2 0 0 9 A N N U A L R E P O R T
Supertel Hospitality’s senior management
team, from left: David Walter, treasurer;
Steve Gilbert, chief operating officer;
Kelly Walters, chief executive officer;
Connie Scarpello, chief financial officer.
Our Company
Supertel is a self-administered real estate investment trust specializing
in the ownership of limited-service hotels. As of March 31, 2010,
the company owned 114 hotels, aggregating 9,929 rooms located
in 23 states.
Our Mission
To consistently generate a competitive rate of return
for our shareholders through a disciplined approach
to real estate investments.
2009 Highlights
Updated the company’s business strategy based on a stronger,
more resilient real estate portfolio to take optimum advantage
of the eventual hotel industry recovery.
Divested eight properties in 2009 for $17.2 million with net
proceeds of $4.7 million.
Re-evaluated the REIT’s portfolio and classified 18 properties as
held for sale in the 2009 fourth quarter, for a total of 19 properties
held for sale as of December 31.
Refinanced a $9.0 million mortgage loan and extended a second
$9.0 million loan.
Reorganized the senior management team, appointed a new chairman,
and expanded an existing executive position to include COO duties.
Supertel Hospitality corporate headquarters located in Norfolk, Nebraska.
Dear Shareholder,
It has been slightly more than a year since I began serving you as CEO of Supertel. While the
challenges have been numerous during these unprecedented economic times in the hotel industry,
the process of reshaping the organization and creating a new growth strategy has been gratifying.
I quickly learned that the entire team here is absolutely first rate, in terms of both competence
and loyalty to the company and its shareholders. All of us are committed to implementing a new
strategy and restoring the company to the level of excellence and returns on which it was founded.
2009 was the most difficult year to be a hotel owner in at least a generation. Industry-wide,
revenue per available room (RevPAR), a key indicator of a hotel’s operating health, declined by
double digits in every quarter, an unprecedented drop, ending the full year down 16.7 percent.
By comparison, Supertel outperformed the industry with a
10.1 percent decline in RevPAR for 2009, but faced the same
difficulties as virtually every other hotel owner. While we
believe that this economic downturn was a singularly rare
occurrence, we have learned important lessons that we will
apply in a new growth strategy as the economy and industry
show early signs of bottoming out and rebounding.
When I joined the company in April 2009 the board of directors
provided clear direction to set the company on a new, steadier
course. As part of charting a new direction, we strengthened
and empowered a new senior management team. Connie
Scarpello was named chief financial officer and Steve Gilbert
was appointed chief operating officer. David Walter, senior
vice president and treasurer, has taken on significantly more
responsibility, especially in the area of finance. Paul Heybrock
was promoted to vice president, controller, and Pat Morland
was promoted to assistant vice president of human resources.
We have a strong and newly empowered capital expenditures
team that includes vice president, Matt Buckley, and assistant
vice presidents, Mark Larimore and Vicki Staab. Overall, this is
a focused, dedicated team with significant experience in hotels,
real estate and finance that is committed to leading Supertel
into the future.
At year end, the board elected Bill Latham as chairman of the
board. He replaces company co-founder and industry pioneer
Paul Schulte. Fortunately, Paul continues as an active board
member, and we will benefit from his more than three decades
of hospitality expertise. The highlights of Paul’s contributions
to the company and hotel industry may be found on page 6 of
this report.
The senior management team, with extensive input from the
board, met over a multi-day period to review and update our
strategic plan. At its core is a new mission statement that will
guide us into the future:
Mission Statement: To consistently generate a competitive rate of
return for our shareholders through a disciplined approach to real
estate investments.
The team set out four strategic goals:
To be a real estate investor generating superior returns
To be respected by our peers as an industry leader
To be a well-regarded employer
To be a good steward of our assets
Evaluate Our Portfolio
The first step in this process was to fully examine our existing
portfolio to determine which assets had strategic long-term
value that would provide an appropriate return on investment
for at least 10 years. We set new, more stringent evaluation
criteria and assessed each asset’s debt service capability,
estimated return on investment, and local market conditions.
Following the analysis, we determined that 18 hotels did not
meet the new criteria and placed them in discontinued
operations and began actively marketing them for sale. As a
result, we took a $23.3 million, one-time, non-cash impairment
charge on these properties in the 2009 fourth quarter. Proceeds
from the sale of the 18 hotels, plus an additional hotel already
held for sale, will be used to retire debt and for working capital.
Additional information on this initiative can be found in our
operations/finance section beginning on page 4.
We intend to asset manage our remaining core portfolio of
96 hotels aggressively to achieve the highest and best possible
return on investment. Part of this will occur through strategic
refurbishment of our properties to keep them competitive.
However, we will avoid costly, major renovations where we
believe we can divest the property and reinvest the proceeds in
assets with higher estimated long-term, more stabilized returns.
Supertel’s current hotel portfolio is concentrated
in the economy sector, and is well-diversified
geographically, with locations in 23 states, and by
hotel brand, identified below.
In researching our portfolio and the current returns, we
compared our hotels to the average returns of segments ranging
from economy through midscale without food and beverage
(F&B). Between 1988 and 2008, according to annualized data
from Smith Travel Research, RevPAR for hotels in the economy
sector had a peak-to-trough range of positive 7.6 percent to
negative 4.7 percent. Midscale hotels without F&B for the same
period had a RevPAR range of plus 11.7 percent to negative
1.6 percent.
We also looked at operating margins and our competitive sets
in these segments. We concluded that our portfolio was too
overweighted in the economy sector, where our REIT cost
structure makes it more difficult to compete with individual
owner/operators, who have significantly lower overhead, and
are a significant competitive force in this segment. We decided
that economy hotels should remain an important part of our
portfolio, but over time we should reduce their percentage in
our portfolio in favor of adding midscale properties without F&B.
When we are in a position to acquire hotels again, we intend to
focus on hotels with a minimum of 80 rooms. Currently our
portfolio contains 63 hotels with less than 80 rooms. The larger
size hotel is expected to generate higher margins. We will focus
on clustering our properties in fewer markets to achieve higher
operating efficiencies. We will concentrate on a small number of
brand families that have a strong track record in terms of guest
acceptance and property operating income. To reduce the
average age of our portfolio, we will focus on acquiring newer
properties that are in markets with higher barriers to new
competition and with a positive market growth outlook.
Improving our portfolio will be a multi-year process, and we
believe it will give Supertel shareholders better returns and
greater protection against the down cycles that occur regularly
in the hotel industry. Our intent is not to acquire for the sake
of adding to our portfolio, but to build sustainable, long-term
growth to support our dividend policy.
Strengthen Our Balance Sheet, Dividend Policy
Our priorities are to create a healthy balance sheet, fund the
ongoing refurbishment and maintenance needs of our assets to
achieve the highest rate of return, and keep a prudent amount
of cash on hand. We are working diligently to strengthen our
balance sheet in a credit-restrained environment. Our foremost
priorities in 2010 are preserving and generating capital sufficient
to fund our liquidity needs.
In 2009, we sold eight hotels for $17.2 million with net proceeds
of approximately $4.7 million. We paid down $11.1 million in
debt and used the remainder for working capital. Over time,
our goal is to reduce significantly our debt to EBITDA multiple
from its current level and maintain it at a more conservative
level going forward.
In the 2009 second quarter, the company refinanced a $9.0
million note. For the second $9.0 million loan due in November,
we negotiated extensions which end in August 2010, to allow
us time to either refinance with the current lender or to find
new financing.
We fully recognize that one of the key benefits of owning
stock in a real estate investment trust is the tax-favored status
2
of the dividend. We suspended the dividend in the 2009 first
quarter in order to preserve cash during the severe recession.
We still have work ahead of us to bring our balance sheet up
to our long-term goals. However, restoring the dividend as
quickly as prudently possible is one of our highest priorities.
There are a number of factors that will influence how quickly
we can reinstate the dividend. The most important is a rebound
in the economy, which historically has helped restore the hotel
industry to more traditional levels of profitability.
The industry is still in decline from a RevPAR viewpoint.
Fortunately, the sharpness of the RevPAR declines has slowed
considerably year-to-date, an encouraging trend. The leading hotel
consultants forecast that 2010 will be a difficult year, but that the
industry will show steady signs of improvement as the year
progresses, with positive growth expected in 2011. To date, those
predictions are on track, perhaps slightly ahead of schedule.
We continue to aggressively asset manage our properties and
work closely with our hotel management companies to increase
Comfort Inn of Farmville, VA
top line revenues while holding down operating costs. Our
goal is to focus intensely on retaining those cost savings as the
hotel industry recovers.
We still face a difficult economy, highly selective capital markets
and a very competitive operating environment. Our new
management team is highly motivated and committed to
working through the current economic situation. We are
putting our strategic plan in place and are confident that we
have set the right path for a stronger Supertel that not only will
be able to withstand the cyclical difficulties that occur in the
hotel industry, but will be well positioned to capitalize on the
inevitable opportunities that occur during the recovery phase.
William C. Latham
Chairman
Kelly A Walters
President & Chief
Executive Officer
3
2009 Operations/Finance Strategic Update
In 2009 and 2010, Supertel has and will continue to focus on three aspects of its updated
business strategy: review and reconfigure the current portfolio, stabilize the balance sheet
and improve operations.
Review and Reconfigure the Portfolio
Operations
In 2009, the company sold eight hotels for $17.2 million, using
the proceeds to pay the underlying mortgages and generating
an additional $4.7 million in cash for operations. The properties
included three Masters Inns, two Super 8 hotels, two Comfort
Inns and a Holiday Inn Express.
As the management team began developing an updated strategy
in the third quarter, it became apparent that a total review of
the company’s hotel portfolio was a key first step. The severe
downturn in the economy revealed some weaknesses and led
us to rethink how the company could best respond to the
eventual rebound, as well as provide some protection against
future severe downturns as best as possible.
We established new, more stringent criteria for our portfolio.
Criteria included age of the property, local market conditions
and segment. We also measured the asset’s ability to service
its debt, estimated return on investment, and the outlook for
each market in terms of competition/overbuilding and future
growth.
Another objective was to reduce our heavy concentration in
the economy segment and increase our weighting in midscale
hotels. Over time, we believe that a more balanced portfolio
that includes larger, midscale hotels with well-regarded brand
names will improve margins and provide greater downside
protection in the down cycle of the economy.
In the 2009 fourth quarter, we completed a thorough review
of the portfolio and reclassified 18 hotels that did not meet
the new strategic criteria. Combined with one hotel already
held for sale, Supertel had 19 hotels classified as held for sale
and included in discontinued operations as of December 31,
2009. The company will continue to review its continuing oper-
ations portfolio on a regular basis.
In 2009, the hotel industry experienced the largest downturn
in revenue per available room since Smith Travel Research
began collecting data in 1987. Supertel also experienced a
difficult year from an operations viewpoint. We take modest
comfort in the fact that Supertel outperformed the industry
RevPAR average of negative 16.7 percent, posting a RevPAR
decline of 10.1 percent. However, we have much work ahead
of us to rebuild occupancy, room rate and profitability.
Our efforts in asset managing our hotels have been and will
continue to focus on three areas: optimizing revenues in a
highly competitive environment, controlling costs and planning
for the anticipated rebound.
Year-over-year hotel industry occupancy and room rate
declined on a holiday-adjusted basis every week in 2009.
Competition was fierce as competitors slashed rates and
sought to take our guests. Supertel worked closely with its
hotel operators to hold room rate and build top-line revenue.
We identified and sought out new guest groups, including
construction, contract, and inventory control groups.
Historically, Supertel has achieved a market share of 106 percent
in occupancy. In December, we increased our market share to
113.5 percent.
In addition, we attracted guests from higher priced segments
who traded down in response to the economy. We asked our
operators to focus on striking the right balance between cost-
cutting and providing the appropriate guest experience and
value. Our operators delivered at the right level, resulting in a
modest increase in guest satisfaction, despite a reduction in
some services.
We focused equally on cutting our variable expenses, such as
energy, room supplies and labor. A new, computerized labor
forecasting system implemented in 2009 has had a positive
4
Investment in and Number of Hotels*
Investment in Hotels
Number of Hotels
115
$376.2
88
$254.2
74
69
76
$167.9
$163.9
$205.2
123
115
$400.9
$359.7
$39.9
Held
for Sale
2003
2004
2005
2006
2007
2008
2009
$500
$400
$300
$200
$100
$0
140
120
100
80
60
40
20
0
$ in millions
* 2009 investment includes $39.9 million designated as held for sale
The in-depth review of our current portfolio produced a list
of hotels that no longer conform to our more stringent
ownership criteria. The eventual sale of these hotels will provide
us with some of the funding to repay some of our debt.
Our immediate priority was to deal with two $9.0 million debt
facilities coming due in 2009 in a very credit-constrained
market. In the second quarter, we successfully refinanced the
first $9.0 million loan, extending the maturity by three years
and reducing the interest rate by nearly 300 basis points. For
the second $9.0 million loan due in November, we negotiated
extensions, which end in August 2010, to allow us time to
either refinance with the current lender or to find new financing.
The company took an aggregate, non-cash impairment charge
of $23.3 million in the fourth quarter of 2009. Of this, $12.4
million was charged against hotels in discontinued operations,
and $10.9 million was charged against hotels held for use. For
the full year, the company recorded total non-cash impairment
charges of $24.1 million.
We have already begun actively marketing these hotels and
intend to use the proceeds to continue to pay down our debt.
The on-going credit crisis and difficult hotel operating environment
makes navigating the capital markets extremely difficult. With
the extension or refinancing of the debt facility in August 2010,
we will have more time and flexibility to look for ways to further
improve our balance sheet, including possibly raising equity.
Corrine L. Scarpello
Chief Financial Officer
Steven C. Gilbert
Chief Operating Officer
effect on holding down costs. Due to these and other initiatives,
hotel and property operating expenses from continuing
operations hotels declined $3.8 million, or 5.3 percent, in 2009.
For 2010, our asset management emphasis will continue to
focus intensely on cost control and building top-line revenues.
We closely monitor room rate in each of our markets and
intend to be as aggressive as possible in returning rates to
previous levels as quickly as possible. That likely will be a several-
year process, in large part influenced by an economic rebound
and the resultant increase in travel.
The continuing operations portfolio remains in good physical
condition. The company invested approximately $4.5 million
to implement product improvement plans in 2009 to refurbish
hotels and remain competitive in their respective markets.
We plan to invest approximately $3.8 million to upgrade our
hotels in 2010. Our short-term capital expense strategy is to
maintain our properties in a highly competitive environment
but spend our dollars as carefully as possible when revenues
and profitability are so heavily influenced by the current
difficult economy.
We believe our continuing operations portfolio is competing
well in this environment, and we are focusing our asset
management efforts on short-term results with an eye
towards the coming rebound in the economy and travel.
Balance Sheet Changes
The severe credit crunch and the decline in hotel values due
to lower occupancy and room rate levels across the industry
put considerable stress on our balance sheet. A key objective
of our revised strategy is to strengthen our balance sheet
through a combination of dispositions, debt refinancings, and
a measured equity raise to retire debt.
5
Paul Schulte: Master Builder
At year-end 2009, Paul Schulte, co-founder of Supertel, stepped down as
chairman of the board of directors. He continues as an active member of
the board. This commentary is dedicated to all of the work, dedication
and innovation he has done for both Supertel and the hotel industry.
Paul Schulte,
co-founder
and former
chairman of
Supertel, is a
builder. Throughout
his career he has built
thousands of structures,
a leading hotel company
and lasting respect and
friendships.
Robert Weller and John Valletta
presenting the President’s Award
to Paul J. Schulte.
Prior to entering the hotel business, he was a leading builder
of commercial real estate. In a 15-year period, he constructed
more than 2,000 buildings containing more than 20 million
square feet of space.
Co-founder (and fellow board member) Steve Borgmann and
Schulte had worked together on a number of construction
projects. Borgmann built a Super 8 Motel in Creston, Iowa
but it took him two years to talk Schulte into investing in the
hotel business. After repeated conversations, Borgmann
convinced a reluctant Schulte to invest in and develop their
first hotel together in 1978, a 35-room Super 8 Motel in
Ainsworth, Nebraska. The rest, as they say, is history.
The two entrepreneurs formed a series of limited partnerships
with a small group of investors and in rapid succession
expanded in Iowa, Kansas, Missouri, Arkansas and Texas; building
Super 8 hotels, a new hotel brand that was perfectly suited for
the company’s markets. Every one of the 40-plus properties
they developed made money for their investors.
In 1994, Supertel became a publicly traded company on
NASDAQ: SPPR at $10 a share. Through 1999, the company
enjoyed 17 percent compounded growth, but the company’s
C-corporation structure was heavily taxed and the stock
languished at $9 a share. Seeking to enhance returns for
shareholders, Schulte took steps to become a real estate
investment trust (REIT), which provides considerable tax
advantages to shareholders. He accomplished the goal with
the merger with Humphrey Hospitality Trust, a REIT, in 1999,
taking the company to 88 properties.
With an engineering background, Schulte was always tinkering
with better ways to build hotels and to operate them. He set
the standard for hotel construction while building 70-plus
Super 8 properties. A typical Supertel project took four to
five months to build, compared to the industry norm of eight
to 11 months. The record of 89 days from breaking ground to
grand opening still stands.
He took the same interest in operations. He created the
original SuperStart ® breakfast program, which became a brand
standard. He had a passion for time management, noting that
shaving off one minute in cleaning a room saved Supertel
20,000 hours annually. He challenged housekeepers and
general managers to do better. They responded by cutting the
average time down by more than six minutes. He rewarded
their efforts with both praise and bonuses.
Schulte instinctively knew that training was the key to success
in running a complex operation like a hotel. Supertel became
one of the first companies to embrace the then ground-
breaking concepts of management expert Ken Blanchard,
author of “The One Minute Manager,” and implemented that
training and philosophy throughout the company.
Schulte has been frequently recognized for his contributions
to the hotel industry. He was a charter member of the Super
8 Advisory Council. He was awarded a Golden Pineapple
Award from Super 8 Motels in 1990 and inducted into the
Lodging Hall of Fame in 1991. Schulte was honored by Super
8 Motels with its Silver Anniversary Heritage Award in 2000
and with its President’s Award for Franchisee of the Year in
2002. In 2009, Super 8 Motels established the Paul J. Schulte
Special Achievement Award honoring Super 8 owners,
managers or employees whose individual contributions have
a meaningful and sustainable influence on Super 8 brand
standards, performance and competiveness.
He has been active in a number of charitable and civic activi-
ties throughout his career. Among his many honors outside
the industry, he received the University of Nebraska College
of Business Administration Leadership Award in 1995.
Schulte has left an indelible imprint on Supertel. He remains
a very active board member and continues to contribute his
insights and expertise, because he never stops building.
6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(cid:58)
(cid:134)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
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: 001-34087
Supertel Hospitality, Inc.
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
309 N. 5th St., Norfolk, NE
(Address of principal executive offices)
52-1889548
(I.R.S. Employer
Identification No.)
68701
(Zip Code)
(402) 371-2520
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $.01 par value per share
The NASDAQ Stock Market, LLC
Series A Preferred Stock, $.01 par value per share
The NASDAQ Stock Market, LLC
10% Series B Cumulative Preferred Stock, $.01 par
value per share
The NASDAQ Stock Market, LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Yes [ ]
No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ]
No [ X]
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.
Yes [ X]
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).
Yes [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ X ]
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.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
No [X]
As of June 30, 2009 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $32.0 million based on
the $1.82 closing price as reported on the Nasdaq Global Market.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $.01 par value per share
Outstanding at February 26, 2010
22,002,322 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders to be held on May 27, 2010.
0
TABLE OF CONTENTS
Item No.
PART I
Form 10-K
Report
Page
1.
Business.........................................................................................................................................3
1A. Risk Factors ...................................................................................................................................8
1B. Unresolved Staff Comments........................................................................................................22
Properties.....................................................................................................................................23
2.
Legal Proceedings........................................................................................................................24
3.
(Removed and Reserved).............................................................................................................24
4.
PART II
5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities ..............................................25
Selected Financial Data ...............................................................................................................26
6
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations .......................................................................................29
7A. Quantitative and Qualitative Disclosures about Market Risk ......................................................44
Financial Statements and Supplementary Data............................................................................45
8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......94
9.
9A. Controls and Procedures..............................................................................................................94
9B. Other Information ........................................................................................................................94
PART III
10. Directors, Executive Officers and Corporate Governance...........................................................95
11. Executive Compensation .............................................................................................................95
12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.....................................................................................................95
13. Certain Relationships and Related Transactions, and Director Independence.............................96
Principal Accountant Fees and Services ......................................................................................96
14.
15. Exhibits and Financial Statement Schedules ..............................................................................96
PART IV
2
Item 1. Business
PART I
References to “we”, “our”, “us” and “Company” refer to Supertel Hospitality, Inc., including, as the context
requires, its direct and indirect subsidiaries.
(a.) Description of Business
Overview
We are a self-administered real estate investment trust (REIT), and through our subsidiaries, as of December
31, 2009 we owned 115 limited service hotels in 23 states. Our hotels operate under several national franchise and
independent brands.
Our significant events for 2009 include:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Supertel offered to each of the Preferred OP Unit holders the option to extend until October 24, 2010 their
right to have units redeemed at $10 per unit. In October 2009, 126,751 units were redeemed at $10 each. The
holders of the remaining 51,035 units elected to extend to October 24, 2010, their right to have units
redeemed at $10 per unit;
We sold eight hotels for $17.2 million using the proceeds to pay the underlying mortgages and generating an
additional $4.7 million in cash for operations;
We secured and borrowed $21.7 million to repay maturing loans and to generate operating capital;
Non cash impairment charges of $24.1 million were booked against hotels sold, held for sale, and held for
use; and
As of December 31, 2009 we had 19 hotels classified as held for sale with a total net book value of $32.0
million. Expected gross proceeds of $35.2 million will be used to pay off the underlying mortgages with
remaining cash used for operations.
Additionally, in January 2010, the Company sold the 99 room Comfort Inn located in Dublin, Virginia for
approximately $2.75 million. These funds were used to pay off the Village Bank loan with the remaining funds used
to reduce the revolving line of credit with Great Western Bank. Also in January 2010, the Company borrowed $0.8
million from First National Bank of Omaha.
General Development of Business
We are a REIT for federal income tax purposes and we were incorporated in Virginia on August 23, 1994.
Our common stock began to trade on The Nasdaq Global Market on October 30, 1996. Our Series A and Series B
preferred stock began to trade on The Nasdaq Global Market on December 30, 2005 and June 3, 2008, respectively.
Through our wholly owned subsidiaries, Supertel Hospitality REIT Trust and E&P REIT Trust, we own a
controlling interest in Supertel Limited Partnership and E&P Financing Limited Partnership. We conduct our
business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by
our operating partnerships, Supertel Limited Partnership and E&P Financing Limited Partnership, limited
partnerships, limited liability companies or other subsidiaries of our operating partnerships. We currently own,
indirectly, an approximate 99% general partnership interest in Supertel Limited Partnership and a 100% partnership
interest in E&P Financing Limited Partnership. In the future, these limited partnerships may issue limited
partnership interests to third parties from time to time in connection with our acquisitions of hotel properties or the
raising of capital.
3
In order for the income from our hotel property investments to constitute “rents from real properties” for
purposes of the gross income tests required for REIT qualification, the income we earn cannot be derived from the
operation of any of our hotels. Therefore, we lease each of our hotel properties to our wholly owned taxable REIT
subsidiaries. Under the REIT Modernization Act (“RMA”), which became effective January 1, 2000, REITs are
permitted to lease their hotels to wholly owned taxable REIT subsidiaries. We formed TRS Leasing, Inc. and its wholly
owned subsidiaries TRS Subsidiary LLC; SPPR TRS Subsidiary, LLC and SPPR-BMI TRS Subsidiary, LLC
(collectively the “TRS Lessee”) in accordance with the RMA. Pursuant to the RMA, the TRS Lessee is required to enter
into management agreements with an “eligible independent contractor” who will manage the hotels leased by the TRS
Lessee. Accordingly the hotels are leased to our taxable TRS Lessee and are managed by Royco Hotels Inc. (“Royco
Hotels”) and HLC Hotels Inc. (“HLC”) pursuant to management agreements.
(b)
Financial Information About Industry Segments
We are engaged primarily in the business of owning equity interests in hotel properties. Therefore,
presentation of information about industry segments is not applicable. See the Consolidated Financial Statements
and notes thereto included in Item 8 of this Annual Report on Form 10-K for certain financial information required
in this Item 1.
(c) Narrative Description of Business
General At December 31, 2009, we owned, through our subsidiaries, 115 hotels in 23 states. The hotels are
operated by Royco Hotels (103 hotels) and HLC (12 hotels).
Mission Statement Our primary objective is to consistently generate a competitive rate of return for our
shareholders through a disciplined approach to real estate investing.
Sale of Hotels We may undertake the sale of one or more of the hotels from time to time in response to
changes in market conditions, our current or projected return on our investment in the hotels or other factors which
we deem relevant. During the year 2008, two hotels were sold, with none of our hotels being classified as held for
sale as of December 31, 2008; during the year 2009, eight of our hotels were sold and as of December 31, 2009,
there are 19 properties held for sale.
Just as we carefully evaluate the hotels we plan to acquire, our asset management team periodically
evaluates our existing properties to determine if an asset is likely to underperform in the market. If we determine
that a property no longer is competitive in a market and has limited opportunity to be repositioned, we will look to
monetize the asset in a disciplined and timely manner. The process of identifying assets for disposition is closely
related to the acquisition criteria and the overall direction of the organization. Every asset is periodically reviewed
by management in the context of the entire portfolio to evaluate its relative ranking against all of the properties. If
an asset is determined to be underperforming our projections and is thereby no longer accretive, and has a low
probability of being repositioned, we will look to dispose of the investment as soon as possible within the constraints
of the market and lender’s covenants.
Internal Growth Strategy We seek to grow internally through improvements to our hotel operating results,
principally through increased occupancy and average daily rates, and through reductions in operating expenses. As a
REIT, we are required to distribute 90% of our REIT taxable income as dividends to our stockholders each year.
Thus, internally generated cash flow will principally be used to pay dividends and any residual cash flow, together
with cash flow from external financing sources, may be used to fund ongoing capital improvements, including
furniture, fixtures and equipment, to our hotels and to meet general corporate and other working capital needs.
4
Acquisition Strategy Any acquisition, investment or purchase of property in excess of $5 million requires approval
of the Investment Committee of our Board of Directors. Our general investment criteria are described below:
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hotels with proven historical cash flows of above 10% cash on cash on moderate leverage;
hotels with brand affiliations that are producing among the best performance metrics in the sector;
hotels constructed within the last 15 years which enjoy a design consistent with contemporary standards;
hotels located in one of our existing markets where operating efficiencies can be garnered;
hotels in markets with improving demographics and stable economic drivers of growth; and
hotels containing a minimum of 80 rooms.
Our organizational documents do not limit the types of investments we can make; however, our intent is to
focus primarily on midscale without food and beverage and economy hotel properties.
Hotel Management Royco Hotels and HLC, both independent contractors, manage our hotels pursuant to
hotel management agreements with TRS Lessee. The hotel management agreements provide that the management
companies have control of all operational aspects of the hotels, including employee-related matters. The
management companies must generally maintain each hotel under their management in good repair and condition
and make routine maintenance, repairs and minor alterations. Additionally, Royco Hotels must operate the hotels in
accordance with the national franchise agreements that cover the hotels, which includes, as applicable, using
franchisor sales and reservation systems as well as abiding by franchisors’ marketing standards. Royco Hotels and
HLC may not assign their management agreements without our consent.
The management agreements generally require TRS Lessee to fund debt service, working capital needs and
capital expenditures and fund Royco Hotels’ and HLC’s third-party operating expenses, except those expenses not
related to the operation of the hotels. TRS Lessee is responsible for obtaining and maintaining insurance policies
with respect to the hotels.
Royco Hotels Management Fee Royco Hotels manages 103 of the hotels we owned at December 31, 2009.
Royco Hotels receives a monthly base management fee and an incentive management fee, if certain financial
thresholds are met or exceeded. The management agreement provides for monthly base management fees and
absorbing additional operating expenses as follows:
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4.25% of gross hotel income for the month for up to the first $75 million of gross hotel income
for a fiscal year;
4.00% of gross hotel income for the month for gross hotel income exceeding $75 million up to
$100 million for a fiscal year;
3.00% of gross hotel income for the month for gross hotel income exceeding $100 million for a
fiscal year;
the base compensation of Royco Hotels district managers to be included in the operating expenses
of TRS Lessee; and
if annual net operating income exceeds 10% of our total investment in the hotels, then Royco
Hotels receives an incentive management fee of 10% of the excess of net operating income up to
the first $1 million, and 20% of excess net operating income above $1 million.
5
Royco Hotels Term and Termination The management agreement expires on December 31, 2011 and,
unless Royco Hotels elects not to extend the term, the term of the agreement will be extended to December 31, 2016
if (i) Royco Hotels achieves average annual net operating income of at least 10% of our total investment in the
hotels during the four fiscal years ending December 1, 2011 and (ii) Royco Hotels does not default prior to
December 31, 2011.
The management agreement may be terminated as follows:
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either of us may terminate the management agreement if net operating income is not at least 8.5% of
our total investment in the hotels or if we undergo a change of control;
we may terminate the agreement if Royco Hotels undergoes a change of control;
we may terminate the agreement if tax laws change to allow a hotel REIT to self manage its
properties; and
by the non-defaulting party in the event of a default that has not been cured within the cure period.
If we terminate the management agreement because we undergo a change of control, Royco Hotels
undergoes a change of control due to the death of one of its principals, or due to a tax law change, then Royco
Hotels will be entitled to a termination fee equal to 50% of the base management fee paid to Royco Hotels during
the twelve months prior to notice of termination. Under certain circumstances, Royco Hotels will be entitled to a
termination fee if we sell a hotel and do not acquire another hotel or replace the sold hotel within twelve months.
The fee, if applicable, is equal to 50% of the base management fee paid with respect to the sold hotel during the
prior twelve months.
Royco Hotels Defaults and Indemnity The following are events of default under the management
agreement:
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the failure of Royco Hotels to diligently and efficiently operate the hotels pursuant to the
management agreement;
the failure of either party to pay amounts due to the other party pursuant to the management
agreement;
certain bankruptcy, insolvency or receivership events with respect to either party;
the failure of either party to perform any of their obligations under the management agreement;
loss of the franchise license for a hotel because of Royco Hotels;
failure by Royco Hotels to pay, when due, the accounts payable for the hotels for which we have
previously reimbursed Royco Hotels; and
any of the hotels fail two successive franchisor inspections if the deficiencies are within Royco
Hotels’ reasonable control.
With the exception of certain events of default as to which no grace period exists, if an event of default
occurs and continues beyond the grace period set forth in the management agreement, the non-defaulting party has
the option of terminating the agreement.
6
The management agreement provides that each party, subject to certain exceptions, indemnifies and holds
harmless the other party against any liabilities stemming from certain negligent acts or omissions, breach of
contract, willful misconduct or tortuous actions by the indemnifying party or any of its affiliates.
HLC Management Fee The hotel management agreement with HLC, as amended July 15, 2008, provides
for HLC to operate and manage twelve of our thirteen Masters Inn hotels through December 31, 2011. The
agreement provides for HLC to receive management fees equal to 5.0% of the gross revenues derived from the
operation of the hotels and incentive fees equal to 10% of the annual operating income of the hotels in excess of
10.5% of the Company’s investment in the hotels.
Franchise Affiliation
Our 115 hotels owned at December 31, 2009 operate under the following national and independent brands:
Franchise Brand
Number of Hotels
Super 8 (1)
Comfort Inn/Comfort Suites (2)
Hampton Inn (3)
Holiday Inn Express (4)
Sleep Inn (2)
Days Inn (1)
Ramada Limited (1)
Guest House Inn/Guesthouse Inn and Suites (5)
Supertel Inn (6)
Savannah Suites (7)
Masters Inn (6)
Tara Inn (8)
Baymont Inn and Suites(1)
Key West Inns (9)
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22
2
2
2
10
1
2
3
7
13
1
1
1
115
(1) Super 8 ®, Ramada Limited ®, Days Inn ®, and Baymont Inn ® are registered trademarks of Wyndham Worldwide
(2) Comfort Inn ® , Comfort Suites ® and Sleep Inn ® are registered trademarks of Choice Hotels International, Inc.
