses		23,231			17,726
Intangible liabilities, net		9,090			9,738
TOTAL LIABILITIES		289,540			263,721

SHAREHOLDERS' EQUITY
Preferred stock, authorized 15,000,000 shares; none issued and outstanding		0			0
Series A preferred stock, no par value, authorized 200,000,000 shares; issued and outstanding 93,001,120 and 93,506,042 shares, respectively		0			0
Series B convertible preferred stock, no par value, authorized 240,000 shares; issued and outstanding 240,000 shares		24			24
Common stock, no par value, authorized 200,000,000 shares; issued and outstanding 93,001,120 and 93,506,042 shares, respectively		921,361			926,759
Distributions greater than net income		(285,584	)		(254,795	)
TOTAL SHAREHOLDERS' EQUITY		635,801			671,988
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	925,341		$	935,709

See notes to consolidated financial statements.

Index

Apple REIT Eight, Inc.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)

	Three months ended						Nine months ended
	September 30,						September 30,
	2012			2011			2012			2011
Revenues:
Room revenue	$	51,894		$	50,138		$	142,118		$	136,023
Other revenue		3,736			3,792			10,360			10,107
Total revenue		55,630			53,930			152,478			146,130

Expenses:
Operating expense		14,184			13,569			40,039			37,668
Hotel administrative expense		4,120			4,261			12,183			12,221
Sales and marketing		4,103			3,934			11,705			11,192
Utilities		2,377			2,487			6,305			6,478
Repair and maintenance		2,461			2,519			7,397			7,315
Franchise fees		2,234			2,171			6,028			5,786
Management fees		2,001			1,950			5,430			5,176
Taxes, insurance and other		2,537			2,310			7,419			7,099
Land lease expense		1,599			1,592			4,802			4,786
General and administrative		1,548			1,335			5,050			3,874
Depreciation expense		9,287			8,961			27,613			26,990
Total expenses		46,451			45,089			133,971			128,585

Operating income		9,179			8,841			18,507			17,545

Net gain from mortgage debt restructuring and extinguishment		0			1,093			0			1,093
Interest expense, net		(3,844	)		(2,797	)		(10,884	)		(8,836	)

Net income	$	5,335		$	7,137		$	7,623		$	9,802

Basic and diluted net income per common share	$	0.06		$	0.08		$	0.08		$	0.10

Weighted average common shares outstanding - basic and diluted		92,968			93,930			93,123			94,162

See notes to consolidated financial statements.

Index

Apple REIT Eight, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Nine months ended
	September 30,
	2012			2011
Cash flow from operating activities:
Net income	$	7,623		$	9,802
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		27,613			26,990
Amortization of deferred financing costs, fair value adjustments and other non-cash expenses, net		414			(85	)
Non-cash portion of net gain on extinguishment of debt		0			(1,482	)
Changes in operating assets and liabilities:
Increase in due from third party managers		(3,370	)		(3,153	)
Increase in other assets		(1,076	)		(1,276	)
Increase in accounts payable and accrued expenses		5,268			4,607
Net cash provided by operating activities		36,472			35,403

Cash flow from investing activities:
Capital improvements		(10,370	)		(3,616	)
Net increase in cash restricted for property improvements		(2,326	)		(1,708	)
Net cash used in investing activities		(12,696	)		(5,324	)

Cash flow from financing activities:
Net proceeds related to issuance of Units		8,434			16,760
Redemptions of Units		(13,977	)		(24,086	)
Distributions paid to common shareholders		(38,412	)		(49,207	)
Proceeds from (payments on) extinguished credit facilities		(73,213	)		34,225
Net proceeds from existing credit facility		37,800			0
Proceeds from mortgage debt		58,700			0
Payments of mortgage debt		(1,963	)		(7,486	)
Deferred financing costs		(1,145	)		(285	)
Net cash used in financing activities		(23,776	)		(30,079	)

Net change in cash and cash equivalents		0			0

Cash and cash equivalents, beginning of period		0			0

Cash and cash equivalents, end of period	$	0		$	0

See notes to consolidated financial statements.

Index

Apple REIT Eight, Inc.

Notes to Consolidated Financial Statements

1. Organization and Summary of Significant Accounting Policies

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 income-producing real estate in the United States. Initial capitalization occurred on January 22, 2007 and operations began on November 9, 2007 when the Company acquired its first hotels. The Company concluded its best efforts offering of Units (each Unit consists of one common share and one Series A preferred share) in April 2008. The Company’s fiscal year end is December 31. The Company has no foreign operations or assets and its operating structure includes two reportable segments. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. As of September 30, 2012, the Company owned 51 hotels located in 19 states with an aggregate of 5,912 rooms.

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 consolidated financial statements included in its 2011 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2012.

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 based upon the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. There were no potential common shares with a dilutive effect for the three or nine months ended September 30, 2012 or 2011. As a result, basic and diluted outstanding shares were the same. Series B convertible preferred shares are not included in earnings per common share calculations until such time that such shares are eligible to be converted to common shares.

Index

2. Credit Facilities, Mortgage Debt and Net Gain from Mortgage Debt Restructuring and Extinguishment

In March 2012, the Company entered into a new $60 million unsecured credit facility with a commercial bank that is utilized for working capital, hotel renovations, and other general corporate funding purposes, including the payment of redemptions and distributions. Interest is payable monthly on the outstanding balance based on an annual rate of either one-month LIBOR (the London Inter-Bank Offered Rate for a one-month term) plus 3.0%, or the prime interest rate plus 2.0%, at the Company’s option. The Company is also required to pay a fee of 0.35% on the average unused balance of the credit facility. Under the terms and conditions of the credit facility, the Company may make voluntary prepayments in whole or in part, at any time. The credit facility matures in March 2013; however, the Company has the right, upon satisfaction of certain conditions including covenant compliance and payment of an extension fee, to extend the maturity date to March 2014.

At closing in March 2012, the Company borrowed approximately $48 million under the credit facility to pay all outstanding balances and extinguish its previously existing $75 million and $20 million credit facilities, and pay transaction costs. At September 30, 2012, the outstanding balance under the credit facility was $37.8 million, and had an interest rate of approximately 3.22%. Loan origination costs totaling approximately $0.4 million are being amortized as interest expense through the March 2013 maturity date. The credit facility contains the following quarterly financial covenants (capitalized terms are defined in the loan agreement):

·	Tangible Net Worth must exceed $275 million;

·	Total Debt to Asset Value must not exceed 50%;

Distributions, net of proceeds from the Company’s Dividend Reinvestment Program, cannot exceed $17 million during any calendar quarter in 2012 (and must not exceed $68 million in any cumulative 12 month period thereafter), and quarterly Distributions cannot exceed $0.1375 per share, unless such Distributions are less than total Funds From Operations for the quarter;

·	Loan balance must not exceed 45% of the Unencumbered Asset Value;

·	Ratio of Net Operating Income, for the Company’s unencumbered properties compared to an Implied Debt Service for the properties must exceed two; and

·	Ratio of net income before depreciation and interest expense to total Fixed Charges, on a cumulative 12 month basis, must exceed two.

