2 0 1 0 A N N U A L R E P O RT
A STRATEGY TAKES SHAPE
Our Company
Supertel is a self-administered real estate
investment trust specializing in the
ownership of limited-service hotels.
As of March 31, 2011, the company
owned 105 hotels, aggregating 9,248
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.
2010 Highlights
:: Sold fi ve hotels in the 2010 fourth quarter,
bringing the full year’s sales activities to
nine properties divested, generating gross
proceeds of $11.7 million.
:: Reduced mortgage debt to $175.0 million
at the end of fi scal 2010 from $189.5
million at the end of fi scal 2009.
:: Improved Continuing Operations
portfolio’s Revenue per Available Room
(RevPAR) by 6.5 percent in the 2010
fourth quarter and 3.1 percent for the
full year.
Larger, newer hotels are
better suited to our
REIT structure’s strengths,
which will allow us to
achieve higher margins
and returns.
Dear Shareholder:
We made important advancements in implementing our new strategic growth plan to transform from
a largely economy-hotel real estate investment trust (REIT) to one with a stronger presence in the
mid-market segment. We took decisive action on several fronts as part of our new strategic direction:
1. We re-evaluated and began to reconfi gure our portfolio
2. We strengthened our balance sheet
3. We took signifi cant steps to improve operations at our hotels
Collectively, these actions will go a long way in moving the
in Property Operating Income (POI) between our continuing
transformation forward. A newly confi gured, more productive
and discontinued operations hotels. POI includes revenues
portfolio will enable us to achieve a greater return on
from room rentals and other services less hotel and property
investment and will provide a clearer competitive advantage.
operating expenses, and is a key performance measure. The
Together with a stronger balance sheet, we will be able to
chart on page 2 shows that POI as a percentage of revenue
attract greater interest among investors and from within the
from our continuing operations hotels was more than
investment community.
double that of our discontinued hotels last year.
Re-evaluated and began reconfi guring our portfolio
We completed a comprehensive analysis of each of our
assets against new, more stringent criteria in 2010. Our
goal is to build a portfolio of properties that are capable of
generating an appropriate risk-adjusted return on investment
for at least 10 years. We will regularly review and refi ne our
portfolio to achieve the highest possible growth while
seeking to diminish the effects of cyclicality in the hotel
industry.
We identifi ed 18 hotels in the 2010 fi rst quarter that did not
meet our new strategic criteria and reclassifi ed them as
discontinued operations and began marketing them for sale.
We sold nine of those properties during the year and as a
result of our on-going evaluation placed an additional nine
assets into discontinued operations, bringing to 18 the
number of hotels we presently are marketing for sale.
Consequently, we took a total of $6.1 million in impairment
charges in 2010 against assets classifi ed as held for sale and
an additional $2.1 million for one hotel in the continuing
The analysis pointed out that we must make major changes
operations portfolio.
to our portfolio over a multi-year period. Many of our hotels
are small, under 80 rooms, and over 20 years old. At this
stage of their life cycle, these properties often are more
effi ciently operated by single or small-unit owner/operators
who have a lower overhead structure. Focusing on larger,
newer hotels, which are better suited to our REIT structure’s
strengths, will allow us to achieve higher margins.
In examining our portfolio, one of the more compelling
arguments for adjusting our portfolio mix was the difference
We currently have 88 hotels in continuing operations and
will regularly review our portfolio and dispose of those
assets that no longer meet our long-term objectives, with a
goal of replacing them with assets that we believe will
generate better and more sustainable returns with less
downside risk over a longer time horizon.
Due to the need to further strengthen our balance sheet, as
well as capital constraints brought about by the poor
economy, we did not acquire any hotels in 2010. As the
economy recovers and we continue to bolster our balance
POI as a Percentage of Revenue*
sheet, we intend to acquire hotels and have begun building
relationships with developers, owners, management
companies and hotel brokers to lay the groundwork for a
pipeline of quality properties.
We will continue to own some economy-segment hotels,
but over time intend to build up our mid-scale, limited-
service hotel portfolio and make it our primary hotel
holdings. The prototypical hotel in the future will be an
internationally branded property with high guest awareness
and satisfaction. Preferred candidates are newly developed
properties, or hotels less than 10 years old. Targeted hotel
size will be 80 or more rooms. We will concentrate mainly
on stable, secondary markets, ideally with some barriers to
new competition. We will invest in fewer markets so we can
cluster our properties and achieve greater economies of
scale. We expect to work closely with developers/operators
to acquire newly built properties to take advantage of the
upside potential, as well as acquire stabilized properties with
proven cash fl ow.
25.2%
23.6%
12.8%
11.0%
Continuing
Operations
Discontinued
Operations
Continuing
Operations
Discontinued
Operations
2009
2010
*POI (Property Operating Income) is a non-GAAP fi nancial measure and
has been reconciled to the comparable GAAP measure. A reconciliation
immediately follows this letter.
Supertel has $17.9 million in mortgage debt maturing in
2011. The credit markets have begun to improve but the
lending community remains quite conservative following the
steep economic decline. However, conditions appear to be
We will continue to reduce our debt-to-value ratio through
improving and lenders seem more open to providing
additional asset sales and improved operations. We will need
hospitality-related debt. We expect to benefi t from this trend
to raise additional equity and debt capacity.
both in the selling and the acquisition of hotels.
Strengthened our balance sheet
Hotel operations
In 2010, we reduced our debt by more than 7.5 percent,
In addition to the defi ciencies in our portfolio mix, the
primarily through the sale of assets. Debt on our continuing
downturn exposed the need to evaluate the operations of
operations properties totaled $144.6 million with an average
our hotels. We undertook a broad study of third-party
term of 4.1 years and weighted average annual interest rate
management companies to determine how best to operate
of 6.19 percent.
our existing portfolio and to adapt as our portfolio evolves.
Depending on the timing and number of asset sales in 2011,
We extended requests for proposals to 25 operators and
we expect to reduce our debt by $30 million to $34 million,
received meaningful responses from 17. After reviewing the
lowering our debt-to-value ratio to the 55 percent range.
proposals, we reduced the number and visited fi ve.
Our long-term goal is to maintain a debt-to-value ratio of 40
We were impressed with the depth of management of the
to 55 percent. Prudent leverage will generate solid returns;
fi nalists but ultimately determined that we would be best
and a more conservative approach should give us greater
served by retaining multiple operators with strong local
stability, especially in the down phase of the economic cycle.
market knowledge. We intend to select new operators with
Occupancy: Same Store (88 Hotels*)
75.0%
60.2%
59.0%
63.3%
61.0%
54.9%
2009
2010
2009
2010
2009
2010
outstrip supply through 2013. Supertel’s continuing
operations portfolio posted a 3.1 percent increase in
Revenue per Available Room (RevPAR) last year, and we are
projecting RevPAR improvement in the 4-plus percent range
in 2011. Modest improvement in the short-term is attributable
to our concentration in economy hotels, which tend not to
lose as much RevPAR in a downturn but also do not improve
as much in a recovery. We expect that the reconfi guration of
our portfolio to include larger, mid-scale, limited-service
hotels will have a favorable impact on RevPAR and returns.
Midscale w/o F&B
Economy
Extended Stay
We made considerable progress in improving occupancy in
*Excludes 18 hotels held for sale
in-depth experience and expertise in our portfolio’s current
and targeted segments and with a proven track record in the
2010, and we will increasingly turn our efforts to improving
room rate in 2011.
We have made good progress in the transformation of the
company, which will be a multi-year process. Reinstatement
of the dividend is a priority, once we have further strengthened
our balance sheet, the economy and our hotel operations
continue to improve and it becomes prudently feasible.
local markets. HLC will continue to manage our Masters
The board of directors has provided valuable insight and
Inns portfolio. Our management contracts will be oriented
direction. Our senior management team has made great
more towards rewarding our operators for performance
strides, and I thank them and all of our associates for the
rather than a standardized fi xed fee. We also believe that
hard and productive work they have done to move our
multiple operators will encourage competition among them
company in a new direction.
to achieve the best and highest possible returns.
We still have a long way to go in our transformation, but we
The transition to new operators is expected to be completed
have made measurable progress in executing our strategic
by the end of the second quarter 2011, and we expect the
plan, a plan that we are confi dent will lead to a stronger
transfer to be seamless to our guests. Based on their track
company with less volatility.
records, we are optimistic that these operators will be able to
improve margins, profi tability and guest satisfaction scores.
We invested $4.3 million to upgrade our properties last year
and will nearly double that amount to $8.5 million in 2011.
These upgrades will be made in phases and are not expected
to have any meaningful impact on occupancy.
William C. Latham
Chairman
Outlook
Our outlook for both the hotel industry and Supertel is
optimistic. Top consulting groups project demand growth to
Kelly A. Walters
President & Chief Executive Offi cer
Property Operating Income
The following presentation includes some non-GAAP fi nancial measures. The company believes that the presentation of hotel
property operating results (POI) is helpful to investors, and represents a more useful description of its core operations, as it
better communicates the comparability of its hotels’ operating results for all of the company’s continuing and discontinued
operations hotel properties. (Unaudited-in thousands)
RECONCILIATION OF NET LOSS TO POI-UNAUDITED:
Net loss
Depreciation and amortization, including discontinued operations
Net gain on disposition of assets, including discontinued operations
Other income
Interest expense, including discontinued operations
General and administrative expense
Impairment losses
Income tax benefi t, including discontinued operations
Room rentals and other hotel services - discontinued operations
Hotel and property operations expense - discontinued operations
Twelve months ended
December 31,
2010
2009
$ (10,602)
$ (27,525)
11,708
(1,276)
(122)
12,224
3,514
8,198
(1,757)
(18,266)
16,252
14,241
(2,264)
(134)
13,015
3,813
24,148
(1,647)
(23,924)
20,862
POI—continuing operations
$ 19,873
$ 20,585
POI—continuing operations
$ 19,873
$ 20,585
Room rentals and other hotel services - discontinued operations
Hotel and property operations expense - discontinued operations
Room rentals and other hotel services - continuing operations
Hotel and property operations expense - continuing operations
18,266
(16,252)
(84,114)
64,241
23,924
(20,862)
(81,570)
60,985
POI—discontinued operations
$
2,014
$
3,062
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 31, 2010
OR
(cid:3)
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, $0.01 par value per share
Series A Preferred Stock, $.01 par value per share
10% Series B Cumulative Preferred Stock,
$.01 par value per share
The NASDAQ Stock Market, LLC
The NASDAQ Stock Market, LLC
The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:4) No ⌧
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 (cid:4) No ⌧
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 ⌧ No (cid:4)
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 (cid:4) No (cid:4)
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. ⌧
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 (cid:4)
Non-accelerated filer (cid:4) (Do not check if a smaller reporting company)
Accelerated filer (cid:4)
Smaller reporting company ⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:4) No ⌧
As of June 30, 2010 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $25.9 million based on
the $1.40 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 last practicable date.
Class
Common Stock, $.01 par value per share
Outstanding at February 25, 2011
22,917,509 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders to be held on May 26, 2011.
TABLE OF CONTENTS
Item No.
PART I
Form 10-K
Report
Page
1.
Business ......................................................................................................................................... 3
1A. Risk Factors ................................................................................................................................... 9
1B. Unresolved Staff Comments ........................................................................................................ 23
Properties ..................................................................................................................................... 24
2.
Legal Proceedings........................................................................................................................ 25
3.
(Removed and Reserved) ............................................................................................................. 25
4.
PART II
5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities .............................................. 26
Selected Financial Data ............................................................................................................... 29
6
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations ....................................................................................... 32
7A. Quantitative and Qualitative Disclosures about Market Risk ...................................................... 51
Financial Statements and Supplementary Data ............................................................................ 52
8.
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 100
9A. Controls and Procedures ............................................................................................................ 100
9B. Other Information ...................................................................................................................... 100
PART III
10. Directors, Executive Officers and Corporate Governance ......................................................... 101
11. Executive Compensation ........................................................................................................... 101
12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ................................................................................................... 101
13. Certain Relationships and Related Transactions, and Director Independence ........................... 102
Principal Accountant Fees and Services .................................................................................... 102
14.
15. Exhibits and Financial Statement Schedules ............................................................................ 102
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, 2010 we owned 106 limited service hotels in 23 states. Our hotels operate under several national franchise and
independent brands.
Our significant events for 2010 include:
•
•
•
•
•
The Company issued an aggregate of 598,803 shares of Supertel common stock and 299,403 warrants in a
private offering for aggregate gross proceeds of $1.0 million in cash;
We sold nine hotels for gross proceeds of $11.7 million and used the net proceeds to pay off the underlying
mortgages and for operations;
We raised $480,000 from a standby equity distribution agreement;
Non cash impairment charges of $8.2 million were booked against hotels sold, held for sale, and held for use;
and
As of December 31, 2010, we had 18 hotels classified as held for sale with a total net book value of $34.4
million. Gross proceeds from the sales are expected to be $37.8 million, and net proceeds will be used to pay
off the underlying mortgages with remaining cash used for operations.
Additionally, in March 2011, the maturity date of our credit facility with Wells Fargo Bank was extended
from March 12, 2011 to September 30, 2011.
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.
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
3
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, 2010, we owned, through our subsidiaries, 106 hotels in 23 states. The hotels are
operated by Royco Hotels (95 hotels) and HLC (11 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 19 properties were held for
sale as of December 31, 2009; and during the year 2010, nine of our hotels were sold and 18 properties were held for
sale as of December 31, 2010.
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.
Thus, internally generated cash flow and any residual cash flow, together with cash flow from external financing
sources, will principally 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 as well as payment of dividends.
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:
•
hotels with proven historical cash flows of above 10% cash on cash on moderate leverage;
4
•
•
•
•
•
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 95 of the hotels we owned at December 31, 2010.
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:
•
•
•
•
•
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.
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 (“NOI”) of at least 10% of our total investment in
the hotels during the four fiscal years ending December 31, 2010 and (ii) Royco Hotels does not default prior to
December 31, 2011.
5
The management agreement may be terminated as follows:
•
•
•
•
either of us may terminate the management agreement if NOI 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.
In 2009 and 2010, NOI as a percentage of total hotel investment was less than 8.5%. Additionally, one of
the conditions for an automatic extension of the management agreement is that an average annual NOI target of at
least 10% is achieved during the four years ending December 31, 2010. Annual NOI as a percentage of total hotel
investment has not exceeded 10% in 2007, 2008, 2009 and 2010.
During the fourth quarter of 2010, we solicited bids from hotel management companies to manage our
hotels. We expect to complete our review process, and make our decision, if any, on a manager or managers for our
hotels during the first half of 2011.
We have been advised by Royco Hotels that it believes our potential termination / nonrenewal of Royco
Hotels is a breach of the management agreement between us and Royco Hotels. On December 15, 2010, Royco
Hotels filed a complaint against Supertel in the District Court of Douglas County, Nebraska alleging breach of the
management agreement and other complaints related to the solicitation of bids from other management companies,
and seeking alleged damages. Royco Hotels has not met the NOI conditions of the agreement and consequently we
do not believe that we have breached the management agreement or that any damages are due to Royco
Hotels. Royco Hotels continues to manage our hotels under the management agreement.
Royco Hotels Defaults and Indemnity The following are events of default under the management
agreement:
•
•
•
•
•
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;
6
•
•
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 Fee The hotel management agreement with HLC, as amended July 15, 2008, provides
for HLC to operate and manage our eleven 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.