(3) Hampton Inn ® is a registered trademark of Hilton Hotels Corporation.
(4) Holiday Inn Express ® is a registered trademark of Six Continents Hotels, Inc.
(5) Guesthouse ® is a registered trademark of Guesthouse International Franchise Systems, Inc.
(6) Supertel Inn® and Masters Inn® are registered trademarks of Supertel Hospitality, Inc.
(7) Savannah Suites® is a registered trademark of Guest House Inn Corp.
(8) Tara Inn & Suites is a registered trade name of Supertel Limited Partnership.
(9) Key West Inn ® is a registered trademark of Key West Inns.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, occupancy rates, revenues and operating results for
hotels operating in the geographic areas in which we operate are greater in the second and third quarters of the
calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which
experience peak demand in the first and fourth quarters of the year.
7
Competition
The hotel industry is highly competitive. Each of our hotels is located in a developed area that includes
other hotel properties. The number of competitive hotel properties in a particular area could have a material adverse
effect on revenues, occupancy and the average daily room rate of the hotels or at hotel properties acquired in the
future. A number of our hotels have experienced increased competition in the form of newly constructed competing
hotels in the local markets, and we expect the entry of new competition to continue in several additional markets
over the next several years.
We may compete for investment opportunities with entities that have substantially greater financial
resources than us. These entities generally may be able to accept more risk than we can prudently manage.
Competition in general may reduce the number of suitable investment opportunities for us and increase the
bargaining power of property owners seeking to sell. Further, we believe that competition from entities organized
for purposes substantially similar to our objectives could increase significantly.
Employees
At December 31, 2009, we had 16 employees. At December 31, 2009 Royco Hotels, manager of 103 of our
hotels, and HLC, manager of 12 of our hotels, had workforces of approximately 1,557 and 211 employees,
respectively, which are dedicated to the operation of the hotels.
(d)
Available Information
Our executive offices are located at 309 N. 5th St, Norfolk, Nebraska 68701, our telephone number is (402)
371-2520, and we maintain an Internet website located at www.supertelinc.com. Our annual reports on Form 10-K
and quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports are available
free of charge on our website as soon as reasonably practicable after they are filed with the SEC. We also make
available the charters of our board committees and our Code of Business Conduct and Ethics on our website.
Copies of these documents are available in print to any shareholder who requests them. Requests should be sent to
Supertel Hospitality, Inc., 309 N. 5th St, P.O. Box 1448, Norfolk, Nebraska 68701, Attn: Corporate Secretary.
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Item 1A. RISK FACTORS
Risks Related to Our Business
The current economy has negatively impacted the hotel industry.
The current difficulties in the credit markets, a softening economy and a growing apprehension among
consumers have negatively impacted the hotel industry. The slowing economy has caused a softening in business
travel, especially among construction-related workers, a particularly strong guest group for many of our hotels.
Accordingly, our financial results and growth could be harmed if the economic slowdown continues for a significant
period or becomes worse.
The weakening economy may impact our current borrowings.
As discussed in “Liquidity and Capital Resources” below and Note 6 of our financial statements contained
herein, during March 2010 we asked for and received amendments and waivers of certain covenants from lenders.
If our plans to meet our liquidity requirements in the weakening economy are not successful, we may violate our
future loan covenants. If we violate covenants in our indebtedness agreements, we could be required to repay all or
a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such
repayment on favorable terms, if at all.
8
The impact of the weakening economy on lenders may impact our future borrowings.
The weakening of the national economy increases the financial instability of some lenders. As a result, we expect
lenders may tighten their lending standards, which could make it more difficult for us to obtain future revolving
credit facilities on terms similar to the terms of our current revolving credit facilities or to obtain long-term
financing on favorable terms or at all. Our financial condition and results of operations would be adversely affected
if we were unable to obtain cost-effective financing.
We cannot assure you that we will qualify, or remain qualified, as a REIT.
We currently are taxed as a REIT, and we expect to qualify as a REIT for future taxable years, but we cannot
assure you that we will remain qualified as a REIT. If we fail to remain qualified as a REIT, all of our earnings will
be subject to federal income taxation, which will reduce the amount of cash available for distribution to our
stockholders, and we will not be required to distribute our income to our stockholders.
Our returns depend on management of our hotels by third parties.
In order to qualify as a REIT, we cannot operate any hotel or participate in the decisions affecting the daily
operations of any hotel. Under the REIT Modernization Act of 1999, REITs are permitted to lease their hotels to
TRSs. However, a TRS, such as TRS Lessee, may not operate or manage the leased hotels and, therefore, must enter
into management agreements with third-party eligible independent contractors to manage the hotels. Thus, an
independent operator under a management agreement with TRS Lessee controls the daily operations of each of our
hotels.
Under the terms of the management agreements between TRS Lessee and Royco Hotels and HLC, our ability to
participate in operating decisions regarding the hotels is limited. We depend on Royco Hotels and HLC to
adequately operate our hotels as provided in the management agreements. We do not have the authority to require
any hotel to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel
(for instance, setting room rates). Thus, even if we believe our hotels are being operated inefficiently or in a manner
that does not result in satisfactory occupancy rates, revenue per available room and average daily rates, we may not
be able to force Royco Hotels or HLC to change their methods of operation of our hotels. We can only seek redress
if a management company violates the terms of the management agreement with TRS Lessee, and then only to the
extent of the remedies provided for under the terms of the applicable management agreement. Additionally, in the
event that we need to replace a management company, we may experience decreased occupancy and other
significant disruptions at our hotels and in our operations generally.
Failure of the hotel industry to continue to improve or remain stable may adversely affect our ability to
execute our business strategies, which, in turn, would adversely affect our ability to make distributions to our
stockholders.
Our business strategy is focused in the hotel industry, and we cannot assure you that hotel industry
fundamentals will continue to improve or remain stable. Economic slowdown and world events outside our control,
such as terrorism, have adversely affected the hotel industry in the recent past and if these events reoccur, may
adversely affect the industry in the future. In the event conditions in the hotel industry do not continue to improve or
remain stable, our ability to execute our business strategies will be adversely affected, which, in turn, would
adversely affect our ability to make distributions to our stockholders.
Arranging financing for acquisitions and dispositions of hotels is difficult in the current capital markets.
The capital markets are weakened as a consequence of the weakening economy. Although we will continue to
carefully evaluate and discuss both buying and selling opportunities, debt and equity financing could be a challenge
to obtain for acquisitions and dispositions of hotels.
9
We face competition for the acquisition of hotels and we may not be successful in identifying or completing
hotel acquisitions that meet our criteria, which may impede our growth.
One component of our business strategy is expansion through acquisitions, and we may not be successful in
identifying or completing acquisitions that are consistent with our strategy, particularly in the current economy. We
compete with institutional pension funds, private equity investors, REITs, hotel companies and others who are
engaged in the acquisition of hotels. This competition for hotel investments may increase the price we pay for hotels
and these competitors may succeed in acquiring those hotels that we seek to acquire. Furthermore, our potential
acquisition targets may find our competitors to be more attractive suitors because they may have greater marketing
and financial resources, may be willing to pay more or may have a more compatible operating philosophy. In
addition, the number of entities competing for suitable hotels may increase in the future, which would increase
demand for these hotels and the prices we must pay to acquire them. If we pay higher prices for hotels, our returns
on investment and profitability may be reduced. Also, future acquisitions of hotels or hotel companies may not yield
the returns we expect and may result in stockholder dilution.
Our TRS lessee structure subjects us to the risk of increased operating expenses.
Our hotel management agreements require us to bear the operating risks of our hotel properties. Our operating
risks include not only changes in hotel revenues and changes in TRS Lessee’s ability to pay the rent due under the
leases, but also increased operating expenses, including, among other things:
• wage and benefit costs;
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•
•
•
•
repair and maintenance expenses;
energy costs;
property taxes;
insurance costs; and
other operating expenses.
Any decreases in hotel revenues or increases in operating expenses could have a materially adverse effect on
our earnings and cash flow.
Our debt service obligations could adversely affect our operating results, may require us to liquidate our
properties and limit our ability to make distributions to our stockholders.
We seek to maintain a total stabilized debt level of no more than 40% to 55% of our aggregate property
investment at cost. We, however, may change or eliminate this target at any time without the approval of our
stockholders. At January 31, 2010, our debt to property investment was approximately 53%. In the future, we and
our subsidiaries may incur substantial additional debt, including secured debt. Incurring such debt could subject us
to many risks, including the risks that:
•
our cash flow from operations will be insufficient to make required payment of principal and interest;
• we may be more vulnerable to adverse economic and industry conditions;
• we may be required to dedicate a substantial portion of our cash flow from operations to the repayment of
our debt, thereby reducing the cash available for distribution to our stockholders, funds available for
operations and capital expenditures, future investment opportunities or other purposes;
10
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the terms of any refinancing may not be as favorable as the terms of the debt being refinanced; and
the use of leverage could adversely affect our stock price and the ability to make distributions to our
stockholders.
If we violate covenants in our indebtedness agreements, we could be required to repay all or a portion of our
indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on
favorable terms, if at all. Our Great Western Bank and Wells Fargo Bank credit facilities contain cross-default
provisions which would allow Great Western Bank and Wells Fargo Bank to declare a default and accelerate our
indebtedness to them if we default on certain other loans, and such default would permit that lender to accelerate our
indebtedness under any such loan.
Approximately $7.9 million of the Company’s long term debt, excluding debt related to hotel properties held for
sale, is scheduled to mature in 2010. If we do not have sufficient funds to repay our debt at maturity, we intend to
refinance this debt through additional debt financing, private or public offerings of debt securities, or additional
equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest
rates on refinancings, increases in interest expense
could adversely affect our cash flow, and, consequently, our cash available for distribution to our stockholders. If we
are unable to refinance our debt on acceptable terms, we may be forced to dispose of our hotel properties on
disadvantageous terms, potentially resulting in losses adversely affecting cash flow from operating activities. In
addition, we may place mortgages on our hotel properties to secure our line of credit or other debt. To the extent we
cannot meet these debt service obligations, we risk losing some or all of those properties to foreclosure.
Additionally, our debt covenants could impair our planned strategies and, if violated, result in a default of our debt
obligations.
Higher interest rates could increase debt service requirements on our floating rate debt and could reduce the
amounts available for distribution to our stockholders, as well as reduce funds available for our operations, future
investment opportunities or other purposes. We may obtain in the future one or more forms of interest rate
protection—in the form of swap agreements, interest rate cap contracts or similar agreements—to “hedge” against
the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will
adequately mitigate the adverse effects of interest rate increases or that counterparties under these agreements will
honor their obligations. In addition, we may be subject to risks of default by hedging counterparties. Adverse
economic conditions could also cause the terms on which we borrow to be unfavorable.
Our ability to make distributions of our common and preferred stock is subject to fluctuations in our financial
performance, operating results and capital improvement requirements.
As a REIT, we generally are required to distribute annually at least 90% of our REIT taxable income,
determined without regard to the dividends paid deduction, each year to our stockholders. In the event of future
downturns in our operating results and financial performance or unanticipated capital improvements to our hotel
properties, we may be unable to declare or pay distributions to our stockholders. We may not generate sufficient
cash in order to fund distributions to our stockholders, which may require us to sell assets or borrow money to
satisfy the REIT distribution requirements.
Among the factors which could adversely affect our results of operations and our distributions to stockholders
are reduced net operating profits or operating losses, increased debt service requirements and capital expenditures at
our hotel properties. Among the factors which could reduce our net operating profits are decreases in hotel property
revenues and increases in hotel property operating expenses. Hotel property revenue can decrease for a number of
reasons, including increased competition from a new supply of rooms and decreased demand for rooms. These
factors can reduce both occupancy and room rates at our hotel properties.
The timing and amount of distributions are in the sole discretion of our Board of Directors, which will consider,
among other factors, our actual results of operations, debt service requirements, capital expenditure requirements for
our properties and our operating expenses. We suspended our quarterly common stock dividend in March 2009 to
11
preserve our capital in a difficult economic environment. Our future dividends on our preferred stock may be
reduced or also suspended if economic circumstances warrant.
We have restrictive debt covenants that could adversely affect our ability to run our business.
We file quarterly loan compliance certificates with certain of our lenders. Weakness in the economy, and the
lodging industry at large, may result in our non-compliance with our loan covenants. Such non-compliance with our
loan covenants may result in our lenders restricting the use of our operating funds for capital improvements to our
existing hotels, including improvements required by our franchise agreements. We cannot assure you that our loan
covenants will permit us to maintain our historic business strategy.
Our restrictive debt covenants may jeopardize our tax status as a REIT.
To maintain our REIT status, we generally must distribute at least 90% of our REIT taxable income to our
stockholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed
to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. In the
event we do not comply with our debt service obligations, our lenders may limit our ability to make distributions to
our shareholders, which could adversely affect our REIT status.
Our failure to have distributed the former Supertel’s earnings and profits may compromise our tax status.
At the end of any taxable year, a REIT may not have any accumulated earnings and profits (described generally
for federal income tax purposes as cumulative undistributed net income) from a non-REIT corporation. In October
1999, our company and the former Supertel Hospitality, Inc. merged. We were the surviving entity in the merger
and in May 2005 we changed our name to Supertel Hospitality, Inc. Prior to the effective time of the merger
between our company and the former Supertel, the former Supertel paid a dividend to its stockholders of record in
the amount of its accumulated earnings and profits for federal income tax purposes. Accordingly, we should not
have succeeded to any of the then current and accumulated earnings and profits of the former Supertel. However, the
determination of accumulated earnings and profits for federal income tax purposes is extremely complex and the
former Supertel’s computations of its accumulated earnings and profits are not binding upon the IRS. Should the
IRS successfully assert that the former Supertel’s accumulated earnings and profits were greater than the amount
distributed by the former Supertel, we may fail to qualify as a REIT.
Operating our hotels under franchise agreements could adversely affect distributions to our shareholders.
Ninety-one of our hotels operate under third party franchise agreements and we are subject to the risks of
concentrating our hotel investments in several franchise brands. These risks include reductions in business following
negative publicity related to any one of our particular brands. Risks associated with our brands could adversely
affect our lease revenues and the amounts available for distribution to our shareholders.
The maintenance of the franchise licenses for our hotels is subject to our franchisors’ operating standards and
other terms and conditions. Our franchisors periodically inspect our hotels to ensure that we and TRS Lessee follow
their standards. Failure to maintain these standards or other terms and conditions could result in a franchise license
being canceled. As a condition of our continued holding of a franchise license, a franchisor could also possibly
require us to make capital expenditures, even if we do not believe the capital improvements are necessary or
desirable or will result in an acceptable return on our investment. Nonetheless, we may risk losing a franchise
license if we do not make franchisor-required capital expenditures.
If a franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise or
to operate the hotel without a franchise license. The loss of a franchise license could materially and adversely affect
the operations or the underlying value of the hotel because of the loss of associated name recognition, marketing
support and centralized reservation systems provided by the franchisor. Loss of a franchise license for several of our
hotels could materially and adversely affect our revenues. This loss of revenues could, therefore, also adversely
affect our cash available for distribution to shareholders.
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Our inability to obtain financing could limit our growth.
We are required to distribute at least 90% of our REIT taxable income to our shareholders each year in order to
continue to qualify as a REIT. Our debt service obligations and distribution requirements limit our ability to fund
capital expenditures, acquisitions and hotel development through retained earnings. Our ability to grow through
acquisitions or development of hotels will be limited if we cannot obtain debt or equity financing.
Neither our articles of incorporation nor our bylaws limit the amount of debt we can incur. Our Board of
Directors can implement and modify a debt limitation policy without shareholder approval. We cannot assure you
that we will be able to obtain additional equity financing or debt financing or that we will be able to obtain any
financing on favorable terms.
We may not be able to complete development of new hotels on time or within budget.
We may develop hotel properties as suitable opportunities arise. New project development is subject to a
number of risks that could cause increased costs or delays in our ability to generate revenue from any development
hotel, reducing our cash available for distribution to shareholders. These risks include:
•
•
•
construction delays or cost overruns that may increase project costs;
competition for suitable development sites;
receipt of zoning, land use, building, construction, occupancy and other required governmental permits and
authorizations; and
•
substantial development costs in connection with projects that are not completed.
We may not be able to complete the development of any projects we begin and, if completed, our development
and construction activities may not be completed in a timely manner or within budget.
We may also rehabilitate hotels that we believe are underperforming. These rehabilitation projects will be
subject to the same risks as development projects.
Hotels that we develop have no operating history and may not achieve levels of occupancy that result in levels
of operating income that provide us with an attractive return on our investment.
The new hotels that we may develop will have no operating history. These hotels, both during the start-up
period and after they have stabilized, may not achieve anticipated levels of occupancy, average daily room rates, or
gross operating margins, and could result in operating losses and reduce the amount of distributions to our
shareholders.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our
reliance on a co-venturer’s financial condition and disputes between us and our co-venturers.
We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring
non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture
or other entity. In such event, we would not be in a position to exercise sole decision-making authority regarding the
property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may,
under certain circumstances, involve risks not present were a third party not involved, including the possibility that
partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions.
Investments in joint ventures may require that we provide the joint venture entity with the right of first offer or right
of first refusal to acquire any new property we consider acquiring directly. Partners or co-venturers may have
economic or other business interests or goals which are inconsistent with our business interests or goals, and may be
in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk
of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full
13
control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in
litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing
their time and effort on our business. Consequently, actions by, or disputes with, partners or co-venturers might
result in subjecting properties owned by the partnership or joint venture to additional risk. We may also, in certain
circumstances, be liable for the actions of our third-party partners or co-venturers. For example, we may be required
to guarantee indebtedness incurred by a partnership, joint venture or other entity for the purchase or renovation of a
hotel property. Such a guarantee may be on a joint and several basis with our partner or co-venturer in which case
we may be liable in the event such party defaults on its guaranty obligation.
Our business could be disrupted if we need to find a new manager upon termination of an existing
management agreement.
If Royco Hotels or HLC fails to materially comply with the terms of the management agreement, we have the
right to terminate the management agreement. Upon termination, we would have to find another manager to manage
the property. We cannot operate the hotels directly due to federal income tax restrictions. We cannot assure you that
we would be able to find another manager or that, if another manager were found, we would be able to enter into a
new management agreement favorable to us. Our franchisors may require us to make substantial capital
improvements to the hotels prior to their approval, if required, of a new manager. There would be disruption during
any change of hotel management that could adversely affect our operating results and reduce our distributions to our
shareholders.
We may not be able to sell hotels on favorable terms.
We sold eight hotels in 2009, and we sold two hotels in 2008. At December 31, 2009, we have nineteen hotel
properties held for sale. We may not be able to sell such hotels on favorable terms, and such hotels may be sold at a
loss. As with acquisitions, we face competition for buyers of our hotel properties. Other sellers of hotels may have
the financial resources to dispose of their hotels on unfavorable terms that we would be unable to accept. If we
cannot find buyers for any properties that are designated for sale, we will not be able to implement our disposition
strategy. In the event that we cannot fully execute our disposition strategy or realize the benefits therefrom, we will
not be able to fully execute our growth strategy.
Geographic concentration of our hotels will make our business vulnerable to economic downturns in the
Midwestern and Eastern United States.
Most of our hotels are located in the Midwestern and Eastern United States. Economic conditions in the
Midwestern and Eastern United States will significantly affect our revenues and the value of our hotels. Business
layoffs or downsizing, industry slowdowns, changing demographics and other similar factors may adversely affect
the economic climate in these areas. Any resulting oversupply or reduced demand for hotels in the Midwestern and
Eastern United States and our markets in particular would therefore have a disproportionate negative impact on our
revenues and limit our ability to make distributions to stockholders.
Unanticipated expenses and insufficient demand for hotels we acquire in new geographic markets could
adversely affect our profitability and our ability to make distributions to our stockholders.
As part of our business plan, we may develop or acquire hotels in geographic areas in which our management
may have little or no operating experience and in which potential customers may not be familiar with our franchise
brands. As a result, we may have to incur costs relating to the opening, operation and promotion of those new hotel
properties that are substantially greater than those incurred in other areas. These hotels may attract fewer customers
than our existing hotels, while at the same time, we may incur substantial additional costs with these new hotel
properties. Unanticipated expenses and insufficient demand at a new hotel property, therefore, could adversely affect
our profitability and our ability to make distributions to our stockholders.
14
An economic recession and industry downturn could adversely affect our results of operations.
If room supply outpaces demand, our operating margins may deteriorate and we may be unable to execute our
business plan. In addition, if this trend continues, we may be unable to continue to meet our debt service obligations
or to obtain necessary additional financing.
Our borrowing costs are sensitive to fluctuations in interest rates.
Higher interest rates could increase debt service requirements on our floating rate debt including any
borrowings under our credit facilities. Any borrowings under our credit facilities having floating interest rates may
increase due to market conditions. Adverse economic conditions could also cause the terms on which we borrow to
be unfavorable. We could be required to liquidate one or more of our hotel investments at times which may not
permit us to receive an attractive return on our investments in order to meet our debt service obligations.
Future acquisitions may not yield the returns expected, may result in disruptions to our business, may strain
management resources, may not be efficiently integrated into operations, and may result in stockholder
dilution.
Our business strategy may not ultimately be successful and may not provide positive returns on our
investments. Acquisitions may cause disruptions in our operations and divert management’s attention away from
day-to-day operations. If the integration of our acquisitions into our management companies’ operations is not
accomplished as efficiently as planned, we will not achieve the expected operating results from the acquisitions.
The issuance of equity securities in connection with any acquisition could be substantially dilutive to our
stockholders.
[
We depend on key personnel.
We depend on the efforts and expertise of our chief executive officer and chief financial officer to drive our
day-to-day operations and strategic business direction. The loss of any of their services could have an adverse effect
on our operations. Our ability to replace key individuals may be difficult because of the limited number of
individuals with the breadth of skills and experience needed to excel in the hotel industry. There can be no assurance
that we would be able to hire, train, retain or motivate such individuals.
Risks Related to the Hotel Industry
Our ability to make distributions to our shareholders may be affected by factors in the hotel industry that are
beyond our control.
Operating Risks
Our hotels are subject to various operating risks found throughout the hotel industry. Many of these risks are
beyond our control. These include, among other things, the following:
•
•
•
•
•
•
competitors with substantially greater marketing and financial resources than us;
over-building in our markets, which adversely affects occupancy and revenues at our hotels;
dependence on business and commercial travelers and tourism;
terrorist incidents which may deter travel;
increases in hotel operating costs, energy costs, airline fares and other expenses, which may affect travel
patterns and reduce the number of business and commercial travelers and tourists; and
adverse effects of general, regional and local economic conditions.
15
These factors could adversely affect the amount of rent we receive from leasing our hotels and reduce the net
operating profits of TRS Lessee, which in turn could adversely affect our ability to make distributions to our
shareholders. Decreases in room revenues of our hotels will result in reduced operating profits for TRS Lessee and
decreased lease revenues to our company under our current percentage leases with TRS Lessee.
Competition and Financing for Acquisitions
We compete for investment opportunities with entities that have substantially greater financial resources than
we do. These entities generally may be able to accept more risk than we can manage wisely. This competition may
generally limit the number of suitable investment opportunities offered to us. This competition may also increase the
bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties
on attractive terms. Additionally, current economic conditions present difficult challenges to obtaining financing for
acquisitions.
Seasonality of Hotel Business
The hotel industry is seasonal in nature. Generally, occupancy rates, hotel revenues, and operating results are
greater in the second and third quarters than in the first and fourth quarters, with the exception of our hotels located
in Florida. This seasonality can be expected to cause quarterly fluctuations in our lease revenues. Our quarterly
earnings may be adversely affected by factors outside our control, including bad weather conditions and poor
economic factors. As a result, we may have to enter into short-term borrowings in our first and fourth quarters in
order to offset these fluctuations in revenues.
Investment Concentration in Particular Segments of Single Industry
Our entire business is hotel-related. Our investment strategy is to acquire interests in midscale without food and
beverage and economy hotel properties. Therefore, a downturn in the hotel industry in general and the economy and
midscale without food and beverage segments in particular will have a material adverse effect on our lease revenues
and amounts available for distribution to our shareholders.
Capital Expenditures
Our hotels have an ongoing need for renovations and other capital improvements, including replacements, from
time to time, of furniture, fixtures and equipment. The franchisors of our hotels also require periodic capital
improvements as a condition of keeping the franchise licenses. The costs of all of these capital improvements could
adversely affect our financial condition and reduce the amounts available for distribution to our shareholders. These
renovations may give rise to the following risks:
•
•
•
possible environmental problems;
construction cost overruns and delays;
a possible shortage of available cash to fund renovations and the related possibility that financing for these
renovations may not be available to us on affordable terms; and
•
uncertainties as to market demand or a loss of market demand after renovations have begun.
For the twelve months ended December 31, 2009, we spent approximately $4.5 million for capital
improvements to our hotels.
16
Recent economic trends, the military action in Afghanistan and Iraq and prospects for future terrorist acts
and military action have adversely affected the hotel industry generally, and similar future events could
adversely affect the industry in the future.
Terrorist attacks and the after-effects (including the prospects for more terror attacks in the United States and
abroad), combined with economic trends and the U.S. led military action in Afghanistan and Iraq, substantially
reduced business and leisure travel and lodging industry RevPAR generally. We cannot predict the extent to which
these factors will directly or indirectly impact your investment in our common stock, the lodging industry or our
operating results in the future. Declining RevPAR at our hotels would reduce our net income and restrict our ability
to fund capital improvements at our hotels and our ability to make distributions to stockholders necessary to
maintain our status as a REIT. Additional terrorist attacks, acts of war or similar events could have further material
adverse effects on the markets on which shares of our stock will trade, the lodging industry in general and our
operations in particular.
Uninsured and underinsured losses could adversely affect our operating results and our ability to make
distributions to our stockholders.
We intend to maintain comprehensive insurance on each of our hotel properties, including liability, fire and
extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. There are no
assurances that current coverage will continue to be available at reasonable rates. Various types of catastrophic
losses, like earthquakes and floods, losses from foreign or domestic terrorist activities, may not be insurable or may
not be economically insurable. Initially, we do not expect to obtain terrorism insurance on our hotel properties
because it is costly. Lenders may require such insurance and our failure to obtain such insurance could constitute a
default under loan agreements. Depending on our access to capital, liquidity and the value of the properties securing
the affected loan in relation to the balance of the loan, a default could reduce our net income and limit our ability to
obtain future financing.
In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market
value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur,
we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue
from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial
obligations related to the property. Inflation, changes in building codes and ordinances, environmental
considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel
after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be
inadequate to restore our economic position on the damaged or destroyed property.
The hotel business is capital intensive, and our inability to obtain financing could limit our growth.
Our hotel properties will require periodic capital expenditures and renovation to remain competitive.
Acquisitions or development of additional hotel properties will require significant capital expenditures. See our risk
factors above concerning the impact of the weakening economy on capital markets, the hotel industry and
borrowing. The lenders under some of the mortgage debt that we will assume will require us to set aside varying
amounts each year for capital improvements at our hotels. We may not be able to fund capital improvements or
acquisitions solely from cash provided from our operating activities because we must distribute at least 90% of our
REIT taxable income, excluding net capital gains, each year to maintain our REIT tax status. Consequently, we rely
upon the availability of debt or equity capital to fund hotel acquisitions and improvements. As a result, our ability to
fund capital expenditures, acquisitions or hotel development through retained earnings is very limited. Our ability to
grow through acquisitions or development of hotels will be limited if we cannot obtain satisfactory debt or equity
financing which will depend on market conditions. Neither our charter nor our bylaws limits the amount of debt that
we can incur. However, we cannot assure you that we will be able to obtain additional equity or debt financing or
that we will be able to obtain such financing on favorable terms.
17
Noncompliance with governmental regulations could adversely affect our operating results.
Environmental Matters
Our hotel properties are subject to various federal, state and local environmental laws. Under these laws, courts
and government agencies have the authority to require the owner of a contaminated property to clean up the
property, even if the owner did not know of or was not responsible for the contamination. These laws also apply to
persons who owned a property at the time it became contaminated. In addition to the costs of cleanup, contamination
can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral.
Under these environmental laws, courts and government agencies also have the authority to require that a
person who sent waste to a waste disposal facility, like a landfill or an incinerator, pay for the clean-up of that
facility if it becomes contaminated and threatens human health or the environment. Furthermore, court decisions
have established that third parties may recover damages for injury caused by property contamination. For instance, a
person exposed to asbestos while staying in a hotel may seek to recover damages if he suffers injury from the
asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various
activities at a property. One example is laws that require a business using chemicals to manage them carefully and to
notify local officials that the chemicals are being used.
Our company could be responsible for the costs discussed above if it found itself in one or more of these
situations. The costs to clean up a contaminated property, to defend against a claim, or to comply with
environmental laws could be material and could affect the funds available for distribution to our shareholders. To
determine whether any costs of this nature might be required, we commissioned Phase I environmental site
assessments, or “ESAs” before we acquired our hotels, and in 2002, commissioned new ESAs for 32 of our hotels in
conjunction with a refinancing of the debt obligations of those hotels. These studies typically included a review of
historical information and a site visit, but not soil or groundwater testing. We obtained the ESAs to help us identify
whether we might be responsible for cleanup costs or other costs in connection with our hotels. The ESAs on our
hotels did not reveal any environmental conditions that are likely to have a material adverse effect on our business,
assets, results of operations or liquidity. However, ESAs do not always identify all potential problems or
environmental liabilities. Consequently, we may have material environmental liabilities of which we are unaware.
Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations
Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations must meet various
federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could
require removal of access barriers and non-compliance could result in the U.S. government imposing fines or in
private litigants obtaining damages. If we were required to make substantial modifications to our hotels, whether to
comply with the ADA or other changes in governmental rules and regulations, our ability to make distributions to
our shareholders and meet our other obligations could be adversely affected.
General Risks Related to the Real Estate Industry
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the
performance of our properties and harm our financial condition.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties
or investments in our portfolio in response to changing economic, financial and investment conditions may be
limited. In addition, our management agreements with Royco Hotels and HLC require us to pay a termination fee
upon the sale of a certain number of hotels, which will limit our ability to sell hotel properties. The real estate
market is affected by many factors that are beyond our control, including:
(cid:120)
(cid:120)
adverse changes in international, national, regional and local economic and market conditions;
changes in interest rates and in the availability, cost and terms of debt financing;
18
(cid:120)
(cid:120)
(cid:120)
(cid:120)
changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs
of compliance with laws and regulations, fiscal policies and ordinances;
the ongoing need for capital improvements, particularly in older structures;
changes in operating expenses; and
civil unrest, acts of God, including earthquakes, floods and other natural disasters and acts of war or
terrorism, including the consequences of terrorist acts such as those that occurred on September 11, 2001,
which may result in uninsured losses.
We may decide to sell our hotel properties in the future. We cannot predict whether we will be able to sell any
hotel property or investment for the price or on the terms set by us, or whether any price or other terms offered by a
prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing
purchaser and to close the sale of a hotel property or loan.
We may be required to expend funds to correct defects or to make improvements before a hotel property can be
sold. We cannot assure you that we will have funds available to correct those defects or to make those
improvements. In acquiring a hotel property, we may agree to lock-out provisions that materially restrict us from
selling that hotel property for a period of time or impose other restrictions, such as limitation on the amount of debt
that can be placed or repaid on that hotel property. These facts and any others that would impede our ability to
respond to adverse changes in the performance of our hotel properties could have a material adverse effect on our
operating results and financial condition, as well as our ability to make distributions to stockholders.