The Company was in compliance with each of these covenants at September 30, 2012.

In September 2012, the Company entered into two secured mortgage loan agreements with a commercial lender. A mortgage loan for $9.7 million is secured by the Company’s Tukwila, Washington Homewood Suites; a separate mortgage loan for $9.0 million is secured by the Company’s Somerset, New Jersey Courtyard. Combined scheduled payments of interest and principal of $106 thousand are due monthly for each loan, and each loan will amortize on a 25 year term with a balloon payment due at maturity in October 2022. Each mortgage loan has an applicable fixed interest rate of approximately 4.73%. At closing, the Company used proceeds from each loan to reduce the outstanding balance on its credit facility, and to pay transaction costs. Combined total loan origination costs of approximately $0.2 million are being amortized as interest expense through the maturity date of each loan, October 2022.

In January 2012, the Company entered into a secured mortgage loan agreement with a commercial bank for $40 million. The loan is jointly secured by the Company’s Burbank, California Residence Inn and Oceanside, California Residence Inn. Interest is payable monthly on the outstanding balance of the loan at a variable interest rate of one-month LIBOR plus 4.25%. The loan matures in January 2015 with an option of the Company to extend the maturity for one year. Interest only is payable for the first year of the loan, with monthly principal payments of $65,000 required beginning in February 2013. Loan origination costs totaling approximately $0.5 million are being amortized as interest expense through the January 2015 maturity date.

To effectively fix the interest rate on the $40 million variable rate mortgage loan and reduce the Company’s exposure to interest rate risk, simultaneous with the closing of the loan the Company entered into an interest rate swap agreement with the same commercial bank. Under terms of the interest rate swap agreement, the Company pays a monthly fixed interest rate of 1.0% and receives a floating rate of interest equal to the one-month LIBOR, effectively fixing the interest rate of the $40 million loan at 5.25%. The notional amount of $40 million for the interest rate swap amortizes in tandem with the amortization of the loan and matures with the loan agreement in January 2015. At closing on the loan and swap agreements in January 2012, the Company used the proceeds to reduce the outstanding balance on its prior credit facility and to pay transaction costs.

Index

The Company recognized a net gain from mortgage debt restructuring and extinguishment of $1.1 million in the third quarter of 2011. Negotiations with the single mortgage servicer on three of the Company’s non-recourse mortgage loans resulted in the early extinguishment, at a discount to the principal amount outstanding, of the mortgage loan secured by the Company’s Tampa, Florida TownePlace Suites property in August 2011. The mortgage loan was extinguished by the Company for a payment of $6.0 million, excluding applicable fees and legal costs; the loan’s principal balance at extinguishment was $8.0 million. Simultaneously, the Company’s mortgage loans secured by the Winston-Salem, North Carolina Courtyard and the Greenville, South Carolina Residence Inn properties were returned to current status, with the Company agreeing to payment of applicable fees, interest and reimbursement of the loan servicer’s expenses incurred in connection with the restructuring and extinguishment transactions. The Company had previously suspended payments due under the three mortgage loans in March 2011, in order to renegotiate terms of the agreements with the loan servicer. In addition to the loan servicer’s fees and reimbursed costs for all three loans, and the Company’s legal and advisory costs incurred with the transactions, the net gain reflects the servicer’s assumption of certain mortgage escrow balances and the Company’s write-off of the deferred financing fees and unamortized fair market adjustment for the Tampa, Florida TownePlace Suites mortgage loan at date of extinguishment.

3. Fair Value of Financial Instruments

The Company estimates the fair value of its 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 terms and credit characteristics which are Level 3 inputs. Market rates take into consideration general market conditions and maturity. As of September 30, 2012, the carrying value and estimated fair value of the Company’s debt was approximately $257.2 million and $268.1 million. As of December 31, 2011, the carrying value and estimated fair value of the Company’s debt was $236.3 million and $236.7 million.

As of September 30, 2012, the Company had two outstanding interest rate swap agreements that effectively fix the interest rate on two separate variable rate mortgage loans. The notional balances on these agreements totaled $46.7 million as of September 30, 2012. One agreement originated in October 2010 has a notional balance of $6.7 million, and matures in October 2015. An additional agreement originated in January 2012 has a notional balance of $40.0 million and matures in January 2015. These derivatives are recorded on the Company’s consolidated balance sheet at a combined net fair value of approximately $897,000 (liability) at September 30, 2012, which is included in accounts payable and accrued expenses in the Company’s consolidated balance sheet. At December 31, 2011, the Company’s outstanding interest rate swap agreement was recorded at a fair value of $244,000 (liability) and included in accounts payable and accrued expenses. The fair value of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash payments (or receipts) which is considered a Level 2 measurement within the Accounting Standards Codification’s fair value hierarchy. The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These derivatives are not designated by the Company as hedges, and the changes in the fair value are recorded to interest expense, net in the consolidated statements of operations. For the three months and nine months ended September 30, 2012, the change in fair value resulted in a net increase of approximately $79,000 and $136,000, respectively, to interest expense, net. For the three and nine months ended September 30, 2011, the change in fair value resulted in a net increase of approximately $184,000 and $282,000, respectively, to interest expense, net. The carrying value of the Company’s other financial instruments approximates fair value due to the short-term nature of these financial instruments.

4. Related Parties

The Company has, and is expected to continue to engage in, significant transactions with related parties. These transactions cannot be construed to be 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’s independent members of the Board of Directors oversee and annually review the Company’s related party relationships (which include the relationships discussed in this section) and are required to approve any significant modifications to the contracts, as well as any new significant related party transactions. During the nine months ended September 30, 2012, there were no changes to the contracts discussed in this section, and no new significant related party transactions. The Board of Directors is not required to approve each individual transaction that falls under the related party relationships. However, under the direction of the Board of Directors, at least one member of the Company’s senior management team approves each related party transaction.

The Company is party to an advisory agreement with Apple Eight Advisors, Inc. (“A8A”), pursuant to which A8A provides management services to the Company. A8A provides these management services through an affiliate called Apple Fund Management, LLC (“AFM”), which is a subsidiary of Apple REIT Six, Inc. An annual advisory fee ranging from 0.1% to 0.25% of total equity proceeds received by the Company, in addition to certain reimbursable expenses, are payable to A8A for these management services. Total advisory fees incurred by the Company under the advisory agreement are included in general and administrative expenses and totaled approximately $0.8 million for both of the nine month periods ended September 30, 2012 and 2011.

