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 March 31, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35074
SUMMIT HOTEL PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction
27-2962512
of incorporation or organization)
(I.R.S. Employer Identification No.)
12600 Hill Country Boulevard, Suite R-100
Austin, TX 78738
(Address of principal executive offices, including zip code)
(512) 538-2300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of May 9, 2014, the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 85,555,856.
TABLE OF CONTENTS
Page
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
1
Consolidated Balance Sheets — March 31, 2014 (unaudited) and December 31, 2013
Consolidated Statements of Operations (unaudited) — Three months ended March 31, 2014 and 2013
2
Consolidated Statements of Comprehensive Income (Loss) (unaudited) - Three months ended March 31, 2014 and 2013
3
Consolidated Statements of Changes in Equity (unaudited) — Three months ended March 31, 2014 and 2013
4
Consolidated Statements of Cash Flows (unaudited) — Three months ended March 31, 2014 and 2013
5
Notes to the Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
34
Item 4.
Controls and Procedures
PART II — OTHER INFORMATION
Legal Proceedings
35
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
36
i
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
MARCH 31, 2014 (UNAUDITED) AND DECEMBER 31, 2013
March 31,
December 31,
2014
2013
ASSETS
Investment in hotel properties, net
$
1,280,255
1,149,967
Investment in hotel properties under development
90
—
Land held for development
13,748
Assets held for sale
9,723
12,224
Cash and cash equivalents
36,551
46,706
Restricted cash
52,181
38,498
Trade receivables
12,611
7,231
Prepaid expenses and other
6,305
8,876
Derivative financial instruments
208
253
Deferred charges, net
10,585
10,270
Deferred tax asset
54
49
Other assets
6,581
6,654
TOTAL ASSETS
1,428,892
1,294,476
LIABILITIES AND EQUITY
LIABILITIES
Debt
567,396
435,589
Accounts payable
10,277
7,583
Accrued expenses
33,528
27,154
1,796
1,772
TOTAL LIABILITIES
612,997
472,098
COMMITMENTS AND CONTINGENCIES (Note 7)
EQUITY
Preferred stock, $.01 par value per share, 100,000,000 shares authorized:
9.25% Series A - 2,000,000 shares issued and outstanding at March 31, 2014 and December 31, 2013 (liquidation preference of $50,398 at March 31, 2014 and December 31, 2013)
20
7.875% Series B - 3,000,000 shares issued and outstanding at March 31, 2014 and December 31, 2013 (liquidation preference of $75,324 at March 31, 2014 and December 31, 2013)
30
7.125% Series C - 3,400,000 shares issued and outstanding at March 31, 2014 and December 31, 2013 (liquidation preference of $85,522 at March 31, 2014 and December 31, 2013)
Common stock, $.01 par value per share, 450,000,000 shares authorized, 85,528,563 and 85,402,408 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively
855
854
Additional paid-in capital
883,345
882,858
Accumulated other comprehensive loss
(1,446
)
(1,379
Accumulated deficit and distributions
(82,888
(72,577
Total stockholders’ equity
799,950
809,840
Noncontrolling interests in operating partnership
8,252
4,722
Noncontrolling interests in joint venture
7,693
7,816
TOTAL EQUITY
815,895
822,378
TOTAL LIABILITIES AND EQUITY
See Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (UNAUDITED)
For the Three Months Ended March 31,
REVENUES
Room revenue
84,552
56,641
Other hotel operations revenue
4,992
3,082
Total Revenues
89,544
59,723
EXPENSES
Hotel operating expenses:
Rooms
23,692
16,510
Other direct
12,020
7,780
Other indirect
23,859
15,303
Other
348
167
Total hotel operating expenses
59,919
39,760
Depreciation and amortization
15,430
10,651
Corporate general and administrative:
Salaries and other compensation
2,159
2,421
2,046
656
Hotel property acquisition costs
692
654
Total Expenses
80,246
54,142
INCOME FROM OPERATIONS
9,298
5,581
OTHER INCOME (EXPENSE)
Interest income
50
17
Other income
40
160
Interest expense
(6,360
(4,050
Gain (loss) on disposal of assets
(3
Total Other Expense, net
(6,273
(3,867
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
3,025
1,714
INCOME TAX EXPENSE
(78
(188
INCOME FROM CONTINUING OPERATIONS
2,947
1,526
INCOME FROM DISCONTINUED OPERATIONS
378
357
NET INCOME
3,325
1,883
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
Operating partnership
(10
(28
Joint venture
(123
(37
NET INCOME ATTRIBUTABLE TO SUMMIT HOTEL PROPERTIES, INC.
3,458
1,948
PREFERRED DIVIDENDS
(4,147
(2,452
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
(689
(504
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic
85,097
62,684
Diluted
85,527
62,950
LOSS PER SHARE
Basic and diluted net loss per share from continuing operations
(0.01
Basic and diluted net income (loss) per share from discontinued operations
Basic and diluted net loss per share
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands)
Other comprehensive income (loss), net of tax:
Changes in unrealized loss on derivatives
(68
107
Total other comprehensive income (loss)
COMPREHENSIVE INCOME
3,257
1,990
COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(11
(23
COMPREHENSIVE INCOME ATTRIBUTABLE TO SUMMIT HOTEL PROPERTIES, INC.
3,391
2,050
COMPREHENSIVE LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
(756
(402
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands, except share amounts)
Accumulated
Shares of
Total
Noncontrolling Interests
Preferred
Common
Additional
Comprehensive
Deficit and
Stockholders’
Operating
Stock
Paid-In Capital
Income (Loss)
Distributions
Equity
Partnership
Joint Venture
BALANCES, DECEMBER 31, 2013
8,400,000
84
85,402,408
Common stock redemption of common units
126,155
26
27
(27
Common units issued for acquisition
3,685
Dividends paid
(13,769
(13,892
Equity-based compensation
461
467
Other comprehensive loss
(67
(1
Net income (loss)
BALANCES, MARCH 31, 2014
85,528,563
BALANCES, DECEMBER 31, 2012
5,000,000
46,159,652
462
468,820
(528
(31,985
436,819
36,718
473,537
Net proceeds from sale of common stock
17,250,000
172
147,981
148,153
Net proceeds from sale of preferred stock
3,400,000
81,917
81,951
1,974,669
6,547
6,567
(6,567
Contribution by noncontrolling interests in joint venture
7,500
(9,879
(366
(10,245
293,704
418
421
Other comprehensive income
102
BALANCES, MARCH 31, 2013
65,678,025
657
705,683
(426
(39,916
666,082
29,762
7,463
703,307
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash from operating activities:
15,434
11,490
Amortization of prepaid lease
12
Loss on impairment of assets
1,500
(5
104
Gain on disposal of assets
(61
(1,640
Changes in operating assets and liabilities:
Restricted cash — operating
(1,689
871
(5,381
(7,199
2,530
2,423
Accounts payable and accrued expenses
7,667
1,220
NET CASH PROVIDED BY OPERATING ACTIVITIES
22,299
11,085
INVESTING ACTIVITIES
Acquisitions of hotel properties
(89,985
(210,335
(77
Acquisition of land held for development
(2,800
Improvements and additions to hotel properties
(19,037
(8,520
Purchases of office furniture and equipment
(224
Proceeds from asset dispositions, net of closing costs
2,681
9,198
Restricted cash — FF&E reserve
(452
(14,030
NET CASH USED IN INVESTING ACTIVITIES
(106,798
(226,788
FINANCING ACTIVITIES
Proceeds from issuance of debt
90,998
74,000
Principal payments on debt
(2,364
(77,649
Financing fees on debt
(398
(1,196
Proceeds from equity offerings, net of offering costs
237,603
Dividends paid and distributions to members
NET CASH PROVIDED BY FINANCING ACTIVITIES
74,344
222,513
NET CHANGE IN CASH AND CASH EQUIVALENTS
(10,155
6,810
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD
13,980
END OF PERIOD
20,790
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash payments for interest
6,028
3,925
Capitalized interest
45
77
Cash payments for income taxes, net of refunds
135
81
Mortgage debt from acquisitions of hotel properties
43,172
23,423
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
Summit Hotel Properties, Inc. (the “Company”) is a self-managed hotel investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. On February 14, 2011, the Company closed on its initial public offering (“IPO”) of 26,000,000 shares of common stock and a concurrent private placement of 1,274,000 shares of common stock. Effective February 14, 2011, the Operating Partnership and Summit Hotel Properties, LLC (the “Predecessor”) completed the merger of the Predecessor with and into the Operating Partnership (the “Merger”). Unless the context otherwise requires, “we,” “us” and “our” refer to the Company and its subsidiaries.
