Table of Contents

 

 

 

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 June 30, 2014

 

OR

 

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:  001-35074

 

SUMMIT HOTEL PROPERTIES, INC.

 (Exact name of registrant as specified in its charter)

 


 

Maryland

27-2962512

(State or other jurisdiction

(I.R.S. Employer Identification No.)

of incorporation or organization)

 

 

12600 Hill Country Boulevard, Suite R-100

Austin, TX  78738

(Address of principal executive offices, including zip code)

 

(512) 538-2300

(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.

 

x Yes                                             o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

x Yes                                             o  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 in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

o Yes                                             x  No

 

As of August 1, 2014, the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 85,915,997.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I —  FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets — June 30, 2014 (unaudited) and December 31, 2013

1

 

Consolidated Statements of Operations (unaudited) — Three and Six Months Ended June 30, 2014 and 2013

2

 

Consolidated Statements of Comprehensive Income (unaudited) - Three and Six Months Ended June 30, 2014 and 2013

3

 

Consolidated Statements of Changes in Equity (unaudited) — Six Months Ended June 30, 2014 and 2013

4

 

Consolidated Statements of Cash Flows (unaudited) — Six Months Ended June 30, 2014 and 2013

5

 

Notes to the Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

PART II —  OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

Item 1A.

Risk Factors

40

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 3.

Defaults Upon Senior Securities

40

 

 

 

Item 4.

Mine Safety Disclosures

40

 

 

 

Item 5.

Other Information

40

 

 

 

Item 6.

Exhibits

42

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.           Financial Statements

 

SUMMIT HOTEL PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)

JUNE 30, 2014 (UNAUDITED) AND DECEMBER 31, 2013

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Investment in hotel properties, net

 

$

1,271,539

 

$

1,149,967

 

Investment in hotel properties under development

 

160

 

 

Land held for development

 

13,748

 

13,748

 

Assets held for sale

 

8,663

 

12,224

 

Cash and cash equivalents

 

41,728

 

46,706

 

Restricted cash

 

54,637

 

38,498

 

Trade receivables

 

13,142

 

7,231

 

Prepaid expenses and other

 

5,681

 

8,876

 

Derivative financial instruments

 

33

 

253

 

Deferred charges, net

 

10,413

 

10,270

 

Deferred tax asset

 

54

 

49

 

Other assets

 

8,525

 

6,654

 

TOTAL ASSETS

 

$

1,428,323

 

$

1,294,476

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Debt

 

$

579,932

 

$

435,589

 

Accounts payable

 

6,256

 

7,583

 

Accrued expenses

 

36,322

 

27,154

 

Derivative financial instruments

 

2,296

 

1,772

 

TOTAL LIABILITIES

 

624,806

 

472,098

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 7)

 

 

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Preferred stock, $.01 par value per share, 100,000,000 shares authorized:

 

 

 

 

 

9.25% Series A - 2,000,000 shares issued and outstanding at June 30, 2014 and December 31, 2013 (aggregate liquidation preference of $50,385 at June 30, 2014 and $50,398 at December 31, 2013)

 

20

 

20

 

7.875% Series B - 3,000,000 shares issued and outstanding at June 30, 2014 and December 31, 2013 (aggregate liquidation preference of $75,492 at June 30, 2014 and $75,324 at December 31, 2013)

 

30

 

30

 

7.125% Series C - 3,400,000 shares issued and outstanding at June 30, 2014 and December 31, 2013 (aggregate liquidation preference of $85,505 at June 30, 2014 and $85,522 at December 31, 2013)

 

34

 

34

 

Common stock, $.01 par value per share, 450,000,000 shares authorized, 85,857,241 and 85,402,408 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

 

859

 

854

 

Additional paid-in capital

 

884,420

 

882,858

 

Accumulated other comprehensive loss

 

(2,114

)

(1,379

)

Accumulated deficit and distributions

 

(87,724

)

(72,577

)

Total stockholders’ equity

 

795,525

 

809,840

 

Non-controlling interests in operating partnership

 

7,992

 

4,722

 

Non-controlling interests in joint venture

 

 

7,816

 

TOTAL EQUITY

 

803,517

 

822,378

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,428,323

 

$

1,294,476

 

 

See Notes to the Consolidated Financial Statements

 

1



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013 (UNAUDITED)

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

Room revenue

 

$

99,680

 

$

75,123

 

$

184,232

 

$

131,764

 

Other hotel operations revenue

 

5,845

 

3,982

 

10,837

 

7,064

 

Total Revenues

 

105,525

 

79,105

 

195,069

 

138,828

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

Hotel operating expenses:

 

 

 

 

 

 

 

 

 

Rooms

 

25,985

 

20,744

 

49,677

 

37,254

 

Other direct

 

13,214

 

9,483

 

25,234

 

17,263

 

Other indirect

 

27,041

 

20,267

 

50,900

 

35,570

 

Other

 

369

 

193

 

717

 

360

 

Total hotel operating expenses

 

66,609

 

50,687

 

126,528

 

90,447

 

Depreciation and amortization

 

16,645

 

12,727

 

32,075

 

23,378

 

Corporate general and administrative:

 

 

 

 

 

 

 

 

 

Salaries and other compensation

 

3,330

 

2,294

 

5,489

 

4,715

 

Other

 

2,087

 

1,729

 

4,133

 

2,385

 

Hotel property acquisition costs

 

17

 

786

 

709

 

1,440

 

Loss on impairment of assets

 

660

 

 

660

 

 

Total Expenses

 

89,348

 

68,223

 

169,594

 

122,365

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

16,177

 

10,882

 

25,475

 

16,463

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest income

 

122

 

18

 

172

 

35

 

Other income

 

64

 

63

 

104

 

223

 

Interest expense

 

(6,846

)

(4,879

)

(13,206

)

(8,929

)

Gain on disposal of assets

 

14

 

 

11

 

6

 

Gain (loss) on derivative financial instruments

 

(1

)

2

 

(1

)

2

 

Total Other Expense, net

 

(6,647

)

(4,796

)

(12,920

)

(8,663

)

 

 

 

 

 

 

 

 

 

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

 

9,530

 

6,086

 

12,555

 

7,800

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX (EXPENSE) BENEFIT

 

(329

)

39

 

(407

)

(149

)

 

 

 

 

 

 

 

 

 

 

INCOME FROM CONTINUING OPERATIONS

 

9,201

 

6,125

 

12,148

 

7,651

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

 

(41

)

545

 

337

 

902

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

9,160

 

6,670

 

12,485

 

8,553

 

 

 

 

 

 

 

 

 

 

 

INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

Operating Partnership

 

61

 

133

 

51

 

105

 

Joint venture

 

124

 

89

 

1

 

52

 

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO SUMMIT HOTEL PROPERTIES, INC.

 

8,975

 

6,448

 

12,433

 

8,396

 

 

 

 

 

 

 

 

 

 

 

PREFERRED DIVIDENDS

 

(4,147

)

(3,844

)

(8,294

)

(6,296

)

 

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

4,828

 

$

2,604

 

$

4,139

 

$

2,100

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

Basic

 

85,165

 

65,480

 

85,136

 

64,090

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

85,663

 

65,954

 

85,596

 

64,452

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

Basic and diluted net income per share from continuing operations

 

$

0.06

 

$

0.03

 

$

0.04

 

$

0.02

 

Basic and diluted net income per share from discontinued operations

 

 

0.01

 

0.01

 

0.01

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income per share

 

$

0.06

 

$

0.04

 

$

0.05

 

$

0.03

 

 

See Notes to the Consolidated Financial Statements

 

2



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013 (UNAUDITED)

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

9,160

 

$

6,670

 

$

12,485

 

$

8,553

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Changes in fair value of derivative financial instruments

 

(676

)

710

 

(744

)

817

 

Total other comprehensive income (loss)

 

(676

)

710

 

(744

)

817

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

8,484

 

7,380

 

11,741

 

9,370

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

Operating Partnership

 

53

 

166

 

42

 

143

 

Joint venture

 

124

 

89

 

1

 

52

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO SUMMIT HOTEL PROPERTIES, INC.

 

8,307

 

7,125

 

11,698

 

9,175

 

 

 

 

 

 

 

 

 

 

 

PREFERRED DIVIDENDS

 

(4,147

)

(3,844

)

(8,294

)

(6,296

)

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

4,160

 

$

3,281

 

$

3,404

 

$

2,879

 

 

See Notes to the Consolidated Financial Statements

 

3



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands, except share amounts)

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013 (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares of

 

 

 

Shares of

 

 

 

 

 

Other

 

Accumulated

 

Total

 

Non-controlling Interests

 

 

 

 

 

Preferred

 

Preferred

 

Common

 

Common

 

Additional

 

Comprehensive

 

Deficit and

 

Stockholders’

 

Operating

 

 

 

Total

 

 

 

Stock

 

Stock

 

Stock

 

Stock

 

Paid-In Capital

 

Income (Loss)

 

Distributions

 

Equity

 

Partnership

 

Joint Venture

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, DECEMBER 31, 2013

 

8,400,000

 

$

84

 

85,402,408

 

$

854

 

$

882,858

 

$

(1,379

)

$

(72,577

)

$

809,840

 

$

4,722

 

$

7,816

 

$

822,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock redemption of common units

 

 

 

151,504

 

2

 

234

 

 

 

236

 

(236

)

 

 

Common units issued for acquisition

 

 

 

 

 

 

 

 

 

3,685

 

 

3,685

 

Acquisition of non-controlling interest in joint venture

 

 

 

 

 

(415

)

 

 

(415

)

 

(7,817

)

(8,232

)

Dividends paid

 

 

 

 

 

 

 

(27,580

)

(27,580

)

(243

)

 

(27,823

)

Equity-based compensation

 

 

 

303,329

 

3

 

1,743

 

 

 

1,746

 

22

 

 

1,768

 

Other comprehensive loss

 

 

 

 

 

 

(735

)

 

(735

)

(9

)

 

(744

)

Net income

 

 

 

 

 

 

 

12,433

 

12,433

 

51

 

1

 

12,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, JUNE 30, 2014

 

8,400,000

 

$

84

 

85,857,241

 

$

859

 

$

884,420

 

$

(2,114

)

$

(87,724

)

$

795,525

 

$

7,992

 

$

 

$

803,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, DECEMBER 31, 2012

 

5,000,000

 

$

50

 

46,159,652

 

$

462

 

$

468,820

 

$

(528

)

$

(31,985

)

$

436,819

 

$

36,718

 

$

 

$

473,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net proceeds from sale of common stock

 

 

 

17,250,000

 

172

 

147,867

 

 

 

148,039

 

 

 

148,039

 

Net proceeds from sale of preferred stock

 

3,400,000

 

34

 

 

 

81,689

 

 

 

81,723

 

 

 

81,723

 

Common stock redemption of common units

 

 

 

2,228,544

 

23

 

6,727

 

 

 

6,750

 

(6,750

)

 

 

Contribution by non-controlling interests in joint venture

 

 

 

 

 

 

 

 

 

 

7,500

 

7,500

 

Dividends paid

 

 

 

 

 

 

 

(21,140

)

(21,140

)

(703

)

 

(21,843

)

Equity-based compensation

 

 

 

324,341

 

3

 

1,267

 

 

 

1,270

 

 

 

1,270

 

Other comprehensive income

 

 

 

 

 

 

779

 

 

779

 

38

 

 

817

 

Net income

 

 

 

 

 

 

 

8,396

 

8,396

 

105

 

52

 

8,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, JUNE 30, 2013

 

8,400,000

 

$

84

 

65,962,537

 

$

660

 

$

706,370

 

$

251

 

$

(44,729

)

$

662,636

 

$

29,408

 

$

7,552

 

$

699,596

 

 

See Notes to the Consolidated Financial Statements

 

4



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013 (UNAUDITED)

 

 

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

12,485

 

$

8,553

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

32,084

 

24,814

 

Amortization of prepaid lease

 

24

 

24

 

Loss on impairment of assets

 

1,060

 

1,500

 

Equity-based compensation

 

1,768

 

1,270

 

Deferred tax asset

 

(5

)

567

 

Gain on disposal of assets

 

(28

)

(1,666

)

(Gain) loss on derivative financial instruments

 

1

 

(2

)

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash - operating

 

(2,234

)

(721

)

Trade receivables

 

(5,911

)

(6,250

)

Prepaid expenses and other

 

3,106

 

(940

)

Accounts payable and accrued expenses

 

6,439

 

7,765

 

 

 

 

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

48,789

 

34,914

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisitions of hotel properties

 

(89,985

)

(388,456

)

Acquisition of non-controlling interest in joint venture

 

(8,232

)

 

Investment in hotel properties under development

 

 

(154

)

Acquisition of land held for development

 

 

(2,800

)

Improvements and additions to hotel properties

 

(26,456

)

(18,292

)

Amounts drawn under note funding obligation

 

(2,000

)

 

Purchases of office furniture and equipment

 

(11

)

(316

)

Proceeds from asset dispositions, net of closing costs

 

2,668

 

25,094

 

Restricted cash - FF&E reserve

 

(2,364

)

(14,156

)

 

 

 

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

 

(126,380

)

(399,080

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from issuance of debt

 

130,998

 

268,150

 

Principal payments on debt

 

(29,828

)

(96,810

)

Financing fees on debt

 

(734

)

(2,160

)

Proceeds from equity offerings, net of offering costs

 

 

237,262

 

Dividends paid and distributions to members

 

(27,823

)

(21,843

)

 

 

 

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

72,613

 

384,599

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(4,978

)

20,433

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

BEGINNING OF PERIOD

 

46,706

 

13,980

 

 

 

 

 

 

 

END OF PERIOD

 

$

41,728

 

$

34,413

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

Cash payments for interest

 

$

12,913

 

$

8,495

 

 

 

 

 

 

 

Capitalized interest

 

$

116

 

$

154

 

 

 

 

 

 

 

Cash payments for income taxes, net of refunds

 

$

617

 

$

676

 

 

 

 

 

 

 

Mortgage debt from acquisitions of hotel properties

 

$

43,172

 

$

33,532

 

 

 

 

 

 

 

Fair value of common units issued for acquisition

 

$

3,685

 

$

 

 

See Notes to the Consolidated Financial Statements

 

5



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1 -                  DESCRIPTION OF BUSINESS

 

Summit Hotel Properties, Inc. (the “Company”) is a self-managed hotel investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. On February 14, 2011, the Company closed on its initial public offering (“IPO”) of 26,000,000 shares of common stock and a concurrent private placement of 1,274,000 shares of common stock. Effective February 14, 2011, the Operating Partnership and Summit Hotel Properties, LLC (the “Predecessor”) completed the merger of the Predecessor with and into the Operating Partnership (the “Merger”). Unless the context otherwise requires, “we”, “us”, and “our” refer to the Company and its subsidiaries.