Our hotels may contain or develop harmful mold, which could lead to liability for adverse health effects and
costs of remediating the problem.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur,
particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds
may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to
mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result,
the presence of significant mold at any of our properties could require us to undertake a costly remediation program
to contain or remove the mold from the affected property, which would reduce our cash available for distribution,
and we could face legal claims from guests. In addition, the presence of significant mold could expose us to liability
from our guests, employees or our management companies and others if property damage or health concerns arise.
Risks Related to our Organization and Structure
Our failure to qualify as a REIT under the federal tax laws would result in adverse tax consequences.
The federal income tax laws governing REITs are complex.
We currently operate as a REIT under the federal income tax laws. The REIT qualification requirements are
extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT
are limited. Accordingly, we cannot be certain that we would be successful in operating so that we can qualify as a
REIT. At any time, new laws, interpretations, or court decisions may change the federal tax laws or the federal
income tax consequences of our qualification as a REIT. We have not applied for or obtained rulings from the
Internal Revenue Service that we will qualify as a REIT.
Failure to qualify as a REIT would subject us to federal income tax.
If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable
income. We might need to borrow money or sell assets in order to pay any such tax. If we cease to be a REIT, we no
longer would be required to distribute most of our taxable income to our stockholders. Unless we were entitled to
relief under certain federal income tax laws, we could not re-elect REIT status during the four calendar years after
the year in which we failed to qualify as a REIT.
19
Failure to make required distributions would subject us to tax.
In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income,
determined without regard to the dividends paid deduction, each year to our stockholders. To the extent that we
satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to
federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% non-deductible
excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount
specified under federal tax laws. As a result, for example, of differences between cash flow and the accrual of
income and expenses for tax purposes, or of nondeductible expenditures, our REIT taxable income in any given year
could exceed our cash available for distribution. In addition, to the extent we may retain earnings of TRS Lessee in
those subsidiaries, such amount of cash would not be available for distribution to our stockholders to satisfy the 90%
distribution requirement. Accordingly, we may be required to borrow money or sell assets to make distributions
sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid
federal corporate income tax and the 4% non-deductible excise tax in a particular year.
The formation of TRS Lessee increases our overall tax liability.
TRS Lessee is subject to federal and state income tax on its taxable income, which in the case of TRS Lessee
currently consists and generally will continue to consist of revenues from the hotel properties leased by TRS Lessee,
net of the operating expenses for such properties and rent payments to us. Accordingly, although our ownership of
TRS Lessee allows us to participate in the operating income from our hotel properties in addition to receiving rent,
that operating income is fully subject to income tax. Such taxes could be substantial. The after-tax net income of
TRS Lessee is available for distribution to us.
We incur a 100% excise tax on transactions with TRS Lessee that are not conducted on an arm’s-length basis.
For example, to the extent that the rent paid by TRS Lessee exceeds an arm’s-length rental amount, such amount
potentially is subject to the excise tax. We intend that all transactions between us and TRS Lessee will continue to
be conducted on an arm’s-length basis and, therefore, that the rent paid by TRS Lessee to us will not be subject to
the excise tax.
Complying with REIT requirements may cause us to forego attractive opportunities that could otherwise
generate strong risk-adjusted returns and instead pursue less attractive opportunities, or none at all.
To continue to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning,
among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute
to our stockholders and the ownership of our stock. Thus, compliance with the REIT requirements may hinder our
ability to operate solely on the basis of generating strong risk-adjusted returns on invested capital for our
stockholders.
Complying with REIT requirements may force us to liquidate otherwise attractive investments, which could
result in an overall loss on our investments.
To continue to qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of
the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The
remainder of our investment in securities (other than government securities and qualified real estate assets) generally
cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total
value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our
assets (other than government securities and qualified real estate assets) can consist of the securities of any one
issuer, and no more than 20% of the value of our total securities can be represented by securities of one or more
TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure
within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax
consequences. If we fail to comply with these requirements at the end of any calendar quarter, we may be able to
preserve our REIT status by benefiting from certain statutory relief provisions. Except with respect to a de minimis
failure of the 5% asset test or the 10% vote or value test, we can maintain our REIT status only if the failure was
20
due to reasonable cause and not to willful neglect. In that case, we will be required to dispose of the assets causing
the failure within six months after the last day of the quarter in which we identified the failure, and we will be
required to pay an additional tax of the greater of $50,000 or the product of the highest applicable tax rate (currently
35%) multiplied by the net income generated on those assets. As a result, we may be required to liquidate otherwise
attractive investments.
Taxation of dividend income could make our common stock less attractive to investors and reduce the market
price of our common stock.
At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws
may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect
us or you as a stockholder. Legislation enacted in 2003 and 2006 generally reduced the maximum rate of tax
applicable to individuals, trusts and estates on dividend income from regular C corporations to 15.0% through 2010.
This reduced substantially the so-called “double taxation” (that is, taxation at both the corporate and stockholder
levels) that has generally applied to corporations that are not taxed as REITs. Generally, dividends from REITs do
not qualify for the dividend tax reduction because, as a result of the dividends paid deduction to which REITs are
entitled, REITs generally do not pay corporate level tax on income that they distribute to stockholders. As a result of
that legislation, individual, trust, and estate investors could view stocks of non-REIT corporations as more attractive
relative to shares of REITs than was the case previously because the dividends paid by non-REIT corporations are
subject to lower tax rates for such investors.
Provisions of our charter may limit the ability of a third party to acquire control of our company.
In order to maintain our REIT qualification, no more than 50% in value of our outstanding capital stock may be
owned, directly or indirectly, by five or fewer individuals (as defined in the federal income tax laws to include
various kinds of entities) during the last half of any taxable year. Our articles of incorporation contain the ownership
limitation, which prohibits both direct and indirect ownership of more than 9.9% of the outstanding shares of our
common stock or 9.9% of any series of our preferred stock by any person, subject to several exceptions. Generally,
any shares of our capital stock owned by affiliated owners will be added together for purposes of the ownership
limitation.
These ownership limitations may prevent an acquisition of control of our company by a third party without our
board of directors’ approval, even if our stockholders believe the change of control is in their best interests. Our
charter authorizes our board of directors to issue shares of common stock and shares of preferred stock, and to set
the preferences, rights and other terms of the preferred stock. Furthermore, our board of directors may, without any
action by the stockholders, amend our charter from time to time to increase or decrease the aggregate number of
shares of stock of any class or series of preferred stock that we have authority to issue. Issuances of additional shares
of stock may have the effect of delaying, deferring or preventing a transaction or a change in control of our company
that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best
interests.
Our ownership limitation may prevent you from engaging in certain transfers of our capital stock.
If anyone transfers shares in a way that would violate the ownership limitation described above or prevent us
from continuing to qualify as a REIT under the federal income tax laws, we will consider the transfer to be null and
void from the outset, and the intended transferee of those shares will be deemed never to have owned the shares.
Those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either
redeemed by our company or sold to a person whose ownership of the shares will not violate the ownership
limitation. Anyone who acquires shares in violation of the ownership limitation or the other restrictions on transfer
in our articles of incorporation bears the risk that he will suffer a financial loss when the shares are redeemed or sold
if the market price of our stock falls between the date of purchase and the date of redemption or sale.
21
We may be subject to the 100% prohibited transaction tax on the gain recognized on the hotels we sold
between 2001 and 2004.
A REIT will incur a 100% tax on the net income derived from any sale or other disposition of property that the
REIT holds primarily for sale to customers in the ordinary course of a trade or business. We undertook a specific
disposition program beginning in 2001 that included the sale of 23 hotels through December 31, 2004. We held the
disposed hotels for an average period of eight years and did not acquire the hotels for purposes of resale.
Accordingly, we do not believe any of those hotels were held primarily for sale in the ordinary course of our trade or
business. However, if the Internal Revenue Service would successfully assert that we held such hotels primarily for
sale in the ordinary course of our business, the gain from such sales could be subject to a 100% prohibited
transaction tax.
The ability of our board of directors to change our major corporate policies may not be in your interest.
Our board of directors determines our major corporate policies, including our acquisition, financing, growth,
operations and distribution policies. Our board may amend or revise these and other policies from time to time
without the vote or consent of our stockholders.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Our Company headquarters is located in Norfolk, Nebraska in an office building owned by us. The following
table sets forth certain information with respect to the hotels owned by us as of December 31, 2009:
Hotel Brand
Super 8
Aksarben-Omaha, NE
Antigo, WI
Batesville, AR
Billings, MT
Boise, ID
Burlington, IA
Clarinda, IA
Clinton, IA
Columbus, GA
Columbus, NE
Cornhusker–Lincoln, NE
Creston, IA
El Dorado, KS
Fayetteville, AR
Ft. Madison, IA
Green Bay, WI
Hays, KS
Iowa City, IA
Jefferson City, MO
Keokuk, IA
Kingdom City, MO
Kirksville, MO
Lenexa, KS
Manhattan, KS
Menomonie, WI
Moberly, MO
Mt. Pleasant, IA
Muscatine, IA
Neosho, MO
Norfolk, NE
O’Neill, NE
Omaha, NE
Parsons, KS
Pella, IA
Pittsburg, KS
Portage, WI
Sedalia, MO
Shawano, WI
Storm Lake, IA
Terre Haute, IN
Tomah, WI
Watertown, SD
Rooms
Hotel Brand
Rooms
Hotel Brand
Rooms
73
52
49
106
108
62
40
62
74
63
133
121
49
83
40
83
76
84
77
61
60
61
101
85
81
60
55
63
58
64
72
116
48
40
64
61
87
55
59
117
65
57
Super 8 - Continued
Wayne, NE
West “O” – Lincoln, NE
West Dodge– Omaha, NE
West Plains, MO
Wichita – (Park City), KS
Wichita, KS
Baymont Inn & Suites
Brooks, KY
Comfort Inn /Comfort Suites
Alexandria, VA
Beacon Marina-Solomons, MD
Chambersburg, PA
Culpeper, VA
Dover, DE
Dublin, VA
Erlanger, KY
Farmville, VA
Fayetteville, NC
Fort Wayne, IN
Glasgow, KY
Lafayette, IN
Louisville, KY
Marion, IN
Minocqua, WI
Morgantown, WV
New Castle, PA
Princeton, WV
Rocky Mount, VA
Sheboygan, WI
South Bend, IN
Warsaw, IN
Days Inn
Alexandria, VA
Ashland, KY
Bossier City, LA
Farmville, VA
Fredericksburg, VA (North)
Fredericksburg, VA (South)
Glasgow, KY
Shreveport, LA
Sioux Falls, SD (Airport)
Sioux Falls, SD (Empire)
40
81
101
49
59
119
65
150
60
63
49
64
99
145
51
120
127
60
62
69
62
51
80
79
51
61
59
135
71
200
63
176
59
120
156
59
148
86
79
Guest House Inn
Ellenton, FL
Jackson, TN
Hampton Inn
Cleveland, TN
Shelby, NC
Holiday Inn Express
Danville, KY
Harlan, KY
Key West Inns
Key Largo, FL
Masters Inn
Augusta, GA
Cave City, KY
Charleston, SC
Columbia, SC (I26)
Columbia, SC (Knox Abbott)
Doraville, GA
Garden City, GA
Marietta, GA
Mt. Pleasant, SC
Seffner, FL (East Tampa)
Tampa, FL (Fairgrounds)
Tucker, GA
Tuscaloosa, AL
Ramada Limited
Ellenton, FL
Savannah Suites
Augusta, GA
Chamblee, GA
Greenville, SC
Jonesboro, GA
Pine Street - Atlanta, GA
Savannah, GA
Stone Mountain, GA
Sleep Inn
Louisville, KY
Omaha, NE
Supertel Inn
Creston, IA
Jane, MO
Neosho, MO
Tara Inn & Suites
Jonesboro, GA
Total
63
114
59
76
63
62
40
120
97
150
112
109
89
128
86
120
120
127
105
151
73
172
120
170
172
164
160
140
63
90
41
45
47
127
10,028
Additional property information is found in Item 8 Schedule III of this Annual Report on Form 10-K.
23
Item 3. Legal Proceedings
Litigation
Various claims and legal proceedings arise in the ordinary course of business and may be pending against the
Company and its properties. Based upon the information available, the Company believes that the resolution of any
of these claims and legal proceedings should not have a material adverse affect on its consolidated financial
position, results of operations or cash flows.
Three separate lawsuits have been filed against the Company in Jefferson Circuit Court, Louisville,
Kentucky; one lawsuit filed by a plaintiff on June 26, 2008, a second lawsuit filed by fourteen plaintiffs on
December 15, 2008 and a third lawsuit filed by six plaintiffs on January 16, 2009. The plaintiffs in the three cases,
now consolidated as one action, allege that as guests at the Company’s hotel in Louisville, Kentucky, they were
exposed to carbon monoxide as a consequence of a faulty water heater at the hotel. The plaintiffs have also sued the
plumbing company which performed repairs on the water heater at the hotel. On August 7, 2009 the Company’s
insurers notified the Company that they would defend the consolidated lawsuit with a reservation of rights as to
coverage.
Plaintiffs are seeking to recover for damages arising out of physical and mental injury, lost wages, pain and
suffering, past and future medical expenses and punitive or exemplary damages. The damages claimed by plaintiffs
in discovery thus far are in a range of approximately $37 to $41 million. The company retains three tranches of
commercial general liability insurance with aggregate limits of $51 million. There are no deductibles on two of the
tranches; the third tranche has a deductible of $10,000. At this time, the Company has not recorded a liability as the
amount of the loss contingency is not reasonably estimable. The Company will continue to evaluate the estimability
of loss contingency amounts.
Item 4. (Removed and Reserved)
Executive Officers of the Company as of March 5, 2010
The following are executive officers of the Company as of March 5, 2010:
Kelly A. Walters, President and Chief Executive Officer. Mr. Walters joined the Company and became
President and Chief Executive Officer on April 14, 2009 as the successor to Paul Schulte, the firm’s co-founder and
then president. Mr. Walters, age 49, is a former Senior Vice President for North Dakota-based Investors Real Estate
Trust (IRET), a self-advised equity real estate investment trust. Prior to IRET, he was Senior Vice President and
Chief Investment Officer of Omaha based Magnum Resources, Inc., a privately held real estate investment and
operating company. Preceding Magnum Resources, Walters was an officer and senior portfolio manager at Brown
Brothers Harriman & Company in Chicago. He also held investment positions with Peter Kiewit Sons’ Inc. He
holds a B.S.B.A. degree in banking and finance from the University of Nebraska at Omaha and an EMBA from the
University of Nebraska.
Corrine L. Scarpello, Senior Vice President and Chief Financial Officer. Ms. Scarpello became Chief
Financial Officer of the Company on August 31, 2009. She joined the Company in November 2005 having worked
for a year as a consultant for the Company and its management company. Ms. Scarpello, age 55, previously worked
for Mutual of Omaha for 17 years, serving as the Vice President of Accounting and Administration for a subsidiary
and as Manager in their mergers and acquisitions department. Ms. Scarpello also has accounting and auditing
experience with PricewaterhouseCoopers (formerly Coopers and Lybrand) and is a CPA. Ms. Scarpello is currently
a director of Nature Technology Corp., a biotech company. Ms. Scarpello is a graduate of the University of
Nebraska at Omaha.
Steven C. Gilbert, Senior Vice President and Chief Operating Officer. Mr. Gilbert joined the Company as
Senior Vice President of CAP-EX in July 2001 and became Chief Operating Officer on August 27, 2009. Mr.
24
Gilbert, age 61, had previously served as Senior Vice President of CAP-EX for Humphrey Hospitality Management,
Inc. (1999-2001) and for old Supertel Hospitality, Inc. (1991-1999). Mr. Gilbert worked in various sales,
purchasing and construction management positions prior to joining old Supertel Hospitality, Inc. in 1991.
David L. Walter, Senior Vice President and Treasurer. Mr. Walter joined the Company as Controller,
September 1, 2004. Mr. Walter, age 62, previously served as a Vice President and Controller of Emprise Financial
Corporation since March 1998. The position was managing the accounting department for the holding company and
four bank charters. Mr. Walter also served the prior 26 years in Banking as Vice President, Treasurer and
Controller, in functions of lending, appraising and accounting. Mr. Walter is a graduate of Newman University,
Wichita, Kansas, with a Bachelor of Science in Business.
PART II
Item 5. Market for the Registrant’s Common Equity / Related Shareholder Matters and Issuer Purchases of
Equity Securities.
(a) Market Information
The common stock trades on the Nasdaq Global Market under the symbol “SPPR.” The closing sales price
for the common stock on February 25, 2010 was $1.43 per share. The table below sets forth the dividends declared
per share and high and low sales prices per share reported on the Nasdaq Global Market for the periods indicated.
Supertel Hospitality, Inc.
Common Stock
Low
High
Dividend
2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 6.78
$ 5.78
$ 4.95
$ 4.05
$ 5.26
$ 4.83
$ 3.90
$ 0.92
$ 0.1275
$ 0.1275
$ 0.1275
$ 0.0800
$ 2.10
$ 1.85
$ 2.35
$ 2.24
$ 0.82
$ 0.83
$ 1.47
$ 1.31
$ -
$ -
$ -
$ -
(b) Holders
As of February 23, 2010, the approximate number of holders of record of the common stock was 131 and
the approximate number of beneficial owners was 4,362.
(c) Dividends
The 2008 fourth quarter dividend of $0.08 was paid in February 2009, and was reported as a component
of 2009 dividend payments for income tax purposes. Of the total dividend, $0.053 represented capital gain
distribution and $0.027 represented a nondividend distribution to shareholders. The actual amount of future
dividends will be determined by the board of directors based on the actual results of operations, economic
conditions, capital expenditure requirements and other factors that the board of directors deems relevant.
25
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative total shareholder return on
our common stock for the period December 31, 2004 through December 31, 2009, with the cumulative total return
on the SNL securities Hotel REIT Index (“Hotel REITs Index”) and the NASDAQ Composite (“NASDAQ—Total
US Index”) for the same period. The Hotel REITs Index is comprised of publicly traded REITs that focus on
investments in hotel properties. The NASDAQ Composite is comprised of all United States common shares traded
on the NASDAQ Stock Market (previously titled NASDAQ—Total US). The comparison assumes a starting
investment of $100 on December 31, 2004 in our common stock and in each of the indices shown, and assumes that
all dividends are reinvested. The performance graph is not necessarily indicative of future investment performance.
Supertel Hospitality, Inc.
Total Return Performance
220
180
140
100
60
e
u
l
a
V
x
e
d
n
I
Supertel Hospitality, Inc.
NASDAQ Composite
SNL REIT Hotel
20
12/31/04
Index
Supertel Hospitality, Inc.
NASDAQ Composite
SNL REIT Hotel
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
Period Ending
12/31/04
100.00
100.00
100.00
12/31/05
127.67
101.37
109.80
12/31/06
201.50
111.03
141.22
12/31/07
190.83
121.92
109.91
12/31/08
59.88
72.49
43.96
12/31/09
52.84
104.31
72.82
Source : SNL Financial LC, Charlottesville, VA
© 2010
Item 6. Selected Financial Data
The following table sets forth our selected financial information. The selected operating data and balance
sheet data have been extracted from our consolidated financial statements for each of the periods presented and
should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of
26
Operations" and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on
Form 10-K.
(In thousands, except per share data)
Operating data (1):
Room rentals and
other hotel services (2)
Net earnings (loss) from continuing operations
Discontinued operations
Net earnings (loss)
Noncontrolling interest
Net earnings (loss) attributable to controlling interests
Preferred stock dividends
Net earnings (loss) available to common shareholders
Adjusted EBITDA (3)
FFO (4)
Weighted average number of shares outstanding:
basic
diluted for EPS calculation
diluted for FFO per share calculation
Net earnings per common share from continuing
operations - basic
Net earnings per common share from discontinued
operations - basic
Net earnings per common share basic
Net earnings per common share diluted
FFO per share - basic
FFO per share - diluted
Total assets
Total debt
Net cash flow:
Provided by operating activities
Provided (used) by investing activities
Provided (used) by financing activities
2009
As of and for the Years Ended December 31,
2006
2007
2008
2005
$
88,970
$
99,256
$
90,084
$
67,733
$
51,709
(14,911)
(12,614)
(27,525)
130
(27,395)
(1,474)
(28,869)
(1,916)
(16,892)
21,647
21,647
21,647
(0.75)
(0.58)
(1.33)
(1.33)
(0.78)
(0.78)
274,395
189,513
6,101
12,025
(18,410)
2,260
4,999
7,259
(603)
6,656
(1,160)
5,496
35,784
14,897
20,840
20,840
22,346
0.04
0.22
0.26
0.26
0.71
0.70
321,477
202,806
20,605
(22,558)
1,499
3,268
1,147
4,415
(337)
4,078
(948)
3,130
29,230
15,358
20,197
20,217
22,343
0.10
0.05
0.15
0.15
0.76
0.73
311,025
196,840
16,640
(104,153)
83,243
3,018
1,037
4,055
(334)
3,721
(1,215)
2,506
20,883
11,189
12,261
12,272
14,960
0.12
0.08
0.20
0.20
0.91
0.83
202,148
94,878
13,558
(49,633)
40,348
2,192
812
3,004
(226)
2,778
(6)
2,772
15,795
9,637
12,062
12,062
12,062
0.16
0.07
0.23
0.23
0.80
0.80
156,956
92,008
10,215
(32,355)
22,986
Dividends per share (5)
-
0.4625
0.48
0.405
0.26
Reconciliation of Weighted average number of shares for
EPS diluted to FFO diluted:
EPS diluted shares
Common stock issuable upon exercise or conversion of:
Warrants
Series A Preferred Stock (6)
FFO diluted shares
21,647
-
-
21,647
20,840
-
1,506
22,346
20,217
8
2,118
22,343
12,272
12,062
-
2,688
14,960
-
-
12,062
27
(In thousands, except per share data)
2009
As of and for the Years Ended December 31,
2006
2008
2007
RECONCILIATION OF NET
EARNINGS (LOSS) TO ADJUSTED EBITDA
Net earnings (loss) available to common shareholders
Interest, including disc ops
Income tax benefit, including disc ops
Depreciation and amortization, including disc ops
EBITDA
Noncontrolling interest
Preferred stock dividend
Adjusted EBITDA
RECONCILIATION OF NET EARNINGS (LOSS)
TO FFO
Net earnings (loss) available to common shareholders
Depreciation and amortization, including disc ops
Net (gain) loss on disposition of continuing and discontinued assets
FFO (4)
$
$
$
$
$
$
$
$
(28,869)
13,015
(1,647)
14,241
(3,260)
(130)
1,474
(1,916)
(28,869)
14,241
(2,264)
(16,892)
5,496
13,848
(305)
14,982
34,021
603
1,160
35,784
5,496
14,982
(5,581)
14,897
3,130
12,908
(304)
12,211
27,945
337
948
29,230
3,130
12,211
17
15,358
$
$
$
$
$
$
$
$
2005
$
$
$
$
2,772
5,959
(31)
6,863
15,563
226
6
15,795
2,772
6,863
2
9,637
2,506
8,255
(107)
8,680
19,334
334
1,215
20,883
2,506
8,680
3
11,189
(1) Revenues for all periods exclude revenues from hotels sold or classified as held for sale, which are classified in
discontinued operations in the statements of operations.
(2) Hotel revenues include room and other revenues from the operations of the hotels.
(3) Adjusted EBITDA is a financial measure that is not calculated in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). We calculate Adjusted EBITDA by adding
back to net earnings (loss) available to common shareholders certain non-operating expenses and non-cash
charges which are based on historical cost accounting and we believe may be of limited significance in
evaluating current performance. We believe these adjustments can help eliminate the accounting effects of
depreciation and amortization and financing decisions and facilitate comparisons of core operating
profitability between periods, even though Adjusted EBITDA also does not represent an amount that accrues
directly to common shareholders. In calculating Adjusted EBITDA, we also add back preferred stock
dividends and noncontrolling interests, which are cash charges.
Adjusted EBITDA doesn’t represent cash generated from operating activities determined by GAAP and
should not be considered as an alternative to net income, cash flow from operations or any other operating
performance measure prescribed by GAAP. Adjusted EBITDA is not a measure of our liquidity, nor is
Adjusted EBITDA indicative of funds available to fund our cash needs, including our ability to make cash
distributions. Neither does the measurement reflect cash expenditures for long-term assets and other items
that have been and will be incurred. Adjusted EBITDA may include funds that may not be available for
management’s discretionary use due to functional requirements to conserve funds for capital expenditures,
property acquisitions, and other commitments and uncertainties. To compensate for this, management
considers the impact of these excluded items to the extent they are material to operating decisions or the
evaluation of our operating performance. Adjusted EBITDA, as presented, may not be comparable to
similarly titled measures of other companies.
(4) FFO is a non-GAAP financial measure. We consider FFO to be a market accepted measure of an equity
REIT's operating performance, which is necessary, along with net earnings (loss), for an understanding of our
operating results. FFO, as defined under the National Association of Real Estate Investment Trusts
(NAREIT) standards, consists of net income computed in accordance with GAAP, excluding gains (or losses)
28
from sales of real estate assets, plus depreciation and amortization of real estate assets. We believe our
method of calculating FFO complies with the NAREIT definition. FFO does not represent amounts available
for management’s discretionary use because of needed capital replacement or expansion, debt service
obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net
income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of
funds available to fund our cash needs, including our ability to pay dividends or make distributions. All
REITs do not calculate FFO in the same manner; therefore, our calculation may not be the same as the
calculation of FFO for similar REITs.
We use FFO as a performance measure to facilitate a periodic evaluation of our operating results relative to
those of our peers, who, like us, are typically members of NAREIT. We consider FFO a useful additional
measure of performance for an equity REIT because it facilitates an understanding of the operating
performance of our properties without giving effect to real estate depreciation and amortization, which
assume that the value of real estate assets diminishes predictably over time. Since real estate values have
historically risen or fallen with market conditions, we believe that FFO provides a meaningful indication of
our performance.
(5) Represents dividends declared by us. The 2008 fourth quarter dividend of $0.08 was paid in February 2009,
and was reported as a component of 2009 dividend payments for income tax purposes. Components of the
dividends paid for the year ended December 31, 2009 were $0.053 capital gain distribution and $0.027
nondividend distribution to shareholders.
(6)
The conversion rights of the Series A preferred stock were cancelled as of February 20, 2009.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain information both included and incorporated by reference in this management’s discussion and
analysis and other sections of this Form 10-K may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. These forward-looking statements are based
on assumptions that management has made in light of experience in the business in which we operate, as well as
management’s perceptions of historical trends, current conditions, expected future developments and other factors
believed to be appropriate under the circumstances. These statements are not guarantees of performance or results.
They involve risks, uncertainties (some of which are beyond our control) and assumptions. Management believes
that these forward-looking statements are based on reasonable assumptions.
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,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend” or “project” or the negative thereof or other variations thereon or
comparable terminology. Factors which could have a material adverse effect on our operations and future prospects
include, but are not limited to, changes in: economic conditions generally and the real estate market specifically,
legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts),
availability of capital, risks associated with debt financing, interest rates, competition, supply and demand for hotel
rooms in our current and proposed market areas, policies and guidelines applicable to real estate investment trusts
and other risks and uncertainties described herein, and in our filings with the SEC from time to time. These risks
and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by
reference herein. We caution readers not to place undue reliance on any forward-looking statements included in this
report which speak only as of the date of this report.
29
Overview
We are a self-administered REIT, and through our subsidiaries, we owned 115 limited service hotels in 23
states at December 31, 2009. Our hotels operate under several national franchise and independent brands.
Our significant events for 2009 include:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Supertel offered to each of the Preferred OP Unit holders the option to extend until October 24, 2010 their
right to have units redeemed at $10 per unit. In October 2009, 126,751 units were redeemed at $10 each. The
holders of the remaining 51,035 units elected to extend to October 24, 2010, their right to have units
redeemed at $10 per unit;
We sold eight hotels for $17.2 million using the proceeds to pay the underlying mortgages and generating an
additional $4.7 million in cash for operations;
We secured and borrowed $21.7 million to repay maturing loans and to generate operating capital;
Non cash impairment charges of $24.1 million were booked against hotels sold, held for sale, and held for
use; and
As of December 31, 2009 we had 19 hotels classified as held for sale with a total net book value of $32.0
million. Expected gross proceeds of $35.2 million will be used to pay off the underlying mortgages with
remaining cash used for operations.
Additionally, in January 2010, the Company sold the 99 room Comfort Inn located in Dublin, Virginia for
approximately $2.75 million. These funds were used to pay off the Village Bank loan with the remaining funds used
to reduce the revolving line of credit with Great Western Bank. Also in January 2010, the Company borrowed $0.8
million from First National Bank of Omaha.
We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel
properties are owned by our operating partnerships, Supertel Limited Partnership and E&P Financing Limited
Partnership, limited partnerships, limited liability companies or other subsidiaries of our operating partnerships. We
currently own, indirectly, an approximate 99% general partnership interest in Supertel Limited Partnership and a
100% partnership interest in E&P Financing Limited Partnership.
The discussion that follows is based primarily on our consolidated financial statements as of December 31,
2009 and 2008, and results of operations for the years ended December 31, 2009, 2008 and 2007, and should be read
along with the consolidated financial statements and related notes.
30
RevPAR, ADR and Occupancy
The following table presents our revenue per available room (“RevPAR”), average daily rate (“ADR”) and
occupancy by region for 2009 and 2008, respectively. The comparisons of same store operations are for 96 hotels owned
and held in continuing operations as of January 1, 2008, including nine of the ten hotels purchased on January 2, 2008.
2009
2008
Same Store
Region
Mountain
West North Central
East North Central
Middle Atlantic/New England
South Atlantic
East South Central
West South Central
Total Same Store Hotels
States included in the Regions
Mountain
West North Central
East North Central
Middle Atlantic/New England
South Atlantic
East South Central
West South Central
RevPAR
Occupancy
ADR
$
$
RevPAR Occupancy
ADR
$
$
Room
Count
214
2,670
1,081
142
2,772
822
456
8,157
31.96
28.44
36.25
38.90
25.71
31.29
25.84
28.96
62.1%
59.4%
58.5%
58.9%
57.8%
53.2%
56.9%
58.0%
51.50
47.86
61.96
66.04
44.48
58.82
45.38
49.90
Room
Count
214
2,670
1,081
142
2,772
822
456
8,157
38.02
31.47
41.85
43.47
28.39
33.59
27.91
32.20
73.2%
65.2%
65.3%
64.3%
60.3%
55.5%
59.7%
62.5%
51.97
48.25
64.11
67.63
47.07
60.53
46.73
51.54
$
$
$
$
Idaho and Montana
Iowa, Kansas, Missouri, Nebraska and South Dakota
Indiana and Wisconsin
Pennsylvania
Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
Alabama, Kentucky and Tennessee
Arkansas and Louisiana
31
Our RevPAR, ADR and Occupancy, by franchise affiliation for 2009 and 2008 were as follows:
Same Store
Brand
Limited Service
Midscale w/o F&B *
Comfort Inn/ Comfort Suites
Hampton Inn
Holiday Inn Express
Other Midscale (1)
Total Midscale w/o F&B *
Economy
Days Inn
Super 8
Other Economy (2)
Total Economy
Total Same Store Midscale/Economy
2009
2008
Room
Count
RevPAR Occupancy
ADR
Room
Count
RevPAR
Occupancy
ADR
1,669
135
125
291
2,220
1,146
3,308
258
4,712
6,932
$
38.53
43.62
43.92
29.77
38.00
27.93
28.34
27.35
28.19
31.33
$
$
$
$
56.0%
58.9%
67.1%
50.5%
56.1%
54.4%
60.0%
43.0%
57.7%
57.2%
$
68.84
74.01
65.44
58.95
67.78
51.35
47.22
63.54
48.83
54.78
$
$
$
$
1,669
135
125
291
2,220
1,146
3,308
258
4,712
6,932
$
44.12
50.78
43.39
36.54
43.49
29.44
31.77
28.73
31.03
35.02
$
$
$
$
60.7%
66.8%
65.1%
58.8%
61.1%
56.0%
66.5%
44.6%
62.7%
62.2%
$
72.62
76.04
66.64
62.15
71.17
52.59
47.77
64.45
49.48
56.30
$
$
$
$
Extended Stay (3)
1,225
$
15.58
62.9%
$
24.78
1,225
$
16.18
63.9%
$
25.30
Total Same Store Hotels
8,157
$
28.96
58.0%
$
49.90
8,157
$
32.20
62.5%
$
51.54
1
2
3
*
Includes Ramada Limited, Baymont Inn & Suites and Sleep Inn brands
Includes Guesthouse Inns, Key West Inns, and non franchised independent hotels
Includes Savannah Suites and Tara Inn & Suites
"w/o F & B" indicates without food and beverage
Same store reflects 96 hotels owned and held in continuing operations as of January 1, 2008, including nine of the
ten hotels purchased on January 2, 2008.