Summit Hotel OP, LP, the Operating Partnership subsidiary of the Company, filed a Form 15 on December 12, 2013 to voluntarily suspend its duty to file periodic and other reports with the Securities and Exchange Commission (the “SEC”) and to voluntarily deregister its common units of limited partnership interest under the Securities and Exchange Act of 1934 (the “Exchange Act”). As a result of filing the Form 15 with the SEC, the Operating Partnership is no longer required to file annual, quarterly or periodic reports with the SEC. The filing of the Form 15 by the Operating Partnership did not impact the registration of the Company’s common stock under the Exchange Act or the Company’s obligations as a reporting issuer under the Exchange Act.
At March 31, 2014, our portfolio consists of 90 upscale and upper midscale hotels with a total of 11,353 guestrooms located in 22 states. The hotels are leased to subsidiaries (“TRS Lessees”) of our taxable REIT subsidiary (“TRS”). 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 accompanying consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
We prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Exchange Act. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the first quarter of 2014 may not be indicative of the results that may be expected for the full year 2014. For further information, please read the financial statements included in our Form 10-K for the year ended December 31, 2013.
Segment Disclosure
Accounting Standards Codification (“ASC”), ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we have one reportable segment, with activities related to investing in real estate. Our investments in real estate are geographically diversified and the chief operating decision makers evaluate operating performance on an individual
asset level. As each of our assets has similar economic characteristics, the assets have been aggregated into one reportable segment.
Assets Held for Sale and Discontinued Operations
We classify assets as held for sale in the period in which certain criteria are met, including when the sale of the asset within one year is probable. Assets held for sale are no longer depreciated and are carried at the lower of carrying amount or fair value, less selling costs.
We present the results of operations of hotel properties that have been sold or otherwise qualify as assets held for sale in discontinued operations if the operations and cash flows of the hotel properties have been or will be eliminated from our ongoing operations.
We periodically review our hotel properties and our land held for development based on established criteria such as age, type of franchise, adverse economic and competitive conditions, and strategic fit, to identify properties which we believe are either non-strategic or no longer complement our business.
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.
Income Taxes
We are taxed as a REIT under certain provisions of the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our shareholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, which does not necessarily equal net income as calculated in accordance with GAAP. As a REIT, we generally will not be subject to federal income tax (other than taxes paid by our TRS) to the extent we currently distribute 100% of our REIT taxable income to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will be unable to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT, unless we satisfy certain relief provisions.
We account for federal and state income taxes of our TRS using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between carrying amounts of existing assets and liabilities based on generally accepted accounting principles and respective carrying amounts for tax purposes, and operating losses and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of the change in tax rates. However, deferred tax assets are recognized only to the extent that it is more likely than not they will be realized based on consideration of available evidence, including future reversals of taxable temporary differences, future projected taxable income and tax planning strategies.
7
Fair Value Measurement
Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 Observable inputs such as quoted prices in active markets.
Level 2 Directly or indirectly observable inputs, other than quoted prices in active markets.
Level 3 Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:
Market approach
Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Cost approach
Amount required to replace the service capacity of an asset (replacement cost).
Income approach
Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models).
Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
We elected not to use the fair value option for cash and cash equivalents, restricted cash, trade receivables, prepaid expenses and other, debt, accounts payable, and accrued expenses. With the exception of our fixed-rate debt, the carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates.
New Accounting Standards
In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The ASU changed the criteria for reporting discontinued operations while enhancing related disclosures. Criteria for discontinued operations will now include only disposals that represent a strategic shift in operations with a major effect on operations and financial results. The ASU is to be applied on a prospective basis and would be effective for us beginning January 1, 2015; however, we have elected early adoption, which is permitted for disposals, and classifications as held for sale, which have not been reported previously. While we have elected early adoption for our consolidated financial statements and footnote disclosures, the sale of the AmericInn, Aspen Hotel & Suites and Hampton Inn in Fort Smith, AR are included in discontinued operations as these hotels were classified as held for sale in our consolidated financial statements for the year ended December 31, 2013. The AmericInn and Aspen Hotel & Suites were sold in January 2014.
8
NOTE 3 - HOTEL PROPERTY ACQUISITIONS
Hotel property acquisitions in the three months ended March 31, 2014 and 2013 include (in thousands):
Date Acquired
Franchise/Brand
Location
Purchase Price
Debt Assumed
First Quarter 2014
January 9
Hilton Garden Inn
Houston, TX
37,500
17,846
January 10
Hampton Inn
Santa Barbara (Goleta), CA
27,900
12,037
January 24
Four Points by Sheraton
South San Francisco, CA
21,250
March 14
DoubleTree by Hilton
San Francisco, CA
39,060
13,289
Total Three Months Ended March 31, 2014
4 hotel properties
125,710
First Quarter 2013
January 22
Hyatt Place
Chicago (Hoffman Estates), IL
9,230
Orlando (Convention), FL
12,252
Orlando (Universal), FL
11,843
February 11
Holiday Inn Express & Suites (1)
60,500
March 11
SpringHill Suites by Marriott
New Orleans, LA
33,095
Courtyard by Marriott
New Orleans (Convention), LA
30,827
New Orleans (French Quarter), LA
25,683
New Orleans (Metairie), LA
23,539
Residence Inn by Marriott
19,890
Total Three Months Ended March 31, 2013
9 hotel properties
226,859
(1) This hotel property was acquired by a joint venture in which we own an 80% controlling interest.
The allocation of the aggregate purchase prices to the fair value of assets and liabilities acquired for the above acquisitions follows (in thousands):
Land
8,600
33,476
Hotel buildings and improvements
114,713
187,754
Furniture, fixtures and equipment
3,389
5,629
11,542
7,443
Total assets acquired
138,244
234,302
Less debt assumed
(43,172
(23,423
Less other liabilities
(1,402
(545
Net assets acquired
93,670
210,334
The allocations for certain of the acquisitions for the three months ended March 31, 2014 are based on preliminary information and are, therefore, subject to change.
9
Total revenues and net income for hotel properties acquired for the three months ended March 31, 2014 and 2013, which are included in our consolidated statements of operations follows (in thousands):
2014 Acquisitions
2013 Acquisitions
Revenues
4,898
15,741
6,779
233
2,076
1,136
The results of operations of acquired hotel properties are included in the consolidated statements of operations beginning on their respective acquisition dates. The following unaudited condensed pro forma financial information presents the results of operations as if all acquisitions in 2013 and first quarter 2014 had taken place on January 1, 2013. The unaudited condensed pro forma information excludes discontinued operations, is for comparative purposes only, and is not necessarily indicative of what actual results of operations would have been had the hotel property acquisitions taken place on January 1, 2013. This information does not purport to represent results of operations for future periods.
The unaudited condensed pro forma financial information for the three months ended March 31, 2014 and 2013 follows (in thousands, except per share amounts):
91,659
85,342
2,990
3,794
Net income (loss) per share attributable to common stockholders - basic and diluted
0.02
NOTE 4 - INVESTMENT IN HOTEL PROPERTIES
Investment in hotel properties includes (in thousands):
163,359
154,831
1,112,152
993,372
Construction in progress
33,188
24,242
151,955
142,976
1,460,654
1,315,421
Less accumulated depreciation
(180,399
(165,454
10
NOTE 5 - ASSETS HELD FOR SALE
Assets held for sale and related debt include (in thousands):
960
1,183
Hotel building and improvements
8,369
10,290
394
751
At March 31, 2014, assets held for sale include a land parcel in Spokane, WA, which is under contract to sell and the Hampton Inn in Fort Smith, AR.