Index

In addition to the fees payable to A8A, the Company reimbursed A8A or paid directly to AFM on behalf of A8A approximately $1.3 million for both of the nine month periods ended September 30, 2012 and 2011. The costs are included in general and administrative expenses and are for the Company’s proportionate share of the staffing and related costs provided by AFM at the direction of A8A.

AFM is an affiliate of Apple Six Advisors, Inc., Apple Seven Advisors, Inc., A8A , Apple Nine Advisors, Inc., Apple Ten Advisors, Inc., Apple Suites Realty Group, Inc. and Apple Six Realty Group, Inc., (collectively the “Advisors” which are wholly owned by Glade M. Knight). As such, the Advisors provide management services through the use of AFM to, respectively, Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc., Apple REIT Ten, Inc. and the Company (collectively the “Apple REIT Entities”). Although there is a potential conflict on time allocation of employees due to the fact that a senior manager, officer or staff member will provide services to more than one company, the Company believes that the executives and staff compensation sharing arrangement described more fully below allows the companies to share costs yet attract and retain superior executives and staff. The cost sharing structure also allows each entity to maintain a much more cost effective structure than having separate staffing arrangements. Amounts reimbursed to AFM include both compensation for personnel and “overhead” (office rent, utilities, benefits, office supplies, etc.) used by the companies. Since the employees of AFM perform services for the Apple REIT Entities and Advisors at the direction of the Advisors, individuals, including executive officers, receive their compensation at the direction of the Advisors and may receive consideration directly from the Advisors.

The Advisors and Apple REIT Entities allocate all of the costs of AFM among the Apple REIT Entities and the Advisors. The allocation of costs from AFM is reviewed at least annually by the Compensation Committees of the Apple REIT Entities. In making the allocation, management of each of the entities and their Compensation Committee consider all relevant facts related to each company’s level of business activity and the extent to which each company requires the services of particular personnel of AFM. Such payments are based on the actual costs of the services and are not based on formal record keeping regarding the time these personnel devote to the Company, but are based on a good faith estimate by the employee and/or his or her supervisor of the time devoted by the employee to the Company. As part of this arrangement, the day to day transactions may result in amounts due to or from the Apple REIT Entities. To efficiently manage cash disbursements, an individual Apple REIT Entity may make payments for any or all of the related companies. The amounts due to or from the related Apple REIT Entity are reimbursed or collected and are not significant in amount.

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. 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.

Included in other assets, net in the Company’s consolidated balance sheet, is a 24% equity investment in Apple Air Holding, LLC (“Apple Air”). The other members of Apple Air are Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc. Through its equity investment the Company has access to Apple Air’s aircraft for asset management and renovation purposes. The Company’s equity investment was approximately $1.9 million and $2.1 million at September 30, 2012 and December 31, 2011. 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. For both of the nine month periods ended September 30, 2012 and 2011, the Company recorded a loss of approximately $145,000 as its share of the net loss of Apple Air, which primarily relates to the depreciation of the aircraft, and is included in general and administrative expense in the Company’s consolidated statements of operations.

The Company has incurred legal fees associated with the Legal Proceedings discussed herein. The Company also incurs other professional fees such as accounting, auditing and reporting. These fees are included in general and administrative expense in the Company’s consolidated statements of operations. To be cost effective, these services received by the Company are shared as applicable across the other Apple REIT Entities. The professionals cannot always specifically identify their fees for one company; therefore management allocates these costs across the companies that benefit from the services.

Index

5. Shareholder’s Equity

Unit Redemption Program

In October 2008, the Company instituted 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 given year is five 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 of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. Since inception of the program through September 30, 2012, the Company has redeemed approximately 7.0 million Units representing approximately $75.0 million, including 1.3 million Units in the amount of $14.0 million and 2.2 million Units in the amount of $24.1 million redeemed during the nine months ended September 30, 2012 and 2011, respectively. As contemplated in the program, beginning with the January 2011 redemption, the scheduled redemption date for the first quarter of 2011, the Company redeemed Units on a pro-rata basis. Prior to 2011, the Company redeemed 100% of redemption requests. The following is a summary of Unit redemptions during 2011 and the first nine months of 2012:

					Redemption
Redemption	Requested Unit		Units		Requests not
Date	Redemptions		Redeemed		Redeemed
January 2011		1,168,279		732,647		435,632
April 2011		1,529,096		729,016		800,080
July 2011		8,255,381		736,960		7,518,421
October 2011		17,938,386		727,604		17,210,782
January 2012		18,910,430		454,405		18,456,025
April 2012		18,397,381		454,638		17,942,743
July 2012		18,607,044		362,553		18,244,491

Dividend Reinvestment Plan

In the second quarter of 2008, the Company instituted a Dividend Reinvestment Plan for its shareholders. The plan provides a 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 nine months ended September 30, 2012 and 2011, approximately 0.8 million and 1.5 million Units were issued under the plan representing approximately $8.4 million and $16.8 million in proceeds to the Company, respectively. Since inception of the plan through September 30, 2012, the Company has issued approximately 8.8 million Units representing approximately $97.3 million in proceeds to the Company.

Distributions

For the three months ended September 30, 2012, the Company made distributions of $0.1375 per common share for a total of $12.8 million. For the nine months ended September 30, 2012, the Company made distributions of $0.4125 per common share for a total of $38.4 million. For the three months ended September 30, 2011, the Company made distributions of $0.1375 per common share for a total of $12.9 million. For the nine months ended September 30, 2011, the Company made distributions of $0.5225 per common share for a total of $49.2 million. In June 2011 the Company’s Board of Directors reduced the annual distribution rate to $0.55 per common share; the previous annual distribution rate was $0.77 per common share. The reduction was effective with the July 2011 distribution. The distribution continues to be paid monthly.

Index

6. Industry Segments

The Company has two reportable segments: the New York hotel and all other hotels. The New York hotel is a full service hotel in New York City, New York. The Company’s other hotels are extended-stay and select service hotel properties throughout the United States that generate rental and other property related income. The Company separately evaluates the performance of each of its hotel properties. However, because each of the hotels has similar economic characteristics, facilities, and services, and each hotel is not individually significant, other than the New York hotel, the other properties have been aggregated into a single reportable segment. The Company does not allocate corporate-level accounts to its reportable segments, including corporate general and administrative expenses, non-operating interest income and interest expense. The following table summarizes the results of operations and assets for each segment for the three and nine months ended September 30, 2012 and 2011. Dollar amounts are in thousands.

