Annual Statements Open main menu

Summit Hotel Properties, Inc. - Quarter Report: 2013 September (Form 10-Q)

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 September 30, 2013

 

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.)

Commission File Number:  001-54273 (Summit Hotel OP, LP)

 

SUMMIT HOTEL PROPERTIES, INC.

SUMMIT HOTEL OP, LP

(Exact name of registrant as specified in its charter)

 


 

Maryland (Summit Hotel Properties, Inc.)

 

27-2962512 (Summit Hotel Properties, Inc.)

Delaware (Summit Hotel OP, LP)

 

20-0617340 (Summit Hotel OP, LP)

(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) 538-2315

(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.

 

Summit Hotel Properties, Inc.  x Yes   o No

Summit Hotel OP, LP     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).

 

Summit Hotel Properties, Inc.  x Yes   o No

Summit Hotel OP, LP     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.

 

Summit Hotel Properties, Inc.

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o

 

Smaller reporting company o

 

Summit Hotel OP, LP

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).

 

Summit Hotel Properties, Inc.  o Yes   x No

Summit Hotel OP, LP     o Yes   x No

 

As of November 1, 2013, the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 85,222,346 and the number of outstanding units of partnership interest in Summit Hotel OP, LP designated as Common Units was 989,439 excluding 85,222,346 Common Units held by Summit Hotel Properties, Inc. and its wholly owned subsidiary which is the general partner of Summit Hotel OP, LP.

 

 

 


 


Table of Contents

 

EXPLANATORY NOTE

 

This report combines the Quarterly Reports on Form 10-Q for the period ended September 30, 2013 of Summit Hotel Properties, Inc., a Maryland corporation, and Summit Hotel OP, LP, a Delaware limited partnership.

 

Unless stated otherwise or the context otherwise requires, references in this report to:

 

·                  “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.

 

Summit REIT is the sole member of Summit Hotel GP, LLC, a Delaware limited liability company, which is the sole general partner (the “General Partner”) of Summit OP. As of September 30, 2013, Summit REIT owned 96.8% of the issued and outstanding common units of partnership interest of Summit OP (“Common Units”), including the sole general partnership interest held by the General Partner.  As of September 30, 2013, Summit REIT owned all of the issued and outstanding 9.25% Series A Cumulative Redeemable Preferred Units of Summit OP (“Series A Preferred Units”), all of the issued and outstanding 7.875% Series B Cumulative Redeemable Preferred Units of Summit OP (“Series B Preferred Units”), and all of the issued and outstanding 7.125% Series C Cumulative Redeemable Preferred Units of Summit OP (“Series C Preferred Units,” the Series C Preferred Units, Series B Preferred Units and Series A Preferred Units collectively referred to as “Preferred Units”). As the sole member of the General Partner, Summit REIT has exclusive control of Summit OP’s day-to-day management.  The remaining Common Units of Summit OP are owned by third parties.

 

We believe combining the Quarterly Reports on Form 10-Q of Summit REIT and Summit OP into this single report provides the following benefits:

 

·                  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.

 

We believe it is important to understand the few differences between Summit REIT and Summit OP in the context of how Summit REIT and Summit OP operate as a consolidated company. Summit REIT has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its short taxable year ended December 31, 2011.

 

As of September 30, 2013, Summit REIT’s only material assets were its ownership of Common Units and Preferred Units of Summit OP and its ownership of the membership interests in the General Partner. As a result, Summit REIT does not conduct business itself, other than controlling, through the General Partner, Summit OP, raising capital through issuances of equity securities from time to time and guaranteeing certain debt of Summit OP and its subsidiaries. Summit OP and its subsidiaries hold all the assets of the consolidated company. Except for net proceeds from securities issuances by Summit REIT, which are contributed to Summit OP in exchange for partnership units of Summit OP, Summit OP and its subsidiaries generate capital from the operation of our business and through borrowings and the issuance of partnership units of Summit OP.

 

Stockholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of Summit REIT and those of Summit OP. As of September 30, 2013, Summit OP’s capital interests include Common Units, representing general and limited partnership interests, and Preferred Units. The Common Units owned by limited partners other than Summit REIT and its subsidiaries are accounted for in partners’ capital in Summit OP’s consolidated financial statements and (within stockholders’ equity) as noncontrolling interests in Summit REIT’s consolidated financial statements.

 



Table of Contents

 

In order to highlight the differences between Summit REIT and Summit OP, there are sections in this report that separately discuss Summit REIT and Summit OP, including separate financial statements and certain notes thereto and separate Exhibit 31 and Exhibit 32 certifications. In the sections that combine disclosure for Summit REIT and Summit OP (i.e., where the disclosure refers to the consolidated company), this report refers to actions or holdings as our actions or holdings and, unless otherwise indicated, means the actions or holdings of Summit REIT and Summit OP and their respective subsidiaries, as one consolidated company.

 

As the sole member of the General Partner, Summit REIT consolidates Summit OP for financial reporting purposes, and Summit REIT does not have assets other than its investment in the General Partner and Summit OP. Therefore, while stockholders’ equity and partners’ capital differ as discussed above, the assets and liabilities of Summit REIT and Summit OP are the same on their respective financial statements.

 

Finally, we refer to a number of other entities and events in this report as follows. Unless the context otherwise requires or indicates, references to:

 

·                  “our TRSs” refer to Summit Hotel TRS, Inc., a Delaware corporation, and 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 Summit OP or subsidiaries of Summit OP.  All but one of our TRS lessees are wholly owned by our TRSs.

 

ii


 


Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements.

1

 

 

 

Summit Hotel Properties, Inc.

 

Consolidated Balance Sheets — September 30, 2013 (unaudited) and December 31, 2012

1

Consolidated Statements of Operations (unaudited) — Quarter and Nine Months Ended September 30, 2013 and 2012

2

Consolidated Statements of Comprehensive Income (Loss) (unaudited) - Quarter and Nine Months  Ended September 30, 2013 and 2012

3

Consolidated Statements of Changes in Equity (unaudited) — Nine Months Ended September 30, 2013 and 2012

4

Consolidated Statements of Cash Flows (unaudited) — Nine Months Ended September 30, 2013 and 2012

5

 

 

Summit Hotel OP, LP

 

Consolidated Balance Sheets — September 30, 2013 (unaudited) and December 31, 2012

6

Consolidated Statements of Operations (unaudited) — Quarter and Nine Months Ended September 30, 2013 and 2012

7

Consolidated Statements of Comprehensive Income (Loss) (unaudited) - Quarter and Nine Months Ended September 30, 2013 and 2012

8

Consolidated Statements of Changes in Equity (unaudited) — Nine Months Ended September 30, 2013 and 2012

9

Consolidated Statements of Cash Flows (unaudited) — Nine Months Ended September 30, 2013 and 2012

10

 

 

Notes to Consolidated Financial Statements (unaudited)

11

 

 

 

Item 2.

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

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

Item 4.

Controls and Procedures

44

 

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

45

 

 

 

Item 1A.

Risk Factors

45

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 3.

Defaults Upon Senior Securities

45

 

 

 

Item 4.

Mine Safety Disclosures

45

 

 

 

Item 5.

Other Information

45

 

 

 

Item 6.

Exhibits

46

 

iii


 


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

SUMMIT HOTEL PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)

SEPTEMBER 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Investment in hotel properties, net

 

$

1,082,395

 

$

734,362

 

Investment in hotel properties under development

 

20,549

 

10,303

 

Land held for development

 

13,748

 

15,802

 

Assets held for sale

 

33,463

 

4,836

 

Cash and cash equivalents

 

45,474

 

13,980

 

Restricted cash

 

35,437

 

3,624

 

Trade receivables

 

9,685

 

5,478

 

Prepaid expenses and other

 

21,006

 

5,311

 

Derivative financial instruments

 

98

 

 

Deferred charges, net

 

9,543

 

8,895

 

Deferred tax asset

 

4,962

 

3,997

 

Other assets

 

3,442

 

4,201

 

TOTAL ASSETS

 

$

1,279,802

 

$

810,789

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Debt

 

$

400,255

 

$

312,613

 

Accounts payable

 

9,276

 

5,013

 

Accrued expenses

 

30,767

 

18,985

 

Derivative financial instruments

 

2,047

 

641

 

TOTAL LIABILITIES

 

442,345

 

337,252

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2013 and December 31, 2012 (liquidation preference of $50,385 at September 30, 2013 and $50,393 at December 31, 2012)

 

20

 

20

 

7.875% Series B - 3,000,000 shares issued and outstanding at September 30, 2013 and December 31, 2012 (liquidation preference of $75,492 at September 30, 2013 and $75,324 at December 31, 2012)

 

30

 

30

 

7.125% Series C - 3,400,000 shares issued and outstanding at September 30, 2013 (liquidation preference of $85,505 at September 30, 2013)

 

34

 

 

Common stock, $.01 par value per share, 450,000,000 shares authorized, 83,451,814 and 46,159,652 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

 

835

 

462

 

Additional paid-in capital

 

867,308

 

468,820

 

Accumulated other comprehensive income (loss)

 

(1,781

)

(528

)

Accumulated deficit and distributions

 

(56,963

)

(31,985

)

Total stockholders’ equity

 

809,483

 

436,819

 

Noncontrolling interests in Operating Partnership

 

20,150

 

36,718

 

Noncontrolling interests in joint venture

 

7,824

 

 

TOTAL EQUITY

 

837,457

 

473,537

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,279,802

 

$

810,789

 

 

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 QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

Room revenue

 

$

78,010

 

$

41,312

 

$

209,774

 

$

111,677

 

Other hotel operations revenue

 

4,164

 

1,758

 

11,228

 

4,914

 

Total revenues

 

82,174

 

43,070

 

221,002

 

116,591

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

Hotel operating expenses:

 

 

 

 

 

 

 

 

 

Rooms

 

21,927

 

11,388

 

59,182

 

31,490

 

Other direct

 

11,072

 

5,603

 

28,336

 

15,047

 

Other indirect

 

20,601

 

11,292

 

56,171

 

30,905

 

Other

 

183

 

155

 

543

 

473

 

Total hotel operating expenses

 

53,783

 

28,438

 

144,232

 

77,915

 

Depreciation and amortization

 

14,029

 

7,647

 

37,623

 

22,094

 

Corporate general and administrative:

 

 

 

 

 

 

 

 

 

Salaries and other compensation

 

1,874

 

1,645

 

6,589

 

3,563

 

Other

 

1,072

 

824

 

3,456

 

2,758

 

Hotel property acquisition costs

 

114

 

245

 

1,553

 

1,573

 

Loss on impairment of assets

 

1,369

 

 

1,369

 

 

Total expenses

 

72,241

 

38,799

 

194,822

 

107,903

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

9,933

 

4,271

 

26,180

 

8,688

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest income

 

16

 

18

 

52

 

20

 

Other income (expense)

 

(103

)

22

 

120

 

497

 

Interest expense

 

(5,948

)

(3,938

)

(14,877

)

(11,150

)

Debt transaction costs

 

(103

)

(228

)

(112

)

(651

)

Gain (loss) on disposal of assets

 

5

 

(12

)

11

 

(199

)

Gain (loss) on derivative financial instruments

 

 

 

2

 

(2

)

Total other income (expense)

 

(6,133

)

(4,138

)

(14,804

)

(11,485

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before
income tax

 

3,800

 

133

 

11,376

 

(2,797

)

 

 

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

(2,684

)

(21

)

894

 

195

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

1,116

 

112

 

12,270

 

(2,602

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

(1,697

)

1,529

 

(4,297

)

1,081

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(581

)

1,641

 

7,973

 

(1,521

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to noncontrolling
interests in:

 

 

 

 

 

 

 

 

 

Operating Partnership

 

(183

)

79

 

(108

)

(1,267

)

Joint venture

 

272

 

 

324

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Summit Hotel Properties, Inc.

 

(670

)

1,562

 

7,757

 

(254

)

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

(4,147

)

(1,156

)

(10,443

)

(3,469

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common shareholders

 

$

(4,817

)

$

406

 

$

(2,686

)

$

(3,723

)

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

Basic

 

68,157

 

31,308

 

65,460

 

29,713

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

68,614

 

31,501

 

65,854

 

29,820

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share from:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.05

)

$

(0.03

)

$

0.02

 

$

(0.16

)

Discontinued operations

 

(0.02

)

0.04

 

(0.06

)

0.03

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share

 

$

(0.07

)

$

0.01

 

$

(0.04

)

$

(0.13

)

 

See Notes to the Consolidated Financial Statements

 

2



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(581

)

$

1,641

 

$

7,973

 

$

(1,521

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Changes in unrealized gain/loss on derivatives

 

(2,127

)

(241

)

(1,310

)

(521

)

Total other comprehensive income (loss)

 

(2,127

)

(241

)

(1,310

)

(521

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

(2,708

)

1,400

 

6,663

 

(2,042

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to noncontrolling interest:

 

 

 

 

 

 

 

 

 

Operating Partnership

 

(308

)

40

 

(165

)

(1,357

)

Joint venture

 

272

 

 

324

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to Summit Hotel Properties, Inc.