 

Summit Hotel OP, LP, the Operating Partnership subsidiary of the Company, filed a Form 15 on December 12, 2013 to voluntarily suspend its duty to file periodic and other reports with the Securities and Exchange Commission (the “SEC”) and to voluntarily deregister its common units of limited partnership interest under the Securities and Exchange Act of 1934 (the “Exchange Act”). As a result of filing the Form 15 with the SEC, the Operating Partnership is no longer required to file annual, quarterly or periodic reports with the SEC. The filing of the Form 15 by the Operating Partnership does not impact the registration of the Company’s common stock under the Exchange Act or the Company’s obligations as a reporting issuer under the Exchange Act.

 

At June 30, 2014, our portfolio consisted of 90 upscale and upper midscale hotels with a total of 11,367 guestrooms located in 22 states. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes commencing with our short taxable year ended December 31, 2011. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, substantially all of our hotels are leased to subsidiaries (“TRS Lessees”) of our taxable REIT subsidiary (“TRS”). We indirectly own 100% of the outstanding equity interests in all of our TRS Lessees. Prior to the second quarter of 2014, we indirectly owned an 81% controlling interest in the TRS Lessee associated with the Holiday Inn Express & Suites in San Francisco, CA, which we acquired in early 2013 through a joint venture.  On June 30, 2014, we acquired the remaining 19% interest in the TRS Lessee as part of the purchase of the non-controlling joint venture interest in the hotel.

 

NOTE 2 -                  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

 

We prepared these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Exchange Act. Accordingly, they do not include all of the information and footnotes required by GAAP for complete audited consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the three and six months ended June 30, 2014 may not be indicative of the results that may be expected for the full year 2014. For further information, please read the financial statements included in our Form 10-K for the year ended December 31, 2013.

 

Segment Disclosure

 

Accounting Standards Codification (“ASC”), ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we have one reportable segment, with activities related to investing in real estate. Our investments in real estate are geographically diversified and the chief operating decision makers evaluate operating performance on an individual asset level. As each of our assets has similar economic characteristics, the assets have been aggregated into one reportable segment.

 

6



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Assets Held for Sale and Discontinued Operations

 

We classify assets as held for sale in the period in which certain criteria are met, including when the sale of the asset within one year is probable. Assets held for sale are no longer depreciated and are carried at the lower of carrying amount or fair value, less selling costs.

 

Historically, we presented the results of operations of hotel properties that had been sold or otherwise qualified as assets held for sale in discontinued operations if the operations and cash flows of the hotel properties had been or would be eliminated from our ongoing operations.  Following adoption of ASU 2014-08 in the first quarter of 2014, as discussed below, we anticipate that the majority of future property sales will not be classified as discontinued operations.

 

We periodically review our hotel properties and our land held for development based on established criteria such as age, type of franchise, adverse economic and competitive conditions, and strategic fit, to identify properties which we believe are either non-strategic or no longer complement our business.

 

Non-controlling Interests

 

Non-controlling interests represent the portion of equity in a subsidiary held by owners other than the consolidating parent. Non-controlling interests are reported in the consolidated balance sheets within equity, separately from stockholders’ equity. Revenue, expenses and net income (loss) attributable to both the Company and the non-controlling interests are reported in the consolidated statements of operations.

 

Our consolidated financial statements include non-controlling interests related to common units of limited partnership interests (“Common Units”) in the Operating Partnership held by unaffiliated third parties and, prior to the second quarter of 2014, third-party ownership of a 19% interest in a consolidated joint venture.

 

Income Taxes

 

We are taxed as a REIT under certain provisions of the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our shareholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, which does not necessarily equal net income as calculated in accordance with GAAP. As a REIT, we generally will not be subject to federal income tax (other than taxes paid by our TRS) to the extent we distribute 100% of our REIT taxable income to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will be unable to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT, unless we satisfy certain relief provisions.

 

We account for federal and state income taxes of our TRS using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between carrying amounts of existing assets and liabilities based on GAAP and respective carrying amounts for tax purposes, and operating losses and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of the change in tax rates. However, deferred tax assets are recognized only to the extent that it is more likely than not they will be realized based on consideration of available evidence, including future reversals of taxable temporary differences, future projected taxable income and tax planning strategies.

 

7



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Fair Value Measurement

 

Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1:

Observable inputs such as quoted prices in active markets.

Level 2:

Directly or indirectly observable inputs, other than quoted prices in active markets.

Level 3:

Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.

 

Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:

 

Market approach:

 

Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Cost approach:

 

Amount required to replace the service capacity of an asset (replacement cost).

Income approach:

 

Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models).

 

Our estimates of fair value were determined using available market information and appropriate valuation methods.  Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.

 

We elected not to use the fair value option for cash and cash equivalents, restricted cash, trade receivables, prepaid expenses and other, debt, accounts payable, and accrued expenses. With the exception of our fixed-rate debt, the carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates.

 

New Accounting Standards

 

In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.”  The ASU changed the criteria for reporting discontinued operations while enhancing related disclosures.  Criteria for discontinued operations will now include only disposals that represent a strategic shift in operations with a major effect on operations and financial results.  The ASU is to be applied on a prospective basis and would be effective for us beginning January 1, 2015; however, we have elected early adoption in the first quarter of 2014, which is permitted for disposals, and classifications as held for sale, which have not been reported previously. While we have elected early adoption for our consolidated financial statements and footnote disclosures, the sale of the AmericInn Hotel & Suites, Aspen Hotel & Suites and Hampton Inn in Fort Smith, AR will be included in discontinued operations as these hotels were classified as held for sale in our consolidated financial statements in prior periods. The AmericInn Hotel & Suites and Aspen Hotel & Suites were sold in January 2014.

 

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017 and early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated financial statements.

 

8



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 3 -                  HOTEL PROPERTY ACQUISITIONS

 

Hotel property acquisitions in the six months ended June 30, 2014 and 2013 include (in thousands):

 

Date Acquired

 

Franchise/Brand

 

Location

 

Purchase Price

 

Debt Assumed

 

 

 

 

 

 

 

 

 

 

 

First Six Months 2014

 

 

 

 

 

 

 

 

 

January 9

 

Hilton Garden Inn

 

Houston, TX

 

$

37,500

 

$

17,846

 

January 10

 

Hampton Inn

 

Santa Barbara (Goleta), CA

 

27,900

 

12,037

 

January 24

 

Four Points by Sheraton

 

San Francisco, CA

 

21,250

 

 

March 14

 

DoubleTree by Hilton

 

San Francisco, CA

 

39,060

 

13,289

 

Total Six Months Ended June 30, 2014

 

4 hotel properties

 

$

125,710

 

$

43,172

 

 

 

 

 

 

 

 

 

 

 

First Six Months 2013

 

 

 

 

 

 

 

 

 

January 22

 

Hyatt Place

 

Chicago (Hoffman Estates), IL

 

$

9,230

 

$

 

January 22

 

Hyatt Place

 

Orlando (Convention), FL

 

12,252

 

 

January 22

 

Hyatt Place

 

Orlando (Universal), FL

 

11,843

 

 

February 11

 

Holiday Inn Express & Suites (1)

 

San Francisco, CA

 

60,500

 

23,423

 

March 11

 

SpringHill Suites by Marriott

 

New Orleans, LA

 

33,095

 

 

March 11

 

Courtyard by Marriott

 

New Orleans (Convention), LA

 

30,827

 

 

March 11

 

Courtyard by Marriott

 

New Orleans (French Quarter), LA

 

25,683

 

 

March 11

 

Courtyard by Marriott

 

New Orleans (Metairie), LA

 

23,539

 

 

March 11

 

Residence Inn by Marriott

 

New Orleans (Metairie), LA

 

19,890

 

 

April 30

 

Hilton Garden Inn

 

Greenville, SC

 

15,250

 

 

May 21

 

IHG / Holiday Inn Express & Suites

 

Minneapolis (Minnetonka), MN

 

6,900

 

3,724

 

May 21

 

Hilton Garden Inn

 

Minneapolis (Eden Prairie), MN

 

10,200

 

6,385

 

May 23

 

Fairfield Inn & Suites by Marriott

 

Louisville, KY

 

25,023

 

 

May 23

 

SpringHill Suites by Marriott

 

Louisville, KY

 

39,138

 

 

May 23

 

Courtyard by Marriott

 

Indianapolis, IN

 

58,634

 

 

May 23

 

SpringHill Suites by Marriott

 

Indianapolis, IN

 

30,205

 

 

Total Six Months Ended June 30, 2013

 

16 hotel properties

 

$

412,209

 

$

33,532

 

 


(1) This hotel property was acquired by a joint venture in which we owned an 81% controlling interest. On June 30, 2014, we acquired the remaining non-controlling interest in the joint venture for $8.2 million. As a result, this hotel property became wholly-owned by us.

 

The allocation of the aggregate purchase prices to the fair value of assets and liabilities acquired for the above acquisitions follows (in thousands):

 

 

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Land

 

$

8,600

 

$

57,276

 

Hotel buildings and improvements

 

114,713

 

341,903

 

Furniture, fixtures and equipment

 

3,389

 

14,996

 

Land held for development

 

 

2,800

 

Other assets

 

11,542

 

9,308

 

Total assets acquired

 

138,244

 

426,283

 

Less debt assumed

 

(43,172

)

(33,532

)

Less lease liability assumed

 

(992

)

 

Less other liabilities

 

(1,402

)

(1,495

)

Net assets acquired

 

$

92,678

 

$

391,256

 

 

9



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Total revenues and net income for hotel properties acquired in the three and six months ended June 30, 2014 and 2013, which are included in our consolidated statements of operations follows (in thousands):

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2014 Acquisitions

 

2013 Acquisitions

 

2014 Acquisitions

 

2013 Acquisitions

 

 

 

2014

 

2014

 

2013

 

2014

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

8,552

 

$

29,044

 

$

20,634

 

$

13,450

 

$

53,444

 

$

27,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

869

 

$

7,261

 

$

4,585

 

$

1,102

 

$

10,457

 

$

5,721

 

 

The results of operations of acquired hotel properties are included in the consolidated statements of operations beginning on their respective acquisition dates. The following unaudited condensed pro forma financial information presents the results of operations as if all acquisitions in 2013 and the first six months of 2014 had taken place on January 1, 2013. The unaudited condensed pro forma information excludes discontinued operations, is for comparative purposes only, and is not necessarily indicative of what actual results of operations would have been had the hotel property acquisitions taken place on January 1, 2013. This information does not purport to represent results of operations for future periods.

 

The unaudited condensed pro forma financial information for the three and six months ended June 30, 2014 and 2013 follows (in thousands, except per share amounts):

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

105,525

 

$

94,607

 

$

197,184

 

$

179,950

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

9,160

 

$

8,527

 

$

12,006

 

$

12,304

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to common stockholders - basic and diluted

 

$

0.06

 

$

0.07

 

$

0.04

 

$

0.09

 

 

NOTE 4 -                  INVESTMENT IN HOTEL PROPERTIES

 

Investment in hotel properties includes (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Land

 

$

163,359

 

$

154,831

 

Hotel buildings and improvements

 

1,120,298

 

993,372

 

Construction in progress

 

14,049

 

24,242

 

Furniture, fixtures and equipment

 

170,373

 

142,976

 

 

 

1,468,079

 

1,315,421

 

Less accumulated depreciation

 

(196,540

)

(165,454

)

 

 

$

1,271,539

 

$

1,149,967

 

 

10



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 5 -                  ASSETS HELD FOR SALE

 

Assets held for sale include (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Land

 

$

300

 

$

1,183

 

Hotel building and improvements

 

7,969

 

10,290

 

Furniture, fixtures and equipment

 

394

 

751

 

 

 

$

8,663

 

$

12,224

 

 

At June 30, 2014, assets held for sale include a land parcel in Spokane, WA and the Hampton Inn in Fort Smith, AR which are both under contract to sell.

 

At December 31, 2013, assets held for sale include the AmericInn Hotel & Suites and the Aspen Hotel & Suites in Fort Smith, AR which were sold on January 17, 2014, and the Hampton Inn in Fort Smith, AR and a land parcel in Spokane, WA, which are under contract to sell.

 

NOTE 6 -                  DEBT

 

Our debt is comprised of a senior unsecured credit facility and mortgage loans secured by various hotel properties. The weighted average interest rate, after giving effect to our interest rate derivatives, for all borrowings was 4.62% at June 30, 2014 and 5.03% at December 31, 2013. Our total fixed-rate and variable-rate debt, after giving effect to our interest rate derivatives, follows (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Fixed-rate debt

 

$

472,046

 

$

358,590

 

Variable-rate debt

 

107,886

 

76,999

 

 

 

$

579,932

 

$

435,589

 

 

Information about the fair value of our fixed-rate debt that is not recorded at fair value follows (in thousands):

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

Carrying
Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Valuation Technique

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt not recorded at fair value

 

$

368,712

 

$

355,285

 

$

329,544

 

$

319,429

 

Level 2 - Market approach

 

 

At June 30, 2014 and December 31, 2013, we had variable rate debt of $103.3 million and $104.0 million, respectively, which had effectively been converted to fixed interest rates through derivative financial instruments which are carried at fair value. Differences between carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value as a result of changes in the current market rate of interest on the valuation date. For additional information on our use of derivatives as interest rate hedges, refer to “Note 11-Derivative Financial Instruments and Hedging.”

