Summit Hotel Properties, Inc. - Annual Report: 2011 (Form 10-K)

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[x]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Maryland (Summit Hotel Properties, Inc.) Delaware (Summit Hotel OP, LP) (State or other jurisdiction of incorporation or organization)

27-2962512 (Summit Hotel Properties, Inc.) 20-0617340 (Summit Hotel OP, LP) (I.R.S. Employer Identification No.)

 

 

Summit Hotel Properties, Inc.
Title of each class Common Stock, $0.01 par value per share 9.25% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share		Name of each exchange on which registered New York Stock Exchange New York Stock Exchange
Summit Hotel OP, LP
Title of each class None		Name of each exchange on which registered Not applicable

 

 

 

Summit Hotel Properties, Inc.  [ ] Yes        [x]  No

Summit Hotel OP, LP  [ ] Yes         [x]  No

Summit Hotel Properties, Inc.  [ ] Yes        [x]  No

Summit Hotel OP, LP  [ ] Yes         [x]  No

Summit Hotel Properties, Inc.  [x] Yes    [ ]  No

Summit Hotel OP, LP  [x] Yes         [ ]  No

Summit Hotel Properties, Inc.  [x] Yes   [ ]  No

Summit Hotel OP, LP  [x] Yes         [ ]  No

Summit Hotel Properties, Inc. [ ]

Summit Hotel OP, LP          [x]

Summit Hotel Properties, Inc.   Large accelerated filer  [ ]   Non-accelerated filer [x]	Accelerated filer  [ ] Smaller reporting company  [ ]
Summit Hotel OP, LP   Large accelerated filer  [ ]   Non-accelerated filer [x]	Accelerated filer  [ ] Smaller reporting company  [ ]

Summit Hotel Properties, Inc.  [ ] Yes            [x]  No

Summit Hotel OP, LP  [ ] Yes        [x]  No

 

 

 

 

●	“Summit REIT” mean Summit Hotel Properties, Inc., a Maryland corporation;
●	“Summit OP” or “our operating partnership” mean Summit Hotel OP, LP, a Delaware limited partnership, our operating partnership, and its consolidated subsidiaries; and
●	“we,” “our,” “us,” “our company” or “the company” mean Summit REIT, Summit OP and their consolidated subsidiaries taken together as one company. When this report discusses or refers to activities occurring prior to February 14, 2011, the date on which our operations commenced, these references refer to Summit Hotel Properties, LLC, our predecessor.

 

 

●	it enhances investors’ understanding of Summit REIT and Summit OP by enabling investors to view the business as a whole in the same manner as management views and operates the business;
●	it eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both Summit REIT and Summit OP; and
●	it creates time and cost efficiencies for both companies through the preparation of one combined report instead of two separate reports.

 

 

 

 

 

 

 

●	“the LLC” refer to Summit Hotel Properties, LLC and references to “our predecessor” refer to the LLC and its consolidated subsidiaries, including Summit Group of Scottsdale, Arizona, LLC (“Summit of Scottsdale”);
●	“our TRSs” refer to Summit Hotel TRS, Inc., a Delaware corporation, Summit Hotel TRS II, Inc., a Delaware corporation, and any other taxable REIT subsidiaries (“TRSs”) that we may form in the future;
●	“our TRS lessees” refer to the wholly owned subsidiaries of our TRSs that lease our hotels from our operating partnership or subsidiaries of our operating partnership.
●	“The Summit Group” refer to The Summit Group, Inc., our predecessor’s hotel management company, Company Manager and Class C Member, which is wholly owned by our Executive Chairman, Kerry W. Boekelheide.

 

 

		Page
PART I
Item 1.	Business.	3
Item 1A.	Risk Factors.	9
Item 2.	Properties.	32
Item 3.	Legal Proceedings.	37
Item 4.	Mine Safety Disclosures.	38
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	38
Item 6.	Selected Financial Data.	40
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	42
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk.	62
Item 8.	Financial Statements and Supplementary Data.	62
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	62
Item 9A.	Controls and Procedures.	63
Item 9B.	Other Information.	64
PART III
Item 10.	Directors, Executive Officers and Corporate Governance.	65
Item 11.	Executive Compensation.	65
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	65
Item 13.	Certain Relationships and Related Transactions, and Trustee Independence.	65
Item 14.	Principal Accountant Fees and Services.	65
PART IV
Item 15.	Exhibits and Financial Statement Schedules.	65
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES		F-1

 

 

 

 

●	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, franchisors and hospitality joint venture partners;
●	the degree and nature of our competition;
●	increased interest rates and operating costs;
●	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, or the Code;
●	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;
●	changes in real estate and zoning laws and increases in real property tax rates; and
●	the other factors discussed under the heading “Risk Factors” in this report.