At December 31, 2013, assets held for sale include the AmericInn Hotel & Suites and the Aspen Hotel & Suites in Fort Smith, AR which were sold on January 17, 2014, and a land parcel in Spokane, WA, which is under contract to sell and the Hampton Inn in Fort Smith, AR.
NOTE 6 - DEBT
Our debt is comprised of a senior unsecured revolving credit facility and mortgage loans secured by various hotel properties. The weighted average interest rate, after giving effect to our interest rate derivatives, for all borrowings was 4.61% at March 31, 2014 and 5.03% at December 31, 2013, respectively. Our total fixed-rate and variable-rate debt, after giving effect to our interest rate derivatives, follows (in thousands):
Fixed-rate debt
474,428
358,590
Variable-rate debt
92,968
76,999
Information about the fair value of our fixed-rate debt that is not recorded at fair value follows (in thousands):
March 31, 2014
December 31, 2013
Carrying Value
Fair Value
Valuation Technique
Fixed-rate debt not recorded at fair value
370,737
359,006
329,544
319,429
Level 2 - Market approach
At March 31, 2014 and December 31, 2013, we had variable rate debt of $194.7 million and $104.0 million, respectively, which had effectively been converted to fixed interest rates through derivative financial instruments which are carried at fair value. Differences between carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value.
11
Senior Unsecured Credit Facility
At March 31, 2014, we have a $300.0 million senior unsecured credit facility. Deutsche Bank AG New York Branch (“Deutsche Bank”) is the administrative agent and Deutsche Bank Securities Inc. is the sole lead arranger. The syndication of lenders includes Deutsche Bank; Bank of America, N.A.; Royal Bank of Canada; Key Bank; Regions Bank; Fifth Third Bank; Raymond James Bank, N.A.; and U.S. Bank National Association. Certain of our existing and future subsidiaries that own or lease an “unencumbered asset” will be required to guaranty this credit facility.
The senior unsecured credit facility is comprised of a $225.0 million revolving credit facility (the “$225 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”). This credit facility has an accordion feature which will allow us to increase the commitments by an aggregate of $100.0 million on the $225 Million Revolver and the $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.
At March 31, 2014, the maximum amount of borrowing permitted under the senior unsecured credit facility was $300.0 million, of which, we had $166.0 million borrowed, $13.9 million in standby letters of credit, and $120.1 million available to borrow.
Term Loans
At March 31, 2014, we had $476.4 million in term loans outstanding. These term loans are secured primarily by first mortgage liens on hotel properties.
On January 9, 2014, as part of our acquisition of the 182-guestroom Hilton Garden Inn in Houston, TX, we assumed a $17.9 million mortgage loan with a fixed interest rate of 6.22%, an amortization period of 30 years, and a maturity date of November 1, 2016.
On January 10, 2014, as part of our acquisition of the 98-guestroom Hampton Inn in Santa Barbara (Goleta), CA, we assumed a $12.0 million mortgage loan with a fixed interest rate of 6.133%, an amortization period of 25 years, and a maturity date of November 11, 2021.
On March 14, 2014, as part of our acquisition of the 210-guestroom DoubleTree by Hilton in San Francisco, CA, we assumed a $13.3 million mortgage loan with a fixed interest rate of 5.98%, an original amortization period of 30 years, and a maturity date of March 8, 2016.
On March 28, 2014, we amended our loan with GE Capital Financial cross-collateralized by the Courtyard by Marriott and the SpringHill Suites by Marriott, both located in Scottsdale, AZ. The loan was amended to bear interest at a fixed rate of 5.39% and the maturity date was extended to April 1, 2020.
On March 28, 2014, we amended two loans with General Electric Capital Corp. cross-collateralized by the Hilton Garden Inn (Lakeshore) and the Hilton Garden Inn (Liberty Park), both located in Birmingham, AL. Both loans were amended to bear interest at a fixed rate of 5.39% and the maturity dates were extended to April 1, 2020.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Pending Hotel Property Acquisitions
At March 31, 2014, we had a purchase agreement for $37.7 million that has not been closed as of the issuance of these financial statements. This acquisition is contingent upon customary closing conditions; therefore, there is no assurance that it will be completed.
Litigation
We are involved from time to time in litigation arising in the ordinary course of business; however, there are currently no actions pending against us that we believe would have a material impact on our financial condition or results of operations.
NOTE 8 - EQUITY
Common Stock
On January 3, 2013, we issued 1,974,669 shares of common stock to limited partners of the Operating Partnership upon redemption of their Common Units.
On January 14, 2013, we completed an underwritten public offering of 17,250,000 shares of common stock. Net proceeds were $148.1 million, after the underwriting discount and offering-related expenses of $7.2 million.
On March 1, 2013, we issued 292,090 shares of common stock to our executive officers pursuant to our 2011 Equity Incentive Plan. On March 22, 2013, we issued 1,614 shares of common stock to one of our independent directors in lieu of cash for director fees.
Preferred Stock
On March 20, 2013, we completed a public offering of 3,400,000 shares of 7.125% Series C Cumulative Redeemable Preferred Stock for net proceeds of $81.7 million, after the underwriting discount and offering-related expenses of $3.3 million.
Our Series A, Series B and Series C preferred stock have a $25 per share liquidation preference and pay dividends at an annual rate of $2.3125 per share of Series A, $1.96875 per share of Series B, and $1.78125 per share of Series C preferred stock. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year.
Noncontrolling Interests in Operating Partnership
Pursuant to the limited partnership agreement, beginning on February 14, 2012, the unaffiliated third parties who hold Common Units in our Operating Partnership have the right to cause us to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of common stock at the time of redemption, or at our option, shares of our common stock on a one-for-one basis. The number of shares of our common stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations.
On January 3, 2013, we redeemed 1,974,669 Common Units for 1,974,669 shares of our common stock.
On January 2, 2014, we redeemed 126,155 Common Units for 126,155 shares of our common stock.
On January 10, 2014, as part of our acquisition of the Hampton Inn in Santa Barbara (Goleta), CA, we issued 412,174 Common Units in our Operating Partnership valued at $3.7 million.
At March 31, 2014 and December 31, 2013, unaffiliated third parties owned 1,097,444 and 811,425, respectively, of Common Units of the Operating Partnership, representing an approximate 1% limited partnership interest in the Operating Partnership.
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.
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
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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 9 - EQUITY-BASED COMPENSATION
Our equity-based awards were issued under our 2011 Equity Incentive Plan which provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based award or incentive awards up to an aggregate of 2,318,290 shares of common stock. Stock options granted may be either incentive stock options or nonqualified stock options. Vesting terms may vary with each grant, and stock option terms are generally five to ten years. We have outstanding equity-based awards in the form of stock options and restricted stock awards. All of our existing equity-based awards are classified as equity awards.
Stock Options
Stock option activity for the three months ended March 31, 2014 follows:
Number of Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Terms
Aggregate Intrinsic Value (Current Value Less Exercise Price)
(Per share)
(In years)
(in thousands)
Outstanding, December 31, 2013
893,000
9.75
7.2
Granted
Exercised
Forfeited
Outstanding, March 31, 2014
6.9
Exercisable, March 31, 2014
535,800
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, and are subject to the other conditions described in our 2011 Equity Incentive Plan. The holders of these awards have the right to vote the related shares of common stock and receive all dividends declared and paid whether or not vested.
The fair value of time-based restricted stock awards granted is calculated based on the market value on the date of grant.
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Time-based restricted stock activity for the three months ended March 31, 2014 follows:
Number of Shares
Weighted Average Grant Date Fair Value
Aggregate Current Value
(In thousands)
Non-vested, December 31, 2013
161,587
9.10
1,454
Vested
26,630
9.78
Non-vested, March 31, 2014
134,957
1,252
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, and are subject to the other conditions described in our 2011 Equity Incentive Plan. The holders of these awards have the right to vote the related shares of common stock and any dividends declared will be accumulated and will be subject to the same vesting conditions as the awards.