 

11



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Senior Unsecured Credit Facility

 

At June 30, 2014, we have a $300.0 million senior unsecured credit facility. Deutsche Bank AG New York Branch (“Deutsche Bank”) is the administrative agent and Deutsche Bank Securities Inc. is the sole lead arranger. The syndication of lenders includes Deutsche Bank; Bank of America, N.A.; Royal Bank of Canada; Key Bank; Regions Bank; Fifth Third Bank; Raymond James Bank, N.A.; and U.S. Bank National Association. Certain of our existing and future subsidiaries that own or lease an “unencumbered asset” are required to guaranty this credit facility.

 

The senior unsecured credit facility is comprised of a $225.0 million revolving credit facility (the “$225 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”). This credit facility has an accordion feature which will allow us to increase the commitments under the $225 Million Revolver and the $75 Million Term Loan by an aggregate of $100.0 million prior to October 10, 2017. The $225 Million Revolver will mature on October 10, 2017, which can be extended to October 10, 2018 at our option, subject to certain conditions. The $75 Million Term Loan will mature on October 10, 2018.

 

At June 30, 2014, the maximum amount of borrowing permitted under the senior unsecured credit facility was $300.0 million, of which, we had $156.0 million borrowed, $13.8 million in standby letters of credit, and $130.2 million available to borrow.

 

Term Loans

 

At June 30, 2014, we had $498.9 million in term loans outstanding. These term loans are secured primarily by first mortgage liens on hotel properties.

 

On January 9, 2014, as part of our acquisition of the 182-guestroom Hilton Garden Inn in Houston, TX, we assumed a $17.8 million mortgage loan with a fixed interest rate of 6.22%, an amortization period of 30 years, and a maturity date of November 1, 2016.

 

On January 10, 2014, as part of our acquisition of the 98-guestroom Hampton Inn in Santa Barbara (Goleta), CA, we assumed a $12.0 million mortgage loan with a fixed interest rate of 6.133%, an amortization period of 25 years, and a maturity date of November 11, 2021.

 

On March 14, 2014, as part of our acquisition of the 210-guestroom DoubleTree by Hilton in San Francisco, CA, we assumed a $13.3 million mortgage loan with a fixed interest rate of 5.98%, an original amortization period of 30 years, and a maturity date of March 8, 2016.

 

On March 28, 2014, we amended our loan with GE Capital Financial, cross-collateralized by the Courtyard by Marriott and the SpringHill Suites by Marriott, both located in Scottsdale, AZ. The loan was amended to bear interest at a fixed rate of 5.39% and the maturity date was extended to April 1, 2020.

 

On March 28, 2014, we amended two loans with General Electric Capital Corp., cross-collateralized by the Hilton Garden Inn (Lakeshore) and the Hilton Garden Inn (Liberty Park), both located in Birmingham, AL. Both loans were amended to bear interest at a fixed rate of 5.39% and the maturity dates were extended to April 1, 2020.

 

On May 6, 2014, we closed on a $25.0 million loan with Compass Bank. The loan carries a variable rate of 30-day LIBOR plus 240 basis points, amortizes over 25 years, and has a May 6, 2020 maturity date. The loan is secured by first mortgage liens on the Hampton Inn & Suites hotels located in San Diego (Poway), CA, Ventura (Camarillo), CA and Fort Worth, TX. The net proceeds from this loan were used to pay down the $225 Million Revolver.

 

12



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 7 -                  COMMITMENTS AND CONTINGENCIES

 

Pending Hotel Property Acquisition

 

We have a purchase agreement with a hotel property developer to acquire a Hampton Inn & Suites in downtown Minneapolis, MN for $37.7 million, subject to certain conditions including the completion of construction of the hotel in accordance with agreed upon architectural and engineering designs, receipt of a Hampton Inn & Suites franchise, and receipt of a certificate of occupancy.  As this acquisition is contingent upon these customary closing conditions, there is no assurance that it will be completed.

 

Departure of Executive Officer

 

As previously reported, at the end of May 2014, Stuart J. Becker resigned from his position as Executive Vice President, Chief Financial Officer and Treasurer of the Company.  On June 16, 2014, in connection with Mr. Becker’s resignation, the Company entered into a severance and release agreement with Mr. Becker (the “Agreement”).  The Agreement became effective on June 19, 2014 and provides for Mr. Becker’s resignation effective as of May 27, 2014.  The Agreement also provides for the following: (i) a release by Mr. Becker of all claims against the Company, its affiliates and other parties; (ii) a covenant by Mr. Becker not to solicit the Company’s employees for employment for a period of one year, and confidentiality and non-disparagement covenants; (iii) a severance payment to Mr. Becker in the gross amount of $348,289 (equal to Mr. Becker’s 2013 base salary plus payment for all accrued and unused vacation), less applicable payroll deductions, all of which was paid in a single lump sum in July 2014; (iv) payment to Mr. Becker for up to twelve months of COBRA premiums; and (v) accelerated vesting of all restricted shares of common stock and options previously awarded to Mr. Becker (all of the options will remain exercisable, in whole or in part, until August 25, 2014, and, if not exercised on or prior to that date, will be forfeited).

 

Litigation

 

We are involved from time to time in litigation arising in the ordinary course of business; however, there are currently no actions pending against us that we believe would have a material impact on our financial condition or results of operations.

 

NOTE 8 -                  EQUITY

 

Common Stock

 

In the first six months of 2014, we issued 151,504 shares of common stock to limited partners of the Operating Partnership upon redemption of their Common Units.

 

On May 28, 2014, we issued 278,916 shares of common stock to our executive officers and management pursuant to our 2011 Equity Incentive Plan. On June 17, 2014, we issued 20,349 shares of common stock to our directors pursuant

 

13



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SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

to our 2011 Equity Incentive Plan.  In the first six months of 2014, we issued 4,064 shares of common stock to one of our independent directors in lieu of cash for director fees.

 

In the first six months of 2013, we issued 2,228,544 shares of common stock to limited partners of the Operating Partnership upon redemption of their Common Units.

 

On January 14, 2013, we completed an underwritten public offering of 17,250,000 shares of common stock. Net proceeds were $148.1 million, after the underwriting discount and offering-related expenses of $7.2 million.

 

On March 1, 2013, we issued 292,090 shares of common stock to our executive officers pursuant to our 2011 Equity Incentive Plan. On June 13, 2013, we issued 29,228 shares of common stock to our directors pursuant to our 2011 Equity Incentive Plan. In the first six months of 2013, we issued 3,023 shares of common stock to one of our independent directors in lieu of cash for director fees.

 

Preferred Stock

 

On March 20, 2013, we completed a public offering of 3,400,000 shares of 7.125% Series C Cumulative Redeemable Preferred Stock for net proceeds of $81.7 million, after the underwriting discount and offering-related expenses of $3.3 million.

 

Our Series A, Series B and Series C preferred stock have a $25 per share liquidation preference and pay dividends at an annual rate of $2.3125 per share of Series A, $1.96875 per share of Series B, and $1.78125 per share of Series C preferred stock. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year.

 

Non-controlling Interests in Operating Partnership

 

Pursuant to the limited partnership agreement, beginning on February 14, 2012, the unaffiliated third parties who hold Common Units in our Operating Partnership have the right to cause us to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of common stock at the time of redemption, or at our option, shares of our common stock on a one-for-one basis. The number of shares of our common stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations.

 

At June 30, 2014 and December 31, 2013, unaffiliated third parties owned 1,072,095 and 811,425, respectively, of Common Units of the Operating Partnership, representing a 1% limited partnership interest in the Operating Partnership.

 

We classify outstanding Common Units held by unaffiliated third parties as non-controlling interests in the Operating Partnership, a component of equity in the Company’s consolidated balance sheets. The portion of net income (loss) allocated to these Common Units is reported on the Company’s consolidated statement of operations as net income (loss) attributable to non-controlling interests of the Operating Partnership.

 

Non-controlling Interests in Joint Venture

 

On February 11, 2013, we formed a joint venture with an affiliate of IHG to purchase a Holiday Inn Express & Suites in San Francisco, CA. Prior to June 30, 2014, we owned an 81% controlling interest in the joint venture and our partner owned a 19% interest, which we classified as non-controlling interest in joint venture on our consolidated balance sheets. For the periods prior to June 30, 2014, the portion of net income (loss) allocated to our partner was reported on our consolidated statements of operations as net income (loss) attributable to non-controlling interests in joint venture.  On June 30, 2014, we acquired the remaining non-controlling interest for $8.2 million and the hotel property became wholly-owned by us.

 

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Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 9 -                  EQUITY-BASED COMPENSATION

 

Our equity-based awards were issued under our 2011 Equity Incentive Plan which provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based award or incentive awards up to an aggregate of 2,318,290 shares of common stock. Stock options granted may be either incentive stock options or nonqualified stock options. Vesting terms may vary with each grant, and stock option terms are generally five to ten years. We have outstanding equity-based awards in the form of stock options and restricted stock awards. All of our existing equity-based awards are classified as equity awards.

 

Stock Options

 

Stock option activity for the six months ended June 30, 2014 follows:

 

 

 

Number of Options

 

Weighted Average
Exercise Price

 

Weighted Average
Remaining
Contractual Terms

 

Aggregate Intrinsic
Value (Current
Value Less Exercise
Price)

 

 

 

 

 

(Per share)

 

(In years)

 

(in thousands)

 

Outstanding, December 31, 2013

 

893,000

 

$

9.75

 

7.2

 

$

 

Granted

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

Outstanding, June 30, 2014

 

893,000

 

$

9.75

 

6.3

 

$

759

 

Exercisable, June 30, 2014

 

554,600

 

$

9.75

 

6.1

 

$

471

 

 

The severance and release agreement between the Company and Stuart J. Becker described above (see “Note 7-Commitments and Contingencies”), provided for accelerated vesting of all options previously granted to Mr. Becker.  On the effective date of the severance and release agreement, the option became exercisable with respect to an additional 18,800 shares of common stock.  The total option grant to purchase 47,000 shares of common stock will remain exercisable, in whole or in part, until August 25, 2014, and thereafter shall be forfeited.

 

Time-Based Restricted Stock Awards

 

On May 28, 2014, we awarded time-based restricted stock awards for 116,981 shares of common stock to our executive officers and management. These awards vest over a three year period based on continued service (25% on May 27, 2015 and 2016 and 50% on May 27, 2017), or upon a change in control, and are subject to the other conditions described in our 2011 Equity Incentive Plan. The holders of these awards have the right to vote the related shares of common stock and receive all dividends declared and paid whether or not vested.

 

On March 1, 2013, we awarded time-based restricted stock awards for 106,518 shares of common stock to our executive officers. These awards vest over a three year period based on continued service (25% on February 28, 2014 and 2015 and 50% on February 28, 2016), or upon a change in control, and are subject to the other conditions described in our 2011 Equity Incentive Plan. The holders of these awards have the right to vote the related shares of common stock and receive all dividends declared and paid whether or not vested.

 

The fair value of time-based restricted stock awards granted is calculated based on the market value on the date of grant.

 

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Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Time-based restricted stock activity for the six months ended June 30, 2014 follows:

 

 

 

Number of Shares

 

Weighted Average
Grant Date Fair
Value

 

Aggregate Current
Value

 

 

 

 

 

(Per share)

 

(In thousands)

 

Non-vested, December 31, 2013

 

161,587

 

$

9.10

 

$

1,454

 

Granted

 

116,981

 

9.82

 

 

 

Vested

 

49,665

 

9.42

 

 

 

Forfeited

 

 

 

 

 

Non-vested, June 30, 2014

 

228,903

 

$

9.40

 

$

2,426

 

 

The severance and release agreement between the Company and Stuart J. Becker described above, provided for accelerated vesting of all restricted shares of common stock previously granted to Mr. Becker.  On the effective date of the severance and release agreement, the restrictions lapsed on 23,035 common shares granted under time-based restricted stock awards.

 

Performance-Based Restricted Stock Awards

 

On May 28, 2014, we awarded performance-based restricted stock awards for 161,935 shares of common stock to our executive officers. These awards vest ratably over the next three years (2015, 2016 and 2017) subject to the attainment of certain performance goals and continued service, or upon a change in control and are subject to the other conditions described in our 2011 Equity Incentive Plan. The holders of these awards have the right to vote the related shares of common stock and any dividends declared will be accumulated and will be subject to the same vesting conditions as the awards.

 

On March 1, 2013, we awarded performance-based restricted stock awards for 185,572 shares of common stock to our executive officers. These awards vest ratably over the next three years (2014, 2015 and 2016) subject to the attainment of certain performance goals and continued service, or upon a change in control and are subject to the other conditions described in our 2011 Equity Incentive Plan. The holders of these awards have the right to vote the related shares of common stock and any dividends declared will be accumulated and will be subject to the same vesting conditions as the awards.

 

Our performance-based restricted stock awards are market-based awards and are accounted for based on the fair value of our common stock on the grant date. These awards vest based on a performance measurement that requires the Company’s total shareholder return (“TSR”) to exceed the TSR for the SNL U.S. REIT Hotel Index for a designated one, two or three year performance period. The fair value of performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model.

 

Performance-based restricted stock activity for the six months ended June 30, 2014 follows:

 

 

 

Number of Shares

 

Weighted Average
Grant Date Fair
Value

 

Aggregate Current
Value

 

 

 

 

 

(Per share)

 

(In thousands)

 

Non-vested, December 31, 2013

 

268,174

 

$

6.48

 

$

2,414

 

Granted

 

161,935

 

7.12

 

 

 

Vested

 

45,551

 

6.50

 

 

 

Forfeited

 

 

 

 

 

Non-vested, June 30, 2014

 

384,558

 

$

6.75

 

$

4,076

 

 

The severance and release agreement between the Company and Stuart J. Becker described above, provided for accelerated vesting of all restricted shares of common stock previously granted to Mr. Becker.  On the effective date of the severance and release agreement, the restrictions lapsed on 45,551 common shares granted under performance-based restricted stock awards.