7
Franchise Affiliation
Our 106 hotels owned at December 31, 2010 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(1)
Key West Inns (9)
Quality Inn (2)
44
21
2
1
2
10
1
2
1
7
11
1
1
1
1
106
(1) Super 8 ®, Ramada Limited ®, Days Inn ®, and Baymont Inn ® are registered trademarks of Wyndham Worldwide.
(2) Comfort Inn ® , Comfort Suites ®, Sleep Inn ®, and Quality 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.
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.
8
Employees
At December 31, 2010, we had 16 employees. At December 31, 2010 Royco Hotels, manager of 95 of our
hotels, and HLC, manager of 11 of our hotels, had workforces of approximately 1,468 and 196 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.
Item 1A. RISK FACTORS
Risks Related to Our Business
The current economy has negatively impacted the hotel industry and our business.
The current difficulties in the credit markets, a soft economy and apprehension among consumers have
negatively impacted the hotel industry and our business. In recent years, 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 weak 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 2011 we asked for and received waivers of certain covenants from lenders. If our plans to
meet our liquidity requirements in the weak 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.
The impact of the weak economy on lenders may impact our future borrowings.
The weakness of the national economy has increased the financial instability of some lenders. As a result, we
expect lenders may continue to maintain tight 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.
9
Litigation with our primary hotel manager and any transition to one or more new managers could disrupt our
hotel operations and present other risks.
During the fourth quarter of 2010, we solicited bids from hotel management companies to manage our
hotels. We expect to complete our review process, and make a decision, if any, on a manager or managers for our
hotels during the first half of 2011.
Our management agreement with Royco Hotels, the manager of a majority of our hotels, terminates on
December 31, 2011, and is subject to an automatic five-year extension thereafter if certain conditions are met. In
addition, provisions in the management agreement permit either party to terminate the management agreement on 60
days notice if a net operating income (“NOI”) target of 8.5% of total investment in hotels is not achieved for a fiscal
year. In 2009 and 2010, NOI as a percentage of total hotel investment was less than 8.5%. Additionally, one of the
conditions for an automatic extension of the management agreement is that an average annual NOI target of at least
10% is achieved during the four years ending December 31, 2010. Annual NOI as a percentage of total hotel
investment has not exceeded 10% in 2007, 2008, 2009 and 2010.
We have been advised by Royco Hotels that it believes our potential termination / nonrenewal of Royco
Hotels is a breach of the management agreement between us and Royco Hotels. On December 15, 2010, Royco
Hotels filed a complaint against us in the District Court of Douglas County, Nebraska alleging breach of the
management agreement and other complaints related to the solicitation of bids from other management companies,
and seeking alleged damages. Royco Hotels has not met the NOI conditions of the agreement and consequently we
do not believe that we have breached the management agreement or that any damages are due to Royco Hotels.
Royco Hotels continues to manage our hotels under the management agreement.
We may experience decreased occupancy and other significant disruptions at our hotels and in our
operations generally due to the litigation with Royco Hotels and transition to one or more new hotel managers. In
addition, any new hotel managers may operate other hotels that may compete with our hotels or divert attention
away from the management of our hotels, may require management agreements with terms that are not favorable to
us and may not be successful in managing our hotels.
Current economic conditions have adversely affected the valuation of our hotels which may result in further
impairment charges on our properties.
We analyze our assets for impairment when events or circumstances occur that indicate an asset’s carrying
value may not be recoverable. For impaired assets, we record an impairment charge equal to the excess of the
property’s carrying value over its fair value. Our operating results for 2010 and 2009 included $8.2 million and
$24.1 million, respectively, of impairment charges related to our hotels sold, held for sale, and held for use. As a
result of continued economic weakness, we may incur additional impairment charges, which will negatively affect
our results of operations. We can provide no assurance that any impairment loss recognized would not be material
to our results of operations.
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
10
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. If any of the foregoing
occurs at franchised hotels, our relationship with the franchisors may be damaged, and we may be in breach of one
or more of our franchise agreements. 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 weak 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.
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;
•
•
repair and maintenance expenses;
energy costs;
11
•
•
•
property taxes;
insurance costs; and
other operating expenses.
Any decreases in hotel revenues or increases in operating expenses could have a material 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, 2011, our debt to property investment was approximately 52.3%. 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;
•
•
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 $23.3 million of the Company’s debt is scheduled to mature in 2011. 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. At January 31, 2011, approximately 25.3% of our debt had floating
12
rates. 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 on 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. Downturns in our
operating results and financial performance or unanticipated capital improvements to our hotel properties may affect
our ability to declare or pay distributions to our stockholders. Further, 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
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 or calling the debt. 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.
Operating our hotels under franchise agreements could adversely affect distributions to our shareholders.
Eighty six 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.
13
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.
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.
14
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 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, HLC, or any other hotel managers that we engage 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. In addition, any new
manager may operate other hotels that may compete with our hotels or divert attention away from the management
of our hotels and may not be successful in managing our hotels. 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. For example, we are currently involved in litigation with Royco Hotels and may
transition to one or more new hotel managers. Information and risks related to our litigation with Royco Hotels and
transition to one or more new managers is discussed above in the risk factor titled “Litigation with our primary hotel
manager and any transition to one or more new managers could disrupt our hotel operations and present other risks.”
We may not be able to sell hotels on favorable terms.
We sold nine hotels in 2010, and we sold eight hotels in 2009. At December 31, 2010, we have eighteen 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 may
not be able to satisfy our liquidity needs (including meeting our debt service obligations) and will not be able to
fully execute our growth strategy.
15
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.
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 executive officers 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.
16
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.
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 current investment strategy, adopted in 2009 as a response to near term and projected long term market
trends, is to acquire interests in well-located, midscale properties with national flags, while divesting
underperforming and/or non-branded hotels. Our entire business is hotel-related. Therefore, a downturn in the hotel
industry in general will have a material adverse effect on our lease revenues and amounts available for distribution
to our shareholders.
17
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, 2010, we spent approximately $4.3 million for capital
improvements to our hotels.
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.
18
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.
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.
19
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:
•
•
•
•
•
•
adverse changes in international, national, regional and local economic and market conditions;
changes in interest rates and in the availability, cost and terms of debt financing;
changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs
of compliance with laws and regulations, fiscal policies and ordinances;
the ongoing need for capital improvements, particularly in older structures;
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.
20
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.
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
21
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 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, 2006, and 2010 generally reduced the maximum rate of tax
applicable to individuals, trusts and estates on dividend income from regular C corporations to 15.0% through 2012.
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
22
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.
We may be subject to the 100% prohibited transaction tax on the gain recognized on the hotels we sold.
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 specific
disposition programs beginning in 2001 (that included the sale of 23 hotels through December 31, 2004) and 2008
(that included the sale of nineteen hotels through December 31, 2010). We held the disposed hotels for an average
period of nine 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.
23
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, 2010:
Hotel Brand
Rooms
Hotel Brand
Rooms
Hotel Brand
Rooms
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
Kirksville, MO
Manhattan, KS
Menomonie, WI
Moberly, MO
Mt. Pleasant, IA
Muscatine, IA
Norfolk, NE
O’Neill, NE
Omaha, NE
Pella, IA
Pittsburg, KS
Portage, WI
Sedalia, MO
Shawano, WI
Storm Lake, IA
Terre Haute, IN
Tomah, WI
Watertown, SD
Wayne, NE
West “O” – Lincoln, NE
West Dodge– Omaha, NE
West Plains, MO
Wichita – (Park City), KS
Wichita, KS
73
52
49
106
108
62
40
62
74
63
133
121
49
83
40
83
76
84
77
61
61
85
81
60
55
63
64
72
116
40
64
61
87
55
59
117
65
57
40
82
101
49
59
119
Baymont Inn
Brooks, KY
Holiday Inn Express
65
Harlan, KY
Comfort Inn /Comfort Suites
Alexandria, VA
Beacon Marina-Solomons, MD
Chambersburg, PA
Culpeper, VA
Dover, DE
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)
Guest House Inn
Ellenton, FL
Jackson, TN
Hampton Inn
Cleveland, TN
Shelby, NC
150
60
63
49
64
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
63
114
59
76
Key West Inns
Key Largo, FL
Masters Inn
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
Quality Inn
Danville, KY
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
Tara Inn & Suites
Jonesboro, GA
Total
62
40
150
112
109
88
128
87
119
120
127
107
151
63
73
172
120
170
172
164
160
140
63
90
41
127
9,355
Additional property information is found in Item 8 Schedule III of this Annual Report on Form 10-K.
24
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.
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. At this time, the Company has
reached agreement to settle the claims, subject to court approval for certain minor plaintiffs, and one settlement has
been paid. The settlements were made with authorization from the insurers and the Company has recorded a
liability for the amount of the unpaid claims and a receivable reflecting recoverability of the claim from the insurers.
The Company’s management agreement with Royco Hotels, the manager of a majority of the Company’s
hotels, terminates on December 31, 2011, and is subject to an automatic five year extension thereafter if certain
conditions are met. In addition, provisions in the management agreement permit either party to terminate the
management agreement on 60 days notice if a net operating income (“NOI”) target of 8.5% of total investment in
hotels is not achieved for a fiscal year. In 2009 and 2010, NOI as a percentage of total hotel investment was less
than 8.5%. Additionally, one of the conditions for an automatic extension of the management agreement is that an
average annual NOI target of at least 10% is achieved during the four years ending December 31, 2010. Annual NOI
as a percentage of total hotel investment has not exceeded 10% in 2007, 2008, 2009 and 2010.
During the fourth quarter of 2010, the Company solicited bids from hotel management companies to
manage the Company’s hotels. The Company expects to complete its review process, and make its decision, if any,
on a manager or managers for its hotels during the first half of 2011.
The Company has been advised by Royco Hotels that it believes the Company’s potential termination /
nonrenewal of Royco Hotels is a breach of the management agreement between the Company and Royco Hotels. On
December 15, 2010, Royco Hotels filed a complaint against Supertel in the District Court of Douglas County,
Nebraska alleging breach of the management agreement and other complaints related to the solicitation of bids from
other management companies, and seeking alleged damages. Royco Hotels has not met the NOI conditions of the
agreement and consequently the Company does not believe that it has breached the management agreement or that
any damages are due to Royco Hotels. Royco Hotels continues to manage our hotels under the management
agreement.
Item 4. (Removed and Reserved)
Executive Officers of the Company as of March 7, 2011
The following are executive officers of the Company as of March 7, 2011:
Kelly A. Walters, Director, 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 50, 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
25
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 56, 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.
Gilbert, age 62, 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 63, 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 21, 2011 was $1.88 per share. The table below sets forth the high and low sales
prices per share reported on the Nasdaq Global Market for the periods indicated.
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Supertel Hospitality, Inc.
Common Stock
High
Low
$ 2.10
$ 1.85
$ 2.35
$ 2.24
$ 0.82
$ 0.83
$ 1.47
$ 1.31
$ 1.97
$ 2.22
$ 1.60
$ 2.00
$ 1.41
$ 1.40
$ 1.14
$ 1.20
26
(b) Holders
As of February 21, 2011, the approximate number of holders of record of the common stock was 128 and
the approximate number of beneficial owners was 3,903.
(c) Dividends
No dividends on common stock were paid for 2009 and 2010. 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.
27
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, 2005 through December 31, 2010, 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, 2005 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
175
150
125
100
75
50
25
0
e
u
l
a
V
x
e
d
n
I
Supertel Hospitality, Inc.
NASDAQ Composite
SNL REIT Hotel
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
Index
Supertel Hospitality, Inc.
NASDAQ Composite
SNL REIT Hotel
Source : SNL Financial LC, Charlottesville, VA
© 2011
Period Ending
12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10
43.59
125.91
93.29
100.00
100.00
100.00
41.39
106.57
66.32
157.83
110.39
128.62
149.47
122.15
100.10
46.91
73.32
40.04
28
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
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)
2010
As of and for the Years Ended December 31,
2007
2008
2009
2006
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 without impairment, a non-cash item, per share - basic
FFO per share - diluted
FFO without impariment, a non-cash item, per share - diluted
Total assets
Total debt
Net cash flow:
Provided by operating activities
Provided (used) by investing activities
Provided (used) by financing activities
$
84,114
$
81,570
$
90,996
$
82,412
$
63,335
(5,477)
(5,125)
(10,602)
17
(10,585)
(1,474)
(12,059)
(11,044)
(16,481)
(27,525)
130
(27,395)
(1,474)
(28,869)
11,573
(1,916)
(1,627)
(16,892)
22,556
22,556
22,556
(0.31)
(0.22)
(0.53)
(0.53)
(0.07)
0.29
(0.07)
0.29
256,644
175,010
7,672
6,865
(14,632)
21,647
21,647
21,647
(0.58)
(0.75)
(1.33)
(1.33)
(0.78)
0.34
(0.78)
0.34
274,395
189,513
6,101
12,025
(18,410)
2,094
5,165
7,259
(603)
6,656
(1,160)
5,496
35,784
14,897
20,840
20,840
22,346
0.03
0.23
0.26
0.26
0.71
0.73
0.70
0.71
321,477
202,806
20,605
(22,558)
1,499
2,746
1,669
4,415
(337)
4,078
(948)
3,130
2,441
1,614
4,055
(334)
3,721
(1,215)
2,506
29,230
20,883
15,358
11,189
20,197
20,217
22,343
12,261
12,272
14,960
0.07
0.08
0.15
0.15
0.76
0.76
0.73
0.73
0.08
0.12
0.20
0.20
0.91
0.91
0.83
0.83
311,025
196,840
16,640
(104,153)
83,243
202,148
94,878
13,558
(49,633)
40,348
Dividends per share (5)
-
-
0.4625
0.48
0.405
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
12,272
8
2,118
22,343
-
2,688
14,960
22,556
-
-
22,556
29
(In thousands, except per share data)
RECONCILIATION OF NET
EARNINGS (LOSS) TO ADJUSTED EBITDA
Net earnings (loss) available to common shareholders
Interest, including discontinued operations
Income taxbenefit, including discontinued operations
Depreciation and amortization, including discontinued operations
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 discontinued operations
Net (gain) loss on disposition of continuing and discontinued assets
FFO available to common shareholders
Impairment
FFO without impairment, a non-cash item(7)
2010
(12,059)
12,224
(1,757)
11,708
10,116
(17)
1,474
11,573
(12,059)
11,708
(1,276)
(1,627)
8,198
6,571
$
$
$
$
$
As of and for the Years Ended December 31,
2007
2008
2009
$
$
$
$
$
(28,869)
13,015
(1,647)
14,241
(3,260)
(130)
1,474
(1,916)
(28,869)
14,241
(2,264)
(16,892)
24,148
7,256
$
$
$
$
$
5,496
13,848
(305)
14,982
34,021
603
1,160
35,784
5,496
14,982
(5,581)
14,897
250
15,147
$
$
$
$
$
3,130
12,908
(304)
12,211
27,945
337
948
29,230
3,130
12,211
17
15,358
-
15,358
2006
$
$
$
$
$
2,506
8,255
(107)
8,680
19,334
334
1,215
20,883
2,506
8,680
3
11,189
-
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.
30
(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)
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 (representing $0.053
capital gain distribution and $0.027 nondividend distribution).
(6) The conversion rights of the Series A preferred stock were cancelled as of February 20, 2009.