Our performance-based restricted stock awards are market-based awards and are accounted for based on the fair value of our common stock on the grant date. These awards vest based on a performance measurement that requires the Company’s total shareholder return (“TSR”) to exceed the TSR for the SNL U.S. Lodging REIT Index for a designated one, two or three year performance period. The fair value of performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model.
No performance-based restricted stock awards vested during the three months ended March 31, 2014 because performance goals were not met.
Performance-based restricted stock activity for the three months ended March 31, 2014 follows:
268,174
7.30
2,414
2,489
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Director Stock Awards
Our directors have the option to receive shares of our common stock in lieu of cash for their director fees. In the three months ended March 31, 2014, we issued no shares of common stock for director fees.
Equity-Based Compensation Expense
Equity-based compensation expense for the three months ended March 31, 2014 and 2013 follows (in thousands):
Included in corporate general and administrative salaries and other compensation in the statements of operations:
Stock options
155
156
Time-based restricted stock
109
Performance-based restricted stock
145
140
405
Included in corporate general and administrative other in the statements of operations:
Director stock
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The amount of expense may be subject to adjustment in future periods depending upon the attainment of specific goals, which affect the vesting of the performance-based restricted stock, or a change in the forfeiture assumptions.
Unrecognized equity-based compensation expense for all non-vested awards was $3.0 million at March 31, 2014. We expect to recognize this cost over a remaining weighted-average period of 1.5 years.
NOTE 10 - LOSS ON IMPAIRMENT OF ASSETS
In the three months ended March 31, 2013, we recognized a loss on impairment of assets of $1.5 million related to the SpringHill Suites in Lithia Springs, GA and the Courtyard by Marriott in Memphis, TN. These hotel properties were classified as held for sale at March 31, 2013 and subsequently sold in 2013. Their operating results, including impairment charges, are included in discontinued operations.
NOTE 11 - DERIVITIVE FINANCIAL INSTRUMENTS AND HEDGING
Information about our derivative financial instruments at March 31, 2014 and December 31, 2013 follows (dollars in thousands):
Number of Instruments
Notional Amount
Interest rate swaps (asset)
28,957
29,273
Interest rate swaps (liability)
75,000
(1,796
(1,772
103,957
(1,588
104,273
(1,519
Our interest rate swaps are designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique, and are all in a liability position. At March 31, 2014, we had not posted any collateral related to these agreements and were not in breach of any financial provisions of the agreements. If we had breached any agreement provisions, we could have been required to settle our obligations under these agreements at their aggregate termination value of $1.8 million at March 31, 2014.
Details of the location in the financial statements of the loss recognized on derivative financial instruments designated as cash flow hedges follows (in thousands):
Gain (loss) recognized in accumulated other comprehensive income on derivative financial instruments (effective portion)
(495
Loss reclassified from accumulated other comprehensive income to interest expense (effective portion)
(427
(86
Amounts reported in accumulated other comprehensive income (loss) related to derivative financial instruments will be reclassified to interest expense as interest payments are made on the hedged variable-rate debt.
NOTE 12 — INCOME TAXES
Income taxes for the interim periods presented have been included in our consolidated financial statements on the basis of an estimated annual effective tax rate. Our effective tax rate is impacted by the mix of earnings and losses by taxing jurisdictions. Our earnings (losses), other than in our TRSs, are not generally subject to federal corporate and state income taxes due to our REIT election.
Due to the decrease in cumulative losses over the past three years, management believes that sufficient positive evidence could become available in the future to reach a conclusion that the valuation allowance will no longer be needed, in whole or in part. Acceleration of improved operating results or significant taxable income from specific non-recurring transactions could further impact this assessment. The likelihood of realizing the benefit of deferred tax assets and the related need for a valuation allowance is assessed on an ongoing basis. This assessment requires estimates and significant management judgment as to future operating results, as well as an evaluation of the effectiveness of our tax planning strategies. At this time, we are not able to reasonably estimate when sufficient positive evidence will require reversal of the valuation allowance or the impact such reversal will have on our effective tax rate.
For the first quarter of 2014 and 2013, we recorded an income tax provision attributable to continuing operations of $0.1 million and $0.2 million, respectively. We had no unrecognized tax benefits at March 31, 2014. We expect no significant changes in unrecognized tax benefits within the next year. We recognize interest expense and penalties associated with unrecognized tax benefits as a component of income tax expense.
NOTE 13 — FAIR VALUE
The following table presents information about our financial instruments measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Disclosures concerning financial instruments measured at fair value are as follows (in thousands):
Fair Value Measurements at March 31, 2014 using
Level 1
Level 2
Level 3
Assets:
Liabilities:
Fair Value Measurements at December 31, 2013 using
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the first quarter of 2014.
NOTE 14 - DISCONTINUED OPERATIONS
We have adjusted our consolidated statement of operations for the three months ended March 31, 2014 and 2013 to reflect the operations of hotel properties sold or classified as held for sale in discontinued operations. Discontinued operations include the following hotel properties that have been sold:
· AmericInn & Suites in Golden, CO — sold January 2013;
· Hampton Inn in Denver, CO — sold February 2013;
· Holiday Inn and Holiday Inn Express in Boise, ID — sold May 2013;
· Courtyard by Marriott in Memphis, TN — sold May 2013;
· SpringHill Suites in Lithia Springs, GA — sold August 2013;
· Fairfield Inn in Lewisville, TX — sold August 2013;
· Fairfield Inn in Lakewood, CO — sold September 2013;
· Fairfield Inn in Emporia, KS — sold October 2013;
· SpringHill Suites in Little Rock, AR — sold November 2013;
· Fairfield Inn and AmericInn in Salina, KS — sold November 2013;
· Hampton Inn and Fairfield Inn & Suites in Boise, ID — sold November 2013;
· Holiday Inn Express in Emporia, KS — sold December 2013; and
· AmericInn and Aspen Hotel & Suites in Fort Smith, AR - sold on January 17, 2014.
In addition, discontinued operations also include the following hotel property that is classified as held for sale at March 31, 2014:
· Hampton Inn in Fort Smith, AR.
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Condensed results of operations for the hotel properties included in discontinued operations follow (in thousands):
REVENUE
1,088
6,292
Hotel operating expenses
770
4,863
839
INCOME (LOSS) FROM HOTEL OPERATIONS
314
(910
103
(63
(1,634
INCOME BEFORE TAXES
377
621
INCOME TAX BENEFIT (EXPENSE)
(264
INCOME FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO NONCONTROLLING INTEREST
INCOME FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO COMMON STOCKHOLDERS
373
339
NOTE 15 - 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.
At March 31, 2014 and 2013, we had 893,000 stock options outstanding which were not included in the computation of diluted earnings per share, as the options’ exercise price was greater than the average market price of our common shares.
For the three months ended March 31, 2013, our basic and diluted earnings per share are based on basic weighted average common shares outstanding due to our loss attributable to common stockholders.
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A summary of the components used to calculate basic and diluted earnings per share follows (in thousands, except per share):
Numerator:
Income from continuing operations
Less: Preferred dividends
4,147
2,452
Allocation to participating securities
Attributable to noncontrolling interest
(138
(83
Loss from continuing operations attributable to common stockholders
(1,077
(864
Income from discontinued operations attributable to common stockholders
Net loss attributable to common stockholders
(704
(525
Denominator:
Weighted average common shares outstanding - basic
Dilutive effect of equity-based compensation awards
430
266
Weighted average common shares outstanding - diluted
Earnings per common share - basic and diluted:
Net loss from continuing operations
Net income (loss) from discontinued operations
Net loss
NOTE 16 — SUBSEQUENT EVENTS
Equity Transactions
On April 1, 2014, we issued 22,570 shares of common stock for Common Units of our Operating Partnership which were tendered for redemption on January 31, 2014.
On May 6, 2014, 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 May 30, 2014.
On May 6, 2014, we closed on a $25 million loan with Compass Bank. The loan carries a variable rate of 30-day LIBOR plus 240 basis points, amortizes over 25 years, and has a May 6, 2020 maturity date. The loan is secured by first mortgage liens on the Hampton Inn & Suites hotels located in Poway, CA, Camarillo, CA and Fort Worth, TX. The net proceeds from this loan were used to pay down our senior unsecured credit facility.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2013 and our unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q.