 

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Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

No other performance-based restricted stock awards vested during the six months ended June 30, 2014 because performance goals were not met.

 

Director Stock Awards

 

Our directors have the option to receive shares of our common stock in lieu of cash for their director fees. In the six months ended June 30, 2014, we issued 4,064 shares of common stock for director fees and an annual grant of 20,349 shares of common stock to our outside directors.

 

Equity-Based Compensation Expense

 

Equity-based compensation expense for the three and six months ended June 30, 2014 and 2013 follows (in thousands):

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Included in corporate general and administrative salaries and other compensation in the statements of operations:

 

 

 

 

 

 

 

 

 

Stock options

 

$

226

 

$

156

 

$

381

 

$

311

 

Time-based restricted stock

 

327

 

167

 

494

 

276

 

Performance-based restricted stock

 

509

 

231

 

654

 

371

 

 

 

1,062

 

554

 

1,529

 

958

 

Included in corporate general and administrative other in the statements of operations:

 

 

 

 

 

 

 

 

 

Director stock

 

239

 

295

 

239

 

312

 

 

 

$

1,301

 

$

849

 

$

1,768

 

$

1,270

 

 

The amount of expense may be subject to adjustment in future periods depending upon the attainment of specific goals, which affect the vesting of the performance-based restricted stock, or a change in the forfeiture assumptions.

 

Unrecognized equity-based compensation expense for all non-vested awards was $4.4 million at June 30, 2014. We expect to recognize this cost over a remaining weighted-average period of 1.1 years.

 

NOTE 10 -           LOSS ON IMPAIRMENT OF ASSETS

 

During the six months ended June 30, 2014, we recognized a loss on impairment of assets of $0.4 million related to the Hampton Inn in Fort Smith, AR.  This property was classified as held for sale at June 30, 2014 and its operating results, including impairment charges, were included in discontinued operations.  In addition, we recognized a loss on impairment of assets related to a land parcel in Spokane, WA that was held for sale at June 30, 2014.  As a result, a loss on impairment of assets of $0.7 million was charged to operations.

 

During the six months ended June 30, 2013, we recognized a loss on impairment of assets of $1.5 million related to the SpringHill Suites in Lithia Springs, GA and the Courtyard by Marriott in Memphis, TN. These hotel properties were classified as held for sale prior to being sold in August 2013 and May 2013, respectively. Their operating results, including impairment charges, are included in discontinued operations.

 

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Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 11 -           DERIVITIVE FINANCIAL INSTRUMENTS AND HEDGING

 

Information about our derivative financial instruments at June 30, 2014 and December 31, 2013 follows (dollars in thousands):

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Number of
Instruments

 

Notional
Amount

 

Fair Value

 

Number of
Instruments

 

Notional
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (asset)

 

2

 

$

21,043

 

$

33

 

3

 

$

29,273

 

$

253

 

Interest rate swaps (liability)

 

2

 

82,598

 

(2,296

)

1

 

75,000

 

(1,772

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

$

103,641

 

$

(2,263

)

4

 

$

104,273

 

$

(1,519

)

 

Our interest rate swaps are designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique.  At June 30, 2014, two of our interest rate swaps were in an asset position and two were in a liability position. We have not posted, and are not required under the terms of the swaps to post, any collateral related to these agreements and are not in breach of any financial provisions of the agreements. If we had breached any agreement provisions at June 30, 2014, we could have been required to settle our obligations under these agreements that were in a liability position at their aggregate termination value, including accrued interest, of $2.4 million at June 30, 2014.

 

Details of the location in the financial statements of the loss recognized on derivative financial instruments designated as cash flow hedges follows (in thousands):

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) recognized in accumulated other comprehensive income on derivative financial instruments (effective portion)

 

$

(1,111

)

$

623

 

$

(1,606

)

$

645

 

 

 

 

 

 

 

 

 

 

 

Loss reclassified from accumulated other comprehensive income to interest expense (effective portion)

 

$

(435

)

$

(87

)

$

(862

)

$

(172

)

 

 

 

 

 

 

 

 

 

 

Gain (loss) recognized in gain (loss) on derivative financial instruments (ineffective portion and amounts excluded from effectiveness testing)

 

$

(1

)

$

2

 

$

(1

)

$

2

 

 

Amounts reported in accumulated other comprehensive income related to derivative financial instruments will be reclassified to interest expense as interest payments are made on the hedged variable-rate debt.

 

NOTE 12 — INCOME TAX

 

Income taxes for the interim periods presented have been included in our consolidated financial statements on the basis of an estimated annual effective tax rate. Our effective tax rate is impacted by the mix of earnings and losses by taxing jurisdictions. Our earnings (losses), other than in our TRS, are not generally subject to federal corporate and state income taxes due to our REIT election.

 

Due to the decrease in cumulative losses over the past three years, management believes that sufficient positive evidence could become available in the future to reach a conclusion that the valuation allowance will no longer be needed, in whole or in part. Acceleration of improved operating results or significant taxable income from specific non-recurring transactions could further impact this assessment. The likelihood of realizing the benefit of deferred tax assets and the related need for a valuation allowance is assessed on an ongoing basis. This assessment requires estimates and significant management judgment as to future operating results, as well as an evaluation of the effectiveness of our tax planning strategies. At this time, we are not able to reasonably estimate when sufficient positive evidence will require reversals of the valuation allowance or the impact such reversal will have on our effective tax rate.

 

18



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

We recorded an income tax provision attributable to continuing operations of $0.3 million, zero, $0.4 million and $0.1 million for the three month periods ended June 30, 2014 and 2013 and the six month periods ended June 30, 2014 and 2013, respectively. We had no unrecognized tax benefits at June 30, 2014. We expect no significant changes in unrecognized tax benefits within the next year. We recognize interest expense and penalties associated with unrecognized tax benefits as a component of tax expense.

 

NOTE 13 — FAIR VALUE

 

The following table presents information about our financial instruments measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input significant to the fair value measurement.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

Disclosures concerning financial instruments measured at fair value are as follows (in thousands):

 

 

 

Fair Value Measurements at June 30, 2014 using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 

$

8,663

 

$

 

$

8,663

 

Interest rate swaps (asset)

 

 

33

 

 

33

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swaps (liability)

 

 

2,296

 

 

2,296

 

Fixed-rate debt

 

 

355,285

 

 

355,285

 

 

 

 

Fair Value Measurements at December 31, 2013 using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 

$

12,224

 

$

 

$

12,224

 

Interest rate swaps (asset)

 

 

253

 

 

253

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swaps (liability)

 

 

1,772

 

 

1,772

 

Fixed-rate debt

 

 

319,429

 

 

319,429

 

 

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2014.

 

19



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 14 - DISCONTINUED OPERATIONS

 

We have adjusted our consolidated statement of operations for the three and six months ended June 30, 2014 and 2013 to reflect the operations of hotel properties sold or classified as held for sale in discontinued operations. Discontinued operations include the following hotel properties that have been sold:

 

·                  AmericInn & Suites in Golden, CO — sold January 2013;

·                  Hampton Inn in Denver, CO — sold February 2013;

·                  Holiday Inn and Holiday Inn Express in Boise, ID — sold May 2013;

·                  Courtyard by Marriott in Memphis, TN — sold May 2013;

·                  SpringHill Suites in Lithia Springs, GA — sold August 2013;

·                  Fairfield Inn in Lewisville, TX — sold August 2013;

·                  Fairfield Inn in Lakewood, CO — sold September 2013;

·                  Fairfield Inn in Emporia, KS — sold October 2013;

·                  SpringHill Suites in Little Rock, AR — sold November 2013;

·                  Fairfield Inn and AmericInn in Salina, KS — sold November 2013;

·                  Hampton Inn and Fairfield Inn & Suites in Boise, ID — sold November 2013;

·                  Holiday Inn Express in Emporia, KS — sold December 2013; and

·                  AmericInn and Aspen Hotel & Suites in Fort Smith, AR - sold on January 17, 2014.

 

In addition, discontinued operations also includes the results of the Hampton Inn in Fort Smith, AR, which is classified as held for sale at June 30, 2014.

 

Condensed results of operations for the hotel properties included in discontinued operations follow (in thousands):

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

REVENUE

 

$

1,193

 

$

5,963

 

$

2,281

 

$

12,255

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses

 

788

 

4,399

 

1,558

 

9,262

 

Depreciation and amortization

 

5

 

596

 

9

 

1,435

 

Loss on impairment of assets

 

400

 

 

400

 

1,500

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM HOTEL OPERATIONS

 

 

968

 

314

 

58

 

Interest expense

 

 

47

 

 

150

 

(Gain) loss on disposal of assets

 

46

 

(26

)

(17

)

(1,660

)

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

(46

)

947

 

331

 

1,568

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX BENEFIT (EXPENSE)

 

5

 

(402

)

6

 

(666

)

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM DISCONTINUED OPERATIONS

 

$

(41

)

$

545

 

$

337

 

$

902

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO NON-CONTROLLING INTEREST

 

$

(1

)

$

24

 

$

4

 

$

42

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

(40

)

$

521

 

$

333

 

$

860

 

 

As discussed above, we have elected to early adopt ASU No. 2014-08 which changes the criteria for discontinued operations to include only disposals that represent a strategic shift in operations with a major effect on operations and results.  While we have elected early adoption for our consolidated financial statements and footnote disclosures, hotels that were classified as held for sale in prior periods will continue to be reported in discontinued operations.  Under this ASU, the Company anticipates that the majority of future property sales will not be classified as discontinued operations.

 

20



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 15 - EARNINGS PER SHARE

 

We apply the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for our non-vested time-based restricted stock awards with nonforfeitable dividends and for our common stock. Our non-vested time-based restricted stock awards with nonforfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Our non-vested time-based restricted stock awards with nonforfeitable dividends do not have such an obligation so they are not allocated losses.

 

For the three months ended June 30, 2014 and the six months ended June 30, 2014 and 2013, we had 893,000 stock options outstanding which were not included in the computation of diluted earnings per share, as the options’ exercise price was greater than the average market price of our common shares.

 

A summary of the components used to calculate basic and diluted earnings per share follows (in thousands, except per share):

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

9,201

 

$

6,125

 

$

12,148

 

$

7,651

 

Less: Preferred dividends

 

4,147

 

3,844

 

8,294

 

6,296

 

Allocation to participating securities

 

26

 

18

 

41

 

27

 

Attributable to non-controlling interest

 

186

 

198

 

48

 

115

 

Income from continuing operations attributable to common stockholders

 

4,842

 

2,065

 

3,765

 

1,213

 

Income (loss) from discontinued operations attributable to common stockholders

 

(40

)

521

 

333

 

860

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

4,802

 

$

2,586

 

$

4,098

 

$

2,073

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

85,165

 

65,480

 

85,136

 

64,090

 

Dilutive effect of equity-based compensation awards

 

498

 

474

 

460

 

362

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - diluted

 

85,663

 

65,954

 

85,596

 

64,452

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic and diluted:

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

0.06

 

$

0.03

 

$

0.04

 

$

0.02

 

Net income from discontinued operations

 

 

0.01

 

0.01

 

0.01

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.06

 

$

0.04

 

$

0.05

 

$

0.03

 

 

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Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 16 — SUBSEQUENT EVENTS

 

Appointment of Directors

 

On July 16, 2014, the Board of Directors (the “Board”) of the Company, based on the recommendation of the Nominating and Corporate Governance Committee of the Board, appointed Jeffrey W. Jones and Kenneth J. Kay as directors of the Company. The Board has determined, based on the recommendation of the Nominating and Corporate Governance Committee, that each appointee is independent in accordance with the applicable rules of the New York Stock Exchange. In connection with Messrs. Jones and Kay appointments, the size of the Board was increased from six (with one vacant seat prior to July 16, 2014) to seven. The two new directors join Kerry W. Boekelheide, the Company’s Executive Chairman of the Board, Daniel P. Hansen, the Company’s President and Chief Executive Officer, Bjorn R. L. Hanson, Thomas W. Storey and Wayne W. Wielgus as members of the Board.

 

Mr. Jones will serve on the Audit and the Nominating and Corporate Governance Committees of the Board. Mr. Kay will serve on the Audit and the Compensation Committees of the Board. The Board, on the recommendation of the Nominating and Corporate Goverance Committee, has determined that each of the appointees meets the requirements for serving on such committees.

 

Messrs. Jones and Kay will participate in the Company’s non-employee director compensation programs. On July 21, 2014, Messrs. Jones and Kay each received a stock award pursuant to the Company’s 2011 Equity Incentive Plan, consisting of 5,984 fully vested shares of the Company’s common stock. The Company has entered into an indemnification agreement with each of Messrs. Jones and Kay in the form entered into with other directors and executive officers of the Company.

 

Equity Transactions

 

On July 1, 2014, we issued 46,788 shares of common stock for Common Units of our Operating Partnership which were tendered for redemption on May 2, 2014.

 

On August 1, 2014, our Board of Directors declared cash dividends of $0.1175 per share of common stock, $0.578125 per share of 9.25% Series A Cumulative Redeemable Preferred Stock, $0.4921875 per share of 7.875% Series B Cumulative Redeemable Preferred Stock, and $0.4453125 per share of 7.125% Series C Cumulative Redeemable Preferred Stock. These dividends are payable on August 29, 2014 for holders of record on August 15, 2014.

 

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Table of Contents

 

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

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2013 and our unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

Unless stated otherwise or the context otherwise requires, references in this report to “we,” “our,” “us,” “our company” or “the company” mean Summit Hotel Properties, Inc. and its consolidated subsidiaries.