32
Results of Operations
Comparison of the year ended December 31, 2009 to the year ended December 31, 2008
Operating results are summarized as follows for the years ended December 31 (table in thousands):
Revenues
Hotel and property operations expenses
Interest expense
Depreciation and amortization expense
General and administrative expenses
Impairment losses
Net gains (losses) on dispositions of assets
Other income
Income tax benefit (expense)
Continuing
Operations
$
2009
Discontinued
Operations
Total
Continuing
Operations
2008
Discontinued
Operations
Total
Continuing
Operations
Variance
$
$
$
$
$
$
88,970
(67,360)
(10,414)
(12,457)
(3,813)
(10,872)
(146)
134
1,047
(14,911)
16,524
(14,487)
(2,601)
(1,784)
-
(13,276)
2,410
-
600
(12,614)
105,494
(81,847)
(13,015)
(14,241)
(3,813)
(24,148)
2,264
134
1,647
(27,525)
99,256
(71,132)
(10,738)
(12,067)
(3,696)
-
1
129
507
2,260
25,729
(19,833)
(3,110)
(2,915)
-
(250)
5,580
-
(202)
4,999
124,985
(90,965)
(13,848)
(14,982)
(3,696)
(250)
5,581
129
305
7,259
(10,286)
3,772
324
(390)
(117)
(10,872)
(147)
5
540
(17,171)
$
$
$
$
$
$
$
Revenues and Operating Expenses
Loss from continuing operations for the twelve months ended December 31, 2009 was $(14.9) million,
compared to earnings from continuing operations of $2.3 million for 2008. After recognition of discontinued
operations, noncontrolling interests and dividends for preferred stock shareholders, the net loss attributable to
common shareholders was $(28.9) million or $(1.33) per diluted share, for the year ended December 31, 2009,
compared to net earnings available to common shareholders of $5.5 million or $0.26 per diluted share for 2008.
During 2009 revenues from continuing operations decreased $10.3 million, or 10.4 percent. This decrease is
primarily due to the effects of the economic downturn.
We refer to our entire portfolio as limited service hotels, which we further describe as midscale without food
and beverage hotels, economy hotels and extended stay hotels. The same store portfolio used for comparison of the
twelve months ending 2009 over the same period of 2008 consists of the 96 hotels in continuing operations that were
owned by the company as of January 1, 2008, including nine of ten hotels purchased January 2, 2008. The
Company’s 59 same-store economy hotels reflected a 9.2 percent decrease in RevPAR to $28.19 in 2009 with an 8.0
percent decline in occupancy to 57.7 percent with a slight decrease in ADR of 1.3%. The Company’s 29 same-store
midscale without food and beverage hotels experienced a 4.8 percent decline in ADR. Occupancy dropped 8.2
percent and RevPAR was down 12.6 percent to $38.00. The extended stay hotels are economy hotels with
significantly lower ADR and RevPAR than other limited service hotels. ADR for the eight same-store extended stay
hotels was down 2.1 percent from the prior year to $24.78. Occupancy slipped 1.6 percent, and RevPAR decreased
3.7 percent to $15.58. The total same-store portfolio of 96 hotels for the year ended 2009, compared with the prior
year, had a 3.2 percent decline in ADR with a coinciding 7.2 percent drop in occupancy, which resulted in a 10.1
percent decrease in RevPAR.
Hotel and property operations expenses from continuing operations for the year ended 2009 decreased $3.8
million or 5.3 percent. These decreases primarily result from reductions in hourly staffing levels and other cost-
saving initiatives implemented across the portfolio to compensate for the occupancy decrease.
Interest Expense, Depreciation and Amortization Expense and General and Administration Expense
Interest expense from continuing operations decreased by $0.3 million, due primarily to lower interest rates on
variable rate debt. The depreciation and amortization expense from continuing operations increased $0.4 million for
2009 over 2008, which was caused by capital improvements to the hotels. The general and administration expense
33
from continuing operations for 2009 rose $0.1 million or 3.2 percent compared to 2008. The primary driver for this
increase is an increase in payroll expense for severance pay, partially offset by a decrease in professional fees.
Impairment Charges
In 2009 we recorded $10.9 million of impairment charges on six hotels classified as held for use. An
additional $13.2 million of impairment was charged against sixteen properties in discontinued operations. Thirteen
of these sixteen properties are classified as held for sale and represent $12.7 million of the impairment charge; the
remaining three have been sold as of December 31, 2009 and represent $0.5 million of the impairment. For
additional information, see Note 5 to the consolidated financial statements.
In 2008 we recorded an impairment charge of $0.3 million on two held for sale hotels.
Dispositions
In 2009 the net losses on dispositions of assets in continuing operations increased $0.1 million over 2008,
partially as a result of franchise-mandated upgrades to the properties. In 2009 discontinued operations reflected a
$2.4 million gain on the disposition of assets. Of this, gains of $2.5 million are attributable to eight properties that
have been sold; while $0.1 million of net losses on the sale of assets are attributable to assets held for sale.
Income Tax Benefit
The income tax benefit from continuing operations is related to the taxable loss from our taxable REIT
subsidiary, the TRS Lessee. Management believes the federal and state income tax rate for the TRS Lessee will be
approximately 38%. The tax benefit is a result of TRS Lessee’s losses for the years ended December 31, 2009 and
2008. The income tax benefit will vary based on the taxable earnings or loss of the TRS Lessee, a C corporation.
The income tax benefit from continuing operations increased by approximately $0.5 million during 2009
compared to the year ago period, due to an increased loss from continuing operations by the TRS Lessee in 2009.
Comparison of the year ended December 31, 2008 to the year ended December 31, 2007
Operating results are summarized as follows for the years ended December 31 (table in thousands):
Revenues
Hotel and property operations expenses
Interest expense
Depreciation and amortization expense
General and administrative expenses
Impairment losses
Net gains (losses) on dispositions of assets
Other income
Income tax benefit (expense)
Continuing
Operations
$
2008
Discontinued
Operations
Total
Continuing
Operations
2007
Discontinued
Operations
Total
$
$
$
$
Continuing
Operations
Variance
$
99,256
(71,132)
(10,738)
(12,067)
(3,696)
-
1
129
507
2,260
25,729
(19,833)
(3,110)
(2,915)
-
(250)
5,580
-
(202)
4,999
124,985
(90,965)
(13,848)
(14,982)
(3,696)
(250)
5,581
129
305
7,259
90,084
(63,104)
(10,047)
(10,032)
(3,864)
-
(16)
177
70
3,268
$
21,547
(15,593)
(2,861)
(2,179)
-
-
(1)
-
234
1,147
$
111,631
(78,697)
(12,908)
(12,211)
(3,864)
-
(17)
177
304
4,415
9,172
(8,028)
(691)
(2,035)
168
-
17
(48)
437
(1,008)
$
$
$
$
$
$
Revenues and Operating Expenses
Earnings from continuing operations for the twelve months ended December 31, 2008 reflected $2.3 million,
compared to net earnings of $3.3 million for 2007. After recognition of discontinued operations, noncontrolling
interest and dividends for preferred stock shareholders, the net earnings available to common shareholders reflected
$5.5 million or $0.26 per diluted share, for the year ended December 31, 2008, compared to $3.1 million or $0.15
per diluted share for 2007.
34
During 2008 revenues from continuing operations increased $9.2 million, or 10.2 percent, of which $7.7
million was due to the increased number of properties related to acquisitions and $1.5 million was due to a revenue
increase from the same-store portfolio. The same store portfolio used for comparison of the twelve months ending
2008 over the same period of 2007 consists of 76 hotels in continuing operations that were owned by the company
as of January 1, 2007. The Company’s 45 same-store economy hotels posted a 2.6 percent improvement in RevPAR
to $31.00 in 2008 with a 2.1 percent increase in occupancy to 63.9 percent with a 1.0 percent increase in ADR from
$48.22 to $48.48. The Company’s 24 same-store midscale without food and beverage hotels had a 2.2 percent
decrease in ADR and a 4.1 percent decrease in occupancy resulting in a RevPAR of $44.37, compared to $47.26 in
2007. The extended stay hotels are economy hotels with significantly lower ADR and RevPAR than other limited
service hotels. ADR for the seven same store extended stay hotels was down 2.6 percent from the prior year to
$25.13. Occupancy was down 5.8 percent, and RevPAR decreased 8.3 percent to $16.31. The total same-store
portfolio of 76 hotels for the year ended 2008, compared with the prior year, had a 0.9 percent decrease in ADR and
a 1.4 percent decrease in occupancy, which resulted in a 2.2 percent decrease in RevPAR.
Hotel and property operations expenses from continuing operations for the year ended 2008 increased $8.0
million or 12.7 percent, of which $5.8 million was related to new hotel acquisitions, and $2.2 million was from the
same-store portfolio.
Interest Expense, Depreciation and Amortization Expense and General and Administration Expense
Interest expense from continuing operations increased by $0.7 million, due primarily to increased debt used for
hotel acquisitions. The depreciation and amortization expense from continuing operations increased $2.0 million for
2008 over 2007. This is primarily related to hotel acquisitions as well as asset additions for the continuing operations
portfolio outpacing the amount of assets exceeding their useful life. The general and administration expense from
continuing operations for 2008 decreased $0.2 million or 4.3 percent compared to 2007. The primary driver for this
decrease is a reduction in professional consulting fees resulting from less acquisition activity in 2008.
Impairment Charges
For 2008, we recorded an impairment charge of $0.3 million on two held for sale hotels. In 2007, no
impairment charges were recorded.
Dispositions
In 2008, we recognized net gains on the disposition of assets of approximately $5.6 million, due to the sale
of two hotels.
Income Tax Benefit
The income tax benefit from continuing operations is related to the taxable loss from our taxable REIT
subsidiary, the TRS Lessee. Management believes the federal and state income tax rate for the TRS Lessee will be
approximately 40%. The tax benefit is a result of TRS Lessee’s losses for the year ended December 31, 2008 and
2007. The income tax benefit will vary based on the taxable earnings of the TRS Lessee, a C corporation. The
income tax benefit from continuing operations increased by approximately $0.4 million during 2008 compared to
the prior period, due to an increased loss from continuing operations by the TRS Lessee in 2008 compared to 2007.
Liquidity and Capital Resources
Our income and ability to meet our debt service obligations, and make distributions to our shareholders,
depends upon the operations of the hotels being conducted in a manner that maintains or increases revenue, or
reduces expenses, to generate sufficient hotel operating income for TRS Lessee to pay the hotels’ operating
expenses, including management fees and rents to us. We depend on rent payments from TRS Lessee to pay our
operating expenses and debt service and to make distributions to shareholders.
35
The Company’s operating performance, as well as its liquidity position, has been and continues to be
negatively affected by recent economic conditions, many of which are beyond our control. The Company does not
believe it is likely that these adverse economic conditions, and their effect on the hospitality industry, will improve
significantly in the next two quarters.
Our business requires continued access to adequate capital to fund our liquidity needs. In 2009, the
Company reviewed its entire portfolio, identified properties considered non-core and developed timetables for
disposal of those assets deemed non-core. We focused on improving our liquidity through cash generating asset
sales and disposition of assets that are not generating cash at levels consistent with our investment principles. In
2010, our foremost priorities are preserving and generating capital sufficient to fund our liquidity needs. Given the
deterioration and uncertainty in the economy and financial markets, management believes that access to
conventional sources of capital will be challenging and management has planned accordingly. We are also working
to proactively address challenges to our short-term and long-term liquidity position.
The following are our expected actual and potential sources of liquidity, which we currently believe will
be sufficient to fund our near-term obligations:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Cash and cash equivalents;
Cash generated from operations;
Proceeds from asset dispositions;
Proceeds from additional secured or unsecured debt financings; and/or
Proceeds from public or private issuances of debt or equity securities.
These sources are essential to our liquidity and financial position, and we cannot assure you that we will be able
to successfully access them (particularly in the current economic environment). If we are unable to generate cash
from these sources, we may have liquidity-related capital shortfalls and will be exposed to default risks. While we
believe that we will have adequate capital for our near –term uses, significant issues with access to the liquidity
sources identified above could lead to our insolvency.
In the near-term, the Company’s cash flow from operations is not projected to be sufficient to meet all of
our liquidity needs. In response, management has identified non-core assets in our portfolio to be liquidated over a
one to ten year period. Among the criteria for determining properties to be sold was potential upside when hotel
fundamentals return to stabilized levels. The nineteen properties held for sale as of December 31, 2009 were
determined to be less likely to participate in increased cash flow levels when markets do improve. As such, we
expect these dispositions to help us (1) preserve cash, through potential disposition of properties with current or
projected negative cash flow and/or other potential near-term cash outlay requirements (including debt maturities)
and (2) generate cash, through the potential disposition of strategically identified non-core assets that we believe
have equity value above debt.
Subsequent to year end, the Company sold a Comfort Inn located in Dublin, Virginia, for approximately
$2.75 million. These funds were used to pay off the Village Bank Loan with the remaining $1.7 million used to
reduce the revolving line of credit with Great Western Bank. With respect to the remainder of 2010, we are actively
marketing the remaining 18 properties that will result in the elimination of $24.5 million of debt and generate an
expected $4.0 million of proceeds for operations. We have continued to receive strong interest in our 18 held for sale
properties. The marketing process has been affected by deteriorating economic conditions and we have experienced
some decreases in expected pricing. If this trend continues to worsen, we may be unable to complete the disposition
of identified properties in a manner that would generate cash flow in line with management’s estimates as noted
above. Our ability to dispose of these assets is impacted by a number of factors. Many of these factors are beyond
our control, including general economic conditions, availability of financing and interest rates. In light of the current
economic conditions, we cannot predict:
36
(cid:120) whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;
(cid:120) whether potential buyers will be able to secure financing; and
(cid:120)
the length of time needed to find a buyer and to close the sale of a property.
As our debt matures, our principal payment obligations also present significant future cash requirements.
We may not be able to successfully extend, refinance or repay our debt due to a number of factors, including
decreased property valuations, limited availability of credit, tightened lending standards and deteriorating economic
conditions. Historically, extending or refinancing loans has required the payment of certain fees to, and expenses of,
the applicable lenders. Any future extensions or refinancing will likely require increased fees due to tightened
lending practices. These fees and cash flow restrictions will affect our ability to fund other liquidity uses. In
addition, the terms of the extensions or refinancing may include operational and financial covenants significantly
more restrictive than our current debt covenants.
The Company’s $9.0 million note payable to Wells Fargo Bank ($7.4 million balance from continuing
operations at December 31, 2009) matures on August 12, 2010. The company’s other 2010 maturities (at December
31, 2009) consist of approximately $4.5 million of principal amortization on mortgage loans and a $0.5 million note
payable to Elkhorn Valley Bank. The company intends to refinance or repay these 2010 maturities using our
existing lines of credit, other financing, funds from operations or proceeds from the sale of hotels. If the Company
is unable to repay or refinance its debt as it becomes due, then its lenders have the ability to take control of its
encumbered hotel assets.
The Company is also required to meet various financial covenants required by its existing lenders. If the
Company’s future financial performance fails to meet these financial covenants, then its lenders also have the ability
to take control of its encumbered hotel assets. Defaults with lenders due to failure to repay or refinance debt when
due or failure to comply with financial covenants could also result in defaults under our credit facilities with Great
Western Bank and Wells Fargo Bank. Our Great Western Bank and Wells Fargo Bank credit facilities contain
cross-default provisions which would allow Great Western Bank and Wells Fargo Bank to declare a default and
accelerate our indebtedness to them if we default on our other loans, and such default would permit that lender to
accelerate our indebtedness under any such loan. If this were to happen, whether due to failure to repay or refinance
debt when due or failure to comply with financial covenants, the Company’s ability to conduct business could be
severely impacted as there can be no assurance that the adequacy and timeliness of cash flow would be available to
meet the Company’s liquidity requirements. The Company believes it has the ability to repay its indebtedness when
due with cash generated from operations, sales of hotels, refinancings or the issuance of stock, while at the same
time continuing to be a substantial owner of limited service and economy hotels. If the economic environment does
not improve in 2010, the Company’s plans and actions may not be sufficient and could lead to possibly failing
financial debt covenant requirements.
The Company declared in 2008 and paid the quarterly common stock dividend of .08 per share on February 2,
2009, but there have been no common stock dividends declared during 2009. The Board of Directors continues to
monitor the Company’s dividend requirements to retain its REIT status on a quarterly basis.
Financing
At December 31, 2009, we had long-term debt of $164.5 million from continuing operations consisting of
notes and mortgages payable, with a weighted average term to maturity of 4.8 years and a weighted average interest
rate of 5.98%. The weighted average fixed rate was 6.8%, and the weighted average variable rate was 4.1%.
Aggregate annual principal payments for the next five years and thereafter are as follows (in thousands):
37
2010
2011
2012
2013
2014
Thereafter
Held For Sale
24,975
$
-
-
-
-
-
24,975
$
2009
Held For Use
12,374
$
18,217
61,066
3,629
4,368
64,884
164,538
$
TOTAL
$
37,349
18,217
61,066
3,629
4,368
64,884
189,513
$
Of the maturities representing continuing operations in 2010 (at December 31, 2009), approximately $4.5
million consist of principal amortization on mortgage loans, which we expect to fund through cash flows from
operations and the sale of hotels. The remaining maturities from continuing operations in 2010 (at December 31,
2009) consist of:
(cid:120)
(cid:120)
a $7.4 million balance on the credit facility with Wells Fargo Bank; and
a $0.5 million note payable to Elkhorn Valley Bank.
The loans with Wells Fargo Bank and Elkhorn Valley Bank are expected to be refinanced or repaid using
our existing lines of credit, other financing, funds from operations or proceeds from the sale of hotels. However,
certain of these alternatives are not within our control.
In March, 2009, the Company borrowed $1.0 million (fixed rate of 6.5%) from Elkhorn Valley Bank.
Funds were used to support operations.
In May, 2009 the Company borrowed $10 million (fixed rate of 5.5%) from the previously unused $10
million term loan facility available under the Amended and Restated Loan Agreement with Great Western Bank
dated December 3, 2008 and used a portion of the borrowings to repay in full the a $9.0 million mortgage loan
(fixed rate 8.4%) with First National Bank of Omaha.
In May, 2009, the Company paid in full the $1.2 million loan with Susquehanna Bank, from a portion of
the Gettysburg, PA hotel (Holiday Inn Express) sale proceeds.
In August, 2009, the Company paid in full the $0.1 million loan with Iowa Business Growth, from a
portion of the Anamosa, IA (Super 8) sale proceeds.
In November, 2009, the Company amended its $9.0 million credit facility with Wells Fargo Bank to,
among other things: (a) set a floor rate of 4.00%; (b) require monthly principal payments of $75,000;, and (c) extend
the maturity date from November 12, 2009 to May 12, 2010. On March 31, 2010, the maturity of the note was
extended to August 12, 2010.
In December, 2009, the Company obtained an approximate $2.0 million line of credit (6.75%) with Elkhorn
Valley Bank in Norfolk, NE. Funds will be used to provide operating capital.
We are required to comply with financial covenants for certain of our loan agreements. As of December
31, 2009, we were either in compliance with the financial covenants or obtained waivers for non-compliance (as
discussed below). As a result, we are not in default of any of our loans.
Prior to the amendment discussed below, our credit facilities with Great Western Bank required that we
38
maintain consolidated and loan-specific debt service coverage ratios (based on a rolling twelve month period) of at
least 1.50 to 1, tested quarterly, and consolidated and loan-specific loan to value ratios (based on a rolling twelve
month period) that do not exceed 65%, tested annually. As of December 31, 2009, our covenant levels, as
calculated pursuant to the loan agreement, were 1.29 to 1 (consolidated debt service coverage ratio), 1.46 to 1 (loan-
specific debt service coverage ratio), 60% (consolidated loan to value ratio) and 65% (loan-specific loan to value
ratio). The credit facilities were amended on March 29, 2010 to require maintenance of (a) a consolidated debt
service coverage ratio of at least 1.05 to 1, tested quarterly, from December 31, 2009 through June 30, 2011 and
1.50 to 1, tested quarterly, from July 1, 2011 through the maturity of the credit facilities, (b) a loan-specific debt
service coverage ratio of 1.20 to 1, tested quarterly, from December 31, 2009 through June 30, 2011 and 1.50 to 1,
tested quarterly, from July 1, 2011 through the maturity of the credit facilities and (c) consolidated and loan-specific
loan to value ratios that do not exceed 70% tested annually commencing on December 31, 2009, in each case,
through the maturity of the credit facilities.
The Great Western Bank amendment also: (a) modifies the borrowing base so that the loans available to the
Company may not exceed the lesser of (i) an amount equal to 70% of the total appraised value of the hotels securing
the credit facilities and (ii) an amount that would result in a loan-specific debt service coverage ratio of less than
1.20 to 1 from December 31, 2009 through June 30, 2011 and 1.50 to 1 from July 1, 2011 through the maturity of
the credit facilities; (b) increases the interest rate on the revolving credit portion of the credit facilities from prime
(subject to a 4.50% floor rate) to 5.50% from March 29, 2010 through June 30, 2011 and prime (subject to a 5.50%
floor rate) from July 1, 2011 through the maturity of the credit facilities; and (c) gives Great Western Bank the
option to increase the interest rates of the credit facilities up to 4.00% any time after June 30, 2011.
Our credit facility with Wells Fargo Bank requires us to maintain a consolidated loan to value ratio (based
on a rolling twelve month period) that does not exceed 70%, tested quarterly. As of December 31, 2009, this ratio,
as calculated pursuant to the loan agreement, was 75%. The credit facility also requires us to maintain a minimum
tangible net worth of not less than $75 million plus 90% of net proceeds from equity transactions after December 31,
2006, tested quarterly. As of December 31, 2009, our tangible net worth, as calculated pursuant to the loan
agreement, was $74.5 million. The Company received a waiver for non-compliance with both of these covenants.
In connection with the waiver, the credit facility was amended on March 31, 2010 to require maintenance of a
consolidated loan to value ratio that does not exceed 77.5% and a minimum tangible net worth of not less than $70
million, in each case, through the maturity of the credit facility. The amendment also reduced our quarterly
minimum consolidated fixed charge coverage ratio covenant (based on a rolling twelve month period) through the
maturity of the credit facility from: 0.90 to 1 after preferred dividends and 1.00 to 1 before preferred dividends; to
0.75 to 1 after preferred dividends and 0.80 to 1 before preferred dividends. The credit facility with Wells Fargo
Bank was also amended on March 31, 2010 to extend the maturity date from May 12, 2010 to August 12, 2010,
require a $200,000 principal payment on March 31, 2010 and require a $100,000 principal payment on April 30,
2010.
On March 25, 2010, our credit facilities with General Electric Capital Corporation were amended to require
us to maintain $3.9 million of total adjusted EBITDA (based on a rolling twelve month period), tested quarterly
commencing on December 31, 2009, with respect to our GE-encumbered properties through 2011, in lieu of
maintenance of minimum fixed charge coverage ratios (FCCRs). This required minimum level of total adjusted
EBITDA will be reduced by the pro rata percentage of total adjusted EBITDA attributable to any GE-encumbered
properties that are sold, if certain conditions are satisfied. As of December 31, 2009, our total adjusted EBITDA, as
calculated pursuant to the loan agreement, with respect to our GE-encumbered properties was $5.2 million (the
reduction for sold properties was $0.7 million). Commencing in 2012 and continuing for the term of the loans, we
are required to maintain, with respect to our GE-encumbered properties, a before dividend FCCR (based on a rolling
twelve month period) of 1.3 to 1 and after dividend FCCR (based on a rolling twelve month period) of 1.0 to 1.
The GE amendment also; (a) reduces our consolidated debt service coverage ratio covenant (based on a
rolling twelve month period) from 1.4 to 1 for each quarter of 2009 and 1.5 to 1 each quarter thereafter for the term
of the loans to 1.05 to 1 for the quarter ended December 31, 2009 and each quarter thereafter through 2011 and 1.5
to 1 each quarter thereafter for the term of the loans; (b) defers prepayment fees with respect to prepayments
39
required as a result of the sale of any of our Masters Inn hotels until January1, 2010; and (c) implements a quarterly
cash flow sweep, equal to the amount by which our consolidated debt service coverage ratio exceeds 1.75 to 1 to pay
deferred prepayment fees. As of December 31, 2009, our consolidated debt service coverage ratio, as calculated
pursuant to the loan agreement was 1.35 to 1. In connection with previous amendments and waivers, the interest
rate of the loans under our credit facilities with GE have increased by 1.5%. If our FCCR with respect to our GE-
encumbered properties equals or exceeds 1.3 to 1 before dividends and 1.0 to 1 after dividends for two consecutive
quarters, the cumulative 1.5% increase in the interest rate of the loans will be eliminated.
If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our
loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to
immediately pay our indebtedness and ultimately lose our hotels through lender foreclosure if we are unable to
obtain alternative sources of financing with acceptable terms. Our Great Western Bank and Wells Fargo Bank credit
facilities contain cross-default provisions which would allow Great Western Bank and Wells Fargo Bank to declare
a default and accelerate our indebtedness to them if we default on our other loans, and such default would permit
that lender to accelerate our indebtedness under any such loan. We are not in default of any of our loans.
Acquisition of Hotels
There were no acquisitions made during 2009.
In 2008, the Company acquired seven hotels in Kentucky, two hotels in Sioux Falls, South Dakota and a
hotel in Green Bay, Wisconsin. The combined purchase price of $22 million was funded by term loans of $15.6
million and $6.4 million from our existing credit facilities. The franchise brands consisted of Comfort Inn (2),
Comfort Suites (1), Days Inn (4), Quality Inn (1), Sleep Inn (1) and Super 8 (1).
In 2007, the Company acquired 27 hotels in Georgia (7), Florida (5), Virginia (4), South Carolina (4),
Louisiana (2), Alabama (1), Idaho (1), Montana (1,) Indiana (1) and Maine (1). The combined purchase price of
$110.5 million was funded by term loans of $43.4 million, assumption of $11.4 million of existing loans, a bridge
loan of $8.5 million, $40.3 million from our existing credit facilities and issuance of 863,611 common operating
units in Supertel Limited Partnership. The franchise brands consisted of Masters Inn (15), Days Inn (5), Super 8 (4),
Comfort Inn (2) and Tara Inn (1).
Disposition of Hotels
Sale Date
2009
Hotel Location
Brand
March
Charles City, IA
May
July
August
August
August
October
October
Gettysburg, PA
Kissimmee, FL
Ellsworth, ME
Orlando, FL
Anamosa, IA
Dahlgren, VA
Kissimmee, FL
Super 8
Holiday Inn
Express
Masters Inn
Comfort Inn
Masters Inn
Super 8
Comfort Inn
Masters Inn
Rooms
43
Sale Price
(millions)
$
1.10
51
116
63
120
35
59
187
674
2.60
1.60
2.20
3.60
0.85
3.50
1.70
17.15
$
Sale proceeds were used to reduce debt.
40
Redemption of Preferred Operating Partnership Units
We own, through our subsidiary, Supertel Hospitality REIT Trust, an approximate 99% general partnership
interest in Supertel Limited Partnership, through which we own 56 of our hotels. We are the sole general partner of
the limited partnership, and the remaining approximate 1% is held by limited partners who transferred property
interests to us in return for limited partnership interests in Supertel Limited Partnership. These limited partners hold,
as of December 31, 2009, 158,161 common operating partnership units and 51,035 preferred operating partnership
units. Each limited partner of Supertel Limited Partnership may, subject to certain limitations, require that Supertel
Limited Partnership redeem all or a portion of his or her common or preferred units, at any time after a specified
period following the date he or she acquired the units, by delivering a redemption notice to Supertel Limited
Partnership. When a limited partner tenders his or her common units to the partnership for redemption, we can, in
our sole discretion, choose to purchase the units for either (1) a number of our shares of common stock equal to the
number of units redeemed (subject to certain adjustments) or (2) cash in an amount equal to the market value of the
number of our shares of common stock the limited partner would have received if we chose to purchase the units for
common stock. We anticipate that we generally will elect to purchase the common units for common stock.
The preferred units are convertible by the holders into common units on a one-for-one basis or may be
redeemed for cash at $10 per unit until October 2009. The preferred units receive a preferred dividend distribution of
$1.10 per preferred unit annually, payable on a monthly basis and do not participate in the allocations of profits and
losses of Supertel Limited Partnership. Supertel offered to each of the Preferred OP Unit holders the option to
extend until October 24, 2010 their right to have units redeemed at $10 per unit. In October 2009, 126,751 units
were redeemed at $10 each. The holders of the remaining 51,035 units elected to extend to October 24, 2010, their
right to have units redeemed at $10 per unit. There were 17,824 preferred operating partnership units redeemed
during the year ended December 31, 2008.
Contractual Obligations
Below is a summary of certain obligations from continuing operations that will require capital (in
thousands) as of December 31, 2009: (cid:3)
(cid:3)(cid:3)
Contractual Obligations
Long-term debt, including interest
Land leases
Total contractual obligations
Total
Less Than
1 Year
$
$
1-3 Years
$
95,499
142
95,641
21,983
72
22,055
3-5 Years
More than
5 Years
$
$
16,402
148
16,550
72,811
4,782
77,593
$
$
$
$
$
206,695
5,144
211,839
We have various standing or renewable contracts with vendors. These contracts are all cancelable with
immaterial or no cancellation penalties. Contract terms are generally one year or less. We also have management
agreements with Royco Hotels and HLC for the management of our hotel properties.
Other
To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our
shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed
to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We
have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual
amount of any future dividends will be determined by the Board of Directors based on our actual results of
operations, economic conditions, capital expenditure requirements and other factors that the Board of Directors
deems relevant.
Off Balance Sheet Financing Transactions
We have not entered into any off balance sheet financing transactions.
41
Critical Accounting Policies
Critical accounting policies are those that are both important to the presentation of our financial condition
and results of operations and require management’s most difficult, complex or subjective judgments. We have
identified the following principal accounting policies that have a material effect on our consolidated financial
statements:
Impairment of assets
In accordance with FASB ASC 360-10-35 Property Plant and Equipment – Overall - Subsequent
Measurement, the Company analyzes its assets for impairment when events or circumstances occur that indicate the
carrying amount may not be recoverable. As part of this process, the Company utilizes a two-step analysis to
determine whether a trigger event (within the meaning of ASC 360-10-35) has occurred with respect to cash flow of,
or a significant adverse change in business climate for, its hotel properties. Quarterly and annually the Company
reviews all of its hotels to determine any property whose cash flow or operating performance significantly
underperformed from budget or prior year, which the Company has set as a shortfall against budget or prior year as
15% or greater.
At year end the Company applied a second analysis on the entire held for use portfolio. The analysis
estimated the expected future cash flows to identify any property whose carrying amount potentially exceeded the
recoverable value. (Note that at the end of each quarter, this analysis is performed only on those properties identified
in the 15% change analysis). In performing this year end analysis, the Company made the following assumptions:
(cid:120) Holding periods ranged from one year for noncore assets to be classified as held for sale in 2010, to ten
years for those assets considered as core. Analysis in prior quarters assumed holding periods of ten years.