	For the three months ended September 30, 2012
	New York,			All Other
	NY Hotel			Hotels			Corporate			Consolidated
Total revenue	$	5,558		$	50,072		$	0		$	55,630
Hotel expenses		5,029			30,587			0			35,616
General and administrative expense		0			0			1,548			1,548
Depreciation expense		1,639			7,648			0			9,287
Operating income/(loss)		(1,110	)		11,837			(1,548	)		9,179
Interest expense, net		0			(3,255	)		(589	)		(3,844	)
Net income/(loss)	$	(1,110	)	$	8,582		$	(2,137	)	$	5,335

Total assets	$	107,948		$	815,157		$	2,236		$	925,341

	For the nine months ended September 30, 2012
	New York, New York			All Other
	Hotel			Hotels			Corporate			Consolidated
Total revenue	$	16,171		$	136,307		$	0		$	152,478
Hotel expenses		15,131			86,177			0			101,308
General and administrative expense		0			0			5,050			5,050
Depreciation expense		4,930			22,683			0			27,613
Operating income/(loss)		(3,890	)		27,447			(5,050	)		18,507
Interest expense, net		0			(9,237	)		(1,647	)		(10,884	)
Net income/(loss)	$	(3,890	)	$	18,210		$	(6,697	)	$	7,623

Total assets	$	107,948		$	815,157		$	2,236		$	925,341

Index

	For the three months ended September 30, 2011
	New York,			All Other
	NY Hotel			Hotels			Corporate			Consolidated
Total revenue	$	5,286		$	48,644		$	0		$	53,930
Hotel expenses		4,866			29,927			0			34,793
General and administrative expense		0			0			1,335			1,335
Depreciation expense		1,636			7,325			0			8,961
Operating income/(loss)		(1,216	)		11,392			(1,335	)		8,841
Net gain from mortgage debt restructuring and extinguishment		0			1,093			0			1,093
Interest expense, net		0			(1,561	)		(1,236	)		(2,797	)
Net income/(loss)	$	(1,216	)	$	10,924		$	(2,571	)	$	7,137

Total assets	$	113,463		$	828,817		$	2,465		$	944,745

	For the nine months ended September 30, 2011
	New York, New York			All Other
	Hotel			Hotels			Corporate			Consolidated
Total revenue	$	14,844		$	131,286		$	0		$	146,130
Hotel expenses		13,727			83,994			0			97,721
General and administrative expense		0			0			3,874			3,874
Depreciation expense		4,905			22,085			0			26,990
Operating income/(loss)		(3,788	)		25,207			(3,874	)		17,545
Net gain from mortgage debt restructuring and extinguishment		0			1,093			0			1,093
Interest expense, net		0			(5,931	)		(2,905	)		(8,836	)
Net income/(loss)	$	(3,788	)	$	20,369		$	(6,779	)	$	9,802

Total assets	$	113,463		$	828,817		$	2,465		$	944,745

7. Legal Proceedings

The term the “Apple REIT Companies” means Apple REIT Eight, Inc. (the “Company”), Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

On December 13, 2011, the United States District Court for the Eastern District of New York ordered that three putative class actions, Kronberg, et al. v. David Lerner Associates, Inc., et al., Kowalski v. Apple REIT Ten, Inc., et al., and Leff v. Apple REIT Ten, Inc., et al., be consolidated and amended the caption of the consolidated matter to be In re Apple REITs Litigation. The District Court also appointed lead plaintiffs and lead counsel for the consolidated action and ordered lead plaintiffs to file and serve a consolidated complaint by February 17, 2012. The Company was previously named as a party in all three of the above mentioned class action lawsuits.

Index

On February 17, 2012, lead plaintiffs and lead counsel in the In re Apple REITs Litigation, Civil Action No. 1:11-cv-02919-KAM-JO, filed an amended consolidated complaint in the United States District Court for the Eastern District of New York against the Company, Apple Suites Realty Group, Inc., Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., Apple Ten Advisors, Inc., Apple Fund Management, LLC, Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc., their directors and certain officers, and David Lerner Associates, Inc. and David Lerner. The consolidated complaint, purportedly brought on behalf of all purchasers of Units in the Company and the other Apple REIT Companies, or those who otherwise acquired these Units that were offered and sold to them by David Lerner Associates, Inc., or its affiliates and on behalf of subclasses of shareholders in New Jersey, New York, Connecticut and Florida, asserts claims under Sections 11, 12 and 15 of the Securities Act of 1933. The consolidated complaint also asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, negligence, and unjust enrichment, and claims for violation of the securities laws of Connecticut and Florida. The complaint seeks, among other things, certification of a putative nationwide class and the state subclasses, damages, rescission of share purchases and other costs and expenses.

On April 18, 2012, the Company, and the other Apple REIT Companies, served a motion to dismiss the consolidated complaint in the In re Apple REITs Litigation. The Company and the other Apple REIT Companies accompanied their motion to dismiss the consolidated complaint with a memorandum of law in support of their motion to dismiss the consolidated complaint. The briefing period for any motion to dismiss was completed on July 13, 2012.

The Company believes that any claims against it, its officers and directors and other Apple entities are without merit, and intends to defend against them vigorously. At this time, the Company cannot reasonably predict the outcome of these proceedings or provide a reasonable estimate of the possible loss or range of loss due to these proceedings, if any.

8. Subsequent Events

In October 2012, the Company declared and paid approximately $4.3 million, or $0.045833 per outstanding common share, in distributions to its common shareholders, of which approximately $0.9 million or 78,000 Units were reinvested under the Company’s Dividend Reinvestment Plan.

In October 2012, under the guidelines of the Company’s Unit Redemption Program, the Company redeemed approximately 391,000 Units in the amount of $4.3 million. As contemplated in the program, the Company redeemed Units on a pro-rata basis, whereby a percentage of each requested redemption was fulfilled at the discretion of the Company’s Board of Directors. This redemption was approximately 2% of the total 19.1 million requested Units to be redeemed, with approximately 18.7 million requested Units not redeemed.

On October 22, 2012, the Financial Industry Regulatory Authority (“FINRA”) issued an order against David Lerner Associates, Inc. (“DLA”) and David Lerner, individually, requiring DLA to pay approximately $12 million in restitution to certain investors in Units of Apple REIT Ten, Inc. In addition, David Lerner, individually, was fined $250,000 and suspended for one year from the securities industry, followed by a two year suspension from acting as a principal. The Company relies on DLA for the administration of its Units and does not believe this settlement will affect the administration of its Units. The Company intends to continue to cooperate with regulatory or governmental inquiries.