 

 

 

Item 1.

Business.

 

 

 

 

 

 

 

 

 

 

 

 

 

●	RevPAR Growth.  We believe our hotels will continue to experience meaningful revenue growth to the extent lodging industry fundamentals recover from the economic recession which caused industry-wide RevPAR to suffer a combined 18.4% decline in 2008 and 2009, according to Smith Travel Research. Industry conditions improved during 2011.  PricewaterhouseCoopers, LLP projects RevPAR growth increases in 2012 for upscale hotels, upper midscale hotels and midscale hotels of 7.4%, 5.8% and 4.5%, respectively.
●	Stable Cash Flow Potential.  Our hotels can be operated with fewer employees than full-service hotels that offer more expansive food and beverage options, which we believe enables us to generate consistent cash flows with less volatility resulting from reductions in RevPAR and less dependence on group travel.
●	Broad Customer Base.  Our target brands deliver consistently high-quality hotel accommodations with value-oriented pricing that we believe appeals to a wide range of customers, including both business and leisure travelers. We believe that our hotels are particularly popular with frequent business travelers who seek to stay in hotels operating under Marriott, Hilton, Hyatt or IHG brands, which offer strong loyalty rewards program points that can be redeemed for family travel.
●	Enhanced Diversification.  Premium-branded upscale and upper midscale assets generally cost significantly less, on a per-key basis, than hotels in the upper upscale and luxury segments of the industry. As a result, we can diversify our investment capital into ownership of a larger number of hotels than we could in more expensive segments.

 

 

 

●	have potential for strong risk-adjusted returns located in the top 50 MSAs, with a secondary focus on the next 100 markets;
●	operate under leading franchise brands, which may include but are not limited to brands owned by Marriott, Hilton, IHG and Hyatt;
●	are located in close proximity to multiple demand generators, including businesses and corporate headquarters, retail centers, airports, medical facilities, tourist attractions and convention centers, with a diverse source of potential guests, including corporate, government and leisure travelers;
●	are located in markets exhibiting barriers to entry due to strong franchise areas of protection or other factors;
●	can be acquired at a discount to replacement cost; and
●	provide an opportunity to add value through operating efficiencies, repositioning, renovating or rebranding.

 

Strategic Hotel Sales.  A primary part of our strategy is to acquire and own hotels.  However, consistent with our strategy of maximizing the cash flow of our portfolio and our return on invested capital, we periodically review our hotels to determine if any significant changes to area markets or our hotels have occurred or are anticipated to occur that would warrant the sale of a particular hotel.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●	we may be unable to acquire, or may be forced to acquire at significantly higher prices, desired hotels because of competition from other real estate investors with more capital, including other real estate operating companies, REITs and investment funds;
●	we may be unable to obtain the necessary debt or equity financing to consummate an acquisition or, if obtainable, financing may not be on satisfactory terms; and
●	agreements for the acquisition of hotels are typically subject to customary conditions to closing, including satisfactory completion of due diligence investigations, and we may spend significant time and money on potential acquisitions that we do not consummate.

 

 

 

 

●	we may not possess the same level of familiarity with the dynamics and market conditions of any new markets that we may enter, which could result in us paying too much for hotels in new markets;
●	market conditions may result in lower than expected occupancy and room rates;
●	we may acquire hotels without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as clean-up of environmental contamination, claims by tenants, vendors or other persons against the former owners of the hotels and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the hotels;

 

●	we may need to spend more than budgeted amounts to make necessary improvements or renovations to our newly acquired hotels; and
●	we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of hotels, into our existing operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●	require us to dedicate a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, thereby reducing our cash flow available to fund working capital, capital expenditures and other general corporate purposes, including to pay dividends on our common stock and our preferred stock as currently contemplated or necessary to satisfy the requirements for qualification as a REIT;
●	increase our vulnerability to general adverse economic and industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and our industry;
●	limit our ability to borrow additional funds or refinance indebtedness on favorable terms or at all to expand our business or ease liquidity constraints; and
●	place us at a competitive disadvantage relative to competitors that have less indebtedness.