In the fourth quarter of 2010, a review of the existing portfolio by the management team identified assets
as core and non-core. This review of assets as core and non core will be an ongoing activity.
(cid:120) Cash flow from trailing twelve months for the individual properties multiplied by the holding period as
noted above. The Company did not assume growth rates on cash flows as part of its step one analysis.
(cid:120) A revenue multiplier for the terminal value based on an average of past two years sales from leading
industry broker of like properties.
For the Company’s hotels that did not pass the analysis above, their identification represented a triggering
event as described in ASC 360-10-35. A trigger event occurred for each hotel property in which the carrying value
exceeded the sum of the undiscounted cash flows expected over its remaining anticipated holding period and from
its disposition. These properties were then tested to determine if such carrying amounts were recoverable. When
testing the recoverability for a property, in accordance with FASB ASC 360-10-35 35-29 Property Plant and
Equipment – Overall - Subsequent Measurement, Estimates of Future Cash Flows Used to Test a Long-Lived Asset
for Recoverability, the Company uses estimates of future cash flows associated with the individual properties over
their expected holding period and eventual disposition. In estimating these future cash flows, the Company
incorporates its own assumptions about its use of the hotel property and expected hotel performance. Assumptions
used for the individual hotels are determined by management, based on discussions with our asset management
group and our third party management companies. Each property was then subjected to a probability-weighted cash
flow analysis as described in FASB ASC 360-10-55 Property Plant and Equipment – Overall – Implementation. In
this analysis, the Company completed a detailed review of each hotel’s market conditions and future prospects,
which incorporated specific detailed cash flow and revenue multiplier assumptions over the remaining expected
holding periods, including the probability that the property will be sold. Based on the results of this analysis, it was
determined that the Company had investments in six properties that were not fully recoverable; accordingly,
impairment was recognized.
42
The holding period of the six properties on which impairment was recognized was three years or less.This
is the result of a fourth quarter review of the entire portfolio performed by the management team identifying those
assets that would no longer be considered long term or core. Prior to this review, properties were considered long
term investments and holding periods of ten years were used, which was reasonable based on the Company’s long
history of holding properties in excess of ten years.
To determine the amount of impairment on the properties identified above, in accordance with FASB ASC
360-10-55, the Company calculated the excess of the carrying value of the each property in comparison to its fair
market value as of December 31, 2009. Based on this calculation, the Company determined total impairment of
$10.9 million existed as of December 31, 2009 on the six held for use assets previously noted. Fair market value
was determined by multiplying trailing 12 months revenue for each property by a revenue multiplier that was
determined based on the Company’s experience with hotel sales in the current year as well as available industry
information. As the fair market value of each property impaired for the year ending December 31, 2009 was
determined in part by management estimates, a reasonable possibility exists that future changes to inputs and
assumptions could affect the accuracy of management’s estimates and such future changes could lead to further
possible impairment in the future.
Acquisition of Hotel Properties
Upon acquisition, we allocate the purchase price of asset classes based on the fair value of the acquired real
estate, furniture, fixtures and equipment, and intangible assets, if any. Our investments in hotel properties are carried
at cost and are depreciated using the straight-line method over an estimated useful life of 15 to 40 years for buildings
and building improvements and three to twelve years for furniture, fixtures and equipment. Renovations and/or
replacements that improve or extend the life of the asset are capitalized and depreciated over their estimated useful
lives.
We are required to make subjective assessments as to the useful lives and classification of its properties for
purposes of determining the amount of depreciation expense to reflect each year with respect to those properties.
These assessments have a direct impact on our net income. Should we change the expected useful life or
classification of particular assets, it would result in a change in depreciation expense and annual net income.
Adoption of New Accounting Pronouncements
Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles—Overall (“ASC
105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source
of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance
contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC
accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the
Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff
Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”).
The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the
Codification, provide background information about the guidance and provide the bases for conclusions on the
change(s) in the Codification. FASB guidance throughout this document has been updated for the Codification.
Effective January 1, 2009 the Company adopted FASB ASC 810-10 Broad Transactions—Consolidation—
Overall. Per ASC 810-10, noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable,
directly or indirectly, to a parent. The ownership interests in the subsidiary that are held by owners other than the
parent are noncontrolling interests. Additionally, such noncontrolling interests are reported on the consolidated
balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations,
revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated
amounts, including both the amounts attributable to the Company and noncontrolling interests. Consolidated
statements of equity are included for both quarterly and annual financial statements, including beginning balances,
activity for the period and ending balances for Shareholders’ equity, noncontrolling interests and total equity.
43
However, per FASB ASC 480-10-S99 Liabilities—Overall—SEC Materials , securities that are redeemable for
cash or other assets at the option of the holder, not solely within the control of the issuer, must be classified outside
of permanent equity. This would result in certain outside ownership interests being included as redeemable
noncontrolling interest outside of permanent equity in the consolidated balance sheets. The Company makes this
determination based on terms in applicable agreements, specifically in relation to redemption provisions.
Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by
delivery of its own shares, the Company considered existing GAAP guidance to evaluate whether the Company
controls the actions or events necessary to issue the maximum number of shares that could be required to be
delivered under share settlement of the contract.
The consolidated results of the Company include the following ownership interests held by owners other than
the Company: the common units in the Operating Partnership held by third parties (158,161 at December 31, 2009),
and the preferred units in the Operating Partnership held by third parties (51,035 at December 31, 2009).
Regarding the preferred units in the Operating Partnership, in certain circumstances, redemption of the units
could result in a net cash settlement outside the Control of the Company. In October, 2009, certain preferred
operating unit holders redeemed 126,751 units at $10 each. In accordance with ASC 480-10 Distinguishing
Liabilities from Equity—Overall , the Company reclassified these units to liabilities as of December 31, 2009. The
Company will continue to record the remaining preferred operating units outside of permanent equity in the
consolidated balance sheets. Based on the Company’s evaluation of the redemption value of the redeemable
noncontrolling interest, the Company has reflected this interest at its redemption value as of December 31, 2009 and
December 31, 2008.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk Information
The market risk associated with financial instruments and derivative financial or commodity instruments is
the risk of loss from adverse changes in market prices or rates. Our market risk arises primarily from interest rate
risk relating to variable rate borrowings. Our interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows. In order to achieve this objective, we have used both long term
fixed rate loans and variable rate loans from institutional lenders to finance our hotels. We are not currently using
derivative financial or commodity instruments to manage interest rate risk.
Management monitors our interest rate risk closely. The table below presents the annual maturities,
weighted average interest rates on outstanding debt, excluding debt related to hotel properties held for sale, at the
end of each year and fair values required to evaluate the expected cash flows under debt and related agreements, and
our sensitivity to interest rate changes at December 31, 2009. Information relating to debt maturities is based on
expected maturity dates and is summarized as follows (in thousands):
2010
2011
2012
2013
2014
Thereafter
Total
Fair Value
Fixed Rate Debt
Average Interest Rate
$
4,749
6.88%
$
17,300
6.88%
$
41,035
7.09%
$
2,574
6.94%
$
3,271
6.93%
$
45,793
7.09%
$
114,722
6.97%
$
118,295
-
Variable Rate Debt
Average Interest Rate
$
7,625
4.14%
$
917
4.16%
$
20,031
3.91%
$
1,055
3.83%
$
1,097
3.83%
$
19,091
3.83%
$
49,816
3.98%
$
49,816
-
As the table incorporates only those exposures that exist as of December 31, 2009, it does not consider
exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss with respect to
interest rate fluctuations would depend on the exposures that arise after December 31, 2009.
44
Item 8. Financial Statements and Supplementary Data
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE III
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2009 AND 2008
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2009, 2008 AND 2007
CONSOLIDATED STATEMENTS OF EQUITY FOR THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 2009, 2008 AND 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
NOTES TO SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
Supplementary information required by this Item is presented in Item 6.
Page
46
47
48
49
50
51
88
93
45
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Supertel Hospitality, Inc.:
We have audited the accompanying consolidated balance sheets of Supertel Hospitality, Inc.
and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, equity, and cash flows for each of the years in the three-year period ended
December 31, 2009. In connection with our audits of the consolidated financial statements, we also have
audited financial statement schedule III. These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Supertel Hospitality, Inc. and subsidiaries as of December 31, 2009 and
2008, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in note 1 to the consolidated financial statements, in 2009 the Company retrospectively
changed its method of accounting for noncontrolling interests in subsidiaries due to adoption of SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements, included in ASC Topic 810,
Consolidation.
Omaha, Nebraska
March 31, 2010
(cid:3)
/s/ KPMG LLP
46
Supertel Hospitality, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share data)
As of
December 31,
2009
December 31,
2008
$
319,770
86,069
233,701
$
330,271
77,028
253,243
428
2,043
4,779
1,414
32,030
712
2,401
2,903
1,580
60,638
$
274,395
$
321,477
$
10,340
24,975
164,538
199,853
$
13,697
37,022
165,784
216,503
511
1,778
7,662
7,662
8
8
220
120,153
(54,420)
65,961
408
66,369
209
112,804
(25,551)
87,470
8,064
95,534
$
274,395
$
321,477
ASSETS
Investments in hotel properties
Less accumulated depreciation
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
of $95 and $107
Prepaid expenses and other assets
Deferred financing costs, net
Investment in hotel properties held for sale
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable, accrued expenses and other liabilities
Debt related to hotel properties held for sale
Long-term debt
Redeemable noncontrolling interest in consolidated
partnership, at redemption value
Redeemable preferred stock
Series B, 800,000 shares authorized; $.01 par value,
332,500 shares outstanding, liquidation preference of $8,312
SHAREHOLDERS' EQUITY
Preferred stock, 40,000,000 shares authorized;
Series A, 2,500,000 shares authorized, $.01 par value, 803,270
shares outstanding, liquidation preference of $8,033
Common stock, $.01 par value, 100,000,000 shares authorized;
22,002,322 and 20,924,677 shares outstanding
Additional paid-in capital
Distributions in excess of retained earnings
Total shareholder equity
Noncontrolling interest in consolidated partnership,
redemption value $237 and $2,101
Total Equity
See accompanying notes to consolidated financial statements.
47
Supertel Hospitality, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
REVENUES
Room rentals and other hotel services
EXPENSES
Hotel and property operations
Depreciation and amortization
General and administrative
EARNINGS BEFORE NET GAINS (LOSSES)
ON DISPOSITIONS OF ASSETS, OTHER INCOME,
INTEREST, IMPAIRMENT LOSSES, NONCONTROLLING INTEREST
AND INCOME TAX BENEFIT
Net gains (losses) on dispositions of assets
Other income
Interest
Impairment losses
Years ended December 31,
2009
2008
2007
$
88,970
$
99,256
$
90,084
67,360
12,457
3,813
83,630
71,132
12,067
3,696
86,895
63,104
10,032
3,864
77,000
5,340
12,361
13,084
(146)
134
(10,414)
(10,872)
1
129
(10,738)
-
(16)
177
(10,047)
-
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND NONCONTROLLING INTEREST
(15,958)
1,753
3,198
Income tax benefit
(1,047)
(507)
(70)
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS
Earnings (loss) from discontinued operations
NET EARNINGS (LOSS)
(14,911)
(12,614)
(27,525)
2,260
4,999
7,259
3,268
1,147
4,415
Noncontrolling interest income (expense)
130
(603)
(337)
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTERESTS
(27,395)
6,656
4,078
Preferred stock dividends
(1,474)
(1,160)
(948)
NET EARNINGS (LOSS) ATTRIBUTABLE
TO COMMON SHAREHOLDERS
$
(28,869)
$
5,496
$
3,130
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
EPS from continuing operations
EPS from discontinued operations
EPS basic and diluted
$
$
$
(0.75)
(0.58)
(1.33)
$
$
$
0.04
0.22
0.26
$
$
$
0.10
0.05
0.15
AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS
Income from continuing operations, net of tax
Discontinued operations, net of tax
Net earnings (loss) attributable to common shareholders
See accompanying notes to consolidated financial statements.
48
$
$
(16,386)
(12,483)
(28,869)
$
826
4,670
5,496
$
$
$
2,026
1,104
3,130
Supertel Hospitality, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
Years ended December 31, 2009, 2008, and 2007
Preferred
Stock
Preferred Stock
Warrants
Common
Stock
Additional Paid-
In Capital
Distributions in
Excess of
Retained Earnings
Total
Shareholder
Equity
Noncontrolling
Interest
Total
Equtiy
Balance at December 31, 2006
$
15
$
53
$
191
$
109,319
$
(14,741)
$
94,837
$
1,572
$
96,409
Partner Draws
Issuance of OP Units
Deferred compensation
Warrant Conversion
Option Conversion
Conversion of Preferred Stock
Common dividends - $.48 per share
Common stock offering
Preferred dividends
Net earnings
-
-
-
(53)
-
-
-
-
-
-
-
-
-
-
1
10
5
-
-
-
-
-
54
52
17
(4)
-
3,354
-
-
-
-
-
-
-
-
-
-
54
-
17
-
(9,791)
(9,791)
-
(948)
4,078
3,359
(948)
4,078
(397)
6925
(397)
6,925
-
-
-
-
-
-
-
54
-
17
-
(9,791)
3,359
(948)
122
4,200
(6)
-
-
-
-
-
-
-
Balance at December 31, 2007
$
9
$
-
$
207
$
112,792
$
(21,402)
$
91,606
$
8,222
$
99,828
Partner Draws
Issuance of OP Units
Deferred compensation
Dividend Reinvestment Plan
Conversion of Preferred Stock
Common dividends - .4625 per share
Preferred dividends
Net earnings
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2
-
-
12
1
(1)
-
-
-
-
-
-
-
-
-
-
12
1
-
(9,645)
(9,645)
(1,160)
(1,160)
(572)
(572)
26
-
-
-
-
-
26
12
1
-
(9,645)
(1,160)
6,656
6,656
388
7,044
(1)
-
-
-
-
-
Balance at December 31, 2008
$
8
$
-
$
209
$
112,804
$
(25,551)
$
87,470
$
8,064
$
95,534
Deferred compensation
Conversion of OP Units
Preferred dividends
Net earnings (loss)
-
-
-
-
-
-
-
-
-
11
-
-
6
7,343
-
-
-
-
6
-
7,354
(7,354)
6
-
(1,474)
(1,474)
-
(1,474)
(27,395)
(27,395)
(302)
(27,697)
Balance at December 31, 2009
$
8
$
-
$
220
$
120,153
$
(54,420)
$
65,961
$
408
$
66,369
See accompanying notes to consolidated financial statements.
49
Supertel Hospitality, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization
Amortization of intangible assets and deferred financing costs
Net losses (gains) on dispositions of assets
Amortization of stock option expense
Provision for impairment loss
Changes in operating assets and liabilities:
(Increase) decrease in assets
Increase (decrease) in liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to hotel properties
Acquisition and development of hotel properties
Proceeds from sale of hotel assets
Net cash (used) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs
Principal payments on long-term debt
Proceeds from long-term debt
Redemption of preferred operating partnership units
Stock option conversion
Distributions to noncontrolling interests
Preferred stock offering
Common stock offering
Dividends paid
Net cash (used) provided by financing activities
Decrease in cash and cash equivalents
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
Years ended December 31,
2008
2009
2007
$
(27,525)
$
7,259
$
4,415
14,241
595
(2,264)
6
24,148
(1,525)
(1,575)
6,101
(4,484)
-
16,509
12,025
(431)
(28,834)
15,541
(1,267)
-
(271)
-
-
(3,148)
(18,410)
(284)
712
14,979
569
(5,581)
12
250
1,720
1,397
20,605
(11,227)
(22,903)
11,572
(22,558)
(199)
(19,565)
26,467
(178)
-
(846)
7,662
(72)
(11,770)
1,499
12,204
408
17
54
-
(2,531)
2,073
16,640
(10,885)
(93,280)
12
(104,153)
(816)
(8,812)
99,418
-
17
(495)
-
3,359
(9,428)
83,243
(454)
(4,270)
1,166
5,436
CASH AND CASH EQUIVALENTS, END OF YEAR
$
428
$
712
$
1,166
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Dividends declared
Issuance of operating partnership units
Assumed debt from Wachovia on BMI
$
12,487
$
13,379
$
12,064
$
1,474
$
-
$
-
$
10,805
$
-
$
-
$
$
$
10,739
6,925
11,356
See accompanying notes to consolidated financial statements.
50
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies
Description of Business
Supertel Hospitality, Inc. (SHI) was incorporated in Virginia on August 23, 1994. SHI is a self-
administered real estate investment trust (REIT) for federal income tax purposes.
SHI, through its wholly owned subsidiaries, Supertel Hospitality REIT Trust and E&P REIT Trust
(collectively, the “Company”) owns a controlling interest in Supertel Limited Partnership (“SLP”) and E&P
Financing Limited Partnership (“E&P LP”). All of the Company’s interests in 105 properties with the exception of
furniture, fixtures and equipment on 79 properties held by TRS Leasing, Inc. and its subsidiaries are held directly or
indirectly by E&P LP, Supertel Limited Partnership or Solomon’s Beacon Inn Limited Partnership (SBILP)
(collectively, the “Partnerships”). The Company’s interests in ten properties are held directly by either SPPR-Hotels,
LLC (SHLLC), SPPR-South Bend, LLC (SSBLLC), or SPPR-BMI, LLC (SBMILLC). SHI, through Supertel
Hospitality REIT Trust, is the sole general partner in Supertel Limited Partnership and at December 31, 2009 owned
approximately 99% of the partnership interests in Supertel Limited Partnership. Supertel Limited Partnership is the
general partner in SBILP. At December 31, 2009, Supertel Limited Partnership and SHI owned 99% and 1%
interests in SBILP, respectively, and SHI owned 100% of Supertel Hospitality Management, Inc, SPPR Holdings,
Inc. (SPPRHI), and SPPR-BMI Holdings, Inc. (SBMIHI). Supertel Limited Partnership and SBMIHI owned 99%
and 1% of SBMILLC, respectively. Supertel Limited Partnership and SPPRHI owned 99% and 1% of SHLLC,
respectively, and Supertel Limited Partnership owned 100% of SSBLLC.
As of December 31, 2009, the Company owned 115 limited service hotels and one office building. All of
the hotels are leased to our wholly owned taxable REIT subsidiary, TRS Leasing, Inc. (“TRS”), and its wholly
owned subsidiaries (collectively “TRS Lessee”), and are managed by Royco Hotels, Inc (“Royco Hotels”), and HLC
Hotels, Inc. (“HLC”).
The hotel management agreement, as amended, between TRS Lessee and Royco Hotels, the manager of
103 of the Company’s hotels, provides for Royco Hotels to operate and manage the hotels through December 31,
2011, with extension to December 31, 2016 upon achievement of average annual net operating income of at least
10% of the Company’s investment in the hotels. Under the agreement, Royco Hotels receives a base management
fee ranging from 4.25% to 3.0% of gross hotel revenues as revenues increase above thresholds that range from up to
$75 million to over $100 million, and, an annual incentive fee of 10% of up to the first $1.0 million of annual net
operating income in excess of 10% of the Company’s investment in the hotels, and 20% of the excess above $1.0
million.
On May 16, 2007, Supertel Limited Partnership acquired 15 hotels which are operated under the Masters
Inn name. Three of these hotels were sold in 2009. In connection with the acquisition, TRS entered into a
management agreement with HLC, an affiliate of the sellers of the hotels. The management agreement, as amended,
provides for HLC to operate and manage the remaining 12 hotels through December 31, 2011 and receive
management fees equal to 5.0% of the gross revenues derived from the operation of the hotels and incentive fees
equal to 10% of the annual operating income of the hotels in excess of 10.5% of the Company’s investment in the
hotels.
The management agreements generally require TRS Lessee to fund debt service, working capital needs,
capital expenditures and third-party operating expenses for Royco Hotels and HLC excluding those expenses not
related to the operation of the hotels. TRS Lessee is responsible for obtaining and maintaining insurance policies
with respect to the hotels.
51
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies (continued)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Partnerships and the TRS
Lessee. All significant intercompany balances and transactions have been eliminated in consolidation.
Estimates, Risks and Uncertainties
The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and revenues and expenses recognized during the reporting period. The significant estimates pertain to
impairment analysis and allocation of purchase price (FASB ASC 805-10 Business Combinations - Overall).
Actual results could differ from those estimates.
Because of the adverse conditions that exist in the real estate markets, as well as the credit and financial
markets, it is possible that the estimates and assumptions that have been utilized in the preparation of the
consolidated financial statements could change. Specifically as it relates to the Company's business, the current
economic recession is expected to reduce the demand for hotel services and result in a decline in occupancy and
room rentals and other hotel service revenues.
Liquidity
The Company’s operating performance, as well as its liquidity position, has been and continues to be
negatively affected by recent economic conditions, many of which are beyond our control. The Company does not
believe it is likely that these adverse economic conditions, and their effect on the hospitality industry, will improve
significantly in the next two quarters.
Our business requires continued access to adequate capital to fund our liquidity needs. In 2009, the
Company reviewed its entire portfolio, identified properties considered non-core and developed timetables for
disposal of those assets deemed non-core. We focused on improving our liquidity through cash generating asset
sales and disposition of assets that are not generating cash at levels consistent with our investment principles. In
2010, our foremost priorities are preserving and generating capital sufficient to fund our liquidity needs. Given the
deterioration and uncertainty in the economy and financial markets, management believes that access to
conventional sources of capital will be challenging and management has planned accordingly. We are also working
to proactively address challenges to our short term and long-term liquidity position.
The following are our expected actual and potential sources of liquidity, which we currently believe will
be sufficient to fund our near-term obligations:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Cash and cash equivalents;
Cash generated from operations;
Proceeds from asset dispositions;
Proceeds from additional secured or unsecured debt financings; and/or
Proceeds from public or private issuances of debt or equity securities.
These sources are essential to our liquidity and financial position, and we cannot assure you that we will be
52
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies (continued)
able to successfully access them (particularly in the current economic environment.). If we are unable to generate
cash from these sources, we may have liquidity-related capital shortfalls and will be exposed to default risks. While
we believe that we will have adequate capital for our near –term uses, significant issues with access to the liquidity
sources identified above could lead to our insolvency.
In the near-term, the Company’s cash flow from operations is not projected to be sufficient to meet all of
our liquidity needs. In response, management has identified non-core assets in our portfolio to be liquidated over a
one to ten year period. Among the criteria for determining properties to be sold was potential upside when hotel
fundamentals return to stabilized levels. The nineteen properties held for sale as of December 31, 2009 were
determined to be less likely to participate in increased cash flow levels when markets do improve. As such, we
expect these dispositions to help us (1) preserve cash, through potential disposition of properties with current or
projected negative cash flow and/or other potential near-term cash outlay requirements (including debt maturities)
and (2) generate cash, through the potential disposition of strategically identified non-core assets that we believe
have equity value above debt.
Subsequent to year end, the Company sold a Comfort Inn located in Dublin, Virginia, for approximately
$2.75 million. These funds were used to pay off the Village Bank Loan with the remaining $1.7 million used to
reduce the revolving line of credit with Great Western Bank. With respect to the remainder of 2010, we are actively
marketing the remaining 18 properties that will result in the elimination of $24.5 million of debt and generate an
expected $4.0 million of proceeds for operations. We have continued to receive strong interest in our 18 held for sale
properties. The marketing process has been affected by deteriorating economic conditions and we have experienced
some decreases in expected pricing. If this trend continues to worsen, we may be unable to complete the disposition
of identified properties in a manner that would generate cash flow in line with management’s estimates as noted
above. Our ability to dispose of these assets is impacted by a number of factors. Many of these factors are beyond
our control, including general economic conditions, availability of financing and interest rates. In light of the current
economic conditions, we cannot predict:
(cid:120) whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;
(cid:120) whether potential buyers will be able to secure financing; and
(cid:120)
the length of time needed to find a buyer and to close the sale of a property.
As our debt matures, our principal payment obligations also present significant future cash requirements.
We may not be able to successfully extend, refinance or repay our debt due to a number of factors, including
decreased property valuations, limited availability of credit, tightened lending standards and deteriorating economic
conditions. Historically, extending or refinancing loans has required the payment of certain fees to, and expenses of,
the applicable lenders. Any future extensions or refinancing will likely require increased fees due to tightened
lending practices. These fees and cash flow restrictions will affect our ability to fund other liquidity uses. In
addition, the terms of the extensions or refinancing may include operational and financial covenants significantly
more restrictive than our current debt covenants.
The Company’s $9.0 million note payable to Wells Fargo Bank ($7.4 million balance from continuing
operations at December 31, 2009) matures on August 12, 2010. The company’s other 2010 maturities (at December
31, 2009) consist of approximately $4.5 million of principal amortization on mortgage loans and a $0.5 million note
payable to Elkhorn Valley Bank. The company intends to refinance or repay these 2010 maturities using our
existing lines of credit, other financing, funds from operations or proceeds from the sale of hotels. If the
53
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies (continued)
Company is unable to repay or refinance its debt as it becomes due, then its lenders have the ability to take control
of its encumbered hotel assets.
The Company is also required to meet various financial covenants required by its existing lenders. If the
Company’s future financial performance fails to meet these financial covenants, then its lenders also have the ability
to take control of its encumbered hotel assets. Defaults with lenders due to failure to repay or refinance debt when
due or failure to comply with financial covenants could also result in defaults under our credit facilities with Great
Western Bank and Wells Fargo Bank. Our Great Western Bank and Wells Fargo Bank credit facilities contain
cross-default provisions which would allow Great Western Bank and Wells Fargo Bank to declare a default and
accelerate our indebtedness to them if we default on our other loans, and such default would permit that lender to
accelerate our indebtedness under any such loan. If this were to happen, whether due to failure to repay or refinance
debt when due or failure to comply with financial covenants, the Company’s ability to conduct business could be
severely impacted as there can be no assurance that the adequacy and timeliness of cash flow would be available to
meet the Company’s liquidity requirements. The Company believes it has the ability to repay its indebtedness when
due with cash generated from operations, sales of hotels, refinancings or the issuance of stock, while at the same
time continuing to be a substantial owner of limited service and economy hotels. If the economic environment does
not improve in 2010, the Company’s plans and actions may not be sufficient and could lead to possibly failing
financial debt covenant requirements.
The Company declared in 2008 and paid the quarterly common stock dividend of .08 per share on February
2, 2009; but there have been no common stock dividends declared during 2009. The Company will monitor
requirements to maintain its REIT status and will regularly evaluate the dividend policy.
Capitalization Policy
Development and construction costs of properties in development are capitalized including, where
applicable, direct and indirect costs, including real estate taxes and interest costs. Development and construction
costs and costs of significant improvements, replacements, renovations to furniture and equipment expenditures for
hotel properties are capitalized while costs of maintenance and repairs are expensed as incurred.
Deferred Financing Cost
Direct costs incurred in financing transactions are capitalized as deferred costs and amortized to interest
expense over the term of the related loan using the effective interest method.
Investment in Hotel Properties
Upon acquisition, the Company allocates the purchase price of assets to asset classes based on the fair
value of the acquired real estate, furniture, fixtures and equipment, and intangible assets, if any. The Company’s
investments in hotel properties are carried at cost and are depreciated using the straight-line method over an
estimated useful life of 15 to 40 years for buildings and three to twelve years for furniture, fixtures and equipment.
The Company periodically reviews the carrying value of each hotel to determine if circumstances exist
indicating impairment to the carrying value of the investment in the hotel or that depreciation periods should be
modified. If facts or circumstances support the possibility of impairment, the Company will prepare an estimate of
the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in
such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will
54
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies (continued)
be made to the carrying value of the hotel to reflect the hotel at fair value.
In accordance with the provisions of FASB ASC 360-10-45 Property, Plant, and Equipment - Overall -
Other Presentation Matters, a hotel is considered held for sale when a contract for sale is entered into, a substantial,
non refundable deposit has been committed by the purchaser, and sale is expected to occur within one year, or if
management has determined to sell the property within one year. Depreciation of these properties is discontinued at
that time, but operating revenues, other operating expenses and interest continue to be recognized until the date of
sale. Revenues and expenses of properties that are classified as held for sale or sold are presented as discontinued
operations for all periods presented in the statements of operations if the properties will be or have been sold on
terms where the Company has limited or no continuing involvement with them after the sale. If active marketing
ceases or the properties no longer meet the criteria to be classified as held for sale, the properties are reclassified as
operating and measured at the lower of their (a) carrying amount before the properties were classified as held for
sale, adjusted for any depreciation expense that would have been recognized had the properties been continuously
classified as operating or (b) their fair value at the date of the subsequent decision not to sell.
Gains on sales of real estate are recognized in accordance with FASB ASC 360-20 Property, Plant, and
Equipment – Real Estate Sales (“ASC 360-20”). The specific timing of the sale is measured against various criteria
of ASC 360-20 related to the terms of the transactions and any continuing involvement in the form of management
or financial assistance associated with the properties. If the sales criteria are not met, the gain is deferred and the
finance, installment or cost recovery method, as appropriate, is applied until the sales criteria are met. To the extent
we sell a property and retain a partial ownership interest in the property, we recognize gain to the extent of the third
party ownership interest in accordance with ASC 360-20.
Cash and Cash Equivalents
Cash and cash equivalents include cash and various highly liquid investments with original maturities of
three months or less when acquired, and are carried at cost which approximates fair value.
Revenue Recognition
Revenues from the operations of the hotel properties are recognized when earned. Sales taxes collected
from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded
from revenues in the consolidated statements of operations.
Adoption of New Accounting Pronouncements
Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles—Overall (“ASC
105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source
of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance
contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC
accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the
Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff
55
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies (continued)
Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”).
The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the
Codification, provide background information about the guidance and provide the bases for conclusions on the
change(s) in the Codification. FASB guidance throughout this document has been updated for the Codification.
Effective January 1, 2009 the Company adopted FASB ASC 810-10 Broad Transactions—Consolidation—
Overall. Per ASC 810-10, noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable,
directly or indirectly, to a parent. The ownership interests in the subsidiary that are held by owners other than the
parent are noncontrolling interests. Additionally, such noncontrolling interests are reported on the consolidated
balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations,
revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated
amounts, including both the amounts attributable to the Company and noncontrolling interests. Consolidated
statements of equity are included for both quarterly and annual financial statements, including beginning balances,
activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
However, per FASB ASC 480-10-S99 Liabilities—Overall—SEC Materials , securities that are redeemable for
cash or other assets at the option of the holder, not solely within the control of the issuer, must be classified outside
of permanent equity. This would result in certain outside ownership interests being included as redeemable
noncontrolling interest outside of permanent equity in the consolidated balance sheets. The Company makes this
determination based on terms in applicable agreements, specifically in relation to redemption provisions.
Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by
delivery of its own shares, the Company considered existing GAAP guidance to evaluate whether the Company
controls the actions or events necessary to issue the maximum number of shares that could be required to be
delivered under share settlement of the contract.
The consolidated results of the Company include the following ownership interests held by owners other than
the Company: the common units in the Operating Partnership held by third parties (158,161 at December 31, 2009),
and the preferred units in the Operating Partnership held by third parties (51,035 at December 31, 2009).
Regarding the preferred units in the Operating Partnership, in certain circumstances, redemption of the units
could result in a net cash settlement outside the Control of the Company. In October, 2009, certain preferred
operating unit holders redeemed 126,751 units at $10 each. In accordance with ASC 480-10 Distinguishing
Liabilities from Equity—Overall, the Company will continue to record the remaining preferred operating units
outside of permanent equity in the consolidated balance sheets. Based on the Company’s evaluation of the
redemption value of the redeemable noncontrolling interest, the Company has reflected this interest at its redemption
value as of December 31, 2009 and December 31, 2008.
Income Taxes
The Company qualifies and intends to continue to qualify as a REIT under applicable provisions of the
Internal Revenue Code, as amended. In general, under such Code provisions, a trust which has made the required
election and, in the taxable year, meets certain requirements and distributes to its shareholders at least 90% of its
REIT taxable income will not be subject to federal income tax to the extent of the income which it distributes.
