UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-K
_________________
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 001-35074 (Summit Hotel Properties, Inc.)
Commission File Number: 001-54273 (Summit Hotel OP, LP)
SUMMIT HOTEL PROPERTIES, INC.
SUMMIT HOTEL OP, LP
(Exact name of registrant as specified in its charter)
_________________
Maryland (Summit Hotel Properties, Inc.)
Delaware (Summit Hotel OP, LP)
(State or other jurisdiction
of incorporation or organization)
27-2962512 (Summit Hotel Properties, Inc.)
20-0617340 (Summit Hotel OP, LP)
(I.R.S. Employer Identification No.)
2701 South Minnesota Avenue, Suite 6
Sioux Falls, SD 57105
(Address of principal executive offices, including zip code)
(605) 361-9566
(Registrant’s telephone number, including area code)
_________________
Securities registered pursuant to Section 12(b) of the Act:
Summit Hotel Properties, Inc.
Title of each class
Common Stock, $0.01 par value per share
9.25% Series A Cumulative Redeemable
Preferred
Stock, par value $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
Title of each class
None
Name of each exchange on which registered
Not applicable
Summit Hotel OP, LP
_________________
Securities registered pursuant to Section 12(g) of the Act:
Summit Hotel Properties, Inc.: None
Summit Hotel OP, LP: Units of partnership interest designated as “Common Units”
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Summit Hotel Properties, Inc. [ ] Yes [x] No
Summit Hotel OP, LP [ ] Yes [x] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Summit Hotel Properties, Inc. [ ] Yes [x] No
Summit Hotel OP, LP [ ] Yes [x] 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.
Summit Hotel Properties, Inc. [x] Yes
Summit Hotel OP, LP [x] Yes [ ] No
[ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
Summit Hotel Properties, Inc. [x] Yes
[ ] No
Summit Hotel OP, LP [x] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.
Summit Hotel Properties, Inc.
[ ]
Summit Hotel OP, LP [x]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company in Rule 12b-2 of the Exchange Act.
Summit Hotel Properties, Inc.
Large accelerated filer [ ]
Non-accelerated filer [x]
Summit Hotel OP, LP
Large accelerated filer [ ]
Non-accelerated filer [x]
Accelerated filer [ ]
Smaller reporting company [ ]
Accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Summit Hotel Properties, Inc. [ ] Yes [x] No
Summit Hotel OP, LP [ ]
Yes [x] No
The aggregate market value of the 15,406,309 common shares of Summit Hotel Properties, Inc. held by non-affiliates was $170,086,093 based on
the closing sale price on the New York Stock Exchange for such common stock as of June 30, 2011.
There is no trading market for the securities of Summit Hotel OP, LP and thus an aggregate market value is not calculable.
As of February 27, 2012, the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 27,278,000 and the number of
outstanding Common Units of Summit Hotel OP, LP was 37,378,000, including 27,278,000 Common Units held by Summit Hotel Properties, Inc.
and the general partner of Summit Hotel OP, LP.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2012 Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year pursuant to Regulation 14A, are incorporated herein by reference into Part III,
Items 10, 11, 12, 13 and 14.
This report combines the Annual Reports on Form 10-K for the year ended December 31, 2011 of Summit Hotel Properties, Inc., a
Maryland corporation, and Summit Hotel OP, LP, a Delaware limited partnership.
EXPLANATORY NOTE
Unless stated otherwise or the context otherwise requires, references in this report to:
● “Summit REIT” mean Summit Hotel Properties, Inc., a Maryland corporation;
● “Summit OP” or “our operating partnership” mean Summit Hotel OP, LP, a Delaware limited partnership, our operating partnership,
and its consolidated subsidiaries; and
● “we,” “our,” “us,” “our company” or “the company” mean Summit REIT, Summit OP and their consolidated subsidiaries taken together
as one company. When this report discusses or refers to activities occurring prior to February 14, 2011, the date on which our operations
commenced, these references refer to Summit Hotel Properties, LLC, our predecessor.
Summit REIT is the sole member of Summit Hotel GP, LLC, a Delaware limited liability company, which is the sole general partner (the
“General Partner”) of Summit OP. Effective as of February 14, 2011, our predecessor merged with and into Summit OP, with the former
members of our predecessor exchanging their membership interests in our predecessor for common units of partnership interest of Summit OP
(“Common Units”) and Summit OP succeeding to the business and assets of our predecessor. Also on February 14, 2011, Summit REIT
completed its initial public offering (“IPO”) and a concurrent private placement of its common stock and contributed the net proceeds of the IPO
and concurrent private placement to Summit OP in exchange for Common Units. On October 28, 2011, Summit REIT completed a follow-on
public offering of 2,000,000 shares of its 9.25% Series A cumulative redeemable preferred stock (“Series A Preferred Stock”). As of December
31, 2011, Summit REIT owned approximately 73% of the issued and outstanding Common Units, including the sole general partnership interest
held by the General Partner. As of December 31, 2011, Summit REIT owned all of the issued and outstanding 9.25% Series A Cumulative
Redeemable Preferred Units of Summit OP (“Series A Preferred Units”). As the sole member of the General Partner, Summit REIT has exclusive
control of Summit OP’s day-to-day management. The remaining Common Units in Summit OP are owned by third parties, including the former
members of our predecessor.
We believe combining the Annual Reports on Form 10-K of Summit REIT and Summit OP into this single report provides the following
benefits:
● it enhances investors’ understanding of Summit REIT and Summit OP by enabling investors to view the business as a whole in the same
manner as management views and operates the business;
● it eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the
disclosure applies to both Summit REIT and Summit OP; and
● it creates time and cost efficiencies for both companies through the preparation of one combined report instead of two separate reports.
We believe it is important to understand the few differences between Summit REIT and Summit OP in the context of how Summit REIT
and Summit OP operate as a consolidated company. Summit REIT intends to elect to be taxed as a real estate investment trust (“REIT”) under the
Internal Revenue Code of 1986, as amended (the “Code”), commencing with its short taxable year ended December 31, 2011 upon filing its
federal income tax return for that year.
As of December 31, 2011, Summit REIT’s only material assets were its ownership of Common Units and Series A Preferred Units of
Summit OP and its ownership of the membership interests in the General Partner. As a result, Summit REIT does not conduct business itself,
other than controlling, through the General Partner, Summit OP, raising capital through issuances of equity securities from time to time and
guaranteeing certain debt of Summit OP and its subsidiaries. Summit OP and its subsidiaries hold all the operating assets of the consolidated
company. Except for net proceeds from securities issuances by Summit REIT, which are contributed to Summit OP in exchange for partnership
units of Summit OP, Summit OP and its subsidiaries generate capital from the operation of our business and through borrowings and the issuance
of partnership units of Summit OP.
Stockholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial
statements of Summit REIT and those of Summit OP. As of December 31, 2011, Summit OP’s capital interests include Common Units,
representing general and limited partnership interests, and Series A Preferred Units, representing limited partnership interests. The Common Units
owned by limited partners other than Summit REIT and its subsidiaries are accounted for in partners’ capital in Summit OP’s consolidated
financial statements and (within stockholders’ equity) as noncontrolling interests in Summit REIT’s consolidated financial statements.
In order to highlight the differences between Summit REIT and Summit OP, there are sections in this report that separately discuss
Summit REIT and Summit OP, including separate financial statements and notes thereto and separate Exhibit 31 and Exhibit 32 certifications. In
the sections that combine disclosure for Summit REIT and Summit OP (i.e., where the disclosure refers to the consolidated company), this report
refers to actions or holdings as our actions or holdings and, unless otherwise indicated, means the actions or holdings of Summit REIT and
Summit OP and their respective subsidiaries, as one consolidated company.
As the sole member of the General Partner, Summit REIT consolidates Summit OP for financial reporting purposes, and Summit REIT
does not have assets other than its investment in the General Partner and Summit OP. Therefore, while stockholders’ equity and partners’ capital
differ as discussed above, the assets and liabilities of Summit REIT and Summit OP are the same on their respective financial statements.
Finally, we refer to a number of other entities in this report as follows. Unless the context otherwise requires or indicates, references to
● “the LLC” refer to Summit Hotel Properties, LLC and references to “our predecessor” refer to the LLC and its consolidated subsidiaries,
including Summit Group of Scottsdale, Arizona, LLC (“Summit of Scottsdale”);
● “our TRSs” refer to Summit Hotel TRS, Inc., a Delaware corporation, Summit Hotel TRS II, Inc., a Delaware corporation, and any other
taxable REIT subsidiaries (“TRSs”) that we may form in the future;
● “our TRS lessees” refer to the wholly owned subsidiaries of our TRSs that lease our hotels from our operating partnership or
subsidiaries of our operating partnership.
● “The Summit Group” refer to The Summit Group, Inc., our predecessor’s hotel management company, Company Manager and Class C
Member, which is wholly owned by our Executive Chairman, Kerry W. Boekelheide.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2011
SUMMIT HOTEL PROPERTIES, INC.
SUMMIT HOTEL OP, LP
TABLE OF CONTENTS
PART I
Item 1. Business.
Item 1A. Risk Factors.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II
Item 6. Selected Financial Data.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Trustee Independence.
Item 14. Principal Accountant Fees and Services.
Item 15. Exhibits and Financial Statement Schedules.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PART IV
i
Page
3
9
32
37
38
38
40
42
62
62
62
63
64
65
65
65
65
65
65
F-1
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This report, together with other statements and information publicly disseminated by us, contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of
complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans,
strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “plan,”
“continue,” “project” or similar expressions. Forward-looking statements in this report include, among others, statements about our business
strategy, including acquisition and development strategies, industry trends, estimated revenue and expenses, ability to realize deferred tax assets
and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). You should not rely
on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our
control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially
from current expectations include, but are not limited to:
● financing risks, including the risk of leverage and the corresponding risk of default on our mortgage loans and other debt and
potential inability to refinance or extend the maturity of existing indebtedness;
● national, regional and local economic conditions;
●
levels of spending in the business, travel and leisure industries, as well as consumer confidence;
● declines in occupancy, average daily rate and revenue per available room and other hotel operating metrics;
● hostilities, including future terrorist attacks, or fear of hostilities that affect travel;
● financial condition of, and our relationships with, third-party property managers, franchisors and hospitality joint venture partners;
●
●
the degree and nature of our competition;
increased interest rates and operating costs;
● risks associated with potential acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no
operating history, and dispositions of hotel properties;
● availability of and our ability to retain qualified personnel;
● our failure to maintain our qualification as a REIT under the Internal Revenue Code of 1986, as amended, or the Code;
● changes in our business or investment strategy;
● availability, terms and deployment of capital;
● general volatility of the capital markets and the market price of our shares of common stock;
● environmental uncertainties and risks related to natural disasters;
● changes in real estate and zoning laws and increases in real property tax rates; and
●
the other factors discussed under the heading “Risk Factors” in this report.
Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the federal securities laws, we
disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or
elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such
statement is based.
2
Item 1. Business.
Overview
PART I
We are a self-managed hotel investment company that was organized in June 2010 to continue and expand the existing hotel investment
business of our predecessor, Summit Hotel Properties, LLC, a leading U.S. hotel owner. We focus on acquiring and owning premium-branded
select-service hotels in the upper midscale and upscale segments of the U.S. lodging industry, as these segments are currently defined by Smith
Travel Research (“STR”). We completed our IPO, a concurrent private placement of our common stock and our formation transactions on
February 14, 2011, netting approximately $240.8 million from the IPO and concurrent private placement, after underwriting discounts and the
payment by us of offering-related costs.
As of December 31, 2011, our hotel portfolio consisted of 70 hotels with a total of 7,095 guestrooms located in 19 states. Based on the
total number of rooms, 49.3% of our portfolio is positioned in the top 50 metropolitan statistical areas (“MSAs”) and 72.2% is located within the
top 100 MSAs as of December 31, 2011.
At December 31, 2011, the majority of our hotels operate under premium franchise brands owned by Marriott International, Inc.
(“Marriott”) (Courtyard by Marriott ® , Residence Inn by Marriott ® , SpringHill Suites by Marriott ® , Fairfield Inn by Marriott ® , Fairfield Inn
and Suites by Marriott ® , and TownePlace Suites by Marriott ® ), Hilton Worldwide (“Hilton”) (DoubleTree by Hilton ® , Hampton Inn ® ,
Hampton Inn & Suites ® , Homewood Suites ® and Hilton Garden Inn ® ), Intercontinental Hotel Group (“IHG”) (Holiday Inn ® , Holiday Inn
Express ® , Holiday Inn Express and Suites ® and Staybridge Suites ® ) and an affiliate of Hyatt Hotels Corporation (“Hyatt”) (Hyatt Place ® ). Our
franchise mix, by total number of rooms, consists of Marriott (2,953 rooms, or 41.6%), Hilton (1,671 rooms, or 23.6%), IHG (1,088 rooms, or
15.3%), Hyatt (556 rooms, or 7.8%) and others (827 rooms, or 11.7%). Smith Travel Research classifies 28 of our hotels within the “upscale”
segment, 34 of our hotels within the “upper midscale” segment, and eight of our hotels in the “midscale” segment.
Our corporate offices are located at 2701 South Minnesota Avenue, Suite 6, Sioux Falls, South Dakota 57105. Our telephone number is
(605) 361-9566. Our website is www.shpreit.com . The information contained on, or accessible through, our website is not incorporated by
reference into this report and should not be considered a part of this report.
Development of Business
Summit REIT was formed June 30, 2010 as a Maryland corporation. On February 14, 2011, we closed our IPO and a concurrent private
placement and sold a total of 27,274,000 shares of common stock.
We conduct substantially all of our business through our operating partnership, which was formed on June 30, 2010 as a Delaware
limited partnership. Effective February 14, 2011, our predecessor merged with and into our operating partnership (the “Merger”) with our
operating partnership as the surviving entity and succeeding to the business and ownership of the 65 hotels owned by our predecessor. At the
effective time of the Merger, the outstanding membership interests in our predecessor were converted into, and cancelled in exchange for,
Common Units and the members of our predecessor were admitted as limited partners of our operating partnership. Also effective February 14,
2011, The Summit Group contributed its Class B membership interest in Summit of Scottsdale, which owns two hotels in Scottsdale, Arizona, to
our operating partnership and an unaffiliated third-party investor contributed its Class C membership interest in Summit of Scottsdale to our
operating partnership. We refer to these transactions as the “formation transactions.”
We intend to elect to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ended December 31,
2011 upon filing our federal income tax return for that year. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, we
lease all but one of our hotels to our TRS lessees. The remaining hotel is owned by a wholly owned subsidiary of one of our TRSs. All of our
hotels are operated pursuant to hotel management agreements with third party hotel management companies.
3
As of December 31, 2011, our TRS lessees have engaged Interstate Management Company (“Interstate”) and its affiliate to operate and
manage 69 of our 70 hotels pursuant to a hotel management agreement, and have engaged one other third-party hotel management company to
operate and manage one of our hotels. We may engage other third-party hotel management companies to operate and manage other hotels in the
future.
Business Strategy
Our strategy focuses on maximizing the cash flow of our portfolio through focused asset management, targeted capital investment and
opportunistic acquisitions. Our primary objective is to enhance stockholder value over time by generating strong risk-adjusted returns for our
stockholders. The key elements of our strategy that we believe will allow us to create long-term value are as follows:
Focus on Premium-Branded Limited-Service and Select-Service Hotels . We focus on hotels in the upper midscale and upscale segments
of the lodging industry. We believe that our focus on these segments provides us the opportunity to achieve strong risk-adjusted returns across
multiple lodging cycles for several reasons, including:
● RevPAR Growth . We believe our hotels will continue to experience meaningful revenue growth to the extent lodging industry
fundamentals recover from the economic recession which caused industry-wide RevPAR to suffer a combined 18.4% decline in 2008
and 2009, according to Smith Travel Research. Industry conditions improved during 2011. PricewaterhouseCoopers, LLP projects
RevPAR growth increases in 2012 for upscale hotels, upper midscale hotels and midscale hotels of 7.4%, 5.8% and 4.5%, respectively.
● Stable Cash Flow Potential . Our hotels can be operated with fewer employees than full-service hotels that offer more expansive food
and beverage options, which we believe enables us to generate consistent cash flows with less volatility resulting from reductions in
RevPAR and less dependence on group travel.
● Broad Customer Base . Our target brands deliver consistently high-quality hotel accommodations with value-oriented pricing that we
believe appeals to a wide range of customers, including both business and leisure travelers. We believe that our hotels are particularly
popular with frequent business travelers who seek to stay in hotels operating under Marriott, Hilton, Hyatt or IHG brands, which offer
strong loyalty rewards program points that can be redeemed for family travel.
● Enhanced Diversification . Premium-branded upscale and upper midscale assets generally cost significantly less, on a per-key basis,
than hotels in the upper upscale and luxury segments of the industry. As a result, we can diversify our investment capital into ownership
of a larger number of hotels than we could in more expensive segments.
Capitalize on Investments in Our Hotels . We strongly believe in investing in our properties to help them be competitive in their
respective markets. Since our IPO, we have invested $28.9 million in capital improvements to the hotels in our portfolio, including the 65 hotels
in our portfolio at the time of our IPO and the five hotels acquired during 2011. We believe these investments produce attractive returns, thus, we
will continue to rebrand, upgrade and renovate our hotels.
Acquire Hotels in Attractive Transaction Landscape . We believe that the significant decline in lodging fundamentals from 2008 through
early 2010 and the resultant declines in cash flows has created a difficult environment for hotel owners lacking ready access to financing or
suffering from reduced cash flows. As a result, we believe that the significant number of hotel properties that experienced substantial declines in
operating cash flow, coupled with continued tight credit markets, near-term debt maturities and, in some instances, covenant defaults relating to
outstanding indebtedness, will continue to present attractive investment opportunities to acquire hotel properties at prices below replacement cost
and with substantial appreciation potential. We intend to continue to grow through acquisitions of existing hotels using a disciplined approach
while maintaining a prudent capital structure. We target upper midscale and upscale hotels that meet one or more of the following acquisition
criteria:
4
● have potential for strong risk-adjusted returns located in the top 50 MSAs, with a secondary focus on the next 100 markets;
● operate under leading franchise brands, which may include but are not limited to brands owned by Marriott, Hilton, IHG and Hyatt;
● are located in close proximity to multiple demand generators, including businesses and corporate headquarters, retail centers, airports,
medical facilities, tourist attractions and convention centers, with a diverse source of potential guests, including corporate, government
and leisure travelers;
● are located in markets exhibiting barriers to entry due to strong franchise areas of protection or other factors;
● can be acquired at a discount to replacement cost; and
● provide an opportunity to add value through operating efficiencies, repositioning, renovating or rebranding.
Selectively Develop Hotels . We believe there will be attractive opportunities to partner on a selective basis with experienced hotel
developers to acquire upon completion newly constructed hotels that meet our investment criteria.
Strategic Hotel Sales. A primary part of our strategy is to acquire and own hotels. However, consistent with our strategy of maximizing
the cash flow of our portfolio and our return on invested capital, we periodically review our hotels to determine if any significant changes to area
markets or our hotels have occurred or are anticipated to occur that would warrant the sale of a particular hotel.
Our Financing Strategy
We maintain a prudent capital structure. While the ratio will vary from time to time, we generally intend to limit our ratio of
indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”) to no more than six to one. For purposes of calculating
this ratio we exclude preferred stock from indebtedness. During 2011 we financed our long-term growth with common and preferred equity
issuances and debt financing having staggered maturities, and intend to continue to do so in the future. Our debt includes, and may include in the
future, mortgage debt secured by hotels and unsecured debt.
When purchasing hotel properties, we may issue Common Units as full or partial consideration to sellers who may desire to take
advantage of tax deferral on the sale of a hotel or participate in the potential appreciation in value of our common stock.
Competition
We face competition for investments in hotel properties from institutional pension funds, private equity investors, REITs, hotel
companies and others who are engaged in hotel acquisitions and investments. Some of these entities have substantially greater financial and
operational resources than we have. This competition may increase the bargaining power of property owners seeking to sell, reduce the number of
suitable investment opportunities available to us and increase the cost of acquiring our targeted hotel properties.
The lodging industry is highly competitive. Our hotels compete with other hotels for guests in their respective markets based on a number
of factors, including location, convenience, brand affiliation, room rates, range of services and guest amenities or accommodations offered and
quality of customer service. Competition is often specific to the individual markets in which our hotels are located and includes competition from
existing and new hotels. Competition could adversely affect our occupancy rates (“occupancy”), our average daily rates (“ADR”) and our revenue
per available room (“RevPAR”), and may require us to provide additional amenities or make capital improvements that we otherwise would not
have to make, which may reduce our profitability.
5
Seasonality
Certain segments of the hotel industry are seasonal in nature. Leisure travelers tend to travel more during the summer. Business
travelers occupy hotels relatively consistently throughout the year, but decreases in business travel occur during summer and the winter
holidays. The hotel industry is also seasonal based upon geography. Hotels in the southern U.S. tend to have higher occupancy rates during the
winter months. Hotels in the northern U.S. tend to have higher occupancy rates during the summer months.
Due to our portfolio’s geographic diversification, our revenue has not experienced significant seasonality. For the year ended
December 31, 2011, we received 22.4% of our total revenue in the first quarter, 25.9% in the second quarter, 28.4% in the third quarter and 23.2%
in the fourth quarter. For the year ended December 31, 2010, our predecessor received 23.1% of its total revenue in the first quarter, 26.4% in the
second quarter, 27.7% in the third quarter and 22.7% in the fourth quarter.
Regulation
Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to accessibility, fire and
safety requirements. We believe each of our hotels has the necessary permits and approvals to operate its business.
Americans with Disabilities Act
Our properties must comply with Title III of the ADA to the extent that they are “public accommodations” as defined by the ADA. Under
the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. The ADA may require
removal of structural barriers to access by persons with disabilities in certain public areas of our properties where removal is readily achievable.
Although we believe the properties in our portfolio substantially comply with present requirements of the ADA, we have not conducted a
comprehensive audit or investigation of all of our properties to determine our compliance, and we are aware that some particular properties may
currently be in non-compliance with the ADA. Noncompliance with the ADA could result in the incurrence of additional costs to attain
compliance. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to
make alterations as appropriate in this respect.
Environmental, Health and Safety Matters
Our hotels and development parcels are subject to various federal, state and local environmental laws that impose liability for
contamination. Under these laws, governmental entities have the authority to require us, as the current owner of property, to perform or pay for the
cleanup of contamination (including hazardous substances, waste, or petroleum products) at, on, under or emanating from the property and to pay
for natural resource damages arising from contamination. These laws often impose liability without regard to whether the owner or operator or
other responsible party knew of, or caused the contamination, and the liability may be joint and several. Because these laws also impose liability
on persons who owned a property at the time it became contaminated, we could incur cleanup costs or other environmental liabilities even after
we sell properties. Contamination at, on, under or emanating from our properties also may expose us to liability to private parties for costs of
remediation, personal injury and death and/or property damage. In addition, environmental liens may be created on contaminated sites in favor of
the government for damages and costs it incurs to address contamination. If contamination is discovered on our properties, environmental laws
also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require
substantial expenditures. Moreover, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow
funds using the property as collateral or to sell the property on favorable terms or at all. Furthermore, persons who sent waste to a waste disposal
facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.
Some of our properties may have contained historic uses which involved the use and/or storage of hazardous chemicals and petroleum
products (for example, storage tanks, gas stations, dry cleaning operations) which, if released, could have affected our properties. In addition,
some of our properties may be near or adjacent to other properties that have contained or currently contain storage tanks containing petroleum
products or conducted or currently conduct operations which utilize other hazardous or toxic substances. Releases from these adjacent or
surrounding properties could affect our properties and we may be liable for any associated cleanup.
6
Independent environmental consultants conducted Phase I environmental site assessments on all of our properties prior to acquisition and
we intend to conduct Phase I environmental site assessments on properties we acquire in the future. Phase I site assessments are intended to
discover and evaluate information regarding the environmental condition of the surveyed properties and surrounding properties. These
assessments do not generally include soil sampling, subsurface investigations or comprehensive asbestos surveys. In some cases, the Phase I
environmental site assessments were conducted by another entity (i.e., a lender) and we may not have the authority to rely on such reports. Except
for our Bloomington, Minnesota hotels, and our Country Inn & Suites hotel located in San Antonio, Texas, none of the Phase I environmental site
assessments of the hotel properties in our portfolio revealed any past or present environmental condition that we believe could have a material
adverse effect on our business, assets or results of operations. Soil and groundwater contamination at the site of our Bloomington, Minnesota
hotels was voluntarily remediated by our predecessor to the satisfaction of the Minnesota Pollution Control Agency. A material liability could
arise in the future if the contamination at the site of the Bloomington, Minnesota hotels affected third parties or an adjacent property if the
Minnesota agency requires further clean-up or if our predecessor’s clean-up does not satisfy the U.S. Environmental Protection Agency. Soil and
groundwater contamination was also identified in an undeveloped portion of our property adjacent to our Country Inn & Suites hotel located in
San Antonio, Texas. The property was sampled on two occasions, after which our environmental consultant recommended no further action unless
the contaminated soil was disturbed. A material liability could arise in the future if the contamination affects an adjacent property or if we are
required to remediate it. In addition, the Phase I environmental site assessments may also have failed to reveal all environmental conditions,
liabilities or compliance concerns. The Phase I environmental site assessments were completed at various times and material environmental
conditions, liabilities or compliance concerns may have arisen after the review was completed or may arise in the future; and future laws,
ordinances or regulations may impose material additional environmental liability.
In addition, our hotels (including our real property, operations and equipment) are subject to various federal, state and local
environmental, health and safety regulatory requirements that address a wide variety of issues, including, but not limited to, the registration,
maintenance and operation of our boilers and storage tanks, the supply of potable water to our guests, air emissions from emergency generators,
storm water and wastewater discharges, protection of natural resources, asbestos, lead-based paint, mold and mildew, and waste management.
Some of our hotels also routinely handle and use hazardous or regulated substances and wastes as part of their operations, which are subject to
regulation (for example, swimming pool chemicals or biological waste). Our hotels incur costs to comply with these environmental, health and
safety laws and regulations and if these regulatory requirements are not met or unforeseen events result in the discharge of dangerous or toxic
substances at our hotels, we could be subject to fines and penalties for non-compliance with applicable laws and material liability from third
parties for harm to the environment, damage to real property or personal injury and death. We are aware of no past or present environmental
liability for non-compliance with environmental, health and safety laws and regulations that we believe would have a material adverse effect on
our business, assets or results of operations.
Certain hotels we currently own or those we acquire in the future contain, may contain, or may have contained, asbestos containing
materials (“ACM”). Environmental, health and safety laws require that ACM be properly managed and maintained, and include requirements to
undertake special precautions, such as removal or abatement, if ACM would be disturbed during maintenance, renovation, or demolition of a
building. These laws regarding ACM may impose fines and penalties on building owners, employers and operators for failure to comply with
these requirements or expose us to third-party liability.
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. Indoor air quality issues can
also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen,
viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects
and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our
properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the
affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to
material liability from third parties if property damage or personal injury occurs. We are not presently aware of any indoor air quality issues at our
properties that would result in a material adverse effect on our business, assets or results of operations.
7
Tax Status
We intend to elect to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ended December 31,
2011 upon filing our federal income tax return for that year. Our qualification as a REIT depends upon our ability to meet, on a continuing basis,
through actual investment and operating results, various complex requirements under the Code relating to, among other things, the sources of our
gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our shares of beneficial interest.
We believe that we were organized and have operated in conformity with the requirements for qualification as a REIT under the Code and that our
current and intended manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT for federal
income tax purposes for our taxable year ending December 31, 2012 and continuing thereafter.
In order for the income from our hotel operations to constitute “rents from real property” for purposes of the gross income tests required
for REIT qualification, we cannot directly operate any of our hotel properties. Accordingly, we lease all but one of our hotels to our TRS
lessees. The remaining hotel is owned by a wholly owned subsidiary of one of our TRSs.
Our TRS lessees pay rent to us that will qualify as “rents from real property,” provided that the TRS lessees engage “eligible independent
contractors” to manage our hotels. A TRS is a corporate subsidiary of a REIT that jointly elects with the REIT to be treated as a TRS of the REIT
and that pays federal income tax at regular corporate rates on its taxable income. All of our hotels are operated pursuant to hotel management
agreements with independent hotel management companies. We believe each of the third party managers qualifies as an eligible independent
contractor.
As a REIT, we generally will not be subject to federal income tax on our REIT taxable income that we distribute currently to our
shareholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they
distribute each year at least 90% of their taxable income, determined without regard to the deduction for dividends paid and excluding any net
capital gains. If we fail to qualify for taxation as a REIT in any taxable year and do not qualify for certain statutory relief provisions, our income
for that year will be taxed at regular corporate rates, and we will be disqualified from taxation as a REIT for the four taxable years following the
year during which we ceased to qualify as a REIT. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to state
and local taxes on our income and assets and to federal income and excise taxes on our undistributed income. Additionally, any income earned by
our TRSs will be fully subject to federal, state and local corporate income tax.
Employees
We currently employ 18 full-time employees. None of our employees is a member of any union. The staff at our hotels are employed by
our third-party hotel managers.
Available Information
Our Internet website is located at www.shpreit.com . Copies of the charters of the committees of our board of directors, our code of
business conduct and ethics and our corporate governance guidelines are available on our website. All reports that we have filed with the
Securities and Exchange Commission (“SEC”) including this Annual Report on Form 10-K and our current reports on Form 8-K, can be obtained
free of charge from the SEC’s website at www.sec.gov or through our website. In addition, all reports filed with the SEC may be read and copied
at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549-1090. Further information regarding the operation of the
public reference room may be obtained by calling the SEC at 1-800-SEC-0330.
8
Item 1A. Risk Factors.
The following risk factors address the material risks concerning our business. If any of the risks discussed in this report were to occur,
our business, prospects, financial condition, results of operation and our ability to service our debt and make distributions to our stockholders
could be materially and adversely affected and the market price per share of our common stock could decline significantly. Some statements in
this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled
“Cautionary Statement Regarding Forward-Looking Statements.”
Risks Related to Our Business
Our business strategy includes achieving revenue and net income growth from anticipated increases in demand for hotel rooms — any
setback in the economic recovery will adversely affect our future results of operations and our growth prospects.
Our hotel properties experienced declining operating performance across various U.S. markets during the recent economic recession. Our
business strategy includes achieving continued revenue and net income growth from anticipated improvement in demand for hotel rooms as the
economic recovery continues. We, however, cannot provide any assurances that demand for hotel rooms will increase from current levels, or the
time or extent of any demand growth that we do experience. If demand does not continue to increase as the economy recovers, or if there is a
setback in the economic recovery resulting in weakening demand, our operating results and growth prospects could be adversely affected. As a
result, any delay in the continued economic recovery or new economic downturn will adversely affect our future results of operations and our
growth prospects.
We may be unable to complete acquisitions that would grow our business.
Our growth strategy includes the disciplined acquisition of hotels as opportunities arise. Our ability to acquire hotels on satisfactory terms
or at all is subject to the following significant risks:
● we may be unable to acquire, or may be forced to acquire at significantly higher prices, desired hotels because of competition from other
real estate investors with more capital, including other real estate operating companies, REITs and investment funds;
● we may be unable to obtain the necessary debt or equity financing to consummate an acquisition or, if obtainable, financing may not be
on satisfactory terms; and
● agreements for the acquisition of hotels are typically subject to customary conditions to closing, including satisfactory completion of
due diligence investigations, and we may spend significant time and money on potential acquisitions that we do not consummate.
If we cannot complete hotel acquisitions on favorable terms or at all, our business, financial condition, results of operations and cash
flow, the market price per share of our common stock and our ability to satisfy our debt service obligations and make distributions to our
stockholders could be materially and adversely affected.
We may fail to successfully integrate and operate newly acquired hotels.
Our ability to successfully integrate and operate newly acquired hotels is subject to the following risks:
● we may not possess the same level of familiarity with the dynamics and market conditions of any new markets that we may enter, which
could result in us paying too much for hotels in new markets;
● market conditions may result in lower than expected occupancy and room rates;
● we may acquire hotels without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as clean-up
of environmental contamination, claims by tenants, vendors or other persons against the former owners of the hotels and claims for
indemnification by general partners, directors, officers and others indemnified by the former owners of the hotels;
9
● we may need to spend more than budgeted amounts to make necessary improvements or renovations to our newly acquired hotels; and
● we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of hotels, into our existing
operations.
If we cannot operate acquired hotels to meet our expectations, our business, financial condition, results of operations and cash flow, the
market price per share of our stock and our ability to satisfy our debt service obligations and make distributions to our stockholders could be
materially and adversely affected.
The management of the hotels in our portfolio is and will continue to be concentrated in one hotel management company.
As of February 27, 2012, 69 of the 71 of the hotels in our portfolio are operated by Interstate or its affiliate. This significant concentration
of operational risk in one hotel management company makes us more vulnerable economically than if our hotel management was diversified with
several hotel management companies. Any adverse developments in Interstate’s business and affairs, financial strength or ability to operate our
hotels efficiently and effectively could have a material adverse effect on our results of operations. We cannot assure you that Interstate will satisfy
its obligations to us or effectively and efficiently operate our hotel properties. The failure or inability of Interstate to satisfy its obligations to us or
effectively and efficiently operate our hotel properties would materially reduce our revenue and net income, which could in turn reduce the
amount of our distributable cash and cause the market price per share of our capital stock to decline.
We may not be able to cause our hotel management companies to operate any of our hotels in a manner satisfactory to us, which could
adversely affect our financial condition, results of operations and our ability to service debt and make distributions to our stockholders.
To qualify as a REIT, we cannot operate our hotels. Accordingly, we lease all but one of our hotels to our TRS lessees. The remaining
hotel is owned by a wholly owned subsidiary of one of our TRSs. All of our hotels are operated pursuant to hotel management agreements with
independent hotel management companies, each of which must qualify as an “eligible independent contractor” to operate our hotels. As a result,
our financial condition, results of operations and our ability to service debt and make distributions to stockholders are dependent on the ability of
our hotel management companies to operate our hotels successfully. Any failure of our hotel management companies to provide quality services
and amenities or maintain a quality brand name and reputation could have a negative effect on their ability to operate our hotels and could have a
material and adverse effect on our financial condition, results of operations and our ability to service debt and make distributions to our
stockholders.
We cannot and will not control the hotel management companies that operate and are responsible for maintenance and other day-to-day
management of our hotels, including, but not limited to, the implementation of significant operating decisions. We cannot assure you that our hotel
management companies will manage our properties in a manner that is consistent with their obligations under the management agreements or our
obligations under our hotel franchise agreements, that our hotel management companies will not be negligent in their performance or engage in
other criminal or fraudulent activity, or that they will not otherwise default on their management obligations to us. If any of the foregoing occurs,
our relationships with the franchisors may be damaged and we may then be in breach of the franchise agreements, and we could incur liabilities
resulting from loss or injury to our property or to persons at our properties, any of which could have a material adverse effect on our operating
results and financial condition, as well as our ability to pay dividends to stockholders.
Even if we believe a hotel is being operated inefficiently or in a manner that does not result in satisfactory operating results, we will have
limited ability to require the hotel management company to change its method of operation. We generally attempt to resolve issues with our hotel
management companies through discussions and negotiations. However, if we are unable to reach satisfactory results through discussions and
negotiations, we may choose to litigate the dispute or submit the matter to third-party dispute resolution or arbitration. We would only be able to
seek redress if a hotel management company violates the terms of the applicable hotel management agreement, and then only to the extent of the
remedies provided for under the terms of the hotel management agreement. Our hotel managers or their affiliates manage, and in some cases own,
have invested in, or provided credit support or operating guarantees to hotels that compete with our hotels, all of which may result in conflicts of
interest. As a result, our hotel managers may in the future make decisions regarding competing lodging facilities that are not or would not be in
our best interest.
10
Termination of any of our hotel management agreements may cause us to pay substantial termination fees or to experience significant
disruptions at the affected hotels.
If we replace the hotel manager of any of our hotels, we may be required to pay a substantial termination fee and we may experience
significant disruptions at the affected hotel. If we experience disruptions at the affected hotel, our financial condition, results of operations and our
ability to service debt and make distributions to our stockholders could be materially and adversely affected.
Restrictive covenants and other provisions in hotel management and franchise agreements could preclude us from taking actions with
respect to the sale, refinancing or rebranding of a hotel that would otherwise be in our best interest.
Our hotel management agreements and franchise agreements generally contain restrictive covenants and other provisions that do not
provide us with flexibility to sell, refinance or rebrand a hotel without the consent of the manager or franchisor. For example, the terms of some of
these agreements may restrict our ability to sell a hotel unless the purchaser is not a competitor of the hotel management company or franchisor,
assumes the related agreement and meets specified other conditions. In addition, our franchise agreements restrict our ability to rebrand particular
hotels without the consent of the franchisor, which could result in significant operational disruptions and litigation if we do not obtain the consent.
We could be forced to pay consent or termination fees to hotel managers or franchisors under these agreements as a condition to changing
management or franchise brands of our hotels, and these fees could deter us from taking actions that would otherwise be in our best interest or
could cause us to incur substantial expense. Funds spent to maintain franchisor operating standards, the loss of a franchise license or a decline in
the value of a franchise brand may have a material adverse effect on our business and financial results.
Funds spent to maintain franchisor operating standards, the loss of a franchise license or a decline in the value of a franchise brand may
have a material adverse effect on our business and financial results.
Our hotels operate under franchise agreements, and the maintenance of franchise licenses for our hotels is subject to our franchisors’
operating standards and other terms and conditions. We expect that franchisors will periodically inspect our hotels to ensure that we, our
TRSs and our hotel management companies maintain our franchisors’ standards. Failure by us, our TRSs or our hotel management companies to
maintain these standards or other terms and conditions could result in a franchise license being canceled. If a franchise license terminates due to
our failure to make required improvements or to otherwise comply with its terms, we could also be liable to the franchisor for a termination
payment, which varies by franchisor and by hotel. As a condition of our continued holding of a franchise license, a franchisor could also require us
to make capital improvements to our hotels, even if we do not believe the improvements are necessary or desirable or would result in an
acceptable return on our investment. Nonetheless, we may risk losing a franchise license if we do not make franchisor-required capital
improvements.
If a franchisor terminated a franchise license, we could 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. A loss of a franchise
license for one or more hotels, particularly if our hotels become concentrated in a limited number of franchise brands in the future, could
materially and adversely affect our revenue. This loss of revenue could, therefore, also adversely affect our financial condition, results of
operations and ability to service debt and make distributions to our stockholders.
Negative publicity related to one of the franchise brands or the general decline of a brand also may adversely affect the underlying value
of our hotels or result in a reduction in business.
11
We rely on external sources of capital to fund future capital needs, and if we encounter difficulty in obtaining such capital, we may not be
able to make future acquisitions necessary to grow our business or meet maturing obligations.
In order to qualify as a REIT under the Code, we are required, among other things, to distribute each year to our stockholders at least
90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. Because of this
distribution requirement, we may not be able to fund, from cash retained from operations, all of our future capital needs, including capital needed
to make investments and to satisfy or refinance maturing obligations.
We expect to rely on external sources of capital, including debt and equity financing, to fund future capital needs. Part of our strategy
involves the use of additional debt financing to supplement our equity capital which may include our secured credit facility and mortgage
financing. Our ability to effectively implement and accomplish our business strategy will be affected by our ability to obtain and utilize additional
leverage in sufficient amounts and on favorable terms. However, the capital environment is often characterized by extended periods of limited
availability of both debt and equity financing, increasing costs, stringent credit terms and significant volatility. We may not be able to secure first
mortgage financing or increase the availability under our secured credit facility. If we are unable to obtain needed capital on satisfactory terms or
at all, we may not be able to make the investments needed to expand our business, or to meet our obligations and commitments as they mature.
Our access to capital will depend upon a number of factors over which we have little or no control, including general market conditions, the
market’s perception of our current and potential future earnings and cash distributions and the market price of the shares of our stock. We may not
be in a position to take advantage of attractive investment opportunities for growth if we are unable to access the capital markets on a timely basis
on favorable terms.
We have a significant amount of debt, and our organizational documents have no limitation on the amount of additional indebtedness
that we may incur in the future. As a result, we may become highly leveraged in the future, which could adversely affect our financial
condition.
We have a significant amount of debt. In the future, we may incur additional indebtedness to finance future hotel acquisitions and
development activities and other corporate purposes. In addition, there are no restrictions in our charter or bylaws that limit the amount or
percentage of indebtedness that we may incur or restrict the form in which our indebtedness will be incurred (including recourse or non-recourse
debt or cross-collateralized debt).
A substantial level of indebtedness could have adverse consequences for our business, results of operations and financial condition
because it could, among other things:
● require us to dedicate a substantial portion of our cash flow from operations to make principal and interest payments on our
indebtedness, thereby reducing our cash flow available to fund working capital, capital expenditures and other general corporate
purposes, including to pay dividends on our common stock and our preferred stock as currently contemplated or necessary to satisfy
the requirements for qualification as a REIT;
increase our vulnerability to general adverse economic and industry conditions and limit our flexibility in planning for, or reacting to,
changes in our business and our industry;
limit our ability to borrow additional funds or refinance indebtedness on favorable terms or at all to expand our business or ease
liquidity constraints; and
●
●
● place us at a competitive disadvantage relative to competitors that have less indebtedness.
Generally, our term debt carries maturity dates or call dates such that the loans become due prior to their full amortization. We have
approximately $28.5 million of debt that matures prior to December 31, 2013. It may be difficult to refinance such loans on terms acceptable to
us, or at all, and we may not have sufficient borrowing capacity on our revolving credit facility to repay the maturing debt using draws on that
facility for amounts that we are unable to refinance. Although we believe that we will be able to refinance these loans, or will have the capacity to
repay them, if necessary, using draws under our revolving credit facility, there can be no assurance that our revolving credit facility will be
available to repay such maturing debt, as draws under our credit facility are subject to borrowing base limitations and certain financial covenants.
The agreements governing our indebtedness place restrictions on us and our subsidiaries, reducing operational flexibility and creating
default risks.
The agreements governing our $125.0 million secured revolving credit facility and other indebtedness contain covenants that place
restrictions on us and our subsidiaries. These covenants may restrict, among other activities, our and our subsidiaries’ ability to:
● merge, consolidate or transfer all or substantially all of our or our subsidiaries’ assets;
12
incur additional debt or issue preferred stock;
● sell, transfer, pledge or encumber our stock or the ownership interests of our subsidiaries;
●
● enter into, terminate or modify leases for our hotels and hotel management and franchise agreements;
● make certain expenditures, including capital expenditures;
● pay dividends on or repurchase our capital stock; and
● enter into certain transactions with affiliates.
These covenants could impair our ability to grow our business, take advantage of attractive business opportunities or successfully
compete. Our ability to comply with financial and other covenants may be affected by events beyond our control, including prevailing economic,
financial and industry conditions. A breach of any of these covenants or covenants under any other agreements governing our indebtedness could
result in an event of default. Cross-default provisions in our debt agreements could cause an event of default under one debt agreement to trigger
an event of default under our other debt agreements. Upon the occurrence of an event of default under any of our debt agreements, the lenders
could elect to declare all outstanding debt under such agreements to be immediately due and payable. If we were unable to repay or refinance the
accelerated debt, the lenders could proceed against any assets pledged to secure that debt, including foreclosing on or requiring the sale of our
hotels, and the proceeds from the sale of these hotels may not be sufficient to repay such debt in full.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in any hotel subject
to mortgage debt.
Borrowings under our $125.0 million secured revolving credit facility are, and all of our other debt existing as of December 31, 2011 is,
secured by mortgages on our hotel properties and related assets. Incurring mortgage and other secured debt obligations increases our risk of
property losses because defaults on secured indebtedness may result in foreclosure actions initiated by lenders and ultimately our loss of the hotels
securing any loans for which we are in default. If we are in default under a cross-defaulted mortgage loan, we could lose multiple hotels to
foreclosure. For tax purposes, a foreclosure of any of our hotels would be treated as a sale of the hotel for a purchase price equal to the outstanding
balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the hotel, we
would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the REIT
distribution requirements imposed by the Code. We may assume or incur new mortgage indebtedness on the hotels in our portfolio or hotels that
we acquire in the future. Any default under any one of our mortgage debt obligations may increase the risk of our default on our other
indebtedness.
An increase in interest rates would increase our interest costs on our variable rate debt and could adversely affect our ability to refinance
existing debt or sell assets.
A significant portion of our indebtedness is subject to variable interest rates. An increase in interest rates would increase our interest
payments and reduce our cash flow available for other corporate purposes, including capital improvements to our hotels or acquisitions of
additional hotels. In addition, rising interest rates could limit our ability to refinance existing debt when it matures and increase interest costs on
any debt that is refinanced. Further, an increase in interest rates could increase the cost of financing, thereby decreasing the amount third parties
are willing to pay for our hotels, which would limit our ability to dispose of hotels when necessary or desired. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Qualitative and Quantitative Effects of Market Risk.”
Although we have not entered into any hedging arrangements, we may, from time to time, enter into agreements such as interest rate
swaps, caps, floors and other interest rate hedging contracts. However, these agreements reduce, but do not eliminate, the effect of rising interest
rates, and they also expose us to the risk that other parties to the agreements will not perform or that the agreements will be unenforceable.
13
We and our hotel managers rely on information technology in our operations, and any material failure, inadequacy, interruption or
security failure of that technology could harm our business.
We and our hotel managers rely on information technology networks and systems, including the Internet, to process, transmit and store
electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying
information, reservations, billing and operating data. We purchase some of our information technology from vendors, on whom our systems
depend. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of
confidential customer information, such as individually identifiable information, including information relating to financial accounts. Although we
have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and
security measures will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally
identifiable information such as in the event of cyber attacks. Security breaches, including physical or electronic break-ins, computer viruses,
attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any
failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation,
subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of
operations.
We have limited operating history as a publicly traded REIT and may not be successful in operating as a publicly traded REIT, which
may adversely affect our ability to make distributions to our stockholders.
We have limited operating history as a publicly traded REIT. The REIT rules and regulations are highly technical and complex. We
cannot assure you that our management team’s experience will be sufficient to continue to successfully operate our company as a publicly traded
REIT, with appropriate operating and investment policies and comply with Code or Treasury Regulations that are applicable to us. Failure to
comply with the income, asset, and other requirements imposed by the REIT rules and regulations could prevent us from qualifying as a REIT,
and could force us to pay unexpected taxes and penalties which may adversely affect our ability to make distributions to our stockholders.
Our success depends on key personnel whose continued service is not guaranteed.
We depend on the efforts and expertise of our management team to manage our day-to-day operations and strategic business direction.
The loss of services from any of the members of our management team, and our inability to find suitable replacements on a timely basis could
have an adverse effect on our operations.
Joint venture investments could be adversely affected by a lack of sole decision-making authority with respect to such investments.
In the future we may enter into strategic joint ventures with unaffiliated investors to acquire, develop, improve or dispose of hotels,
thereby reducing the amount of capital required by us to make investments and diversifying our capital sources for growth. We may not have sole
decision-making authority with respect to these investments, which may:
● prevent us from taking actions that are opposed by our joint venture partners;
● create impasses on major decisions, such as acquisitions or sales;
● prevent us from selling our interests in the joint venture without the consent of our joint venture partners; or
● subject us to liability for the actions of our joint venture partners.
Joint venture investments could subject us to risks related to the financial condition of joint venture partners.
If a joint venture partner becomes bankrupt or otherwise defaults on its obligations under a joint venture agreement, we and any other
remaining joint venture partners would generally remain liable for the joint venture liabilities. Furthermore, if a joint venture partner becomes
bankrupt or otherwise defaults on its obligations under a joint venture agreement, we may be unable to continue the joint venture other than by
purchasing such joint venture partner’s interests or the underlying assets at a premium to the market price. If any of the above risks are realized, it
could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our
stockholders.
14
We may have disputes with joint venture partners.
Disputes between us and our joint venture partners may result in litigation or arbitration which could increase our expenses and prevent
our officers and directors from focusing their time and effort on our business and could result in subjecting the hotels owned by the applicable
joint venture to additional risks.
Our tax protection agreements may require our operating partnership to maintain certain debt levels that otherwise would not be required
to operate our business, which may impair our ability to generate cash available for distribution and otherwise not be in our stockholders’
best interests.
Under the tax protection agreements entered into by our operating partnership and certain of its limited partners, including The Summit
Group, in connection with our formation transactions, our operating partnership has agreed to provide those limited partners with the opportunity
to guarantee debt or enter into a deficit restoration obligation, both of which are intended to cause a special allocation of liabilities to those limited
partners to prevent them from recognizing a taxable deemed cash distribution. If our operating partnership fails to make those opportunities
available, our operating partnership will be required to deliver to each such limited partner a cash payment intended to approximate that limited
partner’s tax liability resulting from our operating partnership’s failure to make such opportunities available to them. Our operating partnership
agreed to these provisions in order to assist those limited partners in avoiding a taxable deemed cash distribution that may have otherwise occurred
in connection with the formation transactions. These obligations may require our operating partnership to maintain more or different indebtedness
than would otherwise have been required for our business, which could result in higher interest expense than we would prefer to incur, reducing
cash available for distribution to stockholders.
Risks Related to the Lodging Industry
Economic conditions may adversely affect the lodging industry.
The performance of the lodging industry has historically been closely linked to the performance of the general economy and, specifically,
growth in U.S. gross domestic product (“GDP”). The lodging industry is also sensitive to business and personal discretionary spending levels.
Declines in corporate budgets and consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower
consumer confidence or adverse political conditions can lower the revenue and profitability of our assets and therefore the net operating profits of
our investments. The recent economic downturn led to a significant decline in demand for products and services provided by the lodging industry,
but hotel demand has experienced a steady improvement beginning in early 2010. A slowing of the current economic recovery or new economic
weakness could have an adverse effect on our revenue and negatively affect our profitability.
Competition from other upscale and upper midscale hotels in the markets in which we operate could have a material adverse effect on
our results of operations.
The lodging industry is highly competitive. Our hotels compete with other hotels for guests in each market in which our hotels operate
based on a number of factors, including location, convenience, brand affiliation, room rates, range of services and guest amenities or
accommodations offered and quality of customer service. Competition will often be specific to the individual markets in which our hotels are
located and includes competition from existing and new hotels. Our competitors may have an operating model that enables them to offer rooms at
lower rates than we can, which could result in our competitors increasing their occupancy at our expense. Competition could adversely affect our
occupancy, ADR and RevPAR, and may require us to provide additional amenities or make capital improvements that we otherwise would not
have to make, which could reduce our profitability and could materially and adversely affect our results of operations.
15
Our investment opportunities and growth prospects may be affected by competition for investment opportunities.
We compete for investment opportunities with other entities, some of which have substantially greater financial resources than we do.
This competition may generally limit the number of suitable investment opportunities offered to us, which may limit our ability to grow. This
competition may also increase the bargaining power of the owners of assets seeking to sell to us, making it more difficult for us to acquire new
hotels on attractive terms or at all.
Our operating results and ability to make distributions to our stockholders may be adversely affected by the markets in which we operate.
Our hotels are subject to various operating risks within the markets in which we operate. These risks include:
● over-building of hotels in our markets, which could adversely affect occupancy and revenue at the hotels we acquire;
● adverse effects of international, national, regional and local economic and market conditions; and
● changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and
regulations, fiscal policies and ordinances.
Our operating results and ability to make distributions to our stockholders may be adversely affected by the risks inherent to the
ownership of hotels.
Hotels have different economic characteristics than many other real estate assets. A typical office property owner, for example, has long-
term leases with third-party tenants, which provide a relatively stable long-term stream of revenue. By contrast, our hotels are subject to various
operating risks common to the lodging industry, many of which are beyond our control, including the following:
● dependence on business and commercial travelers and tourism;
●
increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and
commercial travelers and tourists;
increases in operating costs due to inflation and other factors that may not be offset by increased room rates;
●
● events beyond our control, such as terrorist attacks, travel related health concerns including pandemics and epidemics such as H1N1
influenza (swine flu), avian bird flu and severe acute respiratory syndrome (“SARS”), imposition of taxes or surcharges by regulatory
authorities, travel-related accidents and unusual weather patterns, including natural disasters such as hurricanes and environmental
disasters such as the oil spill in the Gulf of Mexico;
● potential increases in labor costs at our hotels, including as a result of unionization of the labor force; and
● adverse effects of a downturn in the lodging industry.
We have significant ongoing needs to make capital expenditures in our hotels, which require us to devote funds to these purposes and
could pose related risks that might impair our ability to make distributions to our stockholders.
Our hotels have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture,
fixtures and equipment. Our franchisors also require periodic capital improvements as a condition of keeping the franchise licenses. In addition,
lenders may require that we set aside annual amounts for capital improvements to our assets. These capital improvements and replacements may
give rise to the following risks:
● possible environmental problems;
● construction cost overruns and delays;
16
● a possible shortage of available cash to fund capital improvements and replacements and, the related possibility that financing for these
capital improvements may not be available to us on affordable terms; and
● uncertainties as to market demand or a loss of market demand after capital improvements and replacements have begun.
If any of the above risks were to be realized, it could materially adversely affect our business, financial condition and results of
operations and our ability to make distributions to our stockholders.
Hotel development is subject to timing, budgeting and other risks. To the extent we develop hotels or acquire hotels that are under
development, these risks may adversely affect our operating results and liquidity position.
We may develop hotels or acquire hotels that are under development from time to time as suitable opportunities arise, taking into
consideration general economic conditions. Hotel development involves a number of risks, including the following:
● possible environmental problems;
● construction delays or cost overruns that may increase project costs;
● receipt of zoning, occupancy and other required governmental permits and authorizations;
● development costs incurred for projects that are not pursued to completion;
● acts of God such as earthquakes, hurricanes, floods or fires that could adversely affect a project;
●
● governmental restrictions on the nature or size of a project.
inability to raise capital; and
To the extent we develop hotels or acquire hotels under development, we cannot assure you that any development project will be
completed on time or within budget. Our inability to complete a project on time or within budget may adversely affect our projected operating
results and our liquidity position.
The increasing use of Internet travel intermediaries by consumers may adversely affect our profitability.
Our hotel rooms are likely to be booked through Internet travel intermediaries, including, but not limited to, Travelocity.com,
Expedia.com and Priceline.com. As these Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced
room rates or other significant contract concessions from our management companies. Moreover, some of these Internet travel intermediaries are
attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star
downtown hotel”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their
reservations system rather than to the brands under which our hotels are franchised. If the amount of sales made through Internet intermediaries
increases significantly, room revenue may flatten or decrease and our profitability may be adversely affected.
Uninsured and underinsured losses could adversely affect our operating results.
We intend to maintain comprehensive insurance on our hotels, including liability, fire and extended coverage, of the type and amount we
believe are customarily obtained for or by owners of hotels similar to our hotels. Various types of catastrophic losses, like earthquakes and floods,
or losses related to business disruption from disputes with franchisors, may not be insurable or may not be economically insurable. 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 asset. Inflation, changes in building codes and ordinances, environmental considerations and other factors might
also keep us from using insurance proceeds to replace or renovate an asset 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 hotels.
17
Risks Related to the Real Estate Industry and Real Estate-Related Investments
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our hotels
or to adjust our portfolio in response to changes in economic and other conditions, and, therefore, may harm our financial condition.
In the future, we may decide to sell hotels. Real estate investments are relatively illiquid. Our ability to promptly sell one or more hotels
in our portfolio in response to changing economic, financial and investment conditions may be limited. We cannot predict whether we will be able
to sell any hotels 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 an asset. 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, that may require us to expend funds to correct defects or to
make improvements before an asset can be sold;
● changes in operating expenses; and
● civil unrest, acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses, and acts of
war or terrorism, including the consequences of the terrorist acts such as those that occurred on September 11, 2001.
Increases in our property taxes would adversely affect our operating results and our ability to make distributions to our stockholders.
Our hotels are subject to real and personal property taxes. These taxes may increase as tax rates change and as our hotels are assessed or
reassessed by taxing authorities. If property taxes increase, our operating results and our ability to make distributions to our stockholders could be
adversely affected.
We could incur significant costs related to government regulation and litigation over environmental, health and safety matters.
Our hotels and development parcels are subject to various federal, state and local environmental laws that impose liability for
contamination. Under these laws, governmental entities have the authority to require us, as the current owner of the property, to perform or pay for
the clean-up of contamination (including hazardous substances, waste or petroleum products) at, on, under or emanating from the property and to
pay for natural resource damage arising from contamination. These laws often impose liability without regard to whether the owner or operator or
other responsible party knew of, or caused the contamination, and the liability may be joint and several. Because these laws also impose liability
on persons who owned a property at the time it became contaminated, we could incur cleanup costs or other environmental liabilities even after
we sell properties. Contamination at, on, under or emanating from our properties also may expose us to liability to private parties for costs of
remediation, personal injury and death and/or property damage. In addition, environmental liens may be created on contaminated sites in favor of
the government for damages and costs it incurs to address contamination. If contamination is discovered on our properties, environmental laws
also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require
substantial expenditures. Moreover, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow
funds using the property as collateral or to sell the property on favorable terms or at all. Furthermore, persons who sent waste to a waste disposal
facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.
18
In addition, our hotels (including our real property, operations and equipment) are subject to various federal, state and local
environmental, health and safety regulatory requirements that address a wide variety of issues, including, but not limited to, the registration,
maintenance and operation of our boilers and storage tanks, the supply of potable water to our guests, air emissions from emergency generators,
storm water and wastewater discharges, protection of natural resources, asbestos, lead-based paint, mold and mildew, and waste management.
Some of our hotels also routinely handle and use hazardous or regulated substances and wastes as part of their operations, which are subject to
regulation (for example, swimming pool chemicals or biological waste). Our hotels incur costs to comply with these environmental, health and
safety laws and regulations and if these regulatory requirements are not met or unforeseen events result in the discharge of dangerous or toxic
substances at our hotels, we could be subject to fines and penalties for non-compliance with applicable laws and material liability from third
parties for harm to the environment, damage to real property or personal injury and death. We are aware of no past or present environmental
liability for non-compliance with environmental, health and safety laws and regulations that we believe would have a material adverse effect on
our business, assets or results of operations.
Certain hotels we currently own or those we acquire in the future contain, may contain, or may have contained, asbestos-containing
material (“ACM”). Environmental, health and safety laws require that ACM be properly managed and maintained, and include requirements to
undertake special precautions, such as removal or abatement, if ACM would be disturbed during maintenance, renovation, or demolition of a
building. These laws regarding ACM may impose fines and penalties on building owners, employers and operators for failure to comply with
these requirements or expose us to third-party liability.
Our properties 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. Indoor air quality issues can
also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen,
viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects
and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our
properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the
affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to
material liability to third parties if property damage or personal injury occurs.
Compliance with the laws, regulations and covenants that apply to our hotels, including permit, license and zoning requirements, may
adversely affect our ability to make future acquisitions or renovations, result in significant costs or delays and adversely affect our growth
strategy.
Our hotels are subject to various covenants and local laws and regulatory requirements, including permitting and licensing requirements.
Local regulations, including municipal or local ordinances, zoning restrictions and restrictive covenants imposed by community developers may
restrict our use of our hotels and may require us to obtain approval from local officials or community standards organizations at any time with
respect to our hotels, including prior to acquiring a hotel or when undertaking any renovations of any of our hotels. Among other things, these
restrictions may relate to fire and safety, seismic, asbestos-cleanup or hazardous material abatement requirements. We cannot assure you that
existing regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional regulations
will not be adopted that would increase such delays or result in additional costs. Our growth strategy may be materially and adversely affected by
our ability to obtain permits, licenses and zoning approvals. Our failure to obtain such permits, licenses and zoning approvals could have a
material adverse effect on our business, financial condition and results of operations.
In addition, federal and state laws and regulations, including laws such as the Americans with Disabilities Act of 1990 (the “ADA”),
impose further restrictions on our operations. Under the ADA, all public accommodations must meet federal requirements related to access and
use by disabled persons. Some of our hotels may currently be in noncompliance with the ADA. If one or more of the hotels in our portfolio is not
in compliance with the ADA or any other regulatory requirements, we may be required to incur additional costs to bring the hotel into compliance
and we might incur damages or governmental fines. In addition, existing requirements may change and future requirements may require us to
make significant unanticipated expenditures that would adversely affect our business, financial condition, results of operations and cash flow, the
market price of our stock and our ability to satisfy our debt service obligations and to make distributions to our stockholders.
19
If we default on ground leases for land on which any of our hotels are located, our business could be materially and adversely affected.
If we default under the terms of any of our ground leases and are unable to cure the default in a timely manner, we may be liable for
damages and could lose our leasehold interest in the applicable property and interest in the hotel on the applicable property. If any of the events of
default were to occur and are not timely cured, our business, financial condition, results of operations and cash flow, the market price of our
securities and our ability to satisfy our debt service obligations and to make distributions to our stockholders could be materially and adversely
affected.
Risks Related to Conflicts of Interest
We assumed liabilities in connection with the formation transactions, including unknown liabilities, which, if significant, could adversely
affect our business.
As part of the formation transactions, we assumed existing liabilities of our predecessor and its affiliates, including, but not limited to,
liabilities in connection with our hotels, some of which may be unknown or unquantifiable. Unknown liabilities might include liabilities for
cleanup or remediation of undisclosed environmental conditions, claims of hotel guests, vendors or other persons dealing with our predecessor,
The Summit Group, and their affiliates, tax liabilities, employment-related issues and accrued but unpaid liabilities whether incurred in the
ordinary course of business or otherwise. In addition, the aggregate value of Common Units issued in the formation transactions was less than the
value assumed in the fairness opinion rendered to our predecessor, thus our predecessor and we will not benefit from such fairness opinion. This
could increase our exposure to claims, if brought, that the Merger was not fair to our predecessor’s members. If the magnitude of such unknown
liabilities is high, they could adversely affect our business, financial condition, results of operations and cash flow, the market price of our stock
and our ability to satisfy our debt service obligations and to make distributions to our stockholders.
Tax consequences to holders of Common Units upon a sale or refinancing of our hotels may cause the interests of holders of Common
Units, including certain of our executive officers and directors, to differ from the interests of our other stockholders.
As a result of the unrealized built-in gain that may be attributable to one or more of our hotels, holders of Common Units, including
certain of our executive officers and directors, may experience more onerous tax consequences than holders of our stock upon the sale or
refinancing of these hotels, including disproportionately greater allocations of items of taxable income and gain upon the occurrence of such an
event. The tax protection agreements that we entered into with certain former members of our predecessor, including The Summit Group, which is
wholly owned by our Executive Chairman, Mr. Boekelheide, will not provide protection from those more onerous tax consequences. A holder of
Common Units that receives a disproportionately greater allocation of taxable income and gain will not receive a correspondingly greater
distribution of cash proceeds with which to pay the income taxes on such income. Accordingly, they may have different objectives regarding the
appropriate pricing, timing and other material terms of any sale or refinancing of such hotels and could exercise their influence over our affairs by
attempting to delay, defer or prevent a transaction that might otherwise be in the best interests of our stockholders.
Our fiduciary duties as the general partner of our operating partnership could create conflicts of interest.
We, through our wholly owned subsidiary that serves as the sole general partner of our operating partnership, have fiduciary duties to our
operating partnership’s limited partners, the discharge of which may conflict with the interests of our stockholders. The limited partners of our
operating partnership have agreed for so long as we own a controlling interest in our operating partnership that, in the event of a conflict between
the duties owed by our directors to our company and the duties that we owe, in our capacity as the sole general partner of our operating
partnership, to the limited partners, our directors must give priority to the interests of our stockholders. In addition, those persons holding
Common Units have the right to vote on certain amendments to the limited partnership agreement (which require approval by a majority in
interest of the limited partners, including us) and individually to approve certain amendments that would adversely affect their rights, as well as
the right to vote on mergers and consolidations of the general partner or us in certain limited circumstances. These voting rights may be exercised
in a manner that conflicts with the interests of our stockholders. For example, we cannot adversely affect the limited partners’ rights to receive
distributions, as set forth in the limited partnership agreement, without their consent, even though modifying such rights might be in the best
interest of our stockholders generally.
20
Certain key members of our senior management team continue to be involved in other businesses, which may interfere with their ability
to devote time and attention to our business and affairs.
We rely on our senior management team to manage our strategic direction and day-to-day operations of our business. Our employment
agreement with Mr. Boekelheide requires him to devote a substantial portion of his business time and attention to our business and our
employment agreements with our other executive officers require our executives to devote substantially all of their business time and attention to
our business. Messrs. Boekelheide, Hansen, Aniszewski, Becker and Bertucci have certain outside business interests which may reduce the
amount of time that Messrs. Boekelheide, Hansen, Aniszewski, Becker and Bertucci are able to devote to our business.
Risks Related to Our Organization and Structure
Provisions of our charter may limit the ability of a third party to acquire control of us by authorizing our board of directors to issue
additional securities.
Our board of directors may, without stockholder approval, amend our charter to increase or decrease the aggregate number of our shares
or the number of shares of any class or series that we have the authority to issue and to classify or reclassify any unissued shares of common stock
or preferred stock, and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may
authorize the issuance of additional shares or establish a series of common or preferred stock that may have the effect of delaying or preventing a
change in control of our company, including transactions at a premium over the market price of our shares, even if stockholders believe that a
change in control is in their interest. These provisions, along with the restrictions on ownership and transfer contained in our charter and certain
provisions of Maryland law described below, could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain
control of us, which could adversely affect the market price of our securities.
Provisions of Maryland law may limit the ability of a third party to acquire control of us by requiring our board of directors or
stockholders to approve proposals to acquire our company or effect a change in control.
Certain provisions of the Maryland General Corporation Law (the “MGCL”) applicable to Maryland corporations may have the effect of
inhibiting a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide
our stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
● “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested
stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock
or an affiliate or associate of us who, at any time within the two-year period immediately prior to the date in question, was the
beneficial owner of 10% or more of the voting power of our then outstanding stock) or an affiliate of any interested stockholder for
five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two
supermajority stockholder voting requirements on these combinations, unless, among other conditions, our common stockholders
receive a minimum price, as defined in the MGCL, for their stock and the consideration is received in cash or in the same form as
previously paid by the interested stockholder for its shares; and
● “control share” provisions that provide that our “control shares” (defined as voting shares of stock which, when aggregated with all
other shares of stock controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in
electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of
issued and outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative
vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding shares owned by the acquirer, by our officers or
by our employees who are also directors of our company.