 

(2,672

)

1,360

 

6,504

 

(685

)

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

(4,147

)

(1,156

)

(10,443

)

(3,469

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to common stockholders

 

$

(6,819

)

$

204

 

$

(3,939

)

$

(4,154

)

 

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 NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares of

 

 

 

Shares of

 

 

 

 

 

Other

 

Accumulated

 

Total

 

Noncontrolling 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, 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

 

 

 

34,500,000

 

345

 

299,821

 

 

 

300,166

 

 

 

300,166

 

Net proceeds from sale of preferred stock

 

3,400,000

 

34

 

 

 

81,689

 

 

 

81,723

 

 

 

81,723

 

Common stock redemption of common units

 

 

 

2,466,404

 

25

 

15,365

 

 

 

15,390

 

(15,390

)

 

 

Contribution by noncontrolling interests in joint venture

 

 

 

 

 

 

 

 

 

 

7,500

 

7,500

 

Dividends paid

 

 

 

 

 

 

 

(32,735

)

(32,735

)

(1,013

)

 

(33,748

)

Equity-based compensation

 

 

 

325,758

 

3

 

1,613

 

 

 

1,616

 

 

 

1,616

 

Other comprehensive income (loss)

 

 

 

 

 

 

(1,253

)

 

(1,253

)

(57

)

 

(1,310

)

Net income (loss)

 

 

 

 

 

 

 

7,757

 

7,757

 

(108

)

324

 

7,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, SEPTEMBER 30, 2013

 

8,400,000

 

$

84

 

83,451,814

 

$

835

 

$

867,308

 

$

(1,781

)

$

(56,963

)

$

809,483

 

$

20,150

 

$

7,824

 

$

837,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, DECEMBER 31, 2011

 

2,000,000

 

$

20

 

27,278,000

 

$

273

 

$

288,902

 

$

 

$

(11,020

)

$

278,175

 

$

41,274

 

$

 

$

319,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Registration and offering costs

 

 

 

 

 

(707

)

 

 

(707

)

 

 

(707

)

Common stock redemption of common units

 

 

 

4,015,192

 

40

 

(3,670

)

 

 

(3,630

)

3,630

 

 

 

Dividends paid

 

 

 

 

 

 

 

(13,540

)

(13,540

)

(2,589

)

 

(16,129

)

Equity-based compensation

 

 

 

208,027

 

2

 

644

 

 

 

646

 

137

 

 

783

 

Other comprehensive income (loss)

 

 

 

 

 

 

(431

)

 

(431

)

(90

)

 

(521

)

Net income (loss)

 

 

 

 

 

 

 

(254

)

(254

)

(1,267

)

 

(1,521

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, SEPTEMBER 30, 2012

 

2,000,000

 

$

20

 

31,501,219

 

$

315

 

$

285,169

 

$

(431

)

$

(24,814

)

$

260,259

 

$

41,095

 

$

 

$

301,354

 

 

See Notes to the Consolidated Financial Statements

 

4


 


Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

 

 

 

First Nine Months

 

 

 

2013

 

2012

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income (loss)

 

$

7,973

 

$

(1,521

)

Adjustments to reconcile net income (loss) to net cash from operating activities:

 

 

 

 

 

Depreciation and amortization

 

39,240

 

25,161

 

Amortization of prepaid lease

 

36

 

36

 

Loss on impairment of assets

 

8,654

 

2,098

 

Equity-based compensation

 

1,616

 

783

 

Deferred tax asset

 

(964

)

(513

)

(Gain) loss on disposal of assets

 

(888

)

199

 

(Gain) loss on derivative financial instruments

 

(2

)

2

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash released (funded)

 

(2,882

)

(265

)

Trade receivables

 

(4,207

)

(2,904

)

Prepaid expenses and other

 

(15,694

)

331

 

Accounts payable and accrued expenses

 

13,365

 

1,214

 

 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

46,247

 

24,621

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisitions of hotel properties

 

(388,456

)

(65,949

)

Investment in hotel properties under development

 

(10,246

)

 

Acquisition of land held for development

 

(2,800

)

 

Improvements and additions to hotel properties

 

(33,840

)

(17,984

)

Purchases of office furniture and equipment

 

(599

)

 

Proceeds from asset dispositions, net of closing costs

 

33,545

 

18,421

 

Restricted cash released (funded)

 

(19,623

)

(2,546

)

 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

(422,019

)

(68,058

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from issuance of debt

 

375,745

 

142,585

 

Principal payments on debt

 

(321,636

)

(80,542

)

Financing fees on debt

 

(2,484

)

(2,020

)

Proceeds from equity offerings, net of offering costs

 

389,389

 

(707

)

Dividends paid and distributions to members

 

(33,748

)

(16,129

)

 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

407,266

 

43,187

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

31,494

 

(250

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

Beginning of period

 

13,980

 

10,537

 

 

 

 

 

 

 

End of period

 

$

45,474

 

$

10,287

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

Cash payments for interest

 

$

14,639

 

$

11,637

 

 

 

 

 

 

 

Capitalized interest

 

$

246

 

$

 

 

 

 

 

 

 

Cash payments for income taxes, net of refunds

 

$

683

 

$

393

 

 

See Notes to the Consolidated Financial Statements

 

5



Table of Contents

 

SUMMIT HOTEL OP, LP

CONSOLIDATED BALANCE SHEETS (in thousands, except unit amounts)

SEPTEMBER 30, 2013 (UNAUDITED) AND DECEMBER 31, 2012

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Investment in hotel properties, net

 

$

1,082,395

 

$

734,362

 

Investment in hotel properties under development

 

20,549

 

10,303

 

Land held for development

 

13,748

 

15,802

 

Assets held for sale

 

33,463

 

4,836

 

Cash and cash equivalents

 

45,474

 

13,980

 

Restricted cash

 

35,437

 

3,624

 

Trade receivables

 

9,685

 

5,478

 

Prepaid expenses and other

 

21,006

 

5,311

 

Derivative financial instruments

 

98

 

 

Deferred charges, net

 

9,543

 

8,895

 

Deferred tax asset

 

4,962

 

3,997

 

Other assets

 

3,442

 

4,201

 

TOTAL ASSETS

 

$

1,279,802

 

$

810,789

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Debt

 

$

400,255

 

$

312,613

 

Accounts payable

 

9,276

 

5,013

 

Accrued expenses

 

30,767

 

18,985

 

Derivative financial instruments

 

2,047

 

641

 

TOTAL LIABILITIES

 

442,345

 

337,252

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

Summit Hotel Properties, Inc., 83,451,814 and 46,159,652 common units outstanding at September 30, 2013 and December 31, 2012, respectively, and 8,400,000 and 5,000,000 preferred units outstanding at September 30, 2013 and December 31, 2012, respectively (preferred units liquidation preference of $211,382 at September 30, 2013 and $125,717 at December 31, 2012)

 

809,483

 

436,819

 

Unaffiliated limited partners, 2,759,971 and 5,226,375 common units outstanding at September 30, 2013 and December 31, 2012, respectively

 

20,150

 

36,718

 

Total partners’ equity

 

829,633

 

473,537

 

Noncontrolling interests in joint venture

 

7,824

 

 

TOTAL EQUITY

 

837,457

 

473,537

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,279,802

 

$

810,789

 

 

See Notes to the Consolidated Financial Statements

 

6



Table of Contents

 

SUMMIT HOTEL OP, LP

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

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

REVENUE

 

 

 

 

 

 

 

 

 

Room revenue

 

$

78,010

 

$

41,312

 

$

209,774

 

$

111,677

 

Other hotel operations revenue

 

4,164

 

1,758

 

11,228

 

4,914

 

Total revenue

 

82,174

 

43,070

 

221,002

 

116,591

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

Hotel operating expenses:

 

 

 

 

 

 

 

 

 

Rooms

 

21,927

 

11,388

 

59,182

 

31,490

 

Other direct

 

11,072

 

5,603

 

28,336

 

15,047

 

Other indirect

 

20,601

 

11,292

 

56,171

 

30,905

 

Other

 

183

 

155

 

543

 

473

 

Total hotel operating expenses

 

53,783

 

28,438

 

144,232

 

77,915

 

Depreciation and amortization

 

14,029

 

7,647

 

37,623

 

22,094

 

Corporate general and administrative:

 

 

 

 

 

 

 

 

 

Salaries and other compensation

 

1,874

 

1,645

 

6,589

 

3,563

 

Other

 

1,072

 

824

 

3,456

 

2,758

 

Hotel property acquisition costs

 

114

 

245

 

1,553

 

1,573

 

Loss on impairment of assets

 

1,369

 

 

1,369

 

 

Total expenses

 

72,241

 

38,799

 

194,822

 

107,903

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

9,933

 

4,271

 

26,180

 

8,688

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest income

 

16

 

18

 

52

 

20

 

Other income (expense)

 

(103

)

22

 

120

 

497

 

Interest expense

 

(5,948

)

(3,938

)

(14,877

)

(11,150

)

Debt transaction costs

 

(103

)

(228

)

(112

)

(651

)

Gain (loss) on disposal of assets

 

5

 

(12

)

11

 

(199

)

Gain (loss) on derivative financial instruments

 

 

 

2

 

(2

)

Total other income (expense)

 

(6,133

)

(4,138

)

(14,804

)

(11,485

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before
income tax

 

3,800

 

133

 

11,376

 

(2,797

)

 

 

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

(2,684

)

(21

)

894

 

195

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

1,116

 

112

 

12,270

 

(2,602

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

(1,697

)

1,529

 

(4,297

)

1,081

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(581

)

1,641

 

7,973

 

(1,521

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to noncontrolling interest in joint venture

 

272

 

 

324

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Summit Hotel OP, LP

 

(853

)

1,641

 

7,649

 

(1,521

)

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

(4,147

)

(1,156

)

(10,443

)

(3,469

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common unit holders

 

$

(5,000

)

$

485

 

$

(2,794

)

$

(4,990

)

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON UNITS OUTSTANDING

 

 

 

 

 

 

 

 

 

Basic

 

70,917

 

37,393

 

68,476

 

37,385

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

71,374

 

37,586

 

68,870

 

37,492

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER UNIT

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per unit from:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.05

)

$

(0.03

)

$

0.02

 

$

(0.16

)

Discontinued operations

 

(0.02

)

0.04

 

(0.06

)

0.03

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per unit

 

$

(0.07

)

$

0.01

 

$

(0.04

)

$

(0.13

)

 

See Notes to the Consolidated Financial Statements

 

7



Table of Contents

 

SUMMIT HOTEL OP, LP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(581

)

$

1,641

 

$

7,973

 

$

(1,521

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Changes in unrealized gain/loss on derivatives

 

(2,127

)

(241

)

(1,310

)

(521

)

Total other comprehensive income (loss)

 

(2,127

)

(241

)

(1,310

)

(521

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

(2,708

)

1,400

 

6,663

 

(2,042

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to noncontrolling interest in joint venture

 

272

 

 

324

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to Summit Hotel OP, LP

 

(2,980

)

1,400

 

6,339

 

(2,042

)

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

(4,147

)

(1,156

)

(10,443

)

(3,469

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to common unit holders

 

$

(7,127

)

$

244

 

$

(4,104

)

$

(5,511

)

 

See Notes to the Consolidated Financial Statements

 

8



Table of Contents

 

SUMMIT HOTEL OP, LP

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

 

 

 

Preferred

 

Common

 

 

 

 

 

 

 

 

 

 

 

Total

 

Noncontrolling

 

 

 

 

 

Summit Hotel

 

Summit Hotel

 

Unaffiliated Limited

 

Interests in

 

Total

 

 

 

Properties, Inc.

 

Properties, Inc.

 

Partners’ Equity

 

Joint Venture

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, DECEMBER 31, 2012

 

$

120,328

 

$

316,491

 

$

36,718

 

$

 

$

473,537

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions

 

81,723

 

300,166

 

 

7,500

 

389,389

 

Common stock redemption of common units

 

 

15,390

 

(15,390

)

 

 

Distributions

 

(10,443

)

(22,292

)

(1,013

)

 

(33,748

)

Equity-based compensation

 

 

1,616

 

 

 

1,616

 

Other comprehensive income (loss)

 

 

(1,253

)

(57

)

 

(1,310

)

Net income (loss)

 

10,443

 

(2,686

)

(108

)

324

 

7,973

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, SEPTEMBER 30, 2013

 

$

202,051

 

$

607,432

 

$

20,150

 

$

7,824

 

$

837,457

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, DECEMBER 31, 2011

 

$

47,875

 

$

230,300

 

$

41,274

 

$

 

$

319,449

 

 

 

 

 

 

 

 

 

 

 

 

 

Registration and offering costs

 

 

(707

)

 

 

(707

)

Common stock redemption of common units

 

 

(3,630

)

3,630

 

 

 

Distributions

 

(3,469

)

(10,071

)

(2,589

)

 

(16,129

)

Equity-based compensation

 

 

646

 

137

 

 

783

 

Other comprehensive income (loss)

 

 

(431

)

(90

)

 

(521

)

Net income (loss)

 

3,469

 

(3,723

)

(1,267

)

 

(1,521

)

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, SEPTEMBER 30, 2012

 

$

47,875

 

$

212,384

 

$

41,095

 

$

 

$

301,354

 

 

See Notes to the Consolidated Financial Statements

 

9



Table of Contents

 

SUMMIT HOTEL OP, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 (UNAUDITED)

 

 

 

First Nine Months

 

 

 

2013

 

2012

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income (loss)

 

$

7,973

 

$

(1,521

)

Adjustments to reconcile net income (loss) to net cash from operating activities:

 

 

 

 

 

Depreciation and amortization

 

39,240

 

25,161

 

Amortization of prepaid lease

 

36

 

36

 

Loss on impairment of assets

 

8,654

 

2,098

 

Equity-based compensation

 

1,616

 

783

 

Deferred tax asset

 

(964

)

(513

)

(Gain) loss on disposal of assets

 

(888

)

199

 

(Gain) loss on derivative financial instruments

 

(2

)

2

 

Changes in operating assets and liabilities:

 

 

 

Restricted cash released (funded)

 

(2,882

)

(265

)

Trade receivables

 

(4,207

)

(2,904

)

Prepaid expenses and other

 

(15,694

)

331

 

Accounts payable and accrued expenses

 

13,365

 

1,214

 

 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

46,247

 

24,621

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Acquisitions of hotel properties

 

(388,456

)

(65,949

)

Investment in hotel properties under development

 

(10,246

)

 

Acquisition of land held for development

 

(2,800

)

 

Improvements and additions to hotel properties

 

(33,840

)

(17,984

)

Purchases of office furniture and equipment

 

(599

)

 

Proceeds from asset dispositions, net of closing costs

 

33,545

 

18,421

 

Restricted cash released (funded)

 

(19,623

)

(2,546

)

 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

(422,019

)

(68,058

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from issuance of debt

 

375,745

 

142,585

 

Principal payments on debt

 

(321,636

)

(80,542

)

Financing fees on debt

 

(2,484

)

(2,020

)

Contributions

 

389,389

 

(707

)

Distributions

 

(33,748

)

(16,129

)

 

 

 

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

407,266

 

43,187

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

31,494

 

(250

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

Beginning of period

 

13,980

 

10,537

 

 

 

 

 

 

 

End of period

 

$

45,474

 

$

10,287

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash payments for interest

 

$

14,639

 

$

11,637

 

 

 

 

 

 

 

Capitalized interest

 

$

246

 

$

 

 

 

 

 

 

 

Cash payments for income taxes, net of refunds

 

$

683

 

$

393

 

 

See Notes to the Consolidated Financial Statements

 

10


 


Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1 -      DESCRIPTION OF BUSINESS

 

Summit Hotel Properties, Inc. (the “Company”) is a self-advised 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. Unless the context otherwise requires, “we” and “our” refer to the Company and the Operating Partnership collectively.