Earnings and profits, which determine the taxability of dividends to shareholders, differ from net income reported
for financial reporting purposes due primarily to differences in depreciation of hotel properties for federal tax
purposes. Except with respect to the TRS Lessee, the Company does not believe that it will be liable for significant
federal or state income taxes in future years.
56
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies (continued)
Deferred income taxes relate primarily to the TRS Lessee and are accounted for using the asset and liability
method. Under this method, deferred income taxes are recognized for temporary differences between the financial
reporting bases of assets and liabilities of the TRS Lessee and their respective tax bases and for operating loss and
tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or
settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be
realized based on consideration of available evidence, including tax planning strategies and other factors.
Under the REIT Modernization Act (“RMA”), which became effective January 1, 2001, the Company is
permitted to lease its hotels to one or more wholly owned taxable REIT subsidiaries (“TRS”) and may continue to
qualify as a REIT provided that the TRS enters into management agreements with an “eligible independent contractor”
that will manage the hotels leased by the TRS. The Company formed the TRS Lessee and, effective January 1, 2002,
the TRS Lessee leased all of the hotel properties. The TRS Lessee is subject to taxation as a C-Corporation. The
TRS Lessee has incurred operating losses for financial reporting and federal income tax purposes for 2009, 2008 and
2007.
Fair Value Measurements
In April 2009, the FASB issued updated guidance which is included in FASB ASC Topic 820-10 Fair
Value Measurements and Disclosures - Overall, requiring disclosures about the fair value of financial instruments
for interim reporting periods of publicly traded companies, as well as annual financial statements, by requiring
disclosures in summarized financial information at interim reporting periods. This pronouncement was effective for
interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March
15, 2009.
Per ASC 820-10 fair value is the price that would be received to sell an asset or would be paid to transfer a
liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. Fair
value measurements are determined under a three-level hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value, distinguishing between market participant assumptions developed based on market data
obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own
assumptions about market participant assumptions developed based on the best information available in the
circumstances (“unobservable inputs”).
We currently do not have any financial instruments that must be measured on a recurring basis under ASC
820-10; however, we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures -
Overall - Subsequent Measurement, for our nonfinancial assets which include our held for sale hotels. We measure
these assets using inputs from Level 3 of the fair value hierarchy.
.
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have
the ability to access at the measurement date.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived
principally from or corroborated by observable market data by correlation or other means (market
corroborated inputs).
57
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies (continued)
Level 3 includes unobservable inputs that reflect our assumptions about the assumptions that market
participants would use in pricing the asset or liability. We develop these inputs based on the best
information available, including our own data.
During the three months ended March 31, 2009, Level 3 inputs were used to determine an impairment loss
of $150 for two hotels held for sale. When these properties were sold in the third quarter of 2009, approximately
$67 of the impairment loss was recovered. During the three months ended September 30, 2009, we recorded
impairment charges of approximately $760 on assets sold and held for sale. During the three months ended
December 31, 2009, we recorded impairment charges of approximately $12.4 million on assets held for sale and
$10.9 million on assets held for use. The fair value of an asset held for sale is based on the estimated selling price
less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated
selling price. The estimated selling costs are based on our experience with similar asset sales.
The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates
on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit
spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into
consideration general market conditions and maturity. As of December 31, 2009, the carrying value and estimated
fair value of the Company’s debt, excluding debt related to hotel properties held for sale, was $164.5 million and
$168.1 million, respectively. The carrying value of the Company’s other financial instruments approximates fair
value due to the short-term nature of these financial instruments.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by
the weighted average number of common shares outstanding. Diluted EPS is computed after adjusting the
numerator and denominator of the basic EPS computation for the effects of any dilutive potential common shares
outstanding during the period, if any. The computation of basic and diluted earnings per common share is presented
below:
58
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies (continued)
For the year ended December 31,
2008
2007
2009
Basic Earnings per Share Calculation:
Numerator:
Net earnings (loss) attributable to common shareholders:
Continuing operations
Discontinued operations
Net earnings (loss) attributable to common shareholders - total
Denominator:
$
$
(16,386)
(12,483)
(28,869)
$
$
826
4,670
5,496
Weighted average number of common shares - basic
21,646,612
20,839,823
Basic Earnings Per Common Share:
Continuing operations
Discontinued operations
Total
$
$
(0.75)
(0.58)
(1.33)
$
$
0.04
0.22
0.26
$
$
$
$
2,026
1,104
3,130
20,197,455
0.10
0.05
0.15
For the year ended December 31,
2008
2007
2009
Diluted Earnings per Share Calculation:
Numerator:
Net earnings (loss) attributable to common shareholders:
Continuing operations
Discontinued operations
Net earnings (loss) attributable to common shareholders - total
Denominator:
Weighted average number of common shares - basic
Effect of dilutive securities:
Common stock options
Weighted average number of common shares - diluted
Diluted Earnings per share:
Continuing operations
Discontinued operations
Total
Preferred and Common Limited Partnership Units in SLP
$
$
(16,386)
(12,483)
(28,869)
$
$
826
4,670
5,496
$
$
2,026
1,104
3,130
21,646,612
20,839,823
20,197,455
-
21,646,612
366
20,840,189
19,421
20,216,876
$
$
$
$
(0.75)
(0.58)
(1.33)
0.04
0.22
0.26
$
$
0.10
0.05
0.15
At December 31, 2009, 2008, and 2007 there were 158,161, 1,235,806 and 1,235,806, respectively of SLP
common operating units outstanding. These units have been excluded from the diluted earnings per share calculation
as there would be no effect on the amounts allocated to the limited partners holding common operating units (whose
units are convertible on a one-to-one basis to common shares) since their share of income (loss) would be added
back to income (loss). During 2009, 1,077,645 common operating units were converted into 1,077,645 shares of
common stock. In addition, the 51,035, 177,786 and 195,610, respectively shares of SLP preferred operating units
held by the limited partners as of December 31, 2009, 2008 and 2007, respectively, are antidilutive.
59
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies (continued)
Preferred Stock of SHI
At December 31, 2009, 2008 and 2007, there were 803,270, 803,270 and 932,026 shares, respectively, of
Series A Preferred Stock. The 126,311 preferred stock warrants outstanding as of December 31, 2006 were fully
exercised in 2007. During 2008 and 2007 there were 128,756 and 606,465 shares, respectively, of Series A
Preferred Stock converted to 227,896 and 1,073,430 shares, respectively, of common stock. The shares of Series A
Preferred Stock, after adjusting the numerator and denominator for the basic EPS computation, are antidilutive for
the year ended December 31, 2009, 2008 and 2007, for the earnings per share computation. The exercise price of the
preferred stock warrants exceeded the market price of the common stock, and therefore these shares were excluded
from the computation of diluted earnings per share. The conversion rights of the Series A Preferred Stock were
cancelled as of February 20, 2009. See additional information regarding preferred stock and warrants in Note 11.
At December 31, 2009, there were 332,500 shares of Series B Cumulative Preferred Stock outstanding.
The Series B Cumulative Preferred Stock is not convertible into common stock, therefore, there is no dilutive effect
on earnings per share.
Stock-Based Compensation
Options
The Company has a 2006 Stock Plan (the “Plan”) which has been approved by the Company’s
shareholders. The Plan authorized the grant of stock options, stock appreciation rights, restricted stock and stock
bonuses for up to 200,000 shares of common stock. At the annual shareholders meeting on May 28, 2009, the
shareholders of Supertel Hospitality, Inc. approved an amendment to the Supertel 2006 Stock Plan. The amendment
increases the maximum number of shares reserved for issuance under the plan from 200,000 to 300,000 and changes
the definition of fair market value to mean the closing price of Supertel common stock with respect to future awards
under the plan.
The potential common shares represented by outstanding stock options for the year ended December 31,
2009, 2008 and 2007 totaled 230,715, 192,143, and 162,143 respectively, of which 230,715, 191,777, and 142,722
shares, respectively are assumed to be repurchased with proceeds from the exercise of stock options resulting in
zero, 366, and 19,421 shares, respectively, that are dilutive.
Share-Based Compensation Expense
The Plan is accounted for in accordance with FASB ASC Topic 718 – 10 Compensation – Stock
Compensation – Overall, requiring the measurement and recognition of compensation expense for all share-based
payment awards to employees and directors based on estimated fair values. The expense recognized in the
consolidated financial statements for the year ended December 31, 2009, 2008, and 2007 for share-based
compensation related to employees and directors was $6, $12, and $54, respectively.
Noncontrolling Interest
Noncontrolling interest in SLP represents the limited partners’ proportionate share of the equity in the
operating partnership. Supertel offered to each of the holders of SLP preferred operating units the option to extend
until October 24, 2010 their right to have units redeemed at $10 per unit. In October 2009, 126,751 units were
60
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 1. Organization and Summary of Significant Accounting Policies (continued)
redeemed at $10 each. The holders of the remaining 51,035 SLP preferred operating units elected to extend to
October 24, 2010, their right to have units redeemed at $10 per unit. During 2008, 17,824 preferred operating units
of limited partnership interest were redeemed by unit holders. An additional 863,611 SLP common operating units
were issued in 2007. See additional information regarding SLP units in Note 10. During 2009, 1,077,645 SLP
common operating units of limited partnership interest were redeemed by unit holders for common shares of SHI.
No limited partnership units were redeemed in 2007. At December 31, 2009, the aggregate partnership interest held
by the limited partners in SLP was approximately 1.0%. Income is allocated to noncontrolling interest based on the
weighted average percentage ownership throughout the year.
Concentration of Credit Risk
The Company maintained a major portion of its deposits with Great Western Bank, a Nebraska Corporation
at December 31, 2009, 2008 and 2007. The balance on deposit at Great Western Bank exceeded the federal deposit
insurance limit; however, management believes that no significant credit risk exists with respect to the uninsured
portion of this cash balance.
Note 2. Acquisitions and Development
During 2009 there were no acquisitions and no properties under construction or redevelopment.
In 2008, the Company acquired seven hotels in Kentucky, two hotels in Sioux Falls, South Dakota and a hotel
in Green Bay, Wisconsin. The combined purchase price of $22 million was funded by term loans of $15.6 million
and $6.4 million from our existing credit facilities. The franchise brands consisted of Comfort Inn (2), Comfort
Suites (1), Days Inn (4), Quality Inn (1), Sleep Inn (1) and Super 8 (1).
In 2007, the Company acquired 27 hotels in Georgia (7), Florida (5), Virginia (4), South Carolina (4),
Louisiana (2), Alabama (1), Idaho (1), Montana (1,) Indiana (1) and Maine (1). The combined purchase price of
$110.5 million was funded by term loans of $43.4 million, assumption of $11.4 million of existing loans, a bridge
loan of $8.5 million, $40.3 million from our existing credit facilities and issuance of 863,611 common operating
units in Supertel Limited Partnership. The franchise brands consisted of Masters Inn (15), Days Inn (5), Super 8 (4),
Comfort Inn (2) and Tara Inn (1).
Note 3. Investments in Hotel Properties
Investments in hotel properties consisted of the following at December 31:
Land
Acquired below market lease intangibles
Buildings and improvements
Furniture and equipment
Construction-in-progress
Held For Sale
5,224
$
89
28,542
6,068
-
39,923
2009
Held For Use
41,270
$
883
227,197
50,124
296
319,770
TOTAL
$
46,494
972
255,739
56,192
296
359,693
Held For Sale
9,773
$
192
51,844
8,761
31
70,601
2008
Held For Use
42,672
$
1,865
237,244
47,840
650
330,271
TOTAL
$
52,445
2,057
289,088
56,601
681
400,872
Less accumulated depreciation
7,893
32,030
$
86,069
233,701
$
93,962
265,731
$
9,963
60,638
$
77,028
253,243
$
86,991
313,881
$
61
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 4. Net Gains (Losses) on Sales of Properties and Discontinued Operations
In accordance with FASB ASC 205-20 Presentation of Financial Statements – Discontinued Operations,
gains, losses and impairment losses on hotel properties sold or classified as held for sale are presented in
discontinued operations. Gains, losses and impairment losses for both continuing and discontinued operations are
summarized as follows:
Continuing Operations
Sales of properties
Impairment losses
Gain (loss) on sale of assets
Discontinued Operations
Sales of properties
Impairment losses
Loss on sale of assets
2009
2008
2007
$
-
(10,872)
(146)
(11,018)
-
$
-
1
1
-
$
-
(16)
(16)
2,520
(13,276)
(110)
(10,866)
5,583
(250)
(3)
5,330
-
-
(1)
(1)
Total
$
(21,884)
$
5,331
$
(17)
As of December 31, 2009, the Company has nineteen properties classified as held for sale. In 2009 and
2008, the Company sold eight hotels and two hotels, respectively, resulting in gains of $2,520 and $5,583,
respectively. In 2009, 2008, and 2007, the Company recognized net gains (losses) and impairment on the
disposition of assets of approximately $(11,012), $5,331, and $(17).
The Company allocates interest expense to discontinued operations for debt that is to be assumed or that is
required to be repaid as a result of the disposal transaction. The Company allocated $2,601, $3,110 and $2,861 to
discontinued operations for the years ended December 31, 2009, 2008 and 2007, respectively.
The operating results of hotel properties included in discontinued operations are summarized as follows:
2009
2008
2007
Revenues
Hotel and property operations expenses
Interest expense
Depreciation and amortization expense
Net gain (loss) on dispositions of assets
Impairment loss
Income tax (expense) benefit
62
$
$
16,524
(14,487)
(2,601)
(1,784)
2,410
(13,276)
600
(12,614)
25,729
(19,833)
(3,110)
(2,915)
5,580
(250)
(202)
4,999
$
21,547
(15,593)
(2,861)
(2,179)
(1)
-
234
1,147
$
$
$
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 5. Impairment Losses
In accordance with FASB ASC 360-10-35 Property Plant and Equipment – Overall - Subsequent Measurement,
the Company analyzes its assets for impairment when events or circumstances occur that indicate the carrying
amount may not be recoverable. As part of this process, the Company utilizes a two-step analysis to determine
whether a trigger event (within the meaning of ASC 360-10-35) has occurred with respect to cash flow of, or a
significant adverse change in business climate for, its hotel properties. Quarterly and annually the Company
reviews all of its hotels to determine any property whose cash flow or operating performance significantly
underperformed from budget or prior year, which the Company has set as a shortfall against budget or prior year as
15% or greater.
At year end the Company applied a second analysis on the entire held for use portfolio. The analysis estimated
the expected future cash flows to identify any property whose carrying amount potentially exceeded the recoverable
value. (Note that at the end of each quarter, this analysis is performed only on those properties identified in the 15%
change analysis). In performing this year end analysis, the Company made the following assumptions:
(cid:120) Holding periods ranged from one year for noncore assets to be classified as held for sale in 2010, to ten
years for those assets considered as core. Analysis in prior quarters assumed holding periods of ten years.
In the fourth quarter of 2010, a review of the existing portfolio by the management team identified assets
as core and non-core. This review of assets as core and non core will be an ongoing activity.
(cid:120) Cash flow from trailing twelve months for the individual properties multiplied by the holding period as
noted above. The Company did not assume growth rates on cash flows as part of its step one analysis.
(cid:120) A revenue multiplier for the terminal value based on an average of past two years sales from leading
industry broker of like properties.
For the Company’s hotels that did not pass the analysis above, their identification represented a triggering event
as described in ASC 360-10-35. A trigger event occurred for each hotel property in which the carrying value
exceeded the sum of the undiscounted cash flows expected over its remaining anticipated holding period and from
its disposition. These properties were then tested to determine if such carrying amounts were recoverable. When
testing the recoverability for a property, in accordance with FASB ASC 360-10-35 35-29 Property Plant and
Equipment – Overall - Subsequent Measurement, Estimates of Future Cash Flows Used to Test a Long-Lived Asset
for Recoverability, the Company uses estimates of future cash flows associated with the individual properties over
their expected holding period and eventual disposition. In estimating these future cash flows, the Company
incorporates its own assumptions about its use of the hotel property and expected hotel performance. Assumptions
used for the individual hotels are determined by management, based on discussions with our asset management
group and our third party management companies. Each property was then subjected to a probability-weighted cash
flow analysis as described in FASB ASC 360-10-55 Property Plant and Equipment – Overall – Implementation. In
this analysis, the Company completed a detailed review of each hotel’s market conditions and future prospects,
which incorporated specific detailed cash flow and revenue multiplier assumptions over the remaining expected
holding periods, including the probability that the property will be sold. Based on the results of this analysis, it was
determined that the Company had investments in six properties that were not fully recoverable; accordingly,
impairment was recognized.
The holding period of the six properties on which impairment was recognized was three years or less. This is
the result of a fourth quarter review of the entire portfolio performed by the management team identifying those
assets that would no longer be considered long term or core. Prior to this review, properties were considered long
term investments and holding periods of ten years were used, which was reasonable based on the Company’s long
history of holding properties in excess of ten years.
63
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 5. Impairment Losses (continued)
To determine the amount of impairment on the properties identified above, in accordance with FASB ASC 360-
10-55, the Company calculated the excess of the carrying value of the each property in comparison to its fair market
value as of December 31, 2009. Based on this calculation, the Company determined total impairment of $10.9
million existed as of December 31, 2009 on the six held for use assets previously noted. Fair market value was
determined by multiplying trailing 12 months revenue for each property by a revenue multiplier that was determined
based on the Company’s experience with hotel sales in the current year as well as available industry information. As
the fair market value of each property impaired for the year ending December 31, 2009, was determined in part by
management estimates, a reasonable possibility exists that future changes to inputs and assumptions could affect the
accuracy of management’s estimates and such future changes could lead to further possible impairment in the future.
Note 6. Long-Term Debt
Long-term debt consisted of the following notes and mortgages payable at December 31:
Mortgage loan payable to Susquehanna Bank, evidenced by a promissory note
dated February 8, 1999, in the amount of approximately $5 million. The note bears
interest at 7.75% per annum. Monthly principal and interest payments are payable
through maturity on July 1, 2009, at which point the remaining principal and accrued
interest are due. This is an extension of the original maturity date of March 1, 2009.
This loan was paid in full on May 21, 2009 with proceeds from the sale of the
Holiday Inn Express In Gettysburg, Pennsylvania.
Mortgage loan payable to Greenwich Capital Financial Products, Inc. ("Greenwich"),
evidenced by a promissory note dated November 26, 2002, in the amount of $40
million. The note bears interest at 7.50% per annum. Monthly principal and interest
payments are payable through maturity on December 1, 2012, at which point the
remaining principal and accrued interest are due.
Mortgage loan payable to First National Bank of Omaha evidenced by a promissory
note in the amount of $15 million dated October 20, 1999. The note bears interest at
8.40% per annum. Monthly principal and interest payments are payable through
maturity on November 1, 2009, at which point the remaining principal and accrued
interest are due. This note was paid in full on May 6, 2009 using additional funding
obtained from Great Western Bank.
Mortgage loans payable to First Citizens National Bank evidenced by promissory
notes totaling approximately $1 million. The loan obligations were assumed on
October 19, 2000 in conjunction with the acquisition of hotel assets. The sole
remaining note bears interest at 6% per annum and adjusts annually each November
1st. This rate is based on the then current 5 year CMT (Constant Maturity Treasury)
plus a margin of 250 basis points. Principal and interest payments are due in monthly
installments, with the note maturing on July 20, 2012. This note was paid in full on
March 30, 2009 with proceeds from the sale of the Super 8 in Charles City, Iowa.
64
2009
2008
-
$1,356
$32,423
$33,769
-
-
$9,234
$307
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
2009
2008
Mortgage loans payable to Small Business Administration evidenced by promissory
notes in the aggregate amounts of approximately $0.9 million. The loan obligations
were assumed on October 23, 2000, October 19, 2000 and October 20, 2000,
respectively, in conjunction with the acquisition of hotel assets. The notes bear
interest at 8.12%, 8.95%, and 6.71% per annum, respectively. Principal and interest
payments are due in monthly installments to January 1, 2017, December 11, 2011 and
May 1, 2013, respectively. Two notes were paid off with the remaining maturity
being May 1, 2013. The remaining note was paid off on August 27, 2009 with
proceeds from the sale of the Super 8 in Anamosa, Iowa.
Loan payable to Village Bank formerly known as Southern Community Bank & Trust
evidenced by a promissory note in the amount of $2.7 million dated November 1,
2004. The note bears interest at an interest rate of 7.57%, effective November 1,
2007. This is based on the three year Treasury Rate plus 3.75% and adjusted every
36 months over the remaining life of the loan. The loan will have a floor of 6.50%
and a ceiling of 11.00%. Principal and interest payments are due in monthly
installments to November 1, 2024. A principal payment was made on this loan in the
amount of $1.3 million, using proceeds from the sale of the Comfort Inn in Dahlgren,
Virginia. This loan, subsequent to December 31, 2009, has been paid in full with
proceeds from the sale of a Comfort Inn in Dublin, Virginia.
-
$110
$993
$2,383
Revolving credit facility from Great Western Bank evidenced by a promissory note
dated December 3, 2008. The revolving line of credit has a limit of $20 million with
interest payable monthly at the greater of the prime rate and 4.5%. The principal
balance of the loan is due and payable on February 22, 2012.
$19,016
$16,174
Mortgage loan payable to Great Western Bank, evidenced by a promissory note dated
December 3, 2008, in the amount of $14 million. The note bears interest at 5.5% per
annum. Principal and interest payments are due in monthly installments with the
outstanding principal and interest payable in full on December 5, 2011.
$13,617
$14,000
Loan payable to Great Western Bank, evidenced by a promissory note dated
December 3, 2008, in the amount of $2 million. The note bears interest at the greater
of the prime rate plus 50 basis points or 5%. The principal balance and accrued
interest are payable sixty days after the date of borrowing. On February 4th, 2009,
the note was amended to increase the principal to $3.2 million, increase the interest
rate to 7%, and extend the maturity to May 3, 2009. This facility was subsequently
paid in full as of May 1, 2009 from our existing lines of credit.
-
$2,000
Loan payable to Great Western Bank, evidenced by a promissory note dated
May 5, 2009 in the amount of $10 million. The note bears interest at 5.5% per
annum. Principal and interest payments are due in monthly installments with the
outstanding principal and interest payable in full on May 5, 2012.
$9,842
-
65
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
2009
2008
Revolving credit facility from Wells Fargo for up to $12 million evidenced by a
promissory note dated September 28, 2007, consummated October 1, 2007 with a
maturity of September 28, 2009. The company exercised the option to fix the interest
rate at l.75% over the one, three, six or twelve month LIBOR. Interest payments are
due in monthly installments. The note was modified on March 16, 2009 to reduce the
amount available for borrowing to $9.5 million and eliminate the revolving feature, as
well as to increase the 1.75% interest over LIBOR to 3.50%. A $0.5 million paydown
was made on August 5, 2009. On September 28, 2009, the Company further amended
the credit facility to extend the maturity date to November 12, 2009. An additional
amendment was made on November 12, 2009, to extend the maturity to May 12,
2010, with monthly principal payments of $75 to begin December 1, 2009 as well as a
floor rate being inserted at 4%. On March 31, 2010, the maturity of the note was
extended to August 12th, 2010. The rate as of December 31, 2009 was 4%.
Mortgage loan payable to Citigroup Global Markets Realty Corp., evidenced by a
promissory note dated November 7, 2005, in the amount of $14.8 million. The note
bears interest at 5.97% per annum. Principal and interest payments are due in
monthly installments with the outstanding principal and interest payable in full on
November 11, 2015.
Mortgage loan payable to GE Capital Franchise Finance Corporation (“GECC”),
evidenced by a promissory note dated December 31, 2007, in the amount of $7.9
million. The note bears interest at three-month LIBOR plus 2.00% (reset monthly).
Monthly interest payments are due through February 1, 2010. Commencing on
March 1, 2010 until and including February 1, 2011, consecutive monthly
installments of interest and principal equal to one-twelfth of one percent (1%) of the
loan amount are due. The principal balance of the loan is due and payable on February
1, 2018. The following principal payments have been made on this loan: A payment
of $0.7 million, in August 2009, using partial proceeds from the sale of a Masters Inn
in Kissimmee, Florida; a payment of $0.5 million, in August of 2009, using partial
proceeds from the sale of a Comfort Inn in Ellsworth, Maine; a payment of $1.1
million, in August 2009, using partial proceeds from the sale of a Masters Inn in
Orlando, Florida; and a payment of $0.2 million in October, 2009, using partial
proceeds from the sale of a Masters Inn in Kissimmee, Florida . On March 16, 2009,
the note was amended to increase the interest rate by 100 basis points. It was further
amended on November 9th, 2009, to increase the interest rate by an additional 0.5%.
The interest rate as of December 31, 2009, was 3.76%.
$8,914
$9,489
$13,696
$14,001
$5,319
$7,875
66
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
2009
2008
Mortgage loan payable to GECC, evidenced by a promissory note dated August 18,
2006, in the amount of $17.9 million. The note bears interest at three-month LIBOR
plus 1.70% (reset monthly) and is convertible to a fixed rate equal to the seven-year
weekly U.S. dollar interest rate swap plus 1.98% between the seventh and thirty-sixth
months of the loan. Interest only payments were due until the Company exercised the
conversion provision on May 1, 2008. Thereafter, monthly installments of principal
and interest are due until September 1, 2016 when the remaining principal balance is
due. On March 16, 2009, the note was amended to increase the interest rate by 100
basis points. It was further amended on November 9th, 2009, to increase the interest
rate by an additional 0.5%. The rate as of December 31, 2009 was 7.17%.
Mortgage loan payable to GECC, evidenced by a promissory note dated January 5,
2007, in the amount of $15.6 million. The note bears interest at three-month LIBOR
plus 1.70% (reset monthly) and is convertible to a fixed rate equal to the seven-year
weekly U.S. dollar interest rate swap plus 1.98% between the seventh and thirty-sixth
months of the loan. Interest only payments were due until the Company exercised the
conversion provision on May 1, 2008. Thereafter, monthly installments of principal
and interest are due until February 1, 2017 when the remaining principal balance is
due. A principal payment of $1.5 million was made in August 2009, using proceeds
from the sale of a Comfort Inn in Ellsworth, Maine. On March 16, 2009, the note was
amended to increase the interest rate by 100 basis points. It was further amended on
November 9th, 2009, to increase the interest rate by an additional 0.5%. The rate as of
December 31, 2009 was 7.17%.
Mortgage loan payable to GECC, evidenced by a promissory note dated February 6,
2007, in the amount of $3.4 million. The note bears interest at three-month LIBOR
plus 1.70% (reset monthly) and is convertible to a fixed rate equal to the seven-year
weekly U.S. dollar interest rate swap plus 1.98% between the seventh and thirty-sixth
months of the loan. Interest only payments were due until the Company exercised the
conversion provision on May 1, 2008. Thereafter, monthly installments of principal
and interest are due until March 1, 2017 when the remaining principal balance is due.
On March 16, 2009, the note was amended to increase the interest rate by 100 basis
points. It was further amended on November 9th, 2009, to increase the interest rate
by an additional 0.5%. The rate as of December 31, 2009 was 7.17%.
Mortgage loan payable to GECC, evidenced by a promissory note dated May 16,
2007, in the amount of $27.8 million. The note bears interest at three-month LIBOR
plus 1.70% (reset monthly) and is convertible to a fixed rate equal to the seven-year
weekly U.S. dollar interest rate swap plus 1.98% between the seventh and thirty-sixth
months of the loan. Interest only payments were due until the Company exercised the
conversion provision on May 1, 2008. Thereafter, monthly installments of principal
and interest are due until June 1, 2017, when the remaining principal balance is due.
The following principal payments have been made on this loan: $0.7 million in July
2009, $2.2 million in August 2009, and $1.2 million in October 2009, each using
proceeds from the sale of three separate Masters Inns in Florida. On March 16, 2009,
the note was amended to increase the interest rate by 100 basis points. It was further
amended on November 9th, 2009, to increase the interest rate by an additional 0.5%.
The rate as of December 31, 2009 was 7.69%.
67
$17,067
$17,527
$13,420
$15,328
$3,301
$3,385
$22,480
$27,311
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Mortgage loan payable to Wachovia Bank, evidenced by a promissory note dated
February 4, 1998 with an original principal amount of $2.5 million, assumed as of
April 4, 2007 with a remaining principal amount of $2.0 million. The note bears
interest at 7.375% per annum. Principal and interest payments are due in monthly
installments with the outstanding principal and interest payable in full on March 1,
2020.
Mortgage loan payable to Wachovia Bank, evidenced by a promissory note dated
February 4, 1998 with an original principal amount of $2.8 million, assumed as of
April 4, 2007 with a remaining principal amount of $2.2 million. The note bears
interest at 7.375% per annum. Principal and interest payments are due in monthly
installments with the outstanding principal and interest payable in full on March 1,
2020.
Mortgage loan payable to Wachovia Bank, evidenced by a promissory note dated
February 4, 1998 with an original principal amount of $4.2 million, assumed as of
April 4, 2007 with a remaining principal amount of $3.3 million. The note bears
interest at 7.375% per annum. Principal and interest payments are due in monthly
installments with the outstanding principal and interest payable in full on March 1,
2020.
Mortgage loan payable to Wachovia Bank, evidenced by a promissory note dated
February 4, 1998 with an original principal amount of $5.1 million, assumed as of
April 4, 2007 with a remaining principal amount of $4.0 million. The note bears
interest at 7.375% per annum. Principal and interest payments are due in monthly
installments with the outstanding principal and interest payable in full on March 1,
2020.
Mortgage Loan payable to GECC, evidenced by a promissory note in the amount of
$6.8 million, dated January 2, 2008. The interest rate is based on the 90-day London
Interbank Offered Rate plus a margin of 200 basis points. The rate as of December
31, 2009 was 3.76%. Monthly interest payments are due through February 1, 2010.
Interest and principal payments (equal to one-twelfth of one percent of the loan
amount) are then due in monthly installments in the third year of the loan. The
payment of principal and interest then in effect will be due monthly until the maturity
of the note on February 1, 2018. On March 16, 2009, the note was amended to
increase the interest rate by 100 basis points. It was further amended on November
9th, 2009, to increase the interest rate by an additional 0.5%.
2009
2008
$1,704
$1,804
$1,874
$1,984
$2,850
$3,017
$3,479
$3,682
$6,765
$6,765
68
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
2009
2008
Mortgage Loan payable to GECC, evidenced by a promissory note in the amount of
$3.4 million, dated January 2, 2008. The interest rate is based on the 90-day London
Interbank Offered Rate plus a margin of 200 basis points. The rate as of December
31, 2009 was 3.76%. Monthly interest payments are due through February 1, 2010.
Interest and principal payments (equal to one-twelfth of one percent of the loan
amount) are then due in monthly installments in the third year of the loan. The
payment of principal and interest then in effect will be due monthly until the maturity
of the note on February 1, 2018. On March 16, 2009, the note was amended to
increase the interest rate by 100 basis points. It was further amended on November
9th, 2009, to increase the interest rate by an additional 0.5%.
Mortgage Loan payable to GECC, evidenced by a promissory note in the amount of
$1.1 million, dated January 2, 2008. The interest rate is based on the 90-day London
Interbank Offered Rate plus a margin of 200 basis points. The rate as of December
31, 2009 was 3.76%. Monthly interest payments are due through February 1, 2010.
Interest and principal payments (equal to one-twelfth of one percent of the loan
amount) are then due in monthly installments in the third year of the loan. The
payment of principal and interest then in effect will be due monthly until the maturity
of the note on February 1, 2018. On March 16, 2009, the note was amended to
increase the interest rate by 100 basis points. It was further amended on November
9th, 2009, to increase the interest rate by an additional 0.5%.
Mortgage Loan payable to GECC, evidenced by a promissory note in the amount of
$4.4 million, dated January 2, 2008. The interest rate is based on the 90-day London
Interbank Offered Rate plus a margin of 200 basis points. The rate as of December
31, 2009 was 3.76%. Monthly interest payments are due through February 1, 2010.