(7) FFO without impairment, a non-cash item (“FFO without impairment”)
FFO without impairment is a non-GAAP financial measure. As a result of a significant downturn in hotel and
lodging fundamentals that took place in 2008 and 2009 and the related decrease in hotel and real estate
valuations, we decided that FFO available to common shareholders did not provide all of the information that
allows us to better evaluate our operating performance.
To arrive at FFO without impairment, we adjust FFO available to common shareholders, to exclude the
following items:
(i)
impairment charges of hotel properties that we have sold or expect to sell, included in discontinued
operations; and
(ii) impairment charges of hotel properties classified as held for use.
We believe that these items are driven by factors relating to the fundamental disruption in the global financial
and real estate markets, rather than factors specific to the company or the performance of our properties or
investments.
The impairment charges of hotel properties that were recognized in 2009 and 2010 were primarily based on
valuations of hotels, which had declined due to market conditions that we no longer expected to hold for
long-term investment, and/or for which we have reduced our prior expected holding periods. In order to
enhance liquidity, we have declared certain properties as held for sale and may declare other properties held
for sale. To the extent these properties are expected to be sold at a loss, we record an impairment charge when
the loss is known. We have recognized certain of these impairment charges over several quarters in 2009 and
2010 and we believe it is reasonably likely that we will recognize similar charges and gains in the near future.
However, we believe that as the financial markets stabilize, the potential for impairment charges of our hotel
31
properties will diminish. We believe FFO without impairment provides investors with an additional measure
to evaluate our operating performance as we emerge from this period of fundamental disruption in the global
financial and real estate markets.
We analyze our operating performance primarily by revenues from our hotel properties, net of operating,
administrative and financing expenses which are not directly impacted by short term fluctuations in the
market value of our hotel properties. As a result, although these non-cash impairment charges have had a
material impact on our financial results and are reflected in our financial statements, the removal of the
effects of these items allows us to better understand the core operating performance of our properties.
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.
Overview
We are a self-administered REIT, and through our subsidiaries, we owned 106 limited service hotels in 23
states at December 31, 2010. Our hotels operate under several national franchise and independent brands.
•
•
•
Our significant events for 2010 include:
The Company issued an aggregate of 598,803 shares of Supertel common stock and 299,403 warrants in a
private offering for aggregate gross proceeds of $1.0 million in cash;
We sold nine hotels for gross proceeds of $11.7 million and used the net proceeds to pay off the underlying
mortgages and for operations;
We raised $480,000 from a standby equity distribution agreement;
32
•
•
Non cash impairment charges of $8.2 million were booked against hotel properties; and
As of December 31, 2010, we had 18 hotels classified as held for sale with a total net book value of $34.4
million. Gross proceeds from the sales are expected to be $37.8 million, and net proceeds will be used to pay
off the underlying mortgages with remaining cash used for operations.
Additionally, in March 2011, the maturity date of our credit facility with Wells Fargo Bank was extended
from March 12, 2011 to September 30, 2011.
As of December 31, 2010, the Company had 18 hotels classified as held for sale. At the beginning of 2010,
the Company had 19 hotels held for sale and during the year classified an additional nine hotels as held for sale.
Nine of these hotels were sold during 2010, and one of the hotels was reclassified as held for use. The
reclassification of this hotel was due to changes in the property’s market condition. Since our previously filed
financial statements, in addition to the hotel reclassified as held for use, two hotels were reclassified as held for sale.
The impact of these changes was to increase income from continuing operations by $0.4 million and $0.3 million for
the years ended 2009 and 2008 compared to the previously filed financial statements.
The Company’s management agreement with Royco Hotels, the manager of a majority of the Company’s
hotels, terminates on December 31, 2011, and is subject to an automatic five year extension thereafter if certain
conditions are met. In addition, provisions in the management agreement permit either party to terminate the
management agreement on 60 days notice if a net operating income (“NOI”) target of 8.5% of total investment in
hotels is not achieved for a fiscal year. In 2009 and 2010, NOI as a percentage of total hotel investment was less
than 8.5%. Additionally, one of the conditions for an automatic extension of the management agreement is that an
average annual NOI target of at least 10% is achieved during the four years ending December 31, 2010. Annual NOI
as a percentage of total hotel investment has not exceeded 10% in 2007, 2008, 2009, and 2010.
During the fourth quarter of 2010, the Company solicited bids from hotel management companies to
manage the Company’s hotels. The Company expects to complete its review process, and make its decision, if any,
on a manager or managers for its hotels during the first half of 2011.
The Company has been advised by Royco Hotels that it believes the Company’s potential termination /
nonrenewal of Royco Hotels is a breach of the management agreement between the Company and Royco Hotels. On
December 15, 2010, Royco Hotels filed a complaint against Supertel in the District Court of Douglas County,
Nebraska alleging breach of the management agreement and other complaints related to the solicitation of bids from
other management companies, and seeking alleged damages. Royco Hotels has not met the NOI conditions of the
agreement and consequently the Company does not believe that it has breached the management agreement or that
any damages are due to Royco Hotels. Royco Hotels continues to manage our hotels under the management
agreement.
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,
2010 and 2009, and results of operations for the years ended December 31, 2010, 2009 and 2008, and should be read
along with the consolidated financial statements and related notes.
33
RevPAR, ADR and Occupancy
The following table presents our revenue per available room (“RevPAR”), average daily rate (“ADR”) and
occupancy by region for 2010 and 2009, respectively. The comparisons of same store operations are for 88 hotels owned
and held in continuing operations as of January 1, 2009.
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
2010
2009
Room
RevPAR Occupancy ADR
Count RevPAR Occupancy ADR
Room
Count
214
$
31.75
65.0%
$
48.85
214
$
31.96
62.1%
$
51.50
2,511
964
142
2,369
677
456
7,333
27.95
36.83
41.43
28.72
34.60
29.78
30.47
$
58.7%
60.3%
71.1%
68.2%
56.8%
68.8%
62.9%
47.61
61.11
58.30
42.10
60.91
43.31
48.47
$
2,511
964
142
2,369
677
456
7,333
28.80
36.04
38.90
26.61
32.99
25.84
29.54
$
60.0%
57.2%
58.9%
58.4%
54.1%
56.9%
58.4%
48.02
63.07
66.04
45.56
61.01
45.38
50.57
$
Idaho and Montana
Iowa, Kansas, Missouri, Nebraska and South Dakota
Indiana and Wisconsin
Middle Atlantic/New England
Pennsylvania
South Atlantic
East South Central
West South Central
Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
Kentucky and Tennessee
Arkansas and Louisiana
34
The following table presents our RevPAR, ADR, and occupancy by franchise affiliation for 2010 and 2009,
respectively. The comparisons of same store operations are for 88 hotels owned and held in continuing operations
as of January 1, 2009.
Same Store
Brand
Limited Service
Midscale w/o F&B *
2010
2009
Room
Count
RevPAR Occupancy
ADR
Room
Count
RevPAR Occupancy
ADR
Comfort Inn/ Comfort Suites
1,524
$
41.90
62.7%
$
66.81
1,524
$
39.97
56.6%
$
70.60
Hampton Inn
Sleep Inn
Guesthouse Inn
Other Midscale (1)
135
153
177
263
48.62
32.70
18.26
35.79
65.4%
51.7%
43.6%
58.7%
74.35
63.28
41.86
60.97
135
153
177
263
43.62
32.18
16.94
35.10
58.9%
50.4%
36.0%
58.4%
74.01
63.81
46.99
60.06
Total Midscale w/o F&B *
2,252
$
39.11
60.2%
$
65.01
2,252
$
37.28
54.9%
$
67.87
Economy
Days Inn
Super 8
Other Economy (2)
Total Economy
Total Same Store Midscale/Economy
870
3,032
81
3,983
6,235
33.33
27.48
48.42
$
$
29.18
32.77
67.1%
59.3%
60.3%
61.0%
60.7%
49.70
46.31
80.35
$
$
47.81
53.96
870
3,032
81
3,983
6,235
29.70
28.26
50.11
$
$
29.02
32.00
55.2%
60.1%
58.4%
59.0%
57.5%
53.83
46.99
85.88
$
$
49.17
55.62
Extended Stay (3)
1,098
17.41
75.0%
23.21
1,098
15.53
63.3%
24.52
Total Same Store Hotels
7,333
$
30.47
62.9%
$
48.47
7,333
$
29.54
58.4%
$
50.57
1
2
3
*
Includes Ramada Limited, Baymont Inn, Quality Inn, and Holiday Inn Express brands
Includes Key West Inns and non franchised independent hotels
Includes Savannah Suites
"w/o F & B" indicates without food and beverage
35
Results of Operations
Comparison of the year ended December 31, 2010 to the year ended December 31, 2009
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
O perations
$
2010
Discontinued
O perations
18,266
$
(16,252)
(2,522)
(697)
(71)
(6,051)
1,342
-
860
(5,125)
$
84,114
(64,241)
(9,702)
(11,011)
(3,443)
(2,147)
(66)
122
897
(5,477)
Total
$
102,380
(80,493)
(12,224)
(11,708)
(3,514)
(8,198)
1,276
122
1,757
(10,602)
Continuing
O perations
81,570
$
(60,985)
(9,581)
(11,405)
(3,813)
(7,399)
(114)
134
549
(11,044)
$
2009
Discontinued
O perations
23,924
$
(20,862)
(3,434)
(2,836)
-
(16,749)
2,378
-
1,098
(16,481)
$
Continuing
O perations
Variance
Total
$
$
105,494
(81,847)
(13,015)
(14,241)
(3,813)
(24,148)
2,264
134
1,647
(27,525)
2,544
(3,256)
(121)
394
370
5,252
48
(12)
348
5,567
$
$
$
$
Revenues and Operating Expenses
Loss from continuing operations for the twelve months ended December 31, 2010 was $(5.5) million,
compared to loss from continuing operations of $(11.0) million for 2009. After recognition of discontinued
operations, noncontrolling interests and dividends for preferred stock shareholders, the net loss attributable to
common shareholders was $(12.1) million or $(0.53) per diluted share, for the year ended December 31, 2010,
compared to net loss attributable to common shareholders of $(28.9) million or $(1.33) per diluted share for 2009.
During 2010 revenues from continuing operations increased $2.5 million, or 3.1 percent. This increase is
primarily due to the ongoing economic recovery.
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 2010 over the same period of 2009 consists of the 88 hotels in continuing operations that were
owned by the company as of January 1, 2009. The Company’s 51 same-store economy hotels reflected a 0.6 percent
increase in RevPAR to $29.18 in 2010 with a 3.4 percent increase in occupancy to 61.0 percent and a decrease in
ADR of 2.8 percent. The Company’s 30 same-store midscale without food and beverage hotels experienced a 4.9
percent increase in RevPAR. Occupancy rose 9.7 percent and ADR was down 4.2 percent to $65.01. The extended
stay hotels are economy hotels with significantly lower ADR and RevPAR than other limited service hotels.
RevPAR for the seven same-store extended stay hotels was up 12.1 percent from the prior year to $17.41.
Occupancy rose 18.5 percent, and ADR decreased 5.3 percent to $23.21. The total same-store portfolio of 88 hotels
for the year ended 2010, compared with the prior year, had a 3.1 percent rise in RevPAR with a 7.7 percent increase
in occupancy, and a 4.2 percent decrease in ADR.
Hotel and property operations expenses from continuing operations for the year ended 2010 increased $3.3
million or 5.3 percent. The majority of the variance is caused by increased expenses due to higher occupancy, with
payroll expense up $1.1 million, franchise-related fees up $0.8 million, utilities expense up $0.5 million, supplies
expense up $0.4 million and repairs and maintenance up $0.4 million.
36
Interest Expense, Depreciation and Amortization Expense and General and Administration Expense
Interest expense from continuing operations increased by $0.1 million, due primarily to an increase in the
interest rate on the revolving line of credit with Great Western Bank. The depreciation and amortization expense
from continuing operations decreased $0.4 million for 2010 over 2009, which was caused by an overall decrease in
capital expenditures during recent years. The general and administration expense from continuing operations for
2010 is down $0.4 million or 9.7 percent compared to 2009. The primary driver for this decrease is a reduction in
salaries and wages caused by management changes and retirement, partially offset by an increase in professional
fees.
Impairment Losses
In 2010 we had $2.1 million of impairment losses in continuing operations and $6.1 million of impairment
losses in discontinued operations for the year. In 2009 we had $7.4 million of impairment losses in continuing
operations and $16.7 million of impairment losses in discontinued operations for the year. Discontinued operations
consist of hotels held for sale at December 31, 2010 or sold during 2009 or 2010. See Note 5 in the footnotes to the
consolidated financial statements for additional information including a discussion of our impairment analysis of our
hotels assets.
The impairment losses consisted of the following:
Continuing
Operations
2010
Discontinued
Operations
Total
Continuing
Operations
2009
Discontinued
Operations
Total
Impairment losses, held for use
Impairment losses, held for sale
Impairment losses, sold
Impairment recovery
2,147
-
-
-
2,147
$
$
-
6,546
421
(916)
6,051
2,147
6,546
421
(916)
8,198
$
$
7,399
-
-
-
7,399
$
-
13,355
3,461
(67)
16,749
7,399
13,355
3,461
(67)
24,148
$
Dispositions
In 2010, the net losses on dispositions of assets in continuing operations remained essentially unchanged
from the prior year. In 2010, discontinued operations reflected a $1.3 million gain on the disposition of assets. Of
this, net gains of $1.4 million are attributable to properties that have been sold; while $0.1 million of net losses on
the sale of assets are attributable to assets held for sale. In 2009, we recognized net losses of approximately $0.1
million on the disposition of furniture, fixtures, and equipment in the normal course of continuing operations.
Discontinued operations in 2009 included gains of $2.5 million on properties sold in 2009, offset by $0.1 million of
net losses on 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, 2010 and
2009. 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 $0.3 million during 2010
compared to the year ago period, due to an increased loss from continuing operations by the TRS Lessee in 2010.
37
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
O perations
$
2009
Discontinued
O perations
$
23,924
(20,862)
(3,434)
(2,836)
-
(16,749)
2,378
-
1,098
(16,481)
$
81,570
(60,985)
(9,581)
(11,405)
(3,813)
(7,399)
(114)
134
549
(11,044)
Total
$
105,494
(81,847)
(13,015)
(14,241)
(3,813)
(24,148)
2,264
134
1,647
(27,525)
Continuing
O perations
$
90,996
(64,529)
(9,906)
(11,081)
(3,696)
-
1
129
180
2,094
$
2008
Discontinued
O perations
$
33,989
(26,436)
(3,942)
(3,901)
-
(250)
5,580
-
125
5,165
$
Continuing
O perations
Variance
Total
$
$
124,985
(90,965)
(13,848)
(14,982)
(3,696)
(250)
5,581
129
305
7,259
(9,426)
3,544
325
(324)
(117)
(7,399)
(115)
5
369
(13,138)
$
$
$
$
Revenues and Operating Expenses
Loss from continuing operations for the twelve months ended December 31, 2009 reflected $(11.0) million,
compared to net earnings of $2.1 million for 2008. After recognition of discontinued operations, noncontrolling
interest and dividends for preferred stock shareholders, the net earnings (loss) attributable to common shareholders
reflected $(28.9) million or $(1.33) per diluted share, for the year ended December 31, 2009, compared to $5.5
million or $0.26 per diluted share for 2008.