 

Cautionary Statement about Forward-Looking Statements

 

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “forecast,” “project,” “potential,” “continue,” “likely,” “will,” “would” or similar expressions. Forward-looking statements in this report include, among others, statements about our business strategy, including acquisition and development strategies, industry trends, estimated revenue and expenses, ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:

 

·                  financing risks, including the risk of leverage and the corresponding risk of default on our mortgage loans and other debt and potential inability to refinance or extend the maturity of existing indebtedness;

·                  national, regional and local economic conditions;

·                  levels of spending in the business, travel and leisure industries, as well as consumer confidence;

·                  declines in occupancy, average daily rate and revenue per available room and other hotel operating metrics;

·                  hostilities, including future terrorist attacks, or fear of hostilities that affect travel;

·                  financial condition of, and our relationships with, third-party property managers and franchisors;

·                  the degree and nature of our competition;

·                  increased interest rates and operating costs;

·                  increased renovation costs, which may cause actual renovation costs to exceed our current estimates;

·                  changes in zoning laws and increases in real property tax rates;

·                  risks associated with potential acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no operating history, and dispositions of hotel properties;

·                  availability of and our ability to retain qualified personnel;

·                  our failure to maintain our qualification as a REIT under the Internal Revenue Code of 1986, as amended;

·                  changes in our business or investment strategy;

·                  availability, terms and deployment of capital;

·                  general volatility of the capital markets and the market price of our shares of common stock;

·                  environmental uncertainties and risks related to natural disasters; and

·                  other factors described under the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

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Table of Contents

 

Overview

 

We focus primarily on acquiring and owning premium-branded select-service hotels in the upscale and upper midscale segments of the U.S. lodging industry, as these segments are currently defined by Smith Travel Research (“STR”). Since completion of our IPO on February 14, 2011 and through June 30, 2014, we have acquired 47 hotels containing 6,539 guestrooms for purchase prices aggregating $916.7 million. As of August 1, 2014, we own 90 hotels containing 11,368 guestrooms located in 22 states. Except for six hotels, five of which are subject to ground leases and one of which is subject to a PILOT (payment in lieu of taxes) lease, we own our hotels in fee simple. Our hotels are located in markets in which we have extensive experience and that exhibit multiple demand generators, such as business and corporate headquarters, retail centers, airports and tourist attractions.

 

The majority of our hotels operate under premium franchise brands owned by Marriott International, Inc. (“Marriott”) (Courtyard by Marriott®, Residence Inn by Marriott®, SpringHill Suites by Marriott®, Fairfield Inn & Suites by Marriott®, and TownePlace Suites by Marriott®), Hilton Worldwide (“Hilton”) (DoubleTree by Hilton®, Hampton Inn®, Hampton Inn & Suites®, Homewood Suites® and Hilton Garden Inn®), Intercontinental Hotel Group (“IHG”) (Holiday Inn®, Holiday Inn Express®, Holiday Inn Express & Suites® and Staybridge Suites®) and an affiliate of Hyatt Hotels Corporation (“Hyatt”) (Hyatt Place® and Hyatt House®).

 

We have elected to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ended December 31, 2011.  To qualify as a REIT, we cannot operate or manage our hotels.  Accordingly, we lease all of our hotels to our TRS lessees.

 

At June 30, 2014, all of our hotel properties are operated pursuant to hotel management agreements with third party hotel management companies, including the following:

 

·                  Interstate Management Company, LLC and its affiliate Noble Management Group, LLC — 50 hotel properties

·                  Select Hotel Group, LLC — 12 hotel properties

·                  Affiliates of Marriott, including Courtyard Management Corporation, SpringHill SMC Corporation and Residence Inn by Marriott — six hotel properties

·                  White Lodging Services Corporation — four hotel properties

·                  Kana Hotels, Inc. — three hotel properties

·                  InterMountain Management, LLC and its affiliate, Pillar Hotels and Resorts, LP — seven hotel properties

·                  Affiliates of IHG including IHG Management (Maryland) LLC and Intercontinental Hotel Group Resources, Inc. — two hotel properties

·                  HP Hotels Management Company, Inc. — two hotel properties

·                  OTO Development, LLC — two hotel properties

·                  American Liberty Hospitality, Inc. — one hotel property

·                  Stonebridge Realty Advisors, Inc. — one hotel property

 

Our TRS lessees may also employ other hotel managers in the future. We have, and will have, no ownership or economic interest in any of the hotel management companies engaged by our TRS lessees.

 

Our revenue is derived from hotel operations and consists of room revenue and other hotel operations revenue. As a result of our focus on select-service hotels in the upscale and upper midscale segments of the U.S. lodging industry, substantially all of our revenue is room revenue generated from sales of hotel rooms. We also generate, to a much lesser extent, other hotel operations revenue, which consists of ancillary revenue related to meeting rooms and other guest services provided at our hotels.

 

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Table of Contents

 

Industry Trends and Outlook

 

Room-night demand in the U.S. lodging industry is correlated to macroeconomic trends. Key drivers of demand include growth in gross domestic product, or GDP, corporate profits, capital investments and employment. Following periods of recession, recovery of room-night demand for lodging historically has lagged improvements in the overall economy. However, in the economic recovery beginning in early 2010, room-night demand has led improvements in the overall economy. Although we expect that our hotels will realize meaningful RevPAR gains as the economy and lodging industry continue to improve, the risk exists that global and domestic economic conditions may cause the economic recovery to stall, which likely would adversely affect our growth and financial performance expectations.

 

We have a positive outlook about macro-economic conditions and their effect on room-night demand.  We also expect that our near-term results will not be adversely affected by increased lodging supply in our markets. Growth in lodging supply typically lags growth in room-night demand. Key drivers of lodging supply include the availability and cost of capital, construction costs, local real estate market conditions and availability and pricing of existing properties. As a result of the scarcity of financing, a severe recession and declining operating fundamentals, during 2008 and 2009 many planned hotel developments were cancelled or postponed. We believe the effect of the severe recession will be prolonged compared with prior recessions, which could limit supply growth.

 

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Table of Contents

 

Our Hotel Property Portfolio

 

At June 30, 2014, our hotel property portfolio consisted of 90 hotels containing 11,367 guestrooms. Of these hotels, according to STR’s current chain segment designations, 60 hotels containing 7,979 guestrooms are “upscale,” and 30 hotels containing 3,388 guestrooms are “upper midscale.” Information for our hotel properties by franchisor as of June 30, 2014 follows:

 

Franchise/Brand

 

Number of Hotel
Properties

 

Number of
Guestrooms

 

Marriott

 

 

 

 

 

Courtyard by Marriott

 

11

 

1,662

 

SpringHill Suites by Marriott

 

9

 

1,188

 

Residence Inn by Marriott

 

7

 

816

 

Fairfield Inn & Suites by Marriott

 

7

 

751

 

TownePlace Suites by Marriott

 

1

 

90

 

Total Marriott

 

35

 

4,507

 

Hilton

 

 

 

 

 

Hilton Garden Inn

 

9

 

1,076

 

Hampton Inn (1)

 

6

 

634

 

Hampton Inn & Suites

 

7

 

834

 

DoubleTree by Hilton

 

2

 

337

 

Homewood Suites

 

1

 

91

 

Total Hilton

 

25

 

2,972

 

Hyatt

 

 

 

 

 

Hyatt Place

 

16

 

2,224

 

Hyatt House

 

1

 

135

 

Total Hyatt

 

17

 

2,359

 

IHG

 

 

 

 

 

Holiday Inn Express

 

2

 

185

 

Holiday Inn Express & Suites (2)

 

4

 

561

 

Holiday Inn

 

1

 

143

 

Staybridge Suites

 

2

 

213

 

Total IHG

 

9

 

1,102

 

Starwood

 

 

 

 

 

Aloft

 

1

 

136

 

FourPoints by Sheraton

 

1

 

101

 

Total Starwood

 

2

 

237

 

Carlson

 

 

 

 

 

Country Inn & Suites by Carlson

 

2

 

190

 

Total

 

90

 

11,367

(3)

 


(1)         Includes one hotel property that is classified as held for sale at June 30, 2014 in our financial statements.

(2)         Prior to June 30, 2014, we owned an 81% controlling interest in a joint venture that owns the Holiday Inn Express & Suites in San Francisco, CA.  On June 30, 2014, we acquired the outstanding non-controlling interest in the joint venture for $8.2 million.  As a result, this hotel property became wholly-owned by us.

(3)         During the second quarter of 2014, we added 14 guestrooms to our portfolio due to hotel renovations. Thus, at June 30, 2014, our hotel property portfolio consisted of 90 hotels containing 11,367 guestrooms.  Due to the addition of one guestroom in July 2014, our hotel property portfolio at August 1, 2014 consisted of 90 hotels containing 11,368 guestrooms.

 

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Table of Contents

 

Hotel Property Portfolio Activity

 

Acquisitions

 

We acquired four hotel properties in the first six months of 2014 and sixteen hotel properties in the first six months of 2013.  A summary of these acquisitions follows (dollars in thousands, except Cost per Key):

 

Date Acquired

 

Franchise/Brand

 

Location

 

Guestrooms as of
August 1, 2014

 

Purchase
Price

 

Renovation
Cost

 

Cost per
Key (5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First six Months of 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

January 9

 

Hilton Garden Inn

 

Houston, TX

 

182

 

$

37,500

 

$

3,400

 (4)

$

225,000

 

January 10

 

Hampton Inn

 

Santa Barbara (Goleta), CA

 

101

 

27,900

 (1)

2,600

 (4)

302,000

 

January 24

 

Four Points by Sheraton

 

San Francisco, CA

 

101

 

21,250

 

1,400

 (4)

224,000

 

March 14

 

Double Tree by Hilton

 

San Francisco, CA

 

210

 

39,060

 

4,500

 (4)

207,000

 

Total six months ended June 30, 2014

 

4 hotel properties

 

594

 

$

125,710

 

$

11,900

 

$

232,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Six Months of 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

January 22

 

Hyatt Place

 

Chicago (Hoffman Estates), IL

 

126

 

$

9,230

 

$

1,400

 (4)

$

84,000

 

January 22

 

Hyatt Place

 

Orlando (Convention), FL

 

150

 

12,252

 

1,907

 (3)

94,000

 

January 22

 

Hyatt Place

 

Orlando (Universal), FL

 

150

 

11,843

 

1,939

 (3)

92,000

 

February 11

 

IHG / Holiday Inn Express & Suites

 

San Francisco, CA

 

252

 

60,500

 (2)

4,161

 (3)

257,000

 

March 11

 

SpringHill Suites by Marriott

 

New Orleans, LA

 

208

 

33,095

 

 (3)

159,000

 

March 11

 

Courtyard by Marriott

 

New Orleans (Convention), LA

 

202

 

30,827

 

2,350

 (3)

164,000

 

March 11

 

Courtyard by Marriott

 

New Orleans (French Quarter), LA

 

140

 

25,683

 

74

 (3)

184,000

 

March 11

 

Courtyard by Marriott

 

New Orleans (Metairie), LA

 

153

 

23,539

 

2,465

 (3)

170,000

 

March 11

 

Residence Inn by Marriott

 

New Orleans (Metairie), LA

 

120

 

19,890

 

 (3)

166,000

 

April 30

 

Hilton Garden Inn

 

Greenville, SC

 

120

 

15,250

 

145

 (3)

128,000

 

May 21

 

IHG / Holiday Inn Express & Suites

 

Minneapolis (Minnetonka), MN

 

93

 

6,900

 

1,700

 (4)

92,000

 

May 21

 

Hilton Garden Inn

 

Minneapolis (Eden Prairie), MN

 

97

 

10,200

 

2,700

 (4)

133,000

 

May 23

 

Fairfield Inn & Suites by Marriott

 

Louisville, KY

 

135

 

25,023

 

2,500

 (4)

204,000

 

May 23

 

SpringHill Suites by Marriott

 

Louisville, KY

 

198

 

39,138

 

3,600

 (4)

216,000

 

May 23

 

Courtyard by Marriott

 

Indianapolis, IN

 

297

 

58,634

 

 (3)

197,000

 

May 23

 

SpringHill Suites by Marriott

 

Indianapolis, IN

 

156

 

30,205

 

 (3)

194,000

 

Total six months ended June 30, 2013

 

16 hotel properties

 

2,597

 

$

412,209

 

$

24,941

 

$

168,000

 

 


(1)             The purchase price for this hotel included the issuance of 412,174 Common Units in our Operating Partnership valued at the time of issuance at $3.7 million.

(2)             Prior to June 30, 2014, we owned an 81% controlling interest in a joint venture that owns the Holiday Inn Express & Suites in San Francisco, CA.  On June 30, 2014, we acquired the outstanding non-controlling interest in the joint venture for $8.2 million. As a result, this hotel property became wholly-owned by us.

(3)             Actual total renovation cost.

(4)             Actual-to-date and estimated remaining costs to complete.

(5)             Purchase price and renovation costs are funded by mortgage debt, advances on our senior unsecured revolving line of credit facility, cash and the issuance of Operating Partnership Common Units described in footnote 1 to this table. Additional information about the mortgage debt financing is provided below in “Outstanding Indebtedness — Term Loans.”

 

Of the total renovation costs detailed in the table above, $17.8 million have been incurred as of June 30, 2014. There is no assurance that our actual renovation costs will not exceed our estimates.

 

Dispositions

 

Pursuant to our strategy to continually evaluate our hotel properties and land held for development, we sold two hotel properties in the first six months of 2014. Historically, when a property was identified as being held for sale, we reclassified the property on our consolidated balance sheets, evaluated for potential impairment and, in the case of a hotel property, reported historical and future results of operations in discontinued operations. We recognized impairment charges on hotel properties in discontinued operations and on land held for development in continuing operations of $1.1 million and $1.5 million in the first six months of 2014 and 2013, respectively.