 

At September 30, 2013, our portfolio consists of 92 upscale, upper midscale and midscale hotel properties containing 10,913 guestrooms located in 24 states. Of our 92 hotel properties, 10 are classified as held for sale. Our hotel properties are leased to subsidiaries (“TRS Lessees”) of our taxable REIT subsidiaries (“TRSs”). We indirectly own 100% of the outstanding equity interests in all but one of our TRS Lessees. We indirectly own an 80% 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.

 

NOTE 2 -      BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership, and their subsidiaries, including joint ventures. The consolidated financial statements of the Operating Partnership include the accounts of the Operating Partnership and its subsidiaries, including joint ventures. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

 

We prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results for the third quarter and first nine months of 2013 may not be indicative of the results that may be expected for the full year 2013. For further information, please read the financial statements included in our Form 10-K for the year ended December 31, 2012.

 

We made certain reclassifications to the third quarter and first nine months of 2012 financial information to conform to our 2013 presentation, which included the reclassification of $0.7 million in third quarter and $2.0 million in first nine months of food and beverage costs previously included as a reduction of other hotel operations revenue to other direct expenses. These reclassifications had no effect on previously reported results of operations or equity.

 

Noncontrolling Interests

 

Noncontrolling interests represent the portion of equity in a subsidiary held by owners other than the consolidating parent. Noncontrolling 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 noncontrolling interests are reported in the consolidated statements of operations.

 

Our consolidated financial statements include noncontrolling interests related to Common Units of the Operating Partnership held by unaffiliated third parties and third-party ownership of joint ventures.

 

11



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

New Accounting Standards

 

In the first quarter of 2013, we adopted Accounting Standards Update (“ASU”) 2013—02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013—02 requires an entity to separately provide information about the effects on net income of certain significant amounts reclassified out of each component of accumulated other comprehensive income.

 

Adoption of this new standard did not have a material effect on the consolidated financial statements of the Company or our Operating Partnership.

 

NOTE 3 -      HOTEL PROPERTY ACQUISITIONS

 

Hotel property acquisitions in the first nine months of 2013 and 2012 include (in thousands):

 

Date Acquired

 

Franchise/Brand

 

Location

 

Purchase Price

 

Debt Assumed

 

 

 

 

 

 

 

 

 

 

 

First Nine Months of 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

 

IHG / Holiday Inn Express & Suites (1)

 

San Francisco, CA

 

60,500

 

23,423

 

March 11

 

SpringHill Suites by Marriott

 

New Orleans, LA

 

33,500

 

 

March 11

 

Courtyard by Marriott

 

New Orleans (Convention), LA

 

31,500

 

 

March 11

 

Courtyard by Marriott

 

New Orleans (French Quarter), LA

 

26,000

 

 

March 11

 

Courtyard by Marriott

 

New Orleans (Metairie), LA

 

24,000

 

 

March 11

 

Residence Inn by Marriott

 

New Orleans (Metairie), LA

 

20,000

 

 

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 First Nine Months of 2013

 

16 hotel properties

 

$

414,175

 

$

33,532

 

 

 

 

 

 

 

 

 

 

 

First Nine Months of 2012

 

 

 

 

 

 

 

January 12

 

Courtyard by Marriott (2)

 

Atlanta, GA

 

$

28,900

 

$

19,011

 

February 28

 

Hilton Garden Inn

 

Birmingham (Liberty Park), AL

 

11,500

 

 

February 28

 

Hilton Garden Inn

 

Birmingham (Lakeshore), AL

 

8,625

 

 

May 16

 

Courtyard by Marriott

 

Dallas (Arlington), TX

 

15,000

 

 

May 16

 

Hilton Garden Inn

 

Nashville (Smyrna), TN

 

11,500

 

8,708

 

June 21

 

Hilton / Hampton Inn & Suites

 

Nashville (Smyrna), TN

 

8,000

 

5,384

 

July 2

 

Residence Inn by Marriott

 

Dallas (Arlington), TX

 

15,500

 

 

 

 

 

 

 

 

 

 

 

 

Total First Nine Months of 2012

 

7 hotel properties

 

$

99,025

 

$

33,103

 

 


(1)        This hotel property was acquired by a joint venture in which we own an 80% controlling interest.

(2)        We acquired a 90% controlling interest in this hotel property and we are obligated to acquire the remaining ownership in 2016 for $0.4 million. The $0.4 million has been accrued as a liability and is included in the purchase price above.

 

In connection with the January 22, 2013 Hyatt Place acquisitions, we acquired a land parcel in Orlando, FL valued at $2.8 million that is classified as land held for development.

 

12



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

 

 

 

First Nine Months

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Land

 

$

57,276

 

$

9,843

 

Hotel buildings and improvements

 

341,903

 

84,757

 

Furniture, fixtures and equipment

 

14,996

 

4,425

 

Land held for development

 

2,800

 

 

Other assets

 

9,308

 

338

 

Total assets acquired

 

426,283

 

99,363

 

Debt assumed

 

33,532

 

33,103

 

Other liabilities

 

1,495

 

311

 

 

 

 

 

 

 

Net assets acquired

 

$

391,256

 

$

65,949

 

 

The allocations for certain of the acquisitions are based on preliminary information and are, therefore, subject to change.

 

Total revenues and net income (loss) for hotel properties acquired in the first nine months of 2013 and 2012, which are included in our consolidated statements of operations, follow (in thousands):

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013 Acquisitions

 

2012 Acquisitions

 

2013 Acquisitions

 

2012 Acquisitions

 

 

 

2013

 

2013

 

2012

 

2013

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

23,449

 

$

6,569

 

$

5,970

 

$

50,862

 

$

19,752

 

$

11,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,847

 

$

708

 

$

450

 

$

9,568

 

$

2,095

 

$

1,057

 

 

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 2012 and the first nine months 2013 had taken place on January 1, 2012. 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, 2012. This information does not purport to represent results of operations for future periods.

 

The unaudited condensed pro forma financial information for 2013 and 2012 follows (in thousands, except per share amounts):

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

82,174

 

$

79,383

 

$

244,942

 

$

232,935

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(581

)

$

10,582

 

$

17,992

 

$

28,354

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.07

)

$

0.25

 

$

0.11

 

$

0.66

 

 

13



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 4 -      INVESTMENT IN HOTEL PROPERTIES

 

Investment in hotel properties includes (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Land

 

$

150,129

 

$

105,571

 

Hotel buildings and improvements

 

934,376

 

649,699

 

Furniture, fixtures and equipment

 

136,243

 

124,385

 

Construction in progress

 

13,492

 

 

 

 

1,234,240

 

879,655

 

Less accumulated depreciation

 

151,845

 

145,293

 

 

 

 

 

 

 

 

 

$

1,082,395

 

$

734,362

 

 

NOTE 5 -      ASSETS HELD FOR SALE

 

Assets held for sale include (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Land

 

$

10,904

 

$

3,092

 

Hotel buildings and improvements

 

20,939

 

1,474

 

Furniture, fixtures and equipment

 

1,620

 

270

 

 

 

 

 

 

 

 

 

$

33,463

 

$

4,836

 

 

At September 30, 2013, assets held for sale included the Hampton Inn, Fairfield Inn & Suites, and a land parcel in Boise, ID; the Hampton Inn, AmericInn, and Aspen Hotel & Suites in Fort Smith, AR; the SpringHill Suites in Little Rock, AR; the Fairfield Inn and Holiday Inn Express in Emporia, KS; the Fairfield Inn and AmericInn in Salina, KS; and land parcels in Houston, TX, Spokane, WA and El Paso, TX. All of these properties are under contract to sell.

 

At December 31, 2012, assets held for sale included the AmericInn & Suites in Golden, CO, which was sold on January 15, 2013; a land parcel in Jacksonville, FL, which was sold on February 27, 2013; and a land parcel in Missoula, MT, which was sold on August 21, 2013.

 

NOTE 6 -      PREPAID EXPENSES AND OTHER

 

Prepaid expenses and other include (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

Deposits and escrow funds on pending acquisitions

 

$

17,815

 

$

2,759

 

Prepaid insurance

 

169

 

663

 

Other

 

3,022

 

1,889

 

 

 

 

 

 

 

 

 

$

21,006

 

$

5,311

 

 

At September 30, 2013, deposits and escrow funds on pending acquisitions include $15.7 million related to our October 1, 2013 acquisition of the Hampton Inn & Suites in Ventura (Camarillo), CA.

 

14



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 7 -      DEBT

 

Our debt is comprised of a $150.0 million senior secured revolving credit facility and term loans secured by various hotel properties. The weighted average interest rate, after giving effect to our interest rate derivatives, for all borrowings was 5.27% at September 30, 2013 and 5.15% at December 31, 2012. Our total fixed-rate and variable-rate debt, after giving effect to our interest rate derivatives, follows (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Fixed-rate debt

 

$

398,225

 

$

229,587

 

Variable-rate debt

 

2,030

 

83,026

 

 

 

 

 

 

 

 

 

$

400,255

 

$

312,613

 

 

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

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

 

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

Valuation Technique

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt not recorded at fair value

 

$

358,496

 

$

349,691

 

$

188,565

 

$

193,448

 

Level 2 - Market approach

 

 

At September 30, 2013 and December 31, 2012, we had variable rate debt of $39.7 million and $41.0 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.

 

$92 Million Senior Secured Interim Loan

 

On May 23, 2013, we closed on a $92.0 million variable rate senior secured interim loan with KeyBank National Association (KeyBank) and Regions Bank, which matures on November 23, 2013. This loan was secured by a pledge of the equity interest in the subsidiaries that own the Fairfield Inn & Suites and SpringHill Suites in Louisville, KY and the Courtyard by Marriott and SpringHill Suites in Indianapolis, IN, and was cross-defaulted with our $150 million senior secured revolving credit facility.

 

In the third quarter of 2013, we paid off our $92 million senior secured interim loan using proceeds from a new term loan with KeyBank, discussed in Term Loans below, and proceeds from a common stock offering, discussed in Note 9 — Equity.

 

$150 Million Senior Secured Revolving Credit Facility

 

In January of 2013, we removed the AmericInn and Fairfield Inn in Golden, CO from the borrowing base of our senior secured revolving credit facility.

 

In May of 2013, we amended our senior secured revolving credit facility to increase the allowed collateral concentration in any given metropolitan statistical area from 20% to 30%. We also added the Courtyard by Marriott and Springhill Suites in New Orleans, LA to the borrowing base. The addition of these hotel properties increased availability on the senior secured revolving credit facility by $36.7 million.

 

15



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

At September 30, 2013, the maximum amount of borrowing permitted under the terms of this facility was $150.0 million, of which we had no borrowings, $0.7 million in standby letters of credit and $149.3 million available to borrow.

 

Term Loans

 

On January 14, 2013, we paid off two variable rate term loans with First National Bank of Omaha that were secured by three hotel properties. These loans totaled $22.8 million and had maturity dates of July 2013 and February 2014. There were no associated prepayment penalties.

 

On January 25, 2013, we closed on a $29.4 million term loan with KeyBank with a fixed rate of 4.46%. This term loan matures on February 1, 2023, amortizes over 30 years, and is secured by four of the Hyatt Place hotels we acquired in October 2012. These hotels are located in Chicago (Lombard), IL; Denver (Lone Tree), CO; Denver (Englewood), CO; and Dallas (Arlington), TX.

 

On February 11, 2013, as a part of our acquisition (through a joint venture) of the Holiday Inn Express & Suites in San Francisco, CA, we assumed a $23.4 million term loan with Greenwich Capital Financial Products, Inc. This loan has a fixed interest rate of 6.2%, matures on January 6, 2016, and amortizes over 30 years.

 

On March 7 and 8, 2013, we closed on two additional term loans with KeyBank, which mature on April 1, 2023, and amortize over 30 years. A $22.7 million term loan with a fixed rate of 4.52% is secured by three of the Hyatt hotels we acquired in October 2012. These hotels include a Hyatt House in Denver (Englewood), CO and Hyatt Place hotels in Baltimore (Owings Mills), MD and Scottsdale, AZ. A $22.0 million term loan with a fixed rate of 4.3% is secured by the three Hyatt Place hotels we acquired in January 2013. These hotels are located in Chicago (Hoffman Estates), IL; Orlando (Convention), FL; and Orlando (Universal), FL.

 

On May 1, 2013, we paid off a 4.95% fixed rate loan with MetaBank that was secured by two hotel properties. This loan totaled $6.7 million and had a maturity date of February 1, 2017. There was no associated prepayment penalty.

 

On May 21, 2013, as a part of our acquisition of the Holiday Inn Express & Suites in Minneapolis (Minnetonka), MN, we assumed a $3.7 million term loan with Wells Fargo Bank, National Association (Wells Fargo). This loan has a fixed rate of 5.53%, matures on October 1, 2015, and amortizes over 25 years.

 

Also on May 21, 2013, as a part of our acquisition of the Hilton Garden Inn in Minneapolis (Eden Prairie), MN, we assumed a $6.4 million term loan with Wells Fargo. This loan has a fixed rate of 5.57%, matures on January 1, 2016, and amortizes over 25 years.

 

On July 22, 2013, we closed on a $38.7 million term loan with KeyBank with a fixed rate of 4.95%. This term loan matures on August 1, 2023, amortizes over 30 years, and is secured by the Fairfield Inn & Suites and SpringHill Suites in Louisville, KY. The proceeds from this new borrowing were used to pay down our $92 million senior secured interim loan.

 

On July 26, 2013, we closed on a $7.4 million term loan with MetaBank with a fixed rate of 4.25%. This term loan matures on August 1, 2018, amortizes over 20 years, and is secured by the Hyatt Place in Atlanta, GA. We expect to receive additional proceeds of $1.3 million after the Hyatt Place attains a required performance level post renovation. The proceeds from this new borrowing were used to pay down our $150 million senior secured revolving credit facility.

 

16



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

On August 1, 2013, we entered into a new $34.0 million term loan with ING with a fixed rate of 4.55%. This loan matures on August 1, 2038 and amortizes over 25 years. ING has the right to call the loan in full on March 1, 2019, 2024, 2029 and 2034. Simultaneously, we amended our existing loan with ING to (i) remove the Fairfield Inn & Suites and the Residence Inn, Germantown, TN; the Hampton Inn, Fort Smith, AR; and the Fairfield Inn, Lewisville, TX from the collateral and (ii) remove $3.9 million in letters of credit from the collateral. We also added the Courtyard by Marriott, Ridgeland, MS; the Hampton Inn & Suites, Ybor, FL; and the Courtyard by Marriott and the Residence Inn, Metairie, LA as collateral to the two notes, such that both ING loans are secured by the same 14 hotel properties and are cross-defaulted. The proceeds from this new borrowing were used to pay down our $150 million senior secured revolving credit facility.