During 2009 revenues from continuing operations decreased $9.4 million or 10.4 percent. This decrease is
primarily due to the effects of the economic downturn. The same store portfolio used for comparison of the twelve
months ending 2009 over the same period of 2008 consists of 88 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 51
same-store economy hotels posted a 9.1 percent decrease in RevPAR to $29.02 in 2009 with an 8.2 percent decrease
in occupancy to 59.0 percent, and a 1.0 percent decrease in ADR from $49.67 to $49.17. The Company’s 30 same-
store midscale without food and beverage hotels had a 12.2 percent decrease in RevPAR and a 7.9 percent decrease
in occupancy. ADR was $67.87, down 4.7 percent from 2008. The extended stay hotels are economy hotels with
significantly lower ADR and RevPAR than other limited service hotels. RevPAR for the seven same store extended
stay hotels was down 4.8 percent from the prior year to $15.53. Occupancy was down 2.5 percent, and ADR
decreased 2.4 percent to $24.52. The total same-store portfolio of 88 hotels for the year ended 2009, compared with
the prior year, had a 10.0 percent decrease in RevPAR and a 7.2 percent decrease in occupancy. ADR was down 3.1
percent from the prior year.
Hotel and property operations expenses from continuing operations for the year ended 2009 decreased $3.5
million or 5.5 percent. The decrease in occupancy was responsible for the majority of the variance, with franchise
related fees down $1.1 million, payroll related expenses down $1.0 million, utilities costs down $0.5 million,
supplies down $0.4 million, and management fees down $0.4 million in relation to the decreased revenue.
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 $0.3 million for
2009 over 2008, which was caused by capital improvements to the hotels. The general and administration expense
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.
38
Impairment Losses
See the discussion above regarding impairment charges for 2009. For 2008, we recorded an impairment
charge of $0.3 million on two held for sale hotels which were subsequently sold in 2009.
Dispositions
In 2009 we recognized net losses of approximately $0.1 on the disposition of furniture, fixtures, and
equipment in the normal course of continuing operations. Discontinued operations in 2009 included gains of $2.5
million on properties sold in 2009, offset by $0.1 million of net losses on assets held for sale. Discontinued
operations in 2008 included gains of $5.6 million on the sale of two properties.
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 year ended December 31, 2009 and
2008. 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 2009 compared to
the prior period, due to an increased loss from continuing operations by the TRS Lessee in 2009 compared to 2008.
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.
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
anticipates that these adverse economic conditions will improve somewhat over the next year; however, in addition
to our operating performance, the other sources described below will be essential to our liquidity and financial
position.
Our business requires continued access to adequate capital to fund our liquidity needs. In 2010, 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
2011, our foremost priorities continue to be 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 the expected actual and potential sources of liquidity, which we currently believe will be
sufficient to fund our near-term obligations:
• 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.
39
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 the potential upside when hotel
fundamentals return to stabilized levels. The 18 properties held for sale as of December 31, 2010 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.
We are actively marketing the 18 properties held for sale, which we anticipate will result in the elimination
of $30.4 million of debt and generate an expected $5.2 million of proceeds for operations. We continue 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:
• whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;
• whether potential buyers will be able to secure financing; and
•
the length of time needed to find a buyer and to close the sale of a property.
On March 26, 2010, we entered into a Standby Equity Distribution Agreement (SEDA) with Yorkville
Advisors and, as of December 31, 2010, we have sold 316,384 shares resulting in net proceeds of $480,000 which
were used for corporate purposes.
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 credit facility with Wells Fargo Bank ($5.3 million balance at December 31, 2010),
previously due on March 12, 2011, has been extended to September 30, 2011. Also, the Company’s note payable to
First National Bank of Omaha ($0.8 million balance at December 31, 2010), previously due on February 1, 2011,
has been extended to March 1, 2012. The Company’s other 2011 maturities (at December 31, 2010) consist of
approximately $5.4 million of principal amortization on mortgage loans and $11.8 million payable to Great Western
Bank pursuant to a term loan that matures in December 2011. The Company intends to refinance or repay these
2011 maturities using its 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.
40
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 2011, the Company’s plans and actions may not be sufficient and could lead to possibly failing
financial debt covenant requirements.
No common stock dividends were declared during 2010. The Board of Directors continues to monitor
requirements to maintain the Company’s REIT status on a quarterly basis.
Financing
At December 31, 2010, we had long-term debt of $144.6 million associated with assets held for use,
consisting of notes and mortgages payable, with a weighted average term to maturity of 4.1 years and a weighted
average interest rate of 6.19%. The weighted average fixed rate was 6.9%, and the weighted average variable rate
was 4.6%. Debt held on properties in continuing operations is classified as held for use. Debt is classified as held
for sale if the properties collateralizing it are included in discontinued operations. Debt associated with assets held
for sale is classified as a short-term liability due in 2011 irrespective of whether the notes and mortgages evidencing
such debt mature in 2011. Aggregate annual principal payments on debt associated with assets held for use for the
next five years and thereafter, and debt associated with assets held for sale, are as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
$
Held For Sale Held For Use
15,186
$
57,723
3,498
4,228
15,278
48,654
144,567
30,316
127
-
-
-
-
30,443
$
$
TOTAL
$
45,502
57,850
3,498
4,228
15,278
48,654
175,010
$
At December 31, 2010 the Company had $23.3 million of long-term debt associated with assets held for
use and debt associated with assets held for sale which matures in 2011 pursuant to the notes and mortgages
evidencing such debt. These 2011 maturities consist of:
•
•
•
•
a $11.8 million balance on a term loan with Great Western Bank;
a $5.3 million balance on the credit facility with Wells Fargo Bank;
a $0.8 million note payable to First National Bank of Omaha; and
$5.4 million of principal amortization on mortgage loans.
41
In March 2011, the maturity date of our credit facility with Wells Fargo Bank was extended to September
30, 2011, and the maturity date of our note payable to First National Bank of Omaha was extended to March 1,
2012. The loans with Great Western Bank and Wells Fargo Bank are expected to be refinanced or repaid using our
existing lines of credit, other financing, cash flows from operations or proceeds from the sale of hotels. However,
certain of these alternatives are not within our control. We expect to fund the principal amortization on mortgage
loans through cash flows from operations and the sale of hotels.
The remaining $22.2 million debt due in 2011 (at December 31, 2010), as set forth in the table above, is
associated with assets held for sale. This debt matures at the time of sale and is expected to be funded from the
proceeds of such sales.
In January 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 pay off the Company’s borrowings from
Village Bank, with the remaining $1.7 million of 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. In March 2011,
the maturity date of the note was extended to March 1, 2012. The note bears interest at 4% over the one month
LIBOR with a floor of 5%. The borrowings were used to fund operations.
In March 2010, covenant modifications and other amendments were obtained for our credit facilities with
Great Western Bank, General Electric Capital Corporation and Wells Fargo Bank. These changes were reflected in
the notes to our financial statements included in our Form 10-K for year ended December 31, 2009.
In June 2010, we sold our Super 8 located in Kingdom City, MO, (60 rooms) for approximately $1.2
million, with a $0.5 million gain. The funds were used to reduce the balance of our revolving line of credit with
Great Western Bank.
In June 2010, we sold our Masters Inn in Cave City, KY (97 rooms) for approximately $0.8 million, with a
nominal net gain. The funds were used to reduce the balance of our revolving line of credit with Great Western
Bank.
In June 2010, we paid off the $1.95 million note from Elkhorn Valley Bank, using funds from the revolving
line of credit with Great Western Bank. In January 2011, we reborrowed the $1.95 million from Elkhorn Valley
Bank. The maturity date of the note is October 1, 2011.
In July 2010, we sold our Super 8 hotel in Parsons, KS (48 rooms) for approximately $1.1 million, with a
$0.1 million gain. The funds were used to reduce the balance of our revolving line of credit with Great Western
Bank.
In August 2010, our credit facility with Wells Fargo Bank was amended to require maintenance of a
consolidated loan to value ratio that does not exceed 85% and a minimum tangible net worth which exceeds $65
million, in each case, through the maturity of the credit facility. The amendment also: (a) extended the maturity date
from August 12, 2010 to March 12, 2011; (b) required a $1.8 million principal payment (which we funded from the
revolving line of credit with Great Western Bank) in exchange for a release of the deeds of trust securing the Super 8
and Supertel Inn hotels located in Neosho, Missouri; and (c) increased the interest rate from LIBOR plus 3.5%
(subject to a 4.0% floor) to LIBOR plus 5.0% (subject to a 5.5% floor). In March 2011, the credit facility was also
amended to: (a) require maintenance of a minimum tangible net worth which exceeds $50 million through the
maturity of the credit facility; (b) extend the maturity date from March 12, 2011 to September 30, 2011; and (c)
decrease the interest rate from LIBOR plus 5.0% (subject to a 5.5% floor) to LIBOR plus 4.0% (subject to a 4.5%
floor).
42
In October 2010, we sold three hotels in Missouri (two in Neosho and one in Jane) with an aggregate of
150 rooms for approximately $2.6 million. The net proceeds were used to reduce the balance of our revolving line
of credit with Great Western Bank and reduce the balance of our credit facility with Wells Fargo Bank.
In October 2010, we sold a Super 8 (101 rooms) located in Lenexa, Kansas for approximately $2.1 million.
The funds were used to reduce the balance of our revolving line of credit and a term loan with Great Western Bank.
In November 2010, we sold a Masters Inn (120 rooms) located in Augusta, Georgia for approximately $1.1
million. The net proceeds were used to reduce the balance of a loan with General Electric Capital Corporation.
The key financial covenants for certain of our loan agreements and compliance calculations as of December
31, 2010 are discussed below (each such covenant is calculated pursuant to the applicable loan agreement). As of
December 31, 2010, 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.
(dollar amounts in thousands)
Great Western Bank Covenants
Consolidated debt service coverage ratio calculated
as follows:
Adjusted NOI (A) / Debt service (B)
Net loss per financial statements
Net adjustments per loan agreement
Adjusted NOI per loan agreement(A)
Interest expense per financial statements-
continuing operations
Interest expense per financial statements-
discontinued operations
Total interest expense per financial
statements
Net adjustments per loan agreement
Debt service per loan agreement (B)
Consolidated debt service coverage ratio
Loan-specific debt service coverage ratio
calculated as follows:
Adjusted NOI (A) / Debt service (B)
Net loss per financial statements
Net adjustments per loan agreement
Adjusted NOI per loan agreement (A)
Interest expense per financial statements-
continuing operations
Interest expense per financial statements-
discontinued operations
Total interest expense per financial
statements
Net adjustments per loan agreement
Debt service per loan agreement (B)
Loan-specific debt service coverage ratio
December 31, 2010
Requirement
December 31, 2010
Calculation
≥1.05:1
$(10,602)
$32,478
$21,876
$9,702
$2,522
$12,224
$5,861
$18,085
1.21:1
$(10,602)
$14,828
$4,226
$9,702
$2,522
$12,224
$(8,606)
$3,618
1.17:1
≥1.20:1
43
Great Western Bank Covenants – continued
Consolidated loan to value ratio calculated as
follows:
Loan balance (A) / Value (B)
Loan balance (A)
Value (B)
Consolidated loan to value ratio
Loan-specific loan to value ratio calculated as
follows:
Loan balance (A) / Value (B)
Loan balance (A)
Value (B)
Loan-specific loan to value ratio
December 31, 2010
Requirement
December 31, 2010
Calculation
≤70.0%
≤70.0%
$175,010
$300,406
58.3%
$37,176
$60,227
61.7%
The Great Western Bank credit facilities also require that we not pay dividends in excess of 75% of our
funds from operations per year. On March 10, 2011, we received a waiver from Great Western Bank for non-
compliance with the loan-specific debt service coverage ratio covenant set forth in the table above as of December
31, 2010.
The credit facilities with Great Western Bank were amended on March 15, 2011 to require maintenance of
consolidated and loan-specific debt service coverage ratios of at least 1.05 to 1, tested quarterly, from December 31,
2010 through the maturity of the credit facilities. The credit facilities continue to require maintenance of
consolidated and loan-specific loan to value ratios that do not exceed 70%, tested annually, from December 31, 2010
through the maturity of the credit facilities.
The Great Western Bank amendment also: (a) modifies the borrowing base so that the loans available to us
under the credit facilities 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 1.05 to 1 from December 31, 2010 through December 31, 2011 and 1.50 to 1 from January 1, 2012
through the maturity of the credit facilities; (b) maintains the interest rate on the revolving credit portion of the credit
facilities at 5.50% from March 15, 2011 through December 31, 2011 and prime (subject to a 5.50% floor rate) from
January 1, 2012 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 January 1, 2012.
(dollar amounts in thousands)
Wells Fargo Bank Covenants
Consolidated loan to value ratio calculated as
follows:
Loan balance (A) / Value (B)
Loan balance (A)
Value (B)
Consolidated loan to value ratio
December 31, 2010
Requirement
December 31, 2010
Calculation
≤85.0%
$175,010
$225,152
77.7%
44
Wells Fargo Bank Covenants - continued
December 31, 2010
December 31, 2010
Requirement
Calculation
>$65 million
≥0.80:1 before
preferred dividends
Consolidated tangible net worth calculated as
follows:
Consolidated shareholder equity (A) – Intangible
assets (B)
Total shareholders’ equity per financial
statements
Redeemable noncontrolling interest per
financial statements
Noncontrolling interest in consolidated
partnership
Redeemable preferred stock per financial
statements
Consolidated shareholder equity (A)
Intangible assets (B)
Consolidated tangible net worth
Consolidated fixed charge coverage ratio calculated
as follows:
EBITDA (A) / Fixed charges (B)
Net loss per financial statements
Net adjustments per loan agreement
EBITDA per loan agreement (A)
Interest expense per financial statements-
continuing operations
Interest expense per financial statements-
discontinued operations
Total interest expense per financial
statements
Net adjustments per loan agreement
Fixed charges per loan agreement (B)
Consolidated fixed charge coverage ratio
$55,394
$511
$335
$7,662
$63,902
$0
$63,902
$(10,602)
$28,959
$18,357
$9,702
$2,522
$12,224
$6,594
$18,818
0.98:1
45
≥0.75:1 after
preferred dividends
Consolidated fixed charge coverage ratio calculated
as follows:
EBITDA (A) / Fixed charges (B)
Net loss per financial statements
Net adjustments per loan agreement
EBITDA per loan agreement (A)
Interest expense per financial statements-
continuing operations
Interest expense per financial statements-
discontinued operations
Total interest expense per financial
statements
Net adjustments per loan agreement
Fixed charges per loan agreement (B)
Consolidated fixed charge coverage ratio
$(10,602)
$28,959
$18,357
$9,702
$2,522
$12,224
$5,120
$17,344
1.06:1
Our credit facility with Wells Fargo Bank was amended on August 12, 2010 to require maintenance of a
consolidated loan to value ratio that does not exceed 85% and a minimum tangible net worth which exceeds $65
million, in each case, through the maturity of the credit facility. The amendment also: (a) extended the maturity date
from August 12, 2010 to March 12, 2011; (b) required a $1.8 million principal payment (which we funded from the
revolving line of credit with Great Western Bank) in exchange for a release of the deeds of trust securing the Super 8
and Supertel Inn hotels located in Neosho, Missouri; and (c) increased the interest rate from LIBOR plus 3.5%
(subject to a 4.0% floor) to LIBOR plus 5.0% (subject to a 5.5% floor). On March 11, 2011, the Company received a
waiver from Wells Fargo Bank for non-compliance with the consolidated tangible net worth covenant set forth in the
table above as of December 31, 2010. In connection with the waiver, the credit facility was amended on March 11,
2011 to require maintenance of a minimum tangible net worth which exceeds $50 million through the maturity of
the credit facility. The amendment also: (a) extended the maturity date from March 12, 2011 to September 30,
2011; and (b) decreased the interest rate from LIBOR plus 5.0% (subject to a 5.5% floor) to LIBOR plus 4.0%
(subject to a 4.5% floor).