21
By resolution of our board of directors, we have opted out of the business combination provisions of the MGCL and provided that any
business combination between us and any other person is exempt from the business combination provisions of the MGCL, provided that the
business combination is first approved by our board of directors (including a majority of directors who are not affiliates or associates of such
persons). In addition, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our board
of directors may by resolution elect to opt in to the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt
in to the control share provisions of the MGCL in the future.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit our
stockholders’ recourse in the event of actions not in our stockholders’ best interests.
Under Maryland law, generally, a director will not be liable if he or she performs his or her duties in good faith, in a manner he or she
reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar
circumstances. In addition, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for
liability resulting from:
● actual receipt of an improper benefit or profit in money, property or services; or
● active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of
action adjudicated.
Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent
permitted by Maryland law. Our bylaws require us to indemnify each director and officer, to the maximum extent permitted by Maryland law, in
the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we
may be obligated to advance the defense costs incurred by our directors and officers. As a result, we and our stockholders may have more limited
rights against our directors and officers than might otherwise exist absent the current provisions in our charter and bylaws or that might exist with
other companies.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect
changes to our management.
Our charter provides that a director may be removed only for cause (as defined in our charter) and then only by the affirmative vote of
holders of shares entitled to cast at least two-thirds of the votes entitled to be cast generally in the election of directors. Our charter also provides
that vacancies on our board of directors may be filled only by a majority of the remaining directors in office, even if less than a quorum. These
requirements prevent stockholders from removing directors except for cause and with a substantial affirmative vote and from replacing directors
with their own nominees and may prevent a change in control of our company that is in the best interests of our stockholders.
The ability of our board of directors to change our major policies without the consent of stockholders may not be in our stockholders’
interest.
Our board of directors determines our major policies, including policies and guidelines relating to our acquisitions, leverage, financing,
growth, operations and distributions to stockholders. Our board of directors may amend or revise these and other policies and guidelines from time
to time without the vote or consent of our stockholders. Accordingly, our stockholders will have limited control over changes in our policies and
those changes could adversely affect our financial condition, results of operations, the market price of our stock and our ability to make
distributions to our stockholders.
22
The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to
our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our
stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we would become
subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders,
which may have adverse consequences on the total return to our stockholders.
We are a holding company with no direct operations. As a result, we rely on funds received from our operating partnership to pay
liabilities and dividends, our stockholders’ claims will be structurally subordinated to all liabilities of our operating partnership and our
stockholders will not have any voting rights with respect to our operating partnership activities, including the issuance of additional
Common Units or Preferred Units.
We are a holding company and conduct all of our operations through our operating partnership. We do not have, apart from our
ownership of our operating partnership, any independent operations. As a result, we rely on distributions from our operating partnership to pay
any dividends we might declare on shares of our common or preferred stock. We also rely on distributions from our operating partnership to meet
any of our obligations, including tax liability on taxable income allocated to us from our operating partnership (which might make distributions to
us that do not equal to the tax on such allocated taxable income).
In addition, because we are a holding company, stockholders’ claims will be structurally subordinated to all existing and future liabilities
and obligations (whether or not for borrowed money) of our operating partnership and its subsidiaries. Therefore, in the event of our bankruptcy,
liquidation or reorganization, claims of our stockholders will be satisfied only after all of our and our operating partnership’s and its subsidiaries’
liabilities and obligations have been paid in full.
We own approximately 73.0% of the Common Units in our operating partnership, 100% of the general partnership interest in our
operating partnership, and 100% of the Series A Preferred Units in our operating partnership. Any future issuances by our operating partnership of
additional Common Units or Preferred Units could reduce our ownership percentage in our operating partnership. Because our common
stockholders do not directly own any Common Units or Series A Preferred Units, they will not have any voting rights with respect to any such
issuances or other partnership-level activities of our operating partnership.
Risks Related to Ownership of Our Securities
The New York Stock Exchange (“NYSE”) or another nationally recognized exchange may not continue to list our securities, which could
limit stockholders’ ability to make transactions in our securities and subject us to additional trading restrictions.
Our common stock trades on the NYSE under the symbol “INN” and our Series A Preferred Stock trades on the NYSE under the symbol
“INNPrA.” In order to remain listed we are required to meet the continued listing requirements of the NYSE or, in the alternative, any other
nationally recognized exchange to which we apply. We may be unable to satisfy those listing requirements, and there is no guarantee our
securities will remain listed on a nationally recognized exchange. If our securities are delisted from the NYSE or another nationally recognized
exchange, we could face significant material adverse consequences, including:
● a limited availability of market quotations for our securities;
● reduced liquidity with respect to our securities;
● a determination that our common stock is “penny stock,” which will require brokers trading in our common stock to adhere to more
stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for the common stock;
● a limited amount of news and analyst coverage; and
● a decreased ability to issue additional securities or obtain additional financing in the future.
23
Failure of the hotel industry to continue to improve 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 based on continued improvements in hotel industry fundamentals generally and our operating results specifically.
We cannot assure you that hotel industry fundamentals or operating results will continue to improve. 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 as we expect, 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.
The cash available for distribution may not be sufficient to make distributions at expected levels, and we cannot assure you of our ability
to make distributions in the future. We may use borrowed funds or funds from other sources to make distributions, which may adversely
affect our operations.
We intend to make quarterly distributions to our stockholders and holders of Common Units. Distributions declared by us will be
authorized by our board of directors in its sole discretion out of funds legally available for distribution and will depend upon a number of factors,
including restrictions under applicable law and the capital requirements of our company. All distributions will be made at the discretion of our
board of directors and will depend on our earnings, our financial condition, the requirements for qualification as a REIT, restrictions under
applicable law and other factors as our board of directors may deem relevant from time to time. We may be required to fund distributions from
working capital, borrowings under our secured revolving credit facility, proceeds of future stock offerings or a sale of assets to the extent
distributions exceed earnings or cash flows from operations. Funding distributions from working capital would restrict our operations. If we
borrow from the secured revolving credit facility in order to pay distributions, we would be more limited in our ability to execute our strategy of
using that secured revolving credit facility to fund acquisitions. Finally, selling assets may require us to dispose of assets at a time or in a manner
that is not consistent with our disposition strategy. If we borrow to fund distributions, our leverage ratios and future interest costs would increase,
thereby reducing our earnings and cash available for distribution from what they otherwise would have been. We may not be able to make
distributions in the future. In addition, some of our distributions may be considered a return of capital for income tax purposes. If we decide to
make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of
capital for federal income tax purposes to the extent of the holder’s adjusted tax basis in their shares. A return of capital is not taxable, but it has
the effect of reducing the holder’s adjusted tax basis in its investment. If distributions exceed the adjusted tax basis of a holder’s shares, they will
be treated as gain from the sale or exchange of such stock.
We may change the distribution policy for our common stock in the future.
The decision to declare and make distributions on our common stock in the future, as well as the timing, amount and composition of any
such future distributions, will be at the sole discretion of our board of directors and will depend on our earnings, funds from operations, liquidity,
financial condition, capital requirements or contractual prohibitions, the annual distribution requirements under the REIT provisions of the Code,
state law and such other factors as our board of directors deems relevant. The actual distribution payable will be determined by our board of
directors based upon the circumstances at the time of declaration and the actual distribution payable may vary from expected amounts. Any
change in our distribution policy could have a material adverse effect on the market price of our stock. We are generally restricted from declaring
or paying any distributions, or setting aside any funds for the payment of distributions, on our common stock or our Common Units, subject to
certain exceptions, redeeming or otherwise acquiring shares of our common stock or our Common Units unless full cumulative distributions on
our Series A Preferred Stock and the Series A Preferred Units have been declared and either paid or set aside for payment in full for all past
distribution periods.
The market price of our stock may be volatile due to numerous circumstances beyond our control.
The trading prices of equity securities issued by REITs and other real estate companies historically have been affected by changes in
market interest rates. One of the factors that may influence the price of our common or preferred stock is the annual yield from distributions on
our common or preferred stock, respectively, as compared to yields on other financial instruments. An increase in market interest rates, or a
decrease in our distributions to stockholders, may lead prospective purchasers of our common or preferred stock to demand a higher annual yield,
which could reduce the market price of our common or preferred stock, respectively.
24
Other factors that could affect the market price of our stock include the following:
● actual or anticipated variations in our quarterly results of operations;
● changes in market valuations of companies in the lodging industry;
● changes in expectations of future financial performance or changes in estimates of securities analysts;
● fluctuations in stock market prices and volumes;
● our issuances of common stock, preferred stock, or other securities in the future;
●
●
● announcements by us or our competitors of acquisitions, investments or strategic alliances; and
● unforeseen events beyond our control, such as instability in the national, European or global economy, terrorist attacks, travel related
the inclusion of our common stock and preferred stock in equity indices, which could induce additional purchases;
the addition or departure of key personnel;
health concerns including pandemics and epidemics such as H1N1 influenza (swine flu), avian bird flu and SARS, political instability,
regional hostilities, increases in fuel prices, imposition of taxes or surcharges by regulatory authorities and travel-related accidents and
unusual weather patterns, including natural disasters such as hurricanes.
The market’s perception of our growth potential and our current and potential future cash distributions, whether from operations, sales or
refinancings, as well as the real estate market value of the underlying assets, may cause our common and preferred stock to trade at prices that
differ from our net asset value per share. If we retain operating cash flow for investment purposes, working capital reserves or other purposes,
these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common and
preferred stock. Our failure to meet the market’s expectations with regard to future earnings and distributions likely would adversely affect the
market price of our common and preferred stock.
The trading market for our stock will rely in part on the research and reports that industry or financial analysts publish about us or our
business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our stock or our industry, or
the stock of any of our competitors, the price of our stock could decline. If one or more of these analysts ceases coverage of our company, we
could lose attention in the market, which in turn could cause the price of our stock to decline.
The number of shares of our common stock and preferred stock available for future sale could adversely affect the market price per share
of our common stock and preferred stock, respectively, and future sales by us of shares of our common stock, preferred stock, or
issuances by our operating partnership of Common Units may be dilutive to existing stockholders.
Sales of substantial amounts of shares of our common stock or preferred stock in the public market, or upon exchange of Common Units
or exercise of any equity awards, or the perception that such sales might occur, could adversely affect the market price of our common stock and
preferred stock. The exchange of Common Units for common stock, conversion of Series A Preferred Stock for common stock, the vesting of any
equity-based awards granted to certain directors, executive officers and other employees under the 2011 Equity Incentive Plan, the issuance of our
common stock or Common Units in connection with hotel, portfolio or business acquisitions and other issuances of our common stock or
Common Units could have an adverse effect on the market price of the shares of our common stock.
We have filed a registration statement on Form S-3 to register up to 10,100,000 shares of common stock issuable by us to the holders of
Common Units issued in our formation transactions upon the exercise of their redemption rights. Once the registration statement becomes
effective, there could be a significant amount of sales of our common stock in a short period of time or the perception that a substantial amount of
sales may occur, either or both of which could depress the market price of our common stock. In addition, future sales by us of shares of our
common stock may be dilutive to existing stockholders.
25
Future offerings of debt securities, which would be senior to our common and preferred stock upon liquidation and issuances of equity
securities (including Common Units), which may be dilutive to our existing stockholders and be senior to our common stock for purposes
of dividend distributions or upon liquidation, may materially and adversely affect the market price of our common stock.
In the future we may offer debt securities and issue equity securities, including Common Units, Series A Preferred Stock or other
preferred shares, that may be senior to our common stock for purposes of dividend distributions or upon liquidation. Upon liquidation, holders of
our debt securities and our preferred shares will receive distributions of our available assets prior to the holders of our common stock. Holders of
our common stock are not entitled to pre-emptive rights or other protections against us offering senior debt or equity securities. Therefore,
additional common share issuances, directly or through convertible or exchangeable securities (including Common Units), warrants or options,
will dilute the holdings of our existing common stockholders and such issuances or the perception of such issuances may reduce the market price
of our common stock. In addition, new issues of preferred stock could have a preference on liquidating distributions and a preference on dividend
payments that could limit our ability to pay a dividend or make another distribution to the holders of our common stock. Because our decision to
issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the
amount, timing or nature of future issuances. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common
stock and diluting their interest in us.
The Series A Preferred Stock is subordinate to our existing and future debt, and Series A Preferred Stockholders interests could be
diluted by the issuance of additional shares of preferred stock and by other transactions.
The Series A Preferred Stock will rank junior to all of our existing and future debt and senior equity securities and to other non-equity
claims on us and our assets available to satisfy claims against us, including claims in bankruptcy, liquidation or similar proceedings. Our existing
debt includes restrictions on our ability to pay dividends to preferred stockholders, and our future debt may include similar restrictions. Our
charter currently authorizes the issuance of up to 100,000,000 shares of preferred stock in one or more classes or series. Our charter authorizes
our Board of Directors, without any action on the part of our stockholders, to amend our charter to increase or decrease the aggregate number of
authorized shares of preferred stock. Subject to limitations prescribed by Maryland law and our charter, the Board of Directors is authorized to
issue, from our authorized but unissued shares of capital stock, preferred stock in such classes or series as our Board of Directors may determine
and to establish from time to time the number of shares of preferred stock to be included in any such class or series. The issuance of additional
shares of Series A Preferred Stock or other parity equity securities could dilute the interests of the holders of Series A Preferred Stock, and the
issuance of any senior equity securities or the incurrence of additional indebtedness could affect our ability to pay dividends on, redeem or pay the
liquidation preference on the Series A Preferred Stock. Other than the conversion right afforded to holders of Series A Preferred Stock that may
become exercisable in connection with certain changes of control as described in the prospectus filed with the Securities and Exchange
Commission on October 25, 2011 (“Prospectus”) under the heading “Description of the Series A Preferred Stock — Conversion Rights,” none of
the provisions relating to the Series A Preferred Stock contain any terms relating to or limiting our indebtedness or affording the holders of Series
A Preferred Stock protection in the event of a highly leveraged or other transaction, including a merger or the sale, lease or conveyance of all or
substantially all our assets, that might adversely affect the holders of Series A Preferred Stock.
Holders of Series A Preferred Stock have extremely limited voting rights.
Holders of Series A Preferred Stock have limited voting rights. Our shares of common stock are the only class of our securities that carry
full voting rights. Voting rights for holders of Series A Preferred Stock exist primarily with respect to the ability to elect, together with holders of
our parity equity securities having similar voting rights, if any, two additional directors to our Board of Directors in the event that six quarterly
dividends (whether or not consecutive) payable on the Series A Preferred Stock are in arrears, and with respect to voting on amendments to our
charter or articles supplementary relating to the Series A Preferred Stock that materially and adversely affect the rights of the holders of Series A
Preferred Stock or create additional classes or series of senior equity securities. Other than these limited circumstances, holders of Series A
Preferred Stock will not have any voting rights.
26
Holders of Series A Preferred Stock may not be permitted to exercise conversion rights upon a change of control. If exercisable, the
change of control conversion feature of the Series A Preferred Stock may not adequately compensate the holders, and the change of
control conversion and redemption features of the Series A Preferred Stock may make it more difficult for a party to take over our
company or discourage a party from taking over our company.
Upon the occurrence of a Change of Control, as defined in our charter, as a result of which our common stock and the common securities of
the acquiring or surviving entity (or ADRs representing such common securities) are not listed on the NYSE, the NYSE Amex or NASDAQ, or
listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE Amex or NASDAQ, holders of Series A Preferred
Stock will have the right to convert some or all of their Series A Preferred Stock into our common stock (or equivalent value of alternative
consideration). Notwithstanding that we generally may not redeem the Series A Preferred Stock prior to October 28, 2016, we have a special
optional redemption right to redeem the Series A Preferred Stock in the event of a Change of Control, and holders of Series A Preferred Stock will
not have the right to convert any shares that we have elected to redeem prior to the Change of Control Conversion Date, as defined in our charter.
Upon such a conversion, the holders will be limited to a maximum number of shares of our common stock equal to 5.92417 multiplied by the
number of Series A Preferred Stock converted. If the Common Stock Price is less than $4.22, subject to adjustment, the holders will receive a
maximum of 5.92417 shares of our common stock per share Series A Preferred Stock, which may result in a holder receiving value that is less
than the liquidation preference of the Series A Preferred Stock. In addition, those features of the Series A Preferred Stock may have the effect of
inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change of control of our
company under circumstances that otherwise could provide the holders of our common stock and Series A Preferred Stock with the opportunity to
realize a premium over the then-current market price or that stockholders may otherwise believe is in their best interests.
Risks Related to Our Status as a REIT
Failure to remain qualified as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds
available for distributions to our stockholders.
We believe that our organization and proposed method of operation enabled us to meet the requirements for qualification and taxation as
a REIT commencing with our short taxable year ended December 31, 2011. However, we cannot assure you that we will qualify and remain
qualified as a REIT.
If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available
for distributions to our stockholders because:
● we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to
federal income tax at regular corporate rates;
● we could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and
● unless we are entitled to relief under certain federal income tax laws, we could not re-elect REIT status until the fifth calendar year
after the year in which we failed to qualify as a REIT.
In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure
to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our stock.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including
taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property
and transfer taxes. In addition, our TRSs are subject to regular corporate federal, state and local taxes. Any of these taxes would decrease cash
available for distributions to stockholders.
27
Failure to make required distributions would subject us to federal corporate income tax.
We intend to operate in a manner so as to qualify as a REIT for federal income tax purposes. 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 and excluding any
net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our
REIT taxable income, we will be subject to federal corporate 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 the Code.
REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable
market conditions or pay taxable stock dividends.
In order to satisfy our qualification as a REIT and to meet the REIT distribution requirements, we may need to borrow funds on a short-
term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. Our cash flows from
operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the
recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required
debt service or amortization payments. For example, we may be required to accrue income from mortgage loans and other types of debt
instruments that we may acquire before we receive any payments of interest or principal on such assets. We may also acquire distressed debt
investments that are subsequently modified or foreclosed upon, which could result in significant taxable income without any corresponding cash
payment. The insufficiency of our cash flows to cover our distribution requirements could have an adverse effect on our ability to raise short- and
long-term debt or sell equity securities in order to fund distributions required to maintain our qualification as a REIT. Also, although the Internal
Revenue Service (“IRS”) has issued private letter rulings to other REITs, which may be relied upon only by the taxpayers to whom they were
issued, and a revenue procedure applicable to our 2007 through 2011 taxable years sanctioning certain issuances of taxable stock dividends by
REITs under certain circumstances, no assurance can be given that we will be able to pay taxable stock dividends to meet our REIT distribution
requirements.
The formation of our TRSs increases our overall tax liability.
Our TRSs are subject to federal, state and local income tax on their taxable income, which consists of the revenue from the hotels leased
by our TRS lessees, net of the operating expenses for such hotels and rent payments to us and, in the case of the one hotel that is owned by a
wholly owned subsidiary of one of our TRSs, the revenue from that hotel, net of the operating expenses. Accordingly, although our ownership of
our TRSs allows us to participate in the operating income from our hotels in addition to receiving rent, that operating income will be fully subject
to income tax. The after-tax net income of our TRSs is available for distribution to us. If we have any non-U.S. TRSs, then they may be subject to
tax in jurisdictions where they operate.
Our TRS lessee structure subjects us to the risk of increased hotel operating expenses that could adversely affect our operating results
and our ability to make distributions to stockholders.
Our leases with our TRS lessees require our TRS lessees to pay us rent based in part on revenue from our hotels. Our operating risks
include decreases in hotel revenue and increases in hotel operating expenses, including but not limited to the increases in wage and benefit costs,
repair and maintenance expenses, energy costs, property taxes, insurance costs and other operating expenses, which would adversely affect our
TRSs’ ability to pay us rent due under the leases. Increases in these operating expenses can have a significant adverse effect on our financial
condition, results of operations, the market price of our common and preferred shares and our ability to make distributions to our stockholders.
28
Our ownership of our TRSs is subject to limitations and our transactions with our TRSs could cause us to be subject to a 100% penalty
tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the Code
limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate
taxation. The Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-
length basis. The 100% tax would apply, for example, to the extent that we were found to have charged our TRS lessees rent in excess of an
arm’s-length rent. We monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with TRS ownership
limitations and structure our transactions with our TRSs on terms that we believe are arm’s length to avoid incurring the 100% excise tax
described above. There can be no assurance, however, that we will be able to comply with the 25% TRS limitation or to avoid application of the
100% excise tax.
If the leases of our hotels to our TRS lessees are not respected as true leases for federal income tax purposes, we will fail to qualify as a
REIT.
To qualify as a REIT, we must annually satisfy two gross income tests, under which specified percentages of our gross income must be
derived from certain sources, such as “rents from real property.” Rents paid to our operating partnership by our TRS lessees pursuant to the leases
of our hotels constitute substantially all of our gross income. In order for such rent to qualify as “rents from real property” for purposes of the
gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as service contracts, financing
arrangements, joint ventures or some other type of arrangement. If our leases are not respected as true leases for federal income tax purposes, we
will fail to qualify as a REIT.
If our operating partnership is treated as a publicly traded partnership taxable as a corporation for federal income tax purposes, we will
cease to qualify as a REIT.
Although we believe that our operating partnership will be treated as a partnership for federal income tax purposes, no assurance can be
given that the IRS will not successfully challenge that position. If the IRS were to successfully contend that our operating partnership should be
treated as a publicly traded partnership taxable as a corporation, we would fail to meet the 75% gross income test and certain of the asset tests
applicable to REITs and, unless we qualified for certain statutory relief provisions, we would cease to qualify as a REIT. Also, our operating
partnership would become subject to federal, state and local income tax, which would reduce significantly the amount of cash available for debt
service and for distribution to us.
If Interstate, our other hotel management companies, or any other hotel management companies that we may engage in the future do not
qualify as “eligible independent contractors,” or if our hotels are not “qualified lodging facilities,” we will fail to qualify as a REIT.
Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests
applicable to REITs. An exception is provided, however, for leases of “qualified lodging facilities” to a TRS so long as the hotels are managed by
an “eligible independent contractor” and certain other requirements are satisfied. We lease all but one of our hotels to our TRS lessees. The
remaining hotel is owned by a wholly owned subsidiary of one of our TRSs. All of our hotels are operated pursuant to hotel management
agreements with Interstate and other hotel management companies, each of which we believe qualifies as an “eligible independent
contractor.” Among other requirements, in order to qualify as an eligible independent contractor, the hotel manager must not own, directly or
through its stockholders, more than 35% of our outstanding shares, and no person or group of persons can own more than 35% of our outstanding
shares and the shares (or ownership interest) of the hotel manager, taking into account certain ownership attribution rules. The ownership
attribution rules that apply for purposes of these 35% thresholds are complex, and monitoring actual and constructive ownership of our shares by
our hotel managers and their owners may not be practical. Accordingly, there can be no assurance that these ownership levels will not be
exceeded.
29
In addition, for a hotel management company to qualify as an eligible independent contractor, such company or a related person must be
actively engaged in the trade or business of operating “qualified lodging facilities” (as defined below) for one or more persons not related to the
REIT or its TRSs at each time that such company enters into a hotel management contract with a TRS or its TRS lessee. As of the date hereof, we
believe each of our hotel management companies operates qualified lodging facilities for certain persons who are not related to us or our TRSs.
However, no assurances can be provided that our hotel management companies or any other hotel managers that we may engage in the future will
in fact comply with this requirement. Failure to comply with this requirement would require us to find other managers for future contracts, and, if
we hired a management company without knowledge of the failure, it could jeopardize our status as a REIT.
Finally, each property with respect to which our TRS lessees pay rent must be a “qualified lodging facility.” A “qualified lodging
facility” is a hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis, including
customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is
engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. As of
the date hereof, we believe that the properties that are leased to our TRS lessees and the property that is owned by a wholly owned subsidiary of
one of our TRSs are qualified lodging facilities. Although we intend to monitor future acquisitions and improvements of properties, REIT
provisions of the Code provide only limited guidance for making determinations under the requirements for qualified lodging facilities, and there
can be no assurance that these requirements will be satisfied.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our stock.
At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We
cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal
income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or
interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal
income tax law, regulation or administrative interpretation.
You may be restricted from acquiring or transferring certain amounts of our stock.
The stock ownership restrictions of the Code for REITs and the 9.8% stock ownership limit in our charter may inhibit market activity in
our capital stock and restrict our business combination opportunities.
In order to qualify as a REIT for each taxable year after 2011, five or fewer individuals, as defined in the Code, may not own,
beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year.
Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement.
Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year after
2011. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our
qualification as a REIT. Unless exempted by our board of directors, our charter prohibits any person from beneficially or constructively owning
more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock.
Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the
value of our outstanding shares would result in our failing to qualify as a REIT. These restrictions on transferability and ownership will not apply,
however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT.
30
We may pay taxable dividends of our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax
on such dividends, placing downward pressure on the market price of our common stock.
We may distribute taxable dividends that are payable in cash and common stock at the election of each stockholder. The IRS has issued
private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in stock as taxable dividends that would
satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for federal income tax purposes. Those rulings
may be relied upon only by the taxpayers to whom they were issued, but we could request a similar ruling from the IRS. In addition, the IRS
previously issued a revenue procedure authorizing publicly traded REITs to make elective cash/stock dividends, but that revenue procedure does
not apply to our 2012 and future taxable years. Accordingly, it is unclear whether and to what extent we will be able to make taxable dividends
payable in cash and common stock.
If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends will be required to
include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for
federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash
dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be
less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale.
Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold federal income tax with respect to such dividends,
including in respect of all or a portion of such dividend that is payable in common stock. If we made a taxable dividend payable in cash and our
common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on
dividends, it may put downward pressure on the trading price of our common stock. We do not currently intend to pay a taxable dividend of our
common stock and cash.
Item 1B. Unresolved Staff Comments.
None.
31
Item 2. Properties.
Our Portfolio
A list of our hotel properties owned as of December 31, 2011 and operating information for those hotels is included in the table
below. We own our hotels in fee simple, except for five hotels, that are ground leased, as described in “-Our Hotel Operating Agreements –
Ground Leases” below. According to STR’s current chain scales, 34 of our hotels are categorized as upper midscale hotels, 28 of our hotels are
categorized as upscale hotels, and eight of our hotels are categorized as midscale. All financial and room information is for the year ended
December 31, 2011.
Franchise/Brand
Location
Year Ended December 31, 2011
Later of
Year of
Opening or
Conversion # Rooms Occupancy (1) ADR (2)
RevPAR (3)
Segment
Marriott
Courtyard by Marriott ®
Courtyard by Marriott ® (4)
Courtyard by Marriott ® (4)
Courtyard by Marriott ® (4)
Courtyard by Marriott ® (4)
Courtyard by Marriott ® (4)
Courtyard by Marriott ® (4)
Fairfield Inn by Marriott ® (4)
Fairfield Inn by Marriott ® (4)
Fairfield Inn by Marriott ® (4)
Fairfield Inn by Marriott ® (4)
Fairfield Inn by Marriott ® (4)
Fairfield Inn by Marriott ® (4)
Fairfield Inn by Marriott ® (4)
Fairfield Inn by Marriott ® (4)
Fairfield Inn by Marriott ® (4)(5)
Fairfield Inn & Suites by Marriott
® (4)
Residence Inn by Marriott ® (4)
Residence Inn by Marriott ® (4)
Residence Inn by Marriott ® (4)
Residence Inn by Marriott ® (4)
El Paso, TX
Flagstaff, AZ
Germantown,
TN
Jackson, MS
Memphis, TN
Missoula, MT
Scottsdale, AZ
Baton Rouge,
LA
Bellevue, WA
Boise, ID
Denver, CO
Emporia, KS
Lakewood, CO
Lewisville, TX
Salina, KS
Spokane, WA
Germantown,
TN
Fort Wayne, IN
Germantown,
TN
Portland, OR
Ridgeland, MS
Baton Rouge,
LA
Bloomington,
MN
SpringHill Suites by Marriott ® (4)
SpringHill Suites by Marriott ® (4)
SpringHill Suites by Marriott ® (4)
(8)
SpringHill Suites by Marriott ® (4) Denver, CO
SpringHill Suites by Marriott ® (4) Flagstaff, AZ
Lithia Springs,
GA
Little Rock,
AR
SpringHill Suites by Marriott ® (4)
SpringHill Suites by Marriott ® (4) Nashville, TN
SpringHill Suites by Marriott ® (4)
(6)
TownePlace Suites by Marriott ®
(4)
Subtotal/Weighted Average
Scottsdale, AZ
Baton Rouge,
LA
Hilton
Doubletree ® (4) (8)
Hampton Inn ® (4)
Hampton Inn ® (4)
Hampton Inn ® (4)
Hampton Inn ® (4)
Baton Rouge,
LA
Denver, CO
Fort Collins,
CO
Fort Smith, AR
Fort Wayne, IN
2011
2009
2005
2005
2005
2005
2003
2004
1997
1995
1997
1994
1995
2000
1994
1995
2005
2006
2005
2009
2007
2004
2011
2007
2008
2004
2004
2004
2003
2004
2011
2003
1996
2005
2006
90
164
93
117
96
92
153
79
144
63
161
57
63
71
63
84
80
109
78
124
100
72.82 % $
71.52
116.09 $
94.11
62.10
59.92
67.96
67.07
53.29
60.21
58.15
66.06
67.83
65.17
62.47
57.92
68.17
58.33
58.47
74.38
65.24
84.00
82.10
93.97
93.49
70.22
99.51
121.23
77.63
113.15
72.24
85.58
77.50
85.18
74.11
73.04
104.26
72.59
91.02
96.56
101.31
103.69
84.54
67.31
58.35
56.02
47.72
66.74
64.61
Upscale
Upscale
Upscale
Upscale
Upscale
Upscale
Upscale
46.74 Upper midscale
65.80 Upper midscale
47.72 Upper midscale
58.05 Upper midscale
50.51 Upper midscale
53.22 Upper midscale
42.93 Upper midscale
49.79 Upper midscale
60.81 Upper midscale
42.45 Upper midscale
Upscale
67.70
63.00
85.10
85.13
Upscale
Upscale
Upscale
78
65.37
82.82
54.14
Upscale
113
124
112
82.24
67.27
71.20
82.03
98.28
92.73
67.46
66.11
66.02
Upscale
Upscale
Upscale
78
53.13
73.50
39.05
Upscale
78
78
66.79
74.49
80.28
102.99
53.62
76.72
Upscale
Upscale
121
50.01
105.13
52.58
Upscale
90
2,953
78.36
66.44
72.41
91.71
56.74 Upper midscale
60.93
127
149
75
178
119
51.35
49.38
65.63
61.06
57.82
84.18
82.55
90.93
94.72
91.76
43.23
Upscale
40.77 Upper midscale
59.67 Upper midscale
57.83 Upper midscale
53.05 Upper midscale
Hampton Inn ® (4)
Hampton Inn ® (4)
Hampton Inn ® (4)
Hampton Inn ® (4)
Hampton Inn & Suites ® (4)
Hampton Inn & Suites ® (4)
Hampton Inn & Suites ® (4)
Hilton Garden Inn ® (4)
Hilton Garden Inn ® (4)
Homewood Suites ® (4)
Subtotal/Weighted Average
Medford, OR
Twin Falls, ID
Provo, UT
Boise, ID
Bloomington,
MN
El Paso, TX
Fort Worth, TX
Duluth, GA
Fort Collins,
CO
Ridgeland, MS
2001
2004
1996
1995
2007
2005
2007
2011
2007
2011
71.58
64.51
66.34
72.09
74.48
81.81
65.45
68.84
64.71
73.87
65.03
102.77
88.39
87.91
88.79
119.08
108.69
110.33
102.47
92.25
96.51
97.69
73.56 Upper midscale
57.02 Upper midscale
58.32 Upper midscale
64.01 Upper midscale
88.69 Upper midscale
88.92 Upper midscale
72.21 Upper midscale
Upscale
70.54
59.70
71.30
63.53
Upscale
Upscale
75
75
87
63
146
139
105
122
120
91
1,671
32
119
143
63
64.85 % $
66.01
71.13
78.67 $
85.80
83.10
51.02 Upper midscale
56.64 Upper midscale
59.11 Upper midscale
66
49.23
92.11
45.35 Upper midscale
119
58
128
88
91
121
92
1,088
150
148
122
136
556
89
52
60
111
62
374
58.94
74.99
51.42
72.71
61.99
80.19
65.43
64.24
81.51
50.79
65.92
81.24
69.84
39.68
46.13
44.53
51.97
48.27
46.42
80.75
89.77
83.41
86.72
92.04
109.76
87.29
87.79
78.44
76.13
92.48
89.99
84.19
63.84
76.68
66.73
70.52
75.48
70.28
47.59 Upper midscale
67.32 Upper midscale
42.89 Upper midscale
63.05 Upper midscale
57.06 Upper midscale
88.01 Upper midscale
57.11 Upper midscale
56.39
63.94
38.66
60.96
73.11
58.80
25.33
35.37
29.71
36.65
36.44
32.63
Upscale
Upscale
Upscale
Upscale
Midscale
Midscale
Midscale
Midscale
Midscale
IHG
Holiday Inn ® (4) (8)
Holiday Inn ® (4)
Holiday Inn Express ® (4)
Holiday Inn Express ®(7) (8)
Boise, ID
Duluth, GA
Boise, ID
Charleston,
WV
Vernon Hills,
IL
Holiday Inn Express ® (4)
Holiday Inn Express & Suites ® (4) Emporia, KS
Las Colinas,
TX
Holiday Inn Express & Suites ®
Holiday Inn Express & Suites ® (4) Sandy, UT
Holiday Inn Express & Suites ® (4) Twin Falls, ID
Staybridge Suites ® (4)
Glendale, CO
Staybridge Suites ® (4)
Jackson, MS
Subtotal/Weighted Average
2011
2011
2005
2011
2008
2000
2007
1998
2009
2011
2007
Atlanta, GA
Fort Myers, FL
2006
2009
Las Colinas,
TX
Portland, OR
2007
2009
Fort Smith, AR
Missoula, MT
Salina, KS
Twin Falls, ID
Lakewood, CO
2011
2011
2011
2011
2011
Hyatt
Hyatt Place ® (4)
Hyatt Place ®
Hyatt Place ® (4)
Hyatt Place ® (4)
Subtotal/Weighted Average
AmericInn
AmericInn ®(8)
AmericInn ® (8)
AmericInn ® (4) (8)
AmericInn ® (4) (8)
AmericInn ® (4)(8)
Subtotal/Weighted Average
Starwood
Aloft ® (4)
Carlson
Country Inn & Suites By Carlson
®
Country Inn & Suites By Carlson
® (4)(8)
Subtotal/Weighted Average
Jacksonville,
FL
Charleston,
WV
San Antonio,
TX
2009
136
70.19
63.06
44.26
Upscale
2001
2011
64
74.09
97.21
72.02
Midscale
126
190
52.62
59.85
77.98
86.00
41.03
51.47
Midscale
Independent
Aspen Hotel & Suites ® (4)
Aspen Hotel & Suites ®(8)
Fort Smith, AR
Fort Worth, TX
2003
2011
57
70
127
47.16
40.30
43.38
65.16
77.38
71.42
30.73
Midscale
31.18 Upper Midscale
30.98
Total/Weighted Average
_____________________________
(1) Occupancy represents the percentage of available rooms that were sold during a specified period of time and is calculated by dividing the
64.45 % $
90.03 $
58.02
7,095
number of rooms sold by the total number of rooms available, expressed as a percentage.
(2) ADR represents the average daily rate paid for rooms sold, calculated by dividing room revenue (i.e., excluding food and beverage revenue or
other hotel operations revenue such as telephone, parking and other guest services) by rooms sold.
(3) RevPAR is the product of ADR and occupancy. RevPAR does not include food and beverage revenue or other hotel operations revenue such
as telephone, parking and other guest services.
(4) This hotel is subject to mortgage debt at December 31, 2011. For additional information concerning our debt and lenders, please see Item 7.
“Management’s Discussion and Analysis of Financial Information and Results of Operations—Indebtedness” and Item 8. “Financial
Statements and Supplementary Data—Note 11” to Consolidated Financial Statements.
(5) The Spokane, WA Fairfield Inn room count decreased from 86 to 84 in fourth quarter 2011 as a result of capital improvements at the hotel.
(6) The Scottsdale, AZ SpringHill Suites room count decreased from 123 to 121 in fourth quarter 2011 as a result of capital improvements at the
hotel.
(7) The Charleston, WV Holiday Inn Express room count decreased from 67 to 66 in fourth quarter 2011 as a result of renovations related to the
franchise conversion from a Comfort Suites to a Holiday Inn Express.
(8) The conversion date reflects the conversion to a new franchise brand due to the termination of the franchise license agreements for 11 of our
hotels during 2011.
33
We have acquired one hotel since December 31, 2011.
As of February 27, 2012, we have also entered into agreements to purchase two additional hotels for an aggregate purchase price of
approximately $20.2 million. We anticipate acquiring these hotels in the first quarter of 2012. See also “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
In addition to our hotel portfolio, we own 14 parcels of vacant land that we believe are suitable for the development of new hotels, the
possible expansion of existing hotels or the development of restaurants in proximity to certain of our hotels. We currently do not intend to
develop new hotels or restaurants or expand any of our existing hotels at these parcels. We may in the future sell these parcels when market
conditions warrant. To reduce the risk of incurring a prohibited transaction tax on any sales, we may transfer some or all of those parcels of
undeveloped land to our TRSs.
Our Hotel Operating Agreements
Ground Leases
Five of our hotels are subject to ground lease agreements that cover all of the land underlying the respective hotel property.
● The AmericInn located in Fort Smith, Arkansas is subject to a ground lease with an initial lease termination date of August 31,
2022. The initial lease term may be extended for an additional 30 years. Annual ground rent currently is $50,100 per year. Annual
ground rent is adjusted every fifth year with adjustments based on the Consumer Price Index for All Urban Consumers. The next
scheduled ground rent adjustment is January 1, 2015.
● The Hampton Inn located in Fort Smith, Arkansas is subject to a ground lease with an initial lease termination date of May 31,
2030 with 11, five-year renewal options. Annual ground rent currently is $132,461 per year. Annual ground rent is adjusted on
June 1 of each year, with adjustments based on increases in the hotel’s RevPAR calculated in accordance with the terms of the
ground lease.
● The Residence Inn by Marriott located in Portland, Oregon is subject to a ground lease with an initial lease termination date of
June 30, 2084 with one option to extend for an additional 14 years. Ground rent for the initial lease term was prepaid in full at the
time we acquired the leasehold interest. If the option to extend is exercised, monthly ground rent will be charged based on a
formula established in the ground lease.
● The Hyatt Place located in Portland, Oregon is subject to a ground lease with a lease termination date of June 30, 2084 with one
option to extend for an additional 14 years. Ground rent for the initial lease term was prepaid in full at the time we acquired the
leasehold interest. If the option to extend is exercised, monthly ground rent will be charged based on a formula established in the
ground lease.
● The Holiday Inn located in Duluth, Georgia is subject to a ground lease with a lease termination date of April 1, 2069. Annual
ground rent currently is $198,057 per year. Annual rent is increased annually by 3% for each successive lease year, on a
cumulative basis.
34
These ground leases generally require us to make rental payments and payments for our share of charges, costs, expenses, assessments
and liabilities, including real property taxes and utilities. Furthermore, these ground leases generally require us to obtain and maintain insurance
covering the subject property.
Franchise Agreements
All of our hotels, except for our two independent hotels, currently operate under franchise agreements with Marriott, Hilton, IHG, Hyatt,
Starwood Hotels and Resorts Worldwide, Inc. (“Starwood”), AmericInn International, LLC and Country Inns & Suites By Carlson, Inc. We
believe that the public’s perception of the quality associated with a brand-name hotel is an important feature in its attractiveness to guests.
Franchisors provide a variety of benefits to franchisees, including centralized reservation systems, national advertising, marketing programs and
publicity designed to increase brand awareness, training of personnel and maintenance of operational quality at hotels across the brand system.
The franchise agreements require our TRS lessees, as franchisees, to pay franchise fees ranging between 2% and 6% of each hotel’s gross
revenue. In addition, some of our franchise agreements will require our TRS lessees to pay marketing fees of up to 4% of each hotel’s gross
revenue. These agreements generally specify management, operational, record-keeping, accounting, reporting and marketing standards and
procedures with which our TRS lessees, as the franchisees, must comply. The franchise agreements obligate our TRS lessees to comply with the
franchisors’ standards and requirements, including training of operational personnel, safety, maintaining specified insurance, the types of services
and products ancillary to guest room services that may be provided by the TRS lessee, display of signage and the type, quality and age of
furniture, fixtures and equipment included in guest rooms, lobbies and other common areas. Some of the agreements require that we deposit a set
percentage, generally not more than 5% of the gross revenue of the hotels, into a reserve fund for capital expenditures.
We have agreed with certain of our franchisors to complete property improvement plans, with completion dates ranging from March
2011 to August 2015. We expect to spend approximately $18.2 million before December 31, 2012 for capital improvements pursuant to these
plans. We intend to fund the cost of completing these plans with future offerings of our securities and borrowings under our secured revolving
credit facility.
Hotel Management Agreements
In order to qualify as a REIT, we cannot directly or indirectly operate any of our hotels. Our operating partnership and subsidiaries of our
operating partnership lease our hotels to our TRS lessees, which engage property managers to manage our hotels. On February 14, 2011, our TRS
lessees entered into a hotel management agreement with Interstate. We may, but we are not required to, enter into hotel management agreements
with Interstate for any additional hotels that we may acquire. As of February 27, 2012, Interstate and its affiliate, Noble Management Group, LLC
(“Noble”), manage 69 of our 71 hotels.
Pursuant to the hotel management agreement with Interstate, our TRS lessees are required to fund working capital needs, fixed asset
supplies, capital expenditures and operating expenses of the hotels. Interstate, subject to certain limited owner approval rights, has control of all
operational aspects of the hotels, including employee-related matters. Interstate is required to maintain each hotel in good repair and condition and
make such routine maintenance and repairs as are reasonably necessary or appropriate consistent with the business plan we approve.
A significant percentage of our hotels are managed by Interstate. Under the hotel management agreement entered into with Interstate on
February 14, 2011, which has an initial term expiring on February 14, 2021 (unless earlier terminated pursuant to its terms), we pay Interstate a
base management fee and, if certain financial thresholds are met or exceeded, an annual incentive management fee. The base management fee,
which is paid on a monthly basis, is 3% of total revenues for all of the hotels covered by the hotel management agreement. For purposes of the
hotel management agreement, “total revenues” is defined as all income, revenue and proceeds resulting directly or indirectly from the operation of
the hotels and all of their facilities (net of refunds and credits to guests and other allowances) before subtracting expenses. An annual incentive fee
is payable to Interstate, if earned, in the amount equal to 10% of the amount by which actual aggregate EBITDA for all hotels covered by the hotel
management agreement exceeds $65 million, subject to adjustment for increases and decreases in the number of hotels covered by the hotel
management agreement. For purposes of the hotel management agreement, “EBITDA” is defined as the amount by which gross operating profit
(the amount by which total revenues exceed operating expenses) exceeds fixed charges. The annual incentive fee for any fiscal year (or partial
fiscal year) is capped at 1.5% of the total revenues for all of the hotels covered by the hotel management agreement for that fiscal year. In
addition, Interstate receives, on a monthly basis, a fee for the use of its centralized accounting services in an amount equal to $1,500 per hotel per
month for hotels with 90 or more rooms and $1,375 per hotel per month for hotels with less than 90 rooms, subject to annual increases of the
lesser of (i) the percentage change in the Consumer Price Index for the previous fiscal year and (ii) 3%.
35
The hotel management agreement may be terminated entirely or with respect to individual hotels, as applicable, for cause, without cause,
due to damage or condemnation of a hotel, on Interstate’s failure to comply with certain REIT-related provisions of the Code, upon a hotel’s
underperformance, due to Interstate entering into competition with one of our hotels and upon the sale of a hotel. Termination under certain
circumstances, such as termination due to our default under the hotel management agreement, termination due to sale of a hotel, termination due to
damage or condemnation and termination without cause, shall require payment by us of a termination fee which would provide Interstate with a
30% Internal Rate of Return with respect to such hotel, however, solely for the first five terminations, if the effective date of such termination
occurs on or before the end of the eighteenth month following the effective date of the agreement, the Internal Rate of Return shall be 20% instead
of 30%.
We amended our hotel management agreement with Interstate effective as of June 30, 2011, to reduce the base management fee paid to
Interstate for 55 of our hotels for the period from April 1, 2011 through June 30, 2011 by an aggregate of $565,000. We and Interstate entered into
the amendment to address operational challenges experienced at the hotels during the second quarter of 2011. In return for this one-time reduction
in management fee, we provided an additional future incentive to Interstate, which is payable if earned, based on improvement of gross operating
profits at the 55 hotels. The aggregate maximum potential incentive is equal to the amount of the one-time reduction in base management fee and
was earned in full during the fourth quarter of 2011. Thus, the incentive will be paid in the first quarter of 2012.
On April 27, 2011, we entered into a contract with IHG Management (Maryland), LLC (“IHG Management”) to manage the143-room
Holiday Inn hotel in Duluth, Georgia pursuant to a hotel management agreement with a 20-year term, which is extendable at IHG’s option, upon
written notice and if IHG Management is not then in default on the agreement, by up to two five-year terms.
On May 25, 2011, we entered into a contract with Noble to manage the 122-room Hilton Garden Inn hotel in Duluth, Georgia pursuant to
a hotel management agreement with a 3-year term, which is extendable at Noble’s option, upon written notice and if Noble is not then in default
on the agreement, by up to two three-year terms. In conjunction with this contract, the Company has agreed to enter into additional hotel
management agreements with Noble up to a capped amount, which left unfulfilled could lead to the assessment of future fees under the
agreement. In December 2011, Interstate acquired Noble, thus Interstate manages this hotel.
On January 12, 2012, we assumed a contract with Courtyard Management Corporation to manage the 150-room Courtyard by Marriott in
Atlanta, Georgia. The contract has a 25 year term, which automatically renews on the same terms and conditions for two successive periods of
ten years unless either we or Courtyard Management Corporation elects not to renew.
Former Choice Hotels
On March 23, 2011, Choice notified us of the immediate termination of the franchise agreements for ten of our hotels, and the
termination of our Cambria Suites, Bloomington, Minnesota franchise agreement on June 23, 2011. We refer to these 11 hotels, containing 995
guestrooms, as the “former Choice hotels.”
As of December 31, 2011, ten of these hotels (containing an aggregate of 925 guestrooms) were operating under new franchise brands
and one of the hotels (containing 70 guestrooms) was operating independently. Of the ten hotels operating under new franchise brands, six hotels
(containing an aggregate of 441 guestrooms) were operating under lesser-known franchise brands, which provide lower levels of marketing
support and guest loyalty programs that may not be as strong as those of the larger, well-known brands. As a result, occupancy, ADR, RevPAR
and revenues for these hotels have been adversely affected and we may not achieve the operating performance we had previously anticipated. We
entered into a new franchise agreement for the Fort Worth, Texas hotel currently operating independently, that will permit the hotel to operate as a
Fairfield Inn and Suites, upon completion of certain capital improvements anticipated to be completed in May 2012, although we can give no
assurances that we will complete this project and operate the hotel under the new franchise agreement within the stated timeframe or at all.
36
The affected hotels include:
Location
Former Brand
New Franchise Brand
Number of Units
Baton Rouge, LA
San Antonio, TX
Boise, ID
Bloomington, MN
Fort Worth, TX
Charleston, WV
Lakewood, CO
Twin Falls, ID
Fort Smith, AR
Salina, KS
Missoula, MT
Cambria Suites
Cambria Suites
Cambria Suites
Cambria Suites
Comfort Suites
Comfort Suites
Comfort Suites
Comfort Inn & Suites
Comfort Inn
Comfort Inn
Comfort Inn
DoubleTree by Hilton
Country Inn & Suites
Holiday Inn
SpringHill Suites
Fairfield Inn & Suites
Holiday Inn Express
AmericInn
AmericInn
AmericInn
AmericInn
AmericInn
127
126
119
113
70
66
62
111
89
60
52
The termination of the franchise agreements with respect to the former Choice hotels has had a negative effect on our operating results
for the twelve months ended December 31, 2011. From the date of the Choice franchise terminations until the former Choice hotels began
operating under new franchise licenses they did not have access to a national reservations system, resulting in significant reductions in occupancy,
thus negatively affecting RevPAR and hotel operating revenues. For the 11 former Choice hotels, for the twelve months ended December 31,
2011, occupancy declined to 53.9% from 65.7% for the twelve months ended December 31, 2010. For the twelve months ended December 31,
2011, ADR decreased to $77.88 from $77.99 for the twelve months ended December 31, 2010. As a result, RevPAR for the 11 former Choice
hotels declined from $51.24 for the twelve months ended December 31, 2010 to $41.95 for the twelve months ended December 31, 2011.
Item 3. Legal Proceedings.
We are involved from time to time in litigation arising in the ordinary course of business, however, other than the Choice proceedings
described below, we are not currently aware of any actions against us that we believe would materially adversely affect our business, financial
condition or results of operations.
On March 23, 2011, Choice terminated franchise agreements on ten of our hotels, effective on that date. Choice also terminated the
franchise agreement for the Cambria Suites, Bloomington, Minnesota effective June 23, 2011. On March 24, 2011, we filed an arbitration action
with the American Arbitration Association against Choice claiming wrongful termination of our franchise agreements. In response to our
arbitration action, Choice asserted counterclaims of fraudulent inducement, negligent misrepresentation, breach of contract and trademark
infringement. The claimants in the arbitration include Summit REIT, Summit OP, the General Partner, our predecessor, Summit Hospitality I,
LLC, Summit Hospitality V, LLC, The Summit Group, Inc., and each of the TRSs that leased one of the former Choice hotels (collectively,
“Summit Parties”). Choice’s counterclaim seeks from the Summit Parties approximately $3.9 million in actual damages for the alleged breaches
of contract and misrepresentation, $2 million in punitive damages, $120,000 in damages for trademark infringement, and reimbursement of costs
and attorneys' fees related to all claims.
On March 31, 2011, Choice filed suit in United States District Court in Maryland against the Summit Parties claiming trademark
infringement and breach of contract. Choice’s complaint seeks $27,271 in damages for unpaid royalties, $297,000 in liquidated damages,
additional actual damages to be proven at trial, and reimbursement of costs and attorneys’ fees related to all claims. The parties agreed to address
their remaining claims solely through arbitration, and the United States District Court case was administratively closed as of July 26, 2011. The
damage claims made in the United States District Court case are duplicative to those described in the arbitration paragraph above. We vehemently
deny all asserted claims and are vigorously defending the claims.
37
The arbitration hearings were held in December 2011 and January 2012. Findings from the arbitration panel are expected in late March
or April 2012. We are unable to estimate a range of gain or losses as it relates to these claims.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The common stock of Summit REIT began trading on the NYSE on February 9, 2011 under the symbol “INN.” Prior to that time, there
was no public trading market for the common stock of Summit REIT. The last reported sale price for Summit REIT’s common stock as reported
on the NYSE on February 27, 2012 was $10.00 per share. The following table sets forth the high and low sales price per share of common
stock per quarter reported on the New York Stock Exchange as traded, and the distributions declared on the common stock and Common Units
for each of the quarters indicated.
Year Ended December 31, 2011
High
Low
Distribution
Declared
Per Common
Share and
Common Unit
Fourth Quarter
Third Quarter
Second Quarter
Period Feb 9, 2011 through March 31, 2011
$
9.77 $
11.47
11.63
10.40
6.16 $
6.68
9.90
9.26
0.1125
0.1125
0.05625
--
There is currently no established public trading market for the Common Units of Summit OP. No public trading market for the Common
Units is expected to develop. Pursuant to the terms of the partnership agreement, holders of 10,100,000 Common Units (other than the General
Partner and Summit REIT) may exercise their right to tender those Common Units for redemption. Any Common Units tendered for redemption
will be redeemed in exchange for either (i) shares of our common stock, on a one-for-one basis, or (ii) a cash amount based upon a ten-day
average of the closing sale price of our common stock on the NYSE, as described in the partnership agreement.
Shareholder Information
As of February 15, 2012, the common stock of Summit REIT was held of record by five holders and there were 27,278,000 shares of
common stock outstanding as of February 27, 2012. As of February 27, 2012, the Common Units of Summit OP were held by 983 holders of
record and there were 37,378,000 Common Units of Summit OP outstanding, including 27,278,000 Common Units held by the General Partner
and Summit REIT.
Distribution Information
As a REIT, Summit REIT must distribute annually to its stockholders an amount at least equal to 90% of its REIT taxable income,
determined without regard to the deduction for dividends paid and excluding any net capital gain. Summit REIT will be subject to income tax on
its taxable income that is not distributed and to an excise tax to the extent that certain percentages of its taxable income are not distributed by
specified dates. Summit REIT’s cash available for distribution may be less than the amount required to meet the distribution requirements for
REITs under the Code, and Summit REIT may be required to borrow money, sell assets or issue capital stock to satisfy the distribution
requirements.
The timing and frequency of distributions will be authorized by the Summit REIT board of directors, in its sole discretion, and declared
by Summit REIT based upon a variety of factors deemed relevant by its directors, including financial condition, restrictions under applicable law
and loan agreements, capital requirements and the REIT requirements of the Code. Summit REIT’s ability to make distributions will generally
depend on receipt of distributions from Summit OP, which depends primarily upon lease payments from our TRS lessees with respect to our
hotels.
38
Summit OP intends to make quarterly distributions to holders of Common Units in a per-unit amount that is equal to the per-share
amount paid by Summit REIT to the holders of Summit REIT common stock.
We are generally restricted from declaring or paying any distributions, or setting aside any funds for the payment of distributions, on our
common stock or the Common Units unless full cumulative distributions on the Series A Preferred Stock and Series A Preferred Units have been
declared and either paid or set aside for payment in full for all past distribution periods.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2011 with respect to our securities, and the securities of our operating
partnership, that may be issued under existing equity compensation plans:
Number of
Securities to
be Issued
Upon
Exercise of
Outstanding
Options
Weighted
Average
Exercise
Price of
Outstanding
Options
Number of
Securities
Remaining
Available for
Future
Issuance
Under Equity
Compensation
Plans (1)
Plan Category
Equity Compensation Plans Approved by Summit REIT Stockholders
(2)
Equity Compensation Plans Not Approved by Summit REIT
Stockholders
Total
___________________________
(1) Excludes securities reflected in the column entitled “Number of Securities to be Issued Upon Exercise of Outstanding Options.” Summit OP
—
940,000 $
—
9.75
—
1,374,290
940,000 $
1,374,290
9.75
has not adopted any equity compensation plans; however, long-term incentive plan units (“LTIP Units”), a special class of partnership units in
Summit OP, may be issued by Summit OP pursuant to Summit REIT’s 2011 Equity Incentive Plan. Neither Summit REIT nor Summit OP
has any current plans to issue LTIP Units pursuant to the Summit REIT’s 2011 Equity Incentive Plan.
(2) Consists of Summit REIT’s 2011 Equity Incentive Plan, which was approved by Summit REIT’s board of directors and the Summit REIT’s
sole stockholder prior to completion of the IPO.
39
Share Performance Graph
The following graph compares the yearly change in our cumulative total shareholder return on our common shares for the period
beginning February 8, 2011 and ending December 31, 2011, with the yearly changes in the Standard and Poor’s 500 Stock Index (the S&P 500
Index), and the SNL US REIT Hotel Index for the same period, assuming a base share price of $100.00 for our common shares, the S&P 500
Index, and the SNL US REIT Hotel Index for comparative purposes. The SNL US REIT Hotel Index is composed of publicly traded REITs
which focus on investments in hotel properties. Total shareholder return equals appreciation in stock price plus dividends paid and assumes that
all dividends are reinvested. The performance graph is not indicative of future investment performance. We do not make or endorse any
predictions as to future share price performance.
Index
Summit Hotel
Properties, Inc.
S&P 500
SNL US REIT Hotel
Period Ending
02/08/11 02/28/11 03/31/11 04/30/11 05/31/11 06/30/11 07/31/11 08/31/11 09/30/11 10/31/11 11/30/11 12/31/11
$ 100.00 $ 100.00 $ 101.95 $ 116.21 $ 116.07 $ 117.00 $ 116.28 $ 86.62 $ 73.86 $ 84.43 $ 89.27 $ 100.08
100.00 100.36 100.40 103.37 102.20 100.50 98.45
86.01
94.04
100.00 94.76
96.02
76.77
93.10
65.77
96.79
79.51
95.81
75.32
86.56
61.20
93.63
89.67
91.31
Securities Sold
There were no unregistered sales of equity securities during the year ended December 31, 2011 other than as previously reported in our
Current Report on Form 8-K filed with the SEC on February 18, 2011 relating to the concurrent private placement and the formation transactions.
Item 6.
Selected Financial Data.
The following financial and operating information should be read in conjunction with the information set forth under “Management’s
Discussion and Analysis of Financial Conditions and Results of Operations” and our consolidated financial statements and related notes thereto
appearing elsewhere in this report and incorporated herein by reference.
40
Statement of Operations Data
(in thousands, except share and per-share data)
Summit
REIT
Period
February 14,
2011 through
December 31,
2011
Our
Predecessor Combined
Period
January 1,
2011 through
February 13,
2011
Twelve
Months
Ended
December 31,
2011
Our Predecessor
Year Ended December 31,
2010
2009
2008
2007
REVENUES
Room revenues
$
Other hotel operations revenues
Total Revenues
EXPENSES
Hotel Operating Expenses
Rooms
Other direct
Other indirect
Other
Total Hotel Operating Expenses
Depreciation and amortization
Corporate general and
administrative:
Salaries and other
compensation
Other
Equity based compensation
Hotel property acquisition costs
Loss on impairment of assets
Total Expenses
INCOME (LOSS) FROM
OPERATIONS
OTHER INCOME (EXPENSE)
Interest income
Interest expense
Gain (loss) on disposal of assets
Total Other Income
(Expense)
INCOME (LOSS) FROM
CONTINUING
OPERATIONS
INCOME FROM
DISCONTINUED
OPERATIONS
NET INCOME (LOSS)
BEFORE
INCOME TAXES
INCOME TAX (EXPENSE)
BENEFIT
131,638 $
2,646
134,284
14,268 $
330
14,598
145,906 $
2,976
148,882
133,069 $
2,566
135,635
118,960 $
2,240
121,200
132,796 $
2,311
135,107
112,043
1,846
113,889
40,138
17,672
35,870
700
94,380
26,378
4,961
2,658
4,686
73
12,378
3,429
45,099
20,330
40,556
773
106,758
29,807
41,129
17,692
36,466
615
95,902
27,251
36,720
18,048
32,389
681
87,838
23,971
36,517
19,831
33,318
330
89,996
22,308
2,641
3,440
480
254
—
127,573
—
—
—
—
—
15,807
2,641
3,440
480
254
—
143,380
—
—
—
367
6,476
129,996
—
—
—
1,389
7,506
120,704
—
—
—
1,571
—
113,875
30,118
19,710
27,466
481
77,775
16,136
—
—
—
1,640
—
95,551
6,711
(1,209 )
5,502
5,639
496
21,232
18,338
16
(13,193 )
(36 )
7
(4,666 )
—
23
(17,859 )
(36 )
47
(26,362 )
(42 )
50
(18,321 )
(4 )
194
(17,026 )
(390 )
446
(14,214 )
(652 )
(13,213 )
(4,659 )
(17,872 )
(26,357 )
(18,275 )
(17,222 )
(14,420 )
(6,502 )
(5,868 )
(12,370 )
(20,718 )
(17,779 )
4,010
3,918
—
—
—
—
1,465
10,278
11,587
(6,502 )
(5,868 )
(12,370 )
(20,718 )
(16,314 )
14,288
15,505
2,325
(339 )
1,986
(202 )
—
(825 )
(715 )
NET INCOME (LOSS)
(4,177 )
(6,207 )
(10,384 )
(20,920 )
(16,314 )
13,463
14,790
NET INCOME (LOSS)
ALLOCATED TO NON-
CONTROLLING INTEREST
NET INCOME (LOSS)
ALLOCATED TO
COMPANY
(1,240 )
(1,240 )
(2,937 )
(6,207 )
(9,144 )
(20,920 )
(16,314 )
13,463
14,790
PREFERRED DIVIDENDS
(411 )
—
(411 )
—
—
—
—
NET INCOME (LOSS)
ALLOCATED TO
COMMON
STOCKHOLDERS
$
(3,348 ) $
(6,207 ) $
(9,555 ) $
(20,920 ) $
(16,314 ) $
13,463 $
14,790
Loss per share attributable to
common stockholders, basic and
diluted
$
(0.12 )
Dividends declared per common
share
$
0.28
Weighted-average number of
common shares, basic and
diluted
27,278,000
Balance Sheet Data (in millions)
Total Assets
Mortgages and Notes
Payable
$
554
N/A $
554 $
493 $
518 $
495 $
217
N/A
217
420
426
390
448
337
41
Our predecessor’s equity interests consisted of four different classes of limited liability company membership interests that were not
publicly traded, thus, a discussion of its selected earnings data would not be meaningful.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the “Selected Financial Data,” Summit REIT’s and Summit OP’s audited
consolidated financial statements as of and for the year ended December 31, 2011, and related notes thereto, our predecessor’s audited
consolidated financial statements as of December 31, 2010 and for the years ended December 31, 2010 and 2009, and related notes thereto,
appearing elsewhere in this report.
Overview
We are a self-managed hotel investment company that was organized in June 2010 to continue and expand the existing hotel investment
business of our predecessor, Summit Hotel Properties, LLC, a leading U.S. hotel owner. We focus on acquiring and owning premium-branded
select-service hotels in the upper midscale and upscale segments of the U.S. lodging industry, as these segments are currently defined by STR. We
completed our IPO, a concurrent private placement of our common stock and our formation transactions on February 14, 2011, netting
approximately $240.8 million from the IPO and concurrent private placement, after underwriting discounts and the payment by us of offering-
related costs.
We had no business activities prior to completion of the IPO and the formation transactions on February 14, 2011. As a result of the
formation transactions, we acquired sole ownership of the 65 hotels in our predecessor’s portfolio. In addition, we assumed the indebtedness of
our predecessor and its subsidiaries. Our predecessor is considered the acquiror for accounting purposes and its financial statements became our
financial statements upon completion of the formation transactions.
Since completion of our IPO, we have acquired six hotels with a total of 717 guestrooms located in four states for purchase prices
aggregating approximately $78.6 million. As of December 31, 2011, our portfolio consisted of 70 hotels with a total of 7,095 guestrooms located
in 19 states. Substantially all of our assets are held by, and all of our operations are conducted through, Summit OP. Through a wholly owned
subsidiary, Summit REIT is the sole general partner of Summit OP. As of December 31, 2011, Summit REIT owned all of Summit OP’s issued
and outstanding Series A Preferred Units. Furthermore, as of December 31, 2011, Summit REIT owned approximately 73.0% of Summit OP’s
issued and outstanding Common Units, including Common Units representing the sole general partnership interest. The other limited partners of
Summit OP, including The Summit Group and the other former members of our predecessor, which include executive officers and directors of the
Company, own the remaining Common Units as of December 31, 2011. Pursuant to the partnership agreement of Summit OP, through our
General Partner, we have full, exclusive and complete responsibility and discretion in the management and control of Summit OP, including the
ability to cause Summit OP to enter into certain major transactions including acquisitions, dispositions and refinancings, to make distributions to
partners and to cause changes in Summit OP’s business activities. On October 28, 2011, Summit REIT completed a follow-on public offering of
2,000,000 shares of its 9.25% Series A cumulative redeemable preferred stock, in which it raised net proceeds, after deducting the underwriting
discount and estimated offering costs, of approximately $47.9 million. The proceeds from this offering were used to pay down the principal
balance of our revolving credit facility.
42
Recent Developments
On January 12, 2012, we purchased 90% of the ownership interests in the 150 unit Courtyard by Marriott hotel in Atlanta, Georgia for a
purchase price of approximately $28.5 million, or approximately $190,000 per key. Upon expiration of tax credits related to the hotel in
approximately four years, we will be able to take assignment of the remaining ownership of the hotel for approximately $350,000. We expect to
perform a minor renovation of approximately $230,000, for a combined purchase price and renovation cost of approximately $191,500 per
key. We funded the purchase price of this acquisition through the assumption of a term loan with Empire Financial with a principal balance of
$19.0 million and the remainder with borrowings under our senior secured revolving credit facility. In connection with this acquisition, we have
engaged Courtyard Management to manage the hotel pursuant to a hotel management agreement. We own our 90% ownership interest in the
Courtyard by Marriott hotel through one of our TRSs.
On February 13, 2012, we closed on the consolidation and refinance of our four loans with ING Life Insurance and Annuity, which four
loans collectively had an aggregate outstanding balance of approximately $69.5 million as of December 31, 2011. The loans were consolidated
into a single 7-year term loan with a principal balance of $67.5 million, maturity date of March 1, 2032, amortized over 20 years and bearing an
annual interest rate of 6.10%, collateralized by first mortgage liens on 16 properties containing 1,639 guestrooms. The lender has the right to call
the loan so as to be payable in full at March 1, 2019, March 1, 2024 and March 1, 2029. If the loan is repaid prior to maturity, other than if called
by the Lender, there is a prepayment penalty equal to the greater of (i) 1% of the principal being repaid and (ii) the yield maintenance
premium. Pursuant to the consolidation, the mortgages on the Courtyard by Marriott, Missoula, Montana and the Courtyard by Marriott,
Memphis, Tennessee were released and new mortgages were taken on the Country Inn & Suites and the Holiday Inn Express in Charleston, West
Virginia.
On February 14, 2012, we closed on the refinance of our loan with Metabank, which had an outstanding balance as of the date of closing
of approximately $7.0 million. The loan matures February 1, 2017, is amortized over approximately 17 years, and bears an annual interest rate of
4.95%. The prepayment penalty is 3% in the first 2 years, 2% in year 3, and 1% in years 4 and 5. The loan is collateralized by first mortgages on
two hotels containing 197 guestrooms.
Industry Trends and Outlook
Room-night demand in the U.S. lodging industry is correlated to macroeconomic trends. Key drivers of demand include growth in gross
domestic product, or GDP, corporate profits, capital investments and employment. Following periods of recession, recovery of room-night
demand for lodging historically has lagged improvements in the overall economy. However, in the economic recovery beginning in early 2010,
room-night demand has led improvements in the overall economy.