Unless stated otherwise or the context otherwise requires, references in this report to “we,” “our,” “us,” “our company” or “the company” mean Summit Hotel Properties, Inc. and its consolidated subsidiaries.
Cautionary Statement about Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “forecast,” “project,” “potential,” “continue,” “likely,” “will,” “would” or similar expressions. Forward-looking statements in this report include, among others, statements about our business strategy, including acquisition and development strategies, industry trends, estimated revenue and expenses, ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
· financing risks, including the risk of leverage and the corresponding risk of default on our mortgage loans and other debt and potential inability to refinance or extend the maturity of existing indebtedness;
· national, regional and local economic conditions;
· levels of spending in the business, travel and leisure industries, as well as consumer confidence;
· declines in occupancy, average daily rate and revenue per available room and other hotel operating metrics;
· hostilities, including future terrorist attacks, or fear of hostilities that affect travel;
· financial condition of, and our relationships with, third-party property managers and franchisors;
· the degree and nature of our competition;
· increased interest rates and operating costs;
· changes in zoning laws and increases in real property tax rates;
· risks associated with potential acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no operating history, and dispositions of hotel properties;
· availability of and our ability to retain qualified personnel;
· our failure to maintain our qualification as a REIT under the Internal Revenue Code of 1986, as amended;
· changes in our business or investment strategy;
· availability, terms and deployment of capital;
· general volatility of the capital markets and the market price of our shares of common stock;
· environmental uncertainties and risks related to natural disasters; and
· other factors described under the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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 47 hotels containing 6,539 guestrooms for purchase prices aggregating $916.7 million. Currently, we own 90 hotels containing 11,353 guestrooms located in 22 states. Except for six hotels, five of which are subject to ground leases and one of which is subject to a PILOT (payment in lieu of taxes) lease, we own our hotels in fee simple. Our hotels are located in markets in which we have extensive experience and that exhibit multiple demand generators, such as business and corporate headquarters, retail centers, airports and tourist attractions.
The majority of our hotels operate under premium franchise brands owned by Marriott International, Inc. (“Marriott”) (Courtyard by Marriott®, Residence Inn by Marriott®, SpringHill Suites by Marriott®, Fairfield Inn & Suites by Marriott®, and TownePlace Suites by Marriott®), Hilton Worldwide (“Hilton”) (DoubleTree by Hilton®, Hampton Inn®, Hampton Inn & Suites®, Homewood Suites® and Hilton Garden Inn®), Intercontinental Hotel Group (“IHG”) (Holiday Inn®, Holiday Inn Express®, Holiday Inn Express & Suites® and Staybridge Suites®) and an affiliate of Hyatt Hotels Corporation (“Hyatt”) (Hyatt Place® and Hyatt House®).
We have elected to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ended December 31, 2011. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, we lease substantially all of our hotels to wholly owned subsidiaries of our taxable REIT subsidiary (our “TRS lessees”).
At March 31, 2014, all of our hotel properties are operated pursuant to hotel management agreements with third party hotel management companies, including the following:
· Interstate Management Company, LLC (“Interstate”) and its affiliate Noble Management Group, LLC (“Noble”) — 49 hotel properties
· Select Hotels Group, LLC (“Hyatt Management”) — 12 hotel properties
· Affiliates of Marriott, including Courtyard Management Corporation (“Courtyard Management”), Spring Hill SMC Corporation (“Spring Hill Management”) and Residence Inn by Marriott, Inc. (“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”) — four hotel properties
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· Affiliates of IHG including IHG Management (Maryland) LLC (“IHG Management”) and Intercontinental Hotel Group Resources, Inc. (“Intercontinental Management”) — two hotel properties
· HP Hotels Management Company, Inc. (“HP Hotels”) — two hotel properties
· OTO Development, LLC (“OTO Management”) — two hotel properties
· Tsunami Hotel Management LLC (“Tsunami Hotel Management”) — three hotel properties
· Lodging Dynamics Hospitality Group (“Lodging Dynamics”) — one hotel property
· American Liberty Hospitality, Inc. (“American Liberty”) — one hotel property
· Stonebridge Realty Advisors, Inc. (“Stonebridge”) — one hotel property
Our TRS lessees, defined below, may also employ other hotel managers in the future. We have, and will have, no ownership or economic interest in any of the hotel management companies engaged by our TRS lessees.
Our revenue is derived from hotel operations and consists of room revenue and other hotel operations revenue. As a result of our focus on select-service hotels in the upscale and upper midscale segments of the U.S. lodging industry, substantially all of our revenue is room revenue generated from sales of hotel rooms. We also generate, to a much lesser extent, other hotel operations revenue, which consists of ancillary revenue related to meeting rooms and other guest services provided at our hotels.
Industry Trends and Outlook
Room-night demand in the U.S. lodging industry is correlated to macroeconomic trends. Key drivers of demand include growth in gross domestic product, or GDP, corporate profits, capital investments and employment. Following periods of recession, recovery of room-night demand for lodging historically has lagged improvements in the overall economy. However, in the economic recovery beginning in early 2010, room-night demand has led improvements in the overall economy. Although we expect that our hotels will realize meaningful RevPAR gains as the economy and lodging industry continue to improve, the risk exists that global and domestic economic conditions may cause the economic recovery to stall, which likely would adversely affect our growth and financial performance expectations.
We have a positive outlook about macro-economic conditions and their effect on room-night demand. We also expect that our near-term results will not be adversely affected by increased lodging supply in our markets. Growth in lodging supply typically lags growth in room-night demand. Key drivers of lodging supply include the availability and cost of capital, construction costs, local real estate market conditions and availability and pricing of existing properties. As a result of the scarcity of financing, a severe recession and declining operating fundamentals, during 2008 and 2009 many planned hotel developments were cancelled or postponed. We believe the effect of the severe recession will be prolonged compared with prior recessions, which could limit supply growth.
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Our Hotel Property Portfolio
At March 31, 2014, our hotel property portfolio consisted of 90 hotels containing 11,353 guestrooms. Of these hotels, according to STR’s current chain segment designations, 60 hotels containing 7,968 guestrooms are “upscale,” and 30 hotels containing 3,385 guestrooms are “upper midscale.” Information for our hotel properties by franchisor as of March 31, 2014 follows:
Number of Hotel Properties
Number of Guestrooms
Marriott
Courtyard by Marriott (1)
1,662
1,188
805
Fairfield Inn & Suites by Marriott
TownePlace Suites by Marriott
Total Marriott
4,496
Hilton
1,076
Hampton Inn (2)
631
Hampton Inn & Suites
834
337
Homewood Suites
91
Total Hilton
25
2,969
Hyatt
2,224
Hyatt House
Total Hyatt
2,359
IHG
Holiday Inn Express
185
Holiday Inn Express & Suites (3)
561
Holiday Inn
143
Staybridge Suites
213
Total IHG
1,102
Starwood
Aloft
136
FourPoints by Sheraton
101
Total Starwood
237
Carlson
Country Inn & Suites by Carlson
190
11,353
(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) Includes one hotel property that is classified as held for sale at March 31, 2014 in our financial statements.
(3) We own an approximate 80% controlling interest in the Holiday Inn Express & Suites in San Francisco, CA with an option to acquire all remaining interests.
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Hotel Property Portfolio Activity
Acquisitions
We acquired four hotel properties in the first quarter 2014 and nine hotel properties in the first quarter 2013. A summary of these acquisitions follows (dollars in thousands):
Guest- rooms
Management Company
182
American Liberty Hospitality, Inc.
98
Tsunami Hotel Management, LLC
Pillar Hotels and Resorts, LP
210
Stonebridge Realty Advisors, Inc.
Total Three months ended March 31, 2014
591
126
Select Hotels Groups, LLC
149
151
IHG / Holiday Inn Express & Suites
252
Intercontinental Hotels Group Resources, Inc.
Spring Hill SMC Corporation
202
Courtyard Management Corporation
153
120
Residence Inn by Marriott, Inc.