(dollar amounts in thousands)
GE Covenants
Loan-specific total adjusted EBITDA calculated as
follows:
Net loss per financial statements
Net adjustments per loan agreement
Loan-specific total adjusted EBITDA
December 31, 2010
Requirement
December 31, 2010
Calculation
≥$3.9 million
$(10,602)
$16,242
$5,640
46
≥1.05:1
Consolidated debt service coverage ratio
calculated as follows:
Adjusted EBITDA (A) / Debt service (B)
Net loss per financial statements
Net adjustments per loan agreement
Adjusted EBITDA per loan agreement (A)
Interest expense per financial statements-
continuing operations
Interest expense per financial statements-
discontinued operations
Total interest expense per financial
statements
Net adjustments per loan agreement
Debt service per loan agreement (B)
Consolidated debt service coverage ratio
$(10,602)
$36,163
$25,561
$9,702
$2,522
$12,224
$5,120
$17,344
1.47:1
Our credit facilities with General Electric Capital Corporation require that, commencing in 2012 and
continuing for the term of the loans, we maintain, with respect to our GE-encumbered properties, a before dividend
fixed charge coverage ratio (FCCR) (based on a rolling twelve month period) of 1.30:1 and after dividend FCCR
(based on a rolling twelve month period) of 1.00:1. The consolidated debt service coverage ratio for the GE credit
facilities increases to 1.50:1 in 2012 through the term of the loans. In connection with previous amendments and
waivers, the interest rates 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 1.30:1 before dividends and 1.00:1 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 2010 or 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).
47
Disposition of Hotels
Sale Date
Hotel Location
2010
Dublin, VA
January
Kingdom City, MO
June
Cave City, MO
June
Parsons, KS
July
Neosho, MO
October
Jane, MO
October
Neosho, MO
October
October
Lenexa, KS
November Augusta, GA
Brand
Comfort Inn
Super 8
Masters Inn
Super 8
Booneslick
Booneslick
Super 8
Super 8
Masters Inn
Rooms
99
60
97
48
47
45
58
101
120
675
Sale Price
(millions)
2.75
$
1.20
0.80
1.10
1.00
0.60
1.00
2.10
1.10
11.65
$
In 2009 a total of eight hotels with 674 rooms were sold for $17.2 million. In 2008 we sold two hotels with
160 rooms for approximately $12.0 million. Sale proceeds were used to reduce debt.
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 50 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, 2010, 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 2010. 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, 2011 their right to have units redeemed at $10 per unit. All holders elected to extend until
October 24, 2011. 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, 2010:
48
Contractual Obligations
Long-term debt, including interest
Land leases
Total contractual obligations
Total
Less Than
1 Year
$
$
1-3 Years
$
72,463
219
72,682
23,857
105
23,962
3-5 Years
More than
5 Years
$
$
27,221
225
27,446
52,634
4,733
57,367
$
$
$
$
$
176,175
5,282
181,457
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.
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 applies a second analysis on the entire held for use portfolio. The analysis
estimates 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 makes the following assumptions:
• Holding periods range from three to five years, for non-core assets, and ten years for those assets
considered as core.
• 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.
49
• A revenue multiplier for the terminal value based on an average of historical sales from a leading industry
broker of like properties was applied according to the assigned holding period.
During the 12 months ended December 31, 2010, a trigger event as described in ASC 360-10-35 occurred for
one of our held for use hotels. During the three months ended June 30, 2010, the analysis above was used to
determine that a trigger event had occurred for one held for use property in which the carrying value of the hotel
exceeded the sum of the undiscounted cash flows expected over its remaining anticipated holding period and from
its disposition. The property was then tested to determine if the carrying amount was 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 hotel were determined by management, based on discussions with our asset management group and our
third party management companies. The 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 the 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’s investment in the subject property was not fully recoverable; accordingly, impairment was
recognized.
To determine the amount of impairment on the property identified above, in accordance with FASB ASC 360-
10-55, the Company calculated the excess of the carrying value of the property in comparison to its fair market
value as of June 30, 2010. Based on this calculation, the Company determined total impairment of $2.1 million
existed as of June 30, 2010 on the held for use asset previously noted. Fair market value was determined by
multiplying trailing 12 months revenue for the 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 the property impaired for the year ending December 31, 2010, 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.
No additional held for use hotels were determined to be impaired during the 12 months ended December 31, 2010.
In accordance with ASC 360-10-35 Property Plant and Equipment—Overall—Subsequent Measurement, the
Company determines the fair value of an asset held for sale 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 using
a market approach. The estimated selling costs are based on our experience with similar asset sales.
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.
50
Accounting for Income Taxes
Income taxes are accounted for under the asset and liability method in accordance with GAAP. Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities and their respective tax basis and for net
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 years in which those temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the
period that includes the enactment date. The realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Management’s evaluation of the need for a valuation allowance must consider positive and
negative evidence, and the weight given to the potential effects of such positive and negative evidence is based on
the extent to which it can be objectively verified.
Related to accounting for uncertainty in income taxes, we follow a process by which the likelihood of a tax
position is gauged based upon the technical merits of the position, perform a subsequent measurement related to the
maximum benefit and the degree of likelihood, and determine the amount of benefit to be recognized in the financial
statements, if any.
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, 2010. Information relating to debt maturities is based on
expected maturity dates and is summarized as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
Total
Fair Value
Fixed Rate Debt
Average Interest Rate
$
10,012
6.96%
$
40,915
7.09%
$
2,443
6.93%
$
3,130
6.92%
$
14,136
6.93%
$
30,694
7.23%
$
101,330
7.01%
$
105,535
-
Variable Rate Debt
Average Interest Rate
$
5,174
4.69%
$
16,808
4.08%
$
1,056
3.87%
$
1,098
3.87%
$
1,141
3.87%
$
17,960
3.87%
$
43,237
4.13%
$
43,237
-
As the table incorporates only those exposures that exist as of December 31, 2010, 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, 2010.
If market rates of interest on the Company’s variable rate long-term debt fluctuate by 0.25%, interest
expense would increase or decrease, depending on rate movement, future earnings and cash flows by $0.1 million
51
annually. This assumes that the amount outstanding under the Company’s held for use variable rate debt remains at
$43.2 million, the balance as of December 31, 2010.
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, 2010 AND 2009
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2010, 2009 AND 2008
CONSOLIDATED STATEMENTS OF EQUITY FOR THE
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 2010, 2009 AND 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
NOTES TO SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
.
Page
53
54
55
56
57
58
94
99
52
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, 2010 and 2009, and the related consolidated statements of operations, equity, and
cash flows for each of the years in the three-year period ended December 31, 2010. In connection with our audits of
the consolidated financial statements, we also have audited the related financial statement schedule, Schedule III –
Real Estate and Accumulated Depreciation. These consolidated financial statements and the 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, 2010 and 2009, and the results of
their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, 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.
Omaha, Nebraska
March 16, 2011
/s/ KMPG LLP
53
Supertel Hospitality, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share data)
ASSETS
Investments in hotel properties
Less accumulated depreciation
As of
December 31,
2010
December 31,
2009
$
295,907
90,086
205,821
$
295,393
80,265
215,128
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $133 and $95
Prepaid expenses and other assets
Deferred financing costs, net
Investment in hotel properties held for sale
333
1,717
13,372
988
34,413
428
2,043
4,779
1,414
50,603
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;
22,917,509 and 22,002,322 shares outstanding
Common stock warrants
Additional paid-in capital
Distributions in excess of retained earnings
Total shareholder equity
Noncontrolling interest in consolidated partnership,
redemption value $250 and $237
Total equity
See accompanying notes to consolidated financial statements.
54
$
256,644
$
274,395
$
17,732
30,443
144,567
192,742
$
10,340
37,634
151,879
199,853
511
511
7,662
7,662
8
8
229
252
121,384
(66,479)
55,394
220
-
120,153
(54,420)
65,961
335
408
55,729
66,369
$
256,644
$
274,395
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,
2010
2009
2008
$
84,114
$
81,570
$
90,996
64,241
11,011
3,443
78,695
60,985
11,405
3,813
76,203
64,529
11,081
3,696
79,306
5,419
5,367
11,690
(66)
122
(9,702)
(2,147)
(114)
134
(9,581)
(7,399)
1
129
(9,906)
-
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND NONCONTROLLING INTEREST
(6,374)
(11,593)
1,914
Income tax benefit
(897)
(549)
(180)
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS
Earnings (loss) from discontinued operations
NET EARNINGS (LOSS)
(5,477)
(11,044)
(5,125)
(16,481)
(10,602)
(27,525)
2,094
5,165
7,259
Noncontrolling interest income (expense)
17
130
(603)
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTERESTS
(10,585)
(27,395)
6,656
Preferred stock dividend
(1,474)
(1,474)
(1,160)
NET EARNINGS (LOSS) ATTRIBUTABLE
TO COMMON SHAREHOLDERS
$
(12,059)
$
(28,869)
$
5,496
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
EPS from continuing operations
EPS from discontinued operations
EPS Basic and Diluted
$
$
$
(0.31)
(0.22)
(0.53)
$
$
$
(0.58)
(0.75)
(1.33)
$
$
$
0.03
0.23
0.26
AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS
Income from continuing operations, net of tax
Discontinued operations, net of tax
Net earnings (loss)
See accompanying notes to consolidated financial statements.
55
$
(6,965)
(5,094)
(12,059)
$
$
$
(12,559)
(16,310)
(28,869)
$
671
4,825
5,496
$
Supertel Hospitality, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
Years ended December 31, 2010, 2009, and 2008
Preferred Common Stock Common Additional Paid-
Stock
Warrants
Stock
In Capital
Distributions in
Excess of
Retained Earnings
Total
Shareholder Noncontrolling Total
Equity
Interest
Equity
Balance at
January 1, 2008
Partner Draws
Issuance of OP Units
Deferred compensation
Dividend Reinvestment Plan
Conversion of Preferred Stock
Common dividends
share
- $0.4625 per
Preferred dividends
Net earnings
$
9
$
-
$
207
$
112,792
$
(21,402)
$
91,606
$
8,222
$
99,828
-
-
-
-
-
-
-
(1)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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
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 loss
-
-
-
-
-
-
-
-
-
11
-
-
6
7,343
-
-
-
-
6
-
6
7,354
(7,354)
-
(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
Deferred compensation
Common stock offerings
Preferred dividends
Net loss
-
-
-
-
-
252
-
-
9
-
-
-
30
1,201
-
-
-
-
30
1,462
(1,474)
(1,474)
-
-
30
-
1,462
(1,474)
(10,585)
(10,585)
(73)
(10,658)
Balance at December 31, 2010
$
8
$
252
$
229
$
121,384
$
(66,479)
$
55,394
$
335
$
55,729
See accompanying notes to consolidated financial statements.
56
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 (loss) to net cash
provided by operating activities:
Depreciation and amortization
Amortization of intangible assets and deferred financing costs
Net 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 operating partnership units
Distributions to minority partners
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,
2009
2010
2008
$
(10,602)
$
(27,525)
$
7,259
11,708
487
(1,276)
30
8,198
(8,267)
7,394
7,672
(4,344)
-
11,209
6,865
(61)
(16,920)
2,417
-
(56)
-
1,462
(1,474)
(14,632)
(95)
428
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
(454)
1,166
CASH AND CASH EQUIVALENTS, END OF YEAR
$
333
$
428
$
712
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Dividends declared
$
11,795
$
12,487
$
13,379
$
1,474
$
1,474
$
10,805
See accompanying notes to consolidated financial statements.
57
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008
(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 96 properties with the exception of
furniture, fixtures and equipment on 72 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, 2010 owned
approximately 99% of the partnership interests in Supertel Limited Partnership. Supertel Limited Partnership is the
general partner in SBILP. At December 31, 2010, 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. References to “we”, “our”, and “us”
herein refer to Supertel Hospitality, Inc., including as the context requires, its direct and indirect subsidiaries.
As of December 31, 2010, the Company owned 106 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 95
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, and one was sold in 2010. 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 11 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.
58
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
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 recent
economic conditions are expected to continue to negatively affect the Company’s operating performance, as well as
its liquidity position.
Liquidity
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.
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
anticipates that these adverse economic conditions will improve somewhat over the next year; however, in addition
to our operating performance, the other sources described below will be essential to our liquidity and financial
position.
Our business requires continued access to adequate capital to fund our liquidity needs. In 2010, 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
2011, our foremost priorities continue to be 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 the expected actual and potential sources of liquidity, which we currently believe will be
sufficient to fund our near-term obligations:
• Cash and cash equivalents;
• Cash generated from operations;
• Proceeds from asset dispositions;
• Proceeds from additional secured or unsecured debt financings; and/or
59
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
• 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 18 properties held for sale as of December 31, 2010 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.
We are actively marketing the 18 properties held for sale, which we anticipate will result in the elimination
of $30.4 million of debt and generate an expected $5.2 million of proceeds for operations. We continue 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:
• whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;
• whether potential buyers will be able to secure financing; and
•
the length of time needed to find a buyer and to close the sale of a property.
On March 26, 2010, we entered into a Standby Equity Distribution Agreement (SEDA) with Yorkville
Advisors and, as of December 31, 2010, we have sold 316,384 shares resulting in net proceeds of $480,000 which
were used for corporate purposes.
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 credit facility with Wells Fargo Bank ($5.3 million balance at December 31, 2010),
previously due on March 12, 2011, has been extended to September 30, 2011. Also, the Company’s note payable to
First National Bank of Omaha ($0.8 million balance at December 31, 2010), previously due on February 1, 2011,
has been extended to March 1, 2012. The Company’s other 2011 maturities (at December 31, 2010) consist of
approximately $5.4 million of principal amortization on mortgage loans and $11.8 million payable to Great Western
Bank pursuant to a term loan that matures in December 2011. The Company intends to refinance or repay these
60
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
2011 maturities using its 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 2011, the Company’s plans and actions may not be sufficient and could lead to possibly failing
financial debt covenant requirements.
No common stock dividends were declared during 2010 or 2009. The Board of Directors continues to
monitor requirements to maintain the Company’s REIT status on a quarterly basis.
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
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
61
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
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.
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.
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
62
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
TRS Lessee has incurred operating losses for financial reporting and federal income tax purposes for 2010, 2009 and
2008.
Fair Value Measurements
We currently do not have any financial instruments that must be measured on a recurring basis under
FASB ASC 820-10 Fair Value Measurements and Disclosures - Overall; 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).
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 12 months ending December 31, 2010, Level 3 inputs were used to determine impairment losses
of $6.1 million on hotels in discontinued operations. This includes the recovery of previously recorded impairment
for which sale price or fair value exceeded management’s previous estimates in the amount of $0.9 million on assets
held for sale and sold. The Company also recorded $2.1 million in impairment loss on one held for use hotel.