Index

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

Forward-Looking Statements

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. Forward-looking statements are typically identified by use of terms such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “target,” “goal,” “plan,” “should,” “will,” “predict,” “potential,” and similar expressions that convey the uncertainty of future events or outcomes. 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; the outcome of current and future litigation, regulatory proceedings or inquiries; and competition within the real estate 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”), was formed to invest in income-producing real estate in the United States. The Company was initially capitalized on January 22, 2007, with its first investor closing on July 27, 2007. The Company completed its best-efforts offering of Units (each Unit consists of one common share and one Series A preferred share) in April 2008. The Company has elected to be treated as a Real Estate Investment Trust (“REIT”) for federal income tax purposes. As of September 30, 2012, the Company owned 51 hotels within different markets in the United States. The Company’s first hotels were acquired on November 9, 2007.

Hotel Operations

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 markets, in general, has met the Company’s expectations for the period owned. Beginning in 2011 and continuing through the first nine months of 2012, the hotel industry and the Company’s revenues and operating income have shown improvement from the significant decline in the industry during 2008 through 2010. Although there is no way to predict future general economic conditions, the Company anticipates mid single digit revenue percentage increases for 2012 as compared to 2011 and similar year over year increases in 2013. Although the Company believes that the hotel industry will continue to improve, several key factors continue to negatively affect the economic recovery and add to general market uncertainty, including but not limited to, the continued high levels of unemployment, the slow pace of the U.S. economic recovery and the uncertainty surrounding the U.S fiscal policy. Therefore, there can be no assurance that revenue at our hotel properties will continue to grow at the current rate.

Index

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 others in its local market, and expenses, such as hotel operating expenses, general and administrative and other expenses described below.

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

	Three months ended September 30,															Nine months ended September 30,
				Percent of						Percent of			Percent						Percent of						Percent of			Percent
(in thousands, except statistical data)	2012			Revenue			2011			Revenue			Change			2012			Revenue			2011			Revenue			Change

Total revenue	$	55,630			100	%	$	53,930			100	%		3	%	$	152,478			100	%	$	146,130			100	%		4	%
Hotel operating expenses		31,480			57	%		30,891			57	%		2	%		89,087			58	%		85,836			59	%		4	%
Taxes, insurance and other expense		2,537			5	%		2,310			4	%		10	%		7,419			5	%		7,099			5	%		5	%
Land lease expense		1,599			3	%		1,592			3	%		0	%		4,802			3	%		4,786			3	%		0	%
General and administrative expense		1,548			3	%		1,335			2	%		16	%		5,050			3	%		3,874			3	%		30	%

Depreciation		9,287						8,961						4	%		27,613						26,990						2	%
Net gain from mortgage debt
restructuring and extinguishment		-						1,093						N/A			-						1,093						N/A
Interest expense, net		3,844						2,797						37	%		10,884						8,836						23	%

Number of hotels		51						51						0	%		51						51						0	%
Average Market Yield(1)		127						128						-1	%		127						129						-2	%
ADR	$	121					$	118						3	%	$	116					$	113						3	%
Occupancy		78	%					78	%					0	%		75	%					74	%					1	%
RevPAR	$	94					$	92						2	%	$	87					$	84						4	%
Room nights sold (2)		420,917						418,313						1	%		1,208,246						1,185,497						2	%
Room nights available (3)		539,868						539,684						0	%		1,608,466						1,602,693						0	%

(1)Calculated from data provided by Smith Travel Research, Inc.®. Excludes hotels under renovation during the applicable periods.

(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.

Legal Proceedings

The term the "Apple REIT Companies" means Apple REIT Eight, Inc. (the "Company"), Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

Index

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, 2012. All dollar amounts are in thousands.