Interest and principal payments (equal to one-twelfth of one percent of the loan
amount) are then due in monthly installments in the third year of the loan. The
payment of principal and interest then in effect will be due monthly until the maturity
of the note on February 1, 2018. On March 16, 2009, the note was amended to
increase the interest rate by 100 basis points. It was further amended on November
9th, 2009, to increase the interest rate by an additional 0.5%.
Mortgage Loan payable to GECC, evidenced by a promissory note in the amount of
$2.5 million, dated January 31, 2008. The interest rate is based on the 90-day London
Interbank Offered Rate plus a margin of 256 basis points. The rate as of December
31, 2009 was 4.32%. Monthly interest payments are due through February 1, 2010.
Interest and principal payments (equal to one-twelfth of one percent of the loan
amount) are then due in monthly installments in the third year of the loan. The
payment of principal and interest then in effect will be due monthly until the maturity
of the note on February 1, 2018. On March 16, 2009, the note was amended to
increase the interest rate by 100 basis points. It was further amended on November
9th, 2009, to increase the interest rate by an additional 0.5%.
$3,380
$3,380
$1,100
$1,100
$4,355
$4,355
$2,470
$2,470
69
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Mortgage Loan payable to Elkhorn Valley Bank in Norfolk, Nebraska, evidenced by a
promissory note in the amount of $1 million, dated March 19, 2009. The note bears
interest at 6.5% per annum. Monthly principal and interest payments are due through
March 2014, with the balance of the loan payable on April 1, 2014.
2009
2008
$948
-
Line of credit from Elkhorn Valley Bank, evidenced by a note dated December 22,
2009, with a limit of $2 million. The note bears interest at 6.75% per annum. Interest
payments are due on the outstanding balance through May 15, 2010. At that time, in
addition to monthly interest, principal payments are to be made as follows: $40 in
June, $50 in July, $60 in August, and $70 in September, with remaining principal and
interest to be paid in October 2010.
$500
$189,513
-
$202,806
The long-term debt is secured by 111 and 121 of the Company’s hotel properties, for the years ended 2009
and 2008, respectively. The Company’s debt agreements contain requirements as to the maintenance of minimum
EBITDA levels, minimum levels of debt service and fixed charge coverage and required loan-to-value ratios and net
worth, and place certain restrictions on distributions. We are required to comply with financial covenants for certain
of our loan agreements. As of December 31, 2009, we either were in compliance with the financial covenants or
obtained waivers for non-compliance (as discussed below). As a result, we are not in default of any of our loans.
Prior to the amendment discussed below, our credit facilities with Great Western Bank required that we
maintain consolidated and loan-specific debt service coverage ratios (based on a rolling twelve month period) of at
least 1.50 to 1, tested quarterly, and consolidated and loan-specific loan to value ratios (based on a rolling twelve
month period) that do not exceed 65%, tested annually. As of December 31, 2009, our covenant levels, as
calculated pursuant to the loan agreement, were 1.29 to 1 (consolidated debt service coverage ratio), 1.46 to 1 (loan-
specific debt service coverage ratio), 60% (consolidated loan to value ratio) and 65% (loan-specific loan to value
ratio). The credit facilities were amended on March 29, 2010 to require maintenance of (a) a consolidated debt
service coverage ratio of at least 1.05 to 1, tested quarterly, from December 31, 2009 through June 30, 2011 and
1.50 to 1, tested quarterly from July 1, 2011 through the maturity of the credit facilities, (b) a loan-specific debt
service coverage ratio of 1.20 to 1, tested quarterly, from December 31, 2009 through June 30, 2011 and 1.50 to 1,
tested quarterly, from July 1, 2011 through the maturity of the credit facilities and (c) consolidated and loan-specific
loan to value ratios that do not exceed 70%, tested annually commencing on December 31, 2009, in each case,
through the maturity of the credit facilities.
The Great Western Bank amendment also: (a) modifies the borrowing base so that the loans available to the
Company may not exceed the lesser of (i) an amount equal to 70% of the total appraised value of the hotels securing
the credit facilities and (ii) an amount that would result in a loan-specific debt service coverage ratio of less than
1.20 to 1 from December 31, 2009 through June 30, 2011 and 1.50 to 1 from July 1, 2011 through the maturity of
the credit facilities, (b) increases the interest rate on the revolving credit portion of the credit facilities from prime
(subject to a 4.50% floor rate) to 5.50% from March 29, 2010 through June 30, 2011 and prime (subject to a 5.50%
floor rate) from July 1, 2011 through the maturity of the credit facilities; and (c) gives Great Western Bank the
option to increase the interest rates of the credit facilities up to 4.00% any time after June 30, 2011.
70
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Our credit facility with Wells Fargo Bank requires us to maintain a consolidated loan to value ratio (based
on a rolling twelve month period) that does not exceed 70%, tested quarterly. As of December 31, 2009, this ratio,
as calculated pursuant to the loan agreement, was 75%. The credit facility also requires us to maintain a minimum
tangible net worth of not less than $75 million plus 90% of net proceeds from equity transactions after December 31,
2006, tested quarterly. As of December 31, 2009, our tangible net worth, as calculated pursuant to the loan
agreement, was $74.5 million. The Company received a waiver for non-compliance with both of these covenants.
In connection with the waiver, the credit facility was amended on March 31, 2010 to require maintenance of a
consolidated loan to value ratio that does not exceed 77.5% and a minimum tangible net worth of not less than $70
million, in each case, through the maturity of the credit facility. The amendment also reduced our quarterly
minimum consolidated fixed charge coverage ratio covenant (based on a rolling twelve month period) through the
maturity of the credit facility from: 0.90 to 1 after preferred dividends and 1.00 to 1 before preferred dividends; to
0.75 to 1 after preferred dividends and 0.80 to 1 before preferred dividends. The credit facility with Wells Fargo
Bank was also amended on March 31, 2010 to extend the maturity date from May 12, 2010 to August 12, 2010,
require a $200,000 principal payment on March 31, 2010 and require a $100,000 principal payment on April 30,
2010.
On March 25, 2010, our credit facilities with General Electric Capital Corporation were amended to require
us to maintain $3.9 million of total adjusted EBITDA (based on a rolling twelve month period), tested quarterly
commencing on December 31, 2009, with respect to our GE-encumbered properties through 2011, in lieu of
maintenance of minimum fixed charge coverage ratios (FCCRs). This required minimum level of total adjusted
EBITDA will be reduced by the pro rata percentage of total adjusted EBITDA attributable to any GE-encumbered
properties that are sold, if certain conditions are satisfied. As of December 31, 2009, our total adjusted EBITDA, as
calculated pursuant to the loan agreement, with respect to our GE-encumbered properties was $5.2 million (the
reduction for sold properties was $0.7 million). Commencing in 2012 and continuing for the term of the loans, we
are required to maintain, with respect to our GE-encumbered properties, a before dividend FCCR (based on a rolling
twelve month period) of 1.3 to 1 and after dividend FCCR (based on a rolling twelve month period) of 1.0 to 1.
The GE amendment also: (a) reduces our consolidated debt service coverage ratio covenant (based on a
rolling twelve month period) from 1.4 to 1 for each quarter of 2009 and 1.5 to 1 each quarter thereafter for the term
of the loans to 1.05 to 1 for the quarter ended December 31, 2009 and each quarter thereafter through 2011 and 1.5
to 1 each quarter thereafter for the term of the loans; (b) defers prepayment fees with respect to prepayments
required as a result of the sale of any of our Masters Inn hotels until January 1, 2012; and (c) implements a quarterly
cash flow sweep, equal to the amount by which our consolidated debt service coverage ratio exceeds 1.75 to 1 to pay
deferred prepayment fees. As of December 31, 2009, our consolidated debt service coverage ratio, as calculated
pursuant to the loan agreement, was 1.35 to 1. In connection with previous amendments and waivers, the interest
rate of the loans under our credit facilities with GE have increased by 1.5%. If our FCCR with respect to our GE-
encumbered properties equals or exceeds 1.3 to 1 before dividends and 1.0 to 1 after dividends for two consecutive
quarters, the cumulative 1.5% increase in the interest rate of the loans will be eliminated.
If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our
loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to
immediately pay our indebtedness and ultimately lose our hotels through lender foreclosure if we are unable to
obtain alternative sources of financing with acceptable terms.
Our Great Western Bank and Wells Fargo Bank credit facilities contain cross-default provisions which
would allow Great Western Bank and Wells Fargo Bank to declare a default and accelerate our indebtedness to them
if we default on our other loans, and such default would permit that lender to accelerate our indebtedness under any
71
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
such loan. We are not in default of any of our loans.
Aggregate annual principal payments for the next five years and thereafter are as follows:
2010
2011
2012
2013
2014
Thereafter
Held For Sale
24,975
$
-
-
-
-
-
24,975
$
2009
Held For Use
12,374
$
18,217
61,066
3,629
4,368
64,884
164,538
$
TOTAL
$
37,349
18,217
61,066
3,629
4,368
64,884
189,513
$
At December 31, 2009 and 2008, the estimated fair values of long-term debt, excluding debt related to
hotel properties held for sale, were approximately $168.1 million and $169.3 million, respectively. The fair values
were estimated by discounting future cash payments to be made at rates that approximate rates currently offered for
loans with similar maturities.
Note 7. Income Taxes
The RMA was included in the Tax Relief Extension Act of 1999, which was enacted into law on December
17, 1999. The RMA includes numerous amendments to the provisions governing the qualification and taxation of
REITs, and these amendments were effective January 1, 2001. One of the principal provisions included in the Act
provides for the creation of TRS. TRS’s are corporations that are permitted to engage in nonqualifying REIT
activities. A REIT is permitted to own up to 100% of the voting stock in a TRS. Previously, a REIT could not own
more than 10% of the voting stock of a corporation conducting nonqualifying activities. Relying on this legislation,
in November 2001, the Company formed the TRS Lessee.
As a REIT, the Company generally will not be subject to corporate level federal income tax on taxable
income it distributes currently to stockholders. If the Company fails to qualify as a REIT in any taxable year, it will
be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and
may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation
as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and
excise taxes on its undistributed taxable income. In addition, taxable income of a TRS is subject to federal, state and
local income taxes.
In connection with the Company’s election to be taxed as a REIT, it has also elected to be subject to the
"built-in gain" rules on the assets formerly held by the old Supertel. Under these rules, taxes will be payable at the
time and to the extent that the net unrealized gains on assets at the date of conversion to REIT status are recognized
in taxable dispositions of such assets in the ten-year period following conversion.
At December 31, 2009, the income tax bases of the Company’s assets and liabilities excluding those of
TRS were approximately $276,026 and $176,234, respectively; at December 31, 2008, they were approximately
$298,010 and $204,864, respectively.
The TRS net operating loss carryforward from December 31, 2009 as determined for federal income tax
purposes was approximately $6.3 million. The availability of such loss carryforward will begin to expire in 2022.
72
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 7. Income Taxes (continued)
Income tax benefit for the years ended December 31, 2009, 2008 and 2007 consists of the following:
Federal
2009
State
Total
Federal
2008
State
Total
Federal
2007
State
Total
Current
Deferred
-
$
(1,343)
-
$
(304)
-
$
(1,647)
-
$
(261)
-
$
(44)
$
-
(305)
-
$
(251)
-
$
(53)
-
$
(304)
Total income tax benefit
$
(1,343)
$
(304)
$
(1,647)
$
(261)
$
(44)
$
(305)
$
(251)
$
(53)
$
(304)
The actual income tax benefit of the TRS for the years ended December 31, 2009, 2008 and 2007 differs
from the “expected” income tax benefit (computed by applying the appropriate U.S. federal income tax rate of 34%
to earnings before income taxes) as a result of the following:
2009
2008
2007
Computed "expected" income tax benefit
State income taxes, net federal income tax benefit
Other
Total income tax benefit
$
$
(1,449)
(201)
3
(1,647)
(251)
(29)
(25)
(305)
$
$
$
$
(258)
(36)
(10)
(304)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
the deferred tax liability at December 31, 2009, 2008 and 2007 are as follows:
73
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 7. Income Taxes (continued)
Deferred Tax Assets:
Expenses accrued for consolidated financial statement
purposes, nondeductible for tax return purposes
2009
2008
2007
$
281
$
273
$
241
Net operating losses carried forward for federal
income tax purposes
2,511
1,289
1,083
Total deferred tax assets
2,792
1,562
1,324
Deferred Liabilities:
Tax depreciation in excess of book depreciation
Total deferred tax liabilities
843
843
1,260
1,327
1,260
1,327
Net deferred tax assets (liabilities)
$
1,949
$
302
$
(3)
The TRS has estimated its income tax benefit using a combined federal and state rate of approximately
38%. As of the year ended 2009, 2008 and 2007 the TRS had a deferred tax asset of $2.8 million, $1.6 million and
$1.3 million, respectively, primarily due to current and past years’ tax net operating losses. These loss carryforwards
will expire in 2022. Management believes that it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the deferred tax asset and has determined that no valuation allowance is
required. Reversal of the deferred tax asset in the subsequent year cannot be reasonably estimated.
Income taxes are accounted for under the asset and liability method. The Company uses an estimate of its
annual effective rate based on the facts and circumstances at the time while the actual effective rate is calculated at
year-end. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those 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. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. There is no valuation allowance at December 31, 2009, 2008 or 2007.
Dividends Paid
Dividends paid were $0.08 per share during the year ended December 31, 2009; of which $0.053
represented capital gain distribution and $0.027 represented a nondividend distribution to shareholders. Dividends
paid were $0.51 during the year ended December 31, 2008; of which $0.206 represented ordinary income, $0.093
represented capital gain distribution and $0.211 represented a nondividend distribution to shareholders. Dividends
paid were $.4625 per share during the year ended December 31, 2007; of which $0.197 represented ordinary income
and $.266 represented nondividend distribution to shareholders.
74
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 8. Commitments and Contingencies and Other Related Party Transactions
Royco Hotels, Inc. (“Royco Hotels”) and HLC Hotels, Inc. (“HLC”), independent contractors, manage our
hotels pursuant to hotel management agreements with TRS Lessee. The management agreements provide that the
management companies have control of all operational aspects of the hotels, including employee-related matters.
Royco Hotels and HLC must generally maintain each hotel in good repair and condition and make routine
maintenance, repairs and minor alterations. Additionally, Royco Hotels and HLC must operate the hotels in
accordance with third party franchise agreements that cover the hotels, which includes using franchisor sales and
reservation systems as well as abiding by franchisors’ marketing standards. Royco Hotels and HLC may not assign
their management agreements without our consent.
The management agreements generally require TRS Lessee to fund debt service, working capital needs,
capital expenditures and to reimburse the management companies for all budgeted direct operating costs and
expenses incurred in the operation of the hotels. TRS Lessee is responsible for obtaining and maintaining insurance
policies with respect to the hotels.
Royco Hotels Management Agreement
Royco Hotels manages 103 of the hotels owned by the Company at December 31, 2009. Royco Hotels
receives a monthly base management fee and an incentive management fee, if certain financial thresholds are met or
exceeded. The management agreement, as amended effective January 1, 2007, provides for monthly base
management fees as follows:
(cid:120)
(cid:120)
(cid:120)
4.25% of gross hotel income for the month for up to the first $75 million of gross hotel income for a
fiscal year;
4.00% of gross hotel income for the month for gross hotel income exceeding $75 million up to $100
million for a fiscal year; and
3.00% of gross hotel income for the month for gross hotel income exceeding $100 million for a
fiscal year.
If annual net operating income exceeds 10% of our total investment in the hotels, then Royco Hotels
receives an incentive management fee of 10% of the excess of net operating income up to the first $1 million, and
20% of excess net operating income above $1 million.
The management agreement expires on December 31, 2011 and, unless Royco Hotels elects not to extend
the term, the term of the agreement will be extended to December 31, 2016 if (i) Royco Hotels achieves average
annual net operating income of at least 10% of our total investment in the hotels during the four fiscal years ending
December 1, 2011 and (ii) Royco Hotels does not default prior to December 31, 2011.
The management agreement may be terminated as follows:
(cid:120)
either party may terminate the management agreement if net operating income is not at least 8.5% of
the Company’s total investment in the hotels or if the Company undergoes a change of control;
75
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 8. Commitments and Contingencies and Other Related Party Transactions (continued)
(cid:120)
(cid:120)
(cid:120)
the Company may terminate the agreement if Royco Hotels undergoes a change of control;
the Company may terminate the agreement if tax laws change to allow a hotel REIT to self manage
its properties; and
by the non-defaulting party in the event of a default that has not been cured within the cure period.
If the Company terminates the management agreement because the Company undergoes a change of
control, Royco Hotels undergoes a change of control due to the death of one of its principals, or due to a tax law
change, then Royco Hotels will be entitled to a termination fee equal to 50% of the base management fee paid to
Royco Hotels during the twelve months prior to notice of termination. Under certain circumstances, Royco Hotels
will be entitled to a termination fee if the Company sells a hotel and does not acquire another hotel or replace the
sold hotel within twelve months. The fee, if applicable, is equal to 50% of the base management fee paid with
respect to the sold hotel during the prior twelve months.
The following are events of default under the management agreement:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
the failure of Royco Hotels to diligently and efficiently operate the hotels pursuant to the
management agreement;
the failure of either party to pay amounts due to the other party pursuant to the management
agreement;
certain bankruptcy, insolvency or receivership events with respect to either party;
the failure of either party to perform any of their obligations under the management agreement;
loss of the franchise license for a hotel because of Royco Hotels;
failure by Royco Hotels to pay, when due, the accounts payable for the hotels for which we have
previously reimbursed Royco Hotels; and
any of the hotels fail two successive franchisor inspections if the deficiencies are within Royco
Hotels’ reasonable control.
With the exception of certain events of default as to which no grace period exists, if an event of default
occurs and continues beyond the grace period set forth in the management agreement, the non-defaulting party has
the option of terminating the agreement.
The management agreement provides that each party, subject to certain exceptions, indemnifies and holds
harmless the other party against any liabilities stemming from certain negligent acts or omissions, breach of
contract, willful misconduct or tortuous actions by the indemnifying party or any of its affiliates.
HLC Management Agreement
The hotel management agreement with HLC, as amended July 15, 2008, provides for HLC to operate and
manage twelve of our thirteen Masters Inn hotels through December 31, 2011. The agreement provides for
76
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 8. Commitments and Contingencies and Other Related Party Transactions (continued)
HLC to receive management fees equal to 5.0% of the gross revenues derived from the operation of the hotels and
incentive fees equal to 10% of the annual operating income of the hotels in excess of 10.5% of the Company’s
investment in the hotels.
Litigation
Various claims and legal proceedings arise in the ordinary course of business and may be pending against the
Company and its properties. Based upon the information available, the Company believes that the resolution of any
of these claims and legal proceedings should not have a material adverse affect on its consolidated financial
position, results of operations or cash flows.
Three separate lawsuits have been filed against the Company in Jefferson Circuit Court, Louisville,
Kentucky; one lawsuit filed by a plaintiff on June 26, 2008, a second lawsuit filed by fourteen plaintiffs on
December 15, 2008 and a third lawsuit filed by six plaintiffs on January 16, 2009. The plaintiffs in the three cases,
now consolidated as one action, allege that as guests at the Company’s hotel in Louisville, Kentucky, they were
exposed to carbon monoxide as a consequence of a faulty water heater at the hotel. The plaintiffs have also sued the
plumbing company which performed repairs on the water heater at the hotel. On August 7, 2009 the Company’s
insurers notified the Company that they would defend the consolidated lawsuit with a reservation of rights as to
coverage.
Plaintiffs are seeking to recover for damages arising out of physical and mental injury, lost wages, pain and
suffering, past and future medical expenses and punitive or exemplary damages. The damages claimed by plaintiffs
in discovery thus far are in a range of approximately $37 to $41 million. The company retains three tranches of
commercial general liability insurance with aggregate limits of $51 million. There are no deductibles on two of the
tranches; the third tranche has a deductible of ten thousand dollars. At this time, the Company has not recorded a
liability as the amount of the loss contingency is not reasonably estimable. The Company will continue to evaluate
the estimability of loss contingency amounts.
Other
In November 2004, the Company obtained a $2.7 million loan from Village Bank, formerly known as
Southern Community Bank & Trust. The Village Bank loan was paid in full January, 2010. George R. Whittemore,
Director of the Company, is a member of the Board of Directors of Village Bank. Further information about the
loan from Village Bank is presented in Note 6. This loan, subsequent to December 31, 2009, has been paid in full
with proceeds from the sale of a Comfort Inn in Dublin, Virginia.
The Company assumed land lease agreements in conjunction with the purchase of three hotels. One lease
requires monthly payments of the greater of $2 or 5% of room revenue through November 2091. A second lease
requires monthly payments of $1 through 2017 with approximately $1 annual increase beginning January 1, 2018,
with additional increases in 2033, 2043, 2053 and 2063. A third lease requires annual payments of $34, with
approximately $3 increases every five years throughout twelve renewal periods. Land lease expense from continuing
operations totaled approximately $109, $104 and $70 in 2009, 2008 and 2007, respectively, and is included in
property operating expense.
As of December 31, 2009, the future minimum lease payments applicable to non-cancellable operating
leases are as follows:
77
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 8. Commitments and Contingencies and Other Related Party Transactions (continued)
2010
2011
2012
2013
2014
Thereafter
$
72
71
71
74
74
4,782
5,144
$
The Company as of December 31, 2009 has agreements with four restaurants and two cell tower operators
for leased space at our hotel locations. The restaurant leases have maturity dates ranging from 2011 to 2028 and cell
tower leases have maturity dates ranging from 2011 to 2014. Several of the restaurant leases have escalation clauses.
Three of the escalations are based on percentages of gross sales and one is based on increases in the Consumer Price
Index for all Urban Consumers. The restaurant and cell tower lease income from continuing operations totaled
approximately $332, $320 and $244 in 2009, 2008 and 2007, respectively, and is included in room rentals and other
hotel services.
As of December 31, 2009, the future minimum lease receipts from the non-cancellable restaurants and cell
tower leases are as follows:
$
2010
2011
2012
2013
2014
Thereafter
134
123
97
91
92
952
1,489
$
Note 9. Redeemable Preferred Stock
On June 3, 2008 the Company offered and sold 332,500 shares of 10.0% Series B Cumulative Preferred
Stock. The shares were sold for $25.00 per share and bear a liquidation preference of $25.00 per share.
Underwriting and other costs of the offering totaled approximately $0.6 million to the Company. The net proceeds
plus additional cash were used by the Company to pay an $8.5 million bridge loan with General Electric Capital
Corporation. At December 31, 2009, 332,500 shares of 10.0% Series B preferred stock remained outstanding.
Dividends on the Series B preferred stock are cumulative and are payable quarterly in arrears on each
March 31, June 30, September 30 and December 31, or, if not a business day, the next succeeding business day, at
the annual rate of 10.0% of the $25.00 liquidation preference per share, equivalent to a fixed annual amount of
$2.50 per share. Dividends on the Series B preferred stock accrue whether or not the Company has earnings,
whether or not there are funds legally available for the payment of such dividends, whether or not such dividends are
declared and whether or not such dividends are prohibited by agreement. Accrued but unpaid dividends on the
Series B preferred stock will not bear interest.
78
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
The Series B preferred stock will, with respect to dividend rights and rights upon the Company’s
liquidation, dissolution or winding up, rank senior to the Company’s common stock, senior to all classes or series of
preferred stock issued by the Company and ranking junior to the Series B preferred stock with respect to dividend
rights or rights upon the Company’s liquidation, dissolution or winding up, on a parity with the Company’s Series A
preferred stock and with all classes or series of preferred stock issued by the Company and ranking on a parity with
the Series B preferred stock with respect to dividend rights or rights upon the Company’s liquidation, dissolution or
winding up and junior to all of the Company’s existing and future indebtedness.
The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its
common shares, unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred
shares for the current and all past dividend periods. The Series B preferred stock has no stated maturity and is not
subject to any sinking fund or mandatory redemption.
The Series B preferred stock is not redeemable prior to June 3, 2013, except in certain limited
circumstances relating to the maintenance of the Company’s ability to qualify as a REIT as provided in the
Company’s articles of incorporation or a change of control (as defined in the Company’s amendment to its articles
of incorporation establishing the Series B preferred stock). The Company may redeem the Series B preferred stock,
in whole or in part, at any time or from time to time on or after June 3, 2013 for cash at a redemption price of $25.00
per share, plus all accrued and unpaid dividends. Also, upon a change of control, each outstanding share of the
Company’s Series B preferred stock will be redeemed for cash at a redemption price of $25.00 per share, plus all
accrued and unpaid dividends. At December 31, 2009, no events have occurred that would lead the Company to
believe redemption of the preferred stock, due to a change of control or failure to maintain its REIT qualification, is
probable.
Note 10. Noncontrolling Interest of Common and Preferred Units in SLP
At December 31, 2009, 158,161 of SLP’s common operating partnership units (“Common OP Units”) were
outstanding. The redemption values for the Common OP Units are $237, and $2,101 for 2009 and 2008 respectively.
Each limited partner of SLP may, subject to certain limitations, require that SLP redeem all or a portion of his or her
Common OP Units, at any time after a specified period following the date the units were acquired, by delivering a
redemption notice to SLP. When a limited partner tenders Common OP Units to SLP for redemption, the Company
can, in its sole discretion, choose to purchase the units for either (1) a number of shares of Company common stock
equal to the number of units redeemed (subject to certain adjustments) or (2) cash in an amount equal to the market
value of the number of shares of Company common stock the limited partner would have received if the Company
chose to purchase the units for common stock. During 2009, 1,077,645 Common OP Units were redeemed for
common shares of SHI.
At December 31, 2009, 51,035 of SLP’s preferred operating partnership units (“Preferred OP Units”) were
outstanding. The redemption value for the Preferred OP Units is $511 for December 31, 2009. The Preferred OP
Units receive a preferred dividend distribution of $1.10 per preferred unit annually, payable on a monthly basis and
do not participate in the allocations of profits and losses of SLP. Distributions to holders of Preferred OP Units have
priority over distributions to holders of Common OP Units. Supertel offered to each of the Preferred OP Unit
holders the option to extend until October 24, 2010 their right to have units redeemed at $10 per unit. In October,
2009, 126,751 units were redeemed at $10 each. The holders of the remaining 51,035 units elected to extend to
October 24, 2010, their right to have units redeemed at $10 per unit. The remaining 51,035 units will continue to be
carried outside of permanent equity at redemption value.
79
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Noncontrolling Interest Reconciliation of Common and Preferred Units
Redeemable
Noncontrolling
Interest
Noncontrolling
Interest
Total
Noncontrolling
Interest
Balance @ 12/31/08
$
1,778
$
8,064
$
9,842
Partner Draws
Conversion of OP units
Reclassification of OP units to current liability
Noncontrolling Interest Expense
$
(172)
-
(1,267)
172
-
$
(7,354)
-
(302)
$
(172)
(7,354)
(1,267)
(130)
Balance @ 12/31/09
$
511
$
408
$
919
Note 11. Common and Preferred Stock
The Company’s common stock is duly authorized, full paid and non-assessable. At December 31, 2009
and 2008, members of the Board of Directors and executive officers owned approximately 20% and 16%,
respectively, of the Company’s outstanding common stock.
At December 31, 2009, 158,161 of SLP’s common operating partnership units (“Common OP Units”) and
51,035 of SLP’s preferred operating partnership units (“Preferred OP Units”) were outstanding. The combined
redemption value for the Common OP Units and Preferred OP Units are $748 and $3,879 as of December 31, 2009
and 2008, respectively. Each limited partner of SLP may, subject to certain limitations, require that SLP redeem all
or a portion of his or her Common OP Units or Preferred OP Units, at any time after a specified period following the
date the units were acquired, by delivering a redemption notice to SLP. When a limited partner tenders Common OP
Units to SLP for redemption, the Company can, in its sole discretion, choose to purchase the units for either (1) a
number of shares of Company common stock equal to the number of units redeemed (subject to certain adjustments)
or (2) cash in an amount equal to the market value of the number of shares of Company common stock the limited
partner would have received if the Company chose to purchase the units for common stock. The Preferred OP Units
are convertible by the holders into Common OP Units on a one-for-one basis or may be redeemed for cash at $10
per unit until October 2010. The Preferred OP Units receive a preferred dividend distribution of $1.10 per preferred
unit annually, payable on a monthly basis and do not participate in the allocations of profits and losses of SLP.
During 2009, 1,077,645 Common OP Units of limited partnership interest were redeemed for common shares of
SHI. During 2008 and 2007, no Common OP Units were redeemed for common shares of SHI. Supertel offered to
each of the Preferred OP Unit holders the option to extend until October 24, 2010 their right to have units redeemed
at $10 per unit. In October 2009, 126,751 units were redeemed at $10 each. The holders of the remaining 51,035
units elected to extend to October 24, 2010, their right to have units redeemed at $10 per unit. There were 17,824
Preferred OP Units redeemed for cash in December 2008, and no Preferred OP Units were redeemed for cash or
converted to common units during 2007.
On December 30, 2005 the Company offered and sold 1,521,258 shares of 8% Series A preferred stock.
The shares were sold for $10.00 per share and bear a liquidation preference of $10.00 per share. Underwriting and
80
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
other costs of the offering totaled $1.2 million. The proceeds were used to reduce borrowings under the Company’s
revolving credit facility with Great Western Bank. At December 31, 2009, 2008 and 2007, 803,270, 803,270 and
932,026 shares respectively, of Series A preferred stock remained outstanding.
Dividends on the Series A preferred stock are cumulative and are payable monthly in arrears on the last day
of each month, at the annual rate of 8% of the $10.00 liquidation preference per share, equivalent to a fixed annual
amount of $.80 per share. Dividends on the Series A preferred stock accrue regardless of whether or not the
Company has earnings, whether there are funds legally available for the payment of such dividends and whether or
not such dividends are declared. Unpaid dividends will accumulate and bear additional dividends at 8%,
compounded monthly.
The Series A preferred stock with respect to dividend rights and rights upon the Company’s liquidation,
dissolution or winding up, ranks senior to all classes or series of the Company’s common stock, senior or on parity
with all other classes or series of preferred stock and junior to all of the Company’s existing and future indebtedness.
Upon liquidation all Series A preferred stock will be entitled to $10.00 per share plus accrued but unpaid dividends.
The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common
shares unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for
the current and all past dividend periods. The outstanding preferred shares do not have any maturity date, and are not
subject to mandatory redemption.
Previously, each share of Series A preferred stock was convertible in whole or in part, at any time at the
option of the holders thereof, into common stock at a conversion price of $5.66 per share of common stock
(equivalent to a conversion rate of 1.77 shares of common stock for each share of Series A convertible preferred
stock) subject to certain adjustments. The conversion rights of the Series A preferred stock were cancelled as of
February 20, 2009. The Company may not optionally redeem the Series A preferred shares prior to January 1, 2009,
except in limited circumstances to preserve its status as a REIT.
The conversion rights of the holders of the Series A preferred stock were subject to cancellation on or after
December 31, 2008 if the closing price of the Company common stock on the Nasdaq Global Market exceeds $7.36
for at least 20 trading days within any period of 30 consecutive trading days. The Company issued a conversion
cancellation notice to holders of the Series A convertible preferred stock and the conversion rights were cancelled as
of February 20, 2009. The Series A preferred stock will be redeemable on or after January 1, 2009 for cash, at the
Company’s option, in whole or from time to time in part, at $10.00 per share, plus accrued and unpaid dividends to
the redemption date.
On December 30, 2005, the Company issued warrants to Anderson & Strudwick Incorporated, the selling
agent for the Company in its public offering of the Series A Preferred Stock, to purchase 126,311 shares of Series A
preferred stock. The warrants were exercisable until December 31, 2010 at $12.00 per share of Series A preferred
stock. The warrants could not be sold, transferred, pledged, assigned or hypothecated for a period of one year after
their issuance, except to officers of the selling agent. During 2007 the warrants were fully exercised.