PricewaterhouseCoopers LLP projects RevPAR growth increases in 2012 for upscale hotels, upper midscale hotels and midscale hotels
of 7.4%, 5.8% and 4.5%, respectively. Although we expect that our hotels will realize meaningful RevPAR gains as the economy and lodging
industry continue to improve, the risk exists that global economic conditions may cause the United States economic recovery to stall, which likely
would adversely affect our growth expectations.
While we are guardedly optimistic about macro-economic conditions and their effect on demand for our guestrooms, we feel relatively
confident that our near-term results will not be adversely affected by increased lodging supply in our markets. Growth in lodging supply typically
lags growth in room-night demand. Key drivers of lodging supply include the availability and cost of capital, construction costs, local real estate
market conditions and availability and pricing of existing properties. As a result of scarcity of financing, severe recession and declining operating
fundamentals during 2008 and 2009, many planned hotel developments were cancelled or postponed. According to Lodging Econometrics,
approximately 339 new hotels with 38,287guestrooms will open during 2012 and 370 hotels with 28,248 guestrooms will open in 2013. This
compares to 5,883 new hotels with 785,547 guestrooms that opened during 2008.
43
If the general economy does not continue its recovery for any number of reasons, including, among others, an economic slowdown and
other events outside of our control, such as terrorism or significantly increased gasoline prices, lodging industry fundamentals may not improve as
expected. In the past, similar events have adversely affected the lodging industry and if these events recur, they may adversely affect the lodging
industry in the future.
Operating Performance Metrics
We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These
key indicators include financial information that is prepared in accordance with generally accepted accounting principles (“GAAP”), as well as
other financial information that is not prepared in accordance with GAAP. In addition, we use other information that may not be financial in
nature, including statistical information and comparative data. We use this information to measure the performance of individual hotels, groups of
hotels and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide
information. These key indicators include:
●
●
●
Occupancy;
ADR; and
RevPAR.
Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR,
which is calculated as the product of ADR and occupancy, is an important statistic for monitoring operating performance at the individual hotel
level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and
prior periods, as well as on a company-wide and regional basis. ADR and RevPAR include only room revenue. Room revenue depends on
demand, as measured by occupancy, pricing, as measured by ADR, and our available supply of hotel rooms. Our ADR, occupancy and RevPAR
performance may be affected by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings,
office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel construction and the pricing
strategies of competitors. In addition, our ADR, occupancy and RevPAR performance is dependent on the continued success of our franchisors
and their brands.
Seasoned and Unseasoned Hotel Information for our Initial Portfolio
As we disclosed in the prospectus for the IPO, the hotels we acquired from our predecessor in our formation transactions consisted of 65
hotels, 46 of which we considered at the time of our IPO to be “seasoned” and 19 of which we considered at the time of our IPO to be
“unseasoned” hotels. At the time of our IPO, we designated hotels as “seasoned” based on their construction or acquisition date and we
designated hotels as “unseasoned” if they had been built after January 1, 2007 or experienced a brand conversion since January 1, 2008. The
following table sets forth various statistical and operating information for the 65 hotels in our initial portfolio at the time of our IPO based on the
seasoned and unseasoned designation on a total portfolio basis, and excluding the 11 former Choice hotels, and the equivalent information and
designations for just the 11 former Choice hotels (dollars in thousands, except ADR and RevPAR):
44
Initial Portfolio (65 hotels)
Average number of rooms
Revenue
Hotel Operating Expense
Occupancy
ADR
RevPAR
Seasoned (46 hotels)
Occupancy
ADR
RevPAR
$
$
$
$
$
$
Seasoned, excluding seven former Choice hotels (39 hotels)
Occupancy
ADR
RevPAR
$
$
Unseasoned (19 hotels)
Occupancy
ADR
RevPAR
$
$
Unseasoned, excluding four former Choice hotels (15 hotels)
Occupancy
ADR
RevPAR
$
$
Former Choice Hotels (11 hotels)
Occupancy
ADR
RevPAR
$
$
Twelve Months Ended
December 31,
2011
2010
Percentage
Change
6,533
138,948 $
99,896 $
64.0 %
89.38 $
57.23 $
6,533
135,635
95,902
63.7 %
87.59
55.80
62.4 %
88.52 $
55.28 $
64.7 %
89.94 $
58.23 $
66.8 %
90.79 $
60.68 $
68.0 %
93.17 $
63.39 $
53.9 %
77.88 $
41.95 $
64.1 %
87.75
56.22
64.2 %
89.01
57.17
63.1 %
87.29
55.06
61.7 %
90.13
55.57
65.7 %
77.99
51.24
-
2.4 %
4.2 %
0.5 %
2.0 %
2.6 %
(2.7 )%
0.9 %
(1.7 )%
0.8 %
1.1 %
1.9 %
5.9 %
4.0 %
10.2 %
10.2 %
3.4 %
14.1 %
(18.0 )%
(0.1 )%
(18.1 )%
As shown in the table above, RevPAR for our seasoned hotels, excluding the seven former Choice hotels, increased by 1.9% for the year
ended December 31, 2011, compared to the same period in 2010. RevPAR for our unseasoned hotels, excluding the four former Choice hotels,
increased 14.1% for the year ended December 31, 2011, compared to the same period in 2010. RevPAR for the 65 hotels in our initial portfolio
for the year ended December 31, 2011 was negatively affected by a substantial decrease in RevPAR for the former Choice hotels, driven primarily
by substantial decreases in occupancy rates at these hotels. For the year ended December 31, 2011, RevPAR for the 11 former Choice hotels
decreased 18.1% as compared to 2010. Decreases in RevPAR for the former Choice hotels primarily resulted from disruptions associated with
termination of the franchises and loss of access to national reservations systems pending effectiveness of new franchises.
We believe our 15 unseasoned hotels, excluding the four former Choice hotels, have continued to stabilize since their construction or
brand conversion during the dramatic economic slowdown beginning in 2008. Most of these hotels are newer, larger and are located in larger
markets than those of our seasoned hotels and operate under premium franchise brands. As a result, we believe the 15 unseasoned hotels,
excluding the four former Choice hotels, are particularly well-positioned to generate RevPAR growth for our portfolio as economic conditions
improve. We recognized 14.1% growth in RevPAR for the 15 unseasoned hotels, excluding the four former Choice hotels, during the twelve
months ended December 31, 2011 as compared to 2010.
45
Because we believe the seasoned/unseasoned designation for the 65 hotels in our initial portfolio is becoming less meaningful over time,
the discussion that follows in “-Results of Operations” below is based on the operating results of our total portfolio (70 hotels as of December 31,
2011 and 65 hotels as of December 31, 2010) and our same-store portfolio, which consists of the 65 hotels in our initial portfolio for the periods
ended December 31, 2011 and 2010. We anticipate that we will cease using these designations in future reports.
Revenues and Expenses
Our revenue is derived from hotel operations and consists of room revenue and other hotel operations revenue. As a result of our focus on
select-service hotels in the upper midscale and upscale segments of the U.S. lodging industry, substantially all of our revenue is room revenue
generated from sales of hotel rooms. We also generate, to a much lesser extent, other hotel operations revenue, which consists of ancillary revenue
related to meeting rooms and other guest services provided at our hotels.
Our hotel operating expenses consist primarily of expenses incurred in the day-to-day operation of our hotels. Many of our expenses are
fixed, such as essential hotel staff, real estate taxes, insurance, depreciation and certain types of franchise fees, and these expenses do not decrease
even if the revenue at our hotels decreases. As reclassified, our hotel operating expenses consist of room expenses (wages, payroll taxes and
benefits, linens, cleaning and guestroom supplies and complimentary breakfast), other direct expenses (office supplies, utilities, telephone,
advertising and bad debts), other indirect expenses (real and personal property taxes, insurance, travel agent and credit card commissions, hotel
management fees and franchise fees), and other expenses (ground rent and other items of miscellaneous expense).
Results of Operations of Summit Hotel Properties, Inc. and Summit Hotel OP, LP
Prior to February 14, 2011, the date we completed our IPO, concurrent private placement and formation transactions, neither Summit
REIT nor Summit OP had any operations other than the issuance of 1,000 shares of common stock of Summit REIT to our Executive Chairman in
connection with Summit REIT’s formation and initial capitalization and activity in connection with the IPO and the formation transactions. We
have therefore set forth a discussion comparing the combined operating results of our operations for the period from February 14, 2011 through
December 31, 2011, and the historical results of operations for the period from January 1, 2011 through February 13, 2011 of our predecessor, to
the historical results of our predecessor for the twelve months ended December 31, 2010. The historical results of operations presented below
should be reviewed in conjunction with the notes to the condensed consolidated and combined financial statements included elsewhere in this
report.
46
Comparison of the Year Ended December 31, 2011 to the Year Ended December 31, 2010
Income from Operations . Income from operations decreased by approximately $137,000 to approximately $5.5 million for the year
ended December 31, 2011 from approximately $5.6 million for the year ended December 31, 2010.
The following tables sets forth key operating metrics for our total portfolio and our same-store portfolio for the year ended December 31,
2011 and the year ended December 31, 2010 (dollars in thousands, except ADR and RevPAR):
Year Ended December 31, 2011
Total Revenue
Total Hotel
Operating
Expenses
Occupancy
ADR
RevPAR
Total Portfolio (70
hotels)
Same Store Portfolio (65 hotels)
$
$
148,882 $
138,948 $
106,758
99,896
64.5 % $
64.0 % $
90.03 $
89.38 $
58.02
57.23
Total/Same Store Portfolio (65 hotels)
Total Revenue
$
135,635 $
Year Ended December 31, 2010
Total Hotel
Operating
Expenses
Occupancy
ADR
RevPAR
95,902
63.7 % $
87.59 $
55.80
Total Revenue
Total Hotel
Operating
Expenses
Occupancy
ADR
RevPAR
Percentage Change
Total Portfolio (70 and 65 hotels)
Same Store Portfolio (65 hotels)
__________________________________
The information in the tables above for our total portfolio for the year ended December 31, 2011 includes revenues and expenses from the five
hotels we acquired during the year from the date of acquisition of the hotel through December 31, 2011, and operating information (occupancy,
ADR, and RevPAR) for the hotels for the period in which they were owned by us. Accordingly, the information does not reflect a full twelve
months of operations for the hotels acquired in 2011.
11.3 %
4.2 %
1.5 %
0.5 %
2.8 %
2.0 %
9.8 %
2.4 %
4.0 %
2.6 %
Revenue . Total revenue increased by $13.2 million, or 9.8%, to $148.9 million for the year ended December 31, 2011 from $135.6
million for the year ended December 31, 2010. The increase was primarily due to improving economic conditions affecting our markets and
leading to continued stabilization of revenue at our unseasoned hotels, and the acquisition of five hotels in the second and third quarters of
2011. The increase in revenues occurred despite the significant 18.1% decrease in RevPAR at our former Choice hotels during the same period as
a result of continued disruptions at these hotels associated with termination of the franchises and the loss of access to national reservations systems
pending effectiveness of new franchises. In addition, of the ten hotels operating under new franchise brands, six hotels (containing an aggregate
of 441 guestrooms) are operating under lesser-known franchise brands, which provide lower levels of marketing support and guest loyalty
programs that may not be as strong as those of the larger brands. As a result, occupancy, ADR, RevPAR and revenues for these hotels have been
adversely affected. Our five hotels acquired during the second and third quarters of 2011 contributed $9.9 million to our revenues for the period
each was owned by us during 2011, and generated occupancy of 72.0%, ADR of $100.55, and RevPAR of $72.43 during the year ended
December 31, 2011 while under our ownership.
On a same-store basis, revenue increased by $3.3 million, or 2.4%, to $138.9 million for the year ended December 31, 2011 from $135.6
million for the year ended December 31, 2010. The increase in same-store revenue resulted from an increase in both occupancy and ADR,
resulting in a 2.6% increase in same-store RevPAR. Same-store RevPAR increased to $57.23 for the year ended December 31, 2011 from $55.80
for the prior period as a result of improving economic conditions, which caused same-store occupancy to increase from 63.7% for the year ended
December 31, 2010 to 64.0% for the year ended December 31, 2011. ADR for the same-store hotel portfolio increased from $55.80 for the year
ended December 31, 2010 to $57.23 for the year ended December 31, 2011. The increases in same-store RevPAR, occupancy and ADR occurred
despite decreases in these operating metrics as a result of disruptions associated with termination of the franchise licenses of the former Choice
hotels. For the 11 former Choice hotels, for the twelve months ended December 31, 2011, occupancy declined to 53.9% from 65.7% for the
twelve months ended December 31, 2010. For the twelve months ended December 31, 2011, ADR decreased to $77.88 from $77.99 for the twelve
months ended December 31, 2010. As a result, RevPAR for the 11 former Choice hotels declined from $51.24 for the twelve months ended
December 31, 2010 to $41.95 for the twelve months ended December 31, 2011.
47
Operating Expenses . The 11.3% increase in total hotel operating expenses for the twelve months ended December 31, 2011 over the
twelve months ended December 31, 2010 was largely related to the increase in revenue and the acquisition of five hotels during the second and
third quarters of 2011. In addition, the transition of management of our 65 initial hotels to Interstate resulted in an increase in expenses as a
percentage of revenue in our hotels. We amended our management agreement with Interstate to address the operational challenges experienced at
the hotels during the second quarter 2011, which resulted in a one-time $565,000 reduction in other indirect hotel operating expenses that would
have otherwise been incurred under the management agreement during the period. The amendment to the hotel management agreement provided
Interstate the opportunity to earn the $565,000 as an additional incentive fee in future periods, which they earned in full during the fourth quarter
of 2011. The transition in hotel management resulted in approximately $1.9 million, or a 58% increase, in additional expenses incurred in the
twelve months ended December 31, 2011 that were not incurred in the twelve months ended December 31, 2010.
We have also incurred expenses related to the franchise conversions of the former Choice hotels and renovation expenses related to
refranchising such hotels of approximately $327,000 during the twelve months ended December 31, 2011. Furthermore, we incurred additional
royalty fees as a result of franchisor negotiations related to the IPO of approximately $265,000 during the twelve months ended December 31,
2011. These two costs equate to an additional 0.4% increase in hotel operating expenses during the twelve months ended December 31, 2011
compared to the same period in 2010.
The following table details our hotel operating expenses for our same-store portfolio for the years ended December 31, 2011 and
December 31, 2010 (dollars in thousands):
Same-Store Portfolio Expenses (65 hotels):
Rooms expense
Other direct expense
Other indirect expense
Other expense
Total Hotel Operating Expenses
48
Year Ended
December 31, 2011
Year Ended
December 31, 2010
$
$
42,065 $
19,144
38,050
637
99,896 $
41,129
17,692
36,466
615
95,902
Depreciation and Amortization . Depreciation and amortization expense increased by $2.6 million, or 9.4%, to $29.8 million for the
twelve months ended December 31, 2011 compared to the twelve months ended December 31, 2010, primarily due to the write-off of unamortized
capitalized costs related to re-franchising the former Choice hotels, refinancing of loans, renovations of existing hotels, and the additional
depreciation associated with newly acquired hotels. The $29.8 million includes $26.7 million of fixed asset depreciation, $2.2 million of financing
costs amortization, and $0.9 million of franchise fees amortization. The $27.3 million of depreciation and amortization expense for the twelve
months ended December 31, 2010 includes $25.3 million of fixed asset depreciation, $1.8 million of financing costs amortization, and $0.2
million of franchise fees amortization.
Corporate General and Administrative . Corporate general and administrative expenses of approximately $6.6 million for the twelve
months ended December 31, 2011 are substantially new expenses following the IPO, not previously incurred by our predecessor prior to the
IPO. Included in this amount are approximately $1.0 million of legal expenses related to the Choice litigation.
Income Tax Benefit. The income tax benefit of $2.3 million was a result of our TRS ’ s net operating loss of $5.5 million. The net
operating loss was caused primarily by the disruption at 11 of our hotels due to franchise termination and renovations at our hotels.
Other Income/Expense. The $8.5 million decrease in interest expense was the result of repayment of $223.7 million of indebtedness
with proceeds of the IPO and concurrent private placement.
Cash Flows. Net cash provided by operating activities increased approximately $13.7 million for the twelve months ended December 31,
2011 compared to the prior-year period largely due to a decline in prepaid expenses by our predecessor related to IPO expenses, increased expense
accruals due to different payable timing practices of our predecessor and Interstate, release of restricted cash and a change in net income due to a
decrease in interest expense of $8.5 million. The approximately $80.3 million increase in net cash used in investing activities for the twelve
months ended December 31, 2011 compared to the prior-year period was the result of $50.0 million in land and hotel acquisitions in the year
ended December 31, 2011, and $33.5 million of purchases of other property and equipment. The approximately $69.4 million increase in net cash
provided by financing activities for the year ended December 31, 2011 compared to the prior-year period was primarily due to our receipt of the
net proceeds from our IPO and concurrent private placement, partially offset by repayment of loan obligations and distributions paid by our
predecessor to its members prior to our IPO, the receipt of net proceeds from our preferred stock offering, as well as the issuance of approximately
$65.4 million of new debt related to the senior secured credit facility and the Goldman Sachs debt, both described under “-Outstanding
Indebtedness” below. Immediately prior to completion of the formation transactions and in accordance with the terms of the merger agreement,
during February 2011, our predecessor paid accrued and unpaid priority returns on its Class A and Class A-1 membership interests in the amount
of approximately $8.3 million. Our predecessor paid approximately $535,000 of priority returns during the first quarter of 2010. Effective upon
the closing of the Merger, no additional payments on priority returns to former members of our predecessor will be made.
Comparison of the Year Ended December 31, 2010 to the Year Ended December 31, 2009
Income from Operations. Income from operations increased by approximately $5.1 million to approximately $5.6 million for the year
ended December 31, 2010 from approximately $500,000 for the year ended December 31, 2009. This increase was primarily the result of a $14.4
million increase in revenue for the year ended December 31, 2010.
49
The following tables sets forth key operating metrics for our total portfolio and our same-store portfolio for the year ended December 31,
2010 and the year ended December 31, 2009 (dollars in thousands, except ADR and RevPAR):
Total Portfolio (65 hotels)
Same Store Portfolio (60 hotels) (1)
(1) Same Store Portfolio reflects the five new hotels opened by our predecessor during 2009.
135,635 $
122,344 $
95,902
86,088
Total Revenue
$
$
Year Ended December 31, 2010
Total Hotel
Operating
Expenses
Occupancy
ADR
RevPAR
63.7 % $
64.1 % $
87.59 $
88.25 $
55.80
56.53
Total Portfolio (65 hotels)
Same Store Portfolio (60 hotels) (1)(2)
(1) Same Store Portfolio reflects the five new hotels opened by our predecessor during 2009.
(2) Excludes hotels that were reclassified to discontinued operations during 2009.
121,200 $
118,791 $
87,838
85,266
Total Revenue
$
$
Year Ended December 31, 2009
Total Hotel
Operating
Expenses
Occupancy
ADR
RevPAR
61.9 % $
62.8 % $
87.40 $
87.59 $
54.12
54.97
Percentage Change
Total Revenue
Total Hotel
Operating
Expenses
Occupancy
ADR
RevPAR
Total Portfolio (65 hotels)
Same Store Portfolio (60 hotels)
11.9 %
3.0 %
9.2 %
1.0 %
2.9 %
2.1 %
0.2 %
0.8 %
3.1 %
2.8 %
Revenue. Total revenue increased by $14.4 million, or 11.9%, to $135.6 million for the year ended December 31, 2010 from $121.2
million for the year ended December 31, 2009. The increase was primarily due to improving economic conditions affecting our markets and
leading to continued stabilization of revenue at our unseasoned hotels plus the opening of five new hotels during 2009.
On a same-store basis, revenue increased by $3.5 million, or 3.0%, to $122.3 million for the year ended December 31, 2010 from $118.8
million for the year ended December 31, 2009. The increase in same-store revenue resulted from an increase in both occupancy and ADR,
resulting in a 2.8% increase in same-store RevPAR. Same-store RevPAR increased to $56.53 for the year ended December 31, 2010 from $54.97
for the prior period as a result of improving economic conditions, which caused higher occupancy at our hotels and resulted in a 2.1% increase and
a 0.8% increase in ADR for the same-store hotel portfolio.
Operating Expenses . Total hotel operating expenses increased $8.1 million, or 9.2%, to $95.9 million for the year ended December 31,
2010 from $87.8 million for the year ended December 31, 2009. This increase was directly related to the $14.4 million increase in sales revenue as
expenses actually decreased as a percentage of revenue to only 70.7% of revenue for 2010 compared to 72.5% of revenue for 2009. Most of this
decrease was related to repairs and maintenance expenses decreasing by $1.5 million, to $4.7 million for the year ended December 31, 2010 from
$6.2 million for the year ended December 31, 2009. The decrease was primarily due to fewer renovations being performed during 2010 than in
2009 at our hotels.
50
The following table details our hotel operating expenses for our same-store portfolio for the years ended December 31, 2010 and
December 31, 2009 (dollars in thousands):
Same-Store Portfolio Expenses (60 hotels):
Rooms expense
Other direct expense
Other indirect expense
Other expense
Total Hotel Operating Expenses
Year Ended
December 31, 2010
Year Ended
December 31, 2009
$
$
36,706 $
15,923
33,099
360
86,088 $
35,707
17,492
31,821
246
85,266
Depreciation and Amortization. On a total portfolio basis, depreciation and amortization expense from continuing operations increased
by $3.3 million, or 13.7%, to $27.3 million for the year ended December 31, 2010 from $24.0 million for the year ended December 31, 2009. The
increase was primarily due to the five hotels opened in 2009 and costs incurred related to the maturity date extension of our loan with Fortress
Credit Corp. The $27.3 million of depreciation and amortization expense for the twelve months ended December 31, 2010 included $25.3 million
of fixed asset depreciation, $1.8 million of financing costs amortization, and $0.2 million of franchise fees amortization. The $24.1 million of
depreciation and amortization expenses for the twelve months ended December 31, 2009 included $21.9 million of fixed asset depreciation, $2.0
million of financing costs amortization, and $0.2 million of franchise fees amortization.
Impairment Losses. During the year ended December 31, 2010, our predecessor determined that four parcels of undeveloped land were
impaired due to the termination of sales contracts for the sale of the land parcels and management’s resulting determination that their carrying
amounts were no longer realizable. As a result, our predecessor recorded a $6.5 million non-cash impairment charge in the fourth quarter of 2010.
Our predecessor determined that the fair market value of these land parcels was $20.3 million as of December 31, 2010. During the year ended
December 31, 2009, our predecessor determined that six parcels of undeveloped land were impaired due to the fact that their aggregate historical
carrying value exceeded their aggregate fair value. This impairment was the result of our predecessor’s decision to stop development projects and
attempt to sell the land. As a result, our predecessor recorded a $6.3 million non-cash impairment charge in the fourth quarter of 2009. Also in
2009, our predecessor determined that the Courtyard by Marriott located in Memphis, Tennessee was impaired due to the fact that its historical
carrying value was higher than the hotel’s fair value. This determination was made based on economic distress on this particular hotel and market.
Accordingly, our predecessor recorded a $1.2 million noncash impairment charge in 2009.
Cash Flows. Net cash provided by operating activities decreased approximately $1.3 million for the twelve months ended December 31,
2010 compared to the prior-year period largely due to an increase in prepaid expenses related to IPO expenses. The approximately $18.5 million
decrease in net cash used in investing activities for the twelve months ended December 31, 2010 compared to the prior-year period was the result
of no acquisitions of hotels in the twelve months ended December 31, 2010. The approximately $7.5 million increase in net cash used in financing
activities for the twelve months ended December 31, 2010 compared to the prior-year period was primarily due to an increase in principal
payments on debt and no offering proceeds received during 2010 compared to 2009, despite a reduction in distributions to members in 2010.
51
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel
properties, including recurring maintenance and capital expenditures necessary to maintain our hotel properties in accordance with brand
standards, capital expenditures to improve our hotel properties, acquisitions, interest expense and scheduled principal payments on outstanding
indebtedness and distributions to our stockholders.
Acquisitions
On January 12, 2012, we purchased the 150 unit Courtyard by Marriott hotel in Atlanta, Georgia for a purchase price of approximately
$28.5 million, or approximately $190,000 per key. We expect to perform a minor renovation of approximately $230,000, for a combined purchase
price and renovation cost of approximately $191,500 per key. We funded the purchase price of this acquisition through the assumption of a term
loan with Empire Financial with a principal balance of $19.0 million, and funded the remainder of the purchase price with borrowings under our
secured revolving credit facility. In connection with this acquisition, we have engaged Courtyard Management to manage the hotel pursuant to a
hotel management agreement.
We anticipate that we will acquire two hotels located in Birmingham, Alabama, described below, during the first quarter in 2012.
We have entered into an agreement to purchase a 95-room Hilton Garden Inn hotel in Birmingham, Alabama. The purchase price is
$8.625 million, and closing is expected to occur during the first quarter of 2012. We anticipate performing approximately $1 million of
renovations to the hotel for a combined purchase and renovation cost of approximately $101,300 per key. We will fund the purchase price with a
draw on our secured revolving credit facility. The hotel will be managed by HP Hotels.
We have entered into an agreement to purchase a 130-room Hilton Garden Inn hotel in Birmingham, Alabama. The purchase price is
$11.5 million, and closing is expected to occur during the first quarter of 2012. We anticipate performing approximately $400,000 of renovations
to the hotel for a combined purchase and renovation cost of approximately $92,000 per key. We will fund the purchase price with a draw on our
secured revolving credit facility. The hotel will be managed by HP Hotels.
52
Acquisition of one or both of these hotels, or other hotels identified by us, may occur if all conditions to closing are satisfied, and if we
have sufficient funds to complete such purchases, considering other short- and long-term liquidity requirements, including planned capital
expenditures at our existing hotels. If one or more hotels is purchased, we expect to fund any purchases with working capital, funds available
under the senior secured revolving credit facility, assumption of existing mortgage debt or additional mortgage loans. The conditions to closing
may not be satisfied, and we may not have sufficient funds to make such purchases, and thus, we cannot assure you that we will acquire any
properties.
Short-Term Liquidity Requirements
We expect to satisfy our short-term liquidity requirements, including capital expenditures, scheduled debt payments and funding the cash
portion of the purchase price of hotel properties under contract, if acquired, with working capital, cash provided by operations, and short-term
borrowings under our secured revolving credit facility. In addition, we may fund the purchase price of hotel acquisitions and cost of required
capital improvements by assuming existing mortgage debt, issuing securities (including partnership units issued by Summit OP), or incurring
other mortgage debt. Further, we may seek to raise capital through public or private offerings of our equity or debt securities. However, certain
factors may have a material adverse effect on our ability to access these capital sources, including our degree of leverage, the value of our
unencumbered hotel properties, borrowing restrictions imposed by lenders and market conditions. We will continue to analyze which source of
capital is most advantageous to us at any particular point in time, but financing may not be consistently available to us on terms that are attractive,
or at all. We believe that our working capital, cash provided by operations, borrowings under our secured revolving credit facility, and other
sources of funds available to us will be sufficient to meet our ongoing short-term liquidity requirements for at least the next 12 months.
Since December 31, 2011, we have refinanced $76.6 million of our existing debt that would otherwise have matured or been callable
during 2012, leaving approximately $28.5 million of debt (approximately 17.1% of our total debt outstanding on December 31, 2011) that matures
prior to December 31, 2013. It may be difficult to refinance such loans on terms acceptable to us, or at all, and we may not have sufficient
borrowing capacity on our revolving credit facility to repay the maturing debt using draws on that facility for amounts that we are unable to
refinance. Although we believe that we will be able to refinance these loans or will have the capacity to repay them, if necessary, using draws
under our revolving credit facility, there can be no assurance that our revolving credit facility will be available to repay such maturing debt, as
draws under our credit facility are subject to certain financial covenants.
We anticipate making renovations and other non-recurring capital expenditures with respect to our hotel properties, including
approximately $20.7 million in capital expenditures we have budgeted to be spent during 2012, pursuant to property improvement plans required
by our franchisors.
Long-Term Liquidity Requirements
Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovations and other non-
recurring capital expenditures that need to be made periodically with respect to our hotel properties, and scheduled debt payments, including
maturing loans. We will seek to satisfy these long-term liquidity requirements through various sources of capital, including working capital, cash
provided by operations, long-term hotel mortgage indebtedness and other borrowings, including borrowings under our secured credit facility. In
addition, we may seek to raise capital through public or private offerings of our equity or debt securities. However, certain factors may have a
material adverse effect on our ability to access these capital sources, including our degree of leverage, the value of our unencumbered hotel
properties, borrowing restrictions imposed by lenders and market conditions. We will continue to analyze which source of capital is most
advantageous to us at any particular point in time, but financing may not be consistently available to us on terms that are attractive, or at all.
53
To satisfy the requirements for qualification as a REIT, we must meet a number of organizational and operational requirements, including
a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction
for dividends paid and excluding any net capital gain. Therefore, we will need to raise additional capital in order to grow our business and invest
in additional hotel properties. However, there is no assurance that we will be able to borrow funds or raise additional capital on terms acceptable
to us, if at all. We anticipate that debt we incur in the future may include, as does our current debt, restrictions (including lockbox and cash
management provisions) that under certain circumstances may limit or prohibit Summit OP and its subsidiaries from making distributions or
paying dividends, repaying loans or transferring assets.
Outstanding Indebtedness
As of December 31, 2011, we had approximately $217.1 million in outstanding indebtedness secured by mortgages on 62 hotels and
eight hotels unencumbered by mortgage debt, including four hotels (containing 432 guestrooms) operating under brands owned by Marriott,
Hilton, IHG and Hyatt that are available to be used as collateral for potential future loans. Our revolving credit facility is available to fund future
acquisitions, property redevelopments and working capital requirements (including the repayment of debt). As of December 31, 2011, the
maximum amount of borrowing permitted by the terms of our revolving credit facility is approximately $92.3 million. Of this maximum amount,
approximately $62.9 million is available for us to borrow as of February 27, 2012.
We maintain a prudent capital structure and, while the ratio will vary from time to time, we generally intend to limit our ratio of
indebtedness to earnings before interest, taxes, depreciation and amortization (“EBITDA”) to no more than six to one. For purposes of calculating
this ratio we exclude preferred stock from indebtedness. During 2011 we financed our long-term growth with common and preferred equity
issuances and debt financing having staggered maturities, and intend to continue to do so in the future. Our debt includes, and may include in the
future, mortgage debt secured by hotels and unsecured debt.
$125 Million Senior Secured Revolving Credit Facility
On April 29, 2011, Summit OP, as borrower, and Summit REIT, as guarantor, entered into a $100.0 million, three-year (with an option to
extend for one additional year if we meet certain requirements) senior secured revolving credit facility with Deutsche Bank AG New York
Branch, as administrative agent, Deutsche Bank Securities Inc., as lead arranger, and a syndicate of lenders including Deutsche Bank AG New
York Branch, Royal Bank of Canada, KeyBank National Association and Regions Bank. On May 13, 2011, Summit OP entered into an agreement
with Deutsche Bank and U.S. Bank National Association that increased the maximum aggregate amount of the credit facility from $100.0 million
to $125.0 million. On August 15, 2011, we entered into a First Letter Amendment to the credit facility. On October 21, 2011, we entered into a
Second Letter Amendment and Limited Waiver to the credit facility. The terms of the credit facility, as amended, are described in the summary
below.
Outstanding borrowings on the revolving credit facility are limited to the least of (1) $125.0 million, (2) 55% of the aggregate appraised
value of the borrowing base assets and (3) the aggregate adjusted net operating income of the borrowing base assets securing the facility divided
by 150% of the monthly factor shown on a standard level constant payment table for a fully amortizing 25-year loan based on an assumed interest
rate equal to the greatest of (x) the ten-year U.S. Treasury rate plus 3.5%, (y) 7.00% and (z) the weighted-average interest rate then applicable to
advances outstanding under the revolving credit facility. The availability of the credit facility is also subject to a borrowing base having no fewer
than 15 properties. As of February 27, 2012, 25 hotel properties are included in the borrowing base and the maximum amount of borrowing
permitted by the terms of the credit facility is approximately $92.3 million. Of this maximum amount, approximately $62.9 million is available for
us to borrow as of February 27, 2012.
54
We will pay interest on the periodic advances under the $125.0 million revolving credit facility at varying rates, based upon, at our
option, either (i) 1-, 2-, 3- or 6-month LIBOR, subject to a floor of 0.50%, plus the applicable LIBOR margin or (ii) the applicable base rate,
which is the greatest of the administrative agent’s prime rate, 0.50% plus the federal funds effective rate, and 1-month LIBOR (incorporating the
floor of 0.50%) plus 1.00%, plus the applicable margin for base rate loans. The applicable LIBOR and base rate margin depends upon the ratio of
our outstanding consolidated total indebtedness to EBITDA. The LIBOR margin ranges from 2.50% to 3.50%, and the base rate margin ranges
from 1.50% to 2.50%.
The credit facility is secured primarily by a first priority mortgage lien on each borrowing base asset and a first priority pledge of our
equity interests in the subsidiaries that hold the borrowing base assets, and Summit Hotel TRS II, LLC, which we formed in connection with the
credit facility to wholly own the TRS lessees that lease each of the borrowing base assets. The borrowing base assets are as follows:
●
●
●
●
●
●
●
●
●
●
●
●
●
SpringHill Suites, Little Rock, AR
Fairfield Inn, Denver, CO
Hampton Inn, Fort Collins, CO
Staybridge Suites, Glendale, CO
AmericInn, Golden, CO
Fairfield Inn, Golden, CO
Hampton Inn, Boise, ID
AmericInn, Twin Falls, ID
Hampton Inn, Twin Falls, ID
Residence Inn, Fort Wayne, IN
Hilton Garden Inn, Duluth, GA
Holiday Inn, Duluth, GA
Fairfield Inn, Emporia, KS
●
●
●
●
●
●
●
●
●
●
●
●
Holiday Inn Express, Emporia, KS
AmericInn, Salina, KS
Fairfield Inn, Salina, KS
Fairfield Inn, Baton Rouge, LA
SpringHill Suites, Baton Rouge, LA
TownePlace Suites, Baton Rouge, LA
Homewood Suites, Ridgeland, MS
Hampton Inn, Medford, OR
SpringHill Suites, Nashville, TN
Hampton Inn, Provo, UT
Fairfield Inn, Bellevue, WA
Fairfield Inn, Spokane, WA
Prior to April 29, 2013, we may elect to increase the amount of the credit facility by up to an additional $75.0 million, increasing the
maximum aggregate amount of the credit facility to $200.0 million, subject to the identification of a lender or lenders willing to make available the
additional amounts, including new lenders acceptable to us and the administrative agent, and subject to adding additional properties to the
borrowing base.
Financial and Other Covenants. We are required to comply with a series of financial and other covenants in order to borrow under the
senior secured revolving credit facility. The material financial covenants, tested quarterly, include the following:
● a maximum ratio of consolidated indebtedness (as defined in the loan documentation) to consolidated EBITDA (as defined in the loan
documentation) ranging from 6.75:1.00 to 5.75:1.00;
● a minimum ratio of adjusted consolidated EBITDA (as defined in the loan documentation) to consolidated fixed charges (as defined in the
loan documentation) ranging from 1.40:1.00 to 1.50:1.00;
● a minimum consolidated tangible net worth (as defined in the loan documentation) of not less than $228,728,000 plus 80% of the net
proceeds of subsequent common equity issuances; and
● a maximum dividend payout ratio of 95% of FFO (as defined in the loan documentation) or an amount necessary to maintain REIT tax
status and avoid corporate income and excise taxes.
55
As of February 27, 2012, we have $29.4 million outstanding under the credit facility, and a total remaining availability of $62.9 million.
Other Outstanding Indebtedness
As of December 31, 2011, we had approximately $217.1 million in outstanding indebtedness, including approximately $11.4
million outstanding under our revolving credit facility, and eight hotels unencumbered by mortgage debt. As of February 27, 2012, we have
approximately $252.9 million in outstanding indebtedness, including approximately $29.4 million outstanding under our revolving credit
facility, and eight hotels unencumbered by mortgage debt, including four hotels with 432 rooms operating under brands owned by Marriott,
Hilton, IHG or Hyatt, available as collateral for potential future loans. We intend to secure or assume term loan financing or use the secured credit
facility, together with other sources of financing, to fund future acquisitions. We may not succeed in obtaining new financing on favorable terms
or at all and we cannot predict the size or terms of the financing if we are able to obtain it. Our failure to obtain new financing could adversely
affect our ability to grow our business.
56
The following table sets forth our mortgage debt obligations that were outstanding as of December 31, 2011:
Lender
Collateral
MetaBank
Holiday Inn, Boise, ID
SpringHill Suites by Marriott, Lithia
Springs, GA
Outstanding
Principal
Balance as of
December 31,
2011
$
7,058
Interest Rate
as of
December 31, 2011
(1)
Prime rate, subject to
a
floor of 5.00%
Amortization
(years)
Maturity
Date
20
03/01/12 (2)
ING Investment Management (3) Fairfield Inn & Suites by Marriott,
$
27,646
5.60 % (3)
20
04/01/12 (3)
Germantown, TN
Residence Inn by Marriott, Germantown,
TN
Holiday Inn Express, Boise, ID
Courtyard by Marriott, Memphis, TN (3)
Hampton Inn & Suites, El Paso, TX
Hampton Inn, Fort Smith, AR
Chambers Bank
Aspen Hotel & Suites, Fort Smith, AR
Bank of the Ozarks (4)
Hyatt Place, Portland, OR
ING Investment Management (3) Hilton Garden Inn, Ft. Collins, CO
ING Investment Management (3) Springhill Suites, Flagstaff, AZ Holiday
$
$
$
$
1,507 6.50 %
6,334
90-day LIBOR +
4.00%, subject to a
floor of 6.75%
7,655 6.34 % (3)
28,158
6.10 % (3)
20 06/24/12
25
06/29/12 (4)
20 07/01/12 (3)
20
07/01/12 (3)
Inn Express, Sandy, UT
Fairfield Inn by Marriott, Lewisville, TX
Hampton Inn, Denver, CO
Holiday Inn Express, Vernon Hills, IL
Hampton Inn, Fort Wayne, IN
Courtyard by Marriott, Missoula, MT (3)
Staybridge Suites, Ridgeland, MS
BNC National Bank (7)
Hampton Inn & Suites, Fort Worth, TX
$
5,519 5.01 %
First National Bank of Omaha (5) Courtyard by Marriott, Germantown, TN
$
23,688
Courtyard by Marriott, Jackson, MS
Hyatt Place, Atlanta, GA
90-day LIBOR +
4.00%, subject to a
floor of 5.25%
20 11/01/13
20
07/01/13
ING Investment Management (3) Residence Inn by Marriott, Ridgeland, MS $
6,047 6.61 % (3)
20 11/01/28 (3)
General Electric Capital Corp. (8)
Country Inn & Suites, San Antonio, TX
$
10,860
90-day LIBOR
+3.50%
National Western Life Insurance
(6)
Courtyard by Marriott, Scottsdale, AZ
SpringHill Suites by Marriott, Scottsdale,
AZ
$
13,197
8.00 %
BNC National Bank (7)
Goldman Sachs
Holiday Inn Express & Suites, Twin Falls,
ID
$
$
SpringHill Suites, Bloomington, MN,
Hampton Inn & Suites, Bloomington, MN
5,700 4.81 %
14,644
5.67 %
Compass Bank
Courtyard by Marriott, Flagstaff, AZ
$
16,083
Prime rate - 0.25%,
subject to a floor of
4.50%
25 04/01/14
17
01/01/15
20 04/01/16
25
07/06/16
20
05/17/18
General Electric Capital Corp. (8) SpringHill Suites by Marriott, Denver, CO $
90-day LIBOR +
3.50%
8,315
20 04/01/18
Aspen Suites, Baton Rouge, LA
90-day LIBOR +
General Electric Capital Corp. (8)
$
10,709 3.50%
Bank of the Cascades
Residence Inn by Marriott, Portland, OR
$
12,557 4.66 % (9)
Secured Revolving Credit Facility See “--$125 Million Senior Secured
$
11,426
Revolving Credit Facility” above
See “--$125 Million
Senior Secured
Revolving Credit
Facility” above
Total
$
217,104
25 03/01/19
25 09/30/21
N/A
04/29/14
57
_______________________________
(1) As of December 31, 2011, the Prime rate was 3.25% and 90-day LIBOR was 0.581%.
(2) On February 14, 2012, we refinanced this loan. It now matures February 1, 2017, is amortized over approximately 17 years and bears an
annual interest rate of 4.95%. There is a prepayment penalty of 3% if the loan is paid off in the first two years, 2% in year 3 and 1% in years
4 and 5. The loan is collateralized by a first mortgage lien on two hotels containing 197 rooms.
(3) On February 13, 2012, we closed on the consolidation and refinance of our four loans with ING Life Insurance and Annuity, which four loans
collectively had an aggregate outstanding balance of approximately $69.5 million as of December 31, 2011. The loans were consolidated into
a single 7-year term loan with a principal balance of $67.5 million, maturity date of March 1, 2032, amortized over 20 years and bearing an
annual interest rate of 6.10%, collateralized by first mortgage liens on 16 properties containing 1,639 guestrooms. The lender has the right to
call the loan so as to be payable in full at March 1, 2019, March 1, 2024 or March 1, 2029. If the loan is repaid prior to maturity, other than if
called by the lender, there is a prepayment penalty equal to the greater of (i) 1% of the principal being repaid and (ii) the yield maintenance
premium. Pursuant to the consolidation, the mortgages on the Courtyard by Marriott, Missoula, MT and the Courtyard by Marriott, Memphis,
TN were released and new mortgages were taken on the Country Inn & Suites and the Holiday Inn Express in Charleston, West Virginia.
The yield maintenance premium under the new ING loan is calculated as follows: (A) if the entire amount of the loan is being prepaid, the
yield maintenance premium is equal to the sum of (i) the present value of the scheduled monthly installments from the date of prepayment to
the maturity date, and (ii) the present value of the amount of principal and interest due on the maturity date (assuming all scheduled monthly
installments due prior to the maturity date were made when due), less (iii) the outstanding principal balance as of the date of prepayment; and
(B) if only a portion of the loan is being prepaid, the yield maintenance premium is equal to the sum of (i) the present value of the scheduled
monthly installments on the pro rata portion of the loan being prepaid, or the release price, from the date of prepayment to the maturity date,
and (ii) the present value of the pro rata amount of principal and interest due on the release price due on the maturity date (assuming all
scheduled monthly installments due prior to the maturity date were made when due), less (iii) the outstanding amortized principal allocation,
as defined in the loan agreement, as of the date of prepayment.
(4) The maturity date may be extended to June 20, 2014 based on the exercise of two, one-year extension options, subject to the satisfaction of
certain conditions.
(5) Evidenced by three promissory notes, the loan secured by the Hyatt Place located in Atlanta, Georgia has a maturity date of February 1, 2014.
The three promissory notes are cross-defaulted and cross-collateralized.
(6) On December 8, 2009, we entered into two cross-collateralized and cross-defaulted mortgage loans with National Western Life Insurance in
the amounts of $8,650,000 and $5,350,000. If these loans are prepaid, there is a prepayment penalty ranging from 1% to 5% of the principal
being prepaid. A one-time, ten-year extension of the maturity date is permitted, subject to the satisfaction of certain conditions.
(7) The two BNC loans are cross-defaulted.
(8) The three GECC loans are cross-defaulted. All three loans became subject to a prepayment penalty equal to 2% of the principal repaid prior to
August 1, 2012, 1% of the principal repaid prior to August 1, 2013, and 0% of the principal repaid thereafter. In addition to the mortgages
securing each of the loans, GECC has additional mortgages on the Jacksonville, FL Aloft, Las Colinas, TX Hyatt Place and Boise, ID
Fairfield Inn, each of which may be released upon realization of certain financial covenants.
(9) The loan carries a fixed interest rate of 4.66% until September 30, 2016 and a fixed interest rate thereafter of the then-current Federal Home
Loan Bank of Seattle Intermediate/Long-Term, Advances Five-year Fixed Rate plus 3.00%.
58
We believe that we will have adequate liquidity to meet requirements for scheduled maturities. However, we can provide no assurances
that we will be able to refinance our indebtedness as it becomes due and, if refinanced, whether such refinancing will be available on favorable
terms.
Capital Expenditures
We have budgeted to spend approximately $20.7 million during 2012 for capital improvements to be made to the hotels in our portfolio,
including capital improvements that we may be required to make pursuant to property improvement plans with respect to certain hotels in our
portfolio, including our recent acquisitions and in connection with the entry into new franchise agreements for the former Choice hotels. In
addition, we may make additional capital improvements at hotels we acquire in the future. Since the completion of our IPO on February 14, 2011
through December 31, 2011, we funded approximately $28.9 million of capital improvements at our hotels. During 2011, we have completed
renovations at seven of our hotels (not including renovations due to franchise conversions) and currently have renovations underway at five of our
hotels. We expect to fund the future capital improvements with working capital, borrowings and other potential sources of capital to the extent
available to us.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to
investors.
Contractual Obligations
The following table outlines the timing of payment requirements related to our long-term debt obligations and other contractual
obligations as of December 31, 2011 (dollars in millions):
Long-term debt obligations (1)
Operating Lease obligations
Total
Total
234.4 $
37.4
271.8 $
$
$
Less than One
Year
Payments Due By Period
One to Three
Years
Four to Five
Years
More than
Five Years
89.6 $
0.4
90.0 $
61.6 $
0.9
62.5 $
36.2 $
0.9
37.1 $
47.0
35.2
82.2
(1) The amounts shown include amortization of principal on our fixed-rate and variable-rate obligations, debt maturities on our fixed-rate and
variable-rate obligations and estimated interest payments of our fixed-rate obligations. Interest payments have been included based on the
weighted-average interest rate.
59
Inflation
Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive
pressures may limit the ability of our management companies to raise room rates.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the
reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of
judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our
estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience
and on various other assumptions that are believed to be reasonable under the circumstances. All of our predecessor’s significant accounting
policies are disclosed in the notes to its consolidated financial statements. The following represent certain critical accounting policies that will
require our management to exercise their business judgment or make significant estimates:
Principles of Consolidation and Basis of Presentation. Our consolidated financial statements include our accounts, the accounts of our
wholly owned subsidiaries or subsidiaries for which we have a controlling interest, the accounts of variable interest entities in which we are the
primary beneficiary, and the accounts of other subsidiaries over which we have a controlling interest. All material inter-company transactions,
balances and profits will be eliminated in consolidation. The determination of whether we are the primary beneficiary is based on a combination of
qualitative and quantitative factors which require management in some cases to estimate future cash flows or likely courses of action.
Hotels—Acquisitions. We allocate the purchase price based on the fair value of the acquired assets and assumed liabilities. We determine
the acquisition-date fair values of all assets and assumed liabilities using methods similar to those used by independent appraisers, for example,
using a discounted cash flow analysis that utilizes appropriate discount and/or capitalization rates and available market information. Estimates of
future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic
conditions. Acquisition costs are expensed as incurred. Changes in estimates and judgments related to the allocation of the purchase price could
result in adjustments to real estate or intangible assets, which can affect depreciation and/or amortization expense and our results of operations.
Depreciation and Amortization of Hotels. Hotels are recorded at cost and depreciated using the straight-line method over an estimated
useful life of 27 to 40 years for buildings and two to 15 years for furniture, fixtures and equipment. We are required to make subjective
assessments as to the useful lives and classification of our properties for purposes of determining the amount of depreciation expense to reflect
each year with respect to the assets. While management believes its estimates are reasonable, a change in the estimated useful lives could affect
the results of operations.
Impairment of Hotels. We monitor events and changes in circumstances for indicators that the carrying value of a hotel and related assets
may be impaired. Factors that could trigger an impairment analysis include, among others: (1) significant underperformance relative to historical
or projected operating results, (2) significant changes in the manner of use of a hotel or the strategy of our overall business, (3) a significant
increase in competition, (4) a significant adverse change in legal factors or regulations or (5) significant negative industry or economic trends.
When such factors are identified, we 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 is
made to the carrying value of the hotel to reflect the hotel at fair value. These assessments may affect the results of our operations.
Stock-Based Compensation. We have adopted the 2011 Equity Incentive Plan, which provides for the grants of stock options, stock
appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other stock-based awards, or any combination of the
foregoing. Equity-based compensation will be recognized as an expense in the financial statements over the vesting period and measured at the
fair value of the award on the date of grant. The amount of the expense may be subject to adjustment in future periods depending on the specific
characteristics of the equity-based award and the application of accounting guidance.
60
Income Taxes. We intend to elect to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ended
December 31, 2011 upon filing our federal income tax return for that year. We have operated so as to qualify as a REIT since our IPO. To qualify
as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our stockholders at
least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, which does
not necessarily equal net income as calculated in accordance with GAAP. As a REIT, we generally will not be subject to federal income tax (other
than taxes paid by our TRSs) to the extent we currently distribute 100% of our REIT taxable income to our stockholders. If we fail to qualify as a
REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will
not be permitted to qualify for treatment as a REIT for the four taxable years following the year during which qualification is lost unless we satisfy
certain relief provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders.
However, we intend to be organized and operate in such a manner as to qualify for treatment as a REIT.
Deferred Tax Assets and Liabilities. We will account for federal and state income taxes with respect to our TRSs using the asset and
liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
consolidated financial statements’ carrying amounts of existing assets and liabilities and respective tax bases and operating losses 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 the event that these assumptions change, the deferred taxes may change.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued an update (ASU No. 2010-06) to Accounting Standards
Codification (ASC) 820, Fair Value Measurements and Disclosures , to improve disclosure requirements regarding transfers, classes of assets and
liabilities, and inputs and valuation techniques. Certain provisions of ASU No. 2010-06 to ASC 820 related to separate line items for all
purchases, sales, issuances, and settlements of financial instruments valued using Level 3 are effective for fiscal years beginning after December
15, 2010. The adoption of this ASC update on January 1, 2011 had no material effect on the consolidated financial statements or disclosures of
the Company, the Operating Partnership or the Predecessor.
In May 2011, FASB issued an update (ASU No. 2011-04) to ASC 820, Fair Value Measurements and Disclosures , to develop common
requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRS. This
update is effective for interim and fiscal years beginning after December 15, 2011. The Company believes that this will not have a material effect
on the consolidated financial statements.
In June 2011, FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires an entity to present the total
of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components
of other comprehensive income as part of the statement of changes in equity. ASU 2011-05 is effective for interim and fiscal years beginning
after December 15, 2011. In December 2011, the FASB decided to defer the effective date of those changes in ASU 2011-05 that relate only to the
presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220): Deferral of
the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update 2011-05 . The Company believes that this will not have a material effect on the consolidated financial statements.
Reclassification of Certain Prior Period Financial Information
Certain reclassifications have been made to the prior-year financial information of the Predecessor to conform to our current-year
presentation as follows for the years ended December 31, 2010 and 2009:
●
●
●
●
●
to reclassify (a) $41.1 million and $37.0 million of direct hotel operations expense (wages, payroll taxes and benefits, linens, cleaning and
guestroom supplies and complimentary breakfast) as rooms expense for the years ended December 31, 2010 and 2009, respectively; and (b)
$6.1 million and $5.4 million of direct hotel operations expense (franchise royalties) as other indirect expense for the years ended December
31, 2010 and 2009, respectively;
to reclassify (a) $8.5 million and $7.7 million of other hotel operating expense (utilities and telephone) as other direct expense for the years
ended December 31, 2010 and 2009, respectively; and (b) $10.5 million and $9.4 million of other hotel operating expense (property taxes,
insurance and cable) as other indirect expense for the years ended December 31, 2010 and 2009;
to reclassify (a) $4.5 million and $4.3 million of general, selling and administrative expense (office supplies, advertising, miscellaneous
operating expenses and bad debt expense) as other direct expenses for the years ended December 31, 2010 and 2009; (b) $20.3 million and
$19.3 million of general, selling and administrative expense (credit card/travel agent commissions, management company expense,
management company legal and accounting fees and franchise fees) as other indirect expenses for the years ended December 31, 2010 and
2009, respectively; and (c) $615,000 and $681,000 of general, selling and administrative expense (ground rent and other expense) as other
expense for the years ended December 31, 2010 and 2009;
to reclassify $4.7 million and $6.2 million of repairs and maintenance expense as other direct expenses for the years ended December 31,
2010 and 2009, respectively; and
to reclassify $367,000 and $1.4 million of other indirect expense (hotel startup costs) as hotel property acquisition costs for the years ended
December 31, 2010 and 2009, respectively.
61
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and
other market changes that affect market-sensitive instruments. In pursuing our business strategies, the primary market risk to which we are
currently exposed, and to which we expect to be exposed in the future, is interest rate risk. Our primary interest rate exposures are to the 30-day
LIBOR rate, the 90-day LIBOR rate and the Prime rate. We primarily use fixed interest rate financing to manage our exposure to fluctuations in
interest rates. We do not use any hedge or other instruments to manage interest rate risk.
As of December 31, 2011, approximately 56.5%, or approximately $122.6 million, of our debt bore fixed interest rates and approximately
43.5%, or approximately $94.5 million, bore variable interest rates. Assuming no increase in the amount of our variable rate debt, if the interest
rates on our variable rate pro forma debt were to increase by 1.0%, our cash flow would decrease by approximately $413,000 per year.
As our debts mature, the financing arrangements that carry fixed interest rates will become subject to interest rate risk. In addition, as
variable rate loans mature, lenders may impose floor interest rates because of the low interest rates experienced during the past few years. As of
December 31, 2011, approximately $82.4 million of our long-term debt will mature during 2012, which amount includes amortizing principal paid
in regular monthly payments, of which approximately $63.6 million bears fixed interest rates and $18.8 million bears variable interest rates. As
of February 27, 2012, approximately $11.8 million of our long-term debt will mature during 2012, which amount includes amortizing principal
paid in regular monthly payments, of which approximately $3.1 million bears fixed interest rates and $8.7 million bears variable interest rates.
Item 8.
Financial Statements and Supplementary Data.
See Index to the Financial Statements on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
62
Item 9A. Controls and Procedures.
Controls and Procedures—Summit REIT
Disclosure Controls and Procedures
Under the supervision and with the participation of Summit REIT’s management, including its Chief Executive Officer and Chief
Financial Officer, Summit REIT has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to
Rule 13a-15(b) under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, Summit REIT’s Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, these disclosure controls and
procedures were effective to provide reasonable assurance that information required to be disclosed in the reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to Summit REIT’s management to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Summit REIT’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of Summit REIT’s
management, including Summit REIT’s principal executive officer, we conducted an evaluation of the effectiveness of Summit REIT’s internal
control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on Summit REIT’s evaluation under the framework in Internal Control—Integrated
Framework, our management concluded that Summit REIT’s internal control over financial reporting was effective as of December 31, 2011.
We acquired the Homewood Suites hotel in Ridgeland, Mississippi on April 15, 2011, the Holiday Inn hotel in Duluth, Georgia and the
Staybridge Suites in Glendale, Colorado on April 27, 2011, the Hilton Garden Inn hotel in Duluth, Georgia on May 25, 2011, and the Courtyard
by Marriott hotel in El Paso, Texas on July 28, 2011, respectively, and have excluded from Summit REIT’s assessment of effectiveness of internal
control over financial reporting as of December 31, 2011 the internal controls over financial reporting of these hotels, which had an aggregate of
$51.9 million in total assets and $9.9 million in total revenues as of and for the year ended December 31, 2011.
Changes in Internal Control Over Financial Reporting
There have been no changes in Summit REIT’s internal control over financial reporting that occurred during the last fiscal quarter of
2011 that have materially affected, or are reasonably likely to materially affect, Summit REIT’s internal control over financial reporting.
Controls and Procedures—Summit OP
Disclosure Controls and Procedures
Under the supervision and with the participation of Summit OP’s management, including the Chief Executive Officer and Chief Financial
Officer of the sole member of Summit OP’s general partner, Summit OP has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer of the sole member of its general partner have concluded that, as of the
end of the period covered by this report, these disclosure controls and procedures were effective to provide reasonable assurance that information
required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Summit OP’s management,
including the Chief Executive Officer and Chief Financial Officer of the sole member of Summit OP’s general partner, to allow timely decisions
regarding required disclosure.
63
Management’s Annual Report on Internal Control Over Financial Reporting
Summit OP’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of Summit OP’s
management, including Summit OP’s principal executive officer, we conducted an evaluation of the effectiveness of Summit OP’s internal control
over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on Summit OP’s evaluation under the framework in Internal Control—Integrated Framework,
our management concluded that Summit OP’s internal control over financial reporting was effective as of December 31, 2011.
We acquired the Homewood Suites hotel in Ridgeland, Mississippi on April 15, 2011, the Holiday Inn hotel in Duluth, Georgia and the
Staybridge Suites in Glendale, Colorado on April 27, 2011, the Hilton Garden Inn hotel in Duluth, Georgia on May 25, 2011, and the Courtyard
by Marriott hotel in El Paso, Texas on July 28, 2011, respectively, and have excluded from Summit OP’s assessment of effectiveness of internal
control over financial reporting as of December 31, 2011 the internal controls over financial reporting of these hotels, which had an aggregate of
$51.9 million in total assets and $9.9 million in total revenues as of and for the year ended December 31, 2011.
Changes in Internal Control Over Financial Reporting
There have been no changes in Summit OP’s internal control over financial reporting that occurred during the last fiscal quarter of 2011
that have materially affected, or are reasonably likely to materially affect, Summit OP’s internal control over financial reporting.
Item 9B. Other Information.
None.
64
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this item is incorporated by reference to Summit REIT’s Proxy Statement for the 2012 Annual Meeting of
Stockholders.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to Summit REIT’s Proxy Statement for the 2012 Annual Meeting of
Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is incorporated by reference to Summit REIT’s Proxy Statement for the 2012 Annual Meeting of
Stockholders.
Item 13. Certain Relationships and Related Transactions, and Trustee Independence.
The information required by this item is incorporated by reference to Summit REIT’s Proxy Statement for the 2012 Annual Meeting of
Stockholders.
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference to Summit REIT’s Proxy Statement for the 2012 Annual Meeting of
Stockholders.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
1. Financial Statements
Included herein at pages F-1 through F-38
2. Financial Statement Schedules
The following financial statement schedule is included herein at pages F-39 through F-40.
Schedule III — Real Estate and Accumulated Depreciation
All schedules for which provision is made in Regulation S-X are either not required to be included herein pursuant to the related instructions
or are inapplicable or the related information is included in the footnotes to the applicable financial statement.
3. Exhibits
The following exhibits are filed as part of this report:
65
Exhibit
Number
3.1 †
3.2
3.3
3.4 †
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Description of Exhibit
Articles of Amendment and Restatement of Summit Hotel Properties, Inc.
Certificate of Limited Partnership of Summit Hotel OP, LP, as amended (incorporated by reference to Exhibit 3.1 to Amendment No.
2 to Registration Statement on Form 8-A filed by Summit Hotel OP, LP on February 11, 2011)
Amended and Restated Bylaws of Summit Hotel Properties, Inc. (incorporated by reference to Exhibit 3.2 to Amendment No. 2 to
Registration Statement on Form S-11 filed by Summit Hotel Properties, Inc. on November 1, 2010)
First Amended and Restated Agreement of Limited Partnership of Summit Hotel OP, LP, dated February 14, 2011, as amended
Specimen certificate of common stock of Summit Hotel Properties, Inc. (incorporated by reference to Exhibit 4.1 to Amendment No. 5
to Registration Statement on Form S-11 filed by Summit Hotel Properties, Inc. on February 7, 2011)
Tax Protection Agreement, dated February 10, 2011, between Summit Hotel OP, LP and The Summit Group, Inc. (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Transition Services Agreement, dated February 14, 2011, between Summit Hotel OP, LP and The Summit Group, Inc. (incorporated
by reference to Exhibit 10.3 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011).
Amended and Restated Hotel Management Agreement, dated February 14, 2011, among Interstate Management Company, LLC and
the subsidiaries of Summit Hotel Properties, Inc. party thereto (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-
K filed by Summit Hotel Properties, Inc. on February 18, 2011)
First Amendment to Amended and Restated Hotel Management Agreement, dated June 30, 2011, among Interstate Management
Company, LLC and the subsidiaries of the Company party thereto (incorporated by reference to Exhibit 10.2 to Quarterly Report on
Form 10-Q filed by Summit Hotel Properties, Inc. on August 15, 2011)
Second Letter Amendment and Limited Waiver, dated October 21, 2011, between Deutsche Bank AG New York Branch, as
Administrative Agent and Summit Hotel OP, LP (incorporated by reference to Exhibit 10.30 of the Company’s Registration
Statement on Form S-11 filed on October 24, 2011)
First Letter Amendment to Secured Credit Facility, dated August 15, 2011, between Deutsche Bank AG New York Branch, as
Administrative Agent, and Summit Hotel OP, LP (incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on
Form 10-Q filed on August 15, 2011)
Accession Agreement, dated May 13, 2011, among Summit Hotel OP, LP, Deutsche Bank AG New York Branch, and U.S. Bank
National Association (incorporated herein by reference to Exhibit 10.17 to Quarterly Report on Form 10-Q filed by Summit Hotel
Properties, Inc. on May 16, 2011)
$30,000,000 Credit Agreement among Sumit Hotel OP, LP, Summit Hotel Properties, Inc. and Deutsche Bank AG New York Branch,
dated March 30, 2011 (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed by Summit Hotel
Properties, Inc. on April 6, 2011).
Amendment Letter to $30,000,000 Credit Agreement among Summit Hotel OP, LP, Summit Hotel Properties, Inc., and Deutsche
Bank AG New York Branch, dated April 26, 2011 (incorporated herein by reference to Exhibit 10.2 to Current Report on Form 8-K
filed by Summit Hotel Properties, Inc. on May 2, 2011).
$100,000,000 Credit Agreement dated April 29, 2011 among Summit Hotel OP, LP, Summit Hotel Properties, Inc., Summit
Hospitality I, LLC and Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., Royal Bank of Canada, KeyBank
National Association and Regions Bank (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed by
Summit Hotel Properties, Inc. on May 2, 2011).
66
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22 †
10.23
10.24
10.25
10.26
Loan Modification Agreement, dated February 14, 2011, among Summit Hotel Properties, LLC, Summit Hotel OP, LP and GE
Commercial Capital of Utah LLC (loan in the original principal amount of $11.4 million) (incorporated by reference to Exhibit 10.5 to
Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)
Second Loan Modification Agreement, dated August 12, 2011, between Summit Hotel OP, LP, Summit Hospitality V, LLC and GE
Commercial Capital of Utah LLC (loan in the original principal amount of $11.4 million) (incorporated by reference to Exhibit 10.5 of
the Company’s Quarterly Report on Form 10-Q filed on August 15, 2011)
Loan Modification Agreement, dated February 14, 2011, among Summit Hotel Properties, LLC, Summit Hotel OP, LP and GE
Commercial Capital of Utah LLC (loan in the original principal amount of $9.5 million) (incorporated by reference to Exhibit 10.6 to
Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)
Second Loan Modification Agreement, dated August 12, 2011, between Summit Hotel OP, LP and GE Commercial Capital of Utah
LLC (loan in the original principal amount of $9.5 million) (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly
Report on Form 10-Q filed on August 15, 2011)
Loan Modification Agreement, dated February 14, 2011, among Summit Hotel Properties, LLC, Summit Hotel OP, LP and GE
Commercial Capital of Utah LLC (loan in the original principal amount of $11.3 million) (incorporated by reference to Exhibit 10.7 to
Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)
Second Loan Modification Agreement, dated August 12, 2011, between Summit Hotel OP, LP and GE Commercial Capital of Utah
LLC (loan in the original principal amount of $11.3 million) (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly
Report on Form 10-Q filed on August 15, 2011)
Employment Agreement, dated February 14, 2011, between Summit Hotel Properties, Inc. and Kerry W. Boekelheide (incorporated by
reference to Exhibit 10.8 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Employment Agreement, dated February 14, 2011, between Summit Hotel Properties, Inc. and Daniel P. Hansen (incorporated by
reference to Exhibit 10.9 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Employment Agreement, dated February 14, 2011, between Summit Hotel Properties, Inc. and Craig J. Aniszewski (incorporated by
reference to Exhibit 10.10 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Employment Agreement, dated February 14, 2011, between Summit Hotel Properties, Inc. and Stuart J. Becker (incorporated by
reference to Exhibit 10.11 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Employment Agreement, dated February 14, 2011, between Summit Hotel Properties, Inc. and Ryan A. Bertucci (incorporated by
reference to Exhibit 10.12 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Second Employment Agreement, dated February 14, 2012, between Summit Hotel Properties, Inc. and Ryan A. Bertucci*
Summit Hotel Properties, Inc. 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.13 to Current Report on Form 8-K
filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Form of Indemnification Agreement between Summit Hotel Properties, Inc. and each of its Executive Officers and Directors
(incorporated by reference to Exhibit 10.14 to Amendment No. 2 to Registration Statement on Form S-11 filed by Summit Hotel
Properties, Inc. on November 1, 2010)
Consolidated, Amended and Restated Loan Agreement dated February 13, 2012, between Summit Hotel OP, LP and ING Life
Insurance and Annuity Company (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed by Summit Hotel
Properties, Inc. on February 16, 2012)
Modification of Loan Agreement, dated September 30, 2011, between Summit Hotel OP, LP and ING Life Insurance and Annuity
Company (loan in the original principal amount of $36.6 million) (incorporated by reference to Exhibit 10.6 to Quarterly Report on
Form 10-Q filed by Summit Hotel Properties, Inc. November 10, 2011)
67
10.27
10.28
10.29
10.30
10.31
10.32
10.33
12.1 †
21.1 †
21.2 †
23.1 †
23.2 †
31.1 †
31.2 †
31.3 †
31.4 †
32.1 †
32.2 †
32.3 †
32.4 †
Construction Loan Agreement between Summit Hotel Properties, LLC and Compass Bank, dated September 17, 2008 (loan in the
original principal amount of $19.25 million) (incorporated by reference to Exhibit 10.23 to Amendment No. 1 to Registration
Statement on Form S-11 filed by Summit Hotel Properties, Inc. on September 23, 2010)
Second Amended and Restated Loan Agreement (Credit Pool) between Summit Hotel Properties, LLC and First National Bank of
Omaha entered into August 19, 2010
Form of Option Award Agreement (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Registration Statement on Form
S-11 filed by Summit Hotel Properties, Inc. on September 23, 2010)*
Form of Lease Agreement between Summit Hotel OP, LP and TRS Lessee (incorporated by reference to Exhibit 10.4 to Amendment
No. 2 to Registration Statement on Form S-11 filed by Summit Hotel Properties, Inc. on November 1, 2010)
Sourcing Agreement between Six Continents Hotel, Inc., d/b/a InterContinental Hotels Group, and Summit Hotel Properties, Inc.