Date

Purchase

City

State

Brand

Manager

Acquired

Rooms

Price

Birmingham

Homewood Suites

McKibbon

5/23/2008

16,500

Rogers

Fairfield Inn & Suites

Intermountain

2/29/2008

8,000

Rogers

Residence Inn

Intermountain

2/29/2008

11,744

Springdale

Residence Inn

Intermountain

3/14/2008

5,606

Burbank

Residence Inn

Marriott

5/13/2008

166

50,500

Cypress

Courtyard

Dimension

4/30/2008

180

31,164

Oceanside

Residence Inn

Marriott

5/13/2008

125

28,750

Sacramento

Hilton Garden Inn

Dimension

3/7/2008

154

27,630

San Jose

Homewood Suites

Dimension

7/2/2008

140

21,862

Tulare

Hampton Inn & Suites

Inn Ventures

6/26/2008

10,331

Jacksonville

Homewood Suites

McKibbon

6/17/2008

119

23,250

Sanford

SpringHill Suites

LBA

3/14/2008

105

11,150

Tallahassee

Hilton Garden Inn

LBA

1/25/2008

13,200

Tampa

TownePlace Suites

McKibbon

6/17/2008

11,250

Port Wentworth

Hampton Inn

Newport

1/2/2008

106

10,780

Savannah

Hilton Garden Inn

Newport

7/31/2008

105

12,500

Overland Park

SpringHill Suites

True North

3/17/2008

102

8,850

Overland Park

Residence Inn

True North

4/30/2008

120

15,850

Overland Park

Fairfield Inn & Suites

True North

8/20/2008

110

12,050

Wichita

Courtyard

Intermountain

6/13/2008

8,874

Bowling Green

Hampton Inn

Newport

12/6/2007

130

18,832

Marlborough

Residence Inn

True North

1/15/2008

112

20,200

Westford

Hampton Inn & Suites

True North

3/6/2008

110

15,250

Westford

Residence Inn

True North

4/30/2008

108

14,850

Annapolis

Hilton Garden Inn

White

1/15/2008

126

25,000

Kansas City

Residence Inn

True North

4/30/2008

106

17,350

Carolina Beach

Courtyard

Crestline

6/5/2008

144

24,214

Concord

Hampton Inn

Newport

3/7/2008

101

9,200

Dunn

Hampton Inn

McKibbon

1/24/2008

120

12,500

Fayetteville

Residence Inn

Intermountain

5/9/2008

12,201

Greensboro

SpringHill Suites

Newport

11/9/2007

8,000

Matthews

Hampton Inn

Newport

1/15/2008

11,300

Wilmington

Fairfield Inn & Suites

Crestline

12/11/2008

122

14,800

Winston-Salem

Courtyard

McKibbon

5/19/2008

122

13,500

Somerset

Courtyard

Newport

11/9/2007

162

16,000

New York

Renaissance

Marriott

1/4/2008

202

99,000

Tulsa

Hampton Inn & Suites

Western

12/28/2007

102

10,200

Columbia

Hilton Garden Inn

Newport

9/22/2008

143

21,200

Greenville

Residence Inn

McKibbon

5/19/2008

8,700

Hilton Head

Hilton Garden Inn

McKibbon

5/29/2008

104

13,500

Chattanooga

Homewood Suites

LBA

12/14/2007

8,600

Texarkana

Courtyard

Intermountain

3/7/2008

12,924

Texarkana

TownePlace Suites

Intermountain

3/7/2008

9,057

Charlottesville

Courtyard

Crestline

6/5/2008

139

27,900

Chesapeake

Marriott

Crestline

10/21/2008

226

38,400

Harrisonburg

Courtyard

Newport

11/16/2007

125

23,219

Suffolk

Courtyard

Crestline

7/2/2008

12,500

Suffolk

TownePlace Suites

Crestline

7/2/2008

10,000

Virginia Beach

Courtyard

Crestline

6/5/2008

141

27,100

Virginia Beach

Courtyard

Crestline

6/5/2008

160

39,700

Tukwila

Homewood Suites

Dimension

7/2/2008

106

15,707

Total

5,912

950,745

Index

Results of Operations

As of September 30, 2012, the Company owned 51 hotels with 5,912 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 period from the second half of 2008 through 2010, the overall weakness in the U.S. economy had a considerable negative impact on both consumer and business travel. As a result, hotel revenue in most markets in the United States declined from levels of 2007 and the first half of 2008. However, economic conditions have shown evidence of improvement in 2011 and the first nine months of 2012. Although the Company expects continued improvements in 2012 and into 2013, it is not anticipated that revenue and operating income will reach pre-recession levels in 2012. The Company’s hotels in general have shown results consistent with industry and brand averages for the period of ownership.

The Company separately evaluates the performance of each of its hotel properties. Due to the significance of the New York, New York hotel, the Company has two reportable segments.

Revenues

The Company’s principal source of revenue is hotel revenue consisting of room and other related revenue. For the three months ended September 30, 2012 and 2011, the Company had total revenue of $55.6 million and $53.9 million. Revenue for the hotel located in New York, New York (the “New York hotel”) was $5.6 million or 10% of total revenue for the third quarter of 2012 and $5.3 million or 10% of total revenue for the third quarter of 2011. For the three months ended September 30, 2012, the hotels achieved combined average occupancy of approximately 78%, ADR of $121 and RevPAR of $94. The New York hotel had average occupancy of 87%, ADR of $264 and RevPAR of $229. For the three months ended September 30, 2011, the hotels achieved combined average occupancy of approximately 78%, ADR of $118 and RevPAR of $92. For the same period, the New York hotel had average occupancy of 89%, ADR of $268 and RevPAR of $238. ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR.

For the nine months ended September 30, 2012 and 2011, the Company had total revenue of $152.5 million and $146.1 million. Revenue for the New York hotel was $16.2 million or 11% of total revenue for the first nine months of 2012 and $14.8 million or 10% of total revenue for the first nine months of 2011. For the nine months ended September 30, 2012, the hotels achieved combined average occupancy of approximately 75%, ADR of $116 and RevPAR of $87. The New York hotel had average occupancy of 87%, ADR of $268 and RevPAR of $232. For the nine months ended September 30, 2011, the hotels achieved combined average occupancy of approximately 74%, ADR of $113 and RevPAR of $84. For the same period, the New York hotel had average occupancy of 84%, ADR of $265 and RevPAR of $222.

During the first nine months of 2012, the Company experienced a modest increase in demand as demonstrated by the improvement in average occupancy for its hotels of 1% as compared to the same period of 2011. In addition, also signifying a stabilizing economy, the Company experienced an increase in ADR of 3% for its hotels during the first nine months of 2012 as compared to the same period of 2011. During the first nine months of 2012, the Company’s revenue growth and occupancy was impacted by approximately 13,300 rooms out of service (of which approximately 2,500 were rooms out of service during the third quarter of 2012) for renovations, resulting in below industry average growth for the first nine months of 2012. With stable to improving demand, and continued room rate improvement, the Company and industry are forecasting a mid single digit percentage increase in revenue for the remainder of 2012 as compared to 2011, with the trend expected to continue in 2013. While reflecting the impact of post-recessionary levels of single-digit growth in national economic activity, the Company’s hotels also continue to be leaders in their respective markets. The Company’s average Market Yield for the first nine months of 2012 and 2011 was 127 and 129, respectively. The Market Yield is a measure of each hotel’s RevPAR compared to the average in the market, with 100 being the average (the index excludes hotels under renovation) and is provided by Smith Travel Research, Inc.®, an independent company that tracks historical hotel performance in most markets throughout the world. The Company will continue to pursue market opportunities to improve revenue.

Index

Expenses

Hotel operating expenses consist of direct room expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. For the three months ended September 30, 2012 and 2011, hotel operating expenses totaled $31.5 million or 57% of total revenue (the New York hotel had operating expenses of $3.3 million or 59% of its total revenue for the quarter) and $30.9 million or 57% of total revenue (the New York hotel had operating expenses of $3.2 million or 60% of its total revenue for the quarter). For the nine months ended September 30, 2012 and 2011, hotel operating expenses totaled $89.1 million or 58% of total revenue (the New York hotel had operating expenses of $9.9 million or 61% of its total revenue for the period) and $85.8 million or 59% of total revenue (the New York hotel had operating expenses of $8.8 million or 59% of its total revenue for the period). Overall results for the nine months ended September 30, 2012 reflect the impact of increases in revenues and occupancy at most of the Company’s hotels, and the Company’s efforts to control costs. The increase at the New York hotel is primarily due to union contract increases for salaries and benefits and a scheduled hotel management contract fee increase. The Company’s operating expenses were also impacted by the hotel renovations during the first nine months of 2012. Certain operating costs such as management costs, certain utility costs and minimum supply and maintenance costs are relatively fixed in nature. The Company has been successful in reducing, relative to revenue increases, certain labor costs, hotel supply costs, maintenance costs and utilities by continually monitoring and sharing utilization data across its hotels and management companies. Although operating expenses will increase as occupancy and revenue increases, the Company has and will continue to work with its management companies to reduce costs as a percentage of revenue where possible while maintaining quality and service levels at each property.

Taxes, insurance, and other expense for the three months ended September 30, 2012 and 2011 totaled $2.5 million and $2.3 million, or 5% and 4% of total revenues for the respective periods (of which approximately $284,000 and $207,000 related to the New York hotel, for each respective period). Taxes, insurance, and other expense for the nine months ended September 30, 2012 and 2011 totaled $7.4 million and $7.1 million, representing 5% of total revenues for both respective periods (of which approximately $838,000 and $497,000 related to the New York hotel, for each respective period). Overall, the Company’s real estate tax expense was higher in the first nine months of 2012 versus the same period of 2011, reflecting upward reassessments of some property values by localities resulting from the improved economy. Results also reflect higher insurance expense during the comparable periods, reflecting 2012 insurance rate increases due to property and casualty carriers’ losses world-wide in the past year. The Company anticipates experiencing higher real estate tax rates during the remainder of 2012, and in 2013, due to upward reassessments of property values by localities. The New York hotel had higher real estate tax expense due to tax incentives that declined and will continue to decline over time.