 

On September 24, 2013, we paid off a 6.5% fixed rate loan with Chambers Bank that was secured by one hotel property. This loan totaled $1.3 million and had a maturity date of June 24, 2014. There was no associated prepayment penalty.

 

On September 27, 2013, we paid off a 5.01% fixed rate loan with BNC Capital that was secured by one hotel property. This loan totaled $5.1 million and had a maturity date of November 1, 2013. There was no associated prepayment penalty.

 

NOTE 8 -      COMMITMENTS AND CONTINGENCIES

 

Pending Hotel Property Acquisitions

 

At September 30, 2013, we had entered into purchase agreements to acquire four hotel properties for a combined purchase price of $96.3 million, including the assumption of debt of $30.0 million. Two of these hotel properties with a combined purchase price of $30.9 million were acquired in October of 2013 and are discussed in Note 15 — Subsequent Events. The remaining two pending acquisitions are subject to customary closing conditions, including lender consent. Therefore, we cannot provide assurance that we will acquire these hotel properties.

 

We are also obligated to purchase a property under development in downtown Minneapolis, MN, subject to certain conditions including the successful conversion of the property, estimated to be completed in the fourth quarter of 2013. At September 30, 2013, we have funded a $20.3 million first mortgage loan on this hotel property. The loan represents a portion of the total acquisition and renovation costs expected to be incurred to convert the property to a Hyatt Place hotel. The purchase price is estimated to be $31.0 million, which will include forgiveness of the loan as partial purchase price consideration. We cannot provide assurance that we will acquire this hotel property.

 

Litigation

 

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 have a material impact on our financial condition or results of operations.

 

17



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 9 -      EQUITY

 

Common Stock

 

In the first nine months of 2013, we issued 2,466,404 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 $148.0 million, after the underwriting discount and offering-related expenses of $7.3 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 nine months of 2013, we issued 4,440 shares of common stock in lieu of cash for director fees.

 

On September 19, 2013, we completed an underwritten public offering of 17,250,000 shares of common stock. Net proceeds were $152.2 million, after the underwriting discount and offering-related expenses of $6.5 million.

 

Preferred Stock

 

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

 

Our Series C Preferred Stock has a $25 per share liquidation preference and pays dividends at an annual rate of $1.78125 per share. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year.

 

Noncontrolling Interests in Operating Partnership

 

Pursuant to the limited partnership agreement, beginning 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. At our option, the exchange can be for shares of our common stock on a one-for-one basis or for cash, based upon the fair value of an equivalent number of our shares of common stock at the time of redemption. 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 dividends, share subdivisions or combinations.

 

In the first nine months of 2013, we redeemed 2,466,404 Common Units for 2,466,404 shares of our common stock.

 

At September 30, 2013 and December 31, 2012, unaffiliated third parties owned 2,759,971 and 5,226,375 Common Units of the Operating Partnership, representing 3.2% and 10.1% limited partnership interest in the Operating Partnership, respectively.

 

We classify outstanding Common Units held by unaffiliated third parties as noncontrolling 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 noncontrolling interests of the Operating Partnership.

 

18



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Noncontrolling 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. We own an 80% controlling interest in the joint venture and our partner owns a 20% interest. We classify our partner’s 20% interest as noncontrolling interest in joint venture on our consolidated balance sheets. The portion of net income (loss) allocated to our partner is reported on our consolidated statements of operations as net income (loss) attributable to noncontrolling interests of joint venture.

 

NOTE 10 -           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 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 first nine months of 2013 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, 2012

 

893,000

 

$

9.75

 

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, September 30, 2013

 

893,000

 

$

9.75

 

7.4

 

$

 

 

 

 

 

 

 

 

 

 

 

Exercisable, September 30, 2013

 

357,200

 

$

9.75

 

7.4

 

$

 

 

At September 30, 2013, the exercise price of our outstanding options exceeds the market price of our common stock.

 

Time-Based Restricted Stock Awards

 

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. 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.

 

19



Table of Contents

 

Time-based restricted stock activity for the first nine months of 2013 follows:

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Number of Shares

 

Weighted Average
Grant Date Fair
Value

 

Aggregate Current
Value

 

 

 

 

 

(Per share)

 

(In thousands)

 

Non-vested, December 31, 2012

 

82,603

 

$

7.78

 

 

 

 

Granted

 

106,518

 

$

9.78

 

 

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Non-vested, September 30, 2013

 

189,121

 

$

8.91

 

$

1,738

 

 

Performance-Based Restricted Stock 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 (2013, 2014 and 2015) subject to the attainment of certain performance goals and continued service, or upon a change in control. 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.

 

Performance-based restricted stock activity for the first nine months of 2013 follows:

 

 

 

Number of Shares

 

Weighted Average
Grant Date Fair
Value

 

Aggregate Current
Value

 

 

 

 

 

(Per share)

 

(In thousands)

 

Non-vested, December 31, 2012

 

82,602

 

$

5.10

 

 

 

 

Granted

 

185,572

 

$

7.09

 

 

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Non-vested, September 30, 2013

 

268,174

 

$

6.48

 

$

2,465

 

 

Director Stock Awards

 

On June 13, 2013, we granted 29,228 shares of common stock to our directors as a part of their compensation plan. These shares vested upon grant.

 

Our directors have the option to receive shares of our common stock in lieu of cash for their director fees. In the first nine months of 2013, we issued 4,440 shares of common stock for director fees.

 

20



Table of Contents

 

Equity-Based Compensation Expense

 

Equity-based compensation expense for the third quarter and first nine months of 2013 and 2012 follows (in thousands):

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Stock options

 

$

155

 

$

126

 

$

466

 

$

378

 

Time-based restricted stock

 

167

 

72

 

443

 

144

 

Performance-based restricted stock

 

11

 

70

 

382

 

141

 

 

 

 

 

 

 

 

 

 

 

 

 

333

 

268

 

1,291

 

663

 

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

 

 

 

 

 

 

 

 

 

Director stock

 

13

 

 

325

 

120

 

 

 

 

 

 

 

 

 

 

 

 

 

$

346

 

$

268

 

$

1,616

 

$

783

 

 

The amount of expense may be subject to adjustment in future periods if there is a change in the forfeiture assumptions.

 

Unrecognized equity-based compensation expense for all non-vested awards was $3.9 million at September 30, 2013. We expect to recognize this cost over a remaining weighted-average period of two years.

 

NOTE 11 -           LOSS ON IMPAIRMENT OF ASSETS

 

In the first nine months of 2013, we recognized a loss on impairment of assets of $7.3 million related to the Courtyard by Marriott in Memphis, TN; the SpringHill Suites in Lithia Springs, GA; the Hampton Inn, AmericInn and Aspen Hotel & Suites in Fort Smith, AR; the AmericInn in Salina, KS and the Fairfield Inn and Holiday Inn Express in Emporia, KS. The impairments were the result of a change in the estimated holding period for these hotel properties. The Memphis hotel property was sold on May 30, 2013 and the Lithia Springs hotel property was sold on August 8, 2013. The Fort Smith, Salina, and Emporia hotel properties are classified as held for sale at September 30, 2013 and are under contract to sell. The operating results of these hotel properties, including impairment charges, are included in discontinued operations.

 

Also in the first nine months of 2013, we recognized a loss on impairment of assets of $1.4 million related to land parcels in Spokane, WA and El Paso, TX that were classified as held for sale at September 30, 2013. The impairments were the result of a change in the estimated holding period for these properties and were charged to continuing operations.

 

In the first nine months of 2012, we recognized a loss on impairment of assets of $2.1 million related to the AmericInn in Twin Falls, ID and the AmericInn in Missoula, MT. The Twin Falls hotel property was sold on May 16, 2012 and the Missoula hotel property was sold on August 15, 2012. The operating results of these hotel properties, including impairment charges, are included in discontinued operations.

 

21



Table of Contents

 

NOTE 12 -           DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING

 

Information about our derivative financial instruments at September 30, 2013 and December 31, 2012 follows (dollars in thousands):

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

Number of
Instruments

 

Notional
Amount

 

Fair Value

 

Number of
Instruments

 

Notional
Amount

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (asset)

 

3

 

$

29,587

 

$

98

 

 

$

 

$

 

Interest rate swaps (liability)

 

2

 

85,353

 

(2,047

)

4

 

41,095

 

(641

)

 

 

5

 

$

114,940

 

$

(1,949

)

4

 

$

41,095

 

$

(641

)

 

On September 5, 2013, we entered into an interest rate swap with a notional value of $75.0 million that will become effective on January 2, 2014 and matures on October 1, 2018. This interest rate swap was designated a cash flow hedge and will effectively convert a $75.0 million variable rate term loan that we expect to fund in the fourth quarter of 2013 into a fixed rate loan.

 

All of our interest rate swaps have been designated cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At September 30, 2013, three of our interest rate swaps were in an asset position and two were in a liability position. At December 31, 2012, all of our interest rate swaps were in a liability position. We have not posted 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 September 30, 2013, we could have been required to settle our obligation under the agreements that were in a liability position at their termination value of $1.9 million.

 

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

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(2,215

)

$

(291

)

$

(1,571

)

$

(587

)

 

 

 

 

 

 

 

 

 

 

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

 

$

(88

)

$

(50

)

$

(261

)

$

(66

)

 

 

 

 

 

 

 

 

 

 

Gain (loss) recognized in gain (loss) on derivative financial instruments (ineffective portion)

 

$

 

$

(1

)

$

2

 

$

(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 13 -           DISCONTINUED OPERATIONS

 

We have adjusted our consolidated statements of operations for the first nine months of 2013 and 2012 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:

 

·                  Hampton Inn, Holiday Inn Express, and AmericInn in Twin Falls, ID — sold May 2012;

·                  AmericInn in Missoula, MT — sold August 2012;

·                  Courtyard by Marriott in Missoula, MT — sold December 2012;

·                  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;

 

22



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

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

 

In addition, discontinued operations also include the following hotel properties that were classified as held for sale at September 30, 2013:

 

·                  Hampton Inn and Fairfield Inn & Suites in Boise, ID;

·                  Hampton Inn, AmericInn and Aspen Hotel & Suites in Fort Smith. AR;

·                  SpringHill Suites in Little Rock, AR;

·                  Fairfield Inn and Holiday Inn Express in Emporia, KS; and

·                  Fairfield Inn and AmericInn in Salina, KS.

 

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

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

REVENUE

 

$

4,874

 

$

9,107

 

$

17,129

 

$

26,199

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses

 

3,653

 

6,315

 

12,913

 

19,143

 

Depreciation and amortization

 

406

 

857

 

1,617

 

3,067

 

Loss on impairment of assets

 

5,785

 

 

7,285

 

2,098

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from hotel operations

 

(4,970

)

1,935

 

(4,686

)

1,891

 

Interest expense

 

24

 

111

 

175

 

729

 

(Gain) loss on disposal of assets

 

783

 

 

(877

)

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before taxes

 

(5,777

)

1,824

 

(3,984

)

1,162

 

 

 

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

4,080

 

(295

)

(313

)

(81

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

(1,697

)

$

1,529

 

$

(4,297

)

$

1,081

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations attributable to noncontrolling interest

 

$

(66

)

$

248

 

$

(188

)

$

221

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations attributable to common stockholders

 

$

(1,631

)

$

1,281

 

$

(4,109

)

$

860

 

 

NOTE 14 -           EARNINGS (LOSS) PER SHARE/UNIT

 

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.

 

In the third quarter of 2013 and 2012 and the first nine months of 2013 and 2012, our outstanding stock options were not included in the computation of diluted earnings per share, as the exercise price for our options was greater than the average market price of our common shares.

 

In the first nine months of 2012, our basic and diluted earnings per share are based on basic weighted average common shares outstanding due to our loss from continuing operations.

 

23



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Summit Hotel Properties, Inc.

 

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

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

Numerator:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

1,116

 

$

112

 

$

12,270

 

$

(2,602

)

Less: Preferred dividends

 

4,147

 

1,156

 

10,443

 

3,469

 

Allocation to participating securities

 

21

 

12

 

52

 

24

 

Attributable to noncontrolling interest

 

155

 

(169

)

404

 

(1,488

)

Income (loss) attributable to common stockholders from continuing operations

 

(3,207

)

(887

)

1,371

 

(4,607

)

Income (loss) attributable to common stockholders from discontinued operations

 

(1,631

)

1,281

 

(4,109

)

860

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

(4,838

)

$

394

 

$

(2,738

)

$

(3,747

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

68,157

 

31,308

 

65,460

 

29,713

 

Dilutive effect of equity-based compensation awards

 

457

 

193

 

394

 

107

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - diluted

 

68,614

 

31,501

 

65,854

 

29,820

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share - basic and diluted:

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(0.05

)

$

(0.03

)

$

0.02

 

$

(0.16

)

Net income (loss) from discontinued operations

 

(0.02

)

0.04

 

(0.06

)

0.03

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(0.07

)

$

0.01

 

$

(0.04

)

$

(0.13

)

 

Summit Hotel OP, LP

 

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

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

Numerator:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

1,116

 

$

112

 

$

12,270

 

$

(2,602

)

Less: Preferred dividends

 

4,147

 

1,156

 

10,443

 

3,469

 

Attributable to noncontrolling interest

 

272

 

 

324

 

 

Income (loss) attributable to common unit holders from continuing operations

 

(3,303

)

(1,044

)

1,503

 

(6,071

)

Income (loss) attributable to common unit holders from discontinued operations

 

(1,697

)

1,529

 

(4,297

)

1,081

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common unit holders

 

$

(5,000

)

$

485

 

$

(2,794

)

$

(4,990

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding - basic

 

70,917

 

37,393

 

68,476

 

37,385

 

Dilutive effect of equity-based compensation awards

 

457

 

193

 

394

 

107

 

 

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding - diluted

 

71,374

 

37,586

 

68,870

 

37,492

 

 

 

 

 

 

 

 

 

 

 

Earnings per common unit - basic and diluted:

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(0.05

)

$

(0.03

)

$

0.02

 

$

(0.16

)

Net income (loss) from discontinued operations

 

(0.02

)

0.04

 

(0.06

)

0.03

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(0.07

)

$

0.01

 

$

(0.04

)

$

(0.13

)

 

24



Table of Contents

 

SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL OP, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 15 -           SUBSEQUENT EVENTS

 

Equity Transactions

 

On October 1, 2013, we issued 1,770,532 shares of common stock for Common Units of our Operating Partnership which were tendered for redemption on September 27, 2013.