During the 12 months ending December 31, 2009, Level 3 inputs were used to determine impairment losses
of $16.7 million on held for sale and sold hotels which includes $3.5 million of impairment losses taken on one
property classified as held for use in 2009 and reclassified as held for sale in 2010. In addition, these impairment
losses include the recovery of previously recorded impairment for which fair value exceeded management’s
previous estimates in the amount of $0.07 million on two assets sold in 2009. This recovery was recorded in the
period the sale occurred. The Company also recorded $7.4 million in impairment loss on five held for use hotels.
In accordance with ASC 360-10-35 Property Plant and Equipment—Overall—Subsequent Measurement,
the Company determines the fair value of an asset held for sale 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 using
a market approach. 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, 2010, the carrying value and estimated
fair value of the Company’s debt, excluding debt related to hotel properties held for sale, was $144.6 million and
$148.8 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
63
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
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:
Weighted average number of common shares - basic
22,556,382
21,646,612
20,839,823
(dollars in thousands, except per share data)
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:
Basic Earnings Per Common Share:
Continuing Operations
Discontinued Operations
Total
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
671
4,825
5,496
0.03
0.23
0.26
For the year ended December 31,
2010
2009
2008
$
$
$
(6,965)
(5,094)
(12,059)
(12,559)
(16,310)
(28,869)
$
$
$
$
$
$
(0.31)
(0.22)
(0.53)
(0.58)
(0.75)
(1.33)
$
$
$
For the year ended December 31,
2010
2009
2008
$
$
$
(6,965)
(5,094)
(12,059)
(12,559)
(16,310)
(28,869)
671
4,825
5,496
$
$
$
22,556,382
21,646,612
20,839,823
-
-
22,556,382
21,646,612
366
20,840,189
$
$
$
(0.31)
(0.22)
(0.53)
(0.58)
(0.75)
(1.33)
0.03
0.23
0.26
$
$
$
Preferred and Common Limited Partnership Units in SLP
At December 31, 2010, 2009, and 2008 there were 158,161, 158,161 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, 51,035 and 177,786 shares of SLP preferred operating units held by the
limited partners as of December 31, 2010, 2009 and 2008, respectively, are antidilutive.
64
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Preferred Stock of SHI
At December 31, 2010, 2009 and 2008, there were 803,270 shares each year of Series A Preferred Stock.
During 2008 there were 128,756 shares of Series A Preferred Stock converted to 227,896 shares 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, 2010, 2009 and 2008, 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, 2010 and 2009, there were 332,500 shares, each year, 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,
2010, 2009 and 2008 totaled 255,143, 230,715, and 192,143 respectively, of which 255,143, 230,715 and 191,777
shares, respectively are assumed to be repurchased with proceeds from the exercise of stock options resulting in
zero, zero, and 366 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, 2010, 2009, and 2008 for share-based
compensation related to employees and directors was $30, $6 and $12, 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, 2011 their right to have units redeemed at $10 per unit. All holders elected to extend until October
24, 2011. In October 2009, 126,751 units were 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. See
additional information regarding SLP units in Note 10. There were no common operating units redeemed in 2010 or
2008. During 2009, 1,077,645 SLP common operating units of limited partnership interest were redeemed by unit
holders for common shares of SHI. At December 31, 2010, 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.
65
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Concentration of Credit Risk
The Company maintained a major portion of its deposits with Great Western Bank, a Nebraska Corporation
at December 31, 2010, 2009 and 2008. 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
There were no acquisitions and no properties under construction or redevelopment during 2010 or 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).
Note 3. Investments in Hotel Properties
Investments in hotel properties consisted of the following at December 31:
2010
2009
Land
Acquired below market lease intangibles
Buildings, improvements, vehicle
Furniture and equipment
Construction-in-progress
$
Held For Sale Held For Use
36,813
$
883
210,587
47,318
306
295,907
6,162
69
29,816
6,400
26
42,473
TOTAL
$
42,975
952
240,403
53,718
332
338,380
$
Held For Sale Held For Use
37,037
$
883
211,194
45,983
296
295,393
9,484
89
44,518
10,209
-
64,300
TOTAL
$
46,521
972
255,712
56,192
296
359,693
Less accumulated depreciation
8,060
34,413
$
90,086
205,821
$
98,146
240,234
$
13,697
50,603
$
80,265
215,128
$
93,962
265,731
$
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:
66
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
2010
2009
2008
Continuing Operations
Impairment losses
Gain (loss) on sale of assets
Discontinued Operations
Gain on sales of properties
Impairment losses
Loss on sale of assets
$
(2,147)
(66)
(2,213)
$
(7,399)
(114)
(7,513)
$
-
1
1
$
1,414
(6,051)
(72)
(4,709)
$
2,520
(16,749)
(142)
(14,371)
$
5,583
(250)
(3)
5,330
Total
$
(6,922)
$
(21,884)
$
5,331
As of December 31, 2010, the Company has eighteen properties classified as held for sale. In 2010, 2009
and 2008, the Company sold nine hotels, eight hotels and two hotels, respectively, resulting in gains of $1,414,
$2,520 and $5,583, respectively. In 2010, 2009, and 2008, the Company recognized net gains (losses) and
impairment on the disposition of assets of approximately $(4,775), $(14,485), and $5,331.
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 $2,522, $3,434, and $3,942 to
discontinued operations for the years ended December 31, 2010, 2009, and 2008, respectively.
The operating results of hotel properties included in discontinued operations are summarized as follows:
2010
2009
2008
Revenues
Hotel and property operations expenses
Interest expense
Depreciation and amortization expense
General and administrative expense
Net gain on dispositions of assets
Impairment loss
Income tax benefit
$
$
$
18,266
(16,252)
(2,522)
(697)
(71)
1,342
(6,051)
860
(5,125)
23,924
(20,862)
(3,434)
(2,836)
-
2,378
(16,749)
1,098
(16,481)
33,989
(26,436)
(3,942)
(3,901)
-
5,580
(250)
125
5,165
$
$
$
As of December 31, 2010, the Company had 18 hotels classified as held for sale. At the beginning of 2010
the Company had 19 hotels held for sale and during the year classified an additional nine hotels as held for sale.
Nine of these hotels were sold during 2010, and one of the hotels was reclassified as held for use. The
reclassification of this hotel was due to changes in the property’s market condition. Since our previously filed
financial statements, in addition to the hotel reclassified as held for use, two hotels were reclassified as held for sale.
The impact of this reclassification increased income from continuing operations by $0.4 million and $0.3 million for
the years ended 2009 and 2008.
67
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(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 applies a second analysis on the entire held for use portfolio. The analysis
estimates 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 makes the following assumptions:
• Holding periods range from three to five years, for non-core assets, and ten years for those assets
considered as core.
• 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.
• A revenue multiplier for the terminal value based on an average of historical sales from a leading industry
broker of like properties was applied according to the assigned holding period.
During the 12 months ended December 31, 2010, a trigger event as described in ASC 360-10-35 occurred
for one of our held for use hotels. During the three months ended June 30, 2010, the analysis above was used to
determine that a trigger event had occurred for one held for use property in which the carrying value of the hotel
exceeded the sum of the undiscounted cash flows expected over its remaining anticipated holding period and from
its disposition. The property was then tested to determine if the carrying amount was 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 hotel were determined by management, based on discussions with our asset management group and our
third party management companies. The 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 the 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’s investment in the subject property was not fully recoverable; accordingly, impairment was
recognized.
To determine the amount of impairment on the property identified above, in accordance with FASB ASC
360-10-55, the Company calculated the excess of the carrying value of the property in comparison to its fair market
value as of June 30, 2010. Based on this calculation, the Company determined total impairment of $2.1 million
existed as of June 30, 2010 on the held for use asset previously noted. Fair market value was determined by
multiplying trailing 12 months revenue for the 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 the property impaired for the year ending December 31, 2010, was determined in part by
management estimates, a reasonable possibility exists that future changes to inputs and assumptions could affect the
68
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
accuracy of management’s estimates and such future changes could lead to further possible impairment in the future.
No additional held for use hotels were determined to be impaired during the year ended December 31, 2010.
Note 6. Long-Term Debt
Long-term debt consisted of the following notes and mortgages payable at December 31:
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.
2010
2009
$30,972
$32,423
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, based on the three year Treasury Rate plus 3.75%. Principal and interest
payments are due in monthly installments to November 1, 2024. A principal payment
was made on this loan in October 2009 in the amount of $1.3 million, using proceeds
from the sale of the Comfort Inn in Dahlgren, Virginia. This loan was paid in full in
January 2010 with proceeds from the sale of a Comfort Inn in Dublin, Virginia.
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. The credit facility was amended on March 29, 2010 to
increase the interest rate to 5.5% from March 29, 2010 through June 30, 2011 and
prime (subject to a 5.5% floor rate) from July 1, 2011 through the maturity of the
credit facility. The credit facility was further amended on March 15, 2011 to maintain
the interest rate at 5.5% from March 15, 2011 through December 31, 2011 and prime
(subject to a 5.5% floor rate) from January 1, 2012 through the maturity of the credit
facility. Great Western Bank has the option to increase the interest rate of the credit
facility up to 4.0% any time after January 1, 2012. The principal balance of the loan
is due and payable on February 22, 2012.
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. Great Western Bank has the option to increase the interest rate of the loan up
to 4.0% any time after January 1, 2012. A payment of $1.4 million was made in
October, 2010, using partial proceeds from the sale of a Super 8 in Lenexa, Kansas.
Principal and interest payments are due in monthly installments with the outstanding
principal and interest payable in full on December 5, 2011.
Mortgage 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. Great Western Bank has the option to increase the interest rate of the loan up
to 4.0% any time after January 1, 2012. Principal and interest payments are due in
monthly installments with the outstanding principal and interest payable in full on
May 5, 2012.
69
-
$993
$15,793
$19,016
$11,832
$13,617
$9,551
$9,842
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
2010
2009
Credit facility from Wells Fargo Bank for up to $12 million evidenced by a
promissory note dated September 28, 2007. 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 12, 2010. On August 12, 2010 the
credit facility was amended to extend the maturity date to March 12, 2011 and
increase the interest rate from LIBOR plus 3.5% (subject to a 4.0% floor) to LIBOR
plus 5.0% (subject to a 5.5% floor). In addition a $1.8 million principal payment was
made in exchange for a release of the deeds of trust securing the Super 8 and Supertel
Inn hotels located in Neosho, Missouri. A principal payment of $0.6 million was
made in October 2010 using proceeds from the sale of a Supertel Inn in Jane,
Missouri. On March 11, 2011, the maturity of the note was extended to September 30,
2011 and the interest rate was decreased from LIBOR plus 5.0% (subject to a 5.5%
floor) to LIBOR plus 4.0% (subject to a 4.5% floor). The rate as of December 31,
2010 was 5.5%.
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 9, 2009, to increase the interest rate by an additional 0.5%.
The rate as of December 31, 2010, was 3.80%.
70
$5,294
$8,914
$13,373
$13,696
$5,268
$5,319
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
2010
2009
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 9, 2009, to increase the interest
rate by an additional 0.5%. The rate as of December 31, 2010 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 9, 2009, to increase the interest rate by an additional 0.5%. The rate as of
December 31, 2010 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 9, 2009, to increase the interest rate by
an additional 0.5%. The rate as of December 31, 2010 was 7.17%.
$16,718
$17,067
$13,061
$13,420
$3,239
$3,301
71
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
2010
2009
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. An additional
payment of $ 0.9 million was made in November 2010, using proceeds from the sale
of a Masters Inn in Georgia. The principal amount owing on this loan includes $128
of prepayment fees related to the November 2010 principal payments. In December
2010, GECC agreed to forbear from requiring payment of such prepayment fees until
January 1, 2012. On March 16, 2009, the note was amended to increase the interest
rate by 100 basis points. It was further amended on November 9, 2009, to increase
the interest rate by an additional 0.5%. The rate as of December 31, 2010 was
7.69%.
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.
72
$20,994
$22,480
$1,597
$1,704
$1,756
$1,874
$2,671
$2,850
$3,260
$3,479
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
2010
2009
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, 2010 was 3.80%. 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 9,
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
$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, 2010 was 3.80%. 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 9,
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, 2010 was 3.80%. 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 9,
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, 2010 was 3.80%. 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 9,
2009, to increase the interest rate by an additional 0.5%.
$6,709
$6,765
$3,352
$3,380
$1,091
$1,100
$4,319
$4,355
73
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
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, 2010 was 4.36%. 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 9,
2009, to increase the interest rate by an additional 0.5%.
Mortgage Loan payable to Elkhorn Valley Bank in Norfolk, Nebraska, evidenced by a
promissory note in the amount of $1.0 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.
Line of credit from Elkhorn Valley Bank, evidenced by a note dated December 22,
2009, with a limit of $1.95 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. In June 2010, the note was paid in
full using funds from the revolving line of credit with Great Western Bank. On
January 26, 2011, the Company reborrowed the $1.95 million from Elkhorn Valley
Bank pursuant to a promissory note that bears interest at 5.9% per annum and matures
on October 1, 2011.
Mortgage Loan payable to First National Bank of Omaha, evidenced by a promissory
note in the amount of $0.8 million, dated January 26, 2010. The interest rate is based
on the one month London Interbank Offered Rate plus 4.0 percentage points with a
5.0% floor. The rate as of December 31, 2010 was 5.0%. Monthly interest payments
are due through February 2011, with the balance of the loan due on February 1, 2011.
On March 1, 2011, the maturity of the note was extended to March 1, 2012.
2010
2009
$2,449
$2,470
$871
$948
-
$500
$840
$175,010
-
$189,513
The long-term debt is secured by 106 and 111 of the Company’s hotel properties, for the years ended 2010
and 2009, 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.
The key financial covenants for certain of our loan agreements and compliance calculations as of December
31, 2010 are discussed below (each such covenant is calculated pursuant to the applicable loan agreement). As of
December 31, 2010, 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.
74
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
(dollar amounts in thousands)
Great Western Bank Covenants
Consolidated debt service coverage ratio calculated
as follows:
Adjusted NOI (A) / Debt service (B)
Net loss per financial statements
Net adjustments per loan agreement
Adjusted NOI per loan agreement(A)
Interest expense per financial statements-
continuing operations
Interest expense per financial statements-
discontinued operations
Total interest expense per financial
statements
Net adjustments per loan agreement
Debt service per loan agreement (B)
Consolidated debt service coverage ratio
Loan-specific debt service coverage ratio
calculated as follows:
Adjusted NOI (A) / Debt service (B)
Net loss per financial statements
Net adjustments per loan agreement
Adjusted NOI per loan agreement (A)
Interest expense per financial statements-
continuing operations
Interest expense per financial statements-
discontinued operations
Total interest expense per financial
statements
Net adjustments per loan agreement
Debt service per loan agreement (B)
Loan-specific debt service coverage ratio
Consolidated loan to value ratio calculated as
follows:
Loan balance (A) / Value (B)
Loan balance (A)
Value (B)
Consolidated loan to value ratio
December 31, 2010
Requirement
December 31, 2010
Calculation
≥1.05:1
$(10,602)
$32,478
$21,876
$9,702
$2,522
$12,224
$5,861
$18,085
1.21:1
$(10,602)
$14,828
$4,226
$9,702
$2,522
$12,224
$(8,606)
$3,618
1.17:1
$175,010
$300,406
58.3%
≥1.20:1
≤70.0%
75
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Great Western Bank Covenants - continued
Loan-specific loan to value ratio calculated as
follows:
Loan balance (A) / Value (B)
Loan balance (A)
Value (B)
Loan-specific loan to value ratio
December 31, 2010
Requirement
December 31, 2010
Calculation
≤70.0%
$37,176
$60,227
61.7%
The Great Western Bank credit facilities also require that we not pay dividends in excess of 75% of our
funds from operations per year. On March 10, 2011, we received a waiver from Great Western Bank for non-
compliance with the loan-specific debt service coverage ratio covenant set forth in the table above as of December
31, 2010.