Land lease expense was $1.6 million for both of the three month periods ended September 30, 2012 and 2011, and $4.8 million for both of the nine month periods ended September 30, 2012 and 2011. 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 both the third quarter of 2012 and 2011, and $4.4 million for the nine month periods ended September 30, 2012 and 2011.

General and administrative expense for the three months ended September 30, 2012 and 2011 was $1.5 million and $1.3 million. For the nine months ended September 30, 2012 and 2011, general and administrative expense was $5.1 million and $3.9 million. The principal components of general and administrative expense are advisory fees and reimbursable expenses, legal fees, accounting fees, the Company’s share of loss from its investment in Apple Air Holding LLC, and reporting expenses. During the nine months ended September 30, 2012 and 2011, the Company incurred approximately $1.3 million and $0.7 million, respectively in legal costs, an increase over prior periods due to the legal matters discussed herein and continued costs related to responding to staff of the Securities and Exchange Commission (“SEC”). The SEC staff has been conducting a non-public investigation, which is focused principally on the adequacy of certain disclosures in the Company’s filings with the SEC beginning in 2008, as well as the Company’s review of certain transactions involving the Company and the other Apple REIT Companies. The Company intends to continue to cooperate with the SEC staff, and is engaging in a dialogue with the SEC staff concerning these issues and the roles of certain officers. The Company does not believe the issues raised by the SEC staff affect the material accuracy of the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations or Consolidated Statements of Cash Flows. At this time, the Company cannot predict the outcome of this investigation as to the Company or any of its officers, nor can it predict the timing associated with any such conclusion or resolution. The Company anticipates it will continue to incur significant legal costs for at least the remainder of 2012 related to these matters and possibly into 2013. Also, during the fourth quarter of 2011 and the first six months of 2012, the Company incurred costs associated with its evaluation of a potential consolidation transaction with Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Nine, Inc. Total related costs incurred during the nine months ended September 30, 2012 were approximately $0.5 million. In May 2012, the Company’s Board of Directors and the Boards of Directors of the other Apple REITs announced that they would not move forward with a potential consolidation transaction at that time.

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Depreciation expense was $9.3 million for the third quarter of 2012 and $9.0 million for the third quarter of 2011. For the nine months ended September 30, 2012 and 2011, depreciation expense was $27.6 million and $27.0 million. The New York hotel incurred depreciation expense of $1.6 million in both of the three month periods ended September 30, 2012 and 2011. Depreciation expense for the New York hotel was $4.9 million for each of the nine month periods ended September 30, 2012 and 2011. Depreciation expense represents the expense of the Company’s hotel buildings and related improvements, and associated furniture, fixtures and equipment, for the respective periods owned. The increase for the nine month period ended September 30, 2012, in comparison to the same period of 2011, is a result of capital improvements made by the Company during 2011 and the first nine months of 2012.

Interest expense, net for the third quarter and nine months ended September 30, 2012 was $3.8 million and $10.9 million. Interest expense, net for the third quarter and nine months ended September 30, 2011 was $2.8 million and $8.8 million. Interest expense primarily represents interest incurred on mortgage loans and the Company’s credit facilities, and for a former term loan extinguished in October 2011, outstanding during the applicable periods of 2012 and 2011. The increase in interest expense from 2011 to 2012 primarily reflects higher loan balances outstanding during the first nine months of 2012, including the third quarter of 2012 compared to the third quarter of 2011. During the third quarter of 2012, the Company originated two ten year mortgage loans, secured separately by two hotel properties and with each loan at an interest rate of approximately 4.73%, for a combined $18.7 million. Proceeds of the two mortgage loans were used to reduce the balance outstanding on the Company’s $60.0 million unsecured credit facility, and to pay transaction costs. During the first quarter of 2012, the Company extinguished two previous credit facilities with proceeds from a newly originated $40.0 million mortgage loan (secured by two hotel properties) and a $60.0 million unsecured credit facility. The two extinguished credit facilities, both of which were due to mature in 2012, had a combined effective interest rate that was lower than the combined effective interest rates of the Company’s mortgage loan and credit facility originated in the first quarter of 2012. Interest expense in the first nine months of 2012 was reduced by capitalized interest of approximately $0.4 million related to renovations at six hotel properties.

Related Parties

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Liquidity and Capital Resources

At closing in March 2012, the Company borrowed approximately $48 million under the credit facility to pay all outstanding balances and extinguish its previously existing $75 million and $20 million credit facilities, and pay transaction costs. At September 30, 2012, the outstanding balance under the credit facility was $37.8 million, and had an interest rate of approximately 3.22%. Loan origination costs totaled approximately $0.4 million and are being amortized as interest expense through the March 2013 maturity date. The credit facility contains the following quarterly financial covenants (capitalized terms are defined in the loan agreement):

·	Tangible Net Worth must exceed $275 million;

·	Total Debt to Asset Value must not exceed 50%;

·	Loan balance must not exceed 45% of the Unencumbered Asset Value;

·	Ratio of Net Operating Income, for the Company’s unencumbered properties compared to an Implied Debt Service for the properties must exceed two; and

·	Ratio of net income before depreciation and interest expense to total Fixed Charges, on a cumulative 12 month basis, must exceed two.

The Company was in compliance with each of these covenants at September 30, 2012.

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The Company anticipates that cash flow from operations and available credit facilities will be adequate to meet its anticipated liquidity requirements in 2012 and 2013, including required distributions to shareholders (the Company is not required to make distributions at its current rate for REIT purposes), planned Unit redemptions, capital expenditures and debt service in 2012. Although reduced in July 2011, the Company’s goal is 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 has and will attempt if necessary 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 further to required levels. If the Company were unable to extend maturing debt or enter into new borrowing agreements, 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 2012 totaled $38.4 million, and were paid monthly at a rate of $0.045833. For the same nine month period, the Company’s cash generated from operations was approximately $36.5 million. This shortfall includes a return of capital and was funded primarily by additional borrowings by the Company. Since a portion of distributions has been funded with borrowed funds, the Company’s ability to maintain its current intended rate of distribution will be primarily based on the ability of the Company’s properties to generate cash from operations at this level, the Company’s ability to utilize currently available financing, or the Company’s ability to obtain additional financing. The Company intends to continue paying distributions on a monthly basis. 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 of $0.045833 per common share. In June 2011, the Company’s Board of Directors approved the reduction in the annual distribution rate from $0.77 to $0.55 per common share; distributions during the first six months of 2011 were paid monthly at a rate of $0.064167. The Board of Directors monitors the Company’s distribution rate relative to the performance of the hotels on an ongoing basis and may make further adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company.