Total Three months ended March 31, 2013
1,501
First Quarter 2014 Acquisitions
On January 9, 2014, we purchased a Hilton Garden Inn in Houston, TX for $37.5 million including the assumption of a $17.8 million mortgage loan with a fixed interest rate of 6.22%, an original amortization period of 30 years, and a maturity date of November 1, 2016. We expect to spend $3.4 million in renovations at this hotel over the next twelve months, for an estimated total cost of $224,700 per key.
On January 10, 2014, we purchased a Hampton Inn in Santa Barbara (Goleta), CA for $27.9 million including: i) the assumption of a $12.0 million mortgage loan with a fixed interest rate of 6.13%, an original amortization period of 25 years, and a maturity date of November 11, 2021, ii) the issuance of 412,174 Common Units in our Operating Partnership valued at the time of issuance at $3.7 million, and iii) $12.2 million in cash. We expect to spend $0.5 million in renovations at this hotel over the next twelve months, for an estimated total cost of $289,800 per key.
On January 24, 2014, we purchased a Four Points by Sheraton in San Francisco, CA for $21.3 million in cash. We expect to spend $1.4 million in renovations at this hotel over the next twelve months, for an estimated total cost of $224,300 per key.
On March 14, 2014, we purchased a DoubleTree by Hilton in San Francisco, CA for $39.1 million. The purchase price plus closing costs and renovation reserves was paid through: i) the assumption of a $13.3
million mortgage loan with a fixed interest rate of 5.98%, an original amortization period of 30 years, and a maturity date of March 8, 2016, and ii) $30.8 million in cash. We anticipate spending $4.5 million in renovations to the hotel during 2014, for a total cost of $207,600 per key.
We funded the cash portion of these acquisitions and renovations with borrowings under our senior unsecured credit facility.
First Quarter 2013 Acquisitions
On January 22, 2013, we purchased from affiliates of Hyatt Hotels Corporation (“Hyatt”), a portfolio of three hotel properties. We completed renovations on two of these hotel properties and expect to spend $0.8 million for renovations over the next twelve months at the remaining property for an estimated total cost of $88,800 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”).
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 $240,100 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.
On March 11, 2013, we purchased a portfolio of five Marriott hotel properties. We completed renovations on two of these hotel properties and expect to spend an additional $0.8 million over the next twelve months, for an estimated total cost of $169,300 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.
Dispositions
Pursuant to our strategy to continually evaluate our hotel properties and land held for development, we sold two hotel properties in the first quarter of 2014. 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 no impairment charges in the first quarter of 2014 and impairment charges of $1.5 million in the first quarter 2013.
On January 17, 2014, we sold the AmericInn Hotel & Suites and the Aspen Hotel & Suites in Fort Smith, AR for $3.1 million. These hotel properties were classified as held for sale at December 31, 2013. The sale of the AmericInn Hotel & Suites also included the assignment of its related ground lease.
On January 15, 2013, we sold the AmericInn Hotel & Suites in Golden, CO for $2.6 million. On February 15, 2013, we sold the Hampton Inn in Denver, CO for $5.5 million and recognized a gain on the sale of $1.7 million. On February 27, 2013, we sold a parcel of land in Jacksonville, FL for $1.9 million.
Results of Operations of Summit Hotel Properties, Inc.
The comparisons that follow should be reviewed in conjunction with the unaudited interim consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. As noted above, in the first quarter of 2014 we sold the AmericInn Hotel & Suites and the Aspen Hotel & Suites in Fort Smith, AR. In addition, at March 31, 2014, we classified as held for sale the Hampton Inn in Fort Smith, AR. Accordingly, we classified these hotel properties as discontinued operations and their operating results are not included in the discussion below.
Comparison of First Quarter 2014 with First Quarter 2013
Key operating metrics for our total portfolio, excluding discontinued operations, (89 hotels at March 31, 2014 and 85 hotels at March 31, 2013) and our same-store portfolio (66 hotels) for the first quarter 2014 and for first quarter 2013 follows (dollars in thousands, except ADR and RevPAR):
First Quarter
Percentage Change
Total Portfolio (89 hotels)
Same-Store Portfolio (66 hotels)
Total Portfolio (85 hotels)
Total Portfolio (89/85 hotels)
Total revenues
57,250
52,945
49.9
%
8.1
38,418
35,483
50.7
8.3
Occupancy
72.2
72.8
71.5
70.3
1.0
3.6
ADR
118.83
110.01
107.28
105.22
10.8
4.6
RevPAR
85.76
80.12
76.68
73.94
11.8
8.4
Revenue. Total revenues, including room and other hotel operations revenue, increased $29.8 million in the first quarter 2014 compared with the first quarter 2013. The increase in revenues is due to an increase in same-store revenues of $4.3 million and an increase in revenues from the 19 hotel properties acquired in 2013 and four hotel properties acquired in the first quarter of 2014 (the “Acquired Hotels”) of $25.5 million.
The same-store revenue increase of $4.3 million, or 8.1%, was due to increases in occupancy to 72.8% in the first quarter 2014 compared with 70.3% in the first quarter 2013, and an increase in ADR to $110.01 in the first quarter 2014 from $105.22 in the first quarter 2013. The increases in occupancy and ADR resulted in an 8.4% increase in same-store RevPAR to $80.12 in the first quarter 2014 compared with $73.94 in the first quarter 2013. These increases were due to the improving economy, hotel industry fundamentals and renovations made at 17 hotel properties in 2013.
Hotel Operating Expenses. Hotel operating expenses increased $20.2 million in the first quarter 2014 compared with first quarter 2013. The increase is due in part to the additional operating expenses from the Acquired Hotels of $17.2 million. In addition, the increase in same-store hotel operating expenses is due to $2.9 million of variable costs related to the increase in revenue.
A summary of our hotel operating expenses for our same-store portfolio (66 hotels) for first quarter 2014 and 2013 follows (dollars in thousands):
Percentage
Percentage of Revenue First Quarter
Change
Rooms expense
15,571
14,586
6.8
27.2
27.5
Other direct expense
7,656
7,059
8.5
13.4
13.3
Other indirect expense
15,003
13,674
9.7
26.2
25.8
Other expense
188
164
14.6
0.3
67.1
66.9
Depreciation and Amortization. Depreciation and amortization expense increased $4.8 million in the first quarter 2014 compared with first quarter 2013, primarily due to the depreciation associated with the Acquired Hotels.
Corporate General and Administrative. Corporate general and administrative expenses increased by $1.1 million in the first quarter 2014 compared with first quarter 2013. Approximately $0.9 million of the increase was due to increased professional fees and expenses related to establishing new procedures and systems for intercompany account reconciliations, as well as performing the reconciliation of the balance sheets of
intercompany company accounts between individual hotels and our consolidated statements of operations for the years ended 2013 and 2012.
Other Income/Expense. The $2.4 million increase in other income (expense) was primarily the result of an increase in interest expense due to debt incurred to finance the acquisition of the Acquired Hotels.
Cash Flows. The increase in net cash provided by operating activities of $11.2 million for first quarter 2014 compared with first quarter 2013 primarily resulted from a $1.4 million improvement in earnings, a $3.9 million increase in depreciation and amortization, and a $6.4 million increase in accounts payable and accrued expenses. The increase in depreciation was primarily related to the Acquired Hotels. The $120.0 million decrease in net cash used in investing activities for the first quarter 2014 compared with the first quarter 2013 primarily resulted from a $120.4 million decrease in acquisitions of hotel properties and a $13.6 million decrease in restricted cash related to renovation reserves funded; partially offset by a $10.5 million increase in improvements and additions to hotel properties and a $6.5 million decrease in net proceeds from asset dispositions. The $148.2 million decrease in net cash provided by financing activities for the first quarter 2014 compared with the first quarter 2013 resulted from a $237.6 million decrease in proceeds from equity offerings, partially offset by a $75.3 million decrease in payments on debt and a $3.6 million increase in dividends and distributions.
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 future results of operations, including impairment charges, in discontinued operations. In the first quarter 2014, we reported the following hotel properties in discontinued operations:
· AmericInn Hotel & Suites, Fort Smith, AR;
· Aspen Hotel & Suites, Fort Smith, AR;
· Hampton Inn, Fort Smith, AR
The AmericInn Hotel & Suites and the Aspen Hotel & Suites located in Fort Smith, AR were sold on January 17, 2014. The Hampton Inn in Fort Smith, AR was classified as held for sale at March 31, 2014.