 

On October 31, 2013, our Board of Directors declared cash dividends of $0.1125 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 November 29, 2013.

 

Debt Transactions

 

On October 10, 2013, we closed on a $300 million senior unsecured credit facility to replace our $150 million senior secured revolving credit facility. The unsecured credit facility is comprised of a $225 million revolving credit facility (the “$225 Million Revolver”) and a $75 million term loan (the “$75 Million Term Loan”). The credit facility has an accordion feature which will allow us to increase the commitments by an aggregate of $100 million on the $225 Million Revolver and the $75 Million Term Loan. Deutsche Bank AG New York Branch is the administrative agent and Deutsche Bank Securities Inc. is the sole lead arranger. The syndication of lenders includes Deutsche Bank AG New York Branch; Bank of America, N.A.; Royal Bank of Canada; Key Bank National Association; Regions Bank; Fifth Third Bank; Raymond James Bank, N.A.; and U.S. Bank National Association.

 

The credit facility requires that no less than 20 of our hotel properties remain unencumbered, as defined in the credit facility documentation. The credit facility also requires compliance with covenants customary among our industry peers. The $225 Million Revolver matures on October 10, 2017 and can be extended to October 10, 2018 at our option, subject to certain conditions. The $75 Million Term Loan matures on October 10, 2018.

 

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. Unused fees are payable quarterly and are assessed at 0.30% per annum if the unused portion of the credit facility is equal to or greater than 50%, or 0.20% per annum if the unused portion of the credit facility is less than 50%.

 

On October 31, 2013, we paid off a 4.10% loan with General Electric Capital Corp. This loan totaled $10.3 million and had a maturity of April 1, 2014. Costs associated with the early payoff were less than $0.1 million.

 

Hotel Property Acquisitions

 

On October 1, 2013, we purchased a Hampton Inn & Suites in Ventura (Camarillo), CA for $15.7 million. On October 8, 2013, we purchased a Hampton Inn & Suites in San Diego (Poway), CA for $15.2 million.

 

Hotel Property Dispositions

 

On October 30, 2013, we sold the Fairfield Inn in Emporia, KS. On November 1, 2013, we sold the SpringHill Suites in Little Rock, AR. Both of these properties were classified as held for sale at September 30, 2013.

 

25


 


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 the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Cautionary Statement About Forward-Looking Statements

 

This report, together with other statements and information publicly disseminated by us, 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,” “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;

 

·                  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 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; 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, 2012 and in other reports we file from time to time with the SEC.

 

26



Table of Contents

 

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.

 

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, we have acquired 40 hotels containing 5,512 guestrooms for purchase prices aggregating $729.6 million. At September 30, 2013, we owned 92 hotels containing 10,913 guestrooms located in 24 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®, SpringHill Suites by Marriott®, Residence Inn by Marriott®, Fairfield Inn & Suites by Marriott®, Fairfield Inn by Marriott®, and TownePlace Suites by Marriott®), Hilton Worldwide (“Hilton”) (Hilton Garden Inn®, Hampton Inn®, Hampton Inn & Suites®, DoubleTree by Hilton®, and Homewood Suites®), an affiliate of Hyatt Hotels Corporation (“Hyatt”) (Hyatt Place® and Hyatt House®), and Intercontinental Hotel Group (“IHG”) (Holiday Inn Express & Suites®, Holiday Inn Express®, Holiday Inn®, and Staybridge Suites®).

 

At September 30, 2013, our hotels are operated pursuant to hotel management agreements with third party hotel management companies, including the following:

 

·                  Interstate Management Company, LLC (“Interstate”) and its affiliate, Noble Management Group (“Noble”) — 58 hotel properties;

 

·                  Select Hotel Group, LLC (“Hyatt Management”) — 11 hotel properties;

 

·                  Affiliates of Marriott, including Courtyard Management Corporation (“Courtyard Management”), SpringHill SMC Corporation (“SpringHill Management”) and Residence Inn by Marriott (“Residence Inn Management”) — six hotel properties;

 

·                  White Lodging Services Corporation (“White Lodging”) — four hotel properties;

 

·                  Kana Hotels, Inc. (“Kana Hotels”) — three hotel properties;

 

·                  InterMountain Management, LLC (“InterMountain”) and its affiliate, Pillar Hotels and Resorts, LP (“Pillar”) — three hotel properties;

 

·                  HP Hotels Management Company, Inc. (“HP Hotels”) — two hotel properties;

 

·                  OTO Development, LLC — two hotel properties;

 

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

 

·                  Lodging Dynamics — one hotel property.

 

We believe the hotel management companies engaged by our TRS lessees qualify as “eligible independent contractors” for federal income tax purposes. 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.

 

27



Table of Contents

 

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.

 

Industry Trends and Outlook

 

Room-night demand in the U.S. lodging industry is generally 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 revenue per available room (“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 expectations.

 

While we are guardedly optimistic about macro-economic conditions and their effect on room-night demand, we feel relatively confident 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, franchise availability, local real estate market conditions, and availability and pricing of existing properties. As a result of scarcity of financing, the severe United States recession and declining operating fundamentals, during 2008 and 2009, many planned hotel developments were cancelled or postponed. Due to continued economic uncertainty, we believe the effect of the severe recession will be prolonged compared with prior recessions, which could limit lodging supply growth.

 

28



Table of Contents

 

Our Hotel Property Portfolio

 

At September 30, 2013, our hotel property portfolio consisted of 92 hotels containing 10,913 guestrooms.  Of these hotels, according to STR’s current chain segment designations, 57 hotels containing 7,339 guestrooms are “upscale,” 32 hotels containing 3,368 guestrooms are “upper midscale” and three hotels containing 206 guestrooms are “midscale.”  Information for our hotel properties by franchisor as of September 30, 2013 follows:

 

Franchise

 

Brand

 

Number of
Hotel
Properties

 

Number of
Guestrooms

 

Marriott

 

Courtyard by Marriott (1)

 

11

 

1,662

 

 

 

SpringHill Suites by Marriott

 

10

 

1,266

 

 

 

Residence Inn by Marriott

 

7

 

805

 

 

 

Fairfield Inn & Suites by Marriott

 

7

 

751

 

 

 

Fairfield Inn by Marriott

 

3

 

183

 

 

 

TownePlace Suites by Marriott

 

1

 

90

 

 

 

Total Marriott

 

39

 

4,757

 

Hilton

 

Hilton Garden Inn

 

8

 

894

 

 

 

Hampton Inn

 

6

 

596

 

 

 

Hampton Inn & Suites

 

5

 

611

 

 

 

DoubleTree by Hilton

 

1

 

127

 

 

 

Homewood Suites

 

1

 

91

 

 

 

Total Hilton

 

21

 

2,319

 

Hyatt

 

Hyatt Place

 

15

 

2,010

 

 

 

Hyatt House

 

1

 

135

 

 

 

Total Hyatt

 

16

 

2,145

 

IHG

 

Holiday Inn Express & Suites(2)

 

5

 

619

 

 

 

Holiday Inn Express

 

2

 

185

 

 

 

Holiday Inn

 

1

 

143

 

 

 

Staybridge Suites

 

2

 

213

 

 

 

Total IHG

 

10

 

1,160

 

Carlson

 

Country Inn & Suites by Carlson

 

2

 

190

 

AmericInn

 

AmericInn

 

2

 

149

 

Starwood

 

Aloft

 

1

 

136

 

Independent

 

Aspen Hotel & Suites

 

1

 

57

 

Total (3)

 

 

 

92

 

10,913

 

 


(1)                                 We own a 90% controlling interest in the Courtyard by Marriott located in Atlanta, GA with the obligation to acquire the remaining 10% interest in 2016.

 

(2)                                 We own an 80% controlling interest in the Holiday Inn Express & Suites in San Francisco, CA with an option to acquire the remaining 20% interest beginning in first quarter 2014.

 

(3)                                 Includes ten hotel properties that are classified as held for sale at September 30, 2013 in our financial statements.  For additional information about our hotels that are classified as held for sale, see Note 5 and Note 13 to our unaudited condensed consolidated financial statements appearing elsewhere in this Form 10-Q.

 

29



Table of Contents

 

Hotel Property Portfolio Activity

 

Acquisitions

 

We acquired 16 hotel properties in the first nine months of 2013 and seven hotel properties in the first nine months of 2012. A summary of these acquisitions follows (dollars in thousands):

 

Date Acquired

 

Franchise/Brand

 

Location

 

Guest-
rooms

 

Purchase
Price

 

Management Company

 

First Nine Months of 2013

 

 

 

 

 

 

 

 

 

January 22

 

Hyatt Place

 

Chicago (Hoffman Estates), IL

 

126

 

$

9,230

 

Hyatt Management

 

January 22

 

Hyatt Place

 

Orlando (Convention), FL

 

149

 

12,252

 

Hyatt Management

 

January 22

 

Hyatt Place

 

Orlando (Universal), FL

 

151

 

11,843

 

Hyatt Management

 

February 11

 

IHG / Holiday Inn Express & Suites

 

San Francisco, CA

 

252

 

60,500

 

Intercontinental Management

 

March 11

 

SpringHill Suites by Marriott

 

New Orleans, LA

 

208

 

33,500

 

SpringHill Management

 

March 11

 

Courtyard by Marriott

 

New Orleans (Convention), LA

 

202

 

31,500

 

Courtyard Management

 

March 11

 

Courtyard by Marriott

 

New Orleans (French Quarter), LA

 

140

 

26,000

 

Courtyard Management

 

March 11

 

Courtyard by Marriott

 

New Orleans (Metairie), LA

 

153

 

24,000

 

Courtyard Management

 

March 11

 

Residence Inn by Marriott

 

New Orleans (Metairie), LA

 

120

 

20,000

 

Residence Inn Management

 

April 30

 

Hilton Garden Inn

 

Greenville, SC

 

120

 

15,250

 

Kana Hotels

 

May 21

 

IHG / Holiday Inn Express & Suites

 

Minneapolis (Minnetonka), MN

 

93

 

6,900

 

Interstate

 

May 21

 

Hilton Garden Inn

 

Minneapolis (Eden Prairie), MN

 

97

 

10,200

 

Interstate

 

May 23

 

Fairfield Inn & Suites by Marriott

 

Louisville, KY

 

135

 

25,023

 

White Lodging

 

May 23

 

SpringHill Suites by Marriott

 

Louisville, KY

 

198

 

39,138

 

White Lodging

 

May 23

 

Courtyard by Marriott

 

Indianapolis, IN

 

297

 

58,634

 

White Lodging

 

May 23

 

SpringHill Suites by Marriott

 

Indianapolis, IN

 

156

 

30,205

 

White Lodging

 

 

 

 

 

 

 

 

 

 

 

 

 

Total First Nine Months of 2013

 

16 hotel properties

 

2,597

 

$

414,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Nine Months of 2012

 

 

 

 

 

 

 

 

 

January 12

 

Courtyard by Marriott

 

Atlanta, GA

 

150

 

$

28,900

 

Courtyard Management

 

February 28

 

Hilton Garden Inn

 

Birmingham (Liberty Park), AL

 

130

 

11,500

 

HP Hotels

 

February 28

 

Hilton Garden Inn

 

Birmingham (Lakeshore), AL

 

95

 

8,625

 

HP Hotels

 

May 16

 

Courtyard by Marriott

 

Dallas (Arlington), TX

 

103

 

15,000

 

InterMountain

 

May 16

 

Hilton Garden Inn

 

Nashville (Smyrna), TN

 

112

 

11,500

 

Kana Hotels

 

June 21

 

Hilton / Hampton Inn & Suites

 

Nashville (Smyrna), TN

 

83

 

8,000

 

Kana Hotels

 

July 2

 

Residence Inn by Marriott

 

Dallas (Arlington), TX

 

96

 

15,500

 

InterMountain

 

 

 

 

 

 

 

 

 

 

 

 

 

Total First Nine Months of 2012

 

seven hotel properties

 

769

 

$

99,025

 

 

 

 

The First Nine Months of 2013 Acquisitions

 

On January 22, 2013, we purchased from affiliates of Hyatt Hotels Corporation (“Hyatt”), a portfolio of three hotel properties. We expect to spend $5.0 million for renovations at these properties for a total cost of $90,000 per key. In addition, we acquired a land parcel in Orlando, FL valued at $2.8 million that is classified as land held for development. We funded this acquisition with a portion of the proceeds from our common stock offering completed on January 14, 2013 (the “January 2013 Stock Offering”). The renovations will be funded with borrowings under our senior unsecured credit facility.

 

On February 11, 2013, through a joint venture with an affiliate of IHG, we purchased a Holiday Inn Express & Suites in San Francisco, CA for $240,079 per key. We expect to spend $4.3 million for renovations at this property for a total cost of $257,100 per key. The joint venture assumed a $23.4 million term loan as a part of the acquisition. We contributed $34.6 million, including $2.8 million in renovation reserves, to the joint venture for an 80% controlling interest. We funded our contribution to the joint venture with a portion of the proceeds from our January 2013 Stock Offering.

 

30



Table of Contents

 

On March 11, 2013, we purchased a portfolio of five Marriott hotel properties. We expect to spend $8.5 million for renovations at these properties for a total cost of $174,400 per key. We funded this acquisition with proceeds from term borrowings secured by previously acquired hotel properties and borrowings under our senior secured revolving credit facility.

 

On April 30, 2013, we purchased a Hilton Garden Inn in Greenville, SC for $127,100 per key. We expect to perform very minor renovations on this hotel property. We funded this acquisition with borrowings under our senior secured revolving credit facility.

 

On May 21, 2013, we purchased a Holiday Inn  Express & Suites in Minneapolis (Minnetonka), MN for $74,200 per key.  We expect to spend $1.2 million for renovations at this property for a total cost of $87,100 per key. We funded this acquisition through assumption of a $3.7 million term loan and borrowings under our senior secured revolving credit facility.

 

On May 21, 2013, we also purchased a Hilton Garden Inn in Minneapolis (Eden Prairie), MN for $105,200 per key.  We expect to spend $2.4 million for renovations at this property for a total cost of $130,200 per key. We funded this acquisition through assumption of a $6.4 million term loan and borrowings under our senior secured revolving credit facility.

 

On May 23, 2013, we purchased a portfolio of four Marriott hotel properties. We expect to spend $4.6 million for renovations at these properties for a total cost of $200,500 per key. We funded this acquisition with proceeds from a $92.0 million senior secured interim loan and borrowings under our senior secured revolving credit facility.