 

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Table of Contents

 

As discussed in the footnotes to the consolidated financial statements, we have elected to early adopt ASU No. 2014-08 which changes the criteria for discontinued operations to include only disposals that represent a strategic shift in operations with a major effect on operations and results.  While we have elected early adoption for our consolidated financial statements and footnote disclosures, the sale of the AmericInn, Aspen Hotel & Suites and Hampton Inn in Fort Smith, AR will be included in discontinued operations as these hotels were classified as held for sale in prior periods.  Under this ASU, the Company anticipates that the majority of future property sales will not be classified as discontinued operations.

 

On January 17, 2014, we sold the AmericInn Hotel & Suites and the Aspen Hotel & Suites in Fort Smith, AR for $3.1 million. The sale of the AmericInn Hotel & Suites also included the assignment of its related ground lease.

 

On January 15, 2013, we sold the AmericInn Hotel & Suites in Golden, CO for $2.6 million. On February 15, 2013, we sold the Hampton Inn in Denver, CO for $5.5 million and recognized a gain on the sale of $1.7 million. On February 27, 2013, we sold a parcel of land in Jacksonville, FL for $1.9 million.  On May 1, 2013, we sold the Holiday Inn and Holiday Inn Express in Boise, ID for $12.6 million. On May 30, 2013, we sold the Courtyard by Marriott in Memphis, TN for $4.2 million.

 

Results of Operations of Summit Hotel Properties, Inc.

 

The comparisons that follow should be reviewed in conjunction with the unaudited interim consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. As noted above, in the first six months of 2014 we sold the AmericInn Hotel & Suites and the Aspen Hotel & Suites in Fort Smith, AR. In addition, at June 30, 2014, we classified as held for sale the Hampton Inn in Fort Smith, AR. Accordingly, we classified these hotel properties as discontinued operations and their operating results are not included in the discussion below.

 

Comparison of Three Months Ended June 30, 2014 with Three Months Ended June 30, 2013

 

Key operating metrics for our total portfolio (89 hotels at June 30, 2014 and 82 hotels at June 30, 2013, excluding discontinued operations) and our same-store portfolio (66 hotels) for the three months ended June 30, 2014 (“second quarter of 2014”) and for the three months ended June 30, 2013 (“second quarter of 2013”) follows (dollars in thousands, except ADR and RevPAR):

 

 

 

Three Months Ended June 30,

 

 

 

 

 

2014

 

2013

 

Percentage Change

 

 

 

Total
Portfolio
(89 hotels)

 

Same-Store
Portfolio
(66 hotels)

 

Total
Portfolio
(82 hotels)

 

Same-Store
Portfolio
(66 hotels)

 

Total
Portfolio
(89/82 hotels)

 

Same-Store
Portfolio
(66 hotels)

 

Total revenues

 

$

105,525

 

$

63,694

 

$

79,105

 

$

58,472

 

33.4

%

8.9

%

Hotel operating expenses

 

$

66,609

 

$

41,466

 

$

50,687

 

$

38,166

 

31.4

%

8.6

%

Occupancy

 

79.9

%

78.9

%

77.9

%

77.0

%

2.6

%

2.5

%

ADR

 

$

122.51

 

$

111.91

 

$

110.90

 

$

105.27

 

10.5

%

6.3

%

RevPAR

 

$

97.93

 

$

88.28

 

$

86.37

 

$

81.07

 

13.4

%

8.9

%

 

Revenue. Total revenues, including room and other hotel operations revenue, increased $26.4 million in the second quarter of 2014 compared with the second quarter of 2013. The increase in revenues is due to an increase in same-store revenues of $5.2 million and an increase in revenues from the 19 hotel properties acquired in 2013 and four hotel properties acquired in the first six months of 2014 (the “Acquired Hotels”) of $21.2 million.

 

The same-store revenue increase of $5.2 million, or 8.9%, was due to increases in occupancy to 78.9% in the second quarter of 2014 compared with 77.0% in the second quarter of 2013, and an increase in ADR to $111.91 in the second quarter of 2014 from $105.27 in the second quarter of 2013. The increases in occupancy and ADR resulted in an 8.9% increase in same-store RevPAR to $88.28 in the second quarter of 2014 compared with $81.07 in the second quarter of 2013. These increases were due to the improving economy, hotel industry fundamentals and renovations made at 17 hotel properties in 2013.

 

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Table of Contents

 

Hotel Operating Expenses. Hotel operating expenses increased $15.9 million in the second quarter of 2014 compared with the second quarter of 2013. The increase is due in part to the additional operating expenses from the Acquired Hotels of $12.6 million. In addition, the increase in same-store hotel operating expenses is due to $3.3 million of variable costs related to the increase in revenue.

 

A summary of our hotel operating expenses for our same-store portfolio (66 hotels) for second quarter of 2014 and 2013 follows (dollars in thousands):

 

 

 

Three Months Ended June 30,

 

Percentage

 

Percentage of Revenue
Three Months Ended June 30,

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Rooms expense

 

$

16,568

 

$

15,593

 

6.3

%

26.0

%

26.7

%

Other direct expense

 

8,092

 

7,140

 

13.3

%

12.7

%

12.2

%

Other indirect expense

 

16,583

 

15,251

 

8.7

%

26.0

%

26.1

%

Other expense

 

223

 

182

 

22.5

%

0.4

%

0.3

%

Total hotel operating expenses

 

$

41,466

 

$

38,166

 

8.6

%

65.1

%

65.3

%

 

Depreciation and Amortization. Depreciation and amortization expense increased $3.9 million in the second quarter of 2014 compared with second quarter of 2013, primarily due to the depreciation associated with the Acquired Hotels.

 

Corporate General and Administrative. Corporate general and administrative expenses increased by $1.4 million in the second quarter of 2014 compared with second quarter of 2013. The increase in expense was primarily due to increases in equity-based compensation of $0.5 million and expenses related to the transition of directors and executive officers of $0.6 million.

 

Other Income/Expense. The $1.9 million increase in other income (expense) was primarily the result of an increase in interest expense due to debt incurred to finance the acquisition of the Acquired Hotels.

 

Comparison of the First Six Months of 2014 with the First Six Months of 2013

 

Key operating metrics for our total portfolio (89 hotels at June 30, 2014 and 82 hotels at June 30, 2013, excluding discontinued operations) and our same-store portfolio (66 hotels) for the six months ended June 30, 2014 (the “first six months of 2014”) compared with the six months ended June 30, 2013 (the “first six months of 2013”) follows (dollars in thousands, except ADR and RevPAR):

 

 

 

Six Months Ended June 30,

 

 

 

 

 

2014

 

2013

 

Percentage Change

 

 

 

Total
Portfolio
(89 hotels)

 

Same-Store
Portfolio
(66 hotels)

 

Total
Portfolio
(82 hotels)

 

Same-Store
Portfolio
(66 hotels)

 

Total
Portfolio
(89/82 hotels)

 

Same-Store
Portfolio
(66 hotels)

 

Total revenues

 

$

195,069

 

$

120,944

 

$

138,828

 

$

111,417

 

40.5

%

8.6

%

Hotel operating expenses

 

$

126,528

 

$

79,884

 

$

90,447

 

$

73,649

 

39.9

%

8.5

%

Occupancy

 

76.1

%

75.9

%

74.9

%

73.7

%

1.6

%

3.0

%

ADR

 

$

120.79

 

$

111.00

 

$

109.31

 

$

105.24

 

10.5

%

5.5

%

RevPAR

 

$

91.94

 

$

84.22

 

$

81.92

 

$

77.52

 

12.2

%

8.6

%

 

Revenue. Total revenues, including room and other hotel operations revenue, increased $56.2 million in the first six months of 2014 compared with the first six months of 2013. The increase in revenues is due to an increase in same-store revenues of $9.5 million and a $46.7 million increase in revenues from the Acquired Hotels.

 

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The same-store revenue increase of $9.5 million, or 8.6%, was due to an increase in occupancy to 75.9% in the first six months of 2014 compared with 73.7% in the first six months of 2013, and an increase in ADR to $111.00 in the first six months of 2014 from $105.24 in the first six months of 2013. The increases in occupancy and ADR resulted in an 8.6% increase in same-store RevPAR to $84.22 in the first six months of 2014 compared with $77.52 in the first six months of 2013. These increases were due to the improving economy and hotel industry fundamentals and renovations made at 17 hotel properties in 2013.

 

Hotel Operating Expenses. Hotel operating expenses increased $36.1 million in the first six months of 2014 compared with the first six months of 2013. The increase is due in part to a $29.8 million increase in operating expenses at the Acquired Hotels. In addition, the increase in same-store hotel operating expenses is due to $6.2 million of variable costs related to the increase in revenue. Expenses at the same-store hotels declined as a percentage of revenue from 66.1% in the first six months of 2013 to 66.0% in the first six months of 2014, due to stability in expenses despite increasing revenues at the same-store hotel properties.

 

A summary of our hotel operating expenses for our same-store portfolio (66 hotels) for the first six months of 2014 and the first six months of 2013 follows (dollars in thousands):

 

 

 

Six Months Ended June 30,

 

Percentage

 

Percentage of Revenue
Six Months Ended June 30,

 

 

 

2014

 

2013

 

Change

 

2014

 

2013

 

Rooms expense

 

$

32,139

 

$

30,179

 

6.5

%

26.6

%

27.1

%

Other direct expense

 

15,748

 

14,199

 

10.9

%

13.0

%

12.7

%

Other indirect expense

 

31,586

 

28,925

 

9.2

%

26.1

%

26.0

%

Other expense

 

411

 

346

 

18.8

%

0.3

%

0.3

%

Total hotel operating expenses

 

$

79,884

 

$

73,649

 

8.5

%

66.0

%

66.1

%

 

Depreciation and Amortization.  Depreciation and amortization expense increased $8.7 million in the first six months of 2014 compared with the first six months of 2013, primarily due to the depreciation associated with the Acquired Hotels.

 

Corporate General and Administrative.  Corporate general and administrative expenses increased $2.5 million in the first six months of 2014 compared with the first six months of 2013. Approximately $1.0 million of the increase was due to increased professional fees and expenses related to establishing new procedures and systems for intercompany account reconciliations, as well as performing the reconciliation of the balance sheets of intercompany accounts between individual hotels and our consolidated statements of operations for the years ended 2013 and 2012.  Additional increases in expense were due to increases in equity-based compensation of $0.5 million and expenses related to the transition of directors and executive officers of $0.6 million.

 

Other Income/Expense.  The $4.3 million increase in other income (expense) in the first six months of 2014 compared with the first six months of 2013 was primarily the result of an increase in interest expense due to debt incurred to finance the acquisition of the Acquired Hotels.

 

Cash Flows

 

The increase in net cash provided by operating activities of $13.9 million for the first six months of 2014 compared with the first six months of 2013 primarily resulted from a $3.9 million improvement in earnings and a $7.3 million increase in depreciation and amortization. The increase in depreciation was primarily related to the Acquired Hotels. The $272.7 million decrease in net cash used in investing activities for the first six months of 2014 compared with the first six months of 2013 primarily resulted from a $298.5 million decrease in acquisitions of hotel properties and a $11.8 million decrease in restricted cash related to renovation reserves funded; partially offset by an $8.2 million increase in improvements and additions to hotel properties, an $8.2 million payment to acquire the remaining 19% non-controlling interest in a joint venture that owns the Holiday Inn Express & Suites in San Francisco, CA and a $22.4 million decrease in net proceeds from asset dispositions. The $312.0 million decrease in net cash provided by financing activities for the first six months of 2014 compared with the first six months of 2013 resulted from a $237.3 million decrease in proceeds from equity offerings, a decrease in proceeds from issuance of debt of $137.2 million and a $6.0 million increase in dividends and distributions, partially offset by a $67.0 million decrease in payments on debt.

 

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Discontinued Operations

 

Pursuant to our strategy, we continually evaluate our hotel properties for potential sale and redeployment of capital. Historically, when a hotel property was sold or identified as being held for sale, we reported its historical and future results of operations, including impairment charges, in discontinued operations.  As discussed above, while we have elected early adoption of ASU No. 2014-08 for our consolidated financial statements and footnote disclosures, hotels that were classified as held for sale in prior periods will continue to be reported in discontinued operations.  In the first six months of 2014, we reported the following hotel properties in discontinued operations:

 

·                  AmericInn Hotel & Suites in Fort Smith, AR

·                  Aspen Hotel & Suites in Fort Smith, AR

·                  Hampton Inn in Fort Smith, AR

 

The AmericInn Hotel & Suites and the Aspen Hotel & Suites located in Fort Smith, AR were sold on January 17, 2014. The Hampton Inn in Fort Smith, AR was classified as held for sale at June 30, 2014 and is currently under contract for sale.

 

A summary of results from our hotel properties included in discontinued operations follows (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

1,193

 

$

5,963

 

$

2,281

 

$

12,255

 

Hotel operating expenses

 

788

 

4,399

 

1,558

 

9,262

 

Depreciation and amortization

 

5

 

596

 

9

 

1,435

 

Loss on impairment of assets

 

400

 

 

400

 

1,500

 

Interest expense

 

 

47

 

 

150

 

(Gain) loss on disposal of assets

 

46

 

(26

)

(17

)

(1,660

)

Total expenses

 

1,239

 

5,016

 

1,950

 

10,687

 

Income (loss) from discontinued operations before income taxes

 

(46

)

947

 

331

 

1,568

 

Income tax (expense) benefit

 

5

 

(402

)

6

 

(666

)

Income (loss) from discontinued operations

 

$

(41

)

$

545

 

$

337

 

$

902

 

 

Non-GAAP Financial Measures

 

We consider funds from operations (“FFO”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”), both of which are non-GAAP financial measures, to be useful to investors as key supplemental measures of our operating performance.