A summary of results from our hotel properties included in discontinued operations follows (in thousands):
Total expenses
711
5,671
Income from discontinued operations before income taxes
Income tax (expense) benefit
Income from discontinued operations
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Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotel properties in accordance with brand standards, capital expenditures to improve our hotel properties, acquisitions, interest expense and scheduled principal payments on outstanding indebtedness, and distributions to our stockholders.
Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovations and other non-recurring capital expenditures that periodically are made with respect to our hotel properties, and scheduled debt payments, including maturing loans.
To satisfy the requirements for qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding any net capital gains. We generally intend to distribute at least 100% of our REIT taxable income to avoid tax on undistributed income. Therefore, if sufficient funds are not available to us from hotel dispositions, our senior unsecured revolving credit facility and mortgage loans, we will need to raise additional capital to grow our business and invest in additional hotel properties.
We expect to satisfy our liquidity requirements with cash provided by operations, working capital, and short-term borrowings under our senior unsecured revolving credit facility. In addition, we may fund the purchase price of hotel acquisitions and cost of required capital improvements by borrowing under our senior unsecured revolving credit facility, assuming existing mortgage debt, issuing securities (including partnership units issued by our operating partnership), or incurring other mortgage debt. Further, we may seek to raise capital through public or private offerings of our equity or debt securities. However, certain factors may have a material adverse effect on our ability to access these capital sources, including our degree of leverage, the value of our unencumbered hotel properties, borrowing restrictions imposed by lenders and market conditions. We will continue to analyze which sources of capital are most advantageous to us at any particular point in time, but financing may not be consistently available to us on terms that are attractive, or at all. We believe that our cash provided by operations, working capital, borrowings available under our senior unsecured revolving credit facility and other sources of funds available to us will be sufficient to meet our ongoing liquidity requirements for at least the next 12 months.
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Outstanding Indebtedness
At March 31, 2014, we had $401.4 million in debt secured by mortgages on 46 hotel properties. We also had $166.0 million outstanding under our senior unsecured credit facility that was supported by 35 hotel properties unencumbered by mortgage debt. In addition, we have nine other hotel properties unencumbered by mortgage debt, including eight hotel properties (containing 1,041 guestrooms) operating under brands owned by Marriott, Hilton and Hyatt, that are available to be used as collateral for future loans.
A summary of our debt at March 31, 2014 follows (dollars in thousands):
Lender
Interest Rate March 31, 2014 (1)
Amortization Period (Years)
Maturity Date
Collateral
Amount of Debt
Deutsche Bank AG New York Branch
$225 Million Revolver
2.05% Variable
n/a
October 10, 2017
91,000
(2)
$75 Million Term Loan
3.94% Fixed
October 10, 2018
Total Senior Unsecured Credit Facility
166,000
Mortgage Loans
ING Life Insurance and Annuity
6.10% Fixed
March 1, 2032
Fourteen hotels
63,825
4.55% Fixed
August 1, 2038
(cross-collateralized with other ING loan)
33,568
KeyBank National Association
4.46% Fixed
February 1, 2023
Four hotels
28,843
4.52% Fixed
April 1, 2023
Three hotels
22,329
4.30% Fixed
21,674
4.95% Fixed
August 1, 2023
Two hotels
38,354
Bank of America Commercial Mortgage
6.41% Fixed
September 1, 2017
One hotel
8,325
Merrill Lynch Mortgage Lending Inc.
6.38% Fixed
August 1, 2016
5,224
GE Capital Financial Inc.
5.39% Fixed
April 1, 2020
9,428
GE Capital Financial, Inc.
5,077
MetaBank
4.25% Fixed
August 1, 2018
7,288
Bank of Cascades
4.66% Fixed
September 30, 2021
11,916
Goldman Sachs
5.67% Fixed
July 6, 2016
14,013
Compass
4.57% Fixed (3)
May 17, 2018
13,120
General Electric Capital Corp.
5,341
6,256
4.82% Fixed
April 1, 2018
7,513
5.03% Fixed
March 1, 2019
10,026
AIG
6.11% Fixed
January 1, 2016
13,374
Greenwich Capital Financial Products, Inc.
6.20% Fixed
January 6, 2016
23,005
Wells Fargo Bank, National Association
5.53% Fixed
October 1, 2015
3,620
5.57% Fixed
6,206
U.S. Bank, NA
6.22% Fixed
November 1, 2016
17,786
6.13% Fixed
November 11, 2021
11,995
5.98% Fixed
March 8, 2016
13,290
Total Mortgage Loans
401,396
Total Debt
(1) The interest rates at March 31, 2014 above give effect to our use of interest rate swaps, where applicable.
(2) Excludes outstanding letter of credit.
(3) Interest rate derivative effectively converts 85% of this loan to a fixed rate.
At March 31, 2014, we have a $300.0 million senior unsecured credit facility. Deutsche Bank AG New York Branch (“Deutsche Bank”) is the administrative agent and Deutsche Bank Securities Inc. is the sole lead arranger. The syndication of lenders includes Deutsche Bank, Bank of America, N.A., Royal Bank of Canada, Key Bank, Regions Bank, Fifth Third Bank, Raymond James Bank, N.A., and U.S. Bank National Association. Certain of our existing and future subsidiaries that own or lease an unencumbered asset, as described below, will be required to guaranty this credit facility.
Outstanding borrowings on this credit facility are limited to the least of (i) the aggregate commitments of all of the lenders, (ii) the aggregate value of the unencumbered assets, less our consolidated unsecured indebtedness, all as calculated pursuant to the terms of the credit facility documentation, multiplied by 60%, and (iii) the principal amount that when drawn under the credit facility would result in an unsecured interest expense, calculated on a pro forma basis for the next consecutive four fiscal quarters after taking such draws into account, equal to 50% of the net operating income of the unencumbered assets, as adjusted pursuant to the credit facility documentation.
Payment Terms. We are obligated to pay interest at the end of each selected interest period, but not less than quarterly, with all outstanding principal and accrued but unpaid interest due at the maturity. We have the right to pay all or any portion of the outstanding borrowings from time to time without penalty or premium. We pay interest on advances at varying rates, based upon, at our option, either (i) 1, 2, 3, or 6-month LIBOR, plus a LIBOR margin between 1.75% and 2.50%, depending upon our leverage ratio (as defined in the credit facility documentation), or (ii) the applicable base rate, which is the greatest of the administrative agent’s prime rate, the federal funds rate plus 0.50%, or 1-month LIBOR plus 1.00%, plus a base rate margin between 0.75% and 1.50%, depending upon our leverage ratio. In addition, on a quarterly basis, we are required to pay a fee on the unused portion of the credit facility equal to the unused amount multiplied by an annual rate of either (i) 0.30%, if the unused amount is equal to or greater than 50% of the maximum aggregate amount of the credit facility, or (ii) 0.20%, if the unused amount is less than 50% of the maximum aggregate amount of the credit facility.
Financial and Other Covenants. We are required to comply with a series of financial and other covenants in order to borrow under this credit facility. The material financial covenants include a maximum leverage ratio, a minimum consolidated tangible net worth, a maximum dividend payout ratio, a minimum consolidated fixed charge coverage ratio, a maximum ratio of secured indebtedness to total asset value, a maximum ratio of secured recourse indebtedness to total asset value, a maximum ratio of consolidated unsecured indebtedness to total unencumbered asset value, and a maximum ratio of unencumbered adjusted net operating income to assumed unsecured interest expense.
We are also subject to other customary covenants, including restrictions on investment and limitations on liens and maintenance of properties. This credit facility also contains customary events of default, including, among others, the failure to make payments when due under the terms of any of the credit facilities, breach of any covenant continuing beyond any cure period, and bankruptcy or insolvency.