 

The First Nine Months of 2012 Acquisitions

 

On January 12, 2012, we purchased 90% of the ownership interests in a Courtyard by Marriott in Atlanta, GA for $190,000 per key. Including renovations, our total cost per key was $191,300. Upon expiration of tax credits related to the hotel in 2016, we are obligated to purchase the remaining ownership for $0.4 million, which has been accrued as a liability and is included in the purchase price of $28.9 million. We funded this acquisition through assumption of a $19.0 million term loan and borrowings under our senior secured revolving credit facility.

 

On February 28, 2012, we purchased a Hilton Garden Inn in Birmingham (Liberty Park), AL for $88,462 per key. Including renovations, our total cost per key was $90,200.  We funded this acquisition with a $6.5 million term loan and borrowings under our senior secured revolving credit facility.

 

On February 28, 2012, we purchased a Hilton Garden Inn in Birmingham (Lakeshore), AL for $90,789 per key. Including renovations, our total cost per key was $107,600.  We funded this acquisition with a $5.6 million term loan and borrowings under our senior secured revolving credit facility.

 

On May 16, 2012, we purchased a Courtyard by Marriott in Dallas (Arlington), TX for $145,631 per key. We performed very minor renovations on this hotel property. We funded this acquisition with borrowings under our senior secured revolving credit facility.

 

On May 16, 2012, we also purchased a Hilton Garden Inn in Nashville (Smyrna), TN for $102,679 per key. Including renovations, our total cost per key was $106,500.  We funded this acquisition through assumption of an $8.7 million term loan and borrowings under our senior secured revolving credit facility.

 

On June 21, 2012, we purchased a Hampton Inn & Suites in Nashville (Smyrna), TN for $96,386 per key. Including renovations, our total cost per key was $101,900.  We funded this acquisition through assumption of a $5.4 million term loan and borrowings under our senior secured revolving credit facility.

 

31



Table of Contents

 

On July 2, 2012, we purchased a Residence Inn by Marriott in Dallas (Arlington), TX for 161,458 per key. We performed very minor renovations on this hotel property. We funded this acquisition with borrowings under our senior secured revolving credit facility.

 

Dispositions

 

Pursuant to our strategy to continually evaluate our hotel properties and land held for development, we sold eight hotel properties and a parcel of land held for development in the first nine months of 2013. When a property is identified as being held for sale, we reclassify the property on our consolidated balance sheets, evaluate for potential impairment and, in the case of a hotel property, report historical and future results of operations in discontinued operations. We recognize impairment charges on hotel properties in discontinued operations and on land held for development in continuing operations. We recognized impairment charges of $8.7 million in the first nine months of 2013 and $2.1 million in the first nine months of 2012 due to the change in the estimated holding period of the related properties.

 

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 $1.6 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. On August 8, 2013, we sold the SpringHill Suites in Lithia Springs, GA for $2.4 million. On August 21, 2013, we sold a parcel of land in Missoula, MT for $0.8 million.  On August 29, 2013, we sold the Fairfield Inn in Lewisville, TX for $2.0 million and recognized a loss on the sale of $0.8 million. On September 30, 2013, we sold the Fairfield Inn in Lakewood, CO for $2.8 million. Proceeds from these sales were used to pay off term debt and pay down our senior secured revolving credit facility.

 

On May 16, 2012, we sold the Hampton Inn, Holiday Inn Express and AmericInn in Twin Falls, ID for $16.5 million. On May 31, 2012, we sold a parcel of land in Twin Falls, ID for $0.3 million. On June 28, 2012, we sold a parcel of land in Boise, ID for $1.4 million. On August 15, 2012, we sold the AmericInn & Suites in Missoula, MT for $1.9 million. Proceeds from these sales were used to pay off related term debt and pay down our senior secured revolving credit facility.

 

For additional information concerning our dispositions and impairment charges, see Note 11 of our financial statements appearing elsewhere in this Form 10-Q.

 

Results of Operations of Summit Hotel Properties, Inc. and Summit Hotel OP, LP

 

The comparisons that follow should be reviewed in conjunction with the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q. As noted above, in the first nine months of 2013 we sold the AmericInn Hotel & Suites in Golden, CO; the Hampton Inn in Denver, CO; the Holiday Inn and Holiday Inn Express in Boise, ID; the Courtyard by Marriott in Memphis, TN; the SpringHill Suites in Lithia Springs, GA; the Fairfield Inn in Lewisville, TX; and the Fairfield Inn in Lakewood, CO. In addition, at September 30, 2013, the Hampton Inn and Fairfield Inn & Suites in Boise, ID; the Hampton Inn, AmericInn and Aspen Hotel & Suites in Fort Smith, AR; the SpringHill Suites in Little Rock, AR, the Fairfield Inn and Holiday Inn Express in Emporia, KS; and the Fairfield Inn and AmericInn in Salina, KS, which were all under contract to sell, were classified as held for sale. Accordingly, we classified all of these hotel properties as discontinued operations and their operating results are not included in the discussion below.

 

32



Table of Contents

 

Comparison of Third Quarter 2013 with Third Quarter 2012

 

Key operating metrics for our total portfolio (82 hotels at September 30, 2013 and 54 hotels at September 30, 2012) and our same-store portfolio (47 hotels) for the three months ended September 30, 2013 (the “third quarter 2013”) compared with the three months ended September 30, 2012 (the “third quarter 2012”) follows (dollars in thousands, except ADR and RevPAR):

 

 

 

Third Quarter

 

 

 

 

 

 

 

2013

 

2012

 

Percentage Change

 

 

 

Total
Portfolio
(82 hotels)

 

Same-Store
Portfolio
(47 hotels)

 

Total
Portfolio
(54 hotels)

 

Same-Store
Portfolio
(47 hotels)

 

Total
Portfolio
(82/54 hotels)

 

Same-Store
Portfolio
(47 hotels)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

82,174

 

$

39,458

 

$

43,070

 

$

37,102

 

90.8

%

6.4

%

Hotel operating expenses

 

$

53,783

 

$

26,141

 

$

28,438

 

$

24,639

 

89.1

%

6.1

%

Occupancy

 

74.7

%

75.9

%

74.9

%

75.4

%

-0.3

%

0.6

%

ADR

 

$

111.90

 

$

104.61

 

$

100.32

 

$

99.14

 

11.5

%

5.5

%

RevPAR

 

$

83.56

 

$

79.38

 

$

75.17

 

$

74.76

 

11.2

%

6.2

%

 

Revenue. Total revenues, including room and other hotel operations revenue, increased $39.1 million in third quarter 2013 compared with third quarter 2012. The increase in revenues is due to an increase in same-store revenues of $2.4 million and an increase in revenues from the 19 hotel properties acquired in 2012 and 16 hotel properties acquired in the first nine months of 2013 (the “Acquired Hotels”) of $36.7 million.

 

The same-store revenue increase of $2.4 million, or 6.4%, was due to increases in occupancy to 75.9% in third quarter 2013 compared with 75.4% in third quarter 2012, and ADR to $104.61 in third quarter 2013 compared with $99.14 in third quarter 2012. The increases in occupancy and ADR resulted in a 6.2% increase in same-store RevPAR to $79.38 in third quarter 2013 compared with $74.76 in third quarter 2012. These increases were due to the improving economy and hotel industry fundamentals and renovations made at 29 hotel properties in 2012 and the first six months of 2013.

 

Hotel Operating Expenses. Hotel operating expenses increased $25.3 million in third quarter 2013 compared with third quarter 2012. The increase is due in part to an increase in operating expenses at the Acquired Hotels of $23.8 million. In addition, the increase in same-store hotel operating expenses is due to $1.5 million of variable costs related to the increase in revenue. Expenses at the same-store hotels declined as a percentage of revenue from 66.4% in third quarter 2012 to 66.3% in third quarter 2013, 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 (47 hotels) for the third quarter of 2013 and 2012 follows (dollars in thousands):

 

 

 

Third Quarter

 

Percentage

 

Percentage of Revenue
Third Quarter

 

 

 

2013

 

2012

 

Change

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms expense

 

$

10,453

 

$

9,957

 

5.0

%

26.5

%

26.8

%

Other direct expense

 

5,049

 

4,716

 

7.1

%

12.8

%

12.7

%

Other indirect expense

 

10,496

 

9,822

 

6.9

%

26.6

%

26.5

%

Other expense

 

143

 

144

 

-0.7

%

0.4

%

0.4

%

 

 

 

 

 

 

 

 

 

 

 

 

Total hotel operating expenses

 

$

26,141

 

$

24,639

 

6.1

%

66.3

%

66.4

%

 

33


 

 


Table of Contents

 

Depreciation and Amortization.  Depreciation and amortization expense increased $6.4 million in third quarter 2013 compared with third quarter 2012, primarily due to the depreciation associated with the Acquired Hotels.

 

Corporate General and Administrative.  Corporate general and administrative expenses increased $0.5 million in third quarter 2013 compared with third quarter 2012. The increase in expense was due to increases in equity-based compensation of $0.1 million, cost related to our development of corporate functions that did not exist prior to our IPO of $0.3 million, and cost related to the relocation of our corporate headquarters from Sioux Falls, SD to Austin, TX of $0.1 million.

 

Other Income/Expense.  The $2.0 million increase in other income (expense) in third quarter 2013 compared with third quarter 2012 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 Nine Months of 2013 with the First Nine Months of 2012

 

Key operating metrics for our total portfolio (82 hotels at September 30, 2013 and 54 hotels at September 30, 2012) and our same-store portfolio (47 hotels) for the nine months ended September 30, 2013 (the “first nine months 2013”) compared with the nine months ended September 30, 2012 (the “first nine months 2012”) follows (dollars in thousands, except ADR and RevPAR):

 

 

 

First Nine Months

 

 

 

 

 

 

 

2013

 

2012

 

Percentage Change

 

 

 

Total
Portfolio
(82 hotels)

 

Same-Store
Portfolio
(47 hotels)

 

Total
Portfolio
(54 hotels)

 

Same-Store
Portfolio
(47 hotels)

 

Total
Portfolio
(82/54 hotels)

 

Same-Store
Portfolio
(47 hotels)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

221,002

 

$

112,104

 

$

116,591

 

$

104,842

 

89.6

%

6.9

%

Hotel operating expenses

 

$

144,232

 

$

74,727

 

$

77,915

 

$

70,660

 

85.1

%

5.8

%

Occupancy

 

74.8

%

73.8

%

72.3

%

72.4

%

3.5

%

1.9

%

ADR

 

$

110.26

 

$

102.74

 

$

98.86

 

$

97.59

 

11.5

%

5.3

%

RevPAR

 

$

82.52

 

$

75.80

 

$

71.52

 

$

70.68

 

15.4

%

7.2

%

 

Revenue. Total revenues, including room and other hotel operations revenue, increased $104.4 million in first nine months 2013 compared with first nine months 2012. The increase in revenues is due to an increase in same-store revenues of $7.3 million and an increase in revenues from the Acquired Hotels of $97.1 million.

 

The same-store revenue increase of $7.3 million, or 6.9%, was due to increases in occupancy to 73.8% in first nine months 2013 compared with 72.4% in first nine months 2012, and ADR to $102.74 in first nine months 2013 compared with $97.59 in first nine months 2012. The increases in occupancy and ADR resulted in a 7.2% increase in same-store RevPAR to $75.80 in first nine months 2013 compared with $70.68 in first nine months 2012. These increases were due to the improving economy and hotel industry fundamentals and renovations made at 29 hotel properties in 2012 and the first six months of 2013.

 

Hotel Operating Expenses. Hotel operating expenses increased $66.3 million in first nine months 2013 compared with first nine months 2012. The increase is due in part to an increase in operating expenses at the Acquired Hotels of $62.2 million. In addition, the increase in same-store hotel operating expenses is due to $4.1 million of variable costs related to the increase in revenue. Expenses at the same-store hotels declined as a percentage of revenue from 67.4% in first nine months 2012 to 66.7% in first nine months 2013, 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 (47 hotels) for the first nine months of 2013 and 2012 follows (dollars in thousands):

 

34



Table of Contents

 

 

 

First Nine Months

 

Percentage

 

Percentage of Revenue
First Nine Months

 

 

 

2013

 

2012

 

Change

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms expense

 

$

30,045

 

$

28,763

 

4.5

%

26.8

%

27.4

%

Other direct expense

 

14,147

 

13,383

 

5.7

%

12.6

%

12.8

%

Other indirect expense

 

30,096

 

28,070

 

7.2

%

26.8

%

26.8

%

Other expense

 

439

 

444

 

-1.1

%

0.4

%

0.4

%

 

 

 

 

 

 

 

 

 

 

 

 

Total hotel operating expenses

 

$

74,727

 

$

70,660

 

5.8

%

66.7

%

67.4

%

 

Depreciation and Amortization.  Depreciation and amortization expense increased $15.5 million in first nine months 2013 compared with first nine months 2012, primarily due to the depreciation associated with the Acquired Hotels.

 

Corporate General and Administrative.  Corporate general and administrative expenses increased $3.7 million in first nine months 2013 compared with first nine months 2012. The increase in expense was due to increases in equity-based compensation of $0.8 million, bonus accruals of $0.9 million, cost related to our development of corporate functions that did not exist prior to our IPO of $0.7 million, and cost related to the relocation of our corporate headquarters from Sioux Falls, SD to Austin, TX of $0.4 million.

 

Other Income/Expense.  The $3.3 million increase in other income (expense) in first nine months 2013 compared with first nine months 2012 was primarily the result of a $3.7 million increase in interest expense, due to debt incurred to finance the acquisition of the Acquired Hotels, partially offset by a $0.5 million decrease in debt transaction costs.

 

Cash Flows

 

The increase in net cash provided by operating activities of $21.6 million for first nine months 2013 compared with first nine months 2012 primarily resulted from a $9.5 million improvement in earnings, a $14.1 million increase in depreciation, and a $6.6 million increase in loss on impairment of assets, which were partially offset by a $7.8 million increase in net operating assets.  The increase in depreciation was primarily related to the Acquired Hotels. The $354.0 million increase in net cash used in investing activities for first nine months 2013 compared with first nine months 2012 primarily resulted from a $322.5 million increase in acquisitions of hotel properties, a $10.2 million increase in hotel properties under development, a $2.8 million increase in acquisition of land held for development, a $15.9 million increase in improvements and additions to hotel properties, and a $17.1 million increase in restricted cash related to renovation reserves funded, which were partially offset by a $15.1 million increase in proceeds from asset dispositions. The $364.1 million increase in net cash provided by financing activities for first nine months 2013 compared with first nine months 2012 resulted from a $390.1 million increase in proceeds from equity offerings, which was partially offset by a $7.9 million decrease in proceeds from borrowings and a $17.6 million increase in dividends and distributions.