 

We caution investors that amounts presented in accordance with our definitions of FFO and EBITDA may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. FFO and EBITDA should be considered along with, but not as alternatives to, net income (loss) as a measure of our operating performance. FFO and EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, debt service obligations and other commitments and uncertainties.  Although we believe that FFO and EBITDA can enhance the understanding of our financial condition and results of operations, these non-GAAP financial measures are not necessarily better indicators of any trend as compared to a comparable GAAP measure such as net income (loss).

 

Funds From Operations

 

As defined by the National Association of Real Estate Investment Trusts, (“NAREIT”), FFO represents net income or loss (computed in accordance with GAAP), excluding gains (or losses) from sales of property, impairment, items classified by GAAP as extraordinary, the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operational performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or

 

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fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and impairment losses, it provides a performance measure that, when compared year over year, reflects the effect to operations from trends in occupancy, room rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. Our computation of FFO differs from the NAREIT definition and may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs because the amount of depreciation and amortization we add back to net income or loss includes amortization of deferred financing costs and amortization of franchise royalty fees. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

 

The following is a reconciliation of our GAAP net income to FFO for the three and six months ended June 30, 2014 and 2013 (in thousands):

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

NET INCOME

 

$

9,160

 

$

6,670

 

$

12,485

 

$

8,553

 

Preferred dividends

 

(4,147

)

(3,844

)

(8,294

)

(6,296

)

Depreciation and amortization

 

16,650

 

13,324

 

32,084

 

24,814

 

Loss on impairment of assets

 

1,060

 

 

1,060

 

1,500

 

(Gain) loss on disposal of assets

 

32

 

(26

)

(28

)

(1,666

)

Non-controlling interest in joint venture

 

(124

)

(89

)

(1

)

(52

)

Adjustments related to joint venture

 

(118

)

(83

)

(204

)

(139

)

Funds From Operations

 

$

22,513

 

$

15,952

 

$

37,102

 

$

26,714

 

Per common unit

 

$

0.26

 

$

0.23

 

$

0.43

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted common shares and Common Units (1)

 

86,735

 

68,952

 

86,660

 

67,598

 

 


(1)         The Company includes the outstanding Common Units of the Operating Partnership held by limited partners other than the Company because these Common Units are redeemable for shares of the Company’s common stock.

 

Earnings Before Interest, Taxes, Depreciation and Amortization

 

EBITDA represents net income or loss, excluding: (i) interest, (ii) income tax expense and (iii) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. Our management also uses EBITDA as one measure in determining the value of acquisitions and dispositions.

 

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The following is a reconciliation of our GAAP net income to EBITDA for the three and six months ended June 30, 2014 and 2013 (in thousands):

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

NET INCOME

 

$

9,160

 

$

6,670

 

$

12,485

 

$

8,553

 

Depreciation and amortization

 

16,650

 

13,324

 

32,084

 

24,814

 

Interest expense

 

6,846

 

4,926

 

13,206

 

9,079

 

Interest income

 

(122

)

(18

)

(172

)

(35

)

Income tax expense

 

324

 

363

 

401

 

815

 

Non-controlling interest in joint venture

 

(124

)

(89

)

(1

)

(52

)

Adjustments related to joint venture

 

(118

)

(83

)

(204

)

(139

)

EBITDA

 

$

32,616

 

$

25,093

 

$

57,799

 

$

43,035

 

 

Liquidity and Capital Resources

 

Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotel properties in accordance with brand standards, capital expenditures to improve our hotel properties, acquisitions, interest expense and scheduled principal payments on outstanding indebtedness, and distributions to our stockholders.

 

Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovations and other non-recurring capital expenditures that periodically are made with respect to our hotel properties, and scheduled debt payments, including maturing loans.

 

To satisfy the requirements for qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding any net capital gains. We generally intend to distribute at least 100% of our REIT taxable income to avoid tax on undistributed income. Therefore, if sufficient funds are not available to us from hotel dispositions, our senior unsecured revolving credit facility and mortgage loans, we will need to raise additional capital to grow our business and invest in additional hotel properties.

 

We expect to satisfy our liquidity requirements with cash provided by operations, working capital, and short-term borrowings under our senior unsecured revolving credit facility. In addition, we may fund the purchase price of hotel acquisitions and cost of required capital improvements by borrowing under our senior unsecured revolving credit facility, assuming existing mortgage debt, issuing securities (including Common Units issued by the Operating Partnership), or incurring other mortgage debt. Further, we may seek to raise capital through public or private offerings of our equity or debt securities. However, certain factors may have a material adverse effect on our ability to access these capital sources, including our degree of leverage, the value of our unencumbered hotel properties, borrowing restrictions

 

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Table of Contents

 

imposed by lenders and market conditions. We will continue to analyze which sources of capital are most advantageous to us at any particular point in time, but financing may not be consistently available to us on terms that are attractive, or at all. We believe that our cash provided by operations, working capital, borrowings available under our senior unsecured revolving credit facility and other sources of funds available to us will be sufficient to meet our ongoing liquidity requirements for at least the next 12 months.

 

Restricted Cash

 

We have submitted requests to our lenders for the release of approximately $20.0 million of our restricted cash.  Upon final approval, these funds will be added to our unrestricted cash balance and will be available for use in operations.  We believe the release of restricted cash is appropriate under the terms of the respective loan documents, therefore, we expect to receive these funds during the third quarter of 2014. There is no assurance that our lenders will agree to this request and release this cash.

 

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Table of Contents

 

Outstanding Indebtedness

 

At June 30, 2014, we had $423.9 million in debt secured by mortgages on 49 hotel properties. We also had $156.0 million outstanding under our senior unsecured credit facility that was supported by 37 hotel properties unencumbered by mortgage debt.

 

A summary of our debt at June 30, 2014 follows (dollars in thousands):

 

Lender

 

Interest Rate
June 30, 2014 (1)

 

Amortization
Period
(Years)

 

Maturity Date

 

Collateral

 

Amount
of Debt

 

Senior Unsecured Credit Facility

 

 

 

 

 

 

 

 

 

 

 

 

Deutsche Bank AG New York Branch

 

 

 

 

 

 

 

 

 

 

 

 

$225 Million Revolver

 

2.26% Variable

 

 

n/a

 

October 10, 2017

 

n/a

 

$

81,000

 (2)

$75 Million Term Loan

 

4.14% Fixed

 

 

n/a

 

October 10, 2018

 

n/a

 

75,000

 

Total Senior Unsecured Credit Facility

 

 

 

 

 

 

 

 

 

 

156,000

 

Mortgage Loans

 

 

 

 

 

 

 

 

 

 

 

 

ING Life Insurance and Annuity

 

6.10% Fixed

 

 

20

 

March 1, 2019

 

Fourteen hotels

 

63,333

 

 

 

4.55% Fixed

 

 

25

 

March 1, 2019

 

(cross-collateralized with other ING loan)

 

33,379

 

KeyBank National Association

 

4.46% Fixed

 

 

30

 

February 1, 2023

 

Four hotels

 

28,728

 

 

 

4.52% Fixed

 

 

30

 

April 1, 2023

 

Three hotels

 

22,241

 

 

 

4.30% Fixed

 

 

30

 

April 1, 2023

 

Three hotels

 

21,586

 

 

 

4.95% Fixed

 

 

30

 

August 1, 2023

 

Two hotels

 

38,219

 

Bank of America Commercial Mortgage

 

6.41% Fixed

 

 

25

 

September 1, 2017

 

One hotel

 

8,270

 

Merrill Lynch Mortgage Lending Inc.

 

6.38% Fixed

 

 

30

 

August 1, 2016

 

One hotel

 

5,201

 

GE Capital Financial Inc.

 

5.39% Fixed

 

 

25

 

April 1, 2020

 

One hotel

 

9,390

 

 

 

5.39% Fixed

 

 

25

 

April 1, 2020

 

One hotel

 

5,056

 

MetaBank

 

4.25% Fixed

 

 

20

 

August 1, 2018

 

One hotel

 

7,227

 

Bank of Cascades

 

4.66% Fixed

 

 

25

 

September 30, 2021

 

One hotel

 

11,854

 

Goldman Sachs

 

5.67% Fixed

 

 

25

 

July 6, 2016

 

Two hotels

 

13,940

 

Compass

 

4.57% Fixed

 (3)

 

20

 

May 17, 2018

 

One hotel

 

12,915

 

 

 

2.56% Variable

 

 

25

 

May 6, 2020

 

Three hotels

 

24,948

 

General Electric Capital Corp.

 

5.39% Fixed

 

 

25

 

April 1, 2020

 

One hotel

 

5,317

 

 

 

5.39% Fixed

 

 

25

 

April 1, 2020

 

One hotel

 

6,227

 

 

 

4.82% Fixed

 

 

20

 

April 1, 2018

 

One hotel

 

7,414

 

 

 

5.03% Fixed

 

 

25

 

March 1, 2019

 

One hotel

 

9,943

 

AIG

 

6.11% Fixed

 

 

20

 

January 1, 2016

 

One hotel

 

13,230

 

Greenwich Capital Financial Products, Inc.

 

6.20% Fixed

 

 

30

 

January 6, 2016

 

One hotel

 

22,910

 

Wells Fargo Bank, National Association

 

5.53% Fixed

 

 

25

 

October 1, 2015

 

One hotel

 

3,588

 

 

 

5.57% Fixed

 

 

25

 

January 1, 2016

 

One hotel

 

6,151

 

U.S. Bank, NA

 

6.22% Fixed

 

 

30

 

November 1, 2016

 

One hotel

 

17,705

 

 

 

6.13% Fixed

 

 

25

 

November 11, 2021

 

One hotel

 

11,937

 

 

 

5.98% Fixed

 

 

30

 

March 8, 2016

 

One hotel

 

13,223

 

Total Mortgage Loans

 

 

 

 

 

 

 

 

 

 

423,932

 

Total Debt

 

 

 

 

 

 

 

 

 

 

$

579,932

 

 


(1)             The interest rates at June 30, 2014 above give effect to our use of interest rate swaps, where applicable.

(2)             Excludes outstanding letters of credit.

(3)             Interest rate derivative effectively converts 85% of this loan to a fixed rate.

 

Senior Unsecured Credit Facility

 

At June 30, 2014, we have a $300.0 million senior unsecured credit facility. Deutsche Bank AG New York Branch (“Deutsche Bank”) is the administrative agent and Deutsche Bank Securities Inc. is the sole lead arranger. The syndication of lenders includes Deutsche Bank, Bank of America, N.A., Royal Bank of Canada, Key Bank, Regions

 

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Table of Contents

 

Bank, Fifth Third Bank, Raymond James Bank, N.A., and U.S. Bank National Association. Certain of our existing and future subsidiaries that own or lease an unencumbered asset, as described below, will be required to guaranty this credit facility.

 

The senior unsecured credit facility is comprised of a $225.0 million revolving credit facility (the “$225 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”). This credit facility has an accordion feature which will allow us to increase the commitments under the $225 Million Revolver and the $75 Million Term Loan by an aggregate of $100.0 million prior to October 10, 2017. The $225 Million Revolver will mature on October 10, 2017, which can be extended to October 10, 2018 at our option, subject to certain conditions. The $75 Million Term Loan will mature on October 10, 2018.

 

Outstanding borrowings on this credit facility are limited to the least of (i) the aggregate commitments of all of the lenders, (ii) the aggregate value of the unencumbered assets, less our consolidated unsecured indebtedness, all as calculated pursuant to the terms of the credit facility documentation, multiplied by 60%, and (iii) the principal amount that when drawn under the credit facility would result in an unsecured interest expense, calculated on a pro forma basis for the next consecutive four fiscal quarters after taking such draws into account, equal to 50% of the net operating income of the unencumbered assets, as adjusted pursuant to the credit facility documentation.

 

Payment Terms. We are obligated to pay interest at the end of each selected interest period, but not less than quarterly, with all outstanding principal and accrued but unpaid interest due at the maturity. We have the right to pay all or any portion of the outstanding borrowings from time to time without penalty or premium. We pay interest on advances at varying rates, based upon, at our option, either (i) 1, 2, 3, or 6-month LIBOR, plus a LIBOR margin between 1.75% and 2.50%, depending upon our leverage ratio (as defined in the credit facility documentation), or (ii) the applicable base rate, which is the greatest of the administrative agent’s prime rate, the federal funds rate plus 0.50%, or 1-month LIBOR plus 1.00%, plus a base rate margin between 0.75% and 1.50%, depending upon our leverage ratio. In addition, on a quarterly basis, we are required to pay a fee on the unused portion of the credit facility equal to the unused amount multiplied by an annual rate of either (i) 0.30%, if the unused amount is equal to or greater than 50% of the maximum aggregate amount of the credit facility, or (ii) 0.20%, if the unused amount is less than 50% of the maximum aggregate amount of the credit facility.

 

Financial and Other Covenants. We are required to comply with a series of financial and other covenants in order to borrow under this credit facility. The material financial covenants include a maximum leverage ratio, a minimum consolidated tangible net worth, a maximum dividend payout ratio, a minimum consolidated fixed charge coverage ratio, a maximum ratio of secured indebtedness to total asset value, a maximum ratio of secured recourse indebtedness to total asset value, a maximum ratio of consolidated unsecured indebtedness to total unencumbered asset value, and a maximum ratio of unencumbered adjusted net operating income to assumed unsecured interest expense.

 

We are also subject to other customary covenants, including restrictions on investment and limitations on liens and maintenance of properties. This credit facility also contains customary events of default, including, among others, the failure to make payments when due under the terms of any of the credit facilities, breach of any covenant continuing beyond any cure period, and bankruptcy or insolvency.