Unencumbered Assets. This credit facility is unsecured; however, borrowings are limited by the value of hotel properties that qualify as unencumbered assets supporting this credit facility. At March 31, 2014, 35 of our hotel properties qualify as, and are deemed to be, unencumbered assets that support this credit facility. Among other conditions, unencumbered assets must not be subject to liens or security interest, and the owner and operating lessee of such unencumbered asset must execute a guaranty supplement pursuant to which the owner and operating lessee become subsidiary guarantors of the credit facility. In addition, hotel properties may be added to or removed from the unencumbered asset pool at any time so long as there is a minimum of 20 hotel
31
properties in the unencumbered asset pool, the unencumbered assets meet certain diversity requirements (such as limits on concentrations in any particular market), and the then-current borrowings on the credit facility do not exceed the maximum available under the credit facility given the availability limitations described above. Further, to be eligible as an unencumbered asset, the hotel property must: be franchised with a nationally-recognized franchisor; have been in operation a minimum of one year; satisfy certain ownership, management and operating lessee criteria; and not be subject to material defects, such as liens, title defects, environmental contamination and other standard lender criteria.
At May 9, 2014, 37 of our unencumbered hotel properties support the senior unsecured credit facility. As a result, the maximum amount of borrowing permitted under the senior unsecured credit facility was $300.0 million, of which we had $141.0 million borrowed, $13.9 million in standby letters of credit and $145.1 million available to borrow.
On March 28, 2014, we amended two loans with GE Capital Financial cross - collateralized by the Courtyard by Marriott and the SpringHill Suites by Marriott, both located in Scottsdale, AZ. The loans were amended to bear interest at a fixed rate of 5.39% and the maturity date was extended to April 1, 2020.
On March 28, 2014, we amended two loans with General Electric Capital Corp. cross - collateralized by the Hilton Garden Inn (Lakeshore) and the Hilton Garden Inn (Liberty Park), both located in Birmingham, AL. Both loans were amended to bear interest at a fixed rate of 5.39% and the maturity dates were extended to April 1, 2020.
For additional information regarding our term loans, please read our consolidated financial statements and related notes thereto, appearing elsewhere in this Form 10-Q.
On January 2, 2014, we redeemed 126,155 Common Units, which had been tendered November 2, 2013, for shares of our common stock. On January 31, 2014, 22,570 Common Units were tendered for redemption, which we redeemed for 22,570 shares of our common stock on April 1, 2014.
On January 10, 2014, as part of our acquisition of the 98-guestroom Hampton Inn in Santa Barbara (Goleta), CA, we issued 412,174 Common Units in our operating partnership valued at $3.7 million.
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Capital Expenditures
In the first quarter 2014, we spent $16.8 million on renovations, including $13.5 million on hotel properties that we owned at the beginning of 2013 and $3.3 million on hotel properties acquired since the beginning of 2013. We currently have renovations underway at six of our hotel properties. We anticipate spending a total of $20.0 million to $28.0 million on hotel property renovations in the remainder of 2014. We expect to fund these renovations with cash provided by operations, working capital, borrowings under our senior unsecured revolving credit facility, and other potential sources of capital, to the extent available to us.
Off-Balance Sheet Arrangements
From time to time, we enter into off-balance sheet arrangements to facilitate our operations. At March 31, 2014, we had $13.9 million in outstanding stand-by letters of credit, of which $0.8 million was supporting performance bonds related to workers’ compensation insurance and other operational matters and $13.1 million in support of a purchase agreement for the Hampton Inn & Suites in downtown Minneapolis. At May 9, 2014, we had $13.9 million in outstanding standby letters of credit.
Contractual Obligations
The timing of required payments related to our long-term debt and other contractual obligations at March 31, 2014 follows (in thousands):
Payments Due By Period
Less than One Year
One to Three Years
Four to Five Years
More than Five Years
Debt obligations (1)
729,293
36,088
156,133
272,777
264,295
Operating lease obligations (2)
72,532
815
1,028
833
69,856
Purchase obligations (3)
3,671
805,496
40,574
157,161
273,610
334,151
(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 March 31, 2014, after giving effect to interest rate swaps.
(2) Primarily ground leases and corporate office leases.
(3) Represents purchase orders and executed contracts for renovation projects at our hotel properties.
In addition to the contractual obligations in the above table, at March 31, 2014 we are also obligated under a purchase agreement with a hotel property developer to acquire a Hampton Inn & Suites in downtown Minneapolis, MN for $37.7 million subject to certain conditions, including the completion of construction of the hotel in accordance with agreed upon architectural and engineering designs, receipt of a Hampton Inn & Suites franchise, and receipt of a certificate of occupancy. Therefore, there is no assurance that the acquisition will be completed. In January 2014, we issued a standby letter of credit for $13.1 million in support of this purchase agreement. This letter of credit was issued under our senior unsecured credit facility.
Critical Accounting Policies
There have been no significant changes in our critical accounting policies or estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
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Recent Developments
On May 6, 2014, we closed on a $25 million loan with Compass Bank. The loan carries a variable rate of 30-day LIBOR plus 240 basis points, amortizes over 25 years, and has a May 6, 2020 maturity date. The loan is secured by first mortgage liens on the Hampton Inn & Suites hotels located in Poway, CA, Camarillo, CA and Fort Worth, TX. The net proceeds of this loan were used to pay down 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.
At March 31, 2014, we were party to four interest rate swap agreements with a total notional amount of $104.0 million, where we receive variable rate payments in exchange for making fixed rate payments. These agreements are accounted for as cash flow hedges and have a termination value of $1.8 million.
At March 31, 2014, after giving effect to our interest rate swap agreements, $474.4 million, or 83.6%, of our debt had fixed interest rates and $93.0 million, or 16.4%, had variable interest rates. Assuming no increase in the outstanding balance of our variable rate debt, if interest rates increase by 1.0% our cash flow would decrease by approximately $0.9 million per year.
As our fixed rate debts mature, they will become subject to interest rate risk. In addition, as our variable rate debts mature, lenders may impose interest rate floors on new financing arrangements because of the low interest rates experienced during the past few years. At March 31, 2014, we have no debt that matures in 2014. However, $10.1 million of our long-term debt is scheduled to amortize in 2014, of which $10.0 million has fixed interest rates.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
We have started implementation of changes to our internal controls over financial reporting to remediate the material weakness identified in our Annual Report on Form 10-K for the year ended December 31, 2013. In the course of preparing our 2013 Annual Report and the consolidated financial statements included therein, our management identified a deficiency in the design of our internal control over financial reporting in that we did not have in place controls and procedures that would allow us to reconcile the balance sheets of our
individual hotels to the final consolidated amounts in our consolidated balance sheet. As a result of the design deficiency, the intercompany accounts between the individual hotels and the consolidated entity had not been reconciled in 2013 and in prior periods. In order to prepare the financial statements for the year ended December 31, 2013 and for the quarter ended March 31, 2014, the audit committee of our board of directors engaged a nationally recognized consulting and accounting firm to assist our management with the reconciliation of the intercompany accounts between the individual hotels and the consolidated entity for 2012, 2013 and the first quarter of 2014. Notwithstanding the material weakness, our management has concluded that the consolidated financial statements included in our 2013 Annual Report and in this Quarterly Report on Form 10-Q, present fairly in all material respects the consolidated financial position, results of operations and cash flows of the Company as of and for the periods presented therein.
Our management has worked diligently to further identify and implement procedures and controls to remediate the material weakness. The Company has begun the implementation of certain processes, which include establishment of an additional balance sheet for each of our hotels to reflect operations as reported by our management companies, and reconciliation of such balance sheets with the intercompany accounts between the individual hotels and our consolidated entity, as well as developing resources to develop and reconcile the same.
Item 1. Legal Proceedings.
We are involved from time to time in litigation arising in the ordinary course of business, however, we are not currently aware of any actions against us that we believe would materially adversely affect our business, financial condition or results of operations.
Item 1A. Risk Factors.
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
The following exhibits are filed as part of this report:
Exhibit Number
Description of Exhibit
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.
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.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
XBRL Taxonomy Presentation Linkbase Document
† Filed herewith.
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:
May 12, 2014
By:
/s/ Stuart J. Becker
Stuart J. Becker
Chief Financial Officer
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EXHIBIT INDEX
38