 

35



Table of Contents

 

Discontinued Operations

 

Pursuant to our strategy, we continually evaluate our hotel properties for potential sale and redeployment of capital. When a hotel property is sold or identified as being held for sale, we report its historical and ongoing results of operations, including impairment charges, in discontinued operations. In addition to the hotel properties previously reported in discontinued operations, in the first nine months of 2013 we began reporting the following hotel properties in discontinued operations:

 

·                  Hampton Inn in Denver, CO

·                  Holiday Inn in Boise, ID

·                  Holiday Inn Express in Boise, ID

·                  Hampton Inn in Boise, ID

·                  Fairfield Inn & Suites in Boise, ID

·                  Courtyard by Marriott in Memphis, TN

·                  SpringHill Suites in Lithia Springs, GA

·                  Fairfield Inn in Lewisville, TX

·                  Fairfield Inn in Lakewood, CO

·                  Hampton Inn in Fort Smith, AR

·                  AmericInn in Fort Smith, AR

·                  Aspen Hotel & Suites in Fort Smith, AR

·                  SpringHill Suites in Little Rock, AR

·                  Fairfield Inn in Emporia, KS

·                  Holiday Inn Express in Emporia, KS

·                  Fairfield Inn in Salina, KS

·                  AmericInn in Salina, KS

 

The Hampton Inn in Denver, CO was sold on February 15, 2013. The Holiday Inn and Holiday Inn Express in Boise, ID were sold on May 1, 2013. The Courtyard by Marriott in Memphis, TN was sold on May 30, 2013.  The SpringHill Suites in Lithia Springs, GA was sold on August 8, 2013. The Fairfield Inn in Lewisville, TX was sold on August 29, 2013. The Fairfield Inn in Lakewood, CO was sold on September 30, 2013. The Hampton Inn and Fairfield Inn & Suites in Boise, ID; the Hampton Inn, AmericInn and Aspen Hotel & Suites in Fort Smith, AR; the SpringHill Suites in Little Rock, AR; the Fairfield Inn and Holiday Inn Express in Emporia, KS; and the Fairfield Inn and AmericInn in Salina, KS were classified as held for sale at September 30, 2013 and were under contract to sell, which sales are anticipated to close during 2013.

 

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

 

 

 

Third Quarter

 

First Nine Months

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

4,874

 

$

9,107

 

$

17,129

 

$

26,199

 

 

 

 

 

 

 

 

 

 

 

Hotel operating expenses

 

3,653

 

6,315

 

12,913

 

19,143

 

Depreciation and amortization

 

406

 

857

 

1,617

 

3,067

 

Loss on impairment of assets

 

5,785

 

 

7,285

 

2,098

 

Interest expense

 

24

 

111

 

175

 

729

 

(Gain) loss on disposal of assets

 

783

 

 

(877

)

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

10,651

 

7,283

 

21,113

 

25,037

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before income taxes

 

(5,777

)

1,824

 

(3,984

)

1,162

 

Income tax (expense) benefit

 

4,080

 

(295

)

(313

)

(81

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

(1,697

)

$

1,529

 

$

(4,297

)

$

1,081

 

 

36



Table of Contents

 

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 need to be made periodically 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 gain. We generally intend to distribute at least 100% of our REIT taxable income to avoid tax on undistributed income. Therefore, 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 credit facility, which replaced our senior secured revolving credit facility on October 10, 2013. In addition, we may fund the purchase price of hotel acquisitions and cost of required capital improvements by assuming existing mortgage debt, issuing securities (including Summit OP partnership units), 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 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 under our senior unsecured 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.

 

37



Table of Contents

 

Outstanding Indebtedness

 

At September 30, 2013, we had $400.3 million in debt secured by mortgages on 77 hotel properties. We also had 15 unencumbered hotel properties, including 13 hotels containing 1,487 guestrooms operating under brands owned by Marriott, Hilton, Hyatt, and IHG that are available to be used as collateral for potential future loans. A summary of our debt at September 30, 2013 follows (dollars in thousands):

 

Lender

 

Interest Rate(1)
Sept 30, 2013

 

Amortization
Period (Years)

 

Maturity Date

 

Collateral

 

Amount of
Debt

 

$150 Million Senior Secured Revolving Credit Facility

 

 

 

 

 

 

 

 

 

Deutsche Bank AG New York Branch

 

n/a

 

n/a

 

May 16, 2015

 

See “$150 Million Senior Secured Revolving Credit Facility”

 

$

 —

 

Term Loans

 

 

 

 

 

 

 

 

 

 

 

ING Life Insurance and Annuity

 

6.10% Fixed

 

20

 

March 1, 2032

 

See “Term Loans”

 

64,786

 

 

 

4.55% Fixed

 

25

 

Aug 1, 2038

 

See “Term Loans”

 

33,939

 

KeyBank National Association

 

4.46% Fixed

 

30

 

Feb 1, 2023

 

Hyatt Place, Chicago (Lombard), IL; Hyatt Place, Denver (Lone Tree), CO; Hyatt Place Denver (Englewood), CO; and Hyatt Place, Dallas (Arlington), TX

 

29,082

 

 

 

4.52% Fixed

 

30

 

April 1, 2023

 

Hyatt House, Denver (Englewood), CO; Hyatt Place, Baltimore (Owings Mills), MD and Hyatt Place Scottsdale, AZ

 

22,509

 

 

 

4.30% Fixed

 

30

 

April 1, 2023

 

Hyatt Place, Orlando (Convention), FL; Hyatt Place, Orlando (Universal), FL; and Hyatt Place, Chicago (Hoffman Estates), IL

 

21,857

 

 

 

4.95% Fixed

 

30

 

Aug 1, 2023

 

Fairfield Inn & Suites and SpringHill Suites, Louisville, KY

 

38,633

 

Empire Financial Services, Inc.

 

6.00% Fixed

 

25

 

Feb 1, 2017

 

Courtyard by Marriott, Atlanta, GA

 

18,461

 

Bank of America Commercial Mortgage

 

6.41% Fixed

 

25

 

Sept 1, 2017

 

Hilton Garden Inn, Smyrna, TN

 

8,436

 

Merrill Lynch Mortgage Lending Inc.

 

6.384% Fixed

 

30

 

Aug 1, 2016

 

Hampton Inn, Smyrna, TN

 

5,273

 

GE Capital Financial Inc.

 

6.03% Fixed

 

25

 

May 1, 2017

 

Courtyard by Marriott, Scottsdale, AZ and SpringHill Suites by Marriott, Scottsdale, AZ

 

14,649

 

Bank of the Ozarks

 

5.75% Fixed

 

25

 

July 10, 2017

 

Hyatt Place, Portland, OR

 

8,655

 

MetaBank

 

4.25% Fixed

 

20

 

Aug 1, 2018

 

Hyatt Place, Atlanta, GA

 

7,408

 

Bank of Cascades

 

4.66% Fixed

 

25

 

Sept 30, 2021

 

Residence Inn by Marriott, Portland, OR

 

12,065

 

Goldman Sachs

 

5.67% Fixed

 

25

 

July 6, 2016

 

SpringHill Suites by Marriott, Bloomington, MN and Hampton Inn & Suites, Bloomington, MN

 

14,164

 

Compass Bank

 

4.57% Fixed

 

20

 

May 17, 2018

 

Courtyard by Marriott, Flagstaff, AZ

 

13,529

 

General Electric Capital Corp.

 

5.46% Fixed

 

25

 

April 1, 2017

 

Hilton Garden Inn, Birmingham (Lakeshore), AL

 

5,399

 

 

 

5.46% Fixed

 

25

 

April 1, 2017

 

Hilton Garden Inn, Birmingham (Liberty Park), AL

 

6,323

 

 

 

4.82% Fixed

 

20

 

April 1, 2018

 

SpringHill Suites by Marriott, Denver, CO (2)

 

7,709

 

 

 

5.03% Fixed

 

25

 

March 1, 2019

 

Double Tree, Baton Rouge, LA (2)

 

10,190

 

 

 

4.10% Fixed

 

25

 

April 1, 2014

 

Country Inn & Suites, San Antonio, TX (2)

 

10,330

 

AIG

 

6.11% Fixed

 

20

 

Jan 1, 2016

 

Residence Inn by Marriott, Salt Lake City, UT

 

13,655

 

Greenwich Capital Financial Products, Inc.

 

6.20% Fixed

 

30

 

Jan 6, 2016

 

Holiday Inn Express & Suites, San Francisco, CA

 

23,203

 

Wells Fargo Bank, National Association

 

5.53% Fixed

 

25

 

Oct 1, 2015

 

Holiday Inn Express & Suites, Minneapolis (Minnetonka), MN

 

3,684

 

 

 

5.57% Fixed

 

25

 

Jan 1, 2016

 

Hilton Garden Inn, Minneapolis (Eden Prairie), MN

 

6,316

 

 

 

 

 

 

 

 

 

 

 

 

 

Total term loans

 

 

 

 

 

 

 

 

 

400,255

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt

 

 

 

 

 

 

 

 

 

$

400,255

 

 


(1)                                     After giving effect to our use of interest rate swaps, where applicable.

(2)                                     These three loans are cross-collateralized and are also secured by the Aloft in Jacksonville FL, the Hyatt Place in Las Colinas, TX, and the Fairfield Inn in Boise, ID.

 

38



Table of Contents

 

$92 Million Senior Secured Interim Loan

 

On May 23, 2013, we closed on a $92 million variable rate senior secured interim loan with KeyBank National Association (KeyBank) and Regions Bank, which matures on November 22, 2013. This loan is secured by a pledge of the equity interest in the subsidiaries that own the Fairfield Inn & Suites and SpringHill Suites in Louisville, KY and the Courtyard and SpringHill Suites in Indianapolis, IN, and is cross-defaulted with our $150 million senior secured revolving credit facility.

 

In the third quarter of 2013, we paid off our $92 million senior secured interim loan using proceeds from a new term loan with KeyBank and proceeds from a common stock offering.  See “Outstanding Indebtedness — Term Loans” and “Equity Transactions” for additional details regarding the KeyBank term loan and the common stock offering, respectively.

 

$150 Million Senior Secured Revolving Credit Facility

 

In January 2013, we removed the AmericInn and Fairfield Inn in Golden, CO from the facility’s borrowing base. In May 2013, we amended our senior secured revolving credit facility to increase the allowed collateral concentration in any given metropolitan statistical area from 20% to 30%. We also added the Courtyard and Springhill Suites in New Orleans, LA to the borrowing base. The addition of these hotel properties increased availability on the senior secured revolving credit facility by $36.7 million.

 

At September 30, 2013, we had no borrowings under our $150 million senior secured revolving credit facility, $0.7 million in standby letters of credit and $149.3 million available to borrow.

 

On October 10, 2013, we replaced our $150 million senior secured revolving credit facility with a $300 million senior unsecured credit facility.  See “Recent Developments — Unsecured Credit Facility” for additional detail regarding the $300 million senior unsecured credit facility.

 

Term Loans

 

At September 30, 2013, we had $400.3 million in term loans outstanding. These term loans are secured primarily by first mortgage liens on hotel properties.

 

Our term loans included borrowings with ING Life Insurance and Annuity (ING). In February 2013, we removed the Hampton Inn in Denver, CO from the security for our original ING loan and replaced it with a $2.4 million stand-by letter of credit issued under our senior secured revolving credit facility. On May 1, 2013, we removed the Holiday Inn Express in Boise, ID from the security for our original ING loan and replaced it with a $1.5 million stand-by letter of credit issued under our senior secured revolving credit facility.

 

On August 1, 2013, we entered into a new $34.0 million term loan with ING with a fixed rate of 4.55%. This loan matures on August 1, 2038 and amortizes over 25 years. ING has the right to call the loan in full on March 1, 2019, 2024, 2029 and 2034. Simultaneously, we amended our existing loan with ING to (i) remove the Fairfield Inn & Suites and the Residence Inn, Germantown, TN; the Hampton Inn, Fort Smith, AR; and the Fairfield Inn, Lewisville, TX from the collateral and (ii) remove $3.9 million in letters of credit from the collateral. We also added the Courtyard by Marriott, Ridgeland, MS; the Hampton Inn & Suites, Ybor, FL; and the Courtyard by Marriott and the Residence Inn, Metairie, LA as collateral to the two loans, such that both ING loans are secured by the same 14 hotel properties and are cross-defaulted. The proceeds from this new borrowing were used to pay down our $150 million senior secured revolving credit facility. At September 30, 2013, the ING loans were secured by 14 hotel properties.

 

On July 22, 2013, we closed on a $38.7 million term loan with KeyBank with a fixed rate of 4.95%. This term loan matures on August 1, 2023, amortizes over 30 years, and is secured by the Fairfield Inn & Suites and SpringHill Suites in Louisville, KY. The proceeds from this new borrowing were used to pay down our $92 million senior secured interim loan.

 

39



Table of Contents

 

On July 26, 2013, we closed on a $7.4 million term loan with MetaBank with a fixed rate of 4.25%. This term loan matures on August 1, 2018, amortizes over 20 years, and is secured by the Hyatt Place in Atlanta, GA. We expect to receive additional proceeds of $1.3 million after the Hyatt Place attains a required performance level post renovation. The proceeds from this new borrowing were used to pay down our $150 million senior secured revolving credit facility.

 

For additional information regarding our term loans, please read our unaudited condensed consolidated financial statements and related notes thereto, appearing elsewhere in this Form 10-Q, and our Annual Report filed on Form 10-K for the year ended December 31, 2012.

 

Equity Transactions

 

On January 14, 2013, we completed an underwritten public offering of 17,250,000 shares of our common stock. Net proceeds were $148.0 million, after the underwriting discount and offering-related expenses. We contributed the net proceeds of this offering to Summit OP in exchange for Common Units. Summit OP used the proceeds for hotel property acquisitions and to pay down our term debt and our senior secured revolving credit facility.

 

On March 20, 2013, we completed an underwritten 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. We contributed the net proceeds of this offering to Summit OP in exchange for Series C Preferred Units. Summit OP used the proceeds to pay down the principal balance of our senior secured revolving credit facility.