The Company also has Series B preferred stock outstanding. See Note 9.
Note 12. Stock-Based Compensation
Upon initial issuance of stock options on May 25, 2006, the Company adopted the provisions of FASB
ASC 718-10-30 Compensation – Stock Compensation – Overall – Initial Measurement, which requires the
81
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 12. Stock-Based Compensation (continued)
measurement and recognition of compensation expense for all share-based payment awards to employees and
directors based on estimated fair values.
Options
The Company has a 2006 Stock Plan (the “Plan”) which has been approved by the Company’s
shareholders. The Plan authorized the grant of stock options, stock appreciation rights, restricted stock and stock
bonuses for up to 200,000 shares of common stock. At the annual shareholders meeting on May 28, 2009, the
shareholders of Supertel Hospitality, Inc. approved an amendment to the Supertel 2006 Stock Plan. The amendment
increases the maximum number of shares reserved for issuance under the plan from 200,000 to 300,000 and changes
the definition of fair market value to mean the closing price of Supertel common stock with respect to future awards
under the plan.
As of December 31, 2009, 230,715 stock options have been awarded under the Plan. The exercise price is
equal to the average of the high and low sales price of the stock as reported on the National Association of Securities
Dealers Automated Quotation system (NASDAQ) on the grant date. A total of 230,715 shares of common stock
have been reserved for issuance pursuant to the Plan with respect to the granted options. There is no intrinsic value
for the vested options as of December 31, 2009. The following table summarizes the options awarded:
Awarded Options
Exercise Price
Date Vested
Expiration Date
Options Grant Date
11/17/09
90,000
1.54
06/30/10
11/17/2013
$
$
05/22/08
30,000
5.28
12/31/08
5/22/2012
$
05/24/07
65,000
7.55
12/31/07
5/24/2011
The Company records compensation expense for stock options based on the estimated fair value of the
options on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data
among other factors to estimate the expected price volatility, the expected option life, the dividend rate and expected
forfeiture rate. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for the estimated
life of the option. The following table summarizes the estimates used in the Black-Scholes option-pricing model
related to the 2009, 2008, and 2007 grants:
Volatility
Expected dividend yield
Expected term (in years)
Risk free interest rate
11/17/09
Grant Date
05/22/08
45.00%
6.33%
3.81
1.74%
20.00%
6.54%
4.00
3.04%
05/24/07
20.00%
5.90%
3.94
4.80%
The following table summarizes the Company’s activities with respect to its stock options for the year
ended December 31, 2009 as follows (in thousands, except per share and share data):
82
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 12. Stock-Based Compensation (continued)
Shares
192,143
90,000
-
51,428
230,715
140,715
Outstanding at December 31, 2008
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2009
Exercisable at December 31, 2009
Share-Based Compensation Expense
Weighted-
Average
Exercise Price
Aggregate
Fair
Value
Weighted-Average Aggregate
Intrinsic
Value
Remaining
Contractual Term
$
$
6.36
1.54
-
6.48
4.45
6.31
133
31
-
38
126
95
$
$
$
$
$
2.21
1.16
$
-
$
-
The expense recognized in the consolidated financial statements for the share-based compensation related
to employees and directors for the years ended December 31, 2009, 2008 and 2007 was $6, $12 and $54,
respectively. At December 31, 2009, we had $25 of total unrecognized compensation expense, net of estimated
forfeitures, related to stock options granted in 2009 that vest as of June 30, 2010. We recognize compensation
expense using the straight-line method over the vesting period. During 2009, 2008 and 2007, the company’s options
granted were 90,000 30,000 and 65,000 respectively, with a weighted average grant date fair value per option of
$0.35, $0.40 and $0.83, respectively. The total intrinsic value of options exercised was $0, $0 and $5 for fiscal years
2009, 2008 and 2007 respectively. The closing market price of our common stock on the last day of 2009 was $1.50
per share.
83
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 13. Supplementary Data
The following tables present our unaudited quarterly results of operations for 2009 and 2008:
2009
Revenues
Expenses
Earnings (loss) before net losses
on disposition of assets, other income, interest
noncontrolling interest and income tax expense (benefit)
Net losses on dispositions of assets
Other income
Interest
Impairment losses
Earnings (loss) from continuing operations
before income taxes
Income tax expense (benefit)
Earnings (loss) from continuing operations
Discontinued operations
Net earnings (loss)
Noncontrolling interest
Net income (loss) attributable to controlling interests
Preferred stock dividend
March 31,
2009
Quarters Ended (unaudited)
June 30,
2009
September 30,
2009
December 31,
2009
YTD
2009
$
19,979
19,970
$
24,348
21,238
$
25,021
22,679
$
19,622
19,743
$
88,970
83,630
9
(26)
38
(2,524)
-
(2,503)
(781)
(1,722)
(703)
(2,425)
87
(2,338)
(369)
3,110
(27)
34
(2,648)
-
469
33
436
907
1,343
(69)
1,274
(369)
2,342
(26)
28
(2,622)
-
(278)
(287)
9
(1,018)
(1,009)
(38)
(121)
5,340
(67)
34
(2,620)
(10,872)
(146)
134
(10,414)
(10,872)
(13,646)
(15,958)
(12)
(1,047)
(13,634)
(14,911)
(11,800)
(12,614)
(25,434)
(27,525)
150
130
(1,047)
(25,284)
(27,395)
(368)
(368)
(1,474)
Net earnings (loss) available to common shareholders
$
(2,707)
$
905
$
(1,415)
$
(25,652)
(28,869)
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
$
EPS from continuing operations
$
EPS from discontinued operations
$
EPS Basic and Diluted
*
*
(0.10)
(0.03)
(0.13)
$
$
$
(0.00)
0.04
0.04
$
$
$
(0.02)
(0.04)
(0.06)
$
$
$
(0.63)
(0.54)
(1.17)
$
$
$
(0.75)
(0.58)
(1.33)
*Quarterly EPS data does not add to total year, due to rounding
84
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
2008
Revenues
Expenses
Earnings before net losses
on disposition of assets, other income, interest,
noncontrolling interest and income tax expense (benefit)
Net gains (losses) on dispositions of assets
Other income
Interest
Impairment losses
Earnings (loss) from continuing operations
before income taxes
Income tax expense (benefit)
Earnings (loss) from continuing operations
Discontinued operations
Net earnings (loss)
Noncontrolling interest
Net income (loss) attributable to controlling interests
Preferred stock dividend
March 31,
2008
Quarters Ended (unaudited)
June 30,
2008
September 30,
2008
December 31,
2008
YTD
2008
$
21,691
20,432
$
27,323
22,737
$
28,309
23,386
$
21,933
20,340
$
99,256
86,895
1,259
3
30
(2,799)
-
(1,507)
(608)
(899)
(7)
(906)
13
(893)
(186)
4,586
(1)
33
(2,612)
-
2,006
216
1,790
527
2,317
(194)
2,123
(236)
4,923
(1)
28
(2,643)
-
2,307
258
2,049
214
2,263
(175)
2,088
(369)
1,593
12,361
-
38
(2,684)
-
(1,053)
(373)
(680)
4,265
3,585
(247)
3,338
(369)
1
129
(10,738)
-
1,753
(507)
2,260
4,999
7,259
(603)
6,656
(1,160)
5,496
Net earnings (loss) available to common shareholders
$
(1,079)
$
1,887
$
1,719
$
2,969
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
$
EPS from continuing operations
$
EPS from discontinued operations
$
EPS Basic and Diluted
(0.05)
(0.00)
(0.05)
$
$
$
0.07
0.02
0.09
$
$
$
0.07
0.01
0.08
$
$
$
(0.05)
0.19
0.14
$
$
$
0.04
0.22
0.26
85
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Note 14. Subsequent Events
On January 28, 2010, we sold our Comfort Inn located in Dublin, VA (99 rooms) for approximately $2.75
million with a negligible gain. A portion of these funds were used to payoff the Company’s borrowings from
Village Bank with the remaining funds used to reduce the revolving line of credit with Great Western Bank.
In January, 2010, the Company borrowed $0.8 million from First National Bank of Omaha. The note bears
interest at 4% over the one month LIBOR with a floor of 5%. The borrowings will be used to fund operations.
Prior to the amendment discussed below, our credit facilities with Great Western Bank required that we
maintain consolidated and loan-specific debt service coverage ratios (based on a rolling twelve month period) of at
least 1.50 to 1, tested quarterly, and consolidated and loan-specific loan to value ratios (based on a rolling twelve
month period) that do not exceed 65%, tested annually. As of December 31, 2009, our covenant levels, as calculated
pursuant to the loan agreement, were 1.29 to 1 (consolidated debt service coverage ratio), 1.46 to 1 (loan-specific
debt service coverage ratio), 60% (consolidated loan to value ratio) and 65% (loan-specific loan to value ratio). The
credit facilities were amended on March 29, 2010 to require maintenance of (a) a consolidated debt service coverage
ratio of at least 1.05 to 1, tested quarterly, from December 31, 2009 through June 30, 2011 and 1.50 to 1, tested
quarterly, from July 1, 2011 through the maturity of the credit facilities, (b) a loan-specific debt service coverage
ratio of 1.20 to 1, tested quarterly, from December 31, 2009 through June 30, 2011 and 1.50 to 1, tested quarterly,
from July 1, 2011 through the maturity of the credit facilities and (c) consolidated and loan-specific loan to value
ratios that do not exceed 70%, tested annually commencing on December 31, 2009, in each case, through the
maturity of the credit facilities.
The Great Western Bank amendment also: (a) modifies the borrowing base so that the loans available to the
Company may not exceed the lesser of (i) an amount equal to 70% of the total appraised value of the hotels securing
the credit facilities and (ii) an amount that would result in a loan-specific debt service coverage ratio of less than
1.20 to 1 from December 31, 2009 through June 30, 2011 and 1.50 to 1 from July 1, 2011 through the maturity of
the credit facilities; (b) increases the interest rate on the revolving credit portion of the credit facilities from prime
(subject to a 4.50% floor rate) to 5.50% from March 29 , 2010 through June 30, 2011 and prime (subject to a 5.50%
floor rate) from July 1, 2011 through the maturity of the credit facilities; and (c) gives Great Western Bank the
option to increase the interest rates of the credit facilities up to 4.00% any time after June 30, 2011.
Our credit facility with Wells Fargo Bank requires us to maintain a consolidated loan to value ratio (based
on a rolling twelve month period) that does not exceed 70%, tested quarterly. As of December 31, 2009, this ratio, as
calculated pursuant to the loan agreement, was 75%. The credit facility also requires us to maintain a minimum
tangible net worth of not less than $75 million plus 90% of net proceeds from equity transactions after December 31,
2006, tested quarterly. As of December 31, 2009, our tangible net worth, as calculated pursuant to the loan
agreement, was $74.5 million. The Company received a waiver for non-compliance with both of these covenants. In
connection with the waiver, the credit facility was amended on March 31, 2010 to require maintenance of a
consolidated loan to value ratio that does not exceed 77.5% and a minimum tangible net worth of not less than $70
million, in each case, through the maturity of the credit facility. The amendment also reduced our quarterly
minimum consolidated fixed charge coverage ratio covenant (based on a rolling twelve month period) through the
maturity of the credit facility from: 0.90 to 1 after preferred dividends and 1.00 to 1 before preferred dividends; to
0.75 to 1 after preferred dividends and 0.80 to 1 before preferred dividends. The credit facility with Wells Fargo
Bank was also amended on March 31, 2010 to extend the maturity date from May 12, 2010 to August 12, 2010,
require a $200,000 principal payment on March 31, 2010 and require a $100,000 principal payment on April 30,
2010.
86
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
On March 25, 2010, our credit facilities with General Electric Capital Corporation were amended to require
us to maintain $3.9 million of total adjusted EBITDA (based on a rolling twelve month period), tested quarterly
commencing on December 31, 2009, with respect to our GE-encumbered properties through 2011, in lieu of
maintenance of minimum fixed charge coverage ratios (FCCRs). This required minimum level of total adjusted
EBITDA will be reduced by the pro rata percentage of total adjusted EBITDA attributable to any GE-encumbered
properties that are sold, if certain conditions are satisfied. As of December 31, 2009, our total adjusted EBITDA, as
calculated pursuant to the loan agreement, with respect to our GE-encumbered properties was $5.2 million (the
reduction for sold properties was $0.7 million). Commencing in 2012 and continuing for the term of the loans, we
are required to maintain, with respect to our GE-encumbered properties, a before dividend FCCR (based on a rolling
twelve month period) of 1.3 to 1 and after dividend FCCR (based on a rolling twelve month period) of 1.0 to 1.
The GE amendment also: (a) reduces our consolidated debt service coverage ratio covenant (based on a
rolling twelve month period) from 1.4 to 1 for each quarter of 2009 and 1.5 to 1 each quarter thereafter for the term
of the loans to 1.05 to 1 for the quarter ended December 31, 2009 and each quarter thereafter through 2011 and 1.5
to 1 each quarter thereafter for the term of the loans; (b) defers prepayment fees with respect to prepayments
required as a result of the sale of any of our Masters Inn hotels until January 1, 2012; and (c) implements a quarterly
cash flow sweep, equal to the amount by which our consolidated debt service coverage ratio exceeds 1.75 to 1, to
pay deferred prepayment fees. As of December 31, 2009, our consolidated debt service coverage ratio, as calculated
pursuant to the loan agreement, was 1.35 to 1. In connection with previous amendments and waivers, the interest
rate of the loans under our credit facilities with GE have increased by 1.5%. If our FCCR with respect to our GE-
encumbered properties equals or exceeds 1.3 to 1 before dividends and 1.0 to 1 after dividends for two consecutive
quarters, the cumulative 1.5% increase in the interest rate of the loans will be eliminated.
87
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E
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2009
ASSET BASIS
Total
(a)
Balance at December 31, 2006
$ 254,241,000
Additions to buildings and improvements
Disposition of buildings and improvements
Impairment loss
Balance at December 31, 2007
Additions to buildings and improvements
Disposition of buildings and improvements
Impairment loss
Balance at December 31, 2008
Additions to buildings and improvements
Disposition of buildings and improvements
Impairment loss
Balance at December 31, 2009
$ 122,445,987
(447,207)
$ 376,239,780
$ 34,157,694
(9,275,478)
(250,000)
$ 400,871,996
$ 4,485,009
(18,942,418)
(26,722,187)
$
359,692,400
ACCUMULATED DEPRECIATION
Total
(b)
Balance at December 31, 2006
$
63,508,717
Depreciation for the period ended December 31, 2007
Depreciation on assets sold or disposed
Balance at December 31, 2007
Depreciation for the period ended December 31, 2008
Depreciation on assets sold or disposed
Balance at December 31, 2008
Depreciation for the period ended December 31, 2009
Depreciation on assets sold or disposed
Impairment loss
Balance at December 31, 2009
12,204,660
(418,324)
75,295,053
$
14,979,630
(3,283,741)
86,990,942
$
14,242,727
(4,697,660)
(2,574,353)
93,961,656
$
$
(c)
The aggregate cost of land, buildings, furniture and equipment for Federal income tax purposes is
approximately $386 million.
(d)
Depreciation is computed based upon the following useful lives:
Buildings and improvements 15 - 40 years
Furniture and equipment 3 - 12 years
(e)
The Company has mortgages payable on the properties as noted. Additional mortgage information can be
found in Note 6 to the consolidated financial statements.
93
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation was performed under the supervision of management, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act
of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures
were effective to provide reasonable assurance that information required to be disclosed by the Company in the
reports the Company files or submits under the Securities Exchange Act of 1934 was (1) accumulated and
communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to
allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within
the time periods specified in the Commission’s rules and forms. No changes in the Company’s internal controls over
financial reporting occurred during the last fiscal quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report On Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over
financial reporting as such term is defined in Securities Exchange Act Rule 13a-15(f). The Company carried out an
evaluation under the supervision and with the participation of the Company’s management, including the
Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s internal
control over financial reporting. The Company’s management used the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations (COSO) to perform this evaluation. Based on that
evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2009.
This annual report does not include an attestation report of our registered public accounting firm regarding
internal control over financial reporting. Internal control over financial reporting was not subject to attestation by
our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that
permit us to provide only management’s report in this annual report.
Item 9B. Other Information
Because this Annual Report on Form 10-K is being filed within four business days after the applicable
triggering events, the information below is being disclosed under this Item 9B instead of under Item 1.01 (Entry into
a Material Definitive Agreement) of Form 8-K.
The Company received amendments and waivers of certain of its financial covenants with certain of its
lenders on March 25, 2010 and March 29, 2010, and certain of the Company’s loans were further amended on
March 25, 2010 and March 29, 2010, as described in, and incorporated herein by reference from, Item 7 of this
Annual Report on Form 10-K under "Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Liquidity and Capital Resources."
94
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information concerning the directors and executive officers of the Company is incorporated by reference
from information relating to executive officers of the Company set forth in Part I of this Form 10-K and to the
Company’s Proxy Statement for the 2010 Annual Meeting of Stockholders (the “2010 Proxy Statement”) under the
captions “Corporate Governance” and “Election of Directors.”
The Company has adopted a Code of Business Conduct and Ethics that applies to the Company’s Chief
Executive Officer and Chief Financial Officer and has posted the Code of Business Conduct and Ethics on its Web
site. The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K relating to amendments
to or waivers from any provision of the Code of Business Conduct and Ethics applicable to the Company’s Chief
Executive Officer and Chief Financial Officer by posting that information on the Company’s Web site at
www.supertelinc.com.
Item 11. Executive Compensation
Information regarding executive and director compensation is incorporated by reference to the 2010 Proxy
Statement under the captions “Compensation Discussion and Analysis,” “Compensation Committee Report,”
“Summary Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-
end,” and “Director Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information regarding the stock ownership of each person known to the Company to be the beneficial
owner of more than 5% of the Common Stock, of each director and executive officer of Supertel Hospitality, Inc.,
and all directors and executive officers as a group, is incorporated by reference to the 2010 Proxy Statement under
the caption “Ownership of the Company’s Common Stock By Management and Certain Beneficial Owners.”
The following table provides information about the Company’s common stock that may be issued upon
exercise of options, warrants and rights under existing equity compensation plans as of December 31, 2009.
Equity Compensation Plan Information
Number of securities
to be issued
upon exercise of outstanding
options, warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available
for future
issuance under equity
compensation (including
securities plans reflected
in column(a))
(c)
230,715
-
230,715
$4.45
-
$4.45
15,000
-
15,000
Plan category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
95
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the 2010 Proxy Statement under the
caption “Corporate Governance.”
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the 2010 Proxy Statement under the
caption “Independent Public Registered Accounting Firm.”
Item 15. Exhibits and Financial Statement Schedules
(a)
Financial Statements and Schedules.
PART IV
Page
Report of Independent Registered Public Accounting Firm ......................................................................46
Consolidated Balance Sheets as of December 31, 2009 and 2008..............................................................47
Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007............48
Consolidated Statements of Equity for the Years Ended December 31, 2009,
2008 and 2007............................................................................................................................................ 49
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007 .........50
Notes to Consolidated Financial Statements ...............................................................................................51
Schedule III – Real Estate and Accumulated Depreciation.........................................................................88
Notes to Schedule III-Real Estate and Accumulated Depreciation .............................................................93
Exhibits.
3.1(b) Second Amended and Restated Articles of Incorporation of the Company, as amended (incorporated herein
by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008).
3.2
on Form 8-K dated December 6, 2007).
Bylaws of the Company (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report
Third Amended and Restated Agreement of Limited Partnership of Supertel Limited Partnership, as
10.1
amended (incorporated herein by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2005).
10.2
Form of Master Lease Agreement made as of January 1, 2002 by and between Supertel Limited
Partnership, E&P Financing Limited Partnership, Solomons Beacon Inn Limited Partnership and TRS Leasing, Inc.
(incorporated herein by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006).
Loan Agreement dated as of November 26, 2002 by and among Solomons Beacon Inn Limited Partnership,
10.3
TRS Subsidiary, LLC and Greenwich Capital Financial Products, Inc. (incorporated herein by reference to Exhibit
10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007).
10.4
Promissory Note dated as of November 26, 2002 between Solomons Beacon Inn Limited Partnership, TRS
Subsidiary, LLC and Greenwich Capital Financial Products, Inc. (incorporated herein by reference to Exhibit 10.4 to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2007).
96
Guaranty of Recourse Obligations dated as of November 26, 2002 made by the Company in favor of
10.5
Greenwich Capital Financial Products, Inc. (incorporated herein by reference to Exhibit 10.5 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007).
Pledge and Security Agreement dated as of November 26, 2002 by the Company, Supertel Limited
10.6
Partnership, TRS Leasing, Inc. and Solomons GP, LLC, for the benefit of Greenwich Capital Financial Products,
Inc. (incorporated herein by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007).
10.7 Master Lease Agreement dated as of November 26, 2002 between Solomons Beacon Inn Limited
Partnership and TRS Subsidiary, LLC. (incorporated herein by reference to Exhibit 10.7 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007).
10.8
First Amended and Restated Master Lease Agreement dated as of November 26, 2002 between Supertel
Limited Partnership, E&P Financing Limited Partnership, TRS Leasing, Inc. and Solomons Beacon Inn Limited
Partnership. (incorporated herein by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2007).
10.9* Hotel Management Agreement dated as of August 1, 2004 between TRS Leasing, Inc., TRS Subsidiary,
LLC and Royco Hotels, Inc.
10.10 Amendment dated January 1, 2007 to Hotel Management Agreement dated August 1, 2004 by and between
Royco Hotels, Inc., TRS Leasing, Inc., TRS Subsidiary, LLC and SPPR TRS Subsidiary, LLC (incorporated herein
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 1, 2007).
10.11 Management Agreement dated May 16, 2007 between TRS Leasing, Inc. and HLC Hotels, Inc.
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 16,
2007).
10.12 Amendment to Management Agreement dated July 15, 2008 between TRS Leasing, Inc. and HLC Hotels,
Inc. (incorporated herein by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008).
10.13 Amended and Restated Loan Agreement dated December 3, 2008 by and between the Company and Great
Western Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated December 3, 2008).
10.14 First Amendment dated February 4, 2009 between the Company and Great Western Bank (incorporated by
reference to Exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 2009.
10.15 Promissory Notes, Loan Agreement and form of Deed to Secure Debt, Assignment of Rents and Leases,
Security Agreement and Fixture Filing dated August 18, 2006 by Supertel Limited Partnership to and for the benefit
of General Electric Capital Corporation (incorporated herein by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K dated August 17, 2006).
10.16 Unconditional Guaranty of Payment and Performance dated August 18, 2006 by the Company to and for
the benefit of General Electric Capital Corporation (incorporated herein by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K dated August 17, 2006).
10.17 Amendment No. 1 to the Promissory Note dated August 18, 2006 by Supertel Limited Partnership to and
for the benefit of General Electric Capital Corporation (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated May 1, 2008).
10.18 Promissory Note, Loan Agreement and form of Mortgage, Assignment of Rents and Leases, Security
Agreement and Fixture Filing dated January 5, 2007 by Supertel Limited Partnership to and for the benefit of
97
General Electric Capital Corporation (incorporated herein by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K dated January 5, 2007).
10.19 Amendment No. 1 to the Promissory Note dated January 5, 2007 by Supertel Limited Partnership to and for
the benefit of General Electric Capital Corporation (incorporated herein by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K dated May 1, 2008).
10.20 Promissory Notes, Loan Agreement and form of Deed to Secure Debt, Assignment of Rents and Leases,
Security Agreement and Fixture Filing dated May 16, 2007 by Supertel Limited Partnership to and for the benefit of
General Electric Capital Corporation (incorporated herein by reference to Exhibit 10.2 to the Company’s Current
Report on Form 8-K dated May 16, 2007).
10.21 Unconditional Guaranty of Payment and Performance dated May 16, 2007 by the Company to and for the
benefit of General Electric Capital Corporation (incorporated herein by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K dated May 16, 2007).
10.22 Amendment No. 1 to the Promissory Note dated May 16, 2007 by Supertel Limited Partnership to and for
the benefit of General Electric Capital Corporation (incorporated herein by reference to Exhibit 10.4 to the
Company’s Current Report on Form 8-K dated May 1, 2008).
10.23 Loan Modification Agreements dated as of September 30, 2009 by and between General Electric Capital
Corporation, the Company, Supertel Limited Partnership, Supertel Hospitality REIT Trust and SPPR-South Bend,
LLC, (incorporated herein by reference to Exhibits 10.1 and 10.2 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2009).
10.24* Covenant Waiver dated as of November 9, 2009 by General Electric Capital Corporation to the Company,
Supertel Limited Partnership, Supertel Hospitality REIT Trust and SPPR-South Bend, LLC.
10.25 Unconditional Guaranties of Payment and Performance dated March 16, 2009, by the Company and
Supertel Hospitality REIT Trust to and for the benefit of General Electric Capital Corporation (incorporated herein
by reference to Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended March 31, 2009).
10.26 Global Amendment and Consent dated March 16, 2009 between Supertel Limited Partnership, SPPR-South
Bend, LLC and General Electric Capital Corporation (incorporated herein by reference to Exhibit 10.2 to the
Company’s Form 10-Q for the quarter ended March 31, 2009).
10.27 Employment Agreement dated as of September 1, 2005 by and between the Company and Paul Schulte
(incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 25,
2005).
10.28 Amendment dated April 2, 2009 of Employment Agreement dated September 1, 2005 by and between the
Company and Paul Schulte (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K dated April 2, 2009).
10.29 Employment Agreement dated as of September 1, 2005 by and between the Company and Don Heimes
(incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 25,
2005).
10.30 The Company’s 2006 Stock Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).
10.31 Form of Stock Option Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10.32 Amendment dated May 28, 2009, to the Company’s 2006 Stock Plan (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 28, 2009).
98
10.33 Employment Agreement of Kelly Walters, dated November 17, 2009 (incorporated herein by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 17, 2009).
10.34 Employment Agreement of Steven C. Gilbert, dated November 17, 2009 (incorporated herein by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated November 17, 2009).
10.35 Employment Agreement of Corrine L. Scarpello, dated November 17, 2009 (incorporated herein by
reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated November 17, 2009).
10.36 Employment Agreement of David L. Walter dated November 17, 2009 (incorporated herein by reference to
Exhibit 10.4 to the Company’s Current Report on Form 8-K dated November 17, 2009).
10.37 Director and Named Executive Officers Compensation is incorporated herein by reference to the sections
entitled “Compensation Discussion and Analysis”, “Compensation Committee Report”, “Summary Compensation
Table”, “Grants of Plan-Based Awards for Fiscal Year 2009”, “Outstanding Equity Awards at Fiscal Year-End”, and
“Director Compensation” in the Company’s Proxy Statement for the Annual Meeting of Stockholders on May 27,
2010.
21.0* Subsidiaries.
23.1* Consent of KPMG LLP.
31.1* Section 302 Certification of Chief Executive Officer.
31.2* Section 302 Certification of Chief Financial Officer.
32.1* Section 906 Certifications.
Pursuant to Item 601 (b)(4) of Regulation S-K, certain instruments with respect to the Company’s long-term debt are
not filed with this Form 10-K. The Company will furnish a copy of any such long-term debt agreement to the
Securities and Exchange Commission upon request.
Management contracts and compensatory plans are set forth as Exhibits 10.27 through 10.37.
_______________
* Filed herewith.
99
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.
SIGNATURES
March 31, 2010
SUPERTEL HOSPITALITY, INC.
By:
/s/ Kelly A. Walters
Kelly A. Walters
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated and on the date indicated above.
By:
/s/ Kelly A. Walters
Kelly A. Walters
President and Chief Executive Officer
(principal executive officer)
By:
/s/ Corrine L. Scarpello
By:
/s/ Jeffrey M. Zwerdling
Jeffrey M. Zwerdling
Director
Corrine L. Scarpello
Chief Financial Officer and Corporate Secretary
(principal financial and accounting officer)
By:
/s/ Allen L. Dayton
Allen L. Dayton
Director
By:
/s/ William C. Latham
William C. Latham
Chairman of the Board
By:
/s/ Steve H. Borgmann
Steve H. Borgmann
Director
By:
/s/ Paul J. Schulte
Paul J. Schulte
Director
By:
/s/ George R. Whittemore
George R. Whittemore
Director
By:
/s/ Patrick J. Jung
Patrick J. Jung
Director
100
Exhibit 31.1
I, Kelly A. Walters, certify that:
CERTIFICATIONS
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2009 of Supertel
Hospitality, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report, based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
March 31, 2010
/s/ Kelly A. Walters
Kelly A. Walters
President and Chief Executive Officer
Exhibit 31.2
I, Corrine L. Scarpello, certify that:
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2009 of Supertel
Hospitality, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report, based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
March 31, 2010
/s/ Corrine L. Scarpello
Corrine L. Scarpello
Chief Financial Officer and Secretary
Exhibit 32.1
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Supertel Hospitality, Inc., on Form 10-K for the year ending
December 31, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, Kelly A.
Walters, President and Chief Executive Officer of Supertel Hospitality, Inc., certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of Supertel Hospitality, Inc. at the dates and for the periods
indicated.
March 31 , 2010
/s/ Kelly A. Walters
Kelly A. Walters
President and Chief Executive Officer
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Supertel Hospitality, Inc., on Form 10-K for the year ending
December 31, 2009 as filed with the Securities and Exchange Commission (the “Report”), I, Corrine L.
Scarpello, Chief Financial Officer and Secretary of Supertel Hospitality, Inc., certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of Supertel Hospitality, Inc. at the dates and for the periods
indicated.
March 31 , 2010
/s/ Corrine L. Scarpello
Corrine L. Scarpello
Chief Financial Officer and Secretary
(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:83)(cid:68)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:79)(cid:92)(cid:3)(cid:79)(cid:72)(cid:73)(cid:87)(cid:3)(cid:69)(cid:79)(cid:68)(cid:81)(cid:78)(cid:17)(cid:3)
Officers of the Company
Board of Directors
Kelly A. Walters
President
Chief Executive Officer
Corrine L.“Connie” Scarpello
Senior Vice President
Chief Financial Officer
Steve C. Gilbert
Senior Vice President
Chief Operating Officer
William C. Latham
Chairman of the Board
Steve H. Borgmann
Director
David L. Walter
Senior Vice President
Treasurer
Matthew Buckley
Vice President,
Capital Expenditures
Paul Heybrock
Vice President
Controller
Allen L. Dayton
Director
Patrick J. Jung
Director
Mark Larimore
Assistant Vice President,
Capital Expenditures
Pat Morland
Assistant Vice President,
Human Resources
Vicki Staab
Assistant Vice President,
Capital Expenditures
Paul J. Schulte
Director
George R. Whittemore
Director
Corporate Headquarters
Annual Meeting
309 N 5th Street
Norfolk, NE 68701
Website
www.supertelinc.com
The annual meeting of shareholders will be
held on Thursday, May 27, 2010 at 10:00
a.m., local time, at the Durham Western
Heritage Museum, 801 South 10th Street,
Omaha, NE 68108.
Certified Public Accountants
Form 10-K
KPMG LLP
Omaha, NE
Stock Transfer Agent
American Stock Transfer and Trust Company
59 Maiden Lane
New York, NY 10038
www.amstock.com
1.800.937.5449
Additional copies of Supertel Hospitality’s
Form 10-K Annual Report for 2009 may
be requested through the Company’s
website or by contacting the Investor
Relations department.
Stock Exchange Listing
Supertel Hospitality’s common stock is
listed on the NASDAQ Global Market
system under the symbol SPPR.
Jeffrey M. Zwerdling
Director
Investor Relations
309 N 5th Street
Norfolk, NE 68701
402.371.2520
Management Company Offices
Royco Hotels Inc.
309 N 5th Street
Norfolk, NE 68701
402.371.2520
HLC Hotels Inc.
7080 Abercorn Street
Savannah, GA 31406
912.352.4493
309 North 5th Street
Norfolk, NE 68701
402.371.2520
www.supertelinc.com