 

Generally, our term debt carries maturity dates or call dates such that the loans become due prior to their full amortization.  We have approximately $28.5 million of debt that matures prior to December 31, 2013.  It may be difficult to refinance such loans on terms acceptable to us, or at all, and we may not have sufficient borrowing capacity on our revolving credit facility to repay the maturing debt using draws on that facility for amounts that we are unable to refinance.  Although we believe that we will be able to refinance these loans, or will have the capacity to repay them, if necessary, using draws under our revolving credit facility, there can be no assurance that our revolving credit facility will be available to repay such maturing debt, as draws under our credit facility are subject to borrowing base limitations and certain financial covenants.

 

 

 

●	merge, consolidate or transfer all or substantially all of our or our subsidiaries’ assets;

●	sell, transfer, pledge or encumber our stock or the ownership interests of our subsidiaries;
●	incur additional debt or issue preferred stock;
●	enter into, terminate or modify leases for our hotels and hotel management and franchise agreements;
●	make certain expenditures, including capital expenditures;
●	pay dividends on or repurchase our capital stock; and
●	enter into certain transactions with affiliates.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●	prevent us from taking actions that are opposed by our joint venture partners;
●	create impasses on major decisions, such as acquisitions or sales;
●	prevent us from selling our interests in the joint venture without the consent of our joint venture partners; or
●	subject us to liability for the actions of our joint venture partners.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●	over-building of hotels in our markets, which could adversely affect occupancy and revenue at the hotels we acquire;
●	adverse effects of international, national, regional and local economic and market conditions; and
●	changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of  compliance with laws and regulations, fiscal policies and ordinances.

 

 

 

●	dependence on business and commercial travelers and tourism;
●	increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;
●	increases in operating costs due to inflation and other factors that may not be offset by increased room rates;
●	events beyond our control, such as terrorist attacks, travel related health concerns including pandemics and epidemics such as H1N1 influenza (swine flu), avian bird flu and severe acute respiratory syndrome (“SARS”), imposition of taxes or surcharges by regulatory authorities, travel-related accidents and unusual weather patterns, including natural disasters such as hurricanes and environmental disasters such as the oil spill in the Gulf of Mexico;
●	potential increases in labor costs at our hotels, including as a result of unionization of the labor force; and
●	adverse effects of a downturn in the lodging industry.

 

 

 

●	possible environmental problems;
●	construction cost overruns and delays;

 

●	a possible shortage of available cash to fund capital improvements and replacements and, the related possibility that financing for these capital improvements may not be available to us on affordable terms; and
●	uncertainties as to market demand or a loss of market demand after capital improvements and replacements have begun.

 

 

 

●	possible environmental problems;
●	construction delays or cost overruns that may increase project costs;
●	receipt of zoning, occupancy and other required governmental permits and authorizations;
●	development costs incurred for projects that are not pursued to completion;
●	acts of God such as earthquakes, hurricanes, floods or fires that could adversely affect a project;
●	inability to raise capital; and
●	governmental restrictions on the nature or size of a project.

 

 

 

 

 

 

 

 

 

●	adverse changes in international, national, regional and local economic and market conditions;
●	changes in interest rates and in the availability, cost and terms of debt financing;
●	changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;
●	the ongoing need for capital improvements, particularly in older structures, that may require us to expend funds to correct defects or to make improvements before an asset can be sold;
●	changes in operating expenses; and
●	civil unrest, acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses, and acts of war or terrorism, including the consequences of the terrorist acts such as those that occurred on September 11, 2001.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●

“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of us who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding stock) or an affiliate of any interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two supermajority stockholder voting requirements on these combinations, unless, among other conditions, our common stockholders receive a minimum price, as defined in the MGCL, for their stock and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares; and

●

“control share” provisions that provide that our “control shares” (defined as voting shares of stock which, when aggregated with all other shares of stock controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding shares owned by the acquirer, by our officers or by our employees who are also directors of our company.

 

 

 

●	actual receipt of an improper benefit or profit in money, property or services; or
●	active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●	a limited availability of market quotations for our securities;
●	reduced liquidity with respect to our securities;
●	a determination that our common stock is “penny stock,” which will require brokers trading in our common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the common stock;
●	a limited amount of news and analyst coverage; and
●	a decreased ability to issue additional securities or obtain additional financing in the future.