 

Unencumbered Assets. This credit facility is unsecured; however, borrowings are limited by the value of hotel properties that qualify as unencumbered assets supporting this credit facility. At June 30, 2014, 37 of our hotel properties qualify as, and are deemed to be, unencumbered assets that support this credit facility. Among other conditions, unencumbered assets must not be subject to liens or security interests, and the owner and operating lessee of such unencumbered asset must execute a guaranty supplement pursuant to which the owner and operating lessee become subsidiary guarantors of the credit facility. In addition, hotel properties may be added to or removed from the unencumbered asset pool at any time so long as there is a minimum of 20 hotel properties in the unencumbered asset pool, the unencumbered assets meet certain diversity requirements (such as limits on concentrations in any particular market), and the then-current borrowings on the credit facility do not exceed the maximum available under the credit facility given the availability limitations described above. Further, to be eligible as an unencumbered asset, the hotel property must: be franchised with a nationally-recognized franchisor; have been in operation a minimum of one year; satisfy certain ownership, management and operating lessee criteria; and not be subject to material defects, such as liens, title defects, environmental contamination and other standard lender criteria.

 

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At June 30, 2014, the maximum amount of borrowing permitted under the senior unsecured credit facility was $300.0 million, of which, we had $156.0 million borrowed, $13.8 million in standby letters of credit and $130.2 million available to borrow under the $225 Million Revolver.

 

At August 1, 2014, 37 of our unencumbered hotel properties are included in the borrowing base which supports the senior unsecured credit facility. As a result, the maximum amount of borrowing permitted under the senior unsecured credit facility was $300.0 million, of which we had $148.0 million borrowed, $13.8 million in standby letters of credit and $138.2 million available to borrow.

 

Term Loans

 

At June 30, 2014, we had $498.9 million in term loans outstanding. These term loans are secured primarily by first mortgage liens on hotel properties.

 

On January 9, 2014, as part of our acquisition of the 182-guestroom Hilton Garden Inn in Houston, TX, we assumed a $17.8 million mortgage loan with a fixed interest rate of 6.22%, an amortization period of 30 years, and a maturity date of November 1, 2016.

 

On January 10, 2014, as part of our acquisition of the 98-guestroom Hampton Inn in Santa Barbara (Goleta), CA, we assumed a $12.0 million mortgage loan with a fixed interest rate of 6.133%, an amortization period of 25 years, and a maturity date of November 11, 2021.

 

On March 14, 2014, as part of our acquisition of the 210-guestroom DoubleTree by Hilton in San Francisco, CA, we assumed a $13.3 million mortgage loan with a fixed interest rate of 5.98%, an original amortization period of 30 years, and a maturity date of March 8, 2016.

 

On March 28, 2014, we amended two loans with GE Capital Financial, cross - collateralized by the Courtyard by Marriott and the SpringHill Suites by Marriott, both located in Scottsdale, AZ. The loans were amended to bear interest at a fixed rate of 5.39% and the maturity date was extended to April 1, 2020.

 

On March 28, 2014, we amended two loans with General Electric Capital Corp., cross - collateralized by the Hilton Garden Inn (Lakeshore) and the Hilton Garden Inn (Liberty Park), both located in Birmingham, AL. Both loans were amended to bear interest at a fixed rate of 5.39% and the maturity dates were extended to April 1, 2020.

 

On May 6, 2014, we closed on a $25.0 million loan with Compass Bank. The loan carries a variable rate of 30-day LIBOR plus 240 basis points, amortizes over 25 years, and has a May 6, 2020 maturity date. The loan is secured by first mortgage liens on the Hampton Inn & Suites hotels located in San Diego (Poway), CA, Ventura (Camarillo), CA and Fort Worth, TX. The net proceeds from this loan were used to pay down the $225 Million Revolver.

 

For additional information regarding our term loans, please read our consolidated financial statements and related notes thereto, appearing elsewhere in this Form 10-Q.

 

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Equity Transactions

 

On April 1, 2014, we redeemed 25,349 Common Units in our Operating Partnership, which had been tendered on January 31, 2014 for shares of our common stock. On May 2, 2014, 46,788 Common Units were tendered for redemption, which we redeemed for 46,788 shares of our common stock on July 1, 2014.

 

Capital Expenditures

 

In the first six months of 2014, we spent $22.8 million on renovations, including $17.8 million on hotel properties that we owned at the beginning of 2013 and $5.0 million on hotel properties acquired since the beginning of 2013.  We currently have renovations underway at five of our hotel properties. We anticipate spending a total of $14.0 million to $20.0 million on hotel property renovations in the remainder of 2014. We expect to fund these renovations with cash provided by operations, working capital, borrowings under our senior unsecured revolving credit facility, and other potential sources of capital, to the extent available to us.

 

Off-Balance Sheet Arrangements

 

From time to time, we enter into off-balance sheet arrangements to facilitate our operations. At June 30, 2014, we had $13.8 million in outstanding stand-by letters of credit, of which $0.7 million was supporting performance bonds related to workers’ compensation insurance and other operational matters and $13.1 million was supporting a purchase agreement for the Hampton Inn & Suites in downtown Minneapolis, MN. At August 1, 2014, we had $13.8 million in outstanding standby letters of credit.

 

Contractual Obligations

 

The timing of required payments related to our long-term debt and other contractual obligations at June 30, 2014 follows (in thousands):

 

 

 

Payments Due By Period

 

 

 

Total

 

Less than
One Year

 

One to
Three Years

 

Four to Five
Years

 

More than
Five Years

 

Debt obligations (1)

 

$

748,779

 

$

37,340

 

$

180,496

 

$

248,512

 

$

282,431

 

Operating lease obligations (2)

 

72,330

 

819

 

1,033

 

786

 

69,692

 

Purchase obligations (3)

 

5,917

 

5,917

 

 

 

 

Other long-term liabilities (4)

 

8,000

 

8,000

 

 

 

 

Total

 

$

835,026

 

$

52,076

 

$

181,529

 

$

249,298

 

$

352,123

 

 


(1)         Amounts shown include amortization of principal, maturities, and estimated interest payments. Interest payments on variable rate debt have been estimated using the rates in effect at June 30, 2014, after giving effect to interest rate swaps.

(2)         Primarily ground leases and corporate office leases.

(3)         Represents purchase orders and executed contracts for renovation projects at our hotel properties.

(4)   Represents remaining note funding obligation.

 

In addition to the contractual obligations in the above table, at June 30, 2014 we are also obligated under a purchase agreement with a hotel property developer to acquire a Hampton Inn & Suites in downtown Minneapolis, MN for $37.7 million subject to certain conditions, including the completion of construction of the hotel in accordance with agreed upon architectural and engineering designs, receipt of a Hampton Inn & Suites franchise, and receipt of a certificate of occupancy.  Therefore, there is no assurance that the acquisition will be completed. In January 2014, we issued a standby letter of credit for $13.1 million in support of this purchase agreement. This letter of credit was issued under our senior unsecured credit facility.

 

Inflation

 

Operators of hotel properties, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates.

 

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Seasonality

 

Certain segments of the hotel industry are seasonal in nature. Leisure travelers tend to travel more during the summer. Business travelers occupy hotels relatively consistently throughout the year, but decreases in business travel occur during summer and the winter holidays. The hotel industry is also seasonal based upon geography. Hotels in the southern U.S. tend to have higher occupancy rates during the winter months. Hotels in the northern U.S. tend to have higher occupancy rates during the summer months. Due to our portfolio’s geographic diversification, our revenue has not experienced significant seasonality.

 

Critical Accounting Policies

 

There have been no significant changes in our critical accounting policies or estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 3.                                                         Quantitative and Qualitative Disclosures about Market Risk.

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. In pursuing our business strategies, the primary market risk to which we are currently exposed, and to which we expect to be exposed in the future, is interest rate risk. Our primary interest rate exposure is to 30-day LIBOR. We primarily use fixed interest rate financing to manage our exposure to fluctuations in interest rates. On a limited basis we also use derivative financial instruments to manage interest rate risk.

 

At June 30, 2014, we were party to four interest rate swap agreements with a total notional amount of $103.6 million, where we receive variable rate payments in exchange for making fixed rate payments. These agreements are accounted for as cash flow hedges and have an aggregate termination value, including accrued interest, of $2.4 million at June 30, 2014.

 

At June 30, 2014, after giving effect to our interest rate swap agreements, $472.0 million, or 81.4%, of our debt had fixed interest rates and $107.9 million, or 18.6%, had variable interest rates. Assuming no increase in the outstanding balance of our variable rate debt, if interest rates increase by 1.0% our cash flow would decrease by approximately $1.1 million per year.

 

As our fixed rate debts mature, they will become subject to interest rate risk. In addition, as our variable rate debts mature, lenders may impose interest rate floors on new financing arrangements because of the low interest rates experienced during the past few years. At June 30, 2014, we have no debt that matures in 2014. However, $10.8 million of our long-term debt is scheduled to amortize in the next twelve months, of which $10.5 million has fixed interest rates.

 

Item 4.                                                         Controls and Procedures.

 

Controls and Procedures

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

We have continued the implementation of changes to our internal controls over financial reporting to remediate the material weakness identified in our Annual Report on Form 10-K for the year ended December 31, 2013.  In the course of preparing our 2013 Annual Report and the consolidated financial statements included therein, our management identified a deficiency in the design of our internal control over financial reporting in that we did not have

 

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in place controls and procedures that would allow us to reconcile the balance sheets of our individual hotels included in our final consolidated balance sheet to the balance sheet information provided by our third party property managers for each individual hotel.  As a result of the design deficiency, the intercompany accounts between the entities which form the consolidated company had not been reconciled in 2013 and in prior periods.

 

In order to prepare the consolidated financial statements for the year ended December 31, 2013 and for the quarter ended March 31, 2014, the audit committee of our board of directors engaged a nationally recognized consulting and accounting firm to assist our management with the reconciliation of the intercompany accounts for 2012, 2013 and the first quarter of 2014.  The Company has developed internal processes and procedures to have its accounting staff reconcile intercompany accounts on a monthly basis as part of its normal accounting close process.  Furthermore, the Company has engaged a local consulting firm to assist with the development of processes and procedures related to the reconciliation of the balance sheets of our individual hotels to the balance sheet information provided by our third party property managers at each quarter end and to perform the reconciliation for the second quarter of 2014.

 

Notwithstanding the material weakness, our management has concluded that the consolidated financial statements included in our 2013 Annual Report and in the Quarterly Reports on Form 10-Q for the periods ended March 31, 2014 and June 30, 2014, present fairly in all material respects the consolidated financial position, results of operations and cash flows of the Company and its subsidiaries.

 

Our management continues to work diligently to further identify and implement procedures and controls to remediate the material weakness and strengthen our overall internal controls.  We are continuing to retain and develop resources to improve our processes, procedures and internal control environment.

 

PART II — OTHER INFORMATION

 

Item 1.                                                         Legal Proceedings.

 

We are involved from time to time in litigation arising in the ordinary course of business, however, we are not currently aware of any actions against us that we believe would materially adversely affect our business, financial condition or results of operations.

 

Item 1A.                                                Risk Factors.

 

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013.

 

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

 

None.

 

Item 3.                                                         Defaults Upon Senior Securities.

 

None.

 

Item 4.                                                         Mine Safety Disclosures.

 

Not applicable.

 

Item 5.                                                         Other Information.

 

On May 28, 2014, the Compensation Committee of the Board of Directors approved the below elements of the 2014 compensation program for the Company’s non-employee directors:

 

Annual Cash Retainer.  An annual cash retainer of $50,000 to each non-employee director.

 

Presiding Director Fee.  A $30,000 annual fee to the presiding director.

 

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Additional Committee Membership Fee.  An additional annual committee membership fee to the members of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, with each member of the Audit Committee being paid $12,500, each member of the Compensation Committee being paid $10,000 and each member of the Nominating and Corporate Governance Committee being paid $7,500.

 

Additional Committee Chairperson Fee.  The chairperson of the Audit Committee, the chairperson of the Compensation Committee and the chairperson of the Nominating and Corporate Governance Committee will each receive an annual committee chairperson fee, with the chairperson of the Audit Committee being paid $25,000, the chairperson of the Compensation Committee being paid $20,000 and the chairperson of the Nominating and Corporate Governance Committee being paid $15,000.

 

Annual Equity Award.  An annual award of shares of the Company’s common stock with an aggregate value of approximately $70,000  to each non-employee director (the number of shares awarded to each non-employee director to be determined by dividing $70,000 by the volume weighted-average price of the Company’s common stock on the NYSE for the ten trading days preceding the grant date).

 

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Item 6.                                                         Exhibits.

 

The following exhibits are filed as part of this report:

 

Exhibit
Number

 

Description of Exhibit

10.1†

 

Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Kerry W. Boekelheide

10.2†

 

Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Daniel P. Hansen

10.3†

 

Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Craig J. Aniszewski

10.4†

 

Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Christopher R. Eng

10.5†

 

Confidential Severance and Release Agreement, dated June 16, 2014, between Summit Hotel Properties, Inc. and Stuart J. Becker

31.1

 

Certification of Chief Executive Officer of Summit Hotel Properties, Inc. pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Interim Chief Financial Officer Summit Hotel Properties, Inc. pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of Chief Executive Officer Summit Hotel Properties, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of Interim Chief Financial Officer Summit Hotel Properties, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

 


† Management contract.

 

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Table of Contents

 

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.

 

 

SUMMIT HOTEL PROPERTIES, INC. (registrant)

 

 

Date:    August 6, 2014

By:

/s/ Paul Ruiz

 

 

Paul Ruiz

 

 

Interim Chief Financial Officer

 

 

Chief Accounting Officer

 

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EXHIBIT INDEX

 

Exhibit
Number

 

Description of Exhibit

10.1†

 

Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Kerry W. Boekelheide

10.2†

 

Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Daniel P. Hansen

10.3†

 

Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Craig J. Aniszewski

10.4†

 

Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Christopher R. Eng

10.5†

 

Confidential Severance and Release Agreement, dated June 16, 2014, between Summit Hotel Properties, Inc. and Stuart J. Becker

31.1

 

Certification of Chief Executive Officer of Summit Hotel Properties, Inc. pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Interim Chief Financial Officer Summit Hotel Properties, Inc. pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of Chief Executive Officer Summit Hotel Properties, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of Interim Chief Financial Officer Summit Hotel Properties, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

 


† Management contract.

 

44