The credit facilities with Great Western Bank were amended on March 15, 2011 to require maintenance of
consolidated and loan-specific debt service coverage ratios of at least 1.05 to 1, tested quarterly, from December 31,
2010 through the maturity of the credit facilities. The credit facilities continue to require maintenance of
consolidated and loan-specific loan to value ratios that do not exceed 70%, tested annually, from December 31, 2010
through the maturity of the credit facilities.
The Great Western Bank amendment also: (a) modifies the borrowing base so that the loans available to us
under the credit facilities 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 1.05 to 1 from December 31, 2010 through December 31, 2011 and 1.50 to 1 from January 1, 2012
through the maturity of the credit facilities; (b) maintains the interest rate on the revolving credit portion of the credit
facilities at 5.50% from March 15, 2011 through December 31, 2011 and prime (subject to a 5.50% floor rate) from
January 1, 2012 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 January 1, 2012.
(dollar amounts in thousands)
Wells Fargo Bank Covenants
Consolidated loan to value ratio calculated as
follows:
Loan balance (A) / Value (B)
Loan balance (A)
Value (B)
Consolidated loan to value ratio
December 31, 2010
Requirement
December 31, 2010
Calculation
≤85.0%
$175,010
$225,152
77.7%
76
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Wells Fargo Bank Covenants – continued
Consolidated tangible net worth calculated as
follows:
Consolidated shareholder equity (A) –
Intangible assets (B)
Total shareholders’ equity per financial
statements
Redeemable noncontrolling interest per
financial statements
Noncontrolling interest in consolidated
partnership
Redeemable preferred stock per financial
statements
Consolidated shareholder equity (A)
Intangible assets (B)
Consolidated tangible net worth
Consolidated fixed charge coverage ratio
calculated as follows:
EBITDA (A) / Fixed charges (B)
Net loss per financial statements
Net adjustments per loan agreement
EBITDA per loan agreement (A)
Interest expense per financial statements-
continuing operations
Interest expense per financial statements-
discontinued operations
Total interest expense per financial
statements
Net adjustments per loan agreement
Fixed charges per loan agreement (B)
Consolidated fixed charge coverage ratio
December 31, 2010
Requirement
December 31, 2010
Calculation
>$65 million
$55,394
$511
$335
$7,662
$63,902
$0
$63,902
$(10,602)
$28,959
$18,357
$9,702
$2,522
$12,224
$6,594
$18,818
0.98:1
≥0.80:1 before
preferred dividends
77
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Wells Fargo Bank Covenants – continued
Consolidated fixed charge coverage ratio
calculated as follows:
EBITDA (A) / Fixed charges (B)
Net loss per financial statements
Net adjustments per loan agreement
EBITDA per loan agreement (A)
Interest expense per financial statements-
continuing operations
Interest expense per financial statements-
discontinued operations
Total interest expense per financial
statements
Net adjustments per loan agreement
Fixed charges per loan agreement (B)
Consolidated fixed charge coverage ratio
December 31, 2010
Requirement
December 31, 2010
Calculation
≥0.75:1 after
preferred dividends
$(10,602)
$28,959
$18,357
$9,702
$2,522
$12,224
$5,120
$17,344
1.06:1
Our credit facility with Wells Fargo Bank was amended on August 12, 2010 to require maintenance of a
consolidated loan to value ratio that does not exceed 85% and a minimum tangible net worth which exceeds $65
million, in each case, through the maturity of the credit facility. The amendment also: (a) extended the maturity date
from August 12, 2010 to March 12, 2011; (b) required a $1.8 million principal payment (which we funded from the
revolving line of credit with Great Western Bank) in exchange for a release of the deeds of trust securing the Super 8
and Supertel Inn hotels located in Neosho, Missouri; and (c) increased the interest rate from LIBOR plus 3.5%
(subject to a 4.0% floor) to LIBOR plus 5.0% (subject to a 5.5% floor). On March 11, 2011, the Company received
a waiver from Wells Fargo Bank for non-compliance with the consolidated tangible net worth covenant set forth in
the table above as of December 31, 2010. In connection with the waiver, the credit facility was amended on March
11, 2011 to require maintenance of a minimum tangible net worth which exceeds $50 million through the maturity
of the credit facility. The amendment also: (a) extended the maturity date from March 12, 2011 to September 30,
2011; and (b) decreased the interest rate from LIBOR plus 5.0% (subject to a 5.5% floor) to LIBOR plus 4.0%
(subject to a 4.5% floor).
78
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
(dollar amounts in thousands)
GE Covenants
Loan-specific total adjusted EBITDA calculated as
follows:
Net loss per financial statements
Net adjustments per loan agreement
Loan-specific total adjusted EBITDA
Consolidated debt service coverage ratio
calculated as follows:
Adjusted EBITDA (A) / Debt service (B)
Net loss per financial statements
Net adjustments per loan agreement
Adjusted EBITDA per loan agreement (A)
Interest expense per financial statements-
continuing operations
Interest expense per financial statements-
discontinued operations
Total interest expense per financial
statements
Net adjustments per loan agreement
Debt service per loan agreement (B)
Consolidated debt service coverage ratio
December 31, 2010
Requirement
December 31, 2010
Calculation
≥$3.9 million
≥1.05:1
$(10,602)
$16,242
$5,640
$(10,602)
$36,163
$25,561
$9,702
$2,522
$12,224
$5,120
$17,344
1.47:1
Our credit facilities with General Electric Capital Corporation require that, commencing in 2012 and
continuing for the term of the loans, we maintain, with respect to our GE-encumbered properties, a before dividend
fixed charge coverage ratio (FCCR) (based on a rolling twelve month period) of 1.30:1 and after dividend FCCR
(based on a rolling twelve month period) of 1.00:1. The consolidated debt service coverage ratio for the GE credit
facilities increases to 1.50:1 in 2012 through the term of the loans. In connection with previous amendments and
waivers, the interest rates 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 1.30:1 before dividends and 1.00:1 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.
79
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Debt held on properties in continuing operations is classified as held for use. Debt is classified as held for
sale if the properties collateralizing it are included in discontinued operations. Debt associated with assets held for
sale is classified as a short-term liability due in 2011 irrespective of whether the notes and mortgages evidencing
such debt mature in 2011. Aggregate annual principal payments on debt associated with assets held for use for the
next five years and thereafter, and debt associated with assets held for sale, are as follows:
2011
2012
2013
2014
2015
Thereafter
$
Held For Sale Held For Use
15,186
$
57,723
3,498
4,228
15,278
48,654
144,567
30,316
127
-
-
-
-
30,443
$
$
TOTAL
$
45,502
57,850
3,498
4,228
15,278
48,654
175,010
$
At December 31, 2010 and 2009, the estimated fair values of long-term debt, excluding debt related to
hotel properties held for sale, were approximately $148.8 million and $155.4 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, 2010, the income tax bases of the Company’s assets and liabilities excluding those of
TRS were approximately $263,706 and $166,997, respectively; at December 31, 2009, they were approximately
$276,026 and $176,234, respectively.
The TRS net operating loss carryforward from December 31, 2010 as determined for federal income tax
purposes was approximately $10.0 million. The availability of such loss carryforward will begin to expire in 2022.
80
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Income tax benefit from continuing operations for the years ended December 31, 2010, 2009 and 2008
consists of the following:
Federal
2010
State
Total
Federal
2009
State
Total
Federal
2008
State
Total
Current
Deferred
-
$
(753)
-
$
(144)
-
$
(897)
-
$
(449)
$
-
(100)
$
-
(549)
-
$
(154)
-
$
(26)
-
$
(180)
Total income tax benefit
$
(753)
$
(144)
$
(897)
$
(449)
$
(100)
$
(549)
$
(154)
$
(26)
$
(180)
The actual income tax benefit from continuing operations of the TRS for the years ended December 31,
2010, 2009 and 2008 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:
2010
2009
2008
Computed "expected" income tax benefit
State income taxes, net Federal income tax benef
Other
Total income tax benefit
$
$
$
(845)
(100)
48
(897)
(479)
(66)
(4)
(549)
(146)
(17)
(17)
(180)
$
$
$
The continuing and discontinued combined tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and the deferred tax liability at December 31, 2010, 2009 and 2008 are as follows:
Deferred Tax Assets:
Expenses accrued for consolidated financial statement
purposes, nondeductible for tax return purposes
2010
2009
2008
$
297
$
281
$
273
Net operating losses carried forward for federal
income tax purposes
3,827
2,511
1,289
Total deferred tax assets
4,124
2,792
1,562
Deferred Tax Liabilities:
Tax depreciation in excess of book depreciation
Total deferred tax liabilities
418
418
843
843
1,260
1,260
Net deferred tax assets
$
3,706
$
1,949
$
302
The TRS has estimated its income tax benefit using a combined federal and state rate of approximately 38%.
As of the year ended 2010, 2009 and 2008 the TRS had a deferred tax asset of $4.1 million, $2.8 million and $1.6
million, respectively, primarily due to current and past years’ tax net operating losses. These loss carryforwards will
81
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
begin to expire in 2022 through 2030. In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers
projected scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. These estimates of future taxable income inherently require significant judgment.
Management uses historical experience and short and long-range business forecasts to develop such estimates. Further,
we employ various prudent and feasible tax planning strategies to facilitate the recoverability of future deductions. To the
extent management does not consider it more likely than not that a deferred tax asset will be recovered, a valuation
allowance is established. The valuation of deferred tax assets requires judgment in assessing the likely future tax
consequences of events that have been recognized in our financial statements or tax returns and future profitability. Our
accounting for deferred tax consequences represents our best estimate of those future events. Changes in our current
estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results
of operations. Based on consideration of these items, management has determined that no valuation allowance is
required.
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, 2010, 2009 or 2008.
Dividends Paid
There were no dividends paid during the year ended December 31, 2010. 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.
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.
82
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Royco Hotels Management Agreement
Royco Hotels manages 95 of the hotels owned by the Company at December 31, 2010. Royco Hotels
receives a monthly base management fee and an incentive management fee, if certain financial thresholds are met or
exceeded. See “Litigation” below with respect to litigation between Royco Hotels and the Company. The
management agreement, as amended effective January 1, 2007, provides for monthly base management fees as
follows:
•
•
•
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 31, 2010 and (ii) Royco Hotels does not default prior to December 31, 2011.
The management agreement may be terminated as follows:
•
•
•
•
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;
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:
•
the failure of Royco Hotels to diligently and efficiently operate the hotels pursuant to the
management agreement;
83
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
•
•
•
•
•
•
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 our eleven 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.
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.
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. At this time, the company has
reached agreement to settle the claims, subject to court approval for certain minor plaintiffs, and one settlement has
been paid. The settlements were made with authorization from the insurers and the Company has recorded a
liability for the amount of the unpaid claims and a receivable reflecting recoverability of the claim from the insurers.
84
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
The Company’s management agreement with Royco Hotels, the manager of a majority of the Company’s
hotels, terminates on December 31, 2011, and is subject to an automatic five year extension thereafter if certain
conditions are met. In addition, provisions in the management agreement permit either party to terminate the
management agreement on 60 days notice if a net operating income (“NOI”) target of 8.5% of total investment in
hotels is not achieved for a fiscal year. In 2009 and 2010, NOI as a percentage of total hotel investment was less
than 8.5%. Additionally, one of the conditions for an automatic extension of the management agreement is that an
average annual NOI target of at least 10% is achieved during the four years ending December 31, 2010. Annual NOI
as a percentage of total hotel investment has not exceeded 10% in 2007, 2008, 2009 and 2010.
During the fourth quarter of 2010, the Company solicited bids from hotel management companies to
manage the Company’s hotels. The Company expects to complete its review process, and make its decision, if any,
on a manager or managers for its hotels during the first half of 2011.
The Company has been advised by Royco Hotels that it believes the Company’s potential termination /
nonrenewal of Royco Hotels is a breach of the management agreement between the Company and Royco Hotels. On
December 15, 2010, Royco Hotels filed a complaint against Supertel in the District Court of Douglas County,
Nebraska alleging breach of the management agreement and other complaints related to the solicitation of bids from
other management companies, and seeking alleged damages. Royco Hotels has not met the NOI conditions of the
agreement and consequently the Company does not believe that it has breached the management agreement or that
any damages are due to Royco Hotels. Royco Hotels continues to manage our hotels under the management
agreement.
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.
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 $111, $109 and $104 in 2010, 2009 and 2008, respectively, and is included in
property operating expense. The Company entered into an office lease agreement in May of 2010 and incurred
office lease expense of $14 during 2010. No office lease expense was incurred during 2009 or 2008.
As of December 31, 2010, the future minimum lease payments applicable to non-cancellable operating
leases are as follows:
Lease
rents
105
108
111
112
113
4,733
5,282
$
2011
2012
2013
2014
2015
Thereafter
85
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
The Company as of December 31, 2010 has agreements with three restaurants and two cell tower operators
for leased space at our hotel locations related to continuing operations. The restaurant leases have maturity dates
ranging from 2011 to 2020 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 $285, $284 and $265 in 2010, 2009 and 2008,
respectively, and is included in room rentals and other hotel services.
As of December 31, 2010, the future minimum lease receipts from the non-cancellable restaurants and cell
tower leases are as follows:
2011
2012
2013
2014
2015
Thereafter
81
55
44
44
30
150
404
$
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, 2010, 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.
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.
86
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
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, 2010, 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, 2010, 158,161 of SLP’s common operating partnership units (“Common OP Units”) were
outstanding. The redemption values for the Common OP Units are $250 and $237 for 2010 and 2009 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, 2010, 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, 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. 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, 2011 their right to have units redeemed at $10 per unit. All holders
elected to extend until October 24, 2011. 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.
Noncontrolling Interest Reconciliation of Common and Preferred Units
Balance at January 1, 2008
Partner draws
Conversion of OP units
Issuance of OP units
Noncontrolling interest income (expense)
Balance at December 31, 2008
Partner draws
Conversion of OP units
Reclassification of OP units to current liability
Noncontrolling interest expense
Balance at December 31, 2009
Partner draws
Noncontrolling interest expense
Balance at December 31, 2010
Redeemable
Noncontrolling
Interest
$
Total
Noncontrolling
Interest
$
Noncontrolling
Interest
$
$
8,222
(572)
-
26
388
8,064
-
(7,354)
-
(302)
408
$
-
(73)
335
$
1,956
(215)
(178)
-
215
1,778
(172)
-
(1,267)
172
511
(56)
56
511
10,178
(787)
(178)
26
603
9,842
(172)
(7,354)
(1,267)
(130)
919
(56)
(17)
846
$
$
$
$
$
$
87
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Note 11. Common and Preferred Stock
The Company’s common stock is duly authorized, full paid and non-assessable. At December 31, 2010
and 2009, members of the Board of Directors and executive officers owned approximately 19% and 20%,
respectively, of the Company’s outstanding common stock.