(incorporated by reference to Exhibit 10.26 to Amendment No. 3 to Registration Statement on Form S-11 filed by Summit Hotel
Properties, Inc. on December 3, 2010)
Form of Severance Agreement between Summit Hotel Properties, Inc. and Christopher R. Eng (incorporated by reference to Exhibit
10.12 to Amendment No. 1 to Registration Statement on Form S-11 filed by Summit Hotel Properties, Inc. on September 23, 2010)*
Form of Severance Agreement between Summit Hotel Properties, Inc. and JoLynn M. Sorum (incorporated by reference to Exhibit
10.13 to Amendment No. 1 to Registration Statement on Form S-11 filed by Summit Hotel Properties, Inc. on September 23, 2010)*
Calculation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
List of Subsidiaries of Summit Hotel Properties, Inc.
List of Subsidiaries of Summit Hotel OP, LP
Consent of KPMG LLP
Consent of Eide Bailly LLP
Certification of Chief Executive Officer of Summit Hotel Properties, Inc. pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Summit Hotel Properties, Inc. pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer of Summit Hotel OP, LP pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Summit Hotel OP, LP pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer Summit Hotel Properties, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Summit Hotel Properties, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer Summit Hotel OP, LP pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Summit Hotel OP, LP pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
68
101.INS XBRL Instance Document(1)
101.SCH XBRL Taxonomy Extension Schema Document(1)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document(1)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document(1)
101.LAB XBRL Taxonomy Extension Labels Linkbase Document(1)
101.PRE XBRL Taxonomy Presentation Linkbase Document(1)
____________________________
* Management contract or compensatory plan or arrangement.
† Filed herewith.
(1) Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a
registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes
of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
69
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
Date: February 28, 2012
Date: February 28, 2012
SUMMIT HOTEL PROPERTIES, INC. (registrant)
By: /s/ Kerry W. Boekelheide
Kerry W. Boekelheide
Executive Chairman of the Board
SUMMIT HOTEL OP, LP (registrant)
By: Summit Hotel GP, LLC, its general partner
By: Summit Hotel Properties, Inc., its sole member
By: /s/ Kerry W. Boekelheide
Kerry W. Boekelheide
Executive Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of
the registrants and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Kerry W. Boekelheide
Kerry W. Boekelheide
/s/ Daniel P. Hansen
Daniel P. Hansen
/s/ Stuart J. Becker
Stuart J. Becker
/s/ JoLynn M. Sorum
JoLynn M. Sorum
/s/ Bjorn R. L. Hanson
Bjorn R. L. Hanson
/s/ David S. Kay
David S. Kay
/s/ Thomas W. Storey
Thomas W. Storey
/s/ Wayne W. Wielgus
Wayne W. Wielgus
Executive Chairman of the Board
February 28, 2012
President, Chief Executive Officer
and Director
(principal executive officer)
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Vice President, Controller and
Chief Accounting Officer
(principal accounting officer)
Director
Director
Director
Director
70
February 28, 2012
February 28, 2012
February 28, 2012
February 28, 2012
February 28, 2012
February 28, 2012
February 28, 2012
EXHIBIT INDEX
Exhibit
Number
3.1 †
3.2
3.3
3.4 †
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Description of Exhibit
Articles of Amendment and Restatement of Summit Hotel Properties, Inc.
Certificate of Limited Partnership of Summit Hotel OP, LP, as amended (incorporated by reference to Exhibit 3.1 to Amendment No.
2 to Registration Statement on Form 8-A filed by Summit Hotel OP, LP on February 11, 2011)
Amended and Restated Bylaws of Summit Hotel Properties, Inc. (incorporated by reference to Exhibit 3.2 to Amendment No. 2 to
Registration Statement on Form S-11 filed by Summit Hotel Properties, Inc. on November 1, 2010)
First Amended and Restated Agreement of Limited Partnership of Summit Hotel OP, LP, dated February 14, 2011, as amended
Specimen certificate of common stock of Summit Hotel Properties, Inc. (incorporated by reference to Exhibit 4.1 to Amendment No. 5
to Registration Statement on Form S-11 filed by Summit Hotel Properties, Inc. on February 7, 2011)
Tax Protection Agreement, dated February 10, 2011, between Summit Hotel OP, LP and The Summit Group, Inc. (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Transition Services Agreement, dated February 14, 2011, between Summit Hotel OP, LP and The Summit Group, Inc. (incorporated
by reference to Exhibit 10.3 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011).
Amended and Restated Hotel Management Agreement, dated February 14, 2011, among Interstate Management Company, LLC and
the subsidiaries of Summit Hotel Properties, Inc. party thereto (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-
K filed by Summit Hotel Properties, Inc. on February 18, 2011)
First Amendment to Amended and Restated Hotel Management Agreement, dated June 30, 2011, among Interstate Management
Company, LLC and the subsidiaries of the Company party thereto (incorporated by reference to Exhibit 10.2 to Quarterly Report on
Form 10-Q filed by Summit Hotel Properties, Inc. on August 15, 2011)
Second Letter Amendment and Limited Waiver, dated October 21, 2011, between Deutsche Bank AG New York Branch, as
Administrative Agent and Summit Hotel OP, LP (incorporated by reference to Exhibit 10.30 of the Company’s Registration
Statement on Form S-11 filed on October 24, 2011)
First Letter Amendment to Secured Credit Facility, dated August 15, 2011, between Deutsche Bank AG New York Branch, as
Administrative Agent, and Summit Hotel OP, LP (incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on
Form 10-Q filed on August 15, 2011)
Accession Agreement, dated May 13, 2011, among Summit Hotel OP, LP, Deutsche Bank AG New York Branch, and U.S. Bank
National Association (incorporated herein by reference to Exhibit 10.17 to Quarterly Report on Form 10-Q filed by Summit Hotel
Properties, Inc. on May 16, 2011)
$30,000,000 Credit Agreement among Sumit Hotel OP, LP, Summit Hotel Properties, Inc. and Deutsche Bank AG New York Branch,
dated March 30, 2011 (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed by Summit Hotel
Properties, Inc. on April 6, 2011).
Amendment Letter to $30,000,000 Credit Agreement among Summit Hotel OP, LP, Summit Hotel Properties, Inc., and Deutsche
Bank AG New York Branch, dated April 26, 2011 (incorporated herein by reference to Exhibit 10.2 to Current Report on Form 8-K
filed by Summit Hotel Properties, Inc. on May 2, 2011).
$100,000,000 Credit Agreement dated April 29, 2011 among Summit Hotel OP, LP, Summit Hotel Properties, Inc., Summit
Hospitality I, LLC and Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., Royal Bank of Canada, KeyBank
National Association and Regions Bank (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed by
Summit Hotel Properties, Inc. on May 2, 2011).
Loan Modification Agreement, dated February 14, 2011, among Summit Hotel Properties, LLC, Summit Hotel OP, LP and GE
Commercial Capital of Utah LLC (loan in the original principal amount of $11.4 million) (incorporated by reference to Exhibit 10.5 to
Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22 †
10.23
10.24
10.25
10.26
Second Loan Modification Agreement, dated August 12, 2011, between Summit Hotel OP, LP, Summit Hospitality V, LLC and GE
Commercial Capital of Utah LLC (loan in the original principal amount of $11.4 million) (incorporated by reference to Exhibit 10.5 of
the Company’s Quarterly Report on Form 10-Q filed on August 15, 2011)
Loan Modification Agreement, dated February 14, 2011, among Summit Hotel Properties, LLC, Summit Hotel OP, LP and GE
Commercial Capital of Utah LLC (loan in the original principal amount of $9.5 million) (incorporated by reference to Exhibit 10.6 to
Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)
Second Loan Modification Agreement, dated August 12, 2011, between Summit Hotel OP, LP and GE Commercial Capital of Utah
LLC (loan in the original principal amount of $9.5 million) (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly
Report on Form 10-Q filed on August 15, 2011)
Loan Modification Agreement, dated February 14, 2011, among Summit Hotel Properties, LLC, Summit Hotel OP, LP and GE
Commercial Capital of Utah LLC (loan in the original principal amount of $11.3 million) (incorporated by reference to Exhibit 10.7 to
Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)
Second Loan Modification Agreement, dated August 12, 2011, between Summit Hotel OP, LP and GE Commercial Capital of Utah
LLC (loan in the original principal amount of $11.3 million) (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly
Report on Form 10-Q filed on August 15, 2011)
Employment Agreement, dated February 14, 2011, between Summit Hotel Properties, Inc. and Kerry W. Boekelheide (incorporated by
reference to Exhibit 10.8 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Employment Agreement, dated February 14, 2011, between Summit Hotel Properties, Inc. and Daniel P. Hansen (incorporated by
reference to Exhibit 10.9 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Employment Agreement, dated February 14, 2011, between Summit Hotel Properties, Inc. and Craig J. Aniszewski (incorporated by
reference to Exhibit 10.10 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Employment Agreement, dated February 14, 2011, between Summit Hotel Properties, Inc. and Stuart J. Becker (incorporated by
reference to Exhibit 10.11 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Employment Agreement, dated February 14, 2011, between Summit Hotel Properties, Inc. and Ryan A. Bertucci (incorporated by
reference to Exhibit 10.12 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Second Employment Agreement, dated February 14, 2012, between Summit Hotel Properties, Inc. and Ryan A. Bertucci*
Summit Hotel Properties, Inc. 2011 Equity Incentive Plan (incorporated by reference to Exhibit 10.13 to Current Report on Form 8-K
filed by Summit Hotel Properties, Inc. on February 18, 2011)*
Form of Indemnification Agreement between Summit Hotel Properties, Inc. and each of its Executive Officers and Directors
(incorporated by reference to Exhibit 10.14 to Amendment No. 2 to Registration Statement on Form S-11 filed by Summit Hotel
Properties, Inc. on November 1, 2010)
Consolidated, Amended and Restated Loan Agreement dated February 13, 2012, between Summit Hotel OP, LP and ING Life
Insurance and Annuity Company (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed by Summit Hotel
Properties, Inc. on February 16, 2012)
Modification of Loan Agreement, dated September 30, 2011, between Summit Hotel OP, LP and ING Life Insurance and Annuity
Company (loan in the original principal amount of $36.6 million) (incorporated by reference to Exhibit 10.6 to Quarterly Report on
Form 10-Q filed by Summit Hotel Properties, Inc. November 10, 2011)
10.27
10.28
10.29
10.30
10.31
10.32
10.33
12.1 †
21.1 †
21.2 †
23.1 †
23.2 †
31.1 †
31.2 †
31.3 †
31.4 †
32.1 †
32.2 †
32.3 †
32.4 †
Construction Loan Agreement between Summit Hotel Properties, LLC and Compass Bank, dated September 17, 2008 (loan in the
original principal amount of $19.25 million) (incorporated by reference to Exhibit 10.23 to Amendment No. 1 to Registration
Statement on Form S-11 filed by Summit Hotel Properties, Inc. on September 23, 2010)
Second Amended and Restated Loan Agreement (Credit Pool) between Summit Hotel Properties, LLC and First National Bank of
Omaha entered into August 19, 2010
Form of Option Award Agreement (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Registration Statement on Form
S-11 filed by Summit Hotel Properties, Inc. on September 23, 2010)*
Form of Lease Agreement between Summit Hotel OP, LP and TRS Lessee (incorporated by reference to Exhibit 10.4 to Amendment
No. 2 to Registration Statement on Form S-11 filed by Summit Hotel Properties, Inc. on November 1, 2010)
Sourcing Agreement between Six Continents Hotel, Inc., d/b/a InterContinental Hotels Group, and Summit Hotel Properties, Inc.
(incorporated by reference to Exhibit 10.26 to Amendment No. 3 to Registration Statement on Form S-11 filed by Summit Hotel
Properties, Inc. on December 3, 2010)
Form of Severance Agreement between Summit Hotel Properties, Inc. and Christopher R. Eng (incorporated by reference to Exhibit
10.12 to Amendment No. 1 to Registration Statement on Form S-11 filed by Summit Hotel Properties, Inc. on September 23, 2010)*
Form of Severance Agreement between Summit Hotel Properties, Inc. and JoLynn M. Sorum (incorporated by reference to Exhibit
10.13 to Amendment No. 1 to Registration Statement on Form S-11 filed by Summit Hotel Properties, Inc. on September 23, 2010)*
Calculation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
List of Subsidiaries of Summit Hotel Properties, Inc.
List of Subsidiaries of Summit Hotel OP, LP
Consent of KPMG LLP
Consent of Eide Bailly LLP
Certification of Chief Executive Officer of Summit Hotel Properties, Inc. pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Summit Hotel Properties, Inc. pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer of Summit Hotel OP, LP pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Summit Hotel OP, LP pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer Summit Hotel Properties, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Summit Hotel Properties, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer Summit Hotel OP, LP pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer Summit Hotel OP, LP pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document(1)
101.SCH XBRL Taxonomy Extension Schema Document(1)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document(1)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document(1)
101.LAB XBRL Taxonomy Extension Labels Linkbase Document(1)
101.PRE XBRL Taxonomy Presentation Linkbase Document(1)
___________________________
* Management contract or compensatory plan or arrangement.
† Filed herewith.
(1) Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a
registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes
of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Summit Hotel Properties, Inc. and Summit Hotel Properties, LLC (Predecessor):
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Changes in Equity for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
Summit Hotel OP, LP and Summit Hotel Properties, LLC (Predecessor):
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Changes in Equity for the years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
Schedule III - Real Estate and Accumulated Depreciation
F-1
Page
F-2
F-6
F-7
F-8
F-9
F-11
F-12
F-13
F-14
F-16
F-39
The Board of Directors
Summit Hotel Properties, Inc.:
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of Summit Hotel Properties, Inc. and subsidiaries as of December 31, 2011, and
the consolidated balance sheet of Summit Hotel Properties, LLC and subsidiaries (Predecessor) as of December 31, 2010, and the related
consolidated statements of operations and changes in equity of Summit Hotel Properties, Inc. and subsidiaries for the period from February 14,
2011 (commencement of operations) through December 31, 2011, the related consolidated statements of operations and changes in equity of
Summit Hotel Properties, LLC and subsidiaries (Predecessor) for the period from January 1, 2011 through February 13, 2011 and the year ended
December 31, 2010, the related combined statement of cash flows of Summit Hotel Properties, Inc. and subsidiaries and Summit Hotel Properties,
LLC and subsidiaries (Predecessor) for the year ended December 31, 2011, and the related consolidated statement of cash flows of Summit Hotel
Properties, LLC and subsidiaries (Predecessor) for the year ended December 31, 2010. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule III. These consolidated financial statements and financial statement schedule are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Summit
Hotel Properties, Inc. and subsidiaries as of December 31, 2011 and the financial position of Summit Hotel Properties, LLC and subsidiaries
(Predecessor) as of December 31, 2010, and the results of Summit Hotel Properties, Inc. and subsidiaries operations for the period from February
14, 2011 (commencement of operations) through December 31, 2011 and the results of Summit Hotel Properties, LLC and subsidiaries
(Predecessor) operations for the period from January 1, 2011 through February 13, 2011 and the year ended December 31, 2010, and Summit
Hotel Properties, Inc. and subsidiaries and Summit Hotel Properties, LLC and subsidiaries (Predecessor) combined cash flows for the year ended
December 31, 2011 and Summit Hotel Properties, LLC and subsidiaries (Predecessor) cash flows for the year ended December 31, 2010, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule III, 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
February 28, 2012
/s/ KPMG LLP
F-2
The Partners
Summit Hotel OP, LP:
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of Summit Hotel OP, LP and subsidiaries as of December 31, 2011, and the
consolidated balance sheet of Summit Hotel Properties, LLC and subsidiaries (Predecessor) as of December 31, 2010, and the related consolidated
statements of operations and changes in equity of Summit Hotel OP, LP and subsidiaries for the period from February 14, 2011 (commencement
of operations) through December 31, 2011, the related consolidated statements of operations and changes in equity of Summit Hotel Properties,
LLC and subsidiaries (Predecessor) for the period from January 1, 2011 through February 13, 2011 and the year ended December 31, 2010, the
related combined statement of cash flows of Summit Hotel OP, LP and subsidiaries and Summit Hotel Properties, LLC and subsidiaries
(Predecessor) for the year ended December 31, 2011, and the related consolidated statement of cash flows of Summit Hotel Properties, LLC and
subsidiaries (Predecessor) for the year ended December 31, 2010. In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule III. These consolidated financial statements and financial statement schedule are the responsibility of
the Partnership’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 Summit
Hotel OP, LP and subsidiaries as of December 31, 2011 and the financial position of Summit Hotel Properties, LLC and subsidiaries (Predecessor)
as of December 31, 2010, and the results of Summit Hotel OP, LP and subsidiaries operations for the period from February 14, 2011
(commencement of operations) through December 31, 2011 and the results of Summit Hotel Properties, LLC and subsidiaries (Predecessor)
operations for the period from January 1, 2011 through February 13, 2011 and the year ended December 31, 2010, and Summit Hotel OP, LP and
subsidiaries and Summit Hotel Properties, LLC and subsidiaries (Predecessor) combined cash flows for the year ended December 31, 2011 and
Summit Hotel Properties, LLC and subsidiaries (Predecessor) cash flows for the year ended December 31, 2010, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement schedule III, 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
February 28, 2012
/s/ KPMG LLP
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Managers
Summit Hotel Properties, LLC
Sioux Falls, South Dakota
We have audited the consolidated statements of operations, changes in members’ equity and cash flows of Summit Hotel Properties, LLC (the
“Company”) for the year ended December 31, 2009. The Company’s management is responsible for these financial statements. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations, changes in
members’ equity and cash flows for Summit Hotel Properties, LLC for the year ended December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Summit Hotel
Properties, LLC’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 31, 2010,
expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Eide Bailly LLP
Greenwood Village, Colorado
March 31, 2010
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Managers
Summit Hotel Properties, LLC
Sioux Falls, South Dakota
We have audited Summit Hotel Properties, LLC (the “Company”) internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Summit Hotel Properties, LLC management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Summit Hotel Properties, LLC maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
statements of operations, members’ equity, and cash flows of Summit Hotel Properties, LLC for the year ended December 31, 2009, and our report
dated March 31, 2010, expressed an unqualified opinion on those financial statements.
/s/ Eide Bailly LLP
Greenwood Village, Colorado
March 31, 2010
F-5
SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND 2010
ASSETS
Cash and cash equivalents
Restricted cash
Trade receivables
Receivable due from affiliate
Prepaid expenses and other
Land held for development
Property and equipment, net
Deferred charges and other assets, net
Deferred tax benefit
Other assets
TOTAL ASSETS
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable
Related party accounts payable
Accrued expenses
Mortgages and notes payable
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
EQUITY
Members' equity
Preferred stock, $.01 par value per share, 100,000,000 shares authorized,
2,000,000 issued and outstanding as of December 31, 2011
Common stock, $.01 par value per share, 450,000,000 shares authorized,
27,278,000 issued and oustanding as of December 31, 2011
Additional paid-in capital
Accumulated deficit and distributions
Total stockholders' equity
Noncontrolling interest
TOTAL EQUITY
Summit Hotel
Properties, Inc.
2011
Summit Hotel
Properties, LLC
(Predecessor)
2010
$
$
$
10,537,132 $
1,464,032
3,424,630
-
4,268,393
20,294,973
498,876,238
8,923,906
2,195,820
4,019,870
554,004,994 $
7,977,418
1,933,268
2,665,076
4,620,059
1,738,645
20,294,973
445,715,804
4,051,295
-
4,011,992
493,008,530
1,670,994 $
-
15,781,577
217,103,728
234,556,299
864,560
771,066
11,092,131
420,437,207
433,164,964
-
61,468,029
20,000
272,780
288,902,331
(11,020,151 )
278,174,960
41,273,735
319,448,695
-
-
-
61,468,029
(1,624,463 )
59,843,566
TOTAL LIABILITIES AND EQUITY
$
554,004,994 $
493,008,530
(See Notes to Consolidated Financial Statements)
F-6
SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
REVENUE
Room revenue
Other hotel operations revenue
Total Revenue
EXPENSES
Hotel operating expenses
Rooms
Other direct
Other indirect
Other
Total hotel operating expenses
Depreciation and amortization
Corporate general and administrative:
Salaries and other compensation
Other
Equity based compensation
Hotel property acquisition costs
Loss on impairment of assets
Total Expenses
Summit Hotel
Properties, Inc.
Period 2/14/11
Summit Hotel Properties, LLC (Predecessor)
Period 1/1/11
through 12/31/11
through 2/13/11
2010
2009
$
131,638,132 $
2,646,214
134,284,346
14,268,042 $
330,251
14,598,293
133,069,346 $
2,565,723
135,635,069
118,959,822
2,239,914
121,199,736
40,138,277
17,672,220
35,870,445
700,290
94,381,232
26,378,314
2,640,878
3,439,788
479,559
253,763
-
127,573,534
4,960,450
2,657,760
4,686,274
73,038
12,377,522
3,429,216
-
-
-
-
-
15,806,738
41,128,699
17,692,322
36,466,147
615,407
95,902,575
27,250,778
-
-
-
366,759
6,475,684
129,995,796
36,719,998
18,047,928
32,388,787
681,304
87,838,017
23,971,118
-
-
-
1,388,639
7,505,836
120,703,610
INCOME (LOSS) FROM OPERATIONS
6,710,812
(1,208,445 )
5,639,273
496,126
OTHER INCOME (EXPENSE)
Interest income
Interest expense
Gain (loss) on disposal of assets
Total Other Income (Expense)
15,756
(13,192,327 )
(36,031 )
(13,212,602 )
7,139
(4,666,216 )
-
(4,659,077 )
47,483
(26,362,265 )
(42,813 )
(26,357,595 )
49,805
(18,320,736 )
(4,335 )
(18,275,266 )
INCOME (LOSS) FROM CONTINUING OPERATIONS
(6,501,790 )
(5,867,522 )
(20,718,322 )
(17,779,140 )
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS
-
-
-
1,464,808
NET INCOME (LOSS) BEFORE INCOME TAXES
(6,501,790 )
(5,867,522 )
(20,718,322 )
(16,314,332 )
INCOME TAX (EXPENSE) BENEFIT
2,324,983
(339,034 )
(202,163 )
-
NET INCOME (LOSS)
(4,176,807 )
(6,206,556 )
(20,920,485 )
(16,314,332 )
NET INCOME (LOSS) ATTRIBUTABLE TO
NONCONTROLLING INTEREST
NET INCOME (LOSS) ATTRIBUTABLE TO SUMMIT
HOTEL PROPERTIES, INC./PREDECESSOR
(1,239,715 )
-
-
-
(2,937,092 )
(6,206,556 )
(20,920,485 )
(16,314,332 )
PREFERRED DIVIDENDS
(411,120 )
-
-
-
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON
STOCKHOLDERS/MEMBERS
Net income (loss) per share:
Basic and diluted
Weighted-average common shares outstanding:
$
(3,348,212 ) $
(6,206,556 ) $
(20,920,485 ) $
(16,314,332 )
$
(0.12 )
Basic and diluted
27,278,000
(See Notes to Consolidated Financial Statements)
F-7
SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
# of
Shares of
Preferred Preferred Common Common
# of
Shares of
Stock
Stock
Stock
Stock
Additional Accumulated Stockholders'/
Paid-In
Capital
Deficit and Members' Noncontrolling
Equity
Distributions
Interest
Total
Equity
Total
Predecessor
BALANCES, JANUARY 1, 2009
Class A-1 units issued
Net income (loss)
Distributions to members
BALANCES, DECEMBER 31,
2009
Net income (loss)
Distributions to members
BALANCES, DECEMBER 31,
2010
Net income (loss)
Distributions to members
BALANCES, FEBRUARY 13,
2011
Summit Hotel Properties, Inc.
Equity from Predecessor
Net proceeds from sale of
common stock
Net proceeds from sale of
preferred stock
Dividends paid
Equity-based compensation
Net income (loss)
-
-
-
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 89,385,223
$
(1,624,463 ) $ 87,760,760
-
22,123,951
-
22,123,951
-
(16,314,332 )
-
(16,314,332 )
-
(12,271,067 )
-
(12,271,067 )
-
$ 82,923,775
$
(1,624,463 ) $ 81,299,312
-
(20,920,485 )
-
(20,920,485 )
-
(535,261 )
-
(535,261 )
-
$ 61,468,029
$
(1,624,463 ) $ 59,843,566
-
-
(6,206,556 )
(8,282,935 )
-
-
(6,206,556 )
(8,282,935 )
-
$ 46,978,538
$
(1,624,463 ) $ 45,354,075
-
$
- $
-
$
-
$
-
$ 45,354,075
$ 45,354,075
-
27,278,000
272,780 240,567,678
-
240,840,458
-
240,840,458
2,000,000
-
-
-
20,000
-
-
-
-
-
-
-
- 47,855,094
-
-
479,559
-
-
-
-
47,875,094
(8,083,059 )
-
(2,937,092 )
(8,083,059 )
479,559
(2,937,092 )
-
47,875,094
(2,840,625 ) (10,923,684 )
479,559
(4,176,807 )
(1,239,715 )
-
BALANCES, DECEMBER 31,
2011
2,000,000 $
20,000
27,278,000
$ 272,780 $ 288,902,331
$ (11,020,151 ) $ 278,174,960
$ 41,273,735
$ 319,448,695
(See Notes to Consolidated Financial Statements)
F-8
SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization
Amortization of prepaid lease
Unsuccessful project costs
Loss on impairment of assets
Equity-based compensation
Deferred tax benefit
(Gain) loss on disposal of assets
Changes in operating assets and liabilities:
Trade receivables
Prepaid expenses and other
Accounts payable and related party accounts payable
Income tax receivable
Accrued expenses
Restricted cash released (funded)
2011
2010
2009
$
(10,383,363 ) $
(20,920,485 ) $
(16,314,332 )
29,807,530
47,400
-
-
479,559
(2,195,820 )
36,031
(394,554 )
2,090,311
35,368
(453,370 )
4,291,446
785,036
27,250,778
47,400
-
6,475,684
-
-
42,813
(56,878 )
(4,942,224 )
53,113
-
1,910,118
562,922
24,125,066
118,501
1,262,219
7,505,836
-
-
(1,297,488 )
13,966
315,891
(5,847,835 )
-
(774,359 )
(76,026 )
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
24,145,574
10,423,241
9,031,439
INVESTING ACTIVITIES
Land and hotel acquisitions and construction in progress
Purchases of other property and equipment
Proceeds from asset dispositions, net of closing costs
Restricted cash released (funded)
(50,017,000 )
(33,514,100 )
361,356
(315,800 )
(1,413,183 )
(1,356,696 )
14,787
(409,947 )
(14,810,896 )
(6,613,397 )
207,814
2,239,184
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(83,485,544 )
(3,165,039 )
(18,977,295 )
FINANCING ACTIVITIES
Proceeds from issuance of debt
Principal payments on debt
Financing fees on debt
Proceeds from equity offerings, net of offering costs
Distributions to members and dividends paid
65,382,528
(268,716,007 )
(4,275,770 )
288,715,552
(19,206,619 )
4,919,026
(10,664,412 )
(1,239,362 )
-
(535,261 )
5,083,518
(6,910,814 )
(945,442 )
15,075,451
(12,271,067 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
61,899,684
(7,520,009 )
31,646
NET CHANGE IN CASH AND CASH EQUIVALENTS
2,559,714
(261,807 )
(9,914,210 )
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD
7,977,418
8,239,225
18,153,435
END OF PERIOD
$
10,537,132 $
7,977,418 $
8,239,225
(See Notes to Consolidated Financial Statements)
F-9
SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash payments for interest
Interest capitalized
Cash payments for state income taxes, net of refunds
SUPPLEMENTAL DISCLOSURE OF
NON-CASH FINANCIAL INFORMATION:
Conversion of construction in progress to other assets
Equity contributions used to pay down debt
Construction in progress financed through related party
accounts payable
Construction in progress financed through accounts payable
Construction in progress financed through issuance
of debt
Issuance of long-term debt for short-term debt
Issuance of long-term debt to refinance existing
long-term debt
Sale proceeds used to pay down long-term debt
(See Notes to Consolidated Financial Statements)
$
$
$
$
$
$
$
$
$
$
$
F-10
2011
2010
2009
18,851,603 $
25,866,571 $
17,810,544
- $
- $
2,977,101
163,206 $
(21,807 ) $
728,514
- $
- $
- $
- $
- $
- $
- $
- $
- $
4,149,379
- $
7,048,500
- $
- $
242,135
244,126
- $
51,098,872
- $
7,450,000
- $
22,215,852
- $
6,134,285
SUMMIT HOTEL OP, LP AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND 2010
ASSETS
Cash and cash equivalents
Restricted cash
Trade receivables
Receivable due from affiliate
Prepaid expenses and other
Land held for development
Property and equipment, net
Deferred charges and other assets, net
Deferred tax benefit
Other assets
TOTAL ASSETS
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable
Related party accounts payable
Accrued expenses
Mortgages and notes payable
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES
EQUITY
Members' equity
Partners' equity:
Summit Hotel Properties, Inc., 27,278,000 common units outstanding
and 2,000,000 preferred units outstanding
Unaffiliated limited partners, 10,100,000 common units outstanding
Total members'/partners' equity
Noncontrolling interest
TOTAL EQUITY
Summit Hotel
OP, LP
2011
Summit Hotel
Properties, LLC
(Predecessor)
2010
$
$
$
10,537,132 $
1,464,032
3,424,630
-
4,268,393
20,294,973
498,876,238
8,923,906
2,195,820
4,019,870
554,004,994 $
7,977,418
1,933,268
2,665,076
4,620,059
1,738,645
20,294,973
445,715,804
4,051,295
-
4,011,992
493,008,530
1,670,994 $
-
15,781,577
217,103,728
234,556,299
864,560
771,066
11,092,131
420,437,207
433,164,964
-
61,468,029
278,174,960
41,273,735
319,448,695
-
319,448,695
-
-
61,468,029
(1,624,463 )
59,843,566
TOTAL LIABILITIES AND EQUITY
$
554,004,994 $
493,008,530
(See Notes to Consolidated Financial Statements)
F-11
SUMMIT HOTEL OP, LP AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
REVENUE
Room revenue
Other hotel operations revenue
Total Revenue
EXPENSES
Hotel operating expenses
Rooms
Other direct
Other indirect
Other
Total hotel operating expenses
Depreciation and amortization
Corporate general and administrative:
Salaries and other compensation
Other
Equity based compensation
Hotel property acquisition costs
Loss on impairment of assets
Total Expenses
Summit Hotel
OP, LP
Period 2/14/11
Summit Hotel Properties, LLC (Predecessor)
Period 1/1/11
through 12/31/11
through 2/13/11
2010
2009
$
131,638,132 $
2,646,214
134,284,346
14,268,042 $
330,251
14,598,293
133,069,346 $
2,565,723
135,635,069
118,959,822
2,239,914
121,199,736
40,138,277
17,672,220
35,870,445
700,290
94,381,232
26,378,314
2,640,878
3,439,788
479,559
253,763
-
127,573,534
4,960,450
2,657,760
4,686,274
73,038
12,377,522
3,429,216
-
-
-
-
-
15,806,738
41,128,699
17,692,322
36,466,147
615,407
95,902,575
27,250,778
-
-
-
366,759
6,475,684
129,995,796
36,719,998
18,047,928
32,388,787
681,304
87,838,017
23,971,118
-
-
-
1,388,639
7,505,836
120,703,610
INCOME (LOSS) FROM OPERATIONS
6,710,812
(1,208,445 )
5,639,273
496,126
OTHER INCOME (EXPENSE)
Interest income
Interest expense
Gain (loss) on disposal of assets
Total Other Income (Expense)
15,756
(13,192,327 )
(36,031 )
(13,212,602 )
7,139
(4,666,216 )
-
(4,659,077 )
47,483
(26,362,265 )
(42,813 )
(26,357,595 )
49,805
(18,320,736 )
(4,335 )
(18,275,266 )
INCOME (LOSS) FROM CONTINUING OPERATIONS
(6,501,790 )
(5,867,522 )
(20,718,322 )
(17,779,140 )
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS
-
-
-
1,464,808
NET INCOME (LOSS) BEFORE INCOME TAXES
(6,501,790 )
(5,867,522 )
(20,718,322 )
(16,314,332 )
INCOME TAX (EXPENSE) BENEFIT
2,324,983
(339,034 )
(202,163 )
-
NET INCOME (LOSS)
(4,176,807 )
(6,206,556 )
(20,920,485 )
(16,314,332 )
PREFERRED DIVIDENDS
(411,120 )
-
-
-
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON UNIT HOLDERS
(4,587,927 )
(6,206,556 )
(20,920,485 )
(16,314,332 )
Net income (loss) per common unit:
Basic and diluted
Weighted-average common units outstanding:
Basic and diluted
(See Notes to Consolidated Financial Statements)
$
(0.12 )
37,378,000
F-12
SUMMIT HOTEL OP, LP AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
Preferred
Common
Summit Hotel
Properties, Inc. Properties, Inc. Partners' Equity
Summit Hotel
Noncontrolling
Interest
Total Members'/
Unaffiliated
Limited
Total
Equity
Predecessor
BALANCES, JANUARY 1, 2009
$
Class A-1 units issued
Net income (loss)
Distributions to members
BALANCES, DECEMBER 31,
2009
$
Net income (loss)
Distributions to members
BALANCES, DECEMBER 31,
2010
$
Net income (loss)
Distributions to members
BALANCES, FEBRUARY 13,
2011
Summit Hotel OP, LP
Equity from predecessor/limited
partners
Contributions
Distributions
Equity-based compensation
Net income (loss)
BALANCES, DECEMBER 31,
2011
$
$
- $
-
-
-
- $
-
-
- $
-
-
- $
- $
89,385,223 $
(1,624,463 ) $
87,760,760
-
22,123,951
-
22,123,951
-
(16,314,332 )
-
(16,314,332 )
-
(12,271,067 )
-
(12,271,067 )
- $
82,923,775 $
(1,624,463 ) $
81,299,312
-
(20,920,485 )
-
(20,920,485 )
-
(535,261 )
-
(535,261 )
- $
61,468,029 $
(1,624,463 ) $
59,843,566
-
-
(6,206,556 )
(8,282,935 )
-
-
(6,206,556 )
(8,282,935 )
- $
46,978,538 $
(1,624,463 ) $
45,354,075
- $
47,875,094
(411,120 )
-
411,120
- $
240,840,458
(7,671,939 )
479,559
(3,348,212 )
45,354,075 $
-
(2,840,625 )
-
(1,239,715 )
- $
-
-
-
-
45,354,075
288,715,552
(10,923,684 )
479,559
(4,176,807 )
$
47,875,094 $
230,299,866 $
41,273,735 $
- $
319,448,695
(See Notes to Consolidated Financial Statements)
F-13
SUMMIT HOTEL OP, LP AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization
Amortization of prepaid lease
Unsuccessful project costs
Loss on impairment of assets
Equity-based compensation
Deferred tax benefit
(Gain) loss on disposal of assets
Changes in operating assets and liabilities:
Trade receivables
Prepaid expenses and other
Accounts payable and related party accounts payable
Income tax receivable
Accrued expenses
Restricted cash released (funded)
2011
2010
2009
$
(10,383,363 ) $
(20,920,485 ) $
(16,314,332 )
29,807,530
47,400
-
-
479,559
(2,195,820 )
36,031
(394,554 )
2,090,311
35,368
(453,370 )
4,291,446
785,036
27,250,778
47,400
-
6,475,684
-
-
42,813
(56,878 )
(4,942,224 )
53,113
-
1,910,118
562,922
24,125,066
118,501
1,262,219
7,505,836
-
-
(1,297,488 )
13,966
315,891
(5,847,835 )
-
(774,359 )
(76,026 )
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
24,145,574
10,423,241
9,031,439
INVESTING ACTIVITIES
Land and hotel acquisitions and construction in progress
Purchases of other property and equipment
Proceeds from asset dispositions, net of closing costs
Restricted cash released (funded)
(50,017,000 )
(33,514,100 )
361,356
(315,800 )
(1,413,183 )
(1,356,696 )
14,787
(409,947 )
(14,810,896 )
(6,613,397 )
207,814
2,239,184
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(83,485,544 )
(3,165,039 )
(18,977,295 )
FINANCING ACTIVITIES
Proceeds from issuance of debt
Principal payments on debt
Financing fees on debt
Contributions
Distributions
65,382,528
(268,716,007 )
(4,275,770 )
288,715,552
(19,206,619 )
4,919,026
(10,664,412 )
(1,239,362 )
-
(535,261 )
5,083,518
(6,910,814 )
(945,442 )
15,075,451
(12,271,067 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
61,899,684
(7,520,009 )
31,646
NET CHANGE IN CASH AND CASH EQUIVALENTS
2,559,714
(261,807 )
(9,914,210 )
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD
7,977,418
8,239,225
18,153,435
END OF PERIOD
$
10,537,132 $
7,977,418 $
8,239,225
(See Notes to Consolidated Financial Statements)
F-14
SUMMIT HOTEL OP, LP AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash payments for interest
Interest capitalized
Cash payments for state income taxes, net of refunds
SUPPLEMENTAL DISCLOSURE OF
NON-CASH FINANCIAL INFORMATION:
Conversion of construction in progress to other assets
Equity contributions used to pay down debt
Construction in progress financed through related party
accounts payable
Construction in progress financed through accounts payable
Construction in progress financed through issuance
of debt
Issuance of long-term debt for short-term debt
Issuance of long-term debt to refinance existing
long-term debt
Sale proceeds used to pay down long-term debt
(See Notes to Consolidated Financial Statements)
$
$
$
$
$
$
$
$
$
$
$
F-15
2011
2010
2009
18,851,603 $
25,866,571 $
17,810,544
- $
- $
2,977,101
163,206 $
(21,807 ) $
728,514
- $
- $
- $
- $
- $
- $
- $
- $
- $
4,149,379
- $
7,048,500
- $
- $
242,135
244,126
- $
51,098,872
- $
7,450,000
- $
22,215,852
- $
6,134,285
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
Basis of Presentation
Summit Hotel Properties, Inc. (the “Company”) is a self-advised hotel investment company that was organized on June 30, 2010 as a Maryland
corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a
Delaware limited partnership also organized on June 30, 2010. On February 14, 2011, the Company closed on its initial public offering (“IPO”) of
26,000,000 shares of common stock and a concurrent private placement of 1,274,000 shares of common stock. Effective February 14, 2011, the
Operating Partnership and Summit Hotel Properties, LLC (the “Predecessor”) completed the merger of the Predecessor with and into the
Operating Partnership (the “Merger”). At the effective time of the Merger, the outstanding Class A, Class A-1, Class B and Class C membership
interests in the Predecessor were issued and converted into, and cancelled in exchange for, a total of 9,993,992 common units of limited
partnership interest in the Operating Partnership (“Common Units”), and the members of the Predecessor were admitted as limited partners of the
Operating Partnership. Also effective February 14, 2011, The Summit Group, Inc., the parent company of the Predecessor (“The Summit Group”),
contributed its 36% Class B membership interest in Summit Group of Scottsdale, Arizona LLC (“Summit of Scottsdale”) to the Operating
Partnership in exchange for 74,829 Common Units and an unaffiliated third-party investor contributed its 15% Class C membership interest in
Summit of Scottsdale to the Operating Partnership in exchange for 31,179 Common Units. The Predecessor owned 49% of Summit of Scottsdale
prior to February 14, 2011. Effective February 14, 2011, the Company contributed the net proceeds of the IPO and the concurrent private
placement to the Operating Partnership in exchange for an aggregate of 27,274,000 Common Units, including Common Units representing the
sole general partnership interest in the Operating Partnership, which are held by a wholly owned subsidiary of the Company as the sole general
partner of the Operating Partnership. Unless the context otherwise requires, “we” and “our” refer to the Company and the Operating Partnership
collectively.
While the Operating Partnership was the survivor of and the legal acquirer of the Predecessor in the Merger, for accounting and financial reporting
purposes, the Predecessor is considered the accounting acquirer in the Merger. As a result, the historical consolidated financial statements of the
Predecessor are presented as the historical consolidated financial statements of the Company and the Operating Partnership after completion of the
Merger and the contributions of the Class B and C membership interests in Summit of Scottsdale to the Operating Partnership (collectively, the
“Reorganization Transaction”).
As a result of the Reorganization Transaction, the Operating Partnership and its subsidiaries acquired sole ownership of the 65 hotels in its initial
portfolio. In addition, the Operating Partnership and its subsidiaries assumed the liabilities, including indebtedness, of the Predecessor and its
subsidiaries.
As of December 31, 2011, our real estate investment portfolio consists of 70 upscale, upper midscale and midscale hotels with a total of 7,095
guestrooms located in small, mid-sized and suburban markets in 19 states (see Note 7 for new acquisitions). The hotels are leased to subsidiaries
(“TRS Lessees”) of the Company’s taxable REIT subsidiaries (“TRSs”). The Company indirectly owns 100% of the outstanding equity interests
in the TRS Lessees.
F-16
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Consolidation
The accompanying consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership, and the
Operating Partnership’s subsidiaries. The accompanying consolidated financial statements of the Operating Partnership include the accounts of
the Operating Partnership and its subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated
financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At times,
cash on deposit may exceed the federally insured limit. The Company maintains its cash with high credit quality financial institutions.
Receivables and Credit Policies
Trade receivables are uncollateralized customer obligations resulting from the rental of hotel rooms and the sales of food, beverage, and banquet
services due under normal trade terms requiring payment upon receipt of the invoice. Trade receivables are stated at the amount billed to the
customer and do not accrue interest. Customer account balances with invoices dated over 60 days old are considered delinquent. Payments of
trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest
unpaid invoices.
The Company reviews the collectability of the receivables monthly. A provision for losses on receivables is determined on the basis of previous
loss experience and current economic conditions. There were no material uncollectible receivables and no allowance for doubtful accounts
recorded as of December 31, 2011 and 2010. The Company incurred bad debt expense of $37,199, $190,107, and $88,125 for 2011, 2010 and
2009, respectively.
Property and Equipment
Buildings and major improvements are recorded at cost and depreciated using the straight-line method over 27 to 40 years, the estimated useful
lives of the assets. Hotel equipment, furniture and fixtures are recorded at cost and depreciated using the straight-line method over the estimated
useful lives of the related assets of 2 to 15 years. The Company periodically re-evaluates fixed asset lives based on current assessments of
remaining utilization that may result in changes in estimated useful lives. Such changes are accounted for prospectively and will increase or
decrease depreciation expense. Depreciation expense from continuing operations for the year ended December 31, 2011, 2010 and 2009 totaled
$26,740,666; $25,234,526 and $21,902,729, respectively. Expenditures that materially extend a property’s life are capitalized. These costs may
include hotel refurbishment, renovation and remodeling expenditures.
F-17
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
Normal maintenance and repair costs are expensed as incurred. When depreciable property is retired or disposed of, the related cost and
accumulated depreciation is removed from the accounts and any gain or loss is reflected in current operations.
Capitalized Development and Interest Costs
The Company capitalizes all hotel development costs and other direct overhead costs related to the construction of hotels. Additionally, the
Company capitalizes the interest costs associated with constructing new hotels. Capitalized development, direct overhead and interest are
depreciated over the estimated lives of the respective assets. Organization and start-up costs are expensed as incurred. For the years ended
December 31, 2011 and 2010, the Company did not capitalize interest costs, as no hotels were constructed. For the year ended December 31,
2009, the Company capitalized interest of $2,977,101.
Acquisitions
We allocate the purchase price of acquisitions based on the fair value of the acquired assets and assumed liabilities. We determine the acquisition-
date fair values of all assets and assumed liabilities using methods similar to those used by independent appraisers, for example, using a
discounted cash flow analysis that utilizes appropriate discount and/or capitalization rates and available market information. Estimates of future
cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic
conditions (see Note 7 for new acquisitions). Acquisition costs are expensed as incurred.
Assets Held for Sale
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360, Property Plant and Equipment , requires a
long-lived asset to be sold to be classified as “held for sale” in the period in which certain criteria are met, including that the sale of the asset
within one year is probable. If assets are classified as held for sale, they are carried at the lower of carrying amount or fair value, less costs to
sell. FASB ASC 360 also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held
for sale be reported in discontinued operations if the operations and cash flows of the component have been or will be eliminated from our
ongoing operations.
As a part of routine procedures, we periodically review hotels based on established criteria such as age of hotel property, type of franchise
associated with hotel property, and adverse economic and competitive conditions in the region surrounding the property. During the period, we
completed a comprehensive review of our investment strategy and of our existing hotel portfolio and our land held for development to identify
properties which we believe are either non-core or no longer complement the business as required by FASB ASC 360. We do not believe that any
of these assets meet this criteria at this time.
Long-Lived Assets and Impairment
We apply the provisions of FASB ASC 360 which addresses financial accounting and reporting for the impairment or disposal of long-lived
assets.
F-18
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
We monitor events and changes in circumstances for indicators that the carrying value of a hotel and related assets may be impaired. Factors that
could trigger an impairment analysis include, among others: (1) significant underperformance relative to historical or projected operating results,
(2) significant changes in the manner of use of a hotel or the strategy of our overall business, (3) a significant increase in competition, (4) a
significant adverse change in legal factors or regulations and (5) significant negative industry or economic trends. When such factors are
identified, we 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 is made to the
carrying value of the hotel to reflect the hotel at fair value.
During 2009, the Predecessor determined that four land parcels were impaired and wrote them down to their fair value. The carrying value of the
assets exceeded fair value by $6,332,736, with fair value being determined by reference to the estimated market prices of such assets (Level 3
Inputs). This impairment was a result of the Predecessor’s decision to stop development projects and attempt to sell the land. The Predecessor
also determined that the Courtyard in Memphis, TN was impaired by $1,173,100 due to the fact that its historical carrying value was higher than
the hotel’s fair value due to recent economic distress on this particular hotel and market. A total impairment loss of $7,505,836 was charged to
operations in 2009. During 2010, the Predecessor, in conjunction with the termination of a contract for sale of land parcels, determined that
another four land parcels were impaired and wrote them down to their fair value. An impairment loss of $6,475,684 was charged to operations in
2010. The contracted sales price for each of these parcels was in excess of their carrying amounts. Subsequent to the termination of the sales
contract management determined the carrying amounts were no longer realizable. During 2011, the Company did not record an impairment loss.
Deferred Charges
These assets are carried at cost and consist of deferred financing fees and initial franchise fees. Costs incurred in obtaining financing are
capitalized and amortized on the straight-line method over the term of the related debt, which approximates the interest method. Initial franchise
fees are capitalized and amortized over the term of the franchise agreement using the straight line method. Amortization expense from continuing
operations for the year ended December 31, 2011, 2010 and 2009 totaled $3,066,864; $2,016,252 and $2,222,336, respectively. Amortization of
financing costs for the years ended December 31, 2011, 2010 and 2009 were $2,206,389; $1,841,717 and $2,029,393, respectively. Amortization
of franchise costs for the years ended December 31, 2011, 2010 and 2009 were $860,475; $174,535 and $192,943, respectively.
Restricted Cash
Restricted cash consists of certain funds maintained in escrow for property taxes, insurance and certain capital expenditures. Funds may be
disbursed from the account upon proof of expenditures and approval from the lenders (see Note 4).
Reclassifications
Certain reclassifications have been made to the prior-year financial information of the Predecessor to conform to our current-year presentation as
follows for the years ended December 31, 2010 and 2009:
F-19
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
•
•
•
•
•
to reclassify (a) $41.1 million and $37.0 million of direct hotel operations expense (wages, payroll taxes and benefits, linens,
cleaning and guestroom supplies and complimentary breakfast) as rooms expense for the years ended December 31, 2010 and 2009,
respectively; and (b) $6.1 million and $5.4 million of direct hotel operations expense (franchise royalties) as other indirect expense
for the years ended December 31, 2010 and 2009, respectively;
to reclassify (a) $8.5 million and $7.7 million of other hotel operating expense (utilities and telephone) as other direct expense for
the years ended December 31, 2010 and 2009, respectively; and (b) $10.5 million and $9.4 million of other hotel operating expense
(property taxes, insurance and cable) as other indirect expense for the years ended December 31, 2010 and 2009;
to reclassify (a) $4.5 million and $4.3 million of general, selling and administrative expense (office supplies, advertising,
miscellaneous operating expenses and bad debt expense) as other direct expenses for the years ended December 31, 2010 and 2009;
(b) $20.3 million and $19.3 million of general, selling and administrative expense (credit card/travel agent commissions,
management company expense, management company legal and accounting fees and franchise fees) as other indirect expenses for
the years ended December 31, 2010 and 2009, respectively; and (c) $615,000 and $681,000 of general, selling and administrative
expense (ground rent and other expense) as other expense for the years ended December 31, 2010 and 2009;
to reclassify $4.7 million and $6.2 million of repairs and maintenance expense as other direct expenses for the years ended
December 31, 2010 and 2009, respectively; and
to reclassify $367,000 and $1.4 million of other indirect expense (hotel startup costs) as hotel property acquisition costs for the
years ended December 31, 2010 and 2009, respectively.
New Accounting Pronouncements
In January 2010, FASB issued an update (ASU No. 2010-06) to ASC 820, Fair Value Measurements and Disclosures , to improve disclosure
requirements regarding transfers, classes of assets and liabilities, and inputs and valuation techniques. Certain provisions of ASU No. 2010-06 to
ASC 820 related to separate line items for all purchases, sales, issuances, and settlements of financial instruments valued using Level 3 are
effective for fiscal years beginning after December 15, 2010. The adoption of this ASC update on January 1, 2011 had no material impact on the
consolidated financial statements or disclosures of the Company, the Operating Partnership or the Predecessor.
In May 2011, FASB issued an update (ASU No. 2011-04) to ASC 820, Fair Value Measurements and Disclosures , to develop common
requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRS. This
update is effective for interim and fiscal years beginning after December 15, 2011. The Company believes that this will not have a material
impact on the consolidated financial statements.
F-20
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
In June 2011, FASB issued ASU 2011-05, Presentation of Comprehensive Income. ASU 2011-05 requires an entity to present the total of
comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other
comprehensive income as part of the statement of changes in equity. ASU 2011-05 is effective for interim and fiscal years beginning after
December 15, 2011. In December 2011, the FASB decided to defer the effective date of those changes in ASU 2011-05 that relate only to the
presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220): Deferral of
the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive income in
Accounting Standards Update 2011-05. The Company believes that this will not have a material impact on the consolidated financial statements.
Revenue Recognition
Revenue is recognized when rooms are occupied and services have been rendered.
Concentrations of Credit Risk
The Company grants credit to qualified customers generally without collateral, in the form of accounts receivable. The Company believes its risk
of loss is minimal due to its periodic evaluations of the credit worthiness of the customers.
Sales Taxes
The Company has customers in states and municipalities in which those governmental units impose a sales tax on certain sales. The Company
collects those sales taxes from its customers and remits the entire amount to the various governmental units. The Company’s accounting policy is
to exclude the tax collected and remitted from revenues.
Fair Value
FASB ASC 820 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value
measurements. Fair value is defined under GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of
observable inputs and minimize the use of unobservable inputs.
Our estimates of the fair value of financial instruments as of December 31, 2011 were determined using available market information and
appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different
market assumptions or estimation methods may have a material effect on the estimated fair value amounts.
The carrying amounts of cash and cash equivalents, restricted cash, receivables, accounts payable and accrued expenses approximate fair value
due to the short-term nature of these instruments.
As of December 31, 2011, the aggregate fair value of our consolidated mortgages and notes payable is approximately $217.4 million, compared to
the aggregate carrying value of approximately $217.1 million on our consolidated balance sheet. As of December 31, 2010, the aggregate fair
value was approximately $420.8 million compared to the aggregate carrying value of approximately $420.4 million.
F-21
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
FASB ASC 820 also requires that non-financial assets and non-financial liabilities be disclosed at fair value in the financial statements if these
items are measured at fair value on a non-recurring basis, such as in determining impairment loss or the value of assets held for sale as described
below.
Equity-Based Compensation
Effective as of the closing of the IPO, we adopted the 2011 Equity Incentive Plan, which provides for the grants of stock options, stock
appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other stock-based awards, or any combination of the
foregoing. In accordance with FASB ASC 718, equity-based compensation is recognized as an expense in the financial statements over the vesting
period and measured at the fair value of the award on the date of grant. The amount of the expense may be subject to adjustment in future periods
depending on the specific characteristics of the equity-based award and the application of accounting guidance.
Tax Status
We intend to elect to be taxed as a REIT under the Code commencing with our short taxable year ended December 31, 2011. To qualify as a
REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our stockholders at
least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, which does
not necessarily equal net income as calculated in accordance with GAAP. As a REIT, we generally will not be subject to federal income tax (other
than taxes paid by our TRSs) to the extent we currently distribute 100% of our REIT taxable income to our stockholders. If we fail to qualify as a
REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will
not be permitted to qualify for treatment as a REIT for the four taxable years following the year during which qualification is lost unless we satisfy
certain relief provisions.
Commencing on February 14, 2011, we began to account for federal and state income taxes with respect to our TRSs using the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated
financial statements’ carrying amounts of existing assets and liabilities and respective tax bases and operating losses 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.
NOTE 2 - INITIAL PUBLIC OFFERING
On February 14, 2011, the Company closed its IPO of 26,000,000 shares of common stock and its concurrent private placement of 1,274,000
shares of common stock. Net proceeds received by the Company and the Operating Partnership from the IPO and the concurrent private placement
were $240.8 million, after deducting the underwriting discount related to the IPO of $17.7 million and the payment of offering-related expenses of
approximately $7.3 million. The Company contributed the net proceeds of the IPO and the concurrent private placement to the Operating
Partnership in exchange for Common Units, representing limited and general partnership interests. The Operating Partnership primarily used
these funds to pay down debt (see Note 11).
F-22
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
NOTE 3 - PREFERRED STOCK OFFERING
On October 28, 2011, Summit REIT completed a public offering of 2,000,000 shares of its 9.25% Series A Cumulative Redeemable Preferred
Stock in which it raised net proceeds of $47.9 million, after deducting the underwriting discount and estimated offering costs of approximately
$2.1 million. The Company contributed the net proceeds of this offering to the Operating Partnership in exchange for Preferred Units. The
Operating Partnership used these funds to pay down the principal balance of our revolving credit facility.
NOTE 4 - RESTRICTED CASH
Restricted cash as of December 31, 2011 and 2010 is comprised of the following:
Financing Lender
Wells Fargo (Lehman)
National Western Life
Goldman Sachs
Bank of the Ozarks
Capmark (ING)
Capmark (ING)
Capmark (ING)
Capmark (ING)
Property
Taxes
Insurance
FF&E
Reserves
2011
2010
$
- $
64,258
174,447
11,112
176,291
575,472
117,620
85,503
- $
-
82,488
8,307
-
-
-
-
- $
-
65,028
103,506
-
-
-
-
- $
64,258
321,963
122,925
176,291
575,472
117,620
85,503
1,284,913
-
-
21,902
139,245
235,576
165,810
85,822
$
1,204,703 $
90,795 $
168,534 $
1,464,032 $
1,933,268
NOTE 5 - PREPAID EXPENSES AND OTHER
Prepaid expenses and other at December 31, 2011 and 2010 are comprised of the following:
Prepaid insurance expense
Other
2011
2010
$
$
425,821 $
3,842,572
511,169
1,227,476
4,268,393 $
1,738,645
F-23
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2011 and 2010 are comprised of the following:
Land
Hotel buildings and improvements
Furniture, fixtures and equipment
Less accumulated depreciation
NOTE 7 - ACQUISITIONS
2011
2010
$
76,846,292 $
444,377,456
103,820,275
625,044,023
126,167,785
69,592,292
392,138,987
88,781,027
550,512,306
104,796,502
$
498,876,238 $
445,715,804
We acquired four hotels during the second quarter of 2011 and one hotel during the third quarter of 2011. We purchased the Homewood Suites in
Ridgeland, MS on April 15, 2011 for approximately $7.3 million, the Staybridge Suites in Glendale, CO on April 27, 2011 for approximately
$10.0 million, the Holiday Inn in Duluth, GA on April 27, 2011 for approximately $7.0 million, the Hilton Garden Inn in Duluth, GA for
approximately $13.4 million on May 25, 2011 and the Courtyard by Marriott in El Paso, TX on July 28, 2011 for approximately $12.4
million. The purchases were financed with borrowings under our revolving credit facility. We did not acquire any intangibles or assume any debt
related to these five acquisitions.
The following table shows the allocation of the aggregated purchase prices for the purchases discussed above during 2011:
Land
Hotel buildings and improvements
Furniture, fixtures and equipment
Current assets
Total assets acquired
Current liabilities
Net assets acquired
F-24
2011
(in thousands)
$
$
$
7,254
41,368
1,428
365
50,415
398
50,017
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
NOTE 8 - DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets at December 31, 2011 and 2010 are comprised of the following:
Initial franchise fees
Deferred financing costs
Less accumulated amortization
Total
Future amortization expense is expected to be approximately:
2012
2013
2014
2015
2016
Thereafter
2011
2010
$
5,810,223 $
7,580,963
13,391,186
4,467,280
2,596,042
9,443,365
12,039,407
7,988,112
$
8,923,906 $
4,051,295
$
2,411,175
1,975,203
1,105,096
610,487
498,114
2,323,831
$
8,923,906
NOTE 9 - OTHER NONCURRENT ASSETS
Other noncurrent assets at December 31, 2011 and 2010 are comprised of the following:
Prepaid land lease
Seller financed notes receivable
Income tax receivable from limited partners
2011
2010
$
3,540,795 $
25,705
453,370
3,588,195
423,797
-
$
4,019,870 $
4,011,992
F-25
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
NOTE 10 - ACCRUED EXPENSES
Accrued expenses at December 31, 2011 and 2010 are comprised of the following:
Accrued sales and other taxes
Accrued salaries and benefits
Accrued interest
Other accrued expenses
F-26
2011
2010
$
6,140,859 $
2,114,935
806,633
6,719,150
5,594,053
1,834,861
1,799,693
1,863,524
$
15,781,577 $
11,092,131
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
NOTE 11 - DEBT OBLIGATIONS
A detail of mortgage loans and notes payable at December 31, 2011 and December 31, 2010 are comprised of the following:
Payee
Interest
Rate
Maturity
Date
2011
2010
Lehman Brothers Bank
Fixed (5.4025%)
1/11/2012 $
- $
76,829,078
ING Investment Management
a ) Fixed (5.60%)
b ) Fixed (6.10%)
c ) Fixed (6.61%)
d ) Fixed (6.34%)
4/1/2012
7/1/2012
11/1/2013
7/1/2012
27,645,831
28,158,119
6,046,891
7,655,240
69,506,081
28,901,411
29,321,614
6,235,813
7,896,366
72,355,204
National Western Life Insurance
e ) Fixed (8.0%)
1/1/2015
13,196,954
13,631,222
f ) Fixed (6.5%)
6/24/2012
1,506,652
1,594,177
Chambers Bank
Bank of the Ozarks
MetaBank
BNC National Bank
g ) Variable (6.75% at 12/31/11
and 6.75% at 12/31/10)
h ) Variable (5.0% at 12/31/11
and 5.0% at 12/31/10)
i ) Fixed (5.01%)
j ) Fixed (4.81%)
Marshall & Ilsley Bank
Variable (5.0% at 12/31/10)
General Electric Capital Corp.
k ) Variable (4.08% at 12/31/11
and 2.05% at 12/31/10)
l ) Variable (4.08% at 12/31/11
and 2.1% at 12/31/10)
m ) Variable (4.08% at 12/31/11
and 2.85% at 12/31/10)
6/29/2012
6,333,971
6,435,774
3/1/2012
7,057,770
7,286,887
11/1/2013
4/1/2016
5,518,845
5,699,850
11,218,695
5,719,872
5,814,136
11,534,008
6/30/2011
3/31/2011
-
-
-
9,895,727
11,524,451
21,420,178
4/1/2018
8,315,294
8,685,517
3/1/2019
10,708,600
11,033,293
4/1/2014
10,860,148
29,884,042
11,182,794
30,901,604
Fortress Credit Corp.
Variable(10.75% at 12/31/10)
3/5/2011
-
86,722,869
First National Bank of Omaha
Variable (5.5% at 12/31/10)
7/31/2011
-
38,375,633
First National Bank of Omaha
First National Bank of Omaha
n ) Variable (5.25% at 12/31/11
and 5.25% at 12/31/10)
n ) Variable (5.25% at 12/31/11
and 5.25% at 12/31/10)
7/1/2013
15,137,035
15,588,572
2/1/2014
8,551,430
8,646,361
Bank of Cascades
o ) Fixed (4.66%)
9/30/2021
12,557,412
12,623,347
Compass Bank
Goldman Sachs
Deutsche Bank
p ) Variable (4.5% at 12/31/11
and 4.5% at 12/31/10)
5/17/2018
16,083,173
16,492,293
q ) Fixed (5.67%)
7/6/2016
14,644,044
r ) Variable (3.8% at 12/31/11)
4/29/2014
11,426,469
-
-
Total mortgages and notes payable
217,103,728 420,437,207
F-27
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
a) In 2005, the Predecessor obtained a permanent loan with ING Investment Management (“ING”) secured by six of our hotels in the amount of
$34,150,000. This loan carries an interest rate of 5.6% and matures on July 1, 2025, with options for the lender to call the note beginning in 2012
upon six months prior notice. ING exercised their call option in May 2011. See further discussion below. Proceeds were used to refinance other
short and long-term debt related to the secured hotels. The monthly principal and interest payment is $236,843.
b) In 2006, the Predecessor obtained a permanent loan with ING secured by nine of our hotels in the amount of $36,600,800. This loan carries an
interest rate of 6.1% and matures in July 2012. Proceeds were used to refinance other short and long-term debt related to the secured hotels. The
monthly principal and interest payment is $243,328.
c) On November 1, 2006, the Predecessor entered into a loan with ING. The loan was for construction of the Residence Inn in Jackson, MS. The
loan for $6,600,000 has a fixed rate of 6.61% and a maturity date of November 1, 2028, with a call option on November 1, 2013. The monthly
principal and interest payment is $49,621.
d) On December 22, 2006, the Predecessor entered into a loan with ING for the construction of the Hilton Garden Inn in Ft. Collins, CO. The loan
was for $8,318,000 and has a fixed rate of 6.34% and matures on July 1, 2012. The monthly principal and interest is $61,236.
e) On December 8, 2009, the Predecessor entered into two loans with National Western Life Insurance Company in the amounts of $8,650,000
and $5,350,000 to refinance the JP Morgan debt on the two Scottsdale, AZ hotels. The loans carry a fixed rate of 8.0% and mature on January 1,
2015. The monthly principal and interest payment is $125,756.
f) In 2003, the Predecessor entered into a loan with Chambers Bank to purchase the Aspen Hotel in Ft. Smith, AR. The loan carries a fixed rate of
6.5% and matures on June 24, 2012. The monthly principal and interest payment is $15,644.
g) On June 29, 2009, the Predecessor entered into a loan with Bank of the Ozarks in the amount of $10,816,000 to fund the hotel construction
located in Portland, OR. The loan carries a variable interest rate of 90 day LIBOR plus 400 basis points with a floor of 6.75% and matures on
June 29, 2012. The monthly principal and interest payment is $44,935.
h) On March 10, 2009, the Predecessor entered into a loan modification agreement with MetaBank in the amount of $7,450,000 on the Boise, ID
Cambria Suites. The loan modification extended the maturity date to March 1, 2012. The loan has a variable interest rate of Prime, with a floor of
5%. The monthly principal and interest is $30,811.
i) On May 10, 2006, the Predecessor entered into a loan with BNC National Bank in the amount of $7,120,000 to fund construction of the
Hampton Inn in Ft. Worth, TX. The loan has a fixed rate of 5.01% and matures on November 1, 2013. The monthly principal and interest
payment is $40,577.
F-28
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
j) On October 1, 2008, the Predecessor entered into a loan with BNC National Bank in the amount of $6,460,000 to fund the land acquisition and
hotel construction of the Holiday Inn Express located in Twin Falls, ID. The loan has a fixed rate of 4.81% and matures on April 1, 2016. The
monthly principal and interest payment is $37,763.
k) On April 30, 2007, the Predecessor entered into a loan with General Electric Capital Corporation (“GECC”) in the amount of $9,500,000 to
fund the land acquisition on hotel construction located in Denver, CO. The loan carries a variable interest rate of LIBOR plus 350 basis points and
matures on April 1, 2018. The monthly principal and interest payment is $53,842.
l) On August 15, 2007, the Predecessor entered into a loan with GECC in the amount of $11,300,000 to fund construction of the Cambria Suites in
Baton Rouge, LA. The loan carries a variable interest rate of LIBOR plus 350 basis points and matures in March 2019. The monthly principal
and interest payment is $49,709.
m) On February 29, 2008, the Predecessor entered into a loan with GECC in the amount of $11,400,000 to fund the land acquisition and hotel
construction located in San Antonio, TX. The loan carries a variable interest rate of 90 day LIBOR plus 350 basis points and matures in April
2014. The monthly principal and interest payment is $54,639.
n) The Company has a credit pool agreement with the First National Bank of Omaha providing the Company with medium-term financing. The
agreement allows for two-year interest only notes and five-year amortizing notes, for which the term of an individual note can extend beyond the
term of the agreement. Interest on unpaid principal is payable monthly at a rate LIBOR plus 4.0% and a floor of 5.25%. Two notes totaling
$15,137,035 require monthly principal and interest payments of $105,865 and mature on July 1, 2013. The note for $8,551,430 requires a
monthly principal and interest payment of $46,072 and matures on February 1, 2014.
o) On October 3, 2008, the Predecessor entered into a loan with Bank of the Cascades in the amount of $13,270,000 to fund the land acquisition
and hotel construction of the Residence Inn located in Portland, OR. On September 30, 2011, we refinanced the loan to have a new maturity date
of September 30, 2021 and a fixed interest rate of 4.66% until September 30, 2016 with a fixed interest rate thereafter of the then-current Federal
Home Loan Bank of Seattle Intermediate/Long-Term, Advances Five-year Fixed Rate plus 3.00%. The monthly principal and interest payment is
$71,316.
p) On September 17, 2008, the Predecessor entered into a loan with Compass Bank in the amount of $19,250,000 to fund the land acquisition and
hotel construction of the Courtyard by Marriott located in Flagstaff, AZ. The loan carries a variable interest rate of Prime minus 25 basis points,
with a floor of 4.5%, and matures on May 17, 2018. The monthly principal and interest payment is $128,838.
q) On June 28, 2011, the Company entered into a loan with Goldman Sachs Commercial Mortgage Capital, LP in the principal amount of
$14,750,000 on the SpringHill Suites hotel in Bloomington, MN and the Hampton Inn & Suites hotel in Bloomington, MN. The interest rate is
fixed at 5.67%. The loan matures on July 6, 2016, and monthly principal and interest payments are $92,082.
