APLE

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2010, for Apple REIT Nine, Inc. (now Apple Hospitality REIT, Inc.). The Company is a Virginia corporation organized as a Real Estate Investment Trust (REIT) focused on acquiring and operating hotels and income-producing real estate. As of the reporting date, the Company owned 44 hotels (5,393 rooms) across 20 states and approximately 410 acres of land leased to Chesapeake Energy Corporation for natural gas production. The Company is in an active capital formation phase, conducting a best-efforts offering of Units (common and preferred shares) to fund acquisitions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 61% year-over-year, driven primarily by the acquisition of 11 new hotels in the first half of 2010 and 12 hotels in 2009. Hotel revenue rose from $40.2 million to $62.1 million.
• Net Income Dilution: While absolute net income increased, net income per share declined from $0.14 to $0.08 due to a significant increase in the weighted average number of shares outstanding (from 51.9 million to 113.8 million) as the Company raised capital.
• Operating Performance: Average Daily Rate (ADR) and RevPAR declined slightly year-over-year ($102 vs. $111 ADR; $66 vs. $73 RevPAR) due to the inclusion of newly constructed hotels in lower-rate markets and general economic weakness, though occupancy remained stable.
• Liquidity: Cash balances increased significantly to $358.3 million, funded by $357.6 million in net proceeds from the issuance of common shares, offset by $234.7 million used for investing activities (primarily acquisitions).

Outlook, Risks, and Management Commentary

• Acquisition Pipeline: The Company has outstanding contracts for 11 additional hotels totaling $169.2 million. Five are under construction, and six are expected to close within six months, though closing is not guaranteed.
• Capital Strategy: The Company continues its best-efforts offering, extended to April 25, 2011. Approximately 47.3 million Units remain unsold. Management anticipates using offering proceeds and cash on hand to fund future acquisitions and capital improvements.
• Distributions: The Company paid distributions of $0.44 per share for the six-month period. A portion of these distributions was funded by offering proceeds rather than operating cash flow, which may be treated as a return of capital for tax purposes.
• Risks: Key risks include the ability to fully invest capital raised, the impact of the economic recession on hotel occupancy and rates, and the uncertainty of closing pending hotel acquisitions. The Company also faces potential dilution from the conversion of Series B preferred stock held by the CEO upon specific triggering events.
• Related Parties: Significant transactions exist with affiliates of the Chairman and CEO, including acquisition fees paid to Apple Suites Realty Group, Inc. (ASRG) and advisory fees to Apple Nine Advisors, Inc. (A9A).

Investor Verification Checklist

• Offering Status: Verify the current status of the best-efforts offering and the number of Units remaining to be sold to assess future dilution and capital availability.
• Acquisition Closings: Monitor the closing of the 11 hotels under contract ($169.2 million) to confirm asset growth and debt assumptions.
• Distribution Sustainability: Review future cash flow statements to determine if distributions can be fully funded by operations as the portfolio matures, or if they will continue to rely on offering proceeds.
• Related Party Fees: Track the magnitude of fees paid to ASRG and A9A relative to total operating expenses.
• Series B Conversion: Assess the potential dilution impact if the Series B convertible preferred stock (held by the CEO) is triggered for conversion.