In October 2008, the Company instituted 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 given year is five 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 of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. Since inception of the program through September 30, 2012, the Company has redeemed approximately 7.0 million Units representing approximately $75.0 million, including 1.3 million Units in the amount of $14.0 million and 2.2 million Units in the amount of $24.1 million redeemed during the nine months ended September 30, 2012 and 2011, respectively. As contemplated by the program, beginning with the January 2011 redemption, the scheduled redemption date for the first quarter of 2011, the Company redeemed Units on a pro-rata basis. Prior to 2011, 100% of requested redemptions were redeemed. The following is a summary of Unit redemptions during 2011 and the first nine months of 2012:

					Redemption
Redemption	Requested Unit		Units		Requests not
Date	Redemptions		Redeemed		Redeemed
January 2011		1,168,279		732,647		435,632
April 2011		1,529,096		729,016		800,080
July 2011		8,255,381		736,960		7,518,421
October 2011		17,938,386		727,604		17,210,782
January 2012		18,910,430		454,405		18,456,025
April 2012		18,397,381		454,638		17,942,743
July 2012		18,607,044		362,553		18,244,491

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As noted in the table above, beginning with the January 2011 redemption, the total redemption requests exceeded the authorized amount of redemptions and, as a result, the Board of Directors has and will continue to limit the amount of redemptions as it deems prudent. Currently, the Company plans to redeem under its Unit Redemption Program approximately 2.0% of weighted average units during 2012.

The Company has on-going capital commitments to fund its capital improvements. The Company is required, under all of the hotel management agreements, and under certain loan 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. The Company expects that this amount will be adequate to fund required repairs, replacements and refurbishments and to maintain the Company’s hotels in a competitive position. As of September 30, 2012, the Company held $12.4 million in reserve for capital expenditures. Total capital expenditures in the first nine months of 2012 were approximately $10.4 million. Total capital expenditures over the next twelve months are anticipated to be approximately $10 million. The Company does not currently have any existing or planned projects for new development.

Impact of Inflation

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

Business Interruption

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

Seasonality

The hotel industry historically has been seasonal in nature. 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.

Subsequent Events

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In October 2012, under the guidelines of the Company’s Unit Redemption Program, the Company redeemed approximately 391,000 Units in the amount of $4.3 million. As contemplated in the Program, the Company redeemed Units on a pro-rata basis, whereby a percentage of each requested redemption was fulfilled at the discretion of the Company’s Board of Directors. This redemption was approximately 2% of the total 19.1 million requested Units to be redeemed, with approximately 18.7 million requested Units not redeemed.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

With the exception of two interest rate swap transactions, the Company has not engaged in transactions in derivative financial instruments or derivative commodity instruments. The Company entered into an interest rate swap in October 2010, with a notional amount at September 30, 2012 of $6.7 million, and based on the London Offered Rate (“LIBOR”), to increase stability and manage interest rate fluctuations related to interest expense on a variable rate loan. Additionally, the Company entered into an interest rate swap in January 2012, with a notional amount at September 30, 2012 of $40.0 million, and based on LIBOR, to increase stability and manage interest rate fluctuations related to a newly originated variable rate loan. Neither swap is designated as a hedge, therefore the changes in the fair market values of each swap transaction are recorded in earnings. The Company recognized a net loss of $136,000 in the first nine months of 2012 from the combined changes in fair value of the two derivative instruments.

As of September 30, 2012, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk, commodity price risk or equity 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 credit facility and due to its variable interest rate term loans. The Company had an outstanding balance of $37.8 million on its $60.0 million credit facility at September 30, 2012, and to the extent it utilizes the credit facility, the Company will be exposed to changes in short-term interest rates. Additionally, the outstanding balance of the Company’s variable rate term loans was $46.7 million at September 30, 2012. Based on these outstanding balances at September 30, 2012, every 100 basis point change in interest rates can potentially impact the Company’s annual net income by approximately $0.8 million, with all other factors remaining the same. The Company’s cash balance at September 30, 2012 was $0.

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 were effective as of September 30, 2012. 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 1. Legal Proceedings

The term the “Apple REIT Companies” means Apple REIT Eight, Inc. (the “Company”), Apple REIT Six, Inc., Apple REIT Seven, Inc., Apple REIT Nine, Inc. and Apple REIT Ten, Inc.

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

Unit Redemption Program

Effective in October 2008, the Company instituted a Unit Redemption Program to provide limited interim liquidity to 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 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 given year is five 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 of redemptions, reject any request for redemption, or otherwise amend the terms of, suspend, or terminate the Unit Redemption Program. As noted below, during 2011 and the first nine months of 2012, the total redemption requests exceeded the authorized amount of redemptions and the Board of Directors has and will continue to limit the amount of redemptions as it deems prudent.

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Since inception of the program through September 30, 2012, the Company has redeemed approximately 7.0 million Units representing $75.0 million. During the nine months ended September 30, 2012, the Company redeemed approximately 1.3 million Units in the amount of $14.0 million. As contemplated in the program, beginning with the January 2011 redemption, the Company redeemed Units on a pro-rata basis with approximately 63%, 48%, 9%, 4%, 2%, 2% and 2% of the amounts requested redeemed in the first, second, third and fourth quarters of 2011 and the first, second and third quarters of 2012, respectively, leaving approximately 18.2 million Units requested but not redeemed as of the last scheduled redemption date in the third quarter of 2012 (July 2012). Prior to 2011, the Company had redeemed 100% of the redemption requests. The Company has a number of cash sources including cash from operations, dividend reinvestment plan proceeds, borrowings under its credit facility and asset sales from which it can make redemptions. See the Company’s complete consolidated statements of cash flows for the nine months ended September 30, 2012 and 2011 included in the Company’s interim financial statements in Item 1 of this Form 10-Q for a description of the sources and uses of the Company’s cash flows. The following is a summary of redemptions during the third quarter of 2012 (no redemptions occurred in August and September of 2012):

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 2012

362,553

10.99

362,553

(1)

(1)The maximum number of Units that may be redeemed in any 12 month period is limited to up to five percent (5.0%) of the weighted average number of Units outstanding from the beginning of the 12 month period, subject to the Company’s right to change the number of Units to be redeemed.

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 Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)
31.2		Certification of the Company's Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)
32.1		Certification of the Company's Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)
101		The following materials from Apple REIT Eight, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail (FURNISHED 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 6, 2012
	Glade M. Knight,
	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

By:	/s/ BRYAN PEERY	Date: November 6, 2012
	Bryan Peery,
	Chief Financial Officer (Principal Financial and Principal Accounting Officer)

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Apple REIT Eight, Inc. - FORM 10-Q - November 6, 2012

Attached files

Apple REIT Eight, Inc. Reports