F-29
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
r) On April 29, 2011, the Company entered into a $100.0 million, three-year (with an option to extend for one additional year if we meet certain
requirements) senior secured revolving credit facility with Deutsche Bank AG New York Branch, as administrative agent and lender, and a
syndicate of other lenders. We pay interest on the periodic advances under the senior secured revolving credit facility at varying rates, based
upon, at our option, either (i) 1-, 2-, 3- or 6-month LIBOR, subject to a floor of 0.50%, plus a LIBOR margin between 2.50% and 3.50%,
depending upon the ratio of our outstanding consolidated total indebtedness to EBITDA (as defined in the loan documentation), or (ii) the
applicable base rate, which is the greatest of the administrative agent’s prime rate, 0.50% plus the federal funds effective rate, and 1-month
LIBOR (incorporating the floor of 0.50%) plus 1.00%, plus a margin between 1.50% and 2.50%, depending upon the ratio of outstanding
consolidated total indebtedness to EBITDA (as defined in the loan documentation). Borrowing availability under the facility is subject to a
borrowing base of properties pledged as collateral for borrowings under the facility and other conditions. On May 13, 2011, the Operating
Partnership entered into an agreement with Deutsche Bank AG New York Branch and U.S. Bank National Association that increased the
maximum aggregate amount of the credit facility from $100.00 million to $125.0 million. As of December 31, 2011, the outstanding principal
balance on this secured credit facility was approximately $11.4 million. Our borrowing capacity as of December 31, 2011 was approximately
$92.3 million and $80.9 million was available for future use.
Maturities of long-term debt for each of the next five years are estimated as follows:
2012
2013
2014
2015
2016
Thereafter
$
82,354,588
25,880,486
29,850,880
13,237,614
19,828,194
45,951,966
$ 217,103,728
The Company refinanced ING and MetaBank debt of approximately $76.6 million in February 2012 (see Note 20). The Company is in
preliminary discussions with Chambers Bank and Bank of the Ozarks about refinancing the related debt that is due in June 2012.
The weighted average interest rate for all borrowings was 5.38% and 5.70% at December 31, 2011 and 2010, respectively.
Fixed-rate mortgage loans
Variable-rate mortgage loans
F-30
2011
(in millions)
2010
(in millions)
$
$
122.6 $
94.5
217.1 $
170.1
250.3
420.4
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
As previously reported, we utilized a portion of the net proceeds from the IPO and concurrent private placement to pay down outstanding
mortgage indebtedness. During the three months ended March 31, 2011, we utilized approximately $227.2 million of such net proceeds to reduce
outstanding mortgage indebtedness and pay associated costs, as follows:
― approx imately $89.3 million to repay in full a loan from Fortress Credit Corp., including approximately $2.1 million of exit fees, interest and
legal fees;
― approximately $78.2 million to repay in full a loan originally made by Lehman Brothers Bank, including approximately $1.4 million to pay an
extinguishment premium and other transaction costs;
― approximately $21.4 million to repay in full two loans from Marshall & Isley Bank; and
― approximately $38.3 million to repay in full two loans from First National Bank of Omaha.
In connection with the March 23, 2011 termination of franchise agreements with Choice Hotels International, Inc. (“Choice”), we executed
agreements with ING and with GECC in connection with the termination of the franchise agreements with respect to the hotels securing loans
from these lenders.
We entered into an agreement with ING pursuant to which ING agreed to forbear, for a period of 120 days, from declaring any default relating to
the termination of the Choice franchise agreements. On July 27, 2011, ING agreed to substitute the SpringHill Suites, Flagstaff, AZ, and the
Staybridge Suites, Ridgeland, MS, and release the AmericInn, Fort Smith, AR (formerly Comfort Inn) and AmericInn, Missoula, MT (formerly
Comfort Inn), and otherwise waive any defaults related to the termination and change of franchise. The collateral substitution closed on
September 30, 2011.
GECC agreed to waive any default relating to the termination of the Choice franchise agreements, provided that an event of default would be
declared if a replacement franchise agreement was not entered into by August 15, 2011. On July 25, 2011, we entered into a non-binding letter of
intent pursuant to which we and GECC agreed to modify the loans as follows: (a) decrease the interest rate to 90-day LIBOR plus 3.50%; (b)
certain fixed charge coverage ratios will be modified to reflect the stabilization of revenues of the former Choice hotels after their conversion to
other nationally-recognized brands; and (c) we will pledge additional collateral for the loans, including the Aloft, Jacksonville, Florida, the Hyatt
Place, Las Colinas, Texas, and the Fairfield Inn, Boise, Idaho, which liens on these three additional hotels may be released upon satisfaction of
certain fixed charge coverage ratio tests on the collateralized hotels as well as on our entire hotel portfolio. The modification cured any potential
default under the GECC loans related to the change in franchise, and was closed August 12, 2011.
In May 2011, ING notified us that it was exercising its contractual right to declare the entire principal balance and accrued but unpaid interest on
its loan to us, which had an outstanding principal balance of approximately $27.6 million as of December 31, 2011, to become due and payable on
January 1, 2012. On October 3, 2011, we and ING agreed to a non-binding term sheet pursuant to which we planned to refinance and consolidate
that loan and our other three ING loans, which four loans collectively had an aggregate outstanding balance of approximately $69.5 million as of
December 31, 2011, into a single 7-year term loan with a principal balance of $67.5 million, amortized over 20 years and bearing an annual
interest rate of 6.10%, collateralized by 16 properties containing 1,639 guestrooms. After taking into account the continuing amortization of the
existing loans through closing and the proceeds of the new loan, we funded at closing approximately $1.5 million of principal paydown with a
draw on our revolving credit facility (see Note 20).
F-31
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
NOTE 12 - DISCONTINUED OPERATIONS
The Company has reclassified its consolidated financial statements of operations for the years ended December 31, 2009 to reflect discontinued
operations of two consolidated hotel properties sold during this period pursuant to the plan for hotel dispositions. This reclassification has no
impact on the Company’s net income or the net income per share. During 2009, the Company sold two hotel properties located in Ellensburg,
WA and St. Joseph, MO for approximately $6,810,000, with net proceeds of approximately $6,342,000.
Condensed financial information of the results of operations for these hotel properties included in discontinued operations are as follows:
REVENUE
EXPENSES
Rooms
Other direct
Other indirect
Other
Depreciation and amortization
INCOME FROM OPERATIONS
OTHER INCOME (EXPENSE)
Interest income
Interest expense
Gain (loss) on disposal of assets
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS
NOTE 13 - NONCONTROLLING INTERESTS
2009
$
1,133,690
296,012
146,159
282,139
53,463
153,948
931,721
201,969
116
(39,100 )
1,301,823
1,262,839
$
1,464,808
As of December 31, 2011, limited partners of the Operating Partnership other than the Company owned 10,100,000 Common Units representing
an approximate 27% limited partnership interest in the Operating Partnership. Beginning on or after February 14, 2012, pursuant to the limited
partnership agreement, redemption rights of the limited partners other than the Company, will enable those limited partners to cause the Operating
Partnership to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of shares of the Company’s
common stock at the time of redemption, or at the Company’s option, shares of the Company’s common stock, on a one-for-one basis. The
number of shares of the Company’s common stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain
events such as share dividends, share subdivisions or combinations.
F-32
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
The Company classifies these Common Units as noncontrolling interests as a component of permanent equity on the December 31, 2011
consolidated balance sheet. The share of net loss allocated to these Common Units is reported on the accompanying consolidated statement of
operations for the period February 14, 2011 through December 31, 2011 as net loss attributable to noncontrolling interests. For the period from
February 14, 2011 through December 31, 2011, no Common Units were redeemed.
NOTE 14 - EQUITY
Common Shares
On February 14, 2011, the Company completed an underwritten public offering of 27,274,000 common shares, par value of $.01 per share (see
Note 2). Upon completion of the offering, the Company issued 4,000 common shares to our independent directors pursuant to the 2011 Equity
Incentive Plan. The Company granted options to purchase 940,000 common shares (see Note 16). The Company paid dividends of $.05625,
$.1125, and $.1125 per share on May 23, 2011; August 31, 2011; and November 30, 2011, respectively.
Preferred Shares
On October 28, 2011, the Company completed an underwritten public offering of 2,000,000 shares of 9.25% Series A Cumulative Redeemable
Preferred Stock, par value of $.01 per share (see Note 3). Dividends are payable quarterly in arrears on or about the last day of February, May,
August and November of each year. The Company paid dividends of $.20556 per share on November 30, 2011.
NOTE 15 - BENEFIT PLANS
Effective August 1, 2011, the Company has a qualified contributory retirement plan (the Plan), under Section 401(k) of the Internal Revenue Code
which covers all full-time employees who meet certain eligibility requirements. Voluntary contributions may be made to the Plan by
employees. The Plan is a Safe Harbor Plan and requires a mandatory employer contribution. The employer contribution expense for the year
ended December 31, 2011 was approximately $69,000.
NOTE 16 - EQUITY-BASED COMPENSATION
The Company measures and recognizes compensation expense for all equity-based payments. The compensation expense is recognized based on
the grant-date fair value of those awards. All of the Company’s existing stock option awards have been determined to be equity-classified awards.
The Company’s 2011 Equity Incentive Plan provides for the granting of options, stock appreciation rights, restricted stock, restricted stock units,
dividend equivalent rights, and other equity-based award or incentive award up to an aggregate of 2,318,290 shares of the Company’s common
stock. Options granted may be either incentive stock options or nonqualified stock options. Vesting terms may vary with each grant, and option
terms are generally five to ten years.
F-33
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
Concurrent with the completion of the IPO, the Company granted options to purchase 940,000 shares of the Company’s common stock. Options
to purchase shares of common stock were granted with exercise prices equal to $9.75 per share, the fair value of the common stock on the date of
grant. Options vest on a ratable basis over a five-year period following the date of grant and options terms are generally five to ten years
following the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following
assumptions:
Expected dividend yield at date of grant
Expected stock price volatility
Risk-free interest rate
Expected life of options (in years)
2011
5.09 %
56.6 %
2.57 %
6.5
The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was
based on historical monthly price changes of a peer group of comparable entities based on the expected life of the options at the date of grant. The
expected life of options is the average number of years the Company estimates that options will be outstanding. The Company considers groups
of associates that have similar historical exercise behavior separately for valuation purposes.
The following table summarizes stock option activity under the Company’s 2011 Equity Incentive Plan for the year ended December 31, 2011:
Outstanding at December 31, 2010
Granted
Exercised
Cancelled
Outstanding at December 31, 2011
Exercisable at December 31, 2011
Number of
Options
Weighted
Average Exercise
Price
Weighted
Average
Remaining
Contractual
Terms (years)
Aggregate
Intrinsic Value
(in thousands)
- $
940,000 $
- $
- $
940,000 $
- $
-
9.75
-
-
9.75
-
- $
- $
- $
- $
9.1 $
- $
-
-
-
-
- (1)
-
(1) Exercise price exceeds our market price at December 31, 2011.
Concurrent with the completion of the IPO, the Company granted 4,000 shares of stock to directors of the Company under the 2011 Equity
Incentive Plan and recognized $39,000 of compensation expense. These shares vested concurrent with the grant.
F-34
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
NOTE 17 - EARNINGS (LOSS) PER SHARE
Diluted loss per share was the same as basic loss per share for the year ended December 31, 2011 as any potential impact from the outstanding
stock option awards and preferred shares were anti-dilutive.
At December 31, 2011, options to purchase 940,000 shares of common stock at a weighted average exercise price of $9.75 per share were
outstanding but were not included in the computation of diluted earnings per share, as the options’ exercise price was greater than the average
market price of the common shares.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
The Company leases land for two of its Ft. Smith, AR properties under the terms of operating ground lease agreements expiring August 2022 and
May 2030. The Company has options to renew the leases for periods that range from 5-30 years. The Company also has a prepaid land lease on
the Portland, OR hotels with a remaining balance of $3,540,795 on December 31, 2011. This lease expires in June 2084. The Company leases
land on the Duluth, GA Holiday Inn property under the terms of an operating ground lease agreement expiring April 1, 2069. Total rent expense
for these four leases for the years ended December 31, 2011, 2010 and 2009 was $352,534, $229,394, and $304,323, respectively.
Approximate future minimum rental payments for noncancelable operating leases in excess of one year are as follows:
2012
2013
2014
2015
2016
Thereafter
$
431,991
442,026
452,362
463,008
473,973
35,164,202
$
37,427,562
On March 23, 2011, Choice Hotels International terminated the franchise agreements on 10 of our hotels. Choice also terminated the franchise
agreement for the Cambria Suites, Bloomington, MN effective June 23, 2011. We filed an arbitration action against Choice claiming wrongful
termination of our franchise agreements. In response to our arbitration action, Choice responded with counterclaims of fraudulent inducement,
negligent misrepresentation, breach of contract and trademark infringement. The parties have agreed to litigate all claims in the arbitration
action. The arbitration hearings were held in December 2011 and January 2012. Findings from the arbitration panel are expected in late March or
April, 2012. The Company vehemently denies all asserted claims and is vigorously defending the claims. The Company is unable to predict the
outcome as it relates to these claims.
F-35
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
Following the termination of the 11 franchise agreements with Choice, we entered into new license or franchise agreements for all of these
hotels. On April 6, 2011, we entered into a license agreement with Holiday Hospitality Franchising, Inc. for the Holiday Inn in Boise, ID. On
April 15, 2011, we entered into franchise agreements with AmericInn International, LLC for five hotels in Salina, KS; Missoula, MT; Golden,
CO; Twin Falls, ID; and Ft. Smith, AR. On May 17, 2011, we entered into a license agreement with Carlson Inc. for the Country Inn & Suites in
San Antonio, TX. On June 24, 2011, we entered into a franchise agreement with Marriott International, Inc. for the SpringHill Suites in
Bloomington, MN. On August 5, 2011, we entered into a franchise agreement with Hilton Worldwide for the DoubleTree in Baton Rouge,
LA. On August 22, 2011, we entered into a franchise agreement with Marriott to operate our 70-room hotel in Fort Worth, TX as a Fairfield Inn
& Suites, upon completion of certain capital improvements, currently expected to be completed during the second quarter of 2012. On August 24,
2011, we entered into a franchise agreement with InterContinental to operate our 67-room hotel in Charleston, WV as a Holiday Inn Express.
NOTE 19 - INCOME TAXES
The deferred tax asset of $2,195,820 relates primarily to the taxable loss of the Company’s taxable REIT subsidiaries. The earnings (loss), other
than in the taxable REIT subsidiaries of the Company are not generally subject to Federal income taxes at the Company level, due to the REIT
election made by the Company. As of December 31, 2011, the Company has estimated net operating loss carry forwards of the taxable REIT
subsidiaries for federal income tax reporting purposes of approximately $5.5 million. No valuation allowances have been recorded against the
Company’s deferred tax assets, as the Company believes the income tax benefit is fully realizable based upon projected future taxable income.
The Company had no unrecognized tax benefits as of or during the three year period ended December 31, 2011. The Company expects no
significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of December 31, 2011. The
Company has no material interest or penalties relating to income taxes recognized in the consolidated statements of operations for the years ended
December 31, 2011, 2010, and 2009 or in the consolidated balance sheets as of December 31, 2011 and 2010.
Current tax liabilities of $148,879 are included in accrued expenses on the accompanying Consolidated Balance Sheets and relate to the state and
local tax expense of the Operating Partnership.
The components of income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 are:
Current:
Federal
State and local
Deferred:
Federal (34%)
State and local (6%)
Summit Hotel
Properties, Inc.
Period 2/14/11
through 12/31/11
Summit Hotel Properties, LLC (Predecessor)
Period 1/1/11
through 2/13/11
2010
2009
$
$
- $
(129,163 )
(1,866,447 )
(329,373 )
(2,324,983 ) $
- $
339,034
-
-
339,034 $
- $
202,163
-
-
202,163 $
-
-
-
-
-
Our Predecessor is a limited liability company and as such, all Federal taxable income of a limited liability company flows through and is taxable
to its members.
F-36
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
For Federal income tax purposes, the cash distributions paid to the Company’s common shareholders and preferred shareholders may be
characterized as ordinary income, return of capital (generally non-taxable) or capital gains.
A summary of the average taxable nature of the Company’s common dividends for the year ended December 31, 2011, is as follows:
Total dividends per share
Ordinary income
Return of capital
2011
$
0.28
33.89 %
66.11 %
100.00 %
A summary of the average taxable nature of the Company’s dividend on Series A Cumulative Redeemable Preferred Shares for the year ended
December 31, 2011, is as follows:
Total dividends per share
Ordinary income
Return of capital
2011
$
0.21
100.00 %
0.00 %
100.00 %
NOTE 20 - SUBSEQUENT EVENTS
On January 12, 2012, we purchased 90% of the ownership interests in the 150 unit Courtyard by Marriott hotel in Atlanta, Georgia for a purchase
price of approximately $28.5 million. Upon expiraiton of tax credits related to the hotel in approximately four years, we will be able to take
assignment of the remaining ownership of the hotel for approximately $350,000 of additional consideration. We funded the purchase price of this
acquisition through the assumption of a term loan with Empire Financial with a principal balance of $19 million and with approximately $9.5
million on our revolving credit facility. In connection with this acquisition, we have engaged Courtyard Management to manage the hotel
pursuant to a hotel management agreement.
On February 13, 2012, we closed on the consolidation and refinance of our four loans with ING Life Insurance and Annuity, which four loans
collectively had an aggregate outstanding balance of approximately $69.5 million as of December 31, 2011. The loans were consolidated into a
single 7-year term loan with a principal balance of $67.5 million, maturity date of March 1, 2032, amortized over 20 years and bearing an annual
interest rate of 6.10%, collateralized by 16 properties containing 1,639 guestrooms. The lender has the right to call the loan so as to be payable in
full at March 1, 2019, March 1, 2024 and March 1, 2029.
On February 14, 2012, we closed on the refinance of our loan with Metabank, which had an outstanding balance as of the date of closing of
approximately $7.0 million. The loan matures on February 1, 2017, is amortized over approximately 17 years, and bears an annual interest rate of
4.95%.
F-37
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011, 2010 and 2009
NOTE 21 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected consolidated quarterly financial data (in thousands, except per unit amounts) for 2011 and 2010 is summarized below. The sum of the
quarterly income (loss) per unit amounts may not equal the annual income per unit amounts due primarily to changes in the number of common
units and common unit equivalents outstanding from quarter to quarter.
2011:
Total revenue
Net income (loss) from continuing
operations
Net income (loss) attributable to
common stockholders/members
Net income (loss) per share,
basic and diluted:
2011:
Total revenue
Net income (loss) from continuing
operations
Net income (loss) attributable to
common unitholders/members
Net income (loss) per share,
basic and diluted:
2010:
Total revenue
Net income (loss) from continuing
operations
Predecessor
Summit Hotel Properties, Inc.
Three Months Ended
1/1-2/13
2/14 -3/31
6/30
9/30
12/31
Total
$
14,598 $
18,809 $
38,589 $
42,330 $
34,556 $
134,284
(5,868 )
(1,442 )
948
40
(6,048 )
(6,502 )
$
(6,207 ) $
(1,178 ) $
441 $
30 $
(2,641 ) $
(3,348 )
$
(0.04 ) $
0.02 $
0.00 $
(0.10 ) $
(0.12 )
Predecessor
Summit Hotel OP, LP
Three Months Ended
1/1-2/13
2/14 -3/31
6/30
9/30
12/31
Total
$
14,598 $
18,809 $
38,589 $
42,330 $
34,556 $
134,284
(5,868 )
(1,442 )
948
40
(6,048 )
(6,502 )
$
(6,207 ) $
(1,614 ) $
604 $
41 $
(3,619 ) $
(4,588 )
$
(0.04 ) $
0.02 $
0.00 $
(0.10 ) $
(0.12 )
Summit Hotel Properties, LLC (Predecessor)
Three Months Ended
3/31
6/30
9/30
12/31
Total
$
31,363 $
35,849 $
37,601 $
30,822 $
135,635
(3,404 )
(3,556 ) $
(1,998 )
(2,074 ) $
(1,251 )
(1,296 ) $
(14,065 )
(13,994 ) $
(20,718 )
(20,920 )
F-38
Net income (loss) attributable to SHP LLC
$
SUMMIT HOTEL PROPERTIES, INC/SUMMIT HOTEL OP, LP
Schedule III - Real Estate and Accumulated Depreciation
December 31, 2011
(in thousands)
Initial Cost
Total Cost
Cost
Capitalized
Subsequent
to
Year
Acquired/
Constructed Land
$ 1,154 $
1,100
345
2006
2008
2004
Building &
Improvements
9,605 $
14,063
3,057
Acquisition Land
2,970 $ 1,154 $
800 1,100
345
638
Building &
Improvements Total
12,575 $ 13,729 $
14,863 15,963
4,040
Accumulated
Depreciation
(3,769 ) $
(2,728 )
(1,271 )
3,695
Total Cost
Net of
Accumulated
Depreciation
Location
Atlanta, GA
Baton Rouge, LA
Baton Rouge, LA
Baton Rouge, LA
Baton Rouge, LA
Bellevue, WA
Bloomington, MN
Bloomington, MN
Boise, ID
Boise, ID
Boise, ID
Boise, ID
Charleston, WV
Charleston, WV
Denver, CO
Denver, CO
Denver, CO
Duluth, GA
Duluth, GA
El Paso, TX
El Paso, TX
Emporia, KS
Emporia, KS
Flagstaff, AZ
Flagstaff, AZ
Ft. Collins, CO
Ft. Collins, CO
Ft. Myers, FL
Ft. Smith, AR
Ft. Smith, AR
Ft. Smith, AR
Ft. Wayne, IN
Ft. Wayne, IN
Ft. Worth, TX
Ft. Worth, TX
Germantown, TN
Germantown, TN
Germantown, TN
Glendale, CO
Jackson, MS
Jackson, MS
Jacksonville, FL
Lakewood, CO
Lakewood, CO
Las Colinas, TX
Las Colinas, TX
Lewisville, TX
Lithia Springs, GA
Little Rock, AR
Medford, OR
Memphis, TN
Missoula, MT
Missoula, MT
Nashville, TN
Portland, OR
Portland, OR
Franchise
Hyatt Place
DoubleTree
Fairfield Inn by Marriott
SpringHill Suites by
Marriott
TownePlace Suites
Fairfield Inn by Marriott
SpringHill Suites by
Marriott
Hampton Inn
Fairfield Inn by Marriott
Hampton Inn
Holiday Inn Express
Holiday Inn
Country Inn & Suites
Holiday Inn Express
Fairfield Inn by Marriott
SpringHill Suites by
Marriott
Hampton Inn
Holiday Inn
Hilton Garden Inn
Courtyard by Marriott
Hampton Inn
Fairfield Inn by Marriott
Holiday Inn Express
Courtyard by Marriott
SpringHill Suites by
Marriott
Hampton Inn
Hilton Garden Inn
Hyatt Place
AmericInn
Aspen Hotel
Hampton Inn
Hampton Inn
Residence Inn by
Marriott
Hampton Inn
Aspen Hotel
Courtyard by Marriott
Fairfield Inn by Marriott
Residence Inn by
Marriott
Staybridge Suites
Courtyard by Marriott
Staybridge Suites
Aloft
Fairfield Inn by Marriott
AmericInn
Hyatt Place
Holiday Inn Express
Fairfield Inn by Marriott
SpringHill Suites by
Marriott
SpringHill Suites by
Marriott
Hampton Inn
Courtyard by Marriott
AmericInn
Courtyard by Marriott
SpringHill Suites by
Marriott
Hyatt Place
Residence Inn by
Marriott
2004
2004
2004
2007
2007
2004
2004
2005
2007
2004
2004
2004
2007
2004
2011
2011
2011
2005
2004
2004
2009
2008
2004
2007
2009
2004
2004
2005
2006
2006
2007
2004
2005
2005
2005
2011
2005
2007
2009
2004
2004
2007
2007
2004
2004
2004
2004
2005
2004
2005
2004
2009
2009
448
259
2,705
1,658
1,658
564
597
1,038
1,934
1,042
907
1,566
1,076
1,125
-
2,200
1,640
2,055
320
292
3,353
1,398
738
1,300
3,608
-
223
-
786
914
1,500
553
1,860
767
1,083
2,100
1,301
698
1,700
521
547
781
912
465
3,729
3,743
12,944
14,071
14,596
2,874
3,295
2,422
10,968
3,489
2,903
6,783
11,079
3,678
7,000
11,150
10,710
10,745
2,436
2,840
20,785
9,352
4,363
11,804
16,583
3,718
3,189
12,401
6,564
6,736
8,184
2,698
5,448
2,700
5,200
7,900
7,322
8,454
15,775
2,433
2,416
5,729
6,689
2,954
696
659
448
259
1,890 2,705
323
669 1,658
45 1,658
564
1,311 1,335
238
780
422 1,299
441 1,042
907
2,130
2,072 1,566
24 1,076
850 1,125
-
97
34 2,200
20 1,640
1,313 2,055
320
292
13 3,353
238
464
287
4,852 1,398
738
64 1,300
2 3,608
-
223
-
786
676
546
882
756
711
914
48 1,500
1,007
553
1,360 1,860
767
529
208
763 1,083
719 2,100
2,306 1,301
698
10 1,700
521
547
781
898
465
264
412
1,709
1,599
482
4,425
4,402
4,873
4,661
15,447 18,152
3,197
3,868
2,918
14,740 16,398
14,641 16,299
3,761
5,203
3,698
12,025 13,324
3,930
4,972
5,940
5,033
9,457 11,023
4,528
7,097
11,103 12,179
5,653
7,097
11,184 13,384
10,730 12,370
12,058 14,113
2,994
3,596
20,798 24,151
2,674
3,304
4,650
14,204 15,602
5,388
11,868 13,168
16,585 20,193
4,394
3,958
13,283 13,283
8,106
4,394
3,735
7,320
7,447
8,232
3,705
6,808
3,229
8,361
9,732
4,258
8,668
3,996
5,963
7,046
8,619 10,719
9,628 10,929
9,360
8,662
15,785 17,485
3,218
3,375
8,219
9,200
3,901
2,697
2,828
7,438
8,302
3,436
(1,565 )
(1,677 )
(3,406 )
(3,088 )
(3,220 )
(998 )
(1,242 )
(1,051 )
(4,063 )
(1,275 )
(840 )
(1,932 )
(2,493 )
(1,992 )
(211 )
(268 )
(172 )
(4,092 )
(883 )
(1,004 )
(2,443 )
(2,675 )
(1,424 )
(3,475 )
(2,555 )
(1,173 )
(1,603 )
(3,471 )
(2,009 )
(1,973 )
(2,115 )
(1,079 )
(2,049 )
(998 )
(1,699 )
(324 )
(1,947 )
(1,564 )
(2,251 )
(919 )
(769 )
(2,638 )
(2,613 )
(1,169 )
480
3,572
618
480
4,190
4,670
(1,523 )
3,147
879
1,230
686
690
650
3,431
4,788
5,814
2,672
5,785
570
879
476 1,230
546
690
650
87
294
138
4,001
5,264
6,041
2,966
5,923
4,880
6,494
6,587
3,656
6,573
777
-
3,576
16,713
539
5
777
-
4,115
4,892
16,718 16,718
(1,475 )
(1,620 )
(1,798 )
(791 )
(2,063 )
(1,526 )
(2,296 )
-
16,409
1
-
16,410 16,410
(2,135 )
14,275 12,557
Mortgage
Debt
9,960 $ 8,551
13,235 10,709 (2)
- (1)
2,769
3,308
2,984
14,746
- (1)
- (1)
- (1)
13,310
2,234
13,079 12,410
- (2)
2,763
- (1)
3,961
2,351
2,647
7,058 (4)
9,261
-
3,697
-
5,100
- (1)
9,091
8,315 (2)
9,686
4,860 (3)
3,661
- (1)
6,886
- (1)
13,116
12,198
-
10,021
7,323
- (1)
2,111
- (1)
2,592
21,708 16,083
12,927
3,964
9,693
17,638
3,221
2,355
9,812
6,097
6,388
7,617
3,179
6,619
2,998
5,347
10,395
8,982
7,796
15,234
2,299
2,606
5,581
6,587
2,732
3,405
4,874
4,789
2,865
4,510
- (3)
- (1)
7,655
-
2,746 (3)
1,507
8,299
4,671 (3)
- (1)
5,519
-
6,561
2,224
3,402
- (1)
8,576
- (3)
- (2)
- (1)
- (1)
- (2)
-
2,152 (3)
- (4)
- (1)
- (1)
4,048
1,945 (3)
4,734 (3)
3,366
14,422
- (1)
6,334
596
909
125 1,314
3,458
6,161
4,367
7,475
Provo, UT
Ridgeland, MS
Ridgeland, MS
Salina, KS
Salina, KS
San Antonio, TX
Sandy, UT
Scottsdale, AZ
Scottsdale, AZ
Spokane, WA
Twin Falls, ID
Twin Falls, ID
Twin Falls, ID
Vernon Hills, IL
Land Parcels
Hampton Inn
Homewood Suites
Residence Inn by
Marriott
AmericInn
Fairfield Inn by Marriott
Country Inn & Suites
Holiday Inn Express
Courtyard by Marriott
SpringHill Suites by
Marriott
Fairfield Inn by Marriott
AmericInn
Holiday Inn Express
Hampton Inn
Holiday Inn Express
2004
2011
2007
2004
2004
2008
2004
2004
2004
2004
2004
2009
2004
2005
909
1,314
1,050
984
499
2,497
720
3,225
2,195
1,637
822
1,212
710
1,198
19,911
$ 97,066 $
2,862
6,036
10,040
1,650
1,744
12,833
1,768
10,152
7,120
3,669
7,473
7,464
3,482
6,099
-
492,729 $
15 1,050
984
374
243
499
383 2,497
720
996
2,784 3,225
2,364 2,195
2,302 1,637
822
1,128
7 1,212
710
1,137 1,198
384 20,295
54,205 $ 97,141 $
90
(946 )
(171 )
(2,770 )
(559 )
(702 )
(2,563 )
(1,210 )
(3,009 )
2,024
1,987
10,055 11,105
3,008
2,486
13,216 15,713
3,484
12,936 16,161
2,764
9,608 11,803
7,608
5,971
9,423
8,601
8,683
7,471
4,282
3,572
8,434
7,236
- 20,295
548,198 $ 646,339 $
(2,114 )
(1,321 )
(2,530 )
(1,460 )
(1,325 )
(2,086 )
-
(126,168 ) $
3,421
7,304
- (1)
- (1)
6,047
8,335
- (1)
2,449
- (1)
1,784
13,150 10,860 (2)
2,400 (3)
2,274
8,154
13,152
9,689
6,287
6,893
7,223
2,957
6,348
20,295
5,043
- (1)
- (1)
5,700
- (1)
4,649 (3)
-
519,171 $ 205,677
11,427 (1)
$ 217,104
(1) Property is collateral for the Company's secured revolving credit facility.
(2) In addition to the DoubleTree in Baton Rouge LA, SpringHill Suites in Denver CO and Country Inn & Suites in San Antonio TX; the Fairfield Inn in Boise ID,
Aloft in Jacksonville FL and Hyatt Place in Las Colinas TX are additional collateral for the GE Capital Corp loans.
(3) In addition to the eight original properties, the SpringHill Suites in Flagstaff AZ and Staybridge Suites in Jackson MS are additional collateral for the ING Investment loan.
(4) In addition to the Holiday Inn in Boise ID; the Springhill Suites in Lithia Springs GA is additional collateral for the MetaBank loan.
F-39
SUMMIT HOTEL PROPERTIES, INC./SUMMIT HOTEL OP, LP
Notes to Schedule III - Real Estate and Accumulated Depreciation
As of December 31, 2011
ASSET BASIS
( a ) Balance at January 1, 2009
Additions to land, buildings and improvements
Disposition of land, buildings and improvements
Impairment loss
Balance at December 31, 2009
Additions to land, buildings and improvements
Disposition of land, buildings and improvements
Impairment loss
Balance at December 31, 2010
Additions to land, buildings and improvements
Disposition of land, buildings and improvements
Balance at December 31, 2011
ACCUMULATED DEPRECIATION
( b ) Balance at January 1, 2009
Depreciation for the period ended December 31, 2009
Depreciation on assets sold or disposed
Balance at December 31, 2009
Depreciation for the period ended December 31, 2010
Depreciation on assets sold or disposed
Balance at December 31, 2010
Depreciation for the period ended December 31, 2011
Depreciation on assets sold or disposed
Balance at December 31, 2011
Total
$ 521,255,330
67,841,533
(6,989,153 )
(7,505,836 )
$ 574,601,874
2,769,879
(88,790 )
(6,475,684 )
$ 570,807,279
79,901,100
(5,369,383 )
$ 645,338,996
Total
$ 59,361,060
21,902,729
(1,655,836 )
$ 79,607,953
25,234,526
(45,977 )
$ 104,796,502
26,740,666
(5,369,383 )
$ 126,167,785
( c ) The aggregrate cost of land, buildings, furniture and equipment for Federal income tax purposes is aproximately $629 million.
( d ) Depreciation is computed based upon the following useful lives:
Buildings and improvements 27-40 years
Furniture and equipment 2-15 years
( e ) The Company has mortgages payable on the properties as noted. Additional mortgage information can be found in Note 11
to the consoldiated financial statements.
( f )
The negative balance for costs capitalized subsequent to acquisition could include out-parcels sold, disposal of assets, and
impairment loss that was recorded.
F-40
SUMMIT HOTEL PROPERTIES, INC.
ARTICLES OF AMENDMENT AND RESTATEMENT
Exhibit 3.1
and as hereinafter amended.
FIRST : Summit Hotel Properties, Inc., a Maryland corporation, desires to amend and restate its charter as currently in effect
accordance with the Maryland General Corporation Law, are as follows:
SECOND : The provisions of the charter of Summit Hotel Properties, Inc., which are now in effect and as amended hereby in
ARTICLE I
INCORPORATION
Dakota 57105, being at least 18 years of age, formed a corporation under the general laws of the State of Maryland on June 30, 2010.
Christopher R. Eng, whose address is c/o The Summit Group, Inc., 2701 South Minnesota Avenue, Suite 6, Sioux Falls, South
ARTICLE II
NAME
The name of the corporation is Summit Hotel Properties, Inc. (the “Corporation”).
ARTICLE III
PURPOSE
The purposes for which the Corporation is formed are to engage in any lawful act or activity (including, without limitation or
obligation, engaging in business as a REIT (as hereinafter defined) under the Internal Revenue Code of 1986, as amended, or any successor statute
(the “Code”)) for which corporations may be organized under the general laws of the State of Maryland as now or hereafter in force. For purposes
of the charter of the Corporation (the “Charter”), “REIT” means a real estate investment trust under Sections 856 through 860 of the Code.
ARTICLE IV
PRINCIPAL OFFICE IN MARYLAND AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Incorporated, 351
West Camden Street, Baltimore, Maryland 21201. The name and address of the resident agent of the Corporation in the State of Maryland are The
Corporation Trust Incorporated, 351 West Camden Street, Baltimore, Maryland 21201. The resident agent is a Maryland corporation.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1 Number of Directors . The business and affairs of the Corporation shall be managed under the direction of the
board of directors of the Corporation (the “Board of Directors”). The number of directors of the Corporation initially shall be two, which number
may be increased or decreased only by the Board of Directors pursuant to the Bylaws of the Corporation (the “Bylaws”), but shall never be less
than the minimum number required by the Maryland General Corporation Law, or any successor statute (the “MGCL”). The names of the
directors who shall serve until their successors are duly elected and qualify are:
Kerry W. Boekelheide
Daniel P. Hansen
2
The directors may increase the number of directors and may fill any vacancy, whether resulting from an increase in the number of directors or
otherwise, on the Board of Directors in the manner provided in the Bylaws.
The Corporation elects, at such time as it becomes eligible to make the election provided for under Section 3-804(c) of the
MGCL, that, except as may be provided by the Board of Directors in setting the terms of any class or series of Preferred Stock (as defined in
Section 6.1), any and all vacancies on the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors in
office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy shall serve for the remainder of the full
term of the directorship in which such vacancy occurred and until his or her successor is duly elected and qualifies.
Section 5.2 Extraordinary Actions . Except as specifically provided in Section 5.8 (relating to removal of directors)
and in the last sentence of Article VIII, notwithstanding any provision of law permitting or requiring any action to be taken or approved by the
affirmative vote of the holders of shares entitled to cast a greater number of votes, any such action shall be effective and valid if declared
advisable by the Board of Directors and taken or approved by the affirmative vote of holders of shares entitled to cast a majority of all the votes
entitled to be cast on the matter.
Section 5.3 Authorization by Board of Stock Issuance . The Board of Directors may authorize the issuance from time
to time of shares of stock of the Corporation of any class or series, whether now or hereafter authorized, or securities or rights convertible into
shares of its stock of any class or series, whether now or hereafter authorized, for such consideration as the Board of Directors may deem
advisable (or without consideration in the case of a stock split or stock dividend), subject to such restrictions or limitations, if any, as may be set
forth in the Charter or the Bylaws.
3
Section 5.4 Preemptive Rights and Appraisal Rights . Except as may be provided by the Board of Directors in setting
the terms of classified or reclassified shares of stock pursuant to Section 6.4 or as may otherwise be provided by a contract approved by the Board
of Directors, no holder of shares of stock of the Corporation shall, as such holder, have any preemptive right to purchase or subscribe for any
additional shares of stock of the Corporation or any other security of the Corporation which it may issue or sell. Holders of shares of stock shall
not be entitled to exercise any rights of an objecting stockholder provided for under Title 3, Subtitle 2 of the MGCL.
Section 5.5 Indemnification . (a) The Corporation shall have the power, to the maximum extent permitted by
Maryland law in effect from time to time, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding without requiring a preliminary determination of the ultimate entitlement to indemnification to, (i) any individual who
is a present or former director or officer of the Corporation or (ii) any individual who, while a director or officer of the Corporation and at the
request of the Corporation, serves or has served as a director, officer, partner, trustee, member or manager of another corporation, REIT,
partnership, joint venture, trust, limited liability company, employee benefit plan or any other enterprise from and against any claim or liability to
which such person may become subject or which such person may incur by reason of his or her service in any of the foregoing capacities. The
Corporation shall have the power, with the approval of the Board of Directors, to provide such indemnification and advancement of expenses to a
person who served a predecessor of the Corporation in any of the capacities described in (i) or (ii) above and to any employee or agent of the
Corporation or a predecessor of the Corporation.
4
described in the preceding paragraph against any liability which may be asserted against such person.
(b) The Corporation may, to the fullest extent permitted by law, purchase and maintain insurance on behalf of any person
(c) The indemnification provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person
for any such expenses to the maximum extent permitted by law, nor shall it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, vote of stockholders or disinterested directors, or otherwise, both as to
action in such person’s official capacity and as to action in another capacity while holding such office.
Section 5.6 Determinations by Board . The determination as to any of the following matters, made in good faith by or
pursuant to the direction of the Board of Directors consistent with the Charter, shall be final and conclusive and shall be binding upon the
Corporation and every holder of shares of its stock: the amount of the net income of the Corporation for any period and the amount of assets at
any time legally available for the payment of dividends, redemption of its stock or the payment of other distributions on its stock; the amount of
paid-in surplus, net assets, other surplus, annual or other net profit, cash flow, funds from operations, net assets in excess of capital, undivided
profits or excess of profits over losses on sales of assets; the amount, purpose, time of creation, increase or decrease, alteration or cancellation of
any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been
created shall have been paid or discharged); any interpretation of the terms, preferences, conversion or other rights, voting powers or rights,
restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of any class or series of stock of
the Corporation; the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the
Corporation or of any shares of stock of the Corporation; the number of shares of stock of any class or series of the Corporation; any matter
relating to the acquisition, holding and disposition of any assets by the Corporation; or any other matter relating to the business and affairs of the
Corporation or required or permitted by applicable law, the Charter or Bylaws or otherwise to be determined by the Board of Directors.
5
Section 5.7 REIT Qualification . The Board of Directors, without any action by the stockholders of the Corporation,
shall have the authority to cause the Corporation to elect to qualify for federal income tax treatment as a REIT. Following such election, if the
Board of Directors determines that it is no longer in the best interests of the Corporation to continue to be qualified as a REIT, the Board of
Directors, without any action by the stockholders of the Corporation, may revoke or otherwise terminate the Corporation’s REIT election pursuant
to Section 856(g) of the Code. In addition, the Board of Directors, without any action by the stockholders of the Corporation, shall have and may
exercise, on behalf of the Corporation, without limitation, the power to determine that compliance with any restriction or limitation on stock
ownership and transfers set forth in Article VII of the Charter is no longer required in order for the Corporation to qualify as a REIT.
Section 5.8 Removal of Directors . Subject to the rights of holders of one or more classes or series of Preferred Stock
to elect or remove one or more directors, any director, or the entire Board of Directors, may be removed from office at any time, but only for
cause, and then only by the affirmative vote of holders of shares entitled to cast at least two-thirds of all the votes entitled to be cast generally in
the election of directors. For the purpose of this paragraph, “cause” shall mean, with respect to any particular director, conviction of a felony or a
final judgment of a court of competent jurisdiction holding that such director caused demonstrable, material harm to the Corporation through bad
faith or active and deliberate dishonesty.
6
Section 5.9 Advisor Agreements . The Board of Directors may authorize the execution and performance by the
Corporation of one or more agreements with any person, corporation, association, company, trust, partnership (limited or general) or other
organization whereby, subject to the supervision and control of the Board of Directors, any such other person, corporation, association, company,
trust, partnership (limited or general) or other organization shall render or make available to the Corporation managerial, investment, advisory
and/or related services, office space and other services and facilities (including, if deemed advisable by the Board of Directors, the management or
supervision of the investments of the Corporation) upon such terms and conditions as may be provided in such agreement or agreements
(including, if deemed fair and equitable by the Board of Directors, the compensation payable thereunder by the Corporation).
ARTICLE VI
STOCK
Section 6.1
Authorized Shares . The Corporation has authority to issue 600,000,000 shares of stock, consisting of
500,000,000 shares of Common Stock, $0.01 par value per share (“Common Stock”), and 100,000,000 shares of Preferred Stock, $0.01 par value
per share (“Preferred Stock”). The aggregate par value of all authorized shares of stock having par value is $6,000,000. If shares of one class of
stock are classified or reclassified into shares of another class of stock pursuant to Section 6.2, 6.3 or 6.4 of this Article VI, the number of
authorized shares of the former class shall be automatically decreased and the number of shares of the latter class shall be automatically increased,
in each case by the number of shares so classified or reclassified, so that the aggregate number of shares of stock of all classes that the Corporation
has authority to issue shall not be more than the total number of shares of stock set forth in the first sentence of this paragraph. The Board of
Directors, with the approval of a majority of the entire Board of Directors, and without any action by the stockholders of the Corporation, may
amend the Charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class
or series that the Corporation has authority to issue.
7
Common Stock . Subject to the provisions of Article VII and except as may otherwise be specified in the
Charter, each share of Common Stock shall entitle the holder thereof to one vote. The Board of Directors may reclassify any unissued shares of
Common Stock from time to time into one or more classes or series of stock.
Section 6.2
Preferred Stock . The Board of Directors may classify any unissued shares of Preferred Stock and
reclassify any previously classified but unissued shares of Preferred Stock of any series from time to time, into one or more classes or series of
stock.
Section 6.3
Section 6.4
Classified or Reclassified Shares . Prior to issuance of classified or reclassified shares of any class or
series, the Board of Directors by resolution shall: (a) designate that class or series to distinguish it from all other classes and series of stock of the
Corporation; (b) specify the number of shares to be included in the class or series; (c) set or change, subject to the provisions of Article VII and
subject to the express terms of any class or series of stock of the Corporation outstanding at the time, the preferences, conversion or other rights,
voting powers, restrictions (including, without limitation, restrictions on transferability), limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption for each class or series; and (d) cause the Corporation to file articles supplementary with the
State Department of Assessments and Taxation of Maryland (“SDAT”). Any of the terms of any class or series of stock set or changed pursuant
to clause (c) of this Section 6.4 may be made dependent upon facts or events ascertainable outside the Charter (including determinations by the
Board of Directors or other facts or events within the control of the Corporation) and may vary among holders thereof, provided that the manner in
which such facts, events or variations shall operate upon the terms of such class or series of stock is clearly and expressly set forth in the articles
supplementary or other Charter document.
8
of the Charter and the Bylaws.
Section 6.5 Charter and Bylaws . The rights of all stockholders and the terms of all stock are subject to the provisions
ARTICLE VII
RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES
Section 7.1
Definitions . For the purpose of this Article VII, the following terms shall have the following meanings:
Beneficial Ownership . The term “Beneficial Ownership” shall mean ownership of Capital Stock by a Person, whether the
interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as
owned through the application of Section 544 of the Code, as modified by Sections 856(h)(1)(B) and 856(h)(3)(A) of the Code. The terms
“Beneficial Owner,” “Beneficially Owns” and “Beneficially Owned” shall have the correlative meanings.
nor a day on which banking institutions in the State of New York are authorized or required by law, regulation or executive order to close.
Business Day . The term “Business Day” shall mean any day, other than a Saturday or a Sunday that is neither a legal holiday
9
limitation, Common Stock and Preferred Stock.
Capital Stock . The term “Capital Stock” shall mean all classes or series of stock of the Corporation, including, without
Charitable Beneficiary . The term “Charitable Beneficiary” shall mean one or more beneficiaries of the Charitable Trust as
determined pursuant to Section 7.3.6, provided that each such organization must be described in Section 501(c)(3) of the Code and contributions
to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code.
Charitable Trust . The term “Charitable Trust” shall mean any trust provided for in Section 7.3.1.
Constructive Ownership . The term “Constructive Ownership” shall mean ownership of Capital Stock by a Person, whether
the interest in the shares of Capital Stock is held directly or indirectly (including by a nominee), and shall include interests that would be treated as
owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms “Constructive Owner,”
“Constructively Owns” and “Constructively Owned” shall have the correlative meanings.
Charter or by the Board of Directors pursuant to Section 7.2.7.
Excepted Holder . The term “Excepted Holder” shall mean a Person for whom an Excepted Holder Limit is created by the
Excepted Holder Limit . The term “Excepted Holder Limit” shall mean, provided that the affected Excepted Holder agrees to
comply with the requirements established by the Charter or by the Board of Directors pursuant to Section 7.2.7 and subject to adjustment pursuant
to Section 7.2.8, the percentage limit established for an Excepted Holder by the Charter or by the Board of Directors pursuant to Section 7.2.7.
10
public offering of Common Stock or such other date as determined by the Board of Directors in its sole and absolute discretion.
Initial Date . The term “Initial Date” shall mean the date of issuance of Common Stock pursuant to the initial underwritten
Market Price . The term “Market Price” on any date shall mean, with respect to any class or series of outstanding shares of
Capital Stock, the Closing Price for such Capital Stock on such date. The “Closing Price” on any date shall mean the last reported sale price for
such Capital Stock, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for
such Capital Stock, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted
to trading on the NYSE or, if such Capital Stock is not listed or admitted to trading on the NYSE, as reported on the principal consolidated
transaction reporting system with respect to securities listed on the principal national securities exchange on which such Capital Stock is listed or
admitted to trading or, if such Capital Stock is not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not
so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the principal automated quotation
system that may then be in use or, if such Capital Stock is not quoted by any such system, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in such Capital Stock selected by the Board of Directors or, in the event that no trading
price is available for such Capital Stock, the fair market value of the Capital Stock, as determined in good faith by the Board of Directors.
NYSE . The term “NYSE” shall mean the New York Stock Exchange.
11
Person . The term “Person” shall mean an individual, corporation, partnership, limited liability company, estate, trust
(including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used
exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the
Code, joint stock company or other entity and also includes a “group” as that term is used for purposes of Rule 13d-5(b) or Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended, and a group to which an Excepted Holder Limit applies .
Prohibited Owner . The term “Prohibited Owner” shall mean, with respect to any purported Transfer (or other event), any
Person who, but for the provisions of Section 7.2.1, would Beneficially Own or Constructively Own shares of Capital Stock in violation of the
provisions of Section 7.2.1(a), and if appropriate in the context, shall also mean any Person who would have been the record owner of the shares
of Capital Stock that the Prohibited Owner would have so owned.
Restriction Termination Date . The term “Restriction Termination Date” shall mean the first day after the Initial Date on which
the Board of Directors determines pursuant to Section 5.7 of the Charter that it is no longer in the best interests of the Corporation to attempt to, or
continue to, qualify as a REIT or that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and
Transfers of shares of Capital Stock set forth herein is no longer required in order for the Corporation to qualify as a REIT.
Stock Ownership Limit . The term “Stock Ownership Limit” shall mean nine and eight-tenths percent (9.8%) in value or in
number of shares, whichever is more restrictive, of the outstanding shares of any class or series of Capital Stock of the Corporation excluding any
outstanding shares of Capital Stock not treated as outstanding for federal income tax purposes, or such other percentage determined by the Board
of Directors in accordance with Section 7.2.8 of the Charter.
12
TRS . The term “TRS” shall mean a taxable REIT subsidiary (as defined in Section 856(l) of the Code) of the Corporation.
Transfer . The term “Transfer” shall mean any issuance, sale, transfer, gift, assignment, devise or other disposition, as well as
any other event that causes any Person to acquire or change such Person’s percentage of Beneficial Ownership or Constructive Ownership, or any
agreement to take any such actions or cause any such events, of Capital Stock or the right to vote or receive dividends on Capital Stock, including
(a) the granting or exercise of any option (or any disposition of any option), (b) any disposition of any securities or rights convertible into or
exchangeable for Capital Stock or any interest in Capital Stock or any exercise of any such conversion or exchange right, and (c) Transfers of
interests in other entities that result in changes in Beneficial or Constructive Ownership of Capital Stock; in each case, whether voluntary or
involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. The terms
“Transferring” and “Transferred” shall have the correlative meanings.
appointed by the Corporation to serve as trustee of the Charitable Trust.
Trustee . The term “Trustee” shall mean the Person unaffiliated with the Corporation and a Prohibited Owner, that is
Section 7.2
Capital Stock .
Restriction Termination Date or as otherwise set forth below, and subject to Section 7.4:
Section 7.2.1
Ownership Limitations . During the period commencing on the Initial Date and prior to the
13
(a)
Basic Restrictions .
Except as provided in Section 7.2.7 hereof, no Person, other than an Excepted Holder, shall
Beneficially Own or Constructively Own shares of Capital Stock in excess of the Stock Ownership Limit. No Excepted Holder shall Beneficially
Own or Constructively Own shares of Capital Stock in excess of the Excepted Holder Limit for such Excepted Holder.
(i)
Except as provided in Section 7.2.7 hereof, no Person shall Beneficially Own shares of Capital
Stock to the extent that such Beneficial Ownership of Capital Stock would result in the Corporation being “closely held” within the meaning of
Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year).
(ii)
Except as provided in Section 7.2.7 hereof, any Transfer of shares of Capital Stock that, if
effective, would result in the Capital Stock being Beneficially Owned by less than one hundred (100) Persons (determined under the principles of
Section 856(a)(5) of the Code) shall be void ab initio , and the intended transferee shall acquire no rights in such Capital Stock.
(iii)
Except as provided in Section 7.2.7 hereof, no Person shall Beneficially Own or
Constructively Own shares of Capital Stock to the extent such Beneficial Ownership or Constructive Ownership would cause the Corporation to
Constructively Own ten percent (10%) or more of the ownership interests in a tenant (other than a TRS) of the Corporation’s real property within
the meaning of Section 856(d)(2)(B) of the Code.
(iv)
No Person shall Beneficially Own or Constructively Own shares of Capital Stock to the extent
that such Beneficial Ownership or Constructive Ownership would otherwise cause the Corporation to fail to qualify as a REIT under the Code,
including, but not limited to, as a result of any “eligible independent contractor” (as defined in Section 856(d)(9)(A) of the Code) that operates a
“qualified lodging facility” (as defined in Section 856(d)(9)(D)(i) of the Code) on behalf of a TRS failing to qualify as such.
(v)
14
Transfer in Trust/Transfer Void Ab Initio . If any Transfer of shares of Capital Stock (or other event)
occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning shares of Capital Stock in violation of
Section 7.2.1(a)(i), (ii), (iv) or (v),
(b)
then that number of shares of the Capital Stock the Beneficial or Constructive Ownership of
which otherwise would cause such Person to violate Section 7.2.1(a)(i), (ii), (iv) or (v) (rounded up to the nearest whole share) shall be
automatically transferred to a Charitable Trust for the benefit of a Charitable Beneficiary, as described in Section 7.3, effective as of the close of
business on the Business Day prior to the date of such Transfer (or other event), and such Person shall acquire no rights in such shares of Capital
Stock; or
(i)
if the transfer to the Charitable Trust described in clause (i) of this Section 7.2.1(b) would not
be effective for any reason to prevent the violation of Section 7.2.1(a)(i), (ii), (iv) or (v), then the Transfer of that number of shares of Capital
Stock that otherwise would cause any Person to violate Section 7.2.1(a)(i), (ii), (iv) or (v) shall be void ab initio , and the intended transferee shall
acquire no rights in such shares of Capital Stock.
(ii)
15
Section 7.2.2
Remedies for Breach . If the Board of Directors or any duly authorized committee thereof or other
designees if permitted by the MGCL shall at any time determine in good faith that a Transfer or other event has taken place that results in a
violation of Section 7.2.1 or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any shares of
Capital Stock in violation of Section 7.2.1 (whether or not such violation is intended), the Board of Directors or a committee thereof or other
designees if permitted by the MGCL shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other
event, including, without limitation, causing the Corporation to redeem shares of Capital Stock, refusing to give effect to such Transfer on the
books of the Corporation or instituting proceedings to enjoin such Transfer or other event; provided , however , that any Transfer or attempted
Transfer or other event in violation of Section 7.2.1 shall automatically result in the transfer to the Charitable Trust described above, or, where
applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or non-action) by the Board of
Directors or a committee thereof.
Section 7.2.3
Notice of Restricted Transfer . Any Person who acquires or attempts or intends to acquire
Beneficial Ownership or Constructive Ownership of shares of Capital Stock that will or may violate Section 7.2.1(a) or any Person who would
have owned shares of Capital Stock that resulted in a transfer to the Charitable Trust pursuant to the provisions of Section 7.2.1(b) shall
immediately give written notice to the Corporation of such event or, in the case of such a proposed or attempted transaction, give at least fifteen
(15) days prior written notice, and shall provide to the Corporation such other information as the Corporation may request in order to determine
the effect, if any, of such Transfer on the Corporation’s status as a REIT.
Termination Date:
Section 7.2.4
Owners Required To Provide Information . From the Initial Date and prior to the Restriction
16
(a)
Every owner of more than five percent (5%) (or such lower percentage as required by the Code or
the Treasury Regulations promulgated thereunder) in number or value of the outstanding shares of Capital Stock, within thirty (30) days after the
end of each taxable year, shall give written notice to the Corporation stating (i) the name and address of such owner, (ii) the number of shares of
Capital Stock Beneficially Owned and (iii) a description of the manner in which such shares are held. Each such owner shall provide to the
Corporation such additional information as the Corporation may request in order to determine the effect, if any, of such Beneficial Ownership on
the Corporation’s status as a REIT and to ensure compliance with the Stock Ownership Limit; and
Each Person who is a Beneficial or Constructive Owner of Capital Stock and each Person (including
the stockholder of record) who is holding Capital Stock for a Beneficial or Constructive Owner shall provide to the Corporation such information
as the Corporation may request, in good faith, in order to determine the Corporation’s status as a REIT and to comply with requirements of any
taxing authority or governmental authority or to determine such compliance and to ensure compliance with the Stock Ownership Limit.
(b)
Remedies Not Limited . Nothing contained in this Section 7.2 shall limit the authority of the
Board of Directors to take such other action as it deems necessary or advisable to, subject to Section 5.7 of the Charter, protect the Corporation
and the interests of its stockholders in preserving the Corporation’s status as a REIT.
Section 7.2.5
Section 7.2.6
Ambiguity . In the case of an ambiguity in the application of any of the provisions of this Article VII,
including any definition contained in Section 7.1 of this Article VII, the Board of Directors shall have the power to determine the application of
the provisions of this Article VII with respect to any situation based on the facts known to it at such time. In the event Section 7.2 or 7.3 requires
an action by the Board of Directors and the Charter fails to provide specific guidance with respect to such action, the Board of Directors shall have
the power to determine the action to be taken so long as such action is not contrary to the provisions of Sections 7.1, 7.2 or 7.3 . Absent a decision
to the contrary by the Board of Directors (which the Board of Directors may make in its sole and absolute discretion), if a Person would have (but
for the remedies set forth in Sections 7.2.1 and 7.2.2) acquired Beneficial or Constructive Ownership of Capital Stock in violation of Section 7.2.1,
such remedies (as applicable) shall apply first to the shares of Capital Stock which, but for such remedies, would have been actually owned by
such Person, and second to shares of Capital Stock which, but for such remedies, would have been Beneficially Owned or Constructively Owned
(but not actually owned) by such Person, pro rata among the Persons who actually own such shares of Capital Stock based upon the relative
number of the shares of Capital Stock held by each such Person.
17
Section 7.2.7
Exceptions .
(i) The Board of Directors, in its sole discretion, may exempt (prospectively or retroactively) a
Person from the restrictions contained in Section 7.2.1(a)(i), (ii), (iii) or (iv) as the case may be, and may establish or increase an Excepted Holder
Limit for such Person if the Board of Directors obtains such representations, covenants and undertakings as the Board of Directors may deem
appropriate in order to conclude that granting the exemption and/or establishing or increasing the Excepted Holder Limit, as the case may be, will
not cause the Corporation to lose its status as a REIT.
(a)
Prior to granting any exception pursuant to Section 7.2.7(a), the Board of Directors may require a
ruling from the Internal Revenue Service or an opinion of counsel, in either case in form and substance satisfactory to the Board of Directors in its
sole discretion, as it may deem necessary or advisable in order to determine that granting the exception will not cause the Corporation to lose its
status as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board of Directors may impose such conditions or restrictions as it
deems appropriate in connection with granting such exception.
(b)
18
(c)
Subject to Section 7.2.1(a)(ii), an underwriter, placement agent or initial purchaser that participates
in a public offering, a private placement or other private offering of Capital Stock (or securities convertible into or exchangeable for Capital
Stock) may Beneficially Own or Constructively Own shares of Capital Stock (or securities convertible into or exchangeable for Capital Stock) in
excess of the Stock Ownership Limit, but only to the extent necessary to facilitate such public offering, private placement or immediate resale of
such Capital Stock and provided that the restrictions contained in Section 7.2.1(a) will not be violated following the distribution by such
underwriter, placement agent or initial purchaser of such shares of Capital Stock.
Section 7.2.8
Change in Stock Ownership Limit and Excepted Holder Limits . (a) The Board of Directors may
from time to time increase or decrease the Stock Ownership Limit; provided , however , that a decreased Stock Ownership Limit will not be
effective for any Person whose percentage ownership of Capital Stock is in excess of such decreased Stock Ownership Limit until such time as
such Person’s percentage of Capital Stock equals or falls below the decreased Stock Ownership Limit, but until such time as such Person’s
percentage of Capital Stock falls below such decreased Stock Ownership Limit, any further acquisition of Capital Stock will be in violation of the
Stock Ownership Limit and, provided further, that the new Stock Ownership Limit would not allow five or fewer individuals (taking into account
all Excepted Holders) to Beneficially Own more than 49.9% in value of the outstanding Capital Stock.
(b) The Board of Directors may only reduce the Excepted Holder Limit for an Excepted Holder: (1) with the written
consent of such Excepted Holder at any time, or (2) pursuant to the terms and conditions of the agreements and undertakings entered into with
such Excepted Holder in connection with the establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted Holder Limit
shall be reduced to a percentage that is less than the then Stock Ownership Limit.
19
Legend . Each certificate, if any, for shares of Capital Stock shall bear a legend summarizing the
restrictions on transfer and ownership contained herein. Instead of a legend, the certificate, if any, may state that the Corporation will furnish a
full statement about certain restrictions on transferability to a stockholder on request and without charge.
Section 7.2.9
Section 7.3
Transfer of Capital Stock in Trust .
Section 7.3.1
Ownership in Trust . Upon any purported Transfer or other event described in Section 7.2.1(b)
that would result in a transfer of shares of Capital Stock to a Charitable Trust, such shares of Capital Stock shall be deemed to have been
transferred to the Trustee as trustee for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be deemed
to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the
Charitable Trust pursuant to Section 7.2.1(b). The Trustee shall be appointed by the Corporation and shall be a Person unaffiliated with the
Corporation and any Prohibited Owner. Each Charitable Beneficiary shall be designated by the Corporation as provided in Section 7.3.6.
20
Section 7.3.2
Status of Shares Held by the Trustee . Shares of Capital Stock held by the Trustee shall continue
to be issued and outstanding shares of Capital Stock of the Corporation. The Prohibited Owner shall have no rights in the Capital Stock held by
the Trustee. The Prohibited Owner shall not benefit economically from ownership of any shares held in trust by the Trustee, shall have no rights
to dividends or other distributions and shall not possess any rights to vote or other rights attributable to the shares held in the Charitable
Trust. The Prohibited Owner shall have no claim, cause of action, or any other recourse whatsoever against the purported transferor of such
Capital Stock.
Section 7.3.3
Dividend and Voting Rights . The Trustee shall have all voting rights and rights to dividends or
other distributions with respect to shares of Capital Stock held in the Charitable Trust, which rights shall be exercised for the exclusive benefit of
the Charitable Beneficiary. Any dividend or other distribution paid to a Prohibited Owner prior to the discovery by the Corporation that the shares
of Capital Stock have been transferred to the Trustee shall be paid with respect to such shares of Capital Stock by the Prohibited Owner to the
Trustee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. Any dividends or other
distributions so paid over to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights
with respect to shares held in the Charitable Trust and, subject to Maryland law, effective as of the date that the shares of Capital Stock have been
transferred to the Charitable Trust, the Trustee shall have the authority (at the Trustee’s sole discretion) (i) to rescind as void any vote cast by a
Prohibited Owner prior to the discovery by the Corporation that the shares of Capital Stock have been transferred to the Trustee and (ii) to recast
such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary; provided , however , that if the
Corporation has already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such
vote. Notwithstanding the provisions of this Article VII, until the Corporation has received notification that shares of Capital Stock have been
transferred into a Charitable Trust, the Corporation shall be entitled to rely on its share transfer and other stockholder records for purposes of
preparing lists of stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of
stockholders.
21
Section 7.3.4
Sale of Shares by Trustee . Within twenty (20) days of receiving notice from the Corporation that
shares of Capital Stock have been transferred to the Charitable Trust, the Trustee of the Charitable Trust shall sell the shares held in the Charitable
Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in Section 7.2.1
(a). Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of
the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 7.3.4. The Prohibited Owner shall receive the lesser
of (1) the price paid by the Prohibited Owner for the shares or, if the Prohibited Owner did not give value for the shares in connection with the
event causing the shares to be held in the Charitable Trust ( e.g. , in the case of a gift, devise or other such transaction), the Market Price of the
shares on the day of the event causing the shares to be held in the Charitable Trust and (2) the price per share received by the Trustee (net of any
commissions and other expenses of sale) from the sale or other disposition of the shares held in the Charitable Trust. The Trustee may reduce the
amount payable to the Prohibited Owner by the amount of dividends and other distributions paid to the Prohibited Owner and owed by the
Prohibited Owner to the Trustee pursuant to Section 7.3.3 of this Article VII. Any net sales proceeds in excess of the amount payable to the
Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Corporation that shares of Capital
Stock have been transferred to the Trustee, such shares are sold by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on
behalf of the Charitable Trust and (ii) to the extent that the Prohibited Owner received an amount for such shares that exceeds the amount that
such Prohibited Owner was entitled to receive pursuant to this Section 7.3.4, such excess shall be paid to the Trustee upon demand.
22
Section 7.3.5
Purchase Right in Stock Transferred to the Trustee . Shares of Capital Stock transferred to the
Trustee shall be deemed to have been offered for sale to the Corporation, or its designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that resulted in such transfer to the Charitable Trust (or, in the case of a devise or gift, the Market Price at the time of such
devise or gift) and (ii) the Market Price on the date the Corporation, or its designee, accepts such offer. The Corporation may reduce the amount
payable to the Prohibited Owner by the amount of dividends and other distributions paid to the Prohibited Owner and owed by the Prohibited
Owner to the Trustee pursuant to Section 7.3.3 of this Article VII. The Corporation may pay the amount of such reduction to the Trustee for the
benefit of the Charitable Beneficiary. The Corporation shall have the right to accept such offer until the Trustee has sold the shares held in the
Charitable Trust pursuant to Section 7.3.4. Upon such a sale to the Corporation, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and any dividends or other distributions held by the
Trustee shall be paid to the Charitable Beneficiary.
Section 7.3.6
Designation of Charitable Beneficiaries . By written notice to the Trustee, the Corporation shall
designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Charitable Trust such that (i) the shares of
Capital Stock held in the Charitable Trust would not violate the restrictions set forth in Section 7.2.1(a) in the hands of such Charitable
Beneficiary and (ii) each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must
be eligible for deduction under one of Sections 170(b)(1)(A), 2055 and 2522 of the Code. Neither the failure of the Corporation to make such
designation nor the failure of the Corporation to appoint the Trustee before the automatic transfer provided for in Section 7.2.1(b)(i) shall make
such transfer ineffective, provided that the Corporation thereafter makes such designation and appointment.