At December 31, 2010, 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 $761 and $748 as of December 31, 2010
and 2009, 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 2010 and 2008, 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, 2011 their right to have units
redeemed at $10 per unit. All holders elected to extend until October 24, 2011. 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.
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
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, 2010, 2009 and 2008, 803,270 shares each year
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.
88
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
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.
On May 10, 2010, the Company consummated the sale of 598,803 shares of its common stock and 299,403
warrants to purchase up to an additional 299,403 shares of the Company’s common stock for aggregate gross
proceeds of $1.0 million, pursuant to the terms of a Private Placement Memorandum with accredited investors as
defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended. The warrants are
exercisable for a period of three years from the date of issuance at an exercise price of $2.50.
During 2010 we sold 316,384 shares of common stock using a Standby Equity Distribution Agreement.
Net proceeds of $480,000 were used for corporate purposes.
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
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, 2010, 255,143 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
89
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Dealers Automated Quotation system (NASDAQ) on the grant date. A total of 255,143 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, 2010. The following table summarizes the options awarded:
Awarded Options
Exercise Price
Date Vested
Expiration Date
Options Grant Date
$
12/05/10
95,500
1.42
06/30/11
12/2/2014
$
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
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 2010, 2009, and 2008 grants:
Volatility
Expected dividend yield
Expected term (in years)
Risk free interest rate
12/02/10
Grant Date
11/17/09
50.00%
6.33%
3.79
1.27%
45.00%
6.33%
3.81
1.74%
05/22/08
20.00%
6.54%
4.00
3.04%
The following table summarizes the Company’s activities with respect to its stock options for the year
ended December 31, 2010 as follows (in thousands, except per share and share data):
Outstanding at December 31, 2009
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2010
Exercisable at December 31, 2010
Share-Based Compensation Expense
Shares
230,715
95,500
-
71,072
255,143
159,643
Weighted-
Average
Exercise Price
Aggregate
Fair
Value
Weighted-Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
$
$
4.45
1.42
-
6.06
2.87
3.74
126
33
-
50
109
76
$
$
$
$
2.71
2.43
$
$
18,880
3,600
The expense recognized in the consolidated financial statements for the share-based compensation related
to employees and directors for the years ended December 31, 2010, 2009 and 2008 was $30, $6 and $12,
respectively. At December 31, 2010, we had $29 of total unrecognized compensation expense, net of estimated
forfeitures, related to stock options granted in 2010 that vest as of June 30, 2011. We recognize compensation
expense using the straight-line method over the vesting period. During 2010, 2009 and 2008, the company’s options
granted were 95,500, 90,000 and 30,000 respectively, with a weighted average grant date fair value per option of
$0.35, $0.35 and $0.40, respectively. The total intrinsic value of options exercised was $0 for all three fiscal years
2010, 2009 and 2008. The closing market price of our common stock on the last day of 2010 was $1.58 per share.
90
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Note 13. Supplementary Data
The following tables present our unaudited quarterly results of operations for 2010 and 2009:
2010
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 loss
Noncontrolling interest
Net loss attributable to controlling interests
Preferred stock dividend
March 31,
2010
Quarters Ended (unaudited)
June 30,
2010
September 30,
2010
December 31,
2010
YTD
2010
$
17,425
18,285
$
23,062
20,308
$
24,433
21,255
$
19,194
18,847
$
84,114
78,695
(860)
(16)
27
(2,408)
-
(3,257)
(680)
(2,577)
(440)
(3,017)
7
(3,010)
(368)
2,754
(23)
34
(2,415)
(2,147)
(1,797)
104
(1,901)
(1,774)
(3,675)
11
(3,664)
(369)
3,178
(16)
31
(2,383)
-
810
151
659
(750)
(91)
(13)
(104)
(368)
347
(11)
30
(2,496)
-
5,419
(66)
122
(9,702)
(2,147)
(2,130)
(6,374)
(472)
(1,658)
(2,161)
(3,819)
12
(897)
(5,477)
(5,125)
(10,602)
17
(3,807)
(10,585)
(369)
(1,474)
Net loss attributable to common shareholders
$
(3,378)
$
(4,033)
$
(472)
$
(4,176)
$
(12,059)
NET EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTED
$
EPS from continuing operations
$
EPS from discontinued operations
$
EPS Basic and Diluted
(0.13)
(0.02)
(0.15)
$
$
$
(0.10)
(0.08)
(0.18)
$
$
$
0.01
(0.03)
(0.02)
$
$
$
(0.09)
(0.09)
(0.18)
$
$
$
(0.31)
(0.22)
(0.53)
91
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
March 31,
2009
Quarters Ended (unaudited)
June 30,
2009
September 30,
2009
December 31,
2009
YTD
2009
$
18,330
18,204
$
$
22,293
19,385
22,928
20,681
$
18,019
17,933
$
81,570
76,203
126
(26)
38
(2,307)
-
(2,169)
(633)
(1,536)
(889)
(2,425)
87
(2,338)
(369)
2,908
(26)
34
(2,437)
-
479
97
382
961
1,343
(69)
1,274
(369)
905
(0.00)
0.04
0.04
2,247
(24)
28
(2,420)
-
(169)
(177)
8
(1,017)
(1,009)
(38)
86
(38)
34
(2,417)
(7,399)
5,367
(114)
134
(9,581)
(7,399)
(9,734)
(11,593)
164
(549)
(9,898)
(11,044)
(15,536)
(16,481)
(25,434)
(27,525)
150
130
(1,047)
(25,284)
(27,395)
(368)
(1,415)
(0.02)
(0.04)
(0.06)
(368)
(1,474)
$
$
$
$
(25,652)
(0.47)
(0.70)
(1.17)
$
$
$
$
(28,869)
(0.58)
(0.75)
(1.33)
$
$
$
$
$
$
$
$
2009
Revenues
Expenses
Earnings before net losses
on disposition of assets, other income, interest
noncontrolling interest and income taxexpense (benefit)
Net losses on dispositions of assets
Other income
Interest
Impairment losses
Earnings (loss) fromcontinuing operations
before income taxes
Income taxexpense (benefit)
Earnings (loss) fromcontinuing operations
Discontinued operations
Net earnings (loss)
Noncontrolling interest
Net income (loss) attributable to controlling interests
Preferred stock dividend
Net earnings (loss) attributable to common shareholders
$
(2,707)
NET EARNINGS (LOSS) PER COMMON SHARE- BASIC AND DILUTED
EPS fromcontinuing operations
EPS fromdiscontinued operations *
*
EPS Basic and Diluted
$
$
$
(0.09)
(0.04)
(0.13)
*Quarterly EPS data does not add to total year, due to rounding
92
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
Note 14. Subsequent Events
On January 26, 2011, the Company borrowed $1.95 million from Elkhorn Valley Bank. The promissory
note bears interest at 5.9% per annum and matures on October 1, 2011. The loan is secured by Super 8 hotels
located in Watertown, South Dakota and Park City, Kansas.
On March 1, 2011, the maturity date of the $0.8 million promissory note to First National Bank of Omaha
was extended to March 1, 2012.
On March 10, 2011, the Company received a waiver from Great Western Bank for non-compliance with
the loan-specific debt service coverage ratio covenant set forth in the credit facilities with Great Western Bank as of
December 31, 2010. Additional information regarding the waiver is included in Note 6 to these Consolidated
Financial Statements.
The credit facilities with Great Western Bank were amended on March 15, 2011 to require maintenance of
consolidated and loan-specific debt service coverage ratios of at least 1.05 to 1, tested quarterly, from December 31,
2010 through the maturity of the credit facilities. The credit facilities continue to require maintenance of
consolidated and loan-specific loan to value ratios that do not exceed 70%, tested annually, from December 31, 2010
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 under the credit facilities 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 1.05 to 1 from December 31, 2010 through December 31, 2011 and 1.50 to 1 from
January 1, 2012 through the maturity of the credit facilities; (b) maintains the interest rate on the revolving credit
portion of the credit facilities at 5.50% from March 15, 2011 through December 31, 2011 and prime (subject to a
5.50% floor rate) from January 1, 2012 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 January 1, 2012.
On March 11, 2011, the Company received a waiver from Wells Fargo Bank for non-compliance with the
consolidated tangible net worth covenant set forth in its credit facility with Wells Fargo Bank as of December 31,
2010. Additional information regarding the waiver is included in Note 6 to these Consolidated Financial
Statements. In connection with the waiver, the credit facility was amended on March 11, 2011 to: (a) reduce the
consolidated tangible net worth covenant from $65 million to $50 million; (b) extend the maturity date from March
12, 2011 to September 30, 2011; and (c) decrease the interest rate from LIBOR plus 5.0% (subject to a 5.5% floor)
to LIBOR plus 4.0% (subject to a 4.5% floor).
93
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98
Supertel Hospitality, Inc. and Subsidiaries
NOTES TO SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2010
ASSET BASIS
Total
(a)
Balance at January 1, 2008
$ 376,239,780
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
Additions to buildings and improvements
Disposition of buildings and improvements
Impairment loss
Balance at December 31, 2010
$ 34,157,694
(9,275,478)
(250,000)
$ 400,871,996
$ 4,485,009
(18,942,418)
(26,722,187)
$ 359,692,400
$ 4,344,356
(17,101,252)
(8,555,306)
$ 338,380,198
ACCUMULATED DEPRECIATION
Total
(b)
Balance at January 1, 2008
$
75,295,053
Depreciation for the period ended December 31, 2008
Depreciation on assets sold or disposed
Balance at December 31, 2008
$ 14,979,630
(3,283,741)
86,990,942
$
Depreciation for the period ended December 31, 2009
Depreciation on assets sold or disposed
Impairment loss
Balance at December 31, 2009
$ 14,242,727
(4,697,660)
(2,574,353)
$ 93,961,656
Depreciation for the period ended December 31, 2010
Depreciation on assets sold or disposed
Impairment loss
Balance at December 31, 2010
$ 11,710,060
(7,168,962)
(356,732)
$ 98,146,022
(c)
The aggregate cost of land, buildings, furniture and equipment for Federal income tax purposes is
approximately $370 million.
(d)
Depreciation is computed based upon the following useful lives:
Buildings and improvements 15 - 40 years
Furniture and equipment 3 - 12 years
99
(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.
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, 2010.
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 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 a waiver for non-compliance with a financial covenant with Great Western Bank on
March 10, 2011, and the Company’s loans with Great Western Bank were further amended on March 15, 2011, 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."
100
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 2011 Annual Meeting of Stockholders (the “2011 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 2011 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 2011 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, 2010.
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)
255,143
-
255,143
$2.87
-
$2.87
42,000
-
42,000
Plan category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
101
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the 2011 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 2011 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 ...................................................................... 53
Consolidated Balance Sheets as of December 31, 2010 and 2009 .............................................................. 54
Consolidated Statements of Operations
for the Years Ended December 31, 2010, 2009 and 2008 ............................................................ 55
Consolidated Statements of Equity
for the Years Ended December 31, 2010, 2009 and 2008 ........................................................... 56
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2010, 2009 and 2008 ........................................................... 57
Notes to Consolidated Financial Statements ............................................................................................... 58
Schedule III – Real Estate and Accumulated Depreciation ......................................................................... 94
Notes to Schedule III-Real Estate and Accumulated Depreciation ............................................................. 99
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
10.1* Third Amended and Restated Agreement of Limited Partnership of Supertel Limited Partnership, as
amended.
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).
102
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).
Hotel Management Agreement dated as of August 1, 2004 between TRS Leasing, Inc., TRS Subsidiary,
10.9
LLC and Royco Hotels, Inc. (incorporated herein by reference to Exhibit 10.9 to the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009).
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 Second Amendment to Amended and Restated Loan Agreement dated as of March 29, 2010 by and
between the Company and Great Western Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).
10.16 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).
10.17 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).
103
10.18 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).
10.19 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
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).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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. (incorporated herein by
reference to Exhibit 10.24 to the Company’s Annual Report on Form10-K for the year ended December 31, 2009).
10.26 Loan Modification Agreement dated as of March 25, 2010 by and between General Electric Capital
Corporation, Supertel Limited Partnership, SPPR-South Bend, LLC, Supertel Hospitality REIT Trust and the
Company (incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2010).
10.27 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 Quarterly Report on Form 10-Q for the quarter ended March 31,
2009).
10.28 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2009).
10.29 Standby Equity Distribution Agreement dated as of March 26, 2010 between YA Global Master SPV Ltd.
and the Company (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated March 26, 2010).
10.30* Employment Agreement dated as of September 1, 2005 by and between the Company and Don Heimes.
104
10.31 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).
10.32 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).
10.33 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).
10.34 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).
10.35 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).
10.36 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).
10.37 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).
10.38 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 26,
2011.
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 10.30 through 10.38.
_______________
* Filed herewith.
105
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 16, 2011
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/ Jeffrey M. Zwerdling
Jeffrey M. Zwerdling
Director
By:
/s/ Corrine L. Scarpello
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/ Kelly A. Walters
Kelly A. Walters
Director
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
By:
/s/ Richard A. Frandeen
Richard A. Frandeen
Director
106
I, Kelly A. Walters, certify that:
CERTIFICATIONS
Exhibit 31.1
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2010 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 16, 2011
/s/ Kelly A. Walters
Kelly A. Walters
President and Chief Executive Officer
107
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(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)
I, Corrine L. Scarpello, certify that:
Exhibit 31.2
1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2010 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 16, 2011
/s/ Corrine L. Scarpello
Corrine L. Scarpello
Chief Financial Officer and Secretary
108
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(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)
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, 2010 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 16, 2011
/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, 2010 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 16 , 2011
/s/ Corrine L. Scarpello
Corrine L. Scarpello
Chief Financial Officer and Secretary
109
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(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)
Supertel Hospitality, Inc.
Offi cers of the Company
Corporate Headquarters
309 N 5th Street
Norfolk, NE 68701
Website
www.supertelinc.com
Certifi ed Public Accountants
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
Annual Meeting
The annual meeting of shareholders will be
held on Thursday, May 26, 2011 at 10:00
a.m., local time, at the Durham Western
Heritage Museum, 801 South 10th Street,
Omaha, NE 68108.
Form 10-K
Additional copies of Supertel Hospitality’s
Form 10-K Annual Report for 2010 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.
Investor Relations
309 N 5th Street
Norfolk, NE 68701
402.371.2520
Kelly A. Walters
President
Chief Executive Offi cer
Corrine L. “Connie”
Scarpello
Senior Vice President
Chief Financial Offi cer
Steve C. Gilbert
Senior Vice President
Chief Operating Offi cer
David L. Walter
Senior Vice President
Treasurer
Matthew Buckley
Vice President,
Portfolio Operations
Paul Heybrock
Vice President
Controller
Mark Larimore
Assistant Vice President,
Capital Expenditures
Pat Morland
Assistant Vice President,
Human Resources
Vicki Staab
Assistant Vice President,
Capital Expenditures
Board of Directors
William C. Latham
Chairman of the Board
Steve H. Borgmann
Director
Allen L. Dayton
Director
Richard Frandeen
Director
Patrick J. Jung
Director
Paul J. Schulte
Director
Kelly A. Walters
Director
President
Chief Executive Offi cer
George R.
Whittemore
Director
Jeffrey M. Zwerdling
Director
309 North 5th Street
Norfolk, NE 68701
402.371.2520
W W W. S U P E RT E L I N C . C O M