 

On September 19, 2013, we completed an underwritten public offering of 17,250,000 shares of common stock. Net proceeds were $152.2 million, after the underwriting discount and offering-related expenses. We contributed the net proceeds of this offering to Summit OP in exchange for Common Units. Summit OP used a portion of the proceeds to reduce the outstanding balances under our $150 million senior secured revolving credit facility and to pay off our $92 million senior secured interim loan. The remaining proceeds will be used for general corporate purposes, including the acquisition of hotel properties.

 

Capital Expenditures

 

In the first nine months of 2013, we spent $28.5 million on renovations, including $13.1 million on hotel properties that we owned prior to 2012 and $15.4 million on hotel properties acquired since the beginning of 2012. We currently have renovations underway at six of our hotel properties. We anticipate spending a total of $15.0 million to $19.0 million on hotel property renovations in the remainder of 2013. We expect to fund these renovations with cash provided by operations, working capital, borrowings under our senior unsecured credit facility, and other potential sources of capital, to the extent available to us.

 

Off-Balance Sheet Arrangements

 

At September 30, 2013, we had $3.4 million in outstanding standby letters of credit related to credit enhancements on two term loans and performance bonds related to our workers’ compensation insurance and other operational matters.

 

40


 


Table of Contents

 

Contractual Obligations

 

The timing of required payments related to our long-term debt and other contractual obligations at September 30, 2013 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)

 

$

546,761

 

$

40,413

 

$

118,467

 

$

119,471

 

$

268,410

 

Operating lease obligations (2)

 

33,988

 

585

 

1,215

 

1,158

 

31,030

 

Purchase obligations (3)

 

13,807

 

13,407

 

400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

594,556

 

$

54,405

 

$

120,082

 

$

120,629

 

$

299,440

 

 


(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 September 30, 2013, 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, and an obligation to purchase the remaining 10% of a hotel property in which we currently have a 90% interest.

 

In addition to the contractual obligations above, at September 30, 2013 we had entered into purchase agreements to acquire four hotel properties for a combined purchase price of $96.3 million, including the assumption of debt of $30.0 million. Two of these hotel properties with a combined purchase price of $30.9 million were acquired in October of 2013 and are discussed in “Recent Developments — Acquisitions.” The remaining two pending acquisitions are subject to customary closing conditions, including lender consent. Therefore, we cannot provide assurance that we will acquire these hotel properties.

 

We are also obligated to purchase a property under development in downtown Minneapolis, MN, subject to certain conditions including the successful conversion of the property, estimated to be completed in the fourth quarter of 2013. At September 30, 2013, we have funded a $20.3 million first mortgage loan on this hotel property. The loan represents a portion of the total acquisition and renovation costs expected to be incurred to convert the property to a Hyatt Place hotel. The purchase price is estimated to be $31.0 million, which will include forgiveness of the loan as partial purchase price consideration. We cannot provide assurance that we will acquire this hotel property.

 

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.

 

Critical Accounting Policies

 

There have been no significant changes in our critical accounting policies or estimates from those disclosed in our 2012 Annual Report on Form 10-K.

 

41



Table of Contents

 

Reclassification of Certain Prior Period Financial Information

 

We reclassified $0.7 million and $2.0 million of food and beverage costs previously included as a reduction of other hotel operations revenue to other direct expenses in the third quarter of 2012 and the first nine months of 2012, respectively, to conform to our 2013 presentation.  This reclassification had no effect on previously reported results of operations or equity.

 

Recent Developments

 

Unsecured Credit Facility

 

On October 10, 2013, Summit OP, as borrower, Summit REIT, as parent guarantor, and each party executing the credit facility documentation as a subsidiary guarantor, entered into a $300 million senior unsecured credit facility with Deutsche Bank AG New York Branch, as administrative agent, Deutsche Bank Securities Inc., as sole lead arranger, and a syndicate of lenders including Deutsche Bank AG New York Branch, Bank of America, N.A., Royal Bank of Canada, Key Bank National Association, Regions Bank, Fifth Third Bank, Raymond James Bank, N.A., and U.S. Bank National Association.  All existing and future subsidiaries that own or lease an “unencumbered asset” will be required to guaranty the facility.

 

The unsecured credit facility is comprised of a $225 million revolving credit facility (the “$225 Million Revolver”) and a $75 million term loan (the “$75 Million Term Loan”) and replaces our $150 million senior secured revolving credit facility. The credit facility has an accordion feature which will allow us to increase the total commitments by an aggregate of $100 million on the $225 Million Revolver and $75 Million Term Loan 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 the $300 million credit facility are limited to the least of (1) the aggregate commitments of all of the lenders, (2) 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 (3) 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 of the respective facility.  We have the right to repay 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 loan documents), or (ii) the applicable base rate, which is the greatest of the administrative agent’s prime rate, the federal funds rate plus 0.50%, and 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 will be required to pay a fee on the unused portion of the unsecured 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. In addition, we are required to comply with a series of financial and other covenants in order to borrow under the $300 million credit facility. The material financial covenants include a maximum leverage ratio, minimum consolidate tangible net worth, maximum dividend payout ratio, minimum consolidated fixed charge coverage ratio, maximum ratio of secured indebtedness to total asset value, 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 investments and limitations on liens and maintenance of properties. The credit facility also contains customary events of default, including, among others, the failure to make payments when due under any of the credit facility documentation, breach of any covenant continuing beyond any cure period and bankruptcy or insolvency.

 

42



Table of Contents

 

Unencumbered Assets. The $300 million credit facility is unsecured.  However, borrowings under the credit facility are limited by the value of hotel assets that qualify as unencumbered assets.  As of November 1, 2013, 32 of our hotel properties qualified as, and are deemed to be, unencumbered assets.  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, hotels may be added to or removed from the unencumbered asset pool at any time so long as there is a minimum of 20 hotels in the unencumbered asset pool, the unencumbered assets meet certain diversity requirements (such as limits on concentrations in any particular market), the then-current borrowings on the credit facility do not exceed the maximum available under the facility given the availability limitations described above.  Further, to be eligible as an unencumbered asset, the anticipated 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; not be subject to material defects, such as liens, title defects, environmental contamination and other standard lender criteria.

 

We transferred to the $300 million unsecured credit facility the outstanding principal balance of $8 million on the existing $150 million senior secured revolving credit facility. The $150 million senior secured revolving credit facility was paid off in full and terminated upon entry into the $300 million unsecured credit facility described above.

 

We expect to fully draw the $75 Million Term Loan in the fourth quarter of 2013. We have entered into an interest rate swap with a notional value of $75 million that will become effective on January 2, 2014 and matures on October 1, 2018. This interest rate swap was designated a cash flow hedge and will effectively convert the $75 Million Term Loan to a fixed rate of 4.145%.

 

At November 1, 2013, the maximum amount of borrowing permitted under the senior unsecured credit facility was $248.7 million. We had $13.0 million in borrowings under this credit facility, $0.7 million in standby letters of credit and $235.0 million available to borrow.

 

Other Debt

 

On October 31, 2013, we paid off a 4.10% interest rate loan with General Electric Capital Corp.  This loan had a principal balance of $10.3 million and a maturity date of April 1, 2014.  Costs associated with the early payoff were less than $0.1 million.

 

Acquisitions

 

On October 1, 2013, we purchased a 115-guestroom Hampton Inn & Suites in Ventura (Camarillo), CA for $15.7 million. On October 8, 2013, we purchased a 108-guestroom Hampton Inn & Suites in San Diego (Poway), CA for $15.2 million.  The acquisitions were funded by proceeds from our common stock offering completed on September 19, 2013, and by an advance on our senior secured revolving credit facility.

 

Dispositions

 

On October 30, 2013 we sold the 57-guestroom Fairfield Inn in Emporia, KS for $1.7 million. On November 1, 2013, we sold the 78-guestroom SpringHill Suites in Little Rock, AR for $4.5 million and recognized a gain on the sale of $1.0 million. Both of these properties were classified as held for sale at September 30, 2013.  We used the proceeds from these sales to pay down the balance on our senior unsecured credit facility.

 

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.

 

43



Table of Contents

 

On September 5, 2013, we entered into an interest rate swap with a notional value of $75.0 million that will become effective on January 2, 2014 and matures on October 1, 2018. This interest rate swap was designated a cash flow hedge and will effectively convert a $75.0 million variable rate term loan that we expect to fund in the fourth quarter of 2013 into a fixed rate loan.

 

At September 30, 2013, we were party to five interest rate swap agreements, with a total notional amount of $114.9 million, where we receive variable rate payments in exchange for making fixed rate payments. These agreements are accounted for as cash flow hedges. Two of these agreements are in a liability position and have a termination value of $1.9 million.

 

At September 30, 2013, after giving effect to our interest rate swap agreements, $398.3 million, or 99.5%, of our debt had fixed interest rates and $2.0 million, or 0.5%, had variable interest rates. Assuming no increase in the level of our variable rate debt, if interest rates increase by 1.0%, our cash flow would decrease by less than $0.1 million per year.

 

As our fixed rate debts mature, we 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 September 30, 2013, $19.7 million of our long-term debt will amortize or mature during the next 12 months, of which $19.6 million has fixed interest rates and $0.1 million has variable interest rates.

 

Item 4.                     Controls and Procedures.

 

Controls and Procedures—Summit REIT

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of Summit REIT’s management, including its Chief Executive Officer and Chief Financial Officer, Summit REIT has evaluated the effectiveness of the design and operation of its 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, Summit REIT’s Chief Executive Officer and 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 Summit REIT’s management to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in Summit REIT’s internal control over financial reporting that occurred during the third quarter of 2013 that have materially affected, or are reasonably likely to materially affect, Summit REIT’s internal control over financial reporting.

 

Controls and Procedures—Summit OP

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of Summit OP’s management, including the Chief Executive Officer and Chief Financial Officer of the sole member of Summit OP’s general partner, Summit OP has evaluated the effectiveness of the design and operation of its 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, the Chief Executive Officer and Chief Financial Officer of the sole member of its general partner 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 Summit OP’s management, including the Chief Executive Officer and Chief Financial Officer of the sole member of Summit OP’s general partner, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in Summit OP’s internal control over financial reporting that occurred during the third quarter of 2013 that have materially affected, or are reasonably likely to materially affect, Summit OP’s internal control over financial reporting.

 

44


 


Table of Contents

 

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.

 

In addition to the risk factors disclosed in the “Risk Factors” section of our combined Annual Report on Form 10-K for the year ended December 31, 2012, we believe we are subject to the following risk:

 

A delay in approving a budget and/or continuing appropriation legislation to fund the operations of the federal government and the failure to raise the borrowing limit for the federal government could affect travel directly and indirectly and may thereby negatively impact our revenues and cash available for distributions.

 

The delay in approving a budget and continuing appropriation legislation to fund the operations of the federal government caused many federal agencies to cease or curtail some activities during the third quarter of 2013.  In addition, in April 2013, the Federal Aviation Administration announced the implementation of furloughs of air traffic controllers, resulting in flight delays throughout the United States until the U.S. Congress passed a bill suspending such furloughs. There can be no assurance that future sequestration obligations under the Budget Control Act of 2011 by the Federal Aviation Administration or other agencies of the federal government will not occur in future periods resulting in difficulties and discouraging travel.  The reduction in income from both businesses and federal government employees and the possibility of another federal government impasse may adversely affect consumer confidence or may discourage both business and leisure travel, resulting in the deferral or cancellation of travel and a negative effect on our revenues in the fourth quarter of 2013 and in subsequent quarters.  Such impacts could have a material adverse impact on our consolidated financial statements.

 

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.

 

None.

 

45



Table of Contents

 

Item 6.                                                         Exhibits.

 

The following exhibits are filed as part of this report:

 

Exhibit
Number

 

Description of Exhibit

10.1

 

$300,000,000 Credit Agreement dated October 10, 2013 among Summit Hotel OP, LP, Summit Hotel Properties, Inc., the subsidiary guarantors party thereto, Deutsche Bank AG New York Branch, Bank of America, N.A., Royal Bank of Canada, Key Bank National Association, Regions Bank, Fifth Third Bank, Raymond James Bank, N.A., and U.S. Bank National Association (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on October 14, 2013)

10.2

 

First Modification of Consolidated, Amended and Restated Loan Agreement among Summit Hotel OP, LP, as borrower, and ING Life Insurance and Annuity Company, as lender, dated August 1, 2013 (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q filed by Summit Hotel Properties, Inc. on August 6, 2013)

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 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.

31.3†

 

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

31.4†

 

Certification of Chief Financial Officer Summit Hotel OP, LP 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 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.

32.3†

 

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

32.4†

 

Certification of Chief Financial Officer Summit Hotel OP, LP 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 (1)

101.SCH

 

XBRL Taxonomy Extension Schema Document(1)

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document(1)

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document(1)

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document(1)

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document(1)

 


† Filed herewith.

(1)                                 Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

46



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: November 5, 2013

 

By:

/s/ Stuart J. Becker

 

 

Stuart J. Becker

 

 

Chief Financial Officer

 

 

 

 

SUMMIT HOTEL OP, LP (registrant)

 

 

 

 

By:

Summit Hotel GP, LLC, its general partner

 

 

 

 

By:

Summit Hotel Properties, Inc., its sole member

 

 

 

Date: November 5, 2013

 

 

By:

/s/ Stuart J. Becker

 

 

 

Stuart J. Becker

 

 

 

Chief Financial Officer

 

47



Table of Contents

 

EXHIBIT INDEX

 

Exhibit
Number

 

Description of Exhibit

 

 

 

10.1

 

$300,000,000 Credit Agreement dated October 10, 2013 among Summit Hotel OP, LP, Summit Hotel Properties, Inc., the subsidiary guarantors party thereto, Deutsche Bank AG New York Branch, Bank of America, N.A., Royal Bank of Canada, Key Bank National Association, Regions Bank, Fifth Third Bank, Raymond James Bank, N.A., and U.S. Bank National Association (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on October 14, 2013)

10.2

 

First Modification of Consolidated, Amended and Restated Loan Agreement among Summit Hotel OP, LP, as borrower, and ING Life Insurance and Annuity Company, as lender, dated August 1, 2013 (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q filed by Summit Hotel Properties, Inc. on August 6, 2013)

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 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.

31.3†

 

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

31.4†

 

Certification of Chief Financial Officer Summit Hotel OP, LP 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 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.

32.3†

 

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

32.4†

 

Certification of Chief Financial Officer Summit Hotel OP, LP 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 (1)

101.SCH

 

XBRL Taxonomy Extension Schema Document(1)

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document(1)

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document(1)

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document(1)

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document(1)

 


† Filed herewith.

(1)                          Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

48