23
Section 7.4
NYSE Transactions . Nothing in this Article VII shall preclude the settlement of any transaction entered
into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system. The fact that the
settlement of any transaction occurs shall not negate the effect of any other provision of this Article VII and any transferee in such a transaction
shall be subject to all of the provisions and limitations set forth in this Article VII.
Section 7.5
relief, to enforce the provisions of this Article VII.
Enforcement . The Corporation is authorized specifically to seek equitable relief, including injunctive
Non-Waiver . No delay or failure on the part of the Corporation or the Board of Directors in exercising any
right hereunder shall operate as a waiver of any right of the Corporation or the Board of Directors, as the case may be, except to the extent
specifically waived in writing.
Section 7.6
Severability . If any provision of this Article VII or any application of any such provision is determined to
be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other
applications of such provisions shall be affected only to the extent necessary to comply with the determination of such court.
Section 7.7
24
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any amendment to the Charter, now or hereafter authorized by
law, including any amendment altering the terms or contract rights, as expressly set forth in the Charter, of any shares of outstanding stock. All
rights and powers conferred by the Charter on stockholders, directors and officers are granted subject to this reservation. Except as otherwise
provided in the Charter and except for those amendments permitted to be made without stockholder approval under Maryland law or by specific
provision in the Charter, any amendment to the Charter shall be valid only if declared advisable by the Board of Directors and approved by the
affirmative vote of holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter. However, any amendment to
Section 5.8 and Article VII or to this sentence of the Charter shall be valid only if declared advisable by the Board of Directors and approved by
the affirmative vote of holders of shares entitled to cast at least two-thirds of all the votes entitled to be cast on the matter.
ARTICLE IX
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and
officers of a corporation, no present or former director or officer of the Corporation shall be liable to the Corporation or its stockholders for money
damages. Neither the amendment nor repeal of this Article IX, nor the adoption or amendment of any other provision of the Charter or Bylaws
inconsistent with this Article IX, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure
to act which occurred prior to such amendment, repeal or adoption.
25
Directors and approved by the sole stockholder of the Corporation as required by law.
THIRD : The amendment to and restatement of the Charter as hereinabove set forth have been duly advised by the Board of
amendment and restatement of the Charter.
FOURTH : The current address of the principal office of the Corporation is as set forth in Article IV of the foregoing
amendment and restatement of the Charter.
FIFTH : The name and address of the Corporation’s current resident agent are as set forth in Article IV of the foregoing
the foregoing amendment and restatement of the Charter.
SIXTH : The number of directors of the Corporation and the names of those currently in office are as set forth in Article V of
SEVENTH : The total number of shares of stock which the Corporation had authority to issue immediately prior to this
amendment and restatement was 1,000 shares, consisting of 1,000 shares of Common Stock, $0.01 par value per share. The aggregate par value of
all shares of stock having par value was $10.00.
EIGHTH : The total number of shares of stock which the Corporation has authority to issue pursuant to the foregoing
amendment and restatement of the Charter is 600,000,000, consisting of 500,000,000 shares of Common Stock, $0.01 par value per share, and
100,000,000 shares of Preferred Stock, $0.01 par value per share. The aggregate par value of all authorized shares of stock having par value is
$6,000,000.
26
NINTH : The undersigned Executive Chairman of the Board of Directors acknowledges these Articles of Amendment and
Restatement to be the corporate act of the Corporation and, as to all matters or facts required to be verified under oath, the undersigned Executive
Chairman of the Board of Directors acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all
material respects and that this statement is made under the penalties for perjury.
[SIGNATURE PAGE FOLLOWS]
27
and on its behalf by its Chairman of the Board and attested to by its Secretary on this 3rd day of February, 2011.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its name
ATTEST:
SUMMIT HOTEL PROPERTIES, INC.
/s/ Christopher R. Eng
Christopher R. Eng
Vice President, General Counsel and Secretary
By:
/s/ Kerry W. Boekelheide
Kerry W. Boekelheide
Executive Chairman of the Board
(SEAL)
28
SUMMIT HOTEL PROPERTIES, INC.
ARTICLES SUPPLEMENTARY
9.25% SERIES A CUMULATIVE REDEEMABLE PREFERRED STOCK
Summit Hotel Properties, Inc., a Maryland corporation (the “ Corporation ”), hereby certifies to the State Department of Assessments and
Taxation of Maryland (the “ SDAT ”) that:
FIRST: Pursuant to authority expressly vested in the Board of Directors of the Corporation (the “ Board ”) by Article VI of the Articles
of Amendment and Restatement of the Corporation (which, as amended and supplemented from time to time, together with these Articles
Supplementary, is referred to herein as the “ Charter ”) and Section 2-208 of the Maryland General Corporation Law, the Board has duly classified
and designated 2,300,000 authorized but unissued shares of preferred stock, $0.01 par value per share, of the Corporation (“ Preferred Stock ”) as
“9.25% Series A Cumulative Redeemable Preferred Stock,” with such preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications and terms and conditions of redemption as appear below, which, upon any
restatement of the Charter, shall become a part of Article VI of the Charter, with any appropriate renumbering or relettering of the sections or
subsections thereof.
SECOND: Capitalized terms used herein and not otherwise defined shall have the meanings given to them in the Charter.
9.25% Series A Cumulative Redeemable Preferred Stock
1. Designation and Number . A series of Preferred Stock, designated the “9.25% Series A Cumulative Redeemable Preferred
Stock” (the “ Series A Preferred Stock ”) is hereby established. The par value of the Series A Preferred Stock shall be $0.01 per share. The
number of authorized shares of Series A Preferred Stock shall be 2,300,000.
2. Rank . The Series A Preferred Stock will, with respect to distribution rights and rights upon liquidation, dissolution or winding
up of the Corporation, rank: (a) senior to all classes or series of common stock, $0.01 par value per share, of the Corporation (the “ Common
Stock ”) and any class or series of capital stock of the Corporation expressly designated as ranking junior to the Series A Preferred Stock as to
distribution rights and rights upon liquidation, dissolution or winding up of the Corporation (collectively, “ Junior Stock ”); (b) on a parity with
any class or series of capital stock of the Corporation expressly designated as ranking on a parity with the Series A Preferred Stock as to
distribution rights and rights upon liquidation, dissolution or winding up of the Corporation (“ Parity Stock ”); and (c) junior to any class or series
of capital stock of the Corporation expressly designated as ranking senior to the Series A Preferred Stock as to distribution rights and rights upon
liquidation, dissolution or winding up of the Corporation. The term “ capital stock ” does not include convertible or exchangeable debt securities
of the Corporation, which will rank senior to the Series A Preferred Stock prior to conversion or exchange. The Series A Preferred Stock will also
rank junior in right of payment to the Corporation’s other existing and future indebtedness.
3. Distributions .
(a) Subject to the preferential rights of holders of any class or series of capital stock of the Corporation expressly
designated as ranking senior to the Series A Preferred Stock as to distributions, the holders of Series A Preferred Stock shall be entitled to receive,
when, as and if authorized by the Board and declared by the Corporation, out of funds legally available for the payment of distributions,
cumulative cash distributions at the rate of 9.25% per annum of the $25.00 liquidation preference per share of Series A Preferred Stock
(equivalent to a fixed annual amount of $2.3125 per share of Series A Preferred Stock). Distributions on the Series A Preferred Stock shall accrue
and be cumulative from (but excluding) the original date of issuance of any shares of Series A Preferred Stock and shall be payable quarterly in
equal amounts in arrears on or about the last day of each February, May, August and November of each year, beginning on November 30, 2011
(each such day being hereinafter called a “ Distribution Payment Date ”); provided, however, if any Distribution Payment Date is not a Business
Day, then the distribution which would otherwise have been payable on such Distribution Payment Date may be paid on the next succeeding
Business Day with the same force and effect as if paid on such Distribution Payment Date, and no interest or additional distributions or other sums
shall accrue on the amount so payable from such Distribution Payment Date to such next succeeding Business Day. The amount of any
distribution payable on the Series A Preferred Stock for any partial distribution period shall be prorated and computed on the basis of a 360-day
year consisting of twelve 30-day months. Distributions shall be payable to holders of record as they appear in the stock records of the Corporation
at the close of business on the applicable record date, which shall be the first day of the calendar month in which the applicable Distribution
Payment Date falls or such other date designated by the Board for the payment of distributions that is not more than 90 nor less than ten days prior
to such Distribution Payment Date (each, a “ Distribution Record Date ”).
(b) No distributions on the Series A Preferred Stock shall be authorized by the Board or declared, paid or set apart for
payment by the Corporation at such time as the terms and provisions of any agreement of the Corporation, including any agreement relating to its
indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such authorization, declaration, payment or setting
apart for payment would constitute a breach thereof, or a default thereunder, or if such declaration or payment shall be restricted or prohibited by
law.
(c) Notwithstanding anything to the contrary contained herein, distributions on the Series A Preferred Stock shall accrue
whether or not the restrictions referred to in Section 3(b) exist, whether or not the Corporation has earnings, whether or not there are funds legally
available for the payment of such distributions and whether or not such distributions are authorized or declared.
(d) Except as provided in Section 3(e) below, no distributions shall be declared and paid or set apart for payment, and no
other distribution of cash or other property may be declared and made, directly or indirectly, on or with respect to, shares of any class or series of
Parity Stock or Junior Stock (other than a distribution paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior
Stock) for any period, nor shall shares of any class or series of Parity Stock or Junior Stock be redeemed, purchased or otherwise acquired for any
consideration (other than a redemption, purchase or acquisition of Common Stock made for purposes of and in compliance with requirements of
any incentive, benefit or stock purchase plan of the Corporation or any subsidiary thereof, or as permitted under Article VII of the Charter), nor
shall any funds be paid or made available for a sinking fund for the redemption of any such shares by the Corporation, directly or indirectly
(except by conversion into or exchange for shares of, or options, warrants or rights to purchase or subscribe for shares of, Junior Stock, and except
for purchases or exchanges pursuant to a purchase or exchange offer made on the same terms to all holders of Series A Preferred Stock and all
holders of shares of Parity Stock), unless full cumulative distributions on the Series A Preferred Stock for all past distribution periods shall have
been or contemporaneously are declared and paid or declared and sum sufficient for the payment thereof is set apart for such payment.
2
(e) When distributions are not paid in full (or a sum sufficient for such full payment is not so set apart) on the Series A
Preferred Stock and any shares of Parity Stock, all distributions declared on the Series A Preferred Stock and any other shares of Parity Stock shall
be declared pro rata so that the amount of distributions declared per share of Series A Preferred Stock and per share of Parity Stock shall in all
cases bear to each other the same ratio that accrued distributions per share of Series A Preferred Stock and per share of Parity Stock (which shall
not include any accrual in respect of unpaid distributions on any shares of Parity Stock for prior distribution periods if such Parity Stock does not
have a cumulative distribution) bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution
payment or payments on the Series A Preferred Stock which may be in arrears.
(f) If, for any taxable year, the Corporation elects to designate as “capital gain dividends” (as defined in Section 857 of
the Internal Revenue Code of 1986, as amended) any portion (the “ Capital Gains Amount ”) of the dividends (as determined for federal income
tax purposes) paid or made available for the year to holders of all classes of shares (the “ Total Dividends ”), then the portion of the Capital Gains
Amount that shall be allocable to the holders of Series A Preferred Stock shall be the amount that the total dividends (as determined for federal
income tax purposes) paid or made available to the holders of the Series A Preferred Stock for the year bears to the Total Dividends. The
Corporation may elect to retain and pay income tax on its net long-term capital gains. In such a case, the holders of Series A Preferred Stock
would include in income their appropriate share of the Corporation’s undistributed long-term capital gains, as designated by the Corporation.
(g) Holders of Series A Preferred Stock shall not be entitled to any distribution, whether payable in cash, property or
shares of capital stock of the Corporation, in excess of full cumulative distributions on the Series A Preferred Stock as described above. Any
distribution payment made on the Series A Preferred Stock shall first be credited against the earliest accrued but unpaid distributions due with
respect to such shares which remains payable. Accrued but unpaid distributions on the Series A Preferred Stock will accumulate as of the
Distribution Payment Date on which they first become payable or on the date of redemption, as the case may be.
(h) For the avoidance of doubt, in determining whether a distribution (other than upon voluntary or involuntary
liquidation), by distribution, redemption or other acquisition of the Corporation’s equity securities is permitted under Maryland law, no effect shall
be given to amounts that would be needed, if the Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.
3
4. Liquidation Preference .
(a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, before any
distribution or payment shall be made to the holders of shares of any Junior Stock, the holders of shares of Series A Preferred Stock then
outstanding shall be entitled to be paid, or have the Corporation declare and set apart for payment, out of the assets of the Corporation legally
available for distribution to its stockholders, after payment or provision for payment of all debts and other liabilities of the Corporation, a
liquidation preference in cash or property at fair market value, as determined by the Board, of $25.00 per share, plus an amount equal to any
accrued and unpaid distributions to, but not including, the date of payment or the date the amount for payment is set apart (the “ Liquidating
Distributions ”).
(b) If, upon any such voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the available
assets of the Corporation are insufficient to pay the full amount of the Liquidating Distributions on all outstanding shares of Series A Preferred
Stock and the corresponding amounts payable on all outstanding shares of Parity Stock, then the holders of shares of Series A Preferred Stock and
the holders of such shares of Parity Stock shall share ratably in any such distribution of assets in proportion to the full Liquidating Distributions to
which they would otherwise be respectively entitled.
(c) Written notice of the effective date of any such voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, stating the payment date or dates when, and the place or places where, the amounts distributable in such circumstances shall be
payable, shall be given by first class mail, postage prepaid, no fewer than 30 nor more than 60 days prior to the payment date stated therein, to
each record holder of shares of Series A Preferred Stock at the address of such holder as the same shall appear on the stock transfer records of the
Corporation.
Series A Preferred Stock will have no right or claim to any of the remaining assets of the Corporation.
(d) After payment of the full amount of the Liquidating Distributions to which they are entitled, the holders of shares of
(e) For the avoidance of doubt, the consolidation or merger of the Corporation with or into another entity, the merger of
another entity with or into the Corporation, a statutory share exchange by the Corporation or the sale, lease, transfer or conveyance of all or
substantially all of the assets or business of the Corporation shall not be considered a liquidation, dissolution or winding up of the Corporation.
5. Optional Redemption
(a) The Series A Preferred Stock is not redeemable prior to October 28, 2016, except as permitted by Article VII of the
Charter and as otherwise provided in this Section 5 and Section 6 below. On and after October 28, 2016, the Corporation, at its option, upon not
less than 30 nor more than 60 days’ written notice, may redeem the Series A Preferred Stock, in whole or from time to time in part, for cash, at a
redemption price of $25.00 per share, plus any accrued and unpaid distributions on such shares of Series A Preferred Stock to, but not including,
the redemption date (the “ Regular Redemption Right ”). If fewer than all of the outstanding shares of Series A Preferred Stock are to be
redeemed pursuant to the Regular Redemption Right, the shares to be redeemed may be selected pro rata (as nearly as practicable without creating
fractional shares) or by lot or in such other equitable method determined by the Corporation. If such redemption is to be by lot and, as a result of
such redemption, any holder of shares of Series A Preferred Stock would become a holder of a number of shares of Series A Preferred Stock in
excess of the Stock Ownership Limit because such holder’s shares of Series A Preferred Stock were not redeemed, or were only redeemed in part
then, except as otherwise provided in Article VII of the Charter, the Corporation will redeem the requisite number of shares of Series A Preferred
Stock of such holder such that no holder will hold a number of shares in excess of the Stock Ownership Limit subsequent to such redemption.
4
(b) To ensure that the Corporation remains qualified as a REIT for federal income tax purposes, the Series A Preferred
Stock shall be subject to the provisions of Article VII of the Charter, pursuant to which shares of Series A Preferred Stock owned by a stockholder
in excess of the Stock Ownership Limit shall automatically be transferred to a Charitable Trust and the Corporation shall have the right to
purchase such shares, as provided in Article VII of the Charter. If the Corporation calls for redemption any shares of Series A Preferred Stock
pursuant to and in accordance with Article VII of the Charter and this Section 5(b), then the redemption price will be an amount equal to $25.00
per share, plus any accrued and unpaid distributions on the Series A Preferred Stock to, but not including, the redemption date, subject to any
restrictions or limitations contained in Article VII of the Charter.
(c) Unless full cumulative distributions on all shares of Series A Preferred Stock shall have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods, (i) no shares
of Series A Preferred Stock shall be redeemed unless all outstanding shares of Series A Preferred Stock are simultaneously redeemed, and (ii) the
Corporation shall not purchase or otherwise acquire directly or indirectly for any consideration, nor shall any monies be paid to or be made
available for a sinking fund for the redemption of, any shares of Series A Preferred Stock (except by conversion into or exchange for shares of, or
options, warrants or rights to purchase or subscribe for shares of, Junior Stock); provided, however , that the foregoing shall not prevent the
redemption or purchase by the Corporation of shares of Series A Preferred Stock pursuant to Article VII of the Charter or otherwise in order to
ensure that the Corporation remains qualified as a REIT for federal income tax purposes or the purchase or acquisition of shares of Series A
Preferred Stock pursuant to a purchase or exchange offer made on the same terms to all holders of Series A Preferred Stock.
(d) Immediately prior to any redemption of shares of Series A Preferred Stock pursuant to the Regular Redemption Right,
the Corporation shall pay, in cash, any accrued and unpaid distributions on the Series A Preferred Stock to, but not including, the redemption date,
unless a redemption date falls after a Distribution Record Date and prior to the corresponding Distribution Payment Date, in which case each
holder of record of Series A Preferred Stock at the close of business on such Distribution Record Date shall be entitled to the distribution payable
on such shares on the corresponding Distribution Payment Date (including any accrued and unpaid distributions for prior distribution periods)
notwithstanding the redemption of such shares before such Distribution Payment Date. Except as provided above and in Section 6(e), the
Corporation will make no payment or allowance for unpaid distributions, whether or not in arrears, on shares of Series A Preferred Stock for
which a notice of redemption has been given.
5
Redemption Right:
(e) The following procedures apply to the redemption of the Series A Preferred Stock pursuant to the Regular
(i) Notice of redemption pursuant to the Regular Redemption Right will be (A) given by publication in a
newspaper of general circulation in the City of New York, such publication to be made once a week for two successive weeks commencing not
less than 30 nor more than 60 days prior to the redemption date, and (B) mailed by the Corporation, postage prepaid, not less than 30 nor more
than 60 days prior to the redemption date, addressed to the respective holders of record of the Series A Preferred Stock to be redeemed at their
respective addresses as they appear on the stock transfer records of the Corporation. A failure to give such notice or any defect thereto or in the
mailing thereof shall not affect the validity of the proceedings for the redemption of any shares of Series A Preferred Stock except as to the holder
to whom notice was defective or not given.
(ii) In addition to any information required by law or by the applicable rules of any exchange upon which the
Series A Preferred Stock may be listed or admitted to trading, such notice shall state: (A) the redemption date; (B) the redemption price; (C) the
number of shares of Series A Preferred Stock to be redeemed; (D) the place or places where the certificates, if any, representing the shares of
Series A Preferred Stock to be redeemed are to be surrendered for payment of the redemption price; (E) the procedures for surrendering non-
certificated shares of Series A Preferred Stock for payment of the redemption price; (F) that distributions on shares of Series A Preferred Stock to
be redeemed will cease to accrue on such redemption date; and (G) that the holders of shares of Series A Preferred Stock to which such notice
relates will not be able to tender such shares of Series A Preferred Stock for conversion in connection with the Change of Control (as defined in
Section 6(b) below) and each share of Series A Preferred Stock tendered for conversion that is selected, prior to the Change of Control Conversion
Date (as defined in Section 9(a) below), for redemption will be redeemed on the related redemption date instead of converted on the Change of
Control Conversion Date. If less than all of the shares of Series A Preferred Stock held by any holder are to be redeemed pursuant to the Regular
Redemption Right, the notice mailed to such holder shall also specify the number of shares of Series A Preferred Stock held by such holder to be
so redeemed.
(iii) If notice of redemption pursuant to the Regular Redemption Right of any shares of Series A Preferred Stock
has been given and if the funds necessary for such redemption have been set apart by the Corporation for the benefit of the holders of any shares
of Series A Preferred Stock so called for redemption, then from and after the redemption date distributions will cease to accrue on such shares of
Series A Preferred Stock, such shares of Series A Preferred Stock shall no longer be deemed outstanding and all rights of the holders of such
shares of Series A Preferred Stock will terminate, except the right to receive the redemption price and any accrued and unpaid distributions to, but
not including, the redemption date; provided, however, if the redemption date falls after a Distribution Record Date and prior to the corresponding
Distribution Payment Date, each holder of shares of Series A Preferred Stock so called for redemption at the close of business on such
Distribution Record Date shall be entitled to the distribution payable on such shares on the corresponding Distribution Payment Date
notwithstanding the redemption of such shares before such Distribution Payment Date.
6
(iv) Holders of shares of Series A Preferred Stock to be redeemed pursuant to the Regular Redemption Right
shall surrender such shares at the place or places designated in such notice and, upon surrender of the certificates, if any, for such shares of Series
A Preferred Stock (properly endorsed or assigned for transfer, if the Corporation shall so require and the notice shall so state), such shares of
Series A Preferred Stock shall be redeemed by the Corporation at the redemption price plus any accrued and unpaid distributions payable upon
such redemption. In case less than all shares of Series A Preferred Stock represented by any such certificate are redeemed, a new certificate or
certificates shall be issued representing the unredeemed shares of Series A Preferred Stock without cost to the holder thereof. Notwithstanding the
foregoing, if the shares of Series A Preferred Stock to be redeemed are held in book-entry form through the facilities of The Depository Trust
Company (“ DTC ”), holders of shares of Series A Preferred Stock to be redeemed shall comply with applicable procedures of DTC in connection
with surrendering their shares for payment of the redemption price.
(f) Subject to applicable law and the limitation on purchases when distributions on the Series A Preferred Stock are in
arrears, the Corporation may, at any time and from time to time, purchase any shares of Series A Preferred Stock in the open market, by tender or
by private agreement.
(g) Any shares of Series A Preferred Stock that shall at any time have been redeemed pursuant to the Regular
Redemption Right or otherwise acquired shall, after such redemption or acquisition, have the status of authorized but unissued shares of Preferred
Stock, without designation as to series until such shares are once more classified and designated as part of a particular series by the Board.
6. Special Optional Redemption .
(a) Upon the occurrence of a Change of Control (as defined below), the Corporation, at its option, upon not less than 30
nor more than 60 days’ written notice, may redeem the shares of Series A Preferred Stock, in whole or in part, within 120 days after the first date
on which such Change of Control occurred, for cash at a redemption price equal to $25.00 per share, plus any accrued and unpaid distributions to,
but not including, the redemption date (“ Special Optional Redemption Right ”).
occurred and are continuing:
(b) A “ Change of Control ” is when, after the original issuance of the Series A Preferred Stock, the following have
(i) the acquisition by any person, including any syndicate or group deemed to be a “person” under Section 13(d)
(3) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), of beneficial ownership, directly or indirectly, through a purchase,
merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of capital stock of the Corporation entitling
that person to exercise more than 50% of the total voting power of all capital stock of the Corporation entitled to vote generally in elections of
directors (except that such person will be deemed to have beneficial ownership of all capital stock of the Corporation that such person has the right
to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); and
7
(ii) following the closing of any transaction referred to in (i) above, neither the Corporation nor the acquiring or
surviving entity has a class of common securities (or American Depositary Receipts representing such securities) listed on the New York Stock
Exchange (the “ NYSE ”), the NYSE Amex Equities (the “ NYSE Amex ”), or the NASDAQ Stock Market (“ NASDAQ ”), or listed or quoted on
an exchange or quotation system that is a successor to the NYSE, the NYSE Amex or NASDAQ.
(c) If fewer than all of the outstanding shares of Series A Preferred Stock are to be redeemed pursuant to the Special
Optional Redemption Right, the shares to be redeemed may be selected pro rata (as nearly as practicable without creating fractional shares) or by
lot or in such other equitable method determined by the Corporation. If such redemption is to be by lot and, as a result of such redemption, any
holder of shares of Series A Preferred Stock would become a holder of a number of shares of Series A Preferred Stock in excess of the Stock
Ownership Limit because such holder’s shares of Series A Preferred Stock were not redeemed, or were only redeemed in part then, except as
otherwise provided in Article VII of the Charter, the Corporation will redeem the requisite number of shares of Series A Preferred Stock of such
holder such that no holder will hold a number of shares in excess of the Stock Ownership Limit subsequent to such redemption.
(d) Unless full cumulative distributions on all shares of Series A Preferred Stock shall have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods, (i) no shares
of Series A Preferred Stock shall be redeemed pursuant to the Special Option Redemption Right unless all outstanding shares of Series A
Preferred Stock are simultaneously redeemed, and (ii) the Corporation shall not purchase or otherwise acquire directly or indirectly for any
consideration, nor shall any monies be paid to or be made available for a sinking fund for the redemption of, any shares of Series A Preferred
Stock (except by conversion into or exchange for shares of, or options, warrants or rights to purchase or subscribe for shares of, Junior Stock);
provided, however , that the foregoing shall not prevent the redemption or purchase by the Corporation of shares of Series A Preferred Stock
pursuant to Article VII of the Charter or otherwise in order to ensure that the Corporation remains qualified as a REIT for federal income tax
purposes or the purchase or acquisition of shares of Series A Preferred Stock pursuant to a purchase or exchange offer made on the same terms to
all holders of Series A Preferred Stock.
(e) Immediately prior to any redemption of shares of Series A Preferred Stock pursuant to the Special Optional
Redemption Right, the Corporation shall pay, in cash, any accrued and unpaid distributions on the Series A Preferred Stock to, but not including,
the redemption date, unless a redemption date falls after a Distribution Record Date and prior to the corresponding Distribution Payment Date, in
which case each holder of Series A Preferred Stock at the close of business on such Distribution Record Date shall be entitled to the distribution
payable on such shares on the corresponding Distribution Payment Date (including any accrued and unpaid distributions for prior distribution
periods) notwithstanding the redemption of such shares before such Distribution Payment Date. Except as provided above, the Corporation will
make no payment or allowance for unpaid distributions, whether or not in arrears, on shares of Series A Preferred Stock for which a notice of
redemption has been given.
8
Redemption Right:
(f) The following procedures apply to the redemption of the Series A Preferred Stock pursuant to the Special Optional
(i) Notice of redemption pursuant to the Special Optional Redemption Right will be (A) given by publication in
a newspaper of general circulation in the City of New York, such publication to be made once a week for two successive weeks commencing not
less than 30 nor more than 60 days prior to the redemption date, and (B) mailed by the Corporation, postage prepaid, not less than 30 nor more
than 60 days prior to the redemption date, addressed to the respective holders of record of the Series A Preferred Stock to be redeemed at their
respective addresses as they appear on the stock transfer records of the Corporation. A failure to give such notice or any defect thereto or in the
mailing thereof shall not affect the validity of the proceedings for the redemption of any shares of Series A Preferred Stock except as to the holder
to whom notice was defective or not given.
(ii) In addition to any information required by law or by the applicable rules of any exchange upon which the
Series A Preferred Stock may be listed or admitted to trading, such notice shall state: (A) the redemption date; (B) the redemption price; (C) the
number of shares of Series A Preferred Stock to be redeemed; (D) the place or places where the certificates, if any, representing the shares of
Series A Preferred Stock to be redeemed are to be surrendered for payment of the redemption price; (E) the procedures for surrendering non-
certificated shares of Series A Preferred Stock for payment of the redemption price; (F) that the shares of Series A Preferred Stock are being
redeemed pursuant to the Special Optional Redemption Right in connection with the occurrence of a Change of Control and a brief description of
the transaction or transactions constituting such Change of Control; (G) that the holders of shares of Series A Preferred Stock to which such notice
relates will not be able to tender such shares of Series A Preferred Stock for conversion in connection with the Change of Control and each share
of Series A Preferred Stock tendered for conversion that is selected, prior to the Change of Control Conversion Date, for redemption will be
redeemed on the related redemption date instead of converted on the Change of Control Conversion Date; and (H) that distributions on shares of
Series A Preferred Stock to be redeemed will cease to accrue on such redemption date. If less than all of the shares of Series A Preferred Stock
held by any holder are to be redeemed pursuant to the Special Optional Redemption Right, the notice mailed to such holder shall also specify the
number of shares of Series A Preferred Stock held by such holder to be redeemed.
(iii) If notice of redemption pursuant to the Special Optional Redemption Right of any shares of Series A
Preferred Stock has been given and if the funds necessary for such redemption have been set aside by the Corporation for the benefit of the holders
of any shares of Series A Preferred Stock so called for redemption, then from and after the redemption date distributions will cease to accrue on
such shares of Series A Preferred Stock, such shares of Series A Preferred Stock shall no longer be deemed outstanding and all rights of the
holders of such shares of Series A Preferred Stock will terminate, except the right to receive the redemption price and any accrued and unpaid
distributions to, but not including, the redemption date; provided, however, if the redemption date falls after a Distribution Record Date and prior
to the corresponding Distribution Payment Date, each holder of shares of Series A Preferred Stock so called for redemption at the close of
business on such Distribution Record Date shall be entitled to the distribution payable on such shares on the corresponding Distribution Payment
Date notwithstanding the redemption of such shares before such Distribution Payment Date.
9
(iv) Holders of shares of Series A Preferred Stock to be redeemed pursuant to the Special Optional Redemption
Right shall surrender such shares at the place or places designated in such notice and, upon surrender of the certificates, if any, for such shares of
Series A Preferred Stock (properly endorsed or assigned for transfer, if the Corporation shall so require and the notice shall so state), such shares
of Series A Preferred Stock shall be redeemed by the Corporation at the redemption price plus any accrued and unpaid distributions payable upon
such redemption. In case less than all shares of Series A Preferred Stock represented by any such certificate are redeemed, a new certificate or
certificates shall be issued representing the unredeemed shares of Series A Preferred Stock without cost to the holder thereof. Notwithstanding the
foregoing, if the shares of Series A Preferred Stock to be redeemed are held in book-entry form through the facilities of DTC, holders of shares of
Series A Preferred Stock to be redeemed shall comply with applicable procedures of DTC in connection with surrendering their shares for
payment of the redemption price.
(g) Any shares of Series A Preferred Stock that shall at any time have been redeemed pursuant to the Special Optional
Redemption Right or otherwise acquired shall, after such redemption or acquisition, have the status of authorized but unissued shares of Preferred
Stock, without designation as to series until such shares are once more classified and designated as part of a particular series by the Board.
7. Voting Rights .
(a) Holders of Series A Preferred Stock will not have any voting rights, except as set forth below.
(b) Whenever distributions on any Series A Preferred Stock shall be in arrears for six or more quarterly periods, whether
or not consecutive (a “ Preferred Distribution Default ”), the number of directors then constituting the Board shall be increased by two and the
holders of Series A Preferred Stock (voting as a single class together with the holders of any other class or series of shares of Parity Stock upon
which like voting rights have been conferred and are exercisable (“ Voting Parity Stock ”)) shall be entitled to vote for the election of a total of
two additional directors of the Corporation (each, a “ Preferred Stock Director ”) at a special meeting of stockholders called by the holders of at
least 33% of the outstanding shares of Series A Preferred Stock (or the holders of at least 33% of the outstanding shares of Voting Parity Stock) if
such request is received 90 or more days before the date fixed for the next annual meeting of stockholders, or, if the request is received less than
90 days before the next annual meeting of stockholders, at the next annual meeting of stockholders, or at the Corporation’s sole discretion, a
separate special meeting of stockholders to be held no later than 90 days after the Corporation’s receipt of such request, and thereafter at each
subsequent annual meeting of stockholders until all accumulated distributions on the shares of Series A Preferred Stock for the past distribution
periods and the then-current distribution period shall have been fully paid or declared and a sum sufficient for the payment thereof set apart for
payment in full. The Preferred Stock Directors shall be elected by a plurality of the votes cast by the holders of the outstanding shares of Series A
Preferred Stock when they have the voting rights set forth in this Section 7(b) (voting together as a single class with the holders of any outstanding
shares of Voting Parity Stock) in the election to serve until the next annual meeting of stockholders and until their successors are duly elected and
qualified or until such directors’ right to hold the office terminates as described below, whichever occurs earlier.
10
(c) If and when all accrued distributions for past distribution periods and the distribution for the then-current distribution
period on the Series A Preferred Stock shall have been paid in full or declared and a sum sufficient for the payment thereof set apart for payment
in full, the holders of Series A Preferred Stock shall immediately be divested of the voting rights set forth in Section 7(b) (subject to revesting in
the event of each and every Preferred Distribution Default) and, if all accumulated distributions for past distribution periods and the distribution
for the then-current distribution period have been paid in full or declared and a sum sufficient for the payment thereof set apart for payment in full
on all outstanding shares of Voting Parity Stock, the term of office of each Preferred Stock Director so elected shall immediately terminate and the
number of directors shall be reduced accordingly. Any Preferred Stock Director may be removed at any time, but only for Cause, by the vote of,
and shall not be removed otherwise than by the vote of, the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock
when they have the voting rights set forth in Section 7(b) and the holders of any outstanding shares of Voting Parity Stock (voting together as a
single class). So long as a Preferred Distribution Default shall continue, any vacancy in the office of a Preferred Stock Director may be filled by
written consent of the Preferred Stock Director remaining in office, or if none remains in office, by a vote of the holders of the outstanding shares
of Series A Preferred Stock when they have the voting rights set forth in Section 7(b) and the holders of any outstanding shares of Voting Parity
Stock (voting together as a single class). The Preferred Stock Directors shall each be entitled to one vote per director on any matter.
(d) So long as any shares of Series A Preferred Stock remain outstanding, the Corporation shall not:
(i) authorize or create, or increase the authorized or issued amount of, any class or series of shares of capital
stock of the Corporation expressly designated ranking senior to the Series A Preferred Stock with respect to payment of dividends or the
distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Corporation, or reclassify any authorized shares
of capital stock of the Corporation into any such shares, or create, authorize or issue any obligation or security convertible into or evidencing the
right to purchase any such equity securities, without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A
Preferred Stock and the holders of any outstanding shares of Voting Parity Stock (voting together as a single class); or
(ii) amend, alter or repeal the provisions of the Charter, whether by merger or consolidation (in either case, an “
Event ”) or otherwise, so as to materially and adversely affect any right, preference, privilege or voting powers of the Series A Preferred Stock or
the holders thereof, without the affirmative vote of the holders of at least two-thirds of the holders of the outstanding shares of Series A Preferred
Stock (voting as a separate class); provided, however , that with respect to the occurrence of any Event set forth above, so long as shares of
Series A Preferred Stock remain outstanding with the terms thereof materially unchanged or the holders of shares of Series A Preferred Stock
receive shares of, or options, warrants or rights to purchase or subscribe for shares of, capital stock with rights, preferences, privileges and voting
powers substantially similar, taken as a whole, to the rights, preferences, privileges and voting powers of the Series A Preferred Stock, the
occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers of the
Series A Preferred Stock or the holders thereof; and provided further that any increase in the amount of the authorized shares of Series A Preferred
Stock or the creation or issuance, or increase in the amounts authorized, of any other class or series of Parity Stock or Junior Stock shall not be
deemed to materially and adversely affect such rights, preferences, privileges or voting powers.
11
(e) In any matter in which the holders of Series A Preferred Stock are entitled to vote separately as a single class, each
such holder shall have the right to one vote for each share of Series A Preferred Stock held by such holder. If the holders of shares of Series A
Preferred Stock and the holders of shares of any other class or series of Voting Parity Stock are entitled to vote together as a single class on any
matter, such holders shall each have one vote for each $25.00 of liquidation preference.
(f) The foregoing voting provisions shall not apply if, at or prior to the time when the act with respect to which such vote
would otherwise be required shall be effected, all outstanding shares of Series A Preferred Stock shall have been redeemed or called for
redemption upon proper notice and sufficient funds shall have been deposited in trust to effect such redemption.
8. Information Rights . During any period in which the Corporation is not subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act and any shares of Series A Preferred Stock are outstanding, the Corporation will (i) transmit by mail or other
permissible means under the Exchange Act to all holders of Series A Preferred Stock, as their names and addresses appear in the Corporation’s
record books and without cost to such holders, copies of the annual reports on Form 10-K and quarterly reports on Form 10-Q that the Corporation
would have been required to file with the Securities and Exchange Commission (the “ SEC ”), pursuant to Section 13 or Section 15(d) of the
Exchange Act if the Corporation were subject thereto (other than any exhibits that would have been required); and (ii) within 15 days following
written request, supply copies of such reports to any prospective holder of Series A Preferred Stock. The Corporation will mail (or otherwise
provide) the reports to the holders of Series A Preferred Stock within 15 days after the respective dates by which the Corporation would have been
required to file such reports with the SEC if it were subject to Section 13 or 15(d) of the Exchange Act.
9. Conversion . Shares of Series A Preferred Stock are not convertible into or exchangeable for any other property or securities of
the Corporation, except as provided in this Section 9.
12
(a) Upon the occurrence of a Change of Control, each holder of Series A Preferred Stock shall have the right, unless,
prior to the Change of Control Conversion Date, the Corporation has provided or provides notice of its election to redeem the shares of Series A
Preferred Stock pursuant to the Regular Redemption Right or Special Optional Redemption Right, to convert some or all of the shares of Series A
Preferred Stock held by such holder (the “ Change of Control Conversion Right ”) on the Change of Control Conversion Date into a number
shares of Common Stock, per share of Series A Preferred Stock to be converted (the “ Common Stock Conversion Consideration ”) equal to the
lesser of (A) the quotient obtained by dividing (i) the sum of (x) the $25.00 liquidation preference plus (y) the amount of any accrued and unpaid
distributions to, but not including, the Change of Control Conversion Date (unless the Change of Control Conversion Date is after a Distribution
Record Date and prior to the corresponding Distribution Payment Date, in which case no additional amount for such accrued and unpaid
distribution will be included in such sum) by (ii) the Common Stock Price (as defined below) and (B) 5.92417 (the “ Share Cap ”), subject to the
immediately succeeding paragraph.
The Share Cap is subject to pro rata adjustments for any stock splits (including those effected pursuant to a Common Stock distribution),
subdivisions or combinations (in each case, a “ Stock Split ”) with respect to shares of Common Stock as follows: the adjusted Share Cap as the
result of a Stock Split shall be the number of shares of Common Stock that is equivalent to the product obtained by multiplying (i) the Share Cap
in effect immediately prior to such Stock Split by (ii) a fraction, the numerator of which is the number of shares of Common Stock outstanding
after giving effect to such Stock Split and the denominator of which is the number of shares of Common Stock outstanding immediately prior to
such Stock Split.
For the avoidance of doubt, subject to the immediately succeeding sentence, the aggregate number of shares of Common Stock (or
equivalent Alternative Conversion Consideration (as defined below), as applicable) issuable in connection with the exercise of the Change of
Control Conversion Right shall not exceed 13,625,592 shares of Common Stock (or equivalent Alternative Conversion Consideration, as
applicable), subject to increase on a pro rata basis if the Corporation issues additional shares of Series A Preferred Stock (the “ Exchange Cap
”). The Exchange Cap is subject to pro rata adjustments for any Stock Splits on the same basis as the corresponding adjustment to the Share Cap.
In the case of a Change of Control pursuant to which shares of Common Stock shall be converted into cash, securities or other property
or assets (including any combination thereof) (the “ Alternative Form Consideration ”), a holder of shares of Series A Preferred Stock shall receive
upon conversion of such shares of Series A Preferred Stock the kind and amount of Alternative Form Consideration which such holder of shares
of Series A Preferred Stock would have owned or been entitled to receive upon the Change of Control had such holder of shares of Series A
Preferred Stock held a number of shares of Common Stock equal to the Common Stock Conversion Consideration immediately prior to the
effective time of the Change of Control (the “ Alternative Conversion Consideratio n”; and the Common Stock Conversion Consideration or the
Alternative Conversion Consideration, as may be applicable to a Change of Control, shall be referred to herein as the “ Conversion Consideration
”).
In the event that holders of Common Stock have the opportunity to elect the form of consideration to be received in the Change of
Control, the consideration that the holders of Series A Preferred Stock shall receive shall be the form of consideration elected by the holders of
Common Stock who participate in the determination (based on the weighted average of elections) and shall be subject to any limitations to which
all holders of Common Stock are subject, including, without limitation, pro rata reductions applicable to any portion of the consideration payable
in the Change of Control.
13
The “ Change of Control Conversion Date ” shall be a Business Day set forth in the notice of Change of Control provided in accordance
with Section 9(c) below that is no less than 20 days nor more than 35 days after the date on which the Corporation provides such notice pursuant
to Section 9(c).
The “ Common Stock Price ” shall be (i) the amount of cash consideration per share of Common Stock, if the consideration to be
received in the Change of Control by holders of Common Stock is solely cash, and (ii) the average of the closing prices per share of Common
Stock on the NYSE for the ten consecutive trading days immediately preceding, but not including, the effective date of the Change of Control, if
the consideration to be received in the Change of Control by holders of Common Stock is other than solely cash.
lieu of fractional shares, holders shall be entitled to receive the cash value of such fractional shares based on the Common Stock Price.
(b) No fractional shares of Common Stock shall be issued upon the conversion of shares of Series A Preferred Stock. In
(c) Within 15 days following the occurrence of a Change of Control, a notice of occurrence of the Change of Control,
describing the resulting Change of Control Conversion Right, shall be delivered to the holders of record of Series A Preferred Stock at their
addresses as they appear on the Corporation’s stock transfer records and notice shall be provided to the Corporation’s transfer agent. No failure to
give such notice or any defect thereto or in the mailing thereof shall affect the validity of the proceedings for the conversion of any shares of
Series A Preferred Stock except as to the holder to whom notice was defective or not given. Each notice shall state: (i) the events constituting the
Change of Control; (ii) the date of the Change of Control; (iii) the last date on which the holders of shares of Series A Preferred Stock may
exercise their Change of Control Conversion Right; (iv) the method and period for calculating the Common Stock Price; (v) the Change of Control
Conversion Date, which shall be a Business Day occurring within 20 to 35 days following the date of such notice; (vi) that if, prior to the Change
of Control Conversion Date, the Corporation has provided or provides notice of its election to redeem all or any portion of the shares of Series A
Preferred Stock pursuant to the Regular Redemption Right or Special Optional Redemption Right, the holder will not be able to convert shares of
Series A Preferred Stock and such shares of Series A Preferred Stock shall be redeemed on the related redemption date, even if they have already
been tendered for conversion pursuant to the Change of Control Conversion Right; (vii) if applicable, the type and amount of Alternative
Conversion Consideration entitled to be received per share of Series A Preferred Stock; (viii) the name and address of the paying agent and the
conversion agent; and (ix) the procedures that the holders of Series A Preferred Stock must follow to exercise the Change of Control Conversion
Right.
(d) The Corporation shall issue a press release for publication on the Dow Jones & Company, Inc., Business Wire, PR
Newswire or Bloomberg Business News (or, if such organizations are not in existence at the time of issuance of such press release, such other
news or press organization as is reasonably calculated to broadly disseminate the relevant information to the public), or post notice on the
Corporation’s website, in any event prior to the opening of business on the first Business Day following any date on which the Corporation
provides notice pursuant to Section 9(c) above to the holders of Series A Preferred Stock.
14
(e) In order to exercise the Change of Control Conversion Right, a holder of Series A Preferred Stock shall be required to
deliver, on or before the close of business on the Change of Control Conversion Date, the certificates evidencing the shares of Series A Preferred
Stock, to the extent such shares are certificated, to be converted, duly endorsed for transfer, together with a written conversion notice completed,
to the Corporation’s transfer agent. Such notice shall state: (i) the relevant Change of Control Conversion Date; (ii) the number of shares of
Series A Preferred Stock to be converted; and (iii) that the shares of Series A Preferred Stock are to be converted pursuant to the applicable terms
of the shares of Series A Preferred Stock. Notwithstanding the foregoing, if the shares of Series A Preferred Stock are held in global form, such
notice shall comply with applicable procedures of DTC.
(f) Holders of Series A Preferred Stock may withdraw any notice of exercise of a Change of Control Conversion Right (in
whole or in part) by a written notice of withdrawal delivered to the Corporation’s transfer agent prior to the close of business on the Business Day
prior to the Change of Control Conversion Date. The notice of withdrawal must state: (i) the number of withdrawn shares of Series A Preferred
Stock; (ii) if certificated shares of Series A Preferred Stock have been issued, the certificate numbers of the withdrawn shares of Series A
Preferred Stock; and (iii) the number of shares of Series A Preferred Stock, if any, which remain subject to the conversion
notice. Notwithstanding the foregoing, if the shares of Series A Preferred Stock are held in global form, the notice of withdrawal shall comply
with applicable procedures of DTC.
(g) Shares of Series A Preferred Stock as to which the Change of Control Conversion Right has been properly exercised
and for which the conversion notice has not been properly withdrawn shall be converted into the applicable Conversion Consideration in
accordance with the Change of Control Conversion Right on the Change of Control Conversion Date, unless, prior to the Change of Control
Conversion Date, the Corporation has provided or provides notice of its election to redeem such shares of Series A Preferred Stock, whether
pursuant to its Regular Redemption Right or Special Optional Redemption Right. Holders of Series A Preferred Stock shall not have the right to
convert any shares that the Corporation has elected to redeem prior to the Change of Control Conversion Date. Accordingly, if the Corporation has
provided a redemption notice with respect to some of all of the Series A Preferred Stock, holders of any Series A Preferred Stock that the
Corporation has called for redemption shall not be permitted to exercise their Change of Control Conversion right in respect of any of the shares
that have been called for redemption, and such shares of Series A Preferred Stock shall not be so converted and the holders of such shares shall be
entitled to receive on the applicable redemption date $25.00 per share, plus any accrued and unpaid distributions thereon to, but not including, the
redemption date.
the Change of Control Conversion Date.
(h) The Corporation shall deliver the applicable Conversion Consideration no later than the third Business Day following
15
(i) Notwithstanding anything to the contrary contained herein, no holder of shares of Series A Preferred Stock will be
entitled to convert such shares of Series A Preferred Stock into shares of Common Stock to the extent that receipt of such shares of Common
Stock would cause the holder of such shares of Common Stock (or any other person) to Beneficially Own or Constructively Own shares of
Common Stock of the Corporation in excess of the Stock Ownership Limit, as such term is defined in the Charter, as applicable.
10. Application of Article VII . The Series A Preferred Stock is subject to the provisions of Article VII of the Charter.
THIRD: The Series A Preferred Stock has been classified and designated by the Board under the authority contained in the Charter.
FOURTH: These Articles Supplementary have been approved by the Board in the manner and by the vote required by law.
FIFTH: These Articles Supplementary shall be effective at the time the SDAT accepts these Articles Supplementary for record.
SIXTH: The undersigned Executive Vice President and Chief Operating Officer of the Corporation acknowledges these Articles
Supplementary to be the act of the Corporation and, as to all matters or facts required to be verified under oath, the undersigned Executive Vice
President and Chief Operating Officer acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in
all material respects and that this statement is made under the penalties for perjury.
[Signature page follows.]
16
IN WITNESS WHEREOF, SUMMIT HOTEL PROPERTIES, INC. has caused these Articles Supplementary to be signed in its name
and on its behalf by its Executive Vice President and Chief Operating Officer and witnessed by its Secretary on October 26, 2011.
WITNESS:
SUMMIT HOTEL PROPERTIES, INC.
By: /s/ Christopher R. Eng
Name: Christopher R. Eng
Title: Secretary
By: /s/ Stuart J. Becker
Name: Stuart J. Becker
Title: Executive Vice President and
Chief Operating Officer
17
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
SUMMIT HOTEL OP, LP
a Delaware limited partnership
dated as of February 14, 2011
Exhibit 3.4
TABLE OF CONTENTS
ARTICLE I DEFINED TERMS
ARTICLE II FORMATION OF THE PARTNERSHIP
2.01
Formation of the Partnership
2.02 Name
2.03 Registered Office and Agent; Principal Office
2.04
2.05
2.06 Certificates Describing Partnership Units
Term and Dissolution
Filing of Certificate and Perfection of Limited Partnership
ARTICLE III BUSINESS OF THE PARTNERSHIP
LTIP Units
ARTICLE IV CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.01 Capital Contributions
4.02 Additional Capital Contributions and Issuances of Additional Partnership Units
4.03 Additional Funding
4.04
4.05 Conversion of LTIP Units
4.06 Capital Accounts
4.07
4.08 No Interest on Contributions
4.09 Return of Capital Contributions
4.10 No Third-Party Beneficiary
Percentage Interests
ARTICLE V PROFITS AND LOSSES; DISTRIBUTIONS
5.01 Allocation of Profit and Loss
5.02 Distribution of Cash
5.03 REIT Distribution Requirements
5.04 No Right to Distributions in Kind
5.05
5.06 Distributions Upon Liquidation
5.07
Limitations on Return of Capital Contributions
Substantial Economic Effect
ARTICLE VI RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER
6.01 Management of the Partnership
6.02 Delegation of Authority
6.03
6.04
6.05
6.06 Outside Activities
6.07
6.08
Indemnification and Exculpation of Indemnitees
Liability of the General Partner
Partnership Obligations
Employment or Retention of Affiliates
Summit REIT’s Activities
-i-
1
11
11
11
11
11
12
12
13
13
13
13
16
17
20
23
23
23
24
24
24
24
26
28
28
28
28
28
29
29
31
31
33
34
34
35
35
6.09
Title to Partnership Assets
Transfer of the General Partner’s Partnership Interest
ARTICLE VII CHANGES IN GENERAL PARTNER
7.01
7.02 Admission of a Substitute or Additional General Partner
7.03
7.04 Removal of General Partner
Effect of Bankruptcy, Withdrawal, Death or Dissolution of General Partner
ARTICLE VIII RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
8.01 Management of the Partnership
Power of Attorney
8.02
Limitation on Liability of Limited Partners
8.03
8.04 Common Unit Redemption Right
8.05 Registration
Purchase for Investment
ARTICLE IX TRANSFERS OF PARTNERSHIP INTERESTS
9.01
9.02 Restrictions on Transfer of Partnership Units
9.03 Admission of Substitute Limited Partner
9.04 Rights of Assignees of Partnership Units
9.05
9.06
Effect of Bankruptcy, Death, Incompetence or Termination of a Limited Partner
Joint Ownership of Partnership Units
ARTICLE X BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
10.01 Books and Records
10.02 Custody of Partnership Funds; Bank Accounts
10.03
Fiscal and Taxable Year
10.04 Annual Tax Information and Report
10.05
Tax Matters Partner; Tax Elections; Special Basis Adjustments
ARTICLE XI AMENDMENT OF AGREEMENT; MERGER
11.01 Amendment of Agreement
11.02 Merger of Partnership
Survival of Rights
ARTICLE XII GENERAL PROVISIONS
12.01 Notices
12.02
12.03 Additional Documents
12.04
12.05
12.06
12.07 Headings
12.08 Counterparts
12.09 Governing Law
Severability
Entire Agreement
Pronouns and Plurals
-ii-
35
36
36
38
38
39
40
40
40
40
40
43
48
48
48
49
50
50
51
51
51
51
52
52
52
53
53
54
54
54
54
54
54
54
55
55
55
55
EXHIBITS
EXHIBIT A—Partners, Capital Contributions and Percentage Interests
EXHIBIT B—Notice of Exercise of Common Unit Redemption Right
EXHIBIT C-1—Certification of Non-Foreign Status (For Redeeming Limited Partners That Are Entities)
EXHIBIT C-2—Certification of Non-Foreign Status (For Redeeming Limited Partners That Are Individuals)
EXHIBIT D—Notice of Election by Partner to Convert LTIP Units into Common Units
EXHIBIT E—Notice of Election by Partnership to Force Conversion of LTIP Units into Common Units
-iii-
FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
SUMMIT HOTEL OP, LP
RECITALS
Summit Hotel OP, LP (the “ Partnership ”) was formed as a limited partnership under the laws of the State of Delaware, pursuant to a
Certificate of Limited Partnership filed with the Secretary of State of the State of Delaware on June 30, 2010 and an Agreement of Limited
Partnership entered into as of June 30, 2010 by Summit Hotel Properties, Inc., a Maryland corporation (“ Summit REIT ”), as the original general
partner, and Summit REIT, as the original limited partner of the Partnership. On December 7, 2010, a Certificate of Amendment to the Certificate
of Limited Partnership was filed with the Secretary of State of the State of Delaware to reflect the withdrawal of Summit REIT as the original
general partner of the Partnership and the admission of Summit Hotel GP, LLC, a Delaware limited liability company, as the successor general
partner of the Partnership effective as of November 30, 2010. This First Amended and Restated Agreement of Limited Partnership is entered into
this 14 th day of February, 2011 among Summit Hotel GP, LLC (the “ General Partner ”), Summit REIT, as the original limited partner of the
Partnership, and any additional Limited Partner that is admitted from time to time to the Partnership and listed on Exhibit A attached hereto.
NOW, THEREFORE, in consideration of the foregoing, of mutual covenants between the parties hereto, and of other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to amend and restate the Agreement of
Limited Partnership to read in its entirety as follows:
AGREEMENT
ARTICLE I
DEFINED TERMS
The following defined terms used in this Agreement shall have the meanings specified below:
“ Act ” means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time.
“ Additional Funds ” has the meaning set forth in Section 4.03 hereof.
“ Additional Securities ” means any: (1) shares of capital stock of Summit REIT now or hereafter authorized or reclassified that has dividend
rights, or rights upon liquidation, winding up and dissolution, that are superior or prior to the REIT Shares (“ Preferred Shares ”), (2) REIT
Shares, (3) shares of capital stock of Summit REIT now or hereafter authorized or reclassified that has dividend rights, or rights upon liquidation,
winding up and dissolution, that are junior in rank to the REIT Shares (“ Junior Shares ”) and (4) (i) rights, options, warrants or convertible or
exchangeable securities having the right to subscribe for or purchase REIT Shares, Preferred
-1-
Shares or Junior Shares, or (ii) indebtedness issued by Summit REIT that provides any of the rights described in clause (4)(i) of this definition
(any such securities referred to in clause (4)(i) or (ii) of this definition, “ New Securities ”).
“ Adjustment Events ” has the meaning set forth in Section 4.04(a)(i) hereof.
“ Administrative Expenses ” means (i) all administrative and operating costs and expenses incurred by the Partnership, (ii) administrative
costs and expenses of the General Partner and Summit REIT, including any salaries or other payments to directors, officers or employees of the
General Partner and Summit REIT, and any accounting and legal expenses of the General Partner and Summit REIT, which expenses, the Partners
hereby agree are expenses of the Partnership and not the General Partner or Summit REIT, and (iii) to the extent not included in clauses (i) or
(ii) above, REIT Expenses; provided , however , that Administrative Expenses shall not include any administrative costs and expenses incurred by
the General Partner or Summit REIT that are attributable to Properties or interests in a Subsidiary that are owned by the General Partner or
Summit REIT other than through its ownership interest in the Partnership.
“ Affiliate ” means, (i) any Person that, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any
other Person that owns, beneficially, directly or indirectly, 10% or more of the outstanding capital stock, shares or equity interests of such Person,
or (iii) any officer, director, employee, partner, member, manager or trustee of such Person or any Person controlling, controlled by or under
common control with such Person. For the purposes of this definition, “control” (including the correlative meanings of the terms “controlled by”
and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, through the ownership of voting securities or partnership interests, contract or
otherwise.
“ Agreed Value ” means the fair market value of a Partner’s non-cash Capital Contribution as of the date of contribution as agreed to by such
Partner and the General Partner. The names and addresses of the Partners, number of Partnership Units issued to each Partner, and the Agreed
Value of non-cash Capital Contributions as of the date of contribution is set forth on Exhibit A , as it may be amended or restated from time to
time.
“ Agreement ” means this First Amended and Restated Agreement of Limited Partnership, as it may be amended, supplemented or restated
from time to time.
“ Articles ” means the Articles of Amendment and Restatement of Summit REIT filed with the State Department and Assessments and
Taxation of the State of Maryland, as amended, supplemented or restated from time to time.
“ Board of Directors ” means the Board of Directors of Summit REIT.
“ Capital Account ” has the meaning set forth in Section 4.06 hereof.
“ Capital Account Limitation ” has the meaning set forth in Section 4.05(b) hereof.
-2-
“ Capital Contribution ” means the total amount of cash, cash equivalents, and the Agreed Value of any Property or other asset contributed or
agreed to be contributed, as the context requires, to the Partnership by each Partner pursuant to the terms of the Agreement. Any reference to the
Capital Contribution of a Partner shall include the Capital Contribution made by a predecessor holder of the Partnership Interest of such Partner.
“ Cash Amount ” means an amount of cash per Common Unit equal to the Value of the REIT Shares Amount on the Specified Redemption
Date.
“ Certificate ” means any instrument or document that is required under the laws of the State of Delaware, or any other jurisdiction in which
the Partnership conducts business, to be signed and sworn to by the Partners of the Partnership (either by themselves or pursuant to the power-of-
attorney granted to the General Partner in Section 8.02 hereof) and filed for recording in the appropriate public offices within the State of
Delaware or such other jurisdiction to perfect or maintain the Partnership as a limited partnership, to effect the admission, withdrawal or
substitution of any Partner of the Partnership, or to protect the limited liability of the Limited Partners as limited partners under the laws of the
State of Delaware or such other jurisdiction.
“ Certificate of Formation ” means the Certificate of Formation of the General Partner filed with the Secretary of State of the State of
Delaware, as amended or supplemented from time to time.
“ Change of Control ” means, as to either the General Partner or Summit REIT, the occurrence of any of the following: (i) the sale, lease or
transfer, in one or a series of related transactions, of 80% or more of the assets of the General Partner or Summit REIT, taken as a whole, to any
Person or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision), other than an
Affiliate of the General Partner or Summit REIT; or (ii) the acquisition by any Person or group (within the meaning of Section 13(d)(3) or
Section 14(d)(2) of the Exchange Act, or any successor provision), including any group acting for the purpose of acquiring, holding or disposing
of securities (within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than an Affiliate of the General Partner or Summit REIT in a
single transaction or in a related series of transactions, by way of merger, share exchange, consolidation or other business combination or purchase
of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision) of more than 50% of the total
voting power of the membership interest of the General Partner or more than 50% of the total voting power of the voting capital stock of Summit
REIT.
“ Code ” means the Internal Revenue Code of 1986, as amended, and as hereafter amended from time to time. Reference to any particular
provision of the Code shall mean that provision in the Code at the date hereof and any successor provision of the Code.
“ Commission ” means the U.S. Securities and Exchange Commission.
“ Common Partnership Unit Distribution ” has the meaning set forth in Section 4.04(a)(ii) hereof.
“ Common Redemption Amount ” means either the Cash Amount or the REIT Shares Amount, as selected by Summit REIT pursuant to
Section 8.04(b) hereof.
-3-
“ Common Unit ” means a Partnership Unit which is designated as a Common Unit of the Partnership.
“ Common Unit Economic Balance ” has the meaning set forth in Section 5.01(g) hereof.
“ Common Unit Redemption Right ” has the meaning set forth in Section 8.04(a) hereof.
“ Common Unit Transaction ” has the meaning set forth in Section 4.05(f) hereof.
“ Constituent Person ” has the meaning set forth in Section 4.05(f) hereof.
“ Conversion Date ” has the meaning set forth in Section 4.05(b) hereof.
“ Conversion Factor ” means a factor of 1.0, as adjusted as provided in this definition and in Section 6.08. The Conversion Factor will be
adjusted in the event that Summit REIT (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to
all holders of its outstanding REIT Shares in REIT Shares, (ii) subdivides its outstanding REIT Shares or (iii) combines its outstanding REIT
Shares into a smaller number of REIT Shares. In each of such events, the Conversion Factor shall be adjusted by multiplying the Conversion
Factor by a fraction, the numerator of which shall be the number of REIT Shares issued and outstanding on the record date for such dividend,
distribution, subdivision or combination (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as
of such time), and the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and
outstanding on such date and, provided further , that in the event that an entity other than an Affiliate of Summit REIT shall become General
Partner pursuant to any merger, consolidation or combination of the General Partner or Summit REIT with or into another entity (the “ Successor
Entity ”), the Conversion Factor shall be adjusted by multiplying the Conversion Factor by the number of shares of the Successor Entity into
which one REIT Share is converted pursuant to such merger, consolidation or combination, determined as of the date of such merger,
consolidation or combination. Any adjustment to the Conversion Factor shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event. If, however, the General Partner receives a Notice of Redemption after the record date, if any,
but prior to the effective date of such event, the Conversion Factor shall be determined as if the General Partner had received the Notice of
Redemption immediately prior to the record date for event.
“ Conversion Notice ” has the meaning set forth in Section 4.05(b) hereof.
“ Conversion Right ” has the meaning set forth in Section 4.05(a) hereof.
“ Defaulting Limited Partner ” means a Limited Partner that has failed to pay any amount owed to the Partnership under a Partnership Loan
within 15 days after demand for payment thereof is made by the Partnership.
“ Distributable Amount ” has the meaning set forth in Section 5.02(d) hereof.
“ Economic Capital Account Balances ” has the meaning set forth in Section 5.01(g) hereof.
-4-
“ Equity Incentive Plan ” means any equity incentive or compensation plan hereafter adopted by the Partnership or Summit REIT, including,
without limitation, Summit REIT’s 2011 Equity Incentive Plan.
“ Event of Bankruptcy ” as to any Person means (i) the filing of a petition for relief as to such Person as debtor or bankrupt under the
Bankruptcy Code of 1978, as amended, or similar provision of law of any jurisdiction (except if such petition is contested by such Person and has
been dismissed within 90 days); (ii) the insolvency or bankruptcy of such Person as finally determined by a court proceeding; (iii) the filing by
such Person of a petition or application to accomplish the same or for the appointment of a receiver or a trustee for such Person or a substantial
part of his assets; or (iv) the commencement of any proceedings relating to such Person as a debtor under any other reorganization, arrangement,
insolvency, adjustment of debt or liquidation law of any jurisdiction, whether now in existence or hereinafter in effect, either by such Person or by
another, provided that if such proceeding is commenced by another, such Person indicates his approval of such proceeding, consents thereto or
acquiesces therein, or such proceeding is contested by such Person and has not been finally dismissed within 90 days.
“ Excepted Holder Limit ” has the meaning set forth in the Articles.
“ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
“ Forced Conversion ” has the meaning set forth in Section 4.05(c) hereof.
“ Forced Conversion Notice ” has the meaning set forth in Section 4.05(c) hereof.
“ General Partner ” means Summit Hotel GP, LLC and any person who becomes a substitute or additional General Partner as provided
herein, and any of their successors as General Partner.
“ General Partner Loan ” means a loan extended by the General Partner to a Defaulting Limited Partner in the form of a payment on a
Partnership Loan by the General Partner to the Partnership on behalf of the Defaulting Limited Partner.
“ General Partnership Interest ” means the Partnership Interest held by the General Partner in its capacity as the general partner of the
Partnership, which Partnership Interest is an interest as a general partner under the Act. The General Partnership Interest will be a number of
Common Units held by the General Partner equal to one-tenth of one percent (0.1%) of all outstanding Partnership Units. All other Partnership
Units owned by the General Partner and any Partnership Units owned by any Affiliate or Subsidiary of the General Partner shall be considered to
constitute a Limited Partnership Interest.
“ Indemnified Party ” has the meaning set forth in Section 8.05(f) hereof.
“ Indemnifying Party ” has the meaning set forth in Section 8.05(f) hereof.
“ Indemnitee ” means (i) any Person made a party to a proceeding by reason of its status as (A) the General Partner or (B) a director of the
General Partner or an officer or employee of the Partnership, the General Partner, Summit REIT or any Subsidiary thereof, and (ii) such other
-5-
Persons (including Affiliates of the General Partner, Summit REIT or the Partnership) as the General Partner may designate from time to time
(whether before or after the event giving rise to potential liability), in its sole and absolute discretion.
“ Independent Director ” means a director of Summit REIT who meets the NYSE requirements for an independent director as set forth from
time to time.
“ Junior Shares ” has the meaning set forth in the definition of “Additional Securities.”
“ Limited Partner ” means any Person named as a Limited Partner on Exhibit A attached hereto, as it may be amended or restated from time
to time, and any Person who becomes a Substitute Limited Partner or any additional Limited Partner, in such Person’s capacity as a Limited
Partner in the Partnership.
“ Limited Partnership Interest ” means a Partnership Interest held by a Limited Partner at any particular time representing a fractional part of
the Partnership Interest of all Limited Partners, and includes any and all benefits to which the holder of such a Limited Partnership Interest may be
entitled as provided in this Agreement and in the Act, together with the obligations of such Limited Partner to comply with all the provisions of
this Agreement and of the Act. Limited Partnership Interests may be expressed as a number of Common Units, LTIP Units or other Partnership
Units.
“ Liquidating Gains ” has the meaning set forth in Section 5.01(g) hereof.
“ LTIP Unit ” means a Partnership Unit which is designated as an LTIP Unit and which has the rights, preferences and other privileges
designated in Section 4.04 hereof and elsewhere in this Agreement in respect of holders of LTIP Units, including both vested LTIP Units and
Unvested LTIP Units. The allocation of LTIP Units among the Partners shall be set forth on Exhibit A as it may be amended or restated from time
to time.
“ LTIP Unitholder ” means a Partner that holds LTIP Units.
“ Loss ” has the meaning set forth in Section 5.01(h) hereof.
“ Majority in Interest ” means Limited Partners holding more than fifty percent (50%) of the Percentage Interests of the Limited Partners.
“ New Securities ” has the meaning set forth in the definition of “Additional Securities”.
“ Notice of Redemption ” means the Notice of Exercise of Common Unit Redemption Right substantially in the form attached as Exhibit B
hereto.
“ NYSE ” means the New York Stock Exchange.
“ Offer ” has the meaning set forth in Section 7.01(c) hereof.
“ Offering ” means the underwritten initial public offering of REIT Shares.
-6-
“ Partner ” means any General Partner or Limited Partner, and “Partners” means the General Partner and the Limited Partners.
“ Partner Nonrecourse Debt Minimum Gain ” has the meaning set forth in Regulations Section 1.704-2(i). A Partner’s share of Partner
Nonrecourse Debt Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(i)(5).
“ Partnership ” has the meaning set forth in the recitals to this Agreement.
“ Partnership Interest ” means an ownership interest in the Partnership held by a Partner, and includes any and all benefits to which the
holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with
the terms and provisions of this Agreement. A Partnership Interest may be expressed as a number of Common Units, LTIP Units or other
Partnership Units.
“ Partnership Loan ” means a loan from the Partnership to the Partner on the day the Partnership pays over the excess of the Withheld
Amount over the Distributable Amount to a taxing authority.
“ Partnership Minimum Gain ” has the meaning set forth in Regulations Section 1.704-2(d). In accordance with Regulations Section 1.704-2
(d), the amount of Partnership Minimum Gain is determined by first computing, for each Partnership nonrecourse liability, any gain the
Partnership would realize if it disposed of the property subject to that liability for no consideration other than full satisfaction of the liability, and
then aggregating the separately computed gains. A Partner’s share of Partnership Minimum Gain shall be determined in accordance with
Regulations Section 1.704-2(g)(1).
“ Partnership Record Date ” means the record date established by the General Partner for the distribution of cash pursuant to Section 5.02
hereof, which record date shall be the same as the record date established by Summit REIT for a distribution to its stockholders of some or all of
its portion of such distribution.
“ Partnership Unit ” means a fractional, undivided share of the Partnership Interests of all Partners issued hereunder, and includes Common
Units, LTIP Units and any other class or series of Partnership Units that may be established after the date hereof in accordance with the terms
hereof. The number of Partnership Units outstanding and the Percentage Interests represented by such Partnership Units are set forth on Exhibit A
hereto, as it may be amended or restated from time to time.
“ Partnership Unit Designation ” has the meaning set forth in Section 4.02(a)(i) hereof.
“ Percentage Interest ” means the percentage determined by dividing the number of Partnership Units of a Partner by the sum of the number
of Partnership Units of all Partners.
“ Person ” means any individual, partnership, corporation, limited liability company, joint venture, trust or other entity.
-7-
“ Preferred Shares ” has the meaning set forth in the definition of “Additional Securities”.
“ Profit ” has the meaning set forth in Section 5.01(h) hereof.
“ Property ” means any property or other investment in which the Partnership, directly or indirectly, holds an ownership interest.
“ Redeeming Limited Partner ” has the meaning set forth in Section 8.04(a) hereof.
“ Redemption Shares ” has the meaning set forth in Section 8.05(a) hereof.
“ Regulations ” means the Federal Income Tax Regulations issued under the Code, as amended and as subsequently amended from time to
time. Reference to any particular provision of the Regulations shall mean that provision of the Regulations on the date hereof and any successor
provision of the Regulations.
“ REIT ” means a real estate investment trust under Sections 856 through 860 of the Code.
“ REIT Expenses ” means (i) costs and expenses relating to the formation and continuity of existence and operation of Summit REIT and any
Subsidiaries thereof (which Subsidiaries shall, for purposes hereof, be included within the definition of Summit REIT), including taxes, fees and
assessments associated therewith, any and all costs, expenses or fees payable to any director, officer or employee of Summit REIT, (ii) costs and
expenses relating to any public offering and registration, or private offering, of securities by Summit REIT, and all statements, reports, fees and
expenses incidental thereto, including, without limitation, underwriting discounts and selling commissions applicable to any such offering of
securities, and any costs and expenses associated with any claims made by any holders of such securities or any underwriters or placement agents
thereof, (iii) costs and expenses associated with any repurchase of any securities by Summit REIT, (iv) costs and expenses associated with the
preparation and filing of any periodic or other reports and communications by Summit REIT under federal, state or local laws or regulations,
including filings with the Commission, (v) costs and expenses associated with compliance by Summit REIT with laws, rules and regulations
promulgated by any regulatory body, including the Commission and any securities exchange, (vi) costs and expenses associated with any health,
dental, vision, disability, life insurance, 401(k) plan, incentive plan, bonus plan or other plan providing for compensation or benefits for the
employees of Summit REIT, (vii) costs and expenses incurred by Summit REIT relating to any issuance or redemption of Partnership Interests and
(viii) all other operating or administrative costs of Summit REIT incurred in the ordinary course of its business on behalf of or related to the
Partnership.
“ REIT Shares ” means shares of common stock, par value $0.01 per share, of Summit REIT (or Successor Entity, as the case may be).
“ REIT Shares Amount ” means the number of REIT Shares equal to the product of (X) the number of Common Units offered for redemption
by a Redeeming Limited Partner, multiplied by (Y) the Conversion Factor as adjusted to and including the Specified Redemption Date; provided
that in the event Summit REIT issues to all holders of REIT Shares rights,
-8-
options, warrants or convertible or exchangeable securities entitling the holders of REIT Shares to subscribe for or purchase additional REIT
Shares, or any other securities or property (collectively, the “ Rights ”), and such Rights have not expired at the Specified Redemption Date, then
the REIT Shares Amount shall also include such Rights issuable to a holder of the REIT Shares Amount on the record date fixed for purposes of
determining the holders of REIT Shares entitled to Rights.
“ Restriction Notice ” has the meaning set forth in Section 8.04(f) hereof.
“ Rights ” has the meaning set forth in the definition of “REIT Shares Amount” herein.
“ Rule 144 ” has the meaning set forth in Section 8.05(c) hereof.
“ S-3 Eligible Date ” has the meaning set forth in Section 8.05(a) hereof.
“ Safe Harbor Election ” has the meaning set forth in Section 11.01 hereof.
“ Safe Harbor Interest ” has the meaning set forth in Section 11.01 hereof.
“ Securities Act ” means the Securities Act of 1933, as amended.
“ Service ” means the Internal Revenue Service.
“ Stock Ownership Limit ” has the meaning set forth in the Articles.
“ Specified Redemption Date ” means the first business day of the calendar quarter that is at least 60 calendar days after the receipt by the
General Partner of a Notice of Redemption.
“ Subsidiary ” means, with respect to any Person, any corporation or other entity of which a majority of (i) the voting power of the voting
equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person.
“ Subsidiary Partnership ” means any partnership or limited liability company in which the General Partner, Summit REIT, the Partnership,
or a wholly owned Subsidiary of the General Partner, Summit REIT or the Partnership owns a partnership or limited liability company interest.
“ Substitute Limited Partner ” means any Person admitted to the Partnership as a Limited Partner pursuant to Section 9.03 hereof.
“ Successor Entity ” has the meaning set forth in the definition of “Conversion Factor” herein.
“ Summit REIT ” has the meaning set forth in the recitals to this Agreement.
“ Survivor ” has the meaning set forth in Section 7.01(d) hereof.
“ Tax Matters Partner ” has the meaning set forth within Section 6231(a)(7) of the Code.
-9-
“ Trading Day ” means a day on which the principal national securities exchange on which a security is listed or admitted to trading is open
for the transaction of business or, if a security is not listed or admitted to trading on any national securities exchange, shall mean any day other
than a Saturday, a Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to
close.
“ Transaction ” has the meaning set forth in Section 7.01(c) hereof.
“ Transfer ” has the meaning set forth in Section 9.02(a) hereof.
“ TRS ” means a taxable REIT subsidiary (as defined in Section 856(l) of the Code) of Summit REIT.
“ Unvested LTIP Units ” has the meaning set forth in Section 4.04(c) hereof.
“ Value ” means, with respect to any security, the average of the daily market prices of such security for the ten consecutive Trading Days
immediately preceding the date of such valuation. The market price for each such Trading Day shall be: (i) if the security is listed or admitted to
trading on the NYSE or any other national securities exchange, the last reported sale price, regular way, on such day, or if no such sale takes place
on such day, the average of the closing bid and asked prices, regular way, on such day, (ii) if the security is not listed or admitted to trading on the
NYSE or any other national securities exchange, the last reported sale price on such day or, if no sale takes place on such day, the average of the
closing bid and asked prices on such day, as reported by a reliable quotation source designated by Summit REIT, or (iii) if the security is not listed
or admitted to trading on the NYSE or any national securities exchange and no such last reported sale price or closing bid and asked prices are
available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by Summit
REIT, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent
day (not more than ten days prior to the date in question) for which prices have been so reported; provided that if there are no bid and asked prices
reported during the ten days prior to the date in question, the value of the security shall be determined by Summit REIT acting in good faith on the
basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the security includes any
additional rights (including any Rights), then the value of such rights shall be determined by Summit REIT acting in good faith on the basis of
such quotations and other information as it considers, in its reasonable judgment, appropriate.
“ Vested LTIP Units ” has the meaning set forth in Section 4.04(c) hereof.
“ Vesting Agreement ” means each or any, as the context implies, agreement or instrument entered into by an LTIP Unitholder upon
acceptance of an award of LTIP Units under an Equity Incentive Plan.
“ Withheld Amount ” means any amount required to be withheld by the Partnership to pay over to any taxing authority as a result of any
allocation or distribution of income to a Partner.
-10-
ARTICLE II
FORMATION OF THE PARTNERSHIP
2.01 Formation of the Partnership . The Partnership was formed as a limited partnership pursuant to the provisions of the Act and upon the
terms and conditions set forth in this Agreement. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and
administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property
for all purposes.
2.02 Name . The Name of the Partnership shall be “Summit Hotel OP, LP” and the Partnership’s business may be conducted under any other
name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words “Limited
Partnership,” “LP,” “L.P.” or “Ltd.” or similar words or letters shall be included in the Partnership’s name where necessary for the purposes of
complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the
Partnership at any time and from time to time and shall notify the Partners of such change in the next regular communication to the Partners;
provided, however, failure to so notify the Partners shall not invalidate such change or the authority granted hereunder.
2.03 Registered Office and Agent; Principal Office . The registered office of the Partnership in the State of Delaware is located at
Corporation Trust Center, 1209 Orange Street, Wilmington, DE 19801, and the registered agent for service of process on the Partnership in the
State of Delaware at such registered office is The Corporation Trust Company, a Delaware corporation. The principal office of the Partnership is
located at 2701 South Minnesota Avenue, Suite 6, Sioux Falls, South Dakota 57105, or such other place as the General Partner may from time to
time designate. Upon such a change of the principal office of the Partnership, the General Partner shall notify the Partners of such change in the
next regular communication to the Partners; provided, however, failure to so notify the Partners shall not invalidate such change or the authority
granted hereunder. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General
Partner deems necessary or desirable.
2.04 Term and Dissolution .
(a) The term of the Partnership shall continue in full force and effect until dissolved upon the first to occur of any of the following events:
(i) the occurrence of an Event of Bankruptcy as to a General Partner or the dissolution, death, removal or withdrawal of a General Partner
unless the business of the Partnership is continued pursuant to Section 7.03(b) hereof; provided that if a General Partner is on the date of such
occurrence a partnership, the dissolution of such General Partner as a result of the dissolution, death, withdrawal, removal or Event of Bankruptcy
of a partner in such partnership shall not be an event of dissolution of the Partnership if the business of such General Partner is continued by the
remaining partner or partners, either alone or with additional partners, and such General Partner and such partners comply with any other
applicable requirements of this Agreement;
-11-
(ii) the passage of 90 days after the sale or other disposition of all or substantially all of the assets of the Partnership ( provided that if the
Partnership receives an installment obligation as consideration for such sale or other disposition, the Partnership shall continue, unless sooner
dissolved under the provisions of this Agreement, until such time as such installment obligations are paid in full);
(iii) the redemption of all Limited Partnership Interests (other than any Limited Partnership Interests held by the General Partner), unless the
General Partner determines to continue the term of the Partnership by the admission of one or more additional Limited Partners; or
(iv) the dissolution of the Partnership upon election by the General Partner.
(b) Upon dissolution of the Partnership (unless the business of the Partnership is continued pursuant to Section 7.03(b) hereof), the General
Partner (or its trustee, receiver, successor or legal representative) shall amend or cancel the Certificate and liquidate the Partnership’s assets and
apply and distribute the proceeds thereof in accordance with Section 5.06 hereof. Notwithstanding the foregoing, the liquidating General Partner
may either (i) defer liquidation of, or withhold from distribution for a reasonable time, any assets of the Partnership (including those necessary to
satisfy the Partnership’s debts and obligations), or (ii) distribute the assets to the Partners in kind.
2.05 Filing of Certificate and Perfection of Limited Partnership . The General Partner shall execute, acknowledge, record and file at the
expense of the Partnership the Certificate and any and all amendments thereto and all requisite fictitious name statements and notices in such
places and jurisdictions as may be necessary to cause the Partnership to be treated as a limited partnership under, and otherwise to comply with,
the laws of each state or other jurisdiction in which the Partnership conducts business.
2.06 Certificates Describing Partnership Units . At the request of a Limited Partner, the General Partner, at its option, may issue a certificate
summarizing the terms of such Limited Partner’s interest in the Partnership, including the class or series and number of Partnership Units owned
and the Percentage Interest represented by such Partnership Units as of the date of such certificate. Any such certificate (i) shall be in form and
substance as determined by the General Partner, (ii) shall not be negotiable and (iii) shall bear a legend to the following effect:
THIS CERTIFICATE IS NOT NEGOTIABLE. THE PARTNERSHIP UNITS REPRESENTED BY THIS CERTIFICATE ARE GOVERNED
BY AND TRANSFERABLE ONLY IN ACCORDANCE WITH (A) THE PROVISIONS OF THE AGREEMENT OF LIMITED
PARTNERSHIP OF SUMMIT HOTEL OP, LP, AS AMENDED, SUPPLEMENTED OR RESTATED FROM TIME TO TIME, AND (B) ANY
APPLICABLE FEDERAL OR STATE SECURITIES OR BLUE SKY LAWS.
-12-
ARTICLE III
BUSINESS OF THE PARTNERSHIP
The purpose and nature of the business to be conducted by the Partnership is (i) to conduct any business that may be lawfully conducted by a
limited partnership organized pursuant to the Act, provided , however , that such business shall be limited to and conducted in such a manner as to
permit Summit REIT at all times to qualify as a REIT, unless Summit REIT otherwise ceases to, or the Board of Directors determines, pursuant to
Section 5.7 of the Articles, that Summit REIT shall no longer, qualify as a REIT, (ii) to enter into any partnership, joint venture or other similar
arrangement to engage in any of the foregoing or the ownership of interests in any entity engaged in any of the foregoing and (iii) to do anything
necessary or incidental to the foregoing. In connection with the foregoing, and without limiting Summit REIT’s right in its sole and absolute
discretion to cease qualifying as a REIT, the Partners acknowledge that the status of Summit REIT as a REIT and the avoidance of income and
excise taxes on Summit REIT inures to the benefit of all the Partners and not solely to the General Partner or its Affiliates. Notwithstanding the
foregoing, the Limited Partners agree that Summit REIT may terminate or revoke its status as a REIT under the Code at any time. Summit REIT
shall also be empowered to do any and all acts and things necessary or prudent to ensure that the Partnership will not be classified as a “publicly
traded partnership” taxable as a corporation for purposes of Section 7704 of the Code.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ACCOUNTS
4.01 Capital Contributions . The General Partner and each Limited Partner has made a capital contribution to the Partnership in exchange for
the Partnership Units set forth opposite such Partner’s name on Exhibit A hereto, as it may be amended or restated from time to time by the
General Partner to the extent necessary to reflect accurately sales, exchanges or other Transfers, redemptions, Capital Contributions, the issuance
of additional Partnership Units or similar events having an effect on a Partner’s ownership of Partnership Units.
4.02 Additional Capital Contributions and Issuances of Additional Partnership Units . Except as provided in this Section 4.02 or in
Section 4.03 hereof, the Partners shall have no right or obligation to make any additional Capital Contributions or loans to the Partnership. The
General Partner may contribute additional capital to the Partnership, from time to time, and receive additional Partnership Interests, in the form of
Partnership Units, in respect thereof, in the manner contemplated in this Section 4.02.
(a) Issuances of Additional Partnership Units .
(i) General . As of the effective date of this Agreement, the Partnership shall have two classes of Partnership Units, entitled “Common
Units” and “LTIP Units.” The General Partner is hereby authorized to cause the Partnership to issue such additional Partnership Interests, in the
form of Partnership Units, for any Partnership purpose at any time or from time to time to the Partners (including the General Partner) or to other
Persons for such consideration and on such terms and conditions as shall be established by the General Partner in its sole and absolute discretion,
all without the
-13-
approval of any Limited Partners. The General Partner’s determination that consideration is adequate shall be conclusive insofar as the adequacy
of consideration relates to whether the Partnership Units are validly issued and fully paid. Any additional Partnership Units issued thereby may be
issued in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional
or other special rights, powers and duties, including rights, powers and duties senior to the then-outstanding Partnership Units held by the Limited
Partners, all as shall be determined by the General Partner in its sole and absolute discretion and without the approval of any Limited Partner,
subject to Delaware law that cannot be preempted by the terms hereof and as set forth in a written document hereafter attached to and made an
exhibit to this Agreement (each, a “ Partnership Unit Designation ”), including, without limitation, (i) the allocations of items of Partnership
income, gain, loss, deduction and credit to each such class or series of Partnership Units; (ii) the right of each such class or series of Partnership
Units to share in Partnership distributions; and (iii) the rights of each such class or series of Partnership Units upon dissolution and liquidation of
the Partnership; provided , however , that no additional Partnership Units shall be issued to the General Partner or Summit REIT (or any direct or
indirect wholly owned Subsidiary of the General Partner or Summit REIT) unless:
(1) (A) the additional Partnership Units are issued in connection with an issuance of REIT Shares or other capital stock of, or other interests
in, Summit REIT, which REIT Shares, capital stock or other interests have designations, preferences and other rights, all such that the economic
interests are substantially similar to the designations, preferences and other rights of the additional Partnership Units issued to the General Partner
or Summit REIT (or any direct or indirect wholly owned Subsidiary of the General Partner or Summit REIT) by the Partnership in accordance
with this Section 4.02 and (B) the General Partner or Summit REIT (or any direct or indirect wholly owned Subsidiary of the General Partner or
Summit REIT) shall make a Capital Contribution to the Partnership in an amount equal to the cash consideration received by Summit REIT from
the issuance of such REIT Shares, capital stock or other interests in Summit REIT;
(2) (A) the additional Partnership Units are issued in connection with an issuance of REIT Shares or other capital stock of, or other interests
in, Summit REIT pursuant to a taxable share dividend declared by Summit REIT, which REIT Shares, capital stock or interests have designations,
preferences and other rights, all such that the economic interests are substantially similar to the designations, preferences and other rights of the
additional Partnership Units issued to the General Partner or Summit REIT (or any direct or indirect wholly owned Subsidiary of the General
Partner or Summit REIT) by the Partnership in accordance with this Section 4.02, (B) if Summit REIT allows the holders of its REIT Shares to
elect whether to receive such dividend in REIT Shares or other capital stock of or, other interests in Summit REIT or cash, the Partnership will
give the Limited Partners (excluding the General Partner, Summit REIT or any direct or indirect Subsidiary of the General Partner or Summit
REIT) the same election to elect to receive (I) Partnership Units or cash or, (II) at the
-14-
election of Summit REIT, REIT Shares, capital stock or other interests in Summit REIT or cash, and (C) if the Partnership issues additional
Partnership Units pursuant to this Section 4.02(a)(i)(2), then an amount of income equal to the value of the Partnership Units received will be
allocated to those holders of Common Units that elect to receive additional Partnership Units;
(3) the additional Partnership Units are issued in exchange for property owned by the General Partner or Summit REIT (or any direct or
indirect wholly owned Subsidiary of the General Partner or Summit REIT) with a fair market value, as determined by the General Partner, in good
faith, equal to the value of the Partnership Units; or
(4) the additional Partnership Units are issued to all Partners in proportion to their respective Percentage Interests.
Without limiting the foregoing, the General Partner is expressly authorized to cause the Partnership to issue Partnership Units for less than fair
market value, so long as the General Partner concludes in good faith that such issuance is in the interests of the Partnership. Upon the issuance of
any additional Partnership Units, the General Partner shall amend Exhibit A as appropriate to reflect such issuance.
(ii) Upon Issuance of Additional Securities . Summit REIT shall not issue any Additional Securities (other than REIT Shares issued in
connection with an exchange pursuant to Section 8.04 hereof or REIT Shares or other capital stock of or other interests in Summit REIT issued in
connection with a taxable stock dividend as described in Section 4.02(a)(i)(2) hereof) or Rights other than to all holders of REIT Shares, Preferred
Shares, Junior Shares, or New Securities, as the case may be, unless (A) the General Partner shall cause the Partnership to issue to the General
Partner or Summit REIT (or any direct or indirect wholly owned Subsidiary of the General Partner or Summit REIT) Partnership Units or Rights
having designations, preferences and other rights, all such that the economic interests are substantially similar to those of the Additional
Securities, and (B) Summit REIT, directly or through the General Partner (or any direct or indirect wholly owned Subsidiary of the General
Partner or another direct or indirect wholly owned Subsidiary of Summit REIT), contributes the proceeds from the issuance of such Additional
Securities and from any exercise of Rights contained in such Additional Securities to the Partnership; provided , however , that Summit REIT is
allowed to issue Additional Securities in connection with an acquisition of Property to be held directly by Summit REIT, but if and only if, such
direct acquisition and issuance of Additional Securities have been approved by a majority of the Independent Directors. Without limiting the
foregoing, Summit REIT is expressly authorized to issue Additional Securities for less than fair market value, and the General Partner is
authorized to cause the Partnership to issue to the General Partner or Summit REIT (or any direct or indirect wholly owned Subsidiary of the
General Partner or Summit REIT) corresponding Partnership Units, so long as (x) the General Partner concludes in good faith that such issuance is
in the best interests of Summit REIT, the General Partner and the Partnership and (y) Summit REIT, directly or through the General Partner (or
any direct or indirect wholly owned Subsidiary of the General Partner or another direct or indirect wholly
-15-
owned Subsidiary of Summit REIT), contributes all proceeds from such issuance to the Partnership, including without limitation, the issuance of
REIT Shares and corresponding Partnership Units pursuant to a stock purchase plan providing for purchases of REIT Shares at a discount from
fair market value or pursuant to stock awards, including stock options that have an exercise price that is less than the fair market value of the REIT
Shares, either at the time of issuance or at the time of exercise, and restricted or other stock awards approved by the Board of Directors. For
example, in the event Summit REIT issues REIT Shares for a cash purchase price and Summit REIT, directly or through the General Partner (or
any direct or indirect wholly owned Subsidiary of the General Partner or another direct or indirect wholly owned Subsidiary of Summit REIT),
contributes all of the proceeds of such issuance to the Partnership as required hereunder, the General Partner or Summit REIT (or any direct or
indirect wholly owned Subsidiary of the General Partner or Summit REIT) shall be issued a number of additional Partnership Units equal to the
product of (A) the number of such REIT Shares issued by Summit REIT, the proceeds of which were so contributed, multiplied by (B) a fraction,
the numerator of which is 100%, and the denominator of which is the Conversion Factor in effect on the date of such contribution.
(b) Certain Contributions of Proceeds of Issuance of REIT Shares . In connection with any and all issuances of REIT Shares, Summit
REIT, directly or through the General Partner (or any direct or indirect wholly owned Subsidiary of the General Partner or another direct or
indirect wholly owned Subsidiary of Summit REIT), shall make Capital Contributions to the Partnership of the proceeds therefrom, provided that
if the proceeds actually received and contributed by Summit REIT, directly or through the General Partner (or any direct or indirect wholly owned
Subsidiary of the General Partner or another direct or indirect wholly owned Subsidiary of Summit REIT), are less than the gross proceeds of such
issuance as a result of any underwriter’s discount, commissions, placement fees or other expenses paid or incurred in connection with such
issuance, then Summit REIT, directly or through the General Partner (or any direct or indirect wholly owned Subsidiary of the General Partner or
another direct or indirect wholly owned Subsidiary of Summit REIT), shall be deemed to have made a Capital Contribution to the Partnership in
the amount equal to the sum of the net proceeds of such issuance plus the amount of such underwriter’s discount, commissions, placement fees or
other expenses paid by Summit REIT, and the Partnership shall be deemed simultaneously to have reimbursed such discount, commissions,
placement fees and expenses as an Administrative Expense for the benefit of the Partnership for purposes of Section 6.05(b).
(c) Repurchases of Summit REIT Securities . If Summit REIT shall repurchase shares of any class or series of its capital stock, the purchase
price thereof and all costs incurred in connection with such repurchase shall be reimbursed to Summit REIT by the Partnership pursuant to
Section 6.05 hereof and the General Partner shall cause the Partnership to redeem an equivalent number of Partnership Units of the appropriate
class or series held by Summit REIT (or any direct or indirect wholly owned Subsidiary of Summit REIT) (which, in the case of REIT Shares,
shall be a number equal to the quotient of the number of such REIT Shares divided by the Conversion Factor).
4.03 Additional Funding . If the General Partner determines that it is in the best interests of the Partnership to provide for additional
Partnership funds (“ Additional Funds ”) for
-16-
any Partnership purpose, the General Partner may (i) cause the Partnership to obtain such funds from outside borrowings, or (ii) elect to have the
General Partner or any of its Affiliates provide such Additional Funds to the Partnership through loans or otherwise.
4.04 LTIP Units .
(a) Issuance of LTIP Units . Notwithstanding anything contained herein to the contrary, the General Partner may from time to time issue
LTIP Units to Persons who provide services to the Partnership, the General Partner or Summit REIT for such consideration as the General Partner
may determine to be appropriate, and admit such Persons as Limited Partners. Subject to the following provisions of this Section 4.04 and the
special provisions of Sections 4.05 and 5.01(g) hereof, LTIP Units shall be treated as Common Units, with all of the rights, privileges and
obligations attendant thereto. For purposes of computing the Partners’ Percentage Interests, holders of LTIP Units shall be treated as Common
Unit holders and LTIP Units shall be treated as Common Units. In particular, the Partnership shall maintain at all times a one-to-one
correspondence between LTIP Units and Common Units for conversion, distribution and other purposes, including, without limitation, complying
with the following procedures:
(i) If an Adjustment Event (as defined below) occurs, then the General Partner shall make a corresponding adjustment to the LTIP Units to
maintain a one-for-one conversion and economic equivalence ratio between Common Units and LTIP Units. The following shall be “ Adjustment
Events ”: (A) the Partnership makes a distribution on all outstanding Common Units in Partnership Units, (B) the Partnership subdivides the
outstanding Common Units into a greater number of units or combines the outstanding Common Units into a smaller number of units, or (C) the
Partnership issues any Partnership Units in exchange for its outstanding Common Units by way of a reclassification or recapitalization of its
Common Units. If more than one Adjustment Event occurs, the adjustment to the LTIP Units need be made only once using a single formula that
takes into account each and every Adjustment Event as if all Adjustment Events occurred simultaneously. For the avoidance of doubt, the
following shall not be Adjustment Events: (x) the issuance of Partnership Units in a financing, reorganization, acquisition or other similar business
Common Unit Transaction, (y) the issuance of Partnership Units pursuant to any employee benefit or compensation plan or distribution
reinvestment plan or (z) the issuance of any Partnership Units to the General Partner or Summit REIT (or any direct or indirect wholly owned
Subsidiary of the General Partner or Summit REIT) in respect of a capital contribution to the Partnership of proceeds from the sale of Additional
Securities by Summit REIT. If the Partnership takes an action affecting the Common Units other than actions specifically described above as
“Adjustment Events” and in the opinion of the General Partner such action would require an adjustment to the LTIP Units to maintain the one-to-
one correspondence described above, the General Partner shall have the right to make such adjustment to the LTIP Units, to the extent permitted
by law and by any Equity Incentive Plan and Vesting Agreement, in such manner and at such time as the General Partner, in its sole discretion,
may determine to be appropriate under the circumstances. If an adjustment is made to the LTIP Units, as herein provided, the Partnership shall
promptly file in the books and records of the Partnership an officer’s certificate setting forth such adjustment and a brief statement of the facts
requiring such adjustment, which certificate shall be conclusive
-17-
evidence of the correctness of such adjustment absent manifest error. Promptly after filing of such certificate, the Partnership shall deliver a notice
to each LTIP Unitholder setting forth the adjustment to his or her LTIP Units and the effective date of such adjustment; provided, however, the
failure to deliver such notice shall not invalidate the adjustment or the authority granted hereunder, and
(ii) The LTIP Unitholders shall, when, as and if authorized and declared by the General Partner out of assets legally available for that
purpose, be entitled to receive distributions in an amount per LTIP Unit equal to the distributions per Common Unit (the “ Common Partnership
Unit Distribution ”), paid to holders of Common Units on such Partnership Record Date established by the General Partner with respect to such
distribution. So long as any LTIP Units are outstanding, no distributions (whether in cash or in kind) shall be authorized, declared or paid on
Common Units, unless equal distributions have been or contemporaneously are authorized, declared and paid on the LTIP Units.
(b) Priority . Subject to the provisions of this Section 4.04, the special provisions of Sections 4.05 and 5.01(g) hereof and any Vesting
Agreement, the LTIP Units shall rank pari passu with the Common Units as to the payment of regular and special periodic or other distributions
and distribution of assets upon liquidation, dissolution or winding up. As to the payment of distributions and as to distribution of assets upon
liquidation, dissolution or winding up, any class or series of Partnership Units which by its terms specifies that it shall rank junior to, on a parity
with, or senior to the Common Units shall also rank junior to, or pari passu with, or senior to, as the case may be, the LTIP Units. Subject to the
terms of any Vesting Agreement, an LTIP Unitholder shall be entitled to transfer his or her LTIP Units to the same extent, and subject to the same
restrictions as holders of Common Units are entitled to transfer their Common Units pursuant to Article IX.
(c) Special Provisions . LTIP Units shall be subject to the following special provisions:
(i) Vesting Agreements . LTIP Units may, in the sole discretion of the General Partner, be issued subject to vesting, forfeiture and additional
restrictions on transfer pursuant to the terms of a Vesting Agreement. The terms of any Vesting Agreement may be modified by the General
Partner from time to time in its sole discretion, subject to any restrictions on amendment imposed by the relevant Vesting Agreement or by the
Equity Incentive Plan, if applicable. LTIP Units that have vested under the terms of a Vesting Agreement are referred to as “ Vested LTIP Units
”; all other LTIP Units shall be treated as “ Unvested LTIP Units .”
(ii) Forfeiture . Unless otherwise specified in the Vesting Agreement, upon the occurrence of any event specified in a Vesting Agreement as
resulting in either the right of the Partnership or the General Partner to repurchase LTIP Units at a specified purchase price or some other
forfeiture of any LTIP Units, then if the Partnership or the General Partner exercises such right to repurchase or forfeiture in accordance with the
applicable Vesting Agreement, the relevant LTIP Units shall immediately, and without any further action, be treated as cancelled and no longer
outstanding for any purpose.
-18-
Unless otherwise specified in the Vesting Agreement, no consideration or other payment shall be due with respect to any LTIP Units that have
been forfeited, other than any distributions declared with respect to a Partnership Record Date prior to the effective date of the forfeiture. In
connection with any repurchase or forfeiture of LTIP Units, the balance of the portion of the Capital Account of the LTIP Unitholder that is
attributable to all of his or her LTIP Units shall be reduced by the amount, if any, by which it exceeds the target balance contemplated by
Section 5.01(g) hereof, calculated with respect to the LTIP Unitholder’s remaining LTIP Units, if any.
(iii) Allocations . LTIP Unitholders shall be entitled to certain special allocations of gain under Section 5.01(g) hereof.
(iv) Redemption . The Common Unit Redemption Right provided to Limited Partners under Section 8.04 hereof shall not apply with respect
to LTIP Units unless and until they are converted to Common Units as provided in clause (v) below and Section 4.05 hereof.
(v) Conversion to Common Units . Vested LTIP Units are eligible to be converted into Common Units in accordance with Section 4.05
hereof.
(d) Voting . LTIP Unitholders shall (a) have the same voting rights as the holders of Common Units, with all Vested LTIP Units and
Unvested LTIP Units voting as a single class with the Common Units and having one vote per LTIP Unit; and (b) have the additional voting rights
that are expressly set forth below. So long as any LTIP Units remain outstanding, the Partnership shall not, without the affirmative vote of the
holders of a majority of the LTIP Units (Vested LTIP Units and Unvested LTIP Units) outstanding at the time, given in person or by proxy, either
in writing or at a meeting (voting separately as a class), amend, alter or repeal, whether by merger, consolidation or otherwise, the provisions of
this Agreement applicable to LTIP Units so as to materially and adversely affect (as determined in good faith by the General Partner) any right,
privilege or voting power of the LTIP Units or the LTIP Unitholders as such, unless such amendment, alteration, or repeal affects equally, ratably
and proportionately the rights, privileges and voting powers of the holders of Common Units; but subject, in any event, to the following
provisions:
(i) With respect to any Common Unit Transaction (as defined in Section 4.05(f) hereof), so long as the LTIP Units are treated in accordance
with Section 4.05(f) hereof, the consummation of such Common Unit Transaction shall not be deemed to materially and adversely affect such
rights, preferences, privileges or voting powers of the LTIP Units or the LTIP Unitholders as such; and
(ii) Any creation or issuance of any Partnership Units or of any class or series of Partnership Interest including without limitation additional
Common Units or LTIP Units, whether ranking senior to, junior to, or on a parity with the LTIP Units with respect to distributions and the
distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers of the LTIP Units or the LTIP Unitholders as such.
-19-
The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be
required will be effected, all outstanding LTIP Units shall have been converted into Common Units.
4.05 Conversion of LTIP Units .
(a) Subject to the provisions of this Section 4.05, an LTIP Unitholder shall have the right (the “ Conversion Right ”), at such holder’s
option, at any time to convert all or a portion of such holder’s Vested LTIP Units into Common Units; provided, however , that a holder may not
exercise the Conversion Right for less than 1,000 Vested LTIP Units or, if such holder holds less than 1,000 Vested LTIP Units, all of the Vested
LTIP Units held by such holder. LTIP Unitholders shall not have the right to convert Unvested LTIP Units into Common Units until they become
Vested LTIP Units; provided , however , that when an LTIP Unitholder is notified of the expected occurrence of an event that will cause such
LTIP Unitholder’s Unvested LTIP Units to become Vested LTIP Units, such LTIP Unitholder may give the Partnership a Conversion Notice
conditioned upon and effective as of the time of vesting and such Conversion Notice, unless subsequently revoked by the LTIP Unitholder, shall
be accepted by the Partnership subject to such condition. The General Partner shall have the right at any time to cause a conversion of Vested
LTIP Units into Common Units. In all cases, the conversion of any LTIP Units into Common Units shall be subject to the conditions and
procedures set forth in this Section 4.05.
(b) A holder of Vested LTIP Units may convert such LTIP Units into an equal number of fully paid and non-assessable Common Units,
giving effect to all adjustments (if any) made pursuant to Section 4.04 hereof. Notwithstanding the foregoing, in no event may a holder of Vested
LTIP Units convert a number of Vested LTIP Units that exceeds (x) the Economic Capital Account Balance of such Limited Partner, to the extent
attributable to its ownership of LTIP Units, divided by (y) the Common Unit Economic Balance, in each case as determined as of the effective
date of conversion (the “ Capital Account Limitation ”).
In order to exercise the Conversion Right, an LTIP Unitholder shall deliver a notice (a “ Conversion Notice ”) in the form attached as
Exhibit D to the Partnership (with a copy to the General Partner) not less than ten nor more than 60 days prior to a date (the “ Conversion Date ”)
specified in such Conversion Notice; provided , however , that if the General Partner has not given to the LTIP Unitholders notice of a proposed or
upcoming Common Unit Transaction (as defined in Section 4.05(f) hereof) at least 30 days prior to the effective date of such Common Unit
Transaction, then LTIP Unitholders shall have the right to deliver a Conversion Notice until the earlier of (x) the tenth day after such notice from
the General Partner of a Common Unit Transaction or (y) the third Trading Day immediately preceding the effective date of such Common Unit
Transaction. A Conversion Notice shall be provided in the manner provided in Section 12.01 hereof. Each LTIP Unitholder covenants and agrees
with the Partnership that all Vested LTIP Units to be converted pursuant to this Section 4.05(b) shall be free and clear of all liens. Notwithstanding
anything herein to the contrary, a holder of LTIP Units may deliver a Notice of Redemption pursuant to Section 8.04(a) hereof relating to those
Common Units that will be issued to such holder upon conversion of such LTIP Units into Common Units in advance of the Conversion Date;
provided , however , that the redemption of such Common Units by the Partnership shall in no event take place until after the Conversion Date.
For clarity, it is noted
-20-
that the objective of this paragraph is to put an LTIP Unitholder in a position where, if such holder so wishes, the Common Units into which such
holder’s Vested LTIP Units will be converted can be tendered to the Partnership for redemption simultaneously with such conversion, with the
further consequence that, if Summit REIT elects to assume the Partnership’s redemption obligation with respect to such Common Units under
Section 8.04(b) hereof by delivering to such holder the REIT Shares Amount, then such holder can have the REIT Shares Amount issued to such
holder simultaneously with the conversion of such holder’s Vested LTIP Units into Common Units. The General Partner and LTIP Unitholder
shall reasonably cooperate with each other to coordinate the timing of the events described in the foregoing sentence.
(c) The Partnership, at any time at the election of the General Partner, may cause any number of Vested LTIP Units held by an LTIP
Unitholder to be converted (a “ Forced Conversion ”) into an equal number of Common Units, giving effect to all adjustments (if any) made
pursuant to Section 4.04 hereof; provided , however , that the Partnership may not cause Forced Conversion of any LTIP Units that would not at
the time be eligible for conversion at the option of such LTIP Unitholder pursuant to Section 4.05(b) hereof. In order to exercise its right of Forced
Conversion, the Partnership shall deliver a notice (a “ Forced Conversion Notice ”) in the form attached as Exhibit E to the applicable LTIP
Unitholder not less than ten nor more than 60 days prior to the Conversion Date specified in such Forced Conversion Notice. A Forced
Conversion Notice shall be provided in the manner provided in Section 12.01 hereof and shall be revocable by the General Partner at any time
prior to the Forced Conversion.
(d) A conversion of Vested LTIP Units for which the holder thereof has given a Conversion Notice or the Partnership has given a Forced
Conversion Notice shall occur automatically after the close of business on the applicable Conversion Date without any action on the part of such
LTIP Unitholder, as of which time such LTIP Unitholder shall be credited on the books and records of the Partnership with the issuance as of the
opening of business on the next day of the number of Common Units issuable upon such conversion. After the conversion of LTIP Units as
aforesaid, the Partnership shall deliver to such LTIP Unitholder, upon his or her written request, a certificate of the General Partner certifying the
number of Common Units and remaining LTIP Units, if any, held by such person immediately after such conversion. The Assignee of any Limited
Partner pursuant to Article IX hereof may exercise the rights of such Limited Partner pursuant to this Section 4.05 and such Limited Partner shall
be bound by the exercise of such rights by the Assignee.
(e) For purposes of making future allocations under Section 5.01(g) hereof and applying the Capital Account Limitation, the portion of the
Economic Capital Account Balance of the applicable LTIP Unitholder that is treated as attributable to his or her LTIP Units shall be reduced, as of
the date of conversion, by the product of the number of LTIP Units converted and the Common Unit Economic Balance.
(f) If the Partnership, the General Partner or Summit REIT shall be a party to any Common Unit Transaction (including without limitation a
merger, consolidation, unit exchange, self tender offer for all or substantially all Common Units or other business combination or reorganization,
or sale of all or substantially all of the Partnership’s assets, but excluding any Common Unit Transaction which constitutes an Adjustment Event)
in each case as a result of which Common Units shall be exchanged for or converted into the right, or the
-21-
holders of Common Units shall otherwise be entitled, to receive cash, securities or other property or any combination thereof (each of the
foregoing being referred to herein as a “ Common Unit Transaction ”), then the General Partner shall, subject to the terms of any applicable
Equity Incentive Plan or Vesting Agreement, exercise immediately prior to the Common Unit Transaction its right to cause a Forced Conversion
with respect to the maximum number of LTIP Units then eligible for conversion, taking into account any allocations that occur in connection with
the Common Unit Transaction or that would occur in connection with the Common Unit Transaction if the assets of the Partnership were sold at
the Common Unit Transaction price or, if applicable, at a value determined by the General Partner in good faith using the value attributed to the
Partnership Units in the context of the Common Unit Transaction (in which case the Conversion Date shall be the effective date of the Common
Unit Transaction).
In anticipation of such Forced Conversion and the consummation of the Common Unit Transaction, the Partnership shall use commercially
reasonable efforts to cause each LTIP Unitholder to be afforded the right to receive in connection with such Common Unit Transaction in
consideration for the Common Units into which such LTIP Unitholder’s Units will be converted the same kind and amount of cash, securities and
other property (or any combination thereof) receivable upon the consummation of such Common Unit Transaction by a holder of the same number
of Common Units, assuming such holder of Common Units is not a Person with which the Partnership consolidated or into which the Partnership
merged or which merged into the Partnership or to which such sale or transfer was made, as the case may be (a “ Constituent Person ”), or an
affiliate of a Constituent Person. In the event that holders of Common Units have the opportunity to elect the form or type of consideration to be
received upon consummation of the Common Unit Transaction, prior to such Common Unit Transaction the General Partner shall give prompt
written notice to each LTIP Unitholder of such election, and shall use commercially reasonable efforts to afford the LTIP Unitholders the right to
elect, by written notice to the General Partner, the form or type of consideration to be received upon conversion of each LTIP Unit held by such
holder into Common Units in connection with such Common Unit Transaction. If an LTIP Unitholder fails to make such an election, such holder
(and any of its transferees) shall receive upon conversion of each LTIP Unit held by such LTIP Unitholder (or by any of such LTIP Unitholder’s
transferees) the same kind and amount of consideration that a holder of a Common Unit would receive if such Common Unit holder failed to make
such an election.
Subject to the rights of the Partnership and the General Partner under any Vesting Agreement and any Equity Incentive Plan, the Partnership
shall use commercially reasonable efforts to cause the terms of any Common Unit Transaction to be consistent with the provisions of this Section
4.05(f) and to enter into an agreement with the successor or purchasing entity, as the case may be, for the benefit of any LTIP Unitholders whose
LTIP Units will not be converted into Common Units in connection with the Common Unit Transaction that will (i) contain provisions enabling
the holders of LTIP Units that remain outstanding after such Common Unit Transaction to convert their LTIP Units into securities as comparable
as reasonably possible under the circumstances to the Common Units and (ii) preserve as far as reasonably possible under the circumstances the
distribution, special allocation, conversion, and other rights set forth in this Agreement for the benefit of the LTIP Unitholders.
-22-
4.06 Capital Accounts . A separate capital account (a “ Capital Account ”) shall be established and maintained for each Partner in
accordance with Regulations Section 1.704-1(b)(2)(iv). If (i) a new or existing Partner acquires an additional Partnership Interest in exchange for
more than a de minimis Capital Contribution, (ii) the Partnership distributes to a Partner more than a de minimis amount of Partnership property as
consideration for a Partnership Interest, (iii) the Partnership is liquidated within the meaning of Regulation Section 1.704-1(b)(2)(ii)(g) or (iv) the
Partnership grants a Partnership Interest (other than a de minimis Partnership Interest) as consideration for the provision of services to or for the
benefit of the Partnership to an existing Partner acting in a Partner capacity, or to a new Partner acting in a Partner capacity or in anticipation of
being a Partner, the General Partner shall revalue the property of the Partnership to its fair market value (as determined by the General Partner, in
its sole and absolute discretion, and taking into account Section 7701(g) of the Code) in accordance with Regulations Section 1.704-1(b)(2)(iv)(f);
provided that the issuance of any LTIP Unit shall be deemed to require a revaluation pursuant to this Section 4.06. When the Partnership’s
property is revalued by the General Partner, the Capital Accounts of the Partners shall be adjusted in accordance with Regulations Sections 1.704-
1(b)(2)(iv)(f) and (g), which generally require such Capital Accounts to be adjusted to reflect the manner in which the unrealized gain or loss
inherent in such property (that has not been reflected in the Capital Accounts previously) would be allocated among the Partners pursuant to
Section 5.01 hereof if there were a taxable disposition of such property for its fair market value (as determined by the General Partner, in its sole
and absolute discretion, and taking into account Section 7701(g) of the Code) on the date of the revaluation. In making those adjustments to the
Capital Accounts of the Partners occurring during any taxable year in which this Agreement is effective, the General Partner shall allocate the
adjustments, to the extent possible and in its sole and absolute discretion, to cause the Capital Account attributable to each Common Unit to be
equal in amount; provided that the General Partner shall not make any allocation that could cause any holder of Partnership Units to recognize
income or gain for federal income tax purposes.
4.07 Percentage Interests . If the number of outstanding Common Units or other class or series of Partnership Units increases or decreases
during a taxable year, each Partner’s Percentage Interest shall be adjusted by the General Partner effective as of the effective date of each such
increase or decrease to a percentage equal to the number of Common Units or other class or series of Partnership Units held by such Partner
divided by the aggregate number of Common Units or other class or series of Partnership Units, as applicable, outstanding after giving effect to
such increase or decrease. If the Partners’ Percentage Interests are adjusted pursuant to this Section 4.07, the Profits and Losses for the taxable
year in which the adjustment occurs shall be allocated between the part of the year ending on the day when the Partnership’s property is revalued
by the General Partner and the part of the year beginning on the following day either (i) as if the taxable year had ended on the date of the
adjustment or (ii) based on the number of days in each part. The General Partner, in its sole and absolute discretion, shall determine which method
shall be used to allocate Profits and Losses for the taxable year in which the adjustment occurs. The allocation of Profits and Losses for the earlier
part of the year shall be based on the Percentage Interests before adjustment, and the allocation of Profits and Losses for the later part shall be
based on the adjusted Percentage Interests.
4.08 No Interest on Contributions . No Partner shall be entitled to interest on its Capital Contribution.
-23-
4.09 Return of Capital Contributions . No Partner shall be entitled to withdraw any part of its Capital Contribution or its Capital Account or
to receive any distribution from the Partnership, except as specifically provided in this Agreement. Except as otherwise provided herein, there
shall be no obligation to return to any Partner or withdrawn Partner any part of such Partner’s Capital Contribution for so long as the Partnership
continues in existence.
4.10 No Third-Party Beneficiary . No creditor or other third party having dealings with the Partnership shall have the right to enforce the
right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it
being understood and agreed that the provisions of this Agreement, except as provided in Section 6.03(h), shall be solely for the benefit of, and
may be enforced solely by, the parties to this Agreement and their respective successors and assigns. None of the rights or obligations of the
Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by
any creditor or other third party, nor may such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered
by the Partnership to secure any debt or other obligation of the Partnership or of any of the Partners. In addition, it is the intent of the parties
hereto that no distribution to any Limited Partner shall be deemed a return of money or other property in violation of the Act. However, if any
court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Limited Partner is obligated to return such
money or property, such obligation shall be the obligation of such Limited Partner and not of the General Partner. Without limiting the generality
of the foregoing, a deficit Capital Account of a Partner shall not be deemed to be a liability of such Partner nor an asset or property of the
Partnership.
5.01 Allocation of Profit and Loss .
ARTICLE V
PROFITS AND LOSSES; DISTRIBUTIONS
(a) Profit . Profit of the Partnership for each fiscal year of the Partnership shall be allocated to the Partners in accordance with their
respective Percentage Interests.
(b) Loss . Loss of the Partnership for each fiscal year of the Partnership shall be allocated to the Partners in accordance with their respective
Percentage Interests.
(c) Minimum Gain Chargeback . Notwithstanding any provision to the contrary, (i) any expense of the Partnership that is a “nonrecourse
deduction” within the meaning of Regulations Section 1.704-2(b)(1) shall be allocated in accordance with the Partners’ respective Percentage
Interests, (ii) any expense of the Partnership that is a “partner nonrecourse deduction” within the meaning of Regulations Section 1.704-2(i)(2)
shall be allocated to the Partner that bears the “economic risk of loss” of such deduction in accordance with Regulations Section 1.704-2(i)(1),
(iii) if there is a net decrease in Partnership Minimum Gain within the meaning of Regulations Section 1.704-2(f)(1) for any Partnership taxable
year, then, subject to the exceptions set forth in Regulations Section 1.704-2(f)(2),(3), (4) and (5), items of gain and income shall be allocated
among the Partners in accordance with Regulations Section 1.704-2(f) and the ordering rules contained in Regulations Section 1.704-2(j), and
(iv) if there is a net decrease in Partner Nonrecourse Debt Minimum Gain within the meaning of Regulations
-24-
Section 1.704-2(i)(4) for any Partnership taxable year, then, subject to the exceptions set forth in Regulations Section 1.704(2)(g), items of gain
and income shall be allocated among the Partners in accordance with Regulations Section 1.704-2(i)(4) and the ordering rules contained in
Regulations Section 1.704-2(j). The manner in which it is reasonably expected that the deductions attributable to nonrecourse liabilities will be
allocated for purposes of determining a Partner’s share of the nonrecourse liabilities of the Partnership within the meaning of Regulations
Section 1.752-3(a)(3) shall be in accordance with a Partner’s Percentage Interest.
(d) Qualified Income Offset . If a Partner receives in any taxable year an adjustment, allocation or distribution described in subparagraphs
(4), (5) or (6) of Regulations Section 1.704-1(b)(2)(ii)(d) that causes or increases a deficit balance in such Partner’s Capital Account that exceeds
the sum of such Partner’s shares of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain, as determined in accordance with
Regulations Sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated specially for such taxable year (and, if necessary, later taxable
years) items of income and gain in an amount and manner sufficient to eliminate such deficit Capital Account balance as quickly as possible as
provided in Regulations Section 1.704-1(b)(2)(ii)(d). After the occurrence of an allocation of income or gain to a Partner in accordance with this
Section 5.01(d), to the extent permitted by Regulations Section 1.704-1(b), items of expense or loss shall be allocated to such Partner in an amount
necessary to offset the income or gain previously allocated to such Partner under this Section 5.01(d).
(e) Capital Account Deficits . Loss shall not be allocated to a Limited Partner to the extent that such allocation would cause a deficit in such
Partner’s Capital Account (after reduction to reflect the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the
sum of such Partner’s shares of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain. Any Loss in excess of that limitation
shall be allocated to the General Partner. After the occurrence of an allocation of Loss to the General Partner in accordance with this Section 5.01
(e), to the extent permitted by Regulations Section 1.704-1(b), Profit first shall be allocated to the General Partner in an amount necessary to offset
the Loss previously allocated to the General Partner under this Section 5.01(e).
(f) Allocations Between Transferor and Transferee . If a Partner transfers any part or all of its Partnership Interest, the distributive shares of
the various items of Profit and Loss allocable among the Partners during such fiscal year of the Partnership shall be allocated between the
transferor and the transferee Partner either (i) as if the Partnership’s fiscal year had ended on the date of the transfer or (ii) based on the number of
days of such fiscal year that each was a Partner without regard to the results of Partnership activities in the respective portions of such fiscal year
in which the transferor and the transferee were Partners. The General Partner, in its sole and absolute discretion, shall determine which method
shall be used to allocate the distributive shares of the various items of Profit and Loss between the transferor and the transferee Partner.
(g) Special Allocations Regarding LTIP Units . Notwithstanding the provisions of Sections 5.01(a) and (b) hereof, Liquidating Gains shall
first be allocated to the LTIP Unitholders until their Economic Capital Account Balances, to the extent attributable to their ownership of LTIP
Units, are equal to (i) the Common Unit Economic Balance, multiplied by (ii) the number of their LTIP Units. For this purpose, “ Liquidating
Gains ” means net capital
-25-
gains realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Partnership, including but not limited
to net capital gain realized in connection with an adjustment to the value of Partnership assets under Section 704(b) of the Code. The “ Economic
Capital Account Balances ” of the LTIP Unit holders will be equal to their Capital Account balances to the extent attributable to their ownership
of LTIP Units. Similarly, the “ Common Unit Economic Balance ” shall mean (i) the Capital Account balance of Summit REIT, plus the amount
of Summit REIT’s share of any Partner Nonrecourse Debt Minimum Gain or Partnership Minimum Gain, in either case to the extent attributable
to Summit REIT’s direct or indirect ownership of Common Units and computed on a hypothetical basis after taking into account all allocations
through the date on which any allocation is made under this Section 5.01(g), divided by (ii) the number of Common Units directly or indirectly
owned by Summit REIT. Any such allocations shall be made among the LTIP Unitholders in proportion to the amounts required to be allocated to
each under this Section 5.01(g). The parties agree that the intent of this Section 5.01(g) is to make the Capital Account balance associated with
each LTIP Unit to be economically equivalent to the Capital Account balance associated with Common Units directly or indirectly owned by
Summit REIT (on a per-Unit basis).
(h) Definition of Profit and Loss . “ Profit ” and “ Loss ” and any items of income, gain, expense or loss referred to in this Agreement shall
be determined in accordance with federal income tax accounting principles, as modified by Regulations Section 1.704-1(b)(2)(iv), except that
Profit and Loss shall not include items of income, gain and expense that are specially allocated pursuant to Sections 5.01(c), (d)or (e) hereof. All
allocations of income, Profit, gain, Loss and expense (and all items contained therein) for federal income tax purposes shall be identical to all
allocations of such items set forth in this Section 5.01, except as otherwise required by Section 704(c) of the Code and Regulations Section 1.704-
1(b)(4). With respect to properties acquired by the Partnership, the General Partner shall have the authority to elect the method to be used by the
Partnership for allocating items of income, gain and expense as required by Section 704(c) of the Code with respect to such properties, and such
election shall be binding on all Partners.
5.02 Distribution of Cash .
(a) Subject to Sections 5.02(c), (d) and (e) hereof and to the terms of any Partnership Unit Designation, the Partnership shall distribute cash
at such times and in such amounts as are determined by the General Partner in its sole and absolute discretion, to the Partners who are Partners on
the Partnership Record Date with respect to such quarter (or other distribution period) in proportion with their respective Common Units on the
Partnership Record Date.
(b) In accordance with Section 4.04(a)(ii), the LTIP Unitholders shall be entitled to receive distributions in an amount per LTIP Unit equal
to the Common Partnership Unit Distribution.
(c) If a new or existing Partner acquires additional Partnership Units in exchange for a Capital Contribution on any date other than a
Partnership Record Date (other than Partnership Units acquired by the General Partner or Summit REIT (or any direct or indirect wholly owned
Subsidiary of the General Partner or Summit REIT ) in connection with the
-26-
issuance of additional REIT Shares or Additional Securities), the cash distribution attributable to such additional Partnership Units relating to the
Partnership Record Date next following the issuance of such additional Partnership Units shall be reduced in the proportion to (i) the number of
days that such additional Partnership Units are held by such Partner bears to (ii) the number of days between such Partnership Record Date and the
immediately preceding Partnership Record Date.
(d) Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that it determines to be
necessary or appropriate to cause the Partnership to comply with any withholding requirements established under the Code or any other federal,
state or local law including, without limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the extent that the Partnership is
required to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to a Partner or
assignee (including by reason of Section 1446 of the Code), either (i) if the actual amount to be distributed to the Partner (the “ Distributable
Amount ”) equals or exceeds the Withheld Amount, the entire Distributable Amount shall be treated as a distribution of cash to such Partner, or
(ii) if the Distributable Amount is less than the Withheld Amount, the excess of the Withheld Amount over the Distributable Amount shall be
treated as a Partnership Loan from the Partnership to the Partner on the day the Partnership pays over such amount to a taxing authority. A
Partnership Loan shall be repaid upon the demand of the Partnership or, alternatively, through withholding by the Partnership with respect to
subsequent distributions to the applicable Partner or assignee. In the event that a Limited Partner fails to pay any amount owed to the Partnership
with respect to the Partnership Loan within 15 days after demand for payment thereof is made by the Partnership on the Limited Partner, the
General Partner, in its sole and absolute discretion, may elect to make the payment to the Partnership on behalf of such Defaulting Limited
Partner. In such event, on the date of payment, the General Partner shall be deemed to have extended a General Partner Loan to the Defaulting
Limited Partner in the amount of the payment made by the General Partner and shall succeed to all rights and remedies of the Partnership against
the Defaulting Limited Partner as to that amount. Without limitation, the General Partner shall have the right to receive any distributions that
otherwise would be made by the Partnership to the Defaulting Limited Partner until such time as the General Partner Loan has been paid in full,
and any such distributions so received by the General Partner shall be treated as having been received by the Defaulting Limited Partner and
immediately paid to the General Partner.
Any amounts treated as a Partnership Loan or a General Partner Loan pursuant to this Section 5.02(d) shall bear interest at the lesser of (i) 300
basis points above the base rate on corporate loans at large United States money center commercial banks, as published from time to time in The
Wall Street Journal , or (ii) the maximum lawful rate of interest on such obligation, such interest to accrue from the date the Partnership or the
General Partner, as applicable, is deemed to extend the loan until such loan is repaid in full.
(e) In no event may a Partner receive a distribution of cash with respect to a Partnership Unit if such Partner is entitled to receive a cash
dividend or other distribution of cash as the holder of record of a REIT Share for which all or part of such Partnership Unit has been or will be
redeemed.
-27-
5.03 REIT Distribution Requirements . The General Partner shall use commercially reasonable efforts to cause the Partnership to distribute
amounts sufficient to enable Summit REIT to pay distributions to its stockholders that will allow Summit REIT to (i) meet its distribution
requirement for qualification as a REIT as set forth in Section 857 of the Code and (ii) avoid any federal income or excise tax liability imposed by
the Code, other than to the extent Summit REIT elects to retain and pay income tax on its net capital gain.
5.04 No Right to Distributions in Kind . No Partner shall be entitled to demand property other than cash in connection with any distributions
by the Partnership.
5.05 Limitations on Return of Capital Contributions . Notwithstanding any of the provisions of this Article V, no Partner shall have the
right to receive, and the General Partner shall not have the right to make, a distribution that includes a return of all or part of a Partner’s Capital
Contributions, unless after giving effect to the return of a Capital Contribution, the sum of all Partnership liabilities, other than the liabilities to a
Partner for the return of his Capital Contribution, does not exceed the fair market value of the Partnership’s assets.
5.06 Distributions Upon Liquidation .
(a) Upon liquidation of the Partnership, after payment of, or adequate provision for, debts and obligations of the Partnership, including any
Partner loans, any remaining assets of the Partnership shall be distributed to all Partners with positive Capital Accounts in accordance with their
respective positive Capital Account balances.
(b) For purposes of Section 5.06(a) hereof, the Capital Account of each Partner shall be determined after all adjustments made in accordance
with Sections 5.01 and 5.02 hereof resulting from Partnership operations and from all sales and dispositions of all or any part of the Partnership’s
assets.
(c) Any distributions pursuant to this Section 5.06 shall be made by the end of the Partnership’s taxable year in which the liquidation occurs
(or, if later, within 90 days after the date of the liquidation). To the extent deemed advisable by the General Partner, appropriate arrangements
(including the use of a liquidating trust) may be made to assure that adequate funds are available to pay any contingent debts or obligations.
5.07 Substantial Economic Effect . It is the intent of the Partners that the allocations of Profit and Loss under the Agreement have substantial
economic effect (or be consistent with the Partners’ interests in the Partnership in the case of the allocation of losses attributable to nonrecourse
debt) within the meaning of Section 704(b) of the Code as interpreted by the Regulations promulgated pursuant thereto. Article V and other
relevant provisions of this Agreement shall be interpreted in a manner consistent with such intent.
-28-
ARTICLE VI
RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER
6.01 Management of the Partnership .
(a) Except as otherwise expressly provided in this Agreement, the General Partner shall have full, complete and exclusive discretion to
manage and control the business of the Partnership for the purposes herein stated, and shall make all decisions affecting the business and assets of
the Partnership. Subject to the restrictions specifically contained in this Agreement, the powers of the General Partner shall include, without
limitation, the authority to take the following actions on behalf of the Partnership:
(i) to acquire, purchase, own, operate, lease and dispose of any real property and any other property or assets including, but not limited to,
notes and mortgages that the General Partner determines are necessary or appropriate in the business of the Partnership;
(ii) to construct buildings and make other improvements on the properties owned or leased by the Partnership;
(iii) to authorize, issue, sell, redeem or otherwise purchase any Partnership Units or any securities (including secured and unsecured debt
obligations of the Partnership, debt obligations of the Partnership convertible into any class or series of Partnership Units, or Rights relating to any
class or series of Partnership Units) of the Partnership;
(iv) to borrow or lend money for the Partnership, issue or receive evidences of indebtedness in connection therewith, refinance, increase the
amount of, modify, amend or change the terms of, or extend the time for the payment of, any such indebtedness, and secure indebtedness by
mortgage, deed of trust, pledge or other lien on the Partnership’s assets;
(v) to pay, either directly or by reimbursement, all operating costs and general administrative expenses of the Partnership to third parties or
to the General Partner or its Affiliates as set forth in this Agreement;
(vi) to guarantee or become a co-maker of indebtedness of any Subsidiary of the General Partner or the Partnership, refinance, increase the
amount of, modify, amend or change the terms of, or extend the time for the payment of, any such guarantee or indebtedness, and secure such
guarantee or indebtedness by mortgage, deed of trust, pledge or other lien on the Partnership’s assets;
(vii) to use assets of the Partnership (including, without limitation, cash on hand) for any purpose consistent with this Agreement, including,
without limitation, payment, either directly or by reimbursement, of all operating costs and general and administrative expenses of Summit REIT,
the General Partner, the Partnership or any Subsidiary of the foregoing, to third parties or to Summit REIT or the General Partner as set forth in
this Agreement;
-29-
(viii) to lease all or any portion of any of the Partnership’s assets, whether or not the terms of such leases extend beyond the termination
date of the Partnership and whether or not any portion of the Partnership’s assets so leased are to be occupied by the lessee, or, in turn, subleased
in whole or in part to others, for such consideration and on such terms as the General Partner may determine and to further lease property from
third parties, including ground leases;
(ix) to prosecute, defend, arbitrate or compromise any and all claims or liabilities in favor of or against the Partnership, on such terms and in
such manner as the General Partner may determine, and similarly to prosecute, settle or defend litigation with respect to the Partners, the
Partnership or the Partnership’s assets;
(x) to file applications, communicate and otherwise deal with any and all governmental agencies having jurisdiction over, or in any way
affecting, the Partnership’s assets or any other aspect of the Partnership’s business;
(xi) to make or revoke any election permitted or required of the Partnership by any taxing authority;
(xii) to maintain such insurance coverage for public liability, fire and casualty, and any and all other insurance for the protection of the
Partnership, for the conservation of Partnership assets, or for any other purpose convenient or beneficial to the Partnership, in such amounts and
such types, as it shall determine from time to time;
(xiii) to determine whether or not to apply any insurance proceeds for any property to the restoration of such property or to distribute the
same;
(xiv) to establish one or more divisions of the Partnership, to hire and dismiss employees of the Partnership or any division of the
Partnership, and to retain legal counsel, accountants, consultants, real estate brokers and such other persons as the General Partner may deem
necessary or appropriate in connection with the Partnership business and to pay therefor such reasonable remuneration as the General Partner may
deem reasonable and proper;
(xv) to retain other services of any kind or nature in connection with the Partnership business, and to pay therefor such remuneration as the
General Partner may deem reasonable and proper;
(xvi) to negotiate and conclude agreements on behalf of the Partnership with respect to any of the rights, powers and authority conferred
upon the General Partner;
(xvii) to maintain accurate accounting records and to file promptly all federal, state and local income tax returns on behalf of the
Partnership;
(xviii) to distribute Partnership cash or other Partnership assets in accordance with this Agreement;
-30-
(xix) to form or acquire an interest in, and contribute property to, any further limited or general partnerships, joint ventures or other
relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, its
Subsidiaries and any other Person in which it has an equity interest from time to time);
(xx) to establish Partnership reserves for working capital, capital expenditures, contingent liabilities or any other valid Partnership purpose;
(xxi) to merge, consolidate or combine the Partnership with or into another Person;
(xxii) to enter into and perform obligations under underwriting or other agreements in connection with issuances of securities by the
Partnership or the General Partner or any affiliate thereof;
(xxiii) to do any and all acts and things necessary or prudent to ensure that the Partnership will not be classified as a “publicly traded
partnership” taxable as a corporation under Section 7704 of the Code or an “investment company” or a subsidiary of an investment company
under the Investment Company Act of 1940; and
(xxiv) to take such other action, execute, acknowledge, swear to or deliver such other documents and instruments, and perform any and all
other acts that the General Partner deems necessary or appropriate for the formation, continuation and conduct of the business and affairs of the
Partnership (including, without limitation, all actions consistent with allowing Summit REIT at all times to qualify as a REIT unless Summit REIT
voluntarily terminates or revokes its REIT status) and to possess and enjoy all of the rights and powers of a general partner as provided by the Act.
(b) Except as otherwise provided herein, to the extent the duties of the General Partner require expenditures of funds to be paid to third
parties, the General Partner shall not have any obligations hereunder except to the extent that Partnership funds are reasonably available to it for
the performance of such duties, and nothing herein contained shall be deemed to authorize or require the General Partner, in its capacity as such,
to expend its individual funds for payment to third parties or to undertake any individual liability or obligation on behalf of the Partnership.
6.02 Delegation of Authority . The General Partner may delegate any or all of its powers, rights and obligations hereunder, and may appoint,
employ, contract or otherwise deal with any Person for the transaction of the business of the Partnership, which Person may, under supervision of
the General Partner, perform any acts or services for the Partnership as the General Partner may approve.
6.03 Indemnification and Exculpation of Indemnitees .
(a) The Partnership shall indemnify an Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several,
expenses (including reasonable legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims,
-31-
demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership as set forth in
this Agreement in which any Indemnitee may be involved, or is threatened to be involved, as a party or otherwise, unless it is established that:
(i) the act or omission of the Indemnitee was material to the matter giving rise to the proceeding and either was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the Indemnitee actually received an improper personal benefit in money, property or services; or
(iii) in the case of any criminal proceeding, the Indemnitee had reasonable cause to believe that the act or omission was unlawful. The termination
of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of
conduct set forth in this Section 6.03(a). The termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent, or
an entry of an order of probation prior to judgment, creates a rebuttable presumption that the Indemnitee acted in a manner contrary to that
specified in this Section 6.03(a). Any indemnification pursuant to this Section 6.03 shall be made only out of the assets of the Partnership.
(b) The Partnership shall reimburse an Indemnitee for reasonable expenses incurred by an Indemnitee who is a party to a proceeding in
advance of the final disposition of the proceeding upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the
Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in this Section 6.03 has
been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard
of conduct has not been met.
(c) The indemnification provided by this Section 6.03 shall be in addition to any other rights to which an Indemnitee or any other Person
may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee
who has ceased to serve in such capacity.
(d) The Partnership may purchase and maintain insurance, as an expense of the Partnership, on behalf of the Indemnitees and such other
Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person
in connection with the Partnership’s activities, regardless of whether the Partnership would have the power to indemnify such Person against such
liability under the provisions of this Agreement.
(e) For purposes of this Section 6.03, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee
benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan
or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable
law shall constitute fines within the meaning of this Section 6.03; and actions taken or omitted by the Indemnitee with respect to an employee
benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the
plan shall be deemed to be for a purpose that is not opposed to the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in
this Agreement.
-32-
(g) An Indemnitee shall not be denied indemnification in whole or in part under this Section 6.03 because the Indemnitee had an interest in
the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 6.03 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) Any amendment, modification or repeal of this Section 6.03 or any provision hereof shall be prospective only and shall not in any way
affect the indemnification of an Indemnitee by the Partnership under this Section 6.03 as in effect immediately prior to such amendment,
modification or repeal with respect to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when
claims relating to such matters may arise or be asserted.
6.04 Liability of the General Partner .
(a) Notwithstanding anything to the contrary set forth in this Agreement, neither the General Partner, nor any of its directors, officers, agents
or employees shall be liable for monetary damages to the Partnership or any Partners for losses sustained or liabilities incurred as a result of errors
in judgment or mistakes of fact or law or of any act or omission if any such party acted in good faith. The General Partner shall not be in breach of
any duty that the General Partner may owe to the Limited Partners or the Partnership or any other Persons under this Agreement or of any duty
stated or implied by law or equity provided the General Partner, acting in good faith, abides by the terms of this Agreement.
(b) The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership, the Limited Partners and
Summit REIT’s stockholders collectively, that the General Partner is under no obligation to consider the separate interests of the Limited Partners
(including, without limitation, the tax consequences to Limited Partners or the tax consequences of some, but not all, of the Limited Partners) in
deciding whether to cause the Partnership to take (or decline to take) any actions. In the event of a conflict between the interests of the
stockholders of Summit REIT on the one hand and the Limited Partners on the other, the General Partner shall endeavor in good faith to resolve
the conflict in a manner not adverse to either the stockholders of Summit REIT or the Limited Partners; provided , however , that for so long as the
General Partner owns a controlling interest in the Partnership, any such conflict that the General Partner, in its sole and absolute discretion,
determines cannot be resolved in a manner not adverse to either the stockholders of Summit REIT or the Limited Partners shall be resolved in
favor of the stockholders of Summit REIT. The General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred
or benefits not derived by the Limited Partners in connection with such decisions.
(c) Subject to its obligations and duties as General Partner set forth in Section 6.01 hereof, the General Partner may exercise any of the
powers granted to it under this Agreement and perform any of the duties imposed upon it hereunder either directly or by or
-33-
through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in
good faith.
(d) Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any
decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission
is necessary or advisable in order (i) to protect the ability of Summit REIT to continue to qualify as a REIT or (ii) to prevent Summit REIT from
incurring any taxes under Section 857, Section 4981 or any other provision of the Code, is expressly authorized under this Agreement and is
deemed approved by all of the Limited Partners.
(e) Any amendment, modification or repeal of this Section 6.04 or any provision hereof shall be prospective only and shall not in any way
affect the limitations on the General Partner’s or any of its officers’, directors’, agents’ or employees’ liability to the Partnership and the Limited
Partners under this Section 6.04 as in effect immediately prior to such amendment, modification or repeal with respect to matters occurring, in
whole or in part, prior to such amendment, modification or repeal, regardless of when claims relating to such matters may arise or be asserted.
6.05 Partnership Obligations .
(a) Except as provided in this Section 6.05 and elsewhere in this Agreement (including the provisions of Articles V and VI hereof regarding
distributions, payments and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general
partner of the Partnership.
(b) All Administrative Expenses shall be obligations of the Partnership, and the General Partner or Summit REIT shall be entitled to
reimbursement by the Partnership for any expenditure (including Administrative Expenses) incurred by it on behalf of the Partnership that shall be
made other than out of the funds of the Partnership. All reimbursements hereunder shall be characterized for federal income tax purposes as
expenses of the Partnership incurred on its behalf, and not as expenses of the General Partner or Summit REIT.
6.06 Outside Activities . Subject to Section 6.08 hereof, the Certificate of Formation and any agreements entered into by the General Partner
or its Affiliates with the Partnership or a Subsidiary, any officer, director, employee, agent, trustee, Affiliate or member of the General Partner, the
General Partner, Summit REIT and any stockholder of Summit REIT shall be entitled to and may have business interests and engage in business
activities in addition to those relating to the Partnership, including business interests and activities substantially similar or identical to those of the
Partnership. Neither the Partnership nor any of the Limited Partners shall have any rights by virtue of this Agreement in any such business
ventures, interest or activities. None of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the
partnership relationship established hereby in any such business ventures, interests or activities, and the General Partner and Summit REIT shall
have no obligation pursuant to this Agreement to offer any interest in any such business ventures, interests and activities to the Partnership or any
Limited Partner, even if such opportunity is of a character that, if presented to the Partnership or any Limited Partner, could be taken by such
Person.
-34-
6.07 Employment or Retention of Affiliates .
(a) Any Affiliate of the General Partner may be employed or retained by the Partnership and may otherwise deal with the Partnership
(whether as a buyer, lessor, lessee, manager, furnisher of goods or services, broker, agent, lender or otherwise) and may receive from the
Partnership any compensation, price or other payment therefor that the General Partner determines to be fair and reasonable.
(b) The Partnership may lend or contribute to its Subsidiaries or other Persons in which it has an equity investment, and such Persons may
borrow funds from the Partnership, on terms and conditions established in the sole and absolute discretion of the General Partner. The foregoing
authority shall not create any right or benefit in favor of any Subsidiary or any other Person.
(c) The Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby
becomes a participant upon such terms and subject to such conditions as the General Partner deems are consistent with this Agreement and
applicable law.
6.08 Summit REIT’s Activities . Summit REIT agrees that, generally, all business activities of Summit REIT, including activities pertaining
to the acquisition, development, ownership of or investment in hotel properties or other property, shall be conducted through the Partnership or
one or more Subsidiaries of the Partnership; provided , however , that Summit REIT may make direct acquisitions or undertake business activities
if such acquisitions or activities are made in connection with the issuance of Additional Securities by Summit REIT or the business activity has
been approved by a majority of the Independent Directors. If, at any time, Summit REIT acquires material assets (other than Partnership Units or
other assets on behalf of the Partnership) without transferring such assets to the Partnership, the definition of “REIT Shares Amount” may be
adjusted, as reasonably determined by the General Partner, to reflect only the fair market value of a REIT Share attributable to Partnership Units
directly or indirectly owned by Summit REIT and other assets held on behalf of the Partnership.
6.09 Title to Partnership Assets . Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be
deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General
Partner, Summit REIT or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner or Summit
REIT. Summit REIT hereby declares and warrants that any Partnership assets for which legal title is held in the name of the General Partner or
Summit REIT or any nominee or Affiliate of the General Partner or Summit REIT shall be held by the General Partner or Summit REIT for the
use and benefit of the Partnership in accordance with the provisions of this Agreement; provided , however , that the General Partner or Summit
REIT shall use its commercially reasonable efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as
reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name
in which legal title to such Partnership assets is held.
-35-
7.01 Transfer of the General Partner’s Partnership Interest .
ARTICLE VII
CHANGES IN GENERAL PARTNER
(a) Other than to an Affiliate of Summit REIT, the General Partner shall not transfer all or any portion of its General Partnership Interests,
and the General Partner shall not withdraw as General Partner, except as provided in or in connection with a transaction contemplated by Sections
7.01(c), (d) or (e) hereof.
(b) The General Partner agrees that its General Partnership Interest will at all times be in the aggregate at least 0.1%.
(c) Except as otherwise provided in Section 7.01(d) or (e) hereof, neither the General Partner nor Summit REIT shall engage in any merger,
consolidation or other combination with or into another Person or sale of all or substantially all of its assets (other than in connection with a
change in the General Partner’s state of organization or organizational form or Summit REIT’s state of incorporation or organizational form), in
each case which results in a Change of Control of the General Partner or Summit REIT (a “ Transaction ”), unless at least one of the following
conditions is met:
(i) the consent of a Majority in Interest (other than the General Partner or any Subsidiary of the General Partner or Summit REIT) is
obtained;
(ii) as a result of such Transaction, all Limited Partners (other than the General Partner, Summit REIT and any Subsidiary of the General
Partner or Summit REIT, and, in the case of LTIP Unitholders, subject to the terms of any applicable Equity Incentive Plan or Vesting Agreement)
will receive, or have the right to receive, for each Partnership Unit an amount of cash, securities or other property equal or substantially equivalent
in value, as determined by the General Partner in good faith, to the product of the Conversion Factor and the greatest amount of cash, securities or
other property paid in the Transaction to a holder of one REIT Share in consideration of one REIT Share, provided that if, in connection with such
Transaction, a purchase, tender or exchange offer (“ Offer ”) shall have been made to and accepted by the holders of more than 50% of the
outstanding REIT Shares, each holder of Partnership Units (other than the General Partner, Summit REIT and any Subsidiary of the General
Partner or Summit REIT) shall be given the option to exchange its Partnership Units for an amount of cash, securities or other property equal or
substantially equivalent in value, as determined by the General Partner in good faith, to the greatest amount of cash, securities or other property
that such Limited Partner would have received had it (A) exercised its Common Unit Redemption Right pursuant to Section 8.04 hereof and
(B) sold, tendered or exchanged pursuant to the Offer the REIT Shares received upon exercise of the Common Unit Redemption Right
immediately prior to the expiration of the Offer; or
(iii) either the General Partner or Summit REIT, as applicable, is the surviving entity in the Transaction and either (A) the holders of REIT
Shares do not receive cash, securities or other property in the Transaction or (B) all Limited Partners
-36-
(other than the General Partner, Summit REIT, and any Subsidiary of the General Partner or Summit REIT, and, in the case of LTIP Unitholders,
subject to the terms of any applicable Equity Incentive Plan or Vesting Agreement) receive for each Partnership Unit an amount of cash, securities
or other property (expressed as an amount per REIT Share) equal or substantially equivalent in value, as determined by the General Partner in
good faith, to the product of the Conversion Factor and the greatest amount of cash, securities or other property (expressed as an amount per REIT
Share) received in the Transaction by any holder of REIT Shares.
(d) Notwithstanding Section 7.01(c) hereof, either of the General Partner or Summit REIT, as applicable, may merge with or into or
consolidate with another entity if immediately after such merger or consolidation (i) substantially all of the assets of the successor or surviving
entity (the “ Survivor ”), other than Partnership Units held directly or indirectly by the General Partner or Summit REIT, are contributed, directly
or indirectly, to the Partnership as a Capital Contribution in exchange for Partnership Units, or for economically equivalent partnership interests
issued by a Subsidiary Partnership established at the direction of the Board of Directors, with a fair market value equal to the value of the assets so
contributed as determined by the Survivor in good faith and (ii) the Survivor expressly agrees to assume all obligations of the General Partner and
Summit REIT hereunder. Upon such contribution and assumption, the Survivor shall have the right and duty to amend this Agreement as set forth
in this Section 7.01(d). The Survivor shall in good faith arrive at a new method for the calculation of the Cash Amount, the REIT Shares Amount
and Conversion Factor for a Partnership Unit after any such merger or consolidation so as to approximate the existing method for such calculation
as closely as reasonably possible. Such calculation shall take into account, among other things, the kind and amount of securities, cash and other
property that was receivable upon such merger or consolidation by a holder of REIT Shares or options, warrants or other rights relating thereto,
and which a holder of Partnership Units could have acquired had such Partnership Units been exchanged immediately prior to such merger or
consolidation. Such amendment to this Agreement shall provide for adjustment to such method of calculation, which shall be as nearly equivalent
as may be practicable to the adjustments provided for with respect to the Conversion Factor. The Survivor also shall in good faith modify the
definition of REIT Shares and make such amendments to Section 8.04 hereof so as to approximate the existing rights and obligations set forth in
Section 8.04 hereof as closely as reasonably possible. The above provisions of this Section 7.01(d) shall similarly apply to successive mergers or
consolidations permitted hereunder.
In respect of any transaction described in the preceding paragraph, each of the General Partner and Summit REIT is required to use its
commercially reasonable efforts to structure such transaction to avoid causing the Limited Partners (other than the General Partner, Summit REIT
or any Subsidiary thereof) to recognize a gain for federal income tax purposes by virtue of the occurrence of, or their participation in, such
transaction, provided such efforts are consistent with and subject in all respects to the exercise of the Board of Directors’ fiduciary duties to the
stockholders of Summit REIT under applicable law.
-37-
(e) Notwithstanding anything in this Article VII,
(i) The General Partner may transfer all or any portion of its General Partnership Interest to (A) any wholly owned Subsidiary of the General
Partner or (B) the owner of all of the ownership interests of the General Partner, and following a transfer of all of its General Partnership Interest,
may withdraw as General Partner; and
(ii) Summit REIT may engage in a transaction required by law or by the rules of any national securities exchange or over-the-counter
interdealer quotation system on which the REIT Shares are listed or traded.
7.02 Admission of a Substitute or Additional General Partner . A Person shall be admitted as a substitute or additional General Partner of
the Partnership only if the following terms and conditions are satisfied:
(a) the Person to be admitted as a substitute or additional General Partner shall have accepted and agreed to be bound by all the terms and
provisions of this Agreement by executing a counterpart thereof and such other documents or instruments as may be required or appropriate in
order to effect the admission of such Person as a General Partner, and a certificate evidencing the admission of such Person as a General Partner
shall have been filed for recordation and all other actions required by Section 2.05 hereof in connection with such admission shall have been
performed;
(b) if the Person to be admitted as a substitute or additional General Partner is a corporation or a partnership, it shall have provided the
Partnership with evidence satisfactory to counsel for the Partnership of such Person’s authority to become a General Partner and to be bound by
the terms and provisions of this Agreement; and
(c) counsel for the Partnership shall have rendered an opinion (relying on such opinions from other counsel as may be necessary) that the
admission of the Person to be admitted as a substitute or additional General Partner is in conformity with the Act, that none of the actions taken in
connection with the admission of such Person as a substitute or additional General Partner will cause (i) the Partnership to be classified other than
as a partnership for federal income tax purposes, or (ii) the loss of any Limited Partner’s limited liability.
7.03 Effect of Bankruptcy, Withdrawal, Death or Dissolution of General Partner .
(a) Upon the occurrence of an Event of Bankruptcy as to the General Partner (and its removal pursuant to Section 7.04(a) hereof) or the
death, withdrawal, removal or dissolution of the General Partner (except that, if the General Partner is on the date of such occurrence a
partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such partnership shall be deemed not to be a
dissolution of the General Partner if the business of the General Partner is continued by the remaining partner or partners), the Partnership shall be
dissolved and terminated unless the Partnership is continued pursuant to Section 7.03(b) hereof. The merger of the General Partner with or into
any entity that is admitted as a substitute or successor General Partner pursuant to Section 7.02 hereof shall not be deemed to be the withdrawal,
dissolution or removal of the General Partner.
-38-
(b) Following the occurrence of an Event of Bankruptcy as to the General Partner (and its removal pursuant to Section 7.04(a) hereof) or the
death, withdrawal, removal or dissolution of the General Partner (except that, if the General Partner is on the date of such occurrence a
partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such partnership shall be deemed not to be a
dissolution of the General Partner if the business of such General Partner is continued by the remaining partner or partners), the Limited Partners,
within 90 days after such occurrence, may elect to continue the business of the Partnership for the balance of the term specified in Section 2.04
hereof by selecting, subject to Section 7.02 hereof and any other provisions of this Agreement, a substitute General Partner by consent of a
Majority in Interest. If the Limited Partners elect to continue the business of the Partnership and admit a substitute General Partner, the
relationship with the Partners and of any Person who has acquired an interest of a Partner in the Partnership shall be governed by this Agreement.
7.04 Removal of General Partner .
(a) Upon the occurrence of an Event of Bankruptcy as to, or the dissolution of, the General Partner, the General Partner shall be deemed to
be removed automatically; provided , however , that if the General Partner is on the date of such occurrence a partnership, the withdrawal, death,
dissolution or Event of Bankruptcy of a partner in such partnership shall be deemed not to be a dissolution of the General Partner if the business of
the General Partner is continued by the remaining partner or partners. The Limited Partners may not remove the General Partner, with or without
cause.
(b) If the General Partner has been removed pursuant to this Section 7.04 and the Partnership is continued pursuant to Section 7.03 hereof,
the General Partner shall promptly transfer and assign its General Partnership Interest in the Partnership to the substitute General Partner approved
by a Majority in Interest in accordance with Section 7.03(b) hereof and otherwise be admitted to the Partnership in accordance with Section 7.02
hereof. At the time of assignment, the removed General Partner shall be entitled to receive from the substitute General Partner the fair market
value of the General Partnership Interest of such removed General Partner. Such fair market value shall be determined by an appraiser mutually
agreed upon by the General Partner and a Majority in Interest (excluding the General Partner and any Subsidiary of the General Partner) within ten
days following the removal of the General Partner. In the event that the parties are unable to agree upon an appraiser, the removed General Partner
and a Majority in Interest (excluding the General Partner and any Subsidiary of the General Partner) each shall select an appraiser. Each such
appraiser shall complete an appraisal of the fair market value of the removed General Partner’s General Partnership Interest within 30 days of the
General Partner’s removal, and the fair market value of the removed General Partner’s General Partnership Interest shall be the average of the two
appraisals; provided , however , that if the higher appraisal exceeds the lower appraisal by more than 20% of the amount of the lower appraisal,
the two appraisers, no later than 40 days after the removal of the General Partner, shall select a third appraiser who shall complete an appraisal of
the fair market value of the removed General Partner’s General Partnership Interest no later than 60 days after the removal of the General Partner.
In such case, the fair market value of the removed General Partner’s General Partnership Interest shall be the average of the two appraisals closest
in value.
-39-
(c) The General Partnership Interest of a removed General Partner, during the time after default until transfer under Section 7.04(b) hereof,
shall be converted to that of a special Limited Partner; provided , however , such removed General Partner shall not have any rights to participate
in the management and affairs of the Partnership, and shall not be entitled to any portion of the income, expense, profit, gain or loss allocations or
cash distributions allocable or payable, as the case may be, to the Limited Partners. Instead, such removed General Partner shall receive and be
entitled only to retain distributions or allocations of such items that it would have been entitled to receive in its capacity as General Partner, until
the transfer is effective pursuant to Section 7.04(b) hereof.
(d) All Partners shall have given and hereby do give such consents, shall take such actions and shall execute such documents as shall be
legally necessary and sufficient to effect all the foregoing provisions of this Section 7.04.
ARTICLE VIII
RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS
8.01 Management of the Partnership . The Limited Partners shall not participate in the management or control of Partnership business nor
shall they transact any business for the Partnership, nor shall they have the power to sign for or bind the Partnership, such powers being vested
solely and exclusively in the General Partner. The Limited Partners covenant and agree not to hold themselves out in a manner that could
reasonably be considered in contravention of the terms hereof by any third party.
8.02 Power of Attorney . Each Limited Partner by entry into this Agreement through execution, execution by power of attorney or other
consent, hereby irrevocably appoints the General Partner its true and lawful attorney-in-fact, who may act for each Limited Partner and in its
name, place and stead, and for its use and benefit, to sign, acknowledge, swear to, deliver, file or record, at the appropriate public offices, any and
all documents, certificates and instruments (including, without limitation, this Agreement and all amendments or restatements thereof) as may be
deemed necessary or desirable by the General Partner to carry out fully the provisions of this Agreement and the Act in accordance with their
terms, which power of attorney is coupled with an interest and shall survive the death, dissolution or legal incapacity of the Limited Partner, or the
transfer by the Limited Partner of any part or all of its Partnership Interest.
8.03 Limitation on Liability of Limited Partners . No Limited Partner shall be liable for any debts, liabilities, contracts or obligations of the
Partnership. A Limited Partner shall be liable to the Partnership only to make payments of its Capital Contribution, if any, as and when due
hereunder. After its Capital Contribution is fully paid, no Limited Partner shall, except as otherwise required by the Act, be required to make any
further Capital Contributions or other payments or lend any funds to the Partnership.
8.04 Common Unit Redemption Right .
(a) Subject to Sections 8.04(b), (c), (d), (e) and (f) hereof and the provisions of any agreements between the Partnership and one or more
Limited Partners with respect to Common Units (including any LTIP Units that are converted into Common Units) held by them,
-40-
each Limited Partner (other than the General Partner, Summit REIT or any Subsidiary of the General Partner or Summit REIT, shall have the right
(the “ Common Unit Redemption Right ”) to require the Partnership to redeem on a Specified Redemption Date all or a portion of the Common
Units held by such Limited Partner at a redemption price equal to and in the form of the Common Redemption Amount to be paid by the
Partnership, provided that (i) such Common Units shall have been outstanding for at least one year (or such lesser time as determined by the
General Partner in its sole and absolute discretion), and (ii) subject to any restriction agreed to in writing between the Redeeming Limited Partner
and the General Partner. The Common Unit Redemption Right shall be exercised pursuant to a Notice of Exercise of Redemption Right in the
form attached hereto as Exhibit B delivered to the Partnership (with a copy to the General Partner) by the Limited Partner who is exercising the
Common Unit Redemption Right (the “ Redeeming Limited Partner ”) and such notice shall be irrevocable unless otherwise agreed upon by the
General Partner. In such event, the Partnership shall deliver the Cash Amount to the Redeeming Limited Partner. Notwithstanding the foregoing,
the Partnership shall not be obligated to satisfy such Common Unit Redemption Right if the General Partner elects to cause Summit REIT to
purchase the Common Units subject to the Notice of Redemption pursuant to Section 8.04(b) hereof. No Limited Partner may deliver more than
two Notices of Redemption during each calendar year unless otherwise agreed upon by the General Partner. A Limited Partner may not exercise
the Common Unit Redemption Right for less than one thousand (1,000) Common Units or, if such Limited Partner holds less than one thousand
(1,000) Common Units, all of the Common Units held by such Limited Partner. The Redeeming Limited Partner shall have no right, with respect
to any Common Units so redeemed, to receive any distribution paid with respect to Common Units if the record date for such distribution is on or
after the Specified Redemption Date.
(b) Notwithstanding the provisions of Section 8.04(a) hereof, if a Limited Partner exercises the Common Unit Redemption Right by
delivering to the Partnership a Notice of Redemption, then the Partnership may, in its sole and absolute discretion, elect to cause Summit REIT to
purchase directly and acquire some or all of, and in such event Summit REIT agrees to purchase and acquire, such Common Units by paying to
the Redeeming Limited Partner either the Cash Amount or the REIT Shares Amount, as elected by Summit REIT (in its sole and absolute
discretion) on the Specified Redemption Date, whereupon Summit REIT shall acquire the Common Units offered for redemption by the
Redeeming Limited Partner and shall be treated for all purposes of this Agreement as the owner of such Common Units.
In the event Summit REIT purchases Common Units with respect to the exercise of a Common Unit Redemption Right, the Partnership shall
have no obligation to pay any amount to the Redeeming Limited Partner with respect to such Redeeming Limited Partner’s exercise of such
Common Unit Redemption Right, and each of the Redeeming Limited Partner, the Partnership and Summit REIT shall treat the transaction
between Summit REIT and the Redeeming Limited Partner for federal income tax purposes as a sale of the Redeeming Limited Partner’s
Common Units to Summit REIT. Each Redeeming Limited Partner agrees to execute such documents as Summit REIT may reasonably require in
connection with the issuance of REIT Shares upon exercise of the Common Unit Redemption Right.
Each Redeeming Limited Partner covenants and agrees that all Common Units subject to a Notice of Redemption will be delivered to the
Partnership or Summit REIT free and clear of all
-41-
liens, claims and encumbrances whatsoever and should any such liens, claims or encumbrances exist or arise with respect to such Common Units,
neither the Partnership nor Summit REIT shall be under any obligation to acquire such Common Units.
(c) Notwithstanding the provisions of Sections 8.04(a) and 8.04(b) hereof, a Limited Partner shall not be entitled to exercise the Common
Unit Redemption Right if the delivery of REIT Shares to such Limited Partner on the Specified Redemption Date by Summit REIT pursuant to
Section 8.04(b) hereof (regardless of whether or not Summit REIT would in fact purchase the Common Units pursuant to Section 8.04(b) hereof)
would (i) result in such Limited Partner or any other Person (as defined in the Articles) owning, directly or indirectly, REIT Shares in excess of
the Stock Ownership Limit or any Excepted Holder Limit (each as defined in the Articles) and calculated in accordance therewith, except as
provided in the Articles, (ii) result in REIT Shares being owned by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in Summit REIT being “closely held” within the meaning of Section 856(h) of the Code, (iv) cause Summit REIT to own,
actually or constructively, 10% or more of the ownership interests in a tenant (other than a TRS) of Summit REIT’s, the Partnership’s or a
Subsidiary Partnership’s real property, within the meaning of Section 856(d)(2)(B) of the Code, (v) otherwise cause Summit REIT to fail to
qualify as a REIT under the Code, including, but not limited to, as a result of any “eligible independent contractor” (as defined in Section 856(d)
(9)(A) of the Code) that operates a “qualified lodging facility” (as defined in Section 856(d)(9)(D) of the Code) on behalf of a TRS failing to
qualify as such, or (vi) cause the acquisition of REIT Shares by such Limited Partner to be “integrated” with any other distribution of REIT Shares
or Common Units for purposes of complying with the registration provisions of the Securities Act. Summit REIT, in its sole and absolute
discretion, may waive the restriction on redemption set forth in this Section 8.04(c).
(d) Any Cash Amount to be paid to a Redeeming Limited Partner pursuant to this Section 8.04 shall be paid on the Specified Redemption
Date; provided , however , that the General Partner may elect to cause the Specified Redemption Date to be delayed for up to an additional 90
days to the extent required for Summit REIT to cause additional REIT Shares to be issued to provide financing to be used to make such payment
of the Cash Amount and may also delay such Specified Redemption Date to the extent necessary to effect compliance with applicable
requirements of the law. Any REIT Share Amount to be paid to a Redeeming Limited Partner pursuant to this Section 8.04 shall be paid on the
Specified Redemption Date; provided , however , that the General Partner may elect to cause the Specified Redemption Date to be delayed for up
to an additional 180 days to the extent required for Summit REIT to cause additional REIT Shares to be issued and may also delay such Specified
Redemption Date to the extent necessary to effect compliance with applicable requirements of the law. Notwithstanding the foregoing, Summit
REIT agrees to use its commercially reasonable efforts to cause the closing of the acquisition of redeemed Common Units hereunder to occur as
quickly as reasonably possible.
(e) Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that it determines to be
necessary or appropriate to cause the Partnership to comply with any withholding requirements established under the Code or any other federal,
state, local or foreign law that apply upon a Redeeming Limited Partner’s exercise of the Common Unit Redemption Right. If a Redeeming
Limited Partner believes that it is
-42-
exempt from such withholding upon the exercise of the Common Unit Redemption Right, such Partner must furnish the General Partner with a
FIRPTA Certificate in the form attached hereto as Exhibit C-1 or Exhibit C-2 , as applicable, and any similar forms or certificates required to
avoid or reduce the withholding under federal, state, local or foreign law or such other form as the General Partner may reasonably request. If the
Partnership, Summit REIT or the General Partner is required to withhold and pay over to any taxing authority any amount upon a Redeeming
Limited Partner’s exercise of the Common Unit Redemption Right and if the Common Redemption Amount equals or exceeds the Withheld
Amount, the Withheld Amount shall be treated as an amount received by such Partner in redemption of its Common Units. If, however, the
Common Redemption Amount is less than the Withheld Amount, the Redeeming Limited Partner shall not receive any portion of the Common
Redemption Amount, the Common Redemption Amount shall be treated as an amount received by such Partner in redemption of its Common
Units, and the Partner shall contribute the excess of the Withheld Amount over the Common Redemption Amount to the Partnership before the
Partnership is required to pay over such excess to a taxing authority.
(f) Notwithstanding any other provision of this Agreement, the General Partner may place appropriate restrictions on the ability of the
Limited Partners to exercise their Common Unit Redemption Rights as and if deemed necessary or reasonable to ensure that the Partnership does
not constitute a “publicly traded partnership” under Section 7704 of the Code. If and when the General Partner determines that imposing such
restrictions is necessary, the General Partner shall give prompt written notice thereof (a “ Restriction Notice ”) to each of the Limited Partners,
which notice shall be accompanied by a copy of an opinion of counsel to the Partnership that states that, in the opinion of such counsel,
restrictions are necessary or reasonable in order to avoid the Partnership being treated as a “publicly traded partnership” under Section 7704 of the
Code.
8.05 Registration . Subject to the terms of any agreement between the General Partner and a Limited Partner with respect to Common Units
held by such Limited Partner:
(a) Shelf Registration of the REIT Shares . Following the date on which Summit REIT becomes eligible to use a registration statement on
Form S-3 for the registration of securities under the Securities Act (the “ S-3 Eligible Date ”) Summit REIT shall file with the Commission a shelf
registration statement under Rule 415 of the Securities Act (a “ Registration Statement ”), or any similar rule that may be adopted by the
Commission, covering (i) the issuance of REIT Shares issuable upon redemption of the Common Units held by such Limited Partner as of the date
of this Agreement (“ Redemption Shares ”) and/or (ii) the resale by the holder of the Redemption Shares; provided , however , that Summit REIT
shall be required to file only two such registrations in any 12-month period. In connection therewith, Summit REIT will:
(1) use commercially reasonable efforts to have such Registration Statement declared effective;
(2) register or qualify the Redemption Shares covered by the Registration Statement under the securities or blue sky laws of such
jurisdictions within the United States as required by law, and do such other reasonable acts and things as may be required of it to enable such
holders to consummate the sale or other disposition in
-43-
such jurisdictions of the Redemption Shares; provided , however , that Summit REIT shall not be required to (i) qualify as a foreign corporation or
consent to a general or unlimited service or process in any jurisdictions in which it would not otherwise be required to be qualified or so consent
or (ii) qualify as a dealer in securities; and
(3) otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the Commission in connection
with a Registration Statement.
Summit REIT further agrees to supplement or make amendments to each Registration Statement, if required by the rules, regulations or
instructions applicable to the registration form utilized by Summit REIT or by the Securities Act or rules and regulations thereunder for such
Registration Statement. Each Limited Partner agrees to furnish to Summit REIT, upon request, such information with respect to the Limited
Partner as may be required to complete and file the Registration Statement.
In connection with and as a condition to Summit REIT’s obligations with respect to the filing of a Registration Statement pursuant to this
Section 8.05, each Limited Partner agrees with Summit REIT that:
(w) it will provide in a timely manner to Summit REIT such information with respect to the Limited Partner as reasonably required to
complete the Registration Statement or as otherwise required to comply with applicable securities laws and regulations;
(x) it will not offer or sell its Redemption Shares until (A) such Redemption Shares have been included in a Registration Statement and
(B) it has received notice that the Registration Statement covering such Redemption Shares, or any post-effective amendment thereto, has been
declared effective by the Commission, such notice to have been satisfied by the posting by the Commission on www.sec.gov of a notice of
effectiveness;
(y) if Summit REIT determines in its good faith judgment, after consultation with counsel, that the use of the Registration Statement,
including any pre- or post-effective amendment thereto, or the use of any prospectus contained in such Registration Statement would require the
disclosure of important information that Summit REIT has a bona fide business purpose for preserving as confidential or the disclosure of which,
in the judgment of Summit REIT, would impede Summit REIT’s ability to consummate a significant transaction, upon written notice of such
determination by Summit REIT (which notice shall be deemed sufficient if given through the issuance of a press release or filing with the
Commission and, if such notice is not publicly distributed, the Limited Partner agrees to keep the subject information confidential and
acknowledges that such information may constitute material non-public information subject to the applicable restrictions under securities laws),
the rights of each Limited Partner to offer, sell or distribute its Redemption Shares pursuant to such Registration Statement or prospectus or to
require Summit REIT to take action with respect to the registration or sale of any Redemption Shares pursuant to a Registration Statement
(including any action contemplated by this Section 8.05) will be suspended until the date upon which Summit REIT notifies such Limited Partner
in writing (which notice shall be deemed sufficient if given through the issuance of a press release or filing with the Commission and, if such
notice is not publicly distributed, the
-44-
Limited Partner agrees to keep the subject information confidential and acknowledges that such information may constitute material non-public
information subject to the applicable restrictions under securities laws) that suspension of such rights for the grounds set forth in this paragraph is
no longer necessary; provided , however , that Summit REIT may not suspend such rights for an aggregate period of more than 180 days in any
12-month period; and
(z) in the case of the registration of any underwritten equity offering proposed by Summit REIT (other than any registration by Summit
REIT on Form S-8, or a successor or substantially similar form, of an employee stock option, stock purchase or compensation plan or of securities
issued or issuable pursuant to any such plan, each Limited Partner will agree, if requested in writing by the managing underwriter or underwriters
administering such offering, not to effect any offer, sale or distribution of any REIT Shares or Redemption Shares (or any option or right to
acquire REIT Shares or Redemption Shares) during the period commencing on the tenth day prior to the expected effective date (which date shall
be stated in such notice) of the registration statement covering such underwritten primary equity offering or, if such offering shall be a “take-
down” from an effective shelf registration statement, the tenth day prior to the expected commencement date (which date shall be stated in such
notice) of such offering, and ending on the date specified by such managing underwriter in such written request to the Limited Partners; provided ,
however , that no Limited Partner shall be required to agree not to effect any offer, sale or distribution of its Redemption Shares for a period of
time that is longer than the greater of 90 days or the period of time for which any senior executive of Summit REIT is required so to agree in
connection with such offering. Nothing in this paragraph shall be read to limit the ability of any Limited Partner to redeem its Common Units in
accordance with the terms of this Agreement.
(b) Listing on Securities Exchange . If Summit REIT lists or maintains the listing of REIT Shares on any securities exchange or national
market system, it shall, at its expense and as necessary to permit the registration and sale of the Redemption Shares hereunder, list thereon,
maintain and, when necessary, increase such listing to include such Redemption Shares.
(c) Registration Not Required . Notwithstanding the foregoing, Summit REIT shall not be required to file or maintain the effectiveness of a
registration statement relating to Redemption Shares after the first date upon which, in the opinion of counsel to Summit REIT, all of the
Redemption Shares covered thereby could be sold by the holders thereof either (i) pursuant to Rule 144 under the Securities Act, or any successor
rule thereto (“Rule 144”) without limitation as to amount or manner of sale or (ii) pursuant to Rule 144 in one transaction in accordance with the
volume limitations contained in Rule 144(e).
(d) Allocation of Expenses . The Partnership shall pay all expenses in connection with the Registration Statement, including without
limitation (i) all expenses incident to filing with the Financial Industry Regulatory Authority, Inc., (ii) registration fees, (iii) printing expenses,
(iv) accounting and legal fees and expenses, except to the extent holders of Redemption Shares elect to engage accountants or attorneys in addition
to the accountants and attorneys engaged by Summit REIT or the Partnership, which fees and expenses for such accountants or attorneys shall be
for the account of the holders of the Redemption Shares, (v) accounting expenses incident to or required by any such registration or qualification
and
-45-
(vi) expenses of complying with the securities or blue sky laws of any jurisdictions in connection with such registration or qualification; provided ,
however , neither the Partnership nor Summit REIT shall be liable for (A) any discounts or commissions to any underwriter or broker attributable
to the sale of Redemption Shares, or (B) any fees or expenses incurred by holders of Redemption Shares in connection with such registration that,
according to the written instructions of any regulatory authority, the Partnership or Summit REIT is not permitted to pay.
(e) Indemnification .
(i) In connection with the Registration Statement, the General Partner and the Partnership agree to indemnify each holder of Redemption
Shares and each Person who controls any such holder of Redemption Shares within the meaning of Section 15 of the Securities Act, against all
losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) caused by any untrue, or alleged untrue, statement of
a material fact contained in the Registration Statement, preliminary prospectus or prospectus (as amended or supplemented if Summit REIT shall
have furnished any amendments or supplements thereto) or caused by any omission or alleged omission, to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses
are caused by any untrue statement, alleged untrue statement, omission, or alleged omission based upon information furnished to Summit REIT by
the Limited Partner of the holder for use therein. Summit REIT and each officer, director and controlling person of Summit REIT and the
Partnership shall be indemnified by each Limited Partner or holder of Redemption Shares covered by the Registration Statement for all such
losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) caused by any untrue, or alleged untrue, statement or
any omission, or alleged omission, based upon information furnished to Summit REIT by the Limited Partner or the holder for use therein.
(ii) Promptly upon receipt by a party indemnified under this Section 8.05(e) of notice of the commencement of any action against such
indemnified party in respect of which indemnity or reimbursement may be sought against any indemnifying party under this Section 8.05(e), such
indemnified party shall notify the indemnifying party in writing of the commencement of such action, but the failure to so notify the indemnifying
party shall not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 8.05(e) unless such failure
shall materially adversely affect the defense of such action. In case notice of commencement of any such action shall be given to the indemnifying
party as above provided, the indemnifying party shall be entitled to participate in and, to the extent it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense of such action at its own expense, with counsel chosen by it and reasonably
satisfactory to such indemnified party. The indemnified party shall have the right to employ separate counsel in any such action and participate in
the defense thereof, but the reasonable fees and expenses of such counsel (other than reasonable costs of investigation) shall be paid by the
indemnified party unless (i) the indemnifying party agrees to pay the same, (ii) the indemnifying party fails to assume the defense of such action
with counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action
-46-
(including any impleaded parties) have been advised by such counsel that representation of such indemnified party and the indemnifying party by
the same counsel would be inappropriate under applicable standards of professional conduct (in which case the indemnified party shall have the
right to separate counsel and the indemnifying party shall pay the reasonable fees and expenses of such separate counsel, provided that, the
indemnifying party shall not be liable for more than one separate counsel). No indemnifying party shall be liable for any settlement of any
proceeding entered into without its consent.
(f) Contribution .
(i) If for any reason the indemnification provisions contemplated by Section 8.05(e) hereof are either unavailable or insufficient to hold
harmless an indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then the party that would otherwise be
required to provide indemnification or the indemnifying party (in either case, for purposes of this Section 8.05(f), the “ Indemnifying Party ”) in
respect of such losses, claims, damages or liabilities, shall contribute to the amount paid or payable by the party that would otherwise be entitled to
indemnification or the indemnified party (in either case, for purposes of this Section 8.05(f), the “ Indemnified Party ”) as a result of such losses,
claims, damages, liabilities or expense, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the
Indemnified Party, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and Indemnified Party shall
be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact related to information supplied by the Indemnifying Party or Indemnified Party, and the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party.
(ii) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 8.05(f) were determined by pro
rata allocation (even if the holders were treated as one entity for such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding paragraph. No person or entity determined to have committed a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person or entity who was
not guilty of such fraudulent misrepresentation.
(iii) The contribution provided for in this Section 8.05(f) shall survive the termination of this Agreement and shall remain in full force and
effect regardless of any investigation made by or on behalf of any Indemnified Party.
-47-
9.01 Purchase for Investment .
ARTICLE IX
TRANSFERS OF PARTNERSHIP INTERESTS
(a) Each Limited Partner, by its signature below or by its subsequent admission to the Partnership, hereby represents and warrants to the
General Partner and to the Partnership that the acquisition of such Limited Partner’s Partnership Units is made for investment purposes only and
not with a view to the resale or distribution of such Partnership Units.
(b) Subject to the provisions of Section 9.02 hereof, each Limited Partner agrees that such Limited Partner will not sell, assign or otherwise
transfer such Limited Partner’s Partnership Units or any fraction thereof, whether voluntarily or by operation of law or at judicial sale or
otherwise, to any Person who does not make the representations and warranties to the General Partner set forth in Section 9.01(a) hereof.
9.02 Restrictions on Transfer of Partnership Units .
(a) Subject to the provisions of Sections 9.02(b) and (c) hereof, no Limited Partner may offer, sell, assign, hypothecate, pledge or otherwise
transfer all or any portion of such Limited Partner’s Partnership Units, or any of such Limited Partner’s economic rights as a Limited Partner,
whether voluntarily or by operation of law or at judicial sale or otherwise (collectively, a “ Transfer ”) without the consent of the General Partner,
which consent may be granted or withheld in its sole and absolute discretion; provided , however , that the term Transfer does not include (a) any
redemption of Common Units by the Partnership or Summit REIT, or acquisition of Common Units by Summit REIT, pursuant to Section 8.04 or
(b) any redemption of Partnership Units pursuant to any Partnership Unit Designation. The General Partner may require, as a condition of any
Transfer to which it consents, that the transferor assume all costs incurred by the Partnership in connection therewith (including, but not limited to,
cost of legal counsel).
(b) No Limited Partner may withdraw from the Partnership other than as a result of a permitted Transfer ( i.e. , a Transfer consented to as
contemplated by clause (a) above or a Transfer pursuant to Section 9.05 hereof) of all of such Limited Partner’s Partnership Units pursuant to this
Article IX or pursuant to a redemption of all of such Limited Partner’s Common Units pursuant to Section 8.04 hereof. Upon the permitted
Transfer or redemption of all of a Limited Partner’s Common Units, such Limited Partner shall cease to be a Limited Partner.
(c) No Limited Partner may effect a Transfer of its Partnership Units, in whole or in part, if, in the opinion of legal counsel for the
Partnership, such proposed Transfer would require the registration of the Partnership Units under the Securities Act or would otherwise violate
any applicable federal or state securities or blue sky law (including investment suitability standards).
(d) No Transfer by a Limited Partner of its Partnership Units, in whole or in part, may be made to any Person if (i) in the opinion of legal
counsel for the Partnership, such Transfer would result in the Partnership being treated as an association taxable as a corporation
-48-
(other than a qualified REIT subsidiary within the meaning of Section 856(i) of the Code), (ii) in the opinion of legal counsel for the Partnership, it
would adversely affect the ability of Summit REIT to continue to qualify as a REIT or subject Summit REIT to any additional taxes under
Section 857 or Section 4981 of the Code, (iii) the General Partner determines, in its sole and absolute discretion, that such Transfer, along or in
connection with other Transfers, could cause the Partnership Units to be treated as readily tradable on an “established securities market” or a
“secondary market (or the substantial equivalent thereof)” within the meaning of Section 7704 of the Code, provided that the General Partner may
presume that any proposed Transfer of Partnership Units during calendar year 2011 will cause the Partnership Units to be treated as readily
tradable on a “secondary market (or the substantial equivalent thereof)“or (iv) in the opinion of legal counsel for the Partnership, such Transfer is
reasonably likely to cause the Partnership to fail to satisfy the 90% qualifying income test described in Section 7704(c) of the Code.
(e) Any purported Transfer in contravention of any of the provisions of this Article IX shall be void ab initio and ineffectual and shall not be
binding upon, or recognized by, the General Partner or the Partnership.
(f) Prior to the consummation of any Transfer under this Article IX, the transferor and/or the transferee shall deliver to the General Partner
such opinions, certificates and other documents as the General Partner shall request in connection with such Transfer.
9.03 Admission of Substitute Limited Partner .
(a) Subject to the other provisions of this Article IX, an assignee of the Partnership Units of a Limited Partner (which shall be understood to
include any purchaser, transferee, donee or other recipient of any disposition of such Partnership Units) shall be deemed admitted as a Limited
Partner of the Partnership only with the consent of the General Partner, which consent may be given or withheld by the General Partner in its sole
and absolute discretion, and upon the satisfactory completion of the following:
(i) The assignee shall have accepted and agreed to be bound by the terms and provisions of this Agreement by executing a counterpart or an
amendment thereof, including a revised Exhibit A , and such other documents or instruments as the General Partner may require in order to effect
the admission of such Person as a Limited Partner.
(ii) To the extent required, an amended Certificate evidencing the admission of such Person as a Limited Partner shall have been signed,
acknowledged and filed in accordance with the Act.
(iii) The assignee shall have delivered a letter containing the representation set forth in Section 9.01(a) hereof and the representations and
warranties set forth in Section 9.01(b) hereof.
(iv) If the assignee is a corporation, partnership, limited liability company or trust, the assignee shall have provided the General Partner with
evidence
-49-
satisfactory to counsel for the Partnership of the assignee’s authority to become a Limited Partner under the terms and provisions of this
Agreement.
(v) The assignee shall have executed a power of attorney containing the terms and provisions set forth in Section 8.02 hereof.
(vi) The assignee shall have paid all legal fees and other expenses of the Partnership and the General Partner and filing and publication costs
in connection with its substitution as a Limited Partner.
(vii) The assignee shall have obtained the prior written consent of the General Partner to its admission as a Substitute Limited Partner,
which consent may be given or denied in the exercise of the General Partner’s sole and absolute discretion.
(b) For the purpose of allocating Profits and Losses and distributing cash received by the Partnership, a Substitute Limited Partner shall be
treated as having become, and appearing in the records of the Partnership as, a Partner upon the filing of the Certificate described in Section 9.03
(a)(ii) hereof or, if no such filing is required, the later of the date specified in the transfer documents or the date on which the General Partner has
received all necessary instruments of transfer and substitution.
(c) The General Partner and the Substitute Limited Partner shall cooperate with each other by preparing the documentation required by this
Section 9.03 and making all official filings and publications. The Partnership shall take all such action as promptly as practicable after the
satisfaction of the conditions in this Article IX to the admission of such Person as a Limited Partner of the Partnership.
9.04 Rights of Assignees of Partnership Units .
(a) Subject to the provisions of Sections 9.01 and 9.02 hereof, except as required by operation of law, the Partnership shall not be obligated
for any purposes whatsoever to recognize the assignment by any Limited Partner of its Partnership Units until the Partnership has received notice
thereof.
(b) Any Person who is the assignee of all or any portion of a Limited Partner’s Partnership Units, but does not become a Substitute Limited
Partner and desires to make a further assignment of such Partnership Units, shall be subject to all the provisions of this Article IX to the same
extent and in the same manner as any Limited Partner desiring to make an assignment of its Partnership Units.
9.05 Effect of Bankruptcy, Death, Incompetence or Termination of a Limited Partner . The occurrence of an Event of Bankruptcy as to a
Limited Partner, the death of a Limited Partner or a final adjudication that a Limited Partner is incompetent (which term shall include, but not be
limited to, insanity) shall not cause the termination or dissolution of the Partnership, and the business of the Partnership shall continue if an order
for relief in a bankruptcy proceeding is entered against a Limited Partner, the trustee or receiver of his estate or, if such Limited Partner dies, such
Limited Partner’s executor, administrator or trustee, or, if such Limited Partner is finally adjudicated incompetent, such Limited Partner’s
committee,
-50-
guardian or conservator, shall have the rights of such Limited Partner for the purpose of settling or managing such Limited Partner’s estate
property and such power as the bankrupt, deceased or incompetent Limited Partner possessed to assign all or any part of such Limited Partner’s
Partnership Units and to join with the assignee in satisfying conditions precedent to the admission of the assignee as a Substitute Limited Partner.
9.06 Joint Ownership of Partnership Units . A Partnership Unit may be acquired by two individuals as joint tenants with right of
survivorship, provided that such individuals either are married or are related and share the same home as tenants in common. The written consent
or vote of both owners of any such jointly held Partnership Unit shall be required to constitute the action of the owners of such Partnership Unit;
provided , however , that the written consent of only one joint owner will be required if the Partnership has been provided with evidence
satisfactory to the counsel for the Partnership that the actions of a single joint owner can bind both owners under the applicable laws of the state of
residence of such joint owners. Upon the death of one owner of a Partnership Unit held in a joint tenancy with a right of survivorship, the
Partnership Unit shall become owned solely by the survivor as a Limited Partner and not as an assignee. The Partnership need not recognize the
death of one of the owners of a jointly-held Partnership Unit until it shall have received certificated notice of such death. Upon notice to the
General Partner from either owner, the General Partner shall cause the Partnership Unit to be divided into two equal Partnership Units, which shall
thereafter be owned separately by each of the former owners.
ARTICLE X
BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS
10.01 Books and Records . At all times during the continuance of the Partnership, the General Partner shall keep or cause to be kept at the
Partnership’s specified office true and complete books of account in accordance with generally accepted accounting principles, including: (a) a
current list of the full name and last known business address of each Partner, (b) a copy of the Certificate Limited Partnership and all certificates
of amendment thereto, (c) copies of the Partnership’s federal, state and local income tax returns and reports, (d) copies of this Agreement and any
financial statements of the Partnership for the three most recent years and (e) all documents and information required under the Act. Any Partner
or its duly authorized representative, upon paying the costs of collection, duplication and mailing, shall be entitled to a copy of such records if
reasonably requested.
10.02 Custody of Partnership Funds; Bank Accounts .
(a) All funds of the Partnership not otherwise invested shall be deposited in one or more accounts maintained in such banking or brokerage
institutions as the General Partner shall determine, and withdrawals shall be made only on such signature or signatures as the General Partner may,
from time to time, determine.
(b) All deposits and other funds not needed in the operation of the business of the Partnership may be invested by the General Partner. The
funds of the Partnership shall not be commingled with the funds of any Person other than the General Partner except for such
-51-
commingling as may necessarily result from an investment in those investment companies permitted by this Section 10.02(b).
10.03 Fiscal and Taxable Year . The fiscal and taxable year of the Partnership shall be the calendar year unless otherwise required by the
Code.
10.04 Annual Tax Information and Report . Within 75 days after the end of each fiscal year of the Partnership, the General Partner shall
furnish to each person who was a Limited Partner at any time during such year the tax information necessary to file such Limited Partner’s
individual tax returns as shall be reasonably required by law.
10.05 Tax Matters Partner; Tax Elections; Special Basis Adjustments .
(a) The General Partner shall be the Tax Matters Partner of the Partnership. As Tax Matters Partner, the General Partner shall have the right
and obligation to take all actions authorized and required, respectively, by the Code for the Tax Matters Partner. The General Partner shall have
the right to retain professional assistance in respect of any audit of the Partnership by the Service and all out-of-pocket expenses and fees incurred
by the General Partner on behalf of the Partnership as Tax Matters Partner shall constitute Partnership expenses. In the event the General Partner
receives notice of a final Partnership adjustment under Section 6223(a)(2) of the Code, the General Partner shall either (i) file a court petition for
judicial review of such final adjustment within the period provided under Section 6226(a) of the Code, a copy of which petition shall be mailed to
all Limited Partners on the date such petition is filed, or (ii) mail a written notice to all Limited Partners, within such period, that describes the
General Partner’s reasons for determining not to file such a petition.
(b) All elections required or permitted to be made by the Partnership under the Code or any applicable state or local tax law shall be made
by the General Partner in its sole and absolute discretion.
(c) In the event of a transfer of all or any part of the Partnership Interest of any Partner, the Partnership, at the option of the General Partner,
may elect pursuant to Section 754 of the Code to adjust the basis of the Properties. Notwithstanding anything contained in Article V of this
Agreement, any adjustments made pursuant to Section 754 shall affect only the successor in interest to the transferring Partner and in no event
shall be taken into account in establishing, maintaining or computing Capital Accounts for the other Partners for any purpose under this
Agreement. Each Partner will furnish the Partnership with all information necessary to give effect to such election.
(d) The Partners, intending to be legally bound, hereby authorize the Partnership to make an election (the “ Safe Harbor Election ”) to have
the “liquidation value” safe harbor provided in Proposed Treasury Regulation § 1.83-3(1) and the Proposed Revenue Procedure set forth in
Internal Revenue Service Notice 2005-43, as such safe harbor may be modified when such proposed guidance is issued in final form or as
amended by subsequently issued guidance (the “ Safe Harbor ”), apply to any interest in the Partnership transferred to a service provider while
the Safe Harbor Election remains effective, to the extent such interest meets the Safe Harbor requirements (collectively, such interests are referred
to as “ Safe Harbor
-52-
Interests ”). The Tax Matters Partner is authorized and directed to execute and file the Safe Harbor Election on behalf of the Partnership and the
Partners. The Partnership and the Partners (including any person to whom an interest in the Partnership is transferred in connection with the
performance of services) hereby agree to comply with all requirements of the Safe Harbor (including forfeiture allocations) with respect to all Safe
Harbor Interests and to prepare and file all U.S. federal income tax returns reporting the tax consequences of the issuance and vesting of Safe
Harbor Interests consistent with such final Safe Harbor guidance. The Partnership is also authorized to take such actions as are necessary to
achieve, under the Safe Harbor, the effect that the election and compliance with all requirements of the Safe Harbor referred to above would be
intended to achieve under Proposed Treasury Regulation § 1.83-3, including amending this Agreement.
(e) Each Limited Partner shall be required to provide such information as reasonably requested by the Partnership in order to determine
whether such Limited Partner (i) owns, directly or constructively (within the meaning of Section 318(a) of the Code, as modified by Section 856
(d)(5) of the Code and Section 7704(d)(3) of the Code), five percent (5%) or more of the of the value of the Partnership or (ii) owns, directly or
constructively (within the meaning of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code and Section 7704(d)(3) of the
Code), ten percent (10%) or more of (a) the stock, by voting power or value, of a tenant (other than a “taxable REIT subsidiary” within the
meaning of Section 856(d) of the Code) of the Partnership that is a corporation or (b) the assets or net profits of a tenant of the Partnership that is a
noncorporate entity.
11.01 Amendment of Agreement .
ARTICLE XI
AMENDMENT OF AGREEMENT; MERGER
The General Partner’s consent shall be required for any amendment to this Agreement. The General Partner, without the consent of the Limited
Partners, may amend this Agreement in any respect; provided , however , that the following amendments shall require the consent of a Majority in
Interest (other than the General Partner or any Subsidiary of the General Partner):
(a) any amendment affecting the operation of the Conversion Factor or the Common Unit Redemption Right (except as otherwise provided
herein) in a manner that adversely affects the Limited Partners in any material respect;
(b) any amendment that would adversely affect the rights of the Limited Partners to receive the distributions payable to them hereunder,
other than with respect to the issuance of additional Partnership Units pursuant to Section 4.02 hereof;
(c) any amendment that would alter the Partnership’s allocations of Profit and Loss to the Limited Partners, other than with respect to the
issuance of additional Partnership Units pursuant to Section 4.02 hereof;
(d) any amendment that would impose on the Limited Partners any obligation to make additional Capital Contributions to the Partnership;
or
-53-
(e) any amendment to this Article XI.
11.02 Merger of Partnership .
The General Partner, without the consent of the Limited Partners, may (i) merge or consolidate the Partnership with or into any other domestic
or foreign partnership, limited partnership, limited liability company or corporation or (ii) sell all or substantially all of the assets of the
Partnership in a transaction pursuant to which the Limited Partners (other than the General Partner, Summit REIT or any Subsidiary of the General
Partner or Summit REIT) receives consideration as set forth in Section 7.01(c)(ii) hereof or the transaction complies with Sections 7.01(c)(iii) or
7.01(d) hereof and may amend this Agreement in connection with any such transaction consistent with the provisions of this Article XI; provided ,
however , that the consent of a Majority in Interest shall be required in the case of any other (a) merger or consolidation of the Partnership with or
into any other domestic or foreign partnership, limited partnership, limited liability company or corporation or (b) sale of all or substantially all of
the assets of the Partnership.
ARTICLE XII
GENERAL PROVISIONS
12.01 Notices . All communications required or permitted under this Agreement shall be in writing and shall be deemed to have been given
when delivered personally, by email, by press release, by posting on the Web site of the General Partner, or upon deposit in the United States mail,
registered, first-class postage prepaid return receipt requested, or via courier to the Partners at the addresses set forth in Exhibit A attached hereto,
as it may be amended or restated from time to time; provided , however , that any Partner may specify a different address by notifying the General
Partner in writing of such different address. Notices to the General Partner and the Partnership shall be delivered at or mailed to its principal office
address set forth in Section 2.03 hereof. The General Partner and the Partnership may specify a different address by notifying the Limited Partners
in writing of such different address.
12.02 Survival of Rights . Subject to the provisions hereof limiting transfers, this Agreement shall be binding upon and inure to the benefit of
the Partners and the Partnership and their permitted respective legal representatives, successors, transferees and assigns.
12.03 Additional Documents . Each Partner agrees to perform all further acts and execute, swear to, acknowledge and deliver all further
documents that may be reasonable, necessary, appropriate or desirable to carry out the provisions of this Agreement or the Act.
12.04 Severability . If any provision of this Agreement shall be declared illegal, invalid or unenforceable in any jurisdiction, then such
provision shall be deemed to be severable from this Agreement (to the extent permitted by law) and in any event such illegality, invalidity or
unenforceability shall not affect the remainder hereof. To the extent permitted under applicable law, the severed provision shall be interpreted or
modified so as to be enforceable to the maximum extent permitted by law.
12.05 Entire Agreement . This Agreement and exhibits attached hereto constitute the entire Agreement of the Partners and supersede all prior
written agreements and prior and
-54-
contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof.
12.06 Pronouns and Plurals . When the context in which words are used in the Agreement indicates that such is the intent, words in the
singular number shall include the plural and the masculine gender shall include the neuter or female gender as the context may require.
12.07 Headings . The Article headings or sections in this Agreement are for convenience only and shall not be used in construing the scope of
this Agreement or any particular Article.
12.08 Counterparts . This Agreement may be executed by hand or by power of attorney in several counterparts, each of which shall be
deemed to be an original copy and all of which together shall constitute one and the same instrument binding on all parties hereto, notwithstanding
that all parties shall not have signed the same counterpart.
12.09 Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware.
[ Signature page follows. ]
-55-
IN WITNESS WHEREOF, the parties hereto have hereunder affixed their signatures to this First Amended and Restated Agreement of Limited
Partnership, all as of the 14 th day of February, 2011.
GENERAL PARTNER:
SUMMIT HOTEL GP, LLC,
a Delaware limited liability company
By: Summit Hotel Properties, Inc.,
a Maryland corporation, its Sole Member
By: /s/ Kerry W. Boekelheide
Name: Kerry W. Boekelheide
Title: Executive Chairman
LIMITED PARTNER:
SUMMIT HOTEL PROPERTIES, INC.,
a Maryland corporation
By: /s/ Kerry W. Boekelheide
Name: Kerry W. Boekelheide
Title: Executive Chairman
Signature Page to First Amended and Restated Agreement of Limited Partnership of Summit Hotel OP, LP
LIMITED PARTNER:
THE SUMMIT GROUP, INC.
a South Dakota corporation
By: /s/ Kerry W. Boekelheide
Name: Kerry W. Boekelheide
Title: Executive Chairman
Signature Page to First Amended and Restated Agreement of Limited Partnership of Summit Hotel OP, LP
LIMITED PARTNER:
By: /s/ Gary Tharaldson
GARY THARALDSON
Signature Page to First Amended and Restated Agreement of Limited Partnership of Summit Hotel OP, LP
Name and Address of Partner
GENERAL PARTNER:
Summit Hotel GP, LLC
c/o Summit Hotel Properties, Inc.
2701 South Minnesota Avenue, Suite 6
Sioux Falls, SD 57105
LIMITED PARTNERS:
Summit Hotel Properties, Inc.
2701 South Minnesota Avenue, Suite 6
Sioux Falls, SD 57105
Other Limited Partners listed on
Schedule 1 attached hereto and
incorporated by reference herein
TOTAL:
EXHIBIT A
(As of February 14, 2011)
Partnership Units
(Type and Amount)
Percentage Interest
37,378 Common Units
0.1000 %
27,240,622 Common Units
72.8788 %
10,100,000 Common Units
27.0212 %
37,378,000 Common Units
100 %
Exhibit A-1
Schedule 1 to Exhibit A
Exhibit A-2
EXHIBIT B
NOTICE OF EXERCISE OF REDEMPTION RIGHT
In accordance with Section 8.04 of the Agreement of Limited Partnership, as amended (the “Agreement”) of Summit Hotel OP, LP, the
undersigned hereby irrevocably (i) presents for redemption ________ Common Units in Summit Hotel OP, LP in accordance with the terms of the
Agreement and the Common Unit Redemption Right referred to in Section 8.04 thereof, (ii) surrenders such Common Units and all right, title and
interest therein and (iii) directs that the Cash Amount or REIT Shares Amount (as defined in the Agreement) as determined by the General Partner
deliverable upon exercise of the Common Unit Redemption Right be delivered to the address specified below, and if REIT Shares (as defined in
the Agreement) are to be delivered, such REIT Shares be registered or placed in the name(s) and at the address(es) specified below. The
undersigned hereby represents, warrants and certifies that the undersigned (a) has title to such Common Units, free and clear of the rights and
interests of any person or entity other than the Partnership or the General Partner; (b) has the full right, power and authority to cause the
redemption of the Common Units as provided herein; and (c) has obtained the approval of all persons or entities, if any, having the right to consent
to or approve the Common Units for redemption.
Dated: ,
Name of Limited Partner:
(Signature of Limited Partner or Authorized
Representative)
(Mailing Address)
(City) (State) (Zip Code)
Signature Guaranteed by:
If REIT Shares are to be issued, issue to:
Name:
Please insert Social Security or Identifying Number:
Exhibit B-1
EXHIBIT C-1
CERTIFICATION OF NON-FOREIGN STATUS
(FOR REDEEMING LIMITED PARTNERS THAT ARE ENTITIES)
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the “Code”), in the event of a disposition by a non-U.S. person of a
partnership interest in a partnership in which (i) 50% or more of the value of the gross assets consists of United States real property interests
(“USRPIs”), as defined in Section 897(c) of the Code, and (ii) 90% or more of the value of the gross assets consists of USRPIs, cash, and cash
equivalents, the transferee will be required to withhold 10% of the amount realized by the non-U.S. person upon the disposition. To inform
Summit Hotel GP, LLC (the “General Partner”) and Summit Hotel OP, LP (the “Partnership”) that no withholding is required with respect to the
redemption by ____________ (“Partner”) of its Common Units in the Partnership, the undersigned hereby certifies the following on behalf of
Partner:
1. Partner is not a foreign corporation, foreign partnership, foreign trust, or foreign estate, as those terms are defined in the Code and the Treasury
regulations thereunder.
2. Partner is not a disregarded entity as defined in Treasury Regulation Section 1.1445-2(b)(2)(iii).
3. The U.S. employer identification number of Partner is ____________.
4. The principal business address of Partner is: _________________________, __________________________ and Partner’s place of
incorporation is ____________.
5. Partner agrees to inform the General Partner if it becomes a foreign person at any time during the three-year period immediately following the
date of this notice.
6. Partner understands that this certification may be disclosed to the Internal Revenue Service by the General Partner and that any false statement
contained herein could be punished by fine, imprisonment, or both.
PARTNER:
By:
Name:
Title:
Exhibit C-1-1
Under penalties of perjury, I declare that I have examined this certification and, to the best of my knowledge and belief, it is true, correct, and
complete, and I further declare that I have authority to sign this document on behalf of Partner.
Date:
Name:
Title:
Exhibit C-1-2
EXHIBIT C-2
CERTIFICATION OF NON-FOREIGN STATUS
(FOR REDEEMING LIMITED PARTNERS THAT ARE INDIVIDUALS)
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the “Code”), in the event of a disposition by a non-U.S. person of a
partnership interest in a partnership in which (i) 50% or more of the value of the gross assets consists of United States real property interests
(“USRPIs”), as defined in Section 897(c) of the Code, and (ii) 90% or more of the value of the gross assets consists of USRPIs, cash, and cash
equivalents, the transferee will be required to withhold 10% of the amount realized by the non-U.S. person upon the disposition. To inform
Summit Hotel GP, LLC (the “General Partner”) and Summit Hotel OP, LP (the “Partnership”) that no withholding is required with respect to my
redemption of my Common Units in the Partnership, I, ___________, hereby certify the following:
1. I am not a nonresident alien for purposes of U.S. income taxation.
2. My U.S. taxpayer identification number (social security number) is ____________.
3. My home address is: _____________________.
4. I agree to inform the General Partner promptly if I become a nonresident alien at any time during the three-year period immediately following
the date of this notice.
5. I understand that this certification may be disclosed to the Internal Revenue Service by the General Partner and that any false statement
contained herein could be punished by fine, imprisonment, or both.
Under penalties of perjury, I declare that I have examined this certification and, to the best of my knowledge and belief, it is true, correct, and
complete.
Name:
Date:
Name:
Title:
Exhibit C-2-1
EXHIBIT D
NOTICE OF ELECTION BY PARTNER TO CONVERT
LTIP UNITS INTO COMMON UNITS
The undersigned holder of LTIP Units hereby irrevocably (i) elects to convert the number of LTIP Units in Summit Hotel OP, LP (the
“Partnership”) set forth below into Common Units in accordance with the terms of the Agreement of Limited Partnership of the Partnership, as
amended; and (ii) directs that any cash in lieu of Common Units that may be deliverable upon such conversion be delivered to the address
specified below. The undersigned hereby represents, warrants, and certifies that the undersigned (a) has title to such LTIP Units, free and clear of
the rights or interests of any other person or entity other than the Partnership or the General Partner; (b) has the full right, power, and authority to
cause the conversion of such LTIP Units as provided herein; and (c) has obtained the consent to or approval of all persons or entities, if any,
having the right to consent to or approve such conversion.
Name of Holder:
(Please Print: Exact Name as Registered with Partnership)
Number of LTIP Units to be Converted:
Date of this Notice:
(Signature of Holder: Sign Exact Name as Registered with Partnership)
(Street Address)
(City)
(State)
(Zip Code)
Signature Guaranteed
by:
Exhibit D-1
EXHIBIT E
NOTICE OF ELECTION BY PARTNERSHIP TO FORCE CONVERSION OF
LTIP UNITS INTO COMMON UNITS
Summit Hotel OP, LP (the “Partnership”) hereby elects to cause the number of LTIP Units held by the holder of LTIP Units set forth below to
be converted into Common Units in accordance with the terms of the Agreement of Limited Partnership of the Partnership, as amended, effective
as of ____________ (the “Conversion Date”).
Name of Holder:
(Please Print: Exact Name as Registered with Partnership)
Number of LTIP Units to be
Converted:
Date of this Notice:
Exhibit E-1
SECOND EMPLOYMENT AGREEMENT
Exhibit 10.22
PROPERTIES, INC., a Maryland