 

 

 

 

 

 

 

 

 

 

 

 

●	actual or anticipated variations in our quarterly results of operations;
●	changes in market valuations of companies in the lodging industry;
●	changes in expectations of future financial performance or changes in estimates of securities analysts;
●	fluctuations in stock market prices and volumes;
●	our issuances of common stock, preferred stock, or other securities in the future;
●	the inclusion of our common stock and preferred stock in equity indices, which could induce additional purchases;
●	the addition or departure of key personnel;
●	announcements by us or our competitors of acquisitions, investments or strategic alliances; and
●	unforeseen events beyond our control, such as instability in the national, European or global economy, terrorist attacks, travel related health concerns including pandemics and epidemics such as H1N1 influenza (swine flu), avian bird flu and SARS, political instability, regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities and travel-related  accidents and unusual weather patterns, including natural disasters such as hurricanes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

●	we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;
●	we could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and
●	unless we are entitled to relief under certain federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

_____________________________

(1)	Occupancy represents the percentage of available rooms that were sold during a specified period of time and is calculated by dividing the number of rooms sold by the total number of rooms available, expressed as a percentage.
(2)	ADR represents the average daily rate paid for rooms sold, calculated by dividing room revenue (i.e., excluding food and beverage revenue or other hotel operations revenue such as telephone, parking and other guest services) by rooms sold.
(3)	RevPAR is the product of ADR and occupancy. RevPAR does not include food and beverage revenue or other hotel operations revenue such as telephone, parking and other guest services.
(4)	This hotel is subject to mortgage debt at December 31, 2011.  For additional information concerning our debt and lenders, please see Item 7. “Management’s Discussion and Analysis of Financial Information and Results of Operations—Indebtedness” and Item 8. “Financial Statements and Supplementary Data—Note 11” to Consolidated Financial Statements.
(5)	The Spokane, WA Fairfield Inn room count decreased from 86 to 84 in fourth quarter 2011 as a result of capital improvements at the hotel.
(6)	The Scottsdale, AZ SpringHill Suites room count decreased from 123 to 121 in fourth quarter 2011 as a result of capital improvements at the hotel.
(7)	The Charleston, WV Holiday Inn Express room count decreased from 67 to 66 in fourth quarter 2011 as a result of renovations related to the franchise conversion from a Comfort Suites to a Holiday Inn Express.
(8)	The conversion date reflects the conversion to a new franchise brand due to the termination of the franchise license agreements for 11 of our hotels during 2011.

 

 

 

 

 

 

 

 

●	The AmericInn located in Fort Smith, Arkansas is subject to a ground lease with an initial lease termination date of August 31, 2022. The initial lease term may be extended for an additional 30 years. Annual ground rent currently is $50,100 per year. Annual ground rent is adjusted every fifth year with adjustments based on the Consumer Price Index for All Urban Consumers. The next scheduled ground rent adjustment is January 1, 2015.
●	The Hampton Inn located in Fort Smith, Arkansas is subject to a ground lease with an initial lease termination date of May 31, 2030 with 11, five-year renewal options. Annual ground rent currently is $132,461 per year.  Annual ground rent is adjusted on June 1 of each year, with adjustments based on increases in the hotel’s RevPAR calculated in accordance with the terms of the ground lease.
●	The Residence Inn by Marriott located in Portland, Oregon is subject to a ground lease with an initial lease termination date of June 30, 2084 with one option to extend for an additional 14 years. Ground rent for the initial lease term was prepaid in full at the time we acquired the leasehold interest. If the option to extend is exercised, monthly ground rent will be charged based on a formula established in the ground lease.
●	The Hyatt Place located in Portland, Oregon is subject to a ground lease with a lease termination date of June 30, 2084 with one option to extend for an additional 14 years. Ground rent for the initial lease term was prepaid in full at the time we acquired the leasehold interest. If the option to extend is exercised, monthly ground rent will be charged based on a formula established in the ground lease.
●	The Holiday Inn located in Duluth, Georgia is subject to a ground lease with a lease termination date of April 1, 2069.  Annual ground rent currently is $198,057 per year.  Annual rent is increased annually by 3% for each successive lease year, on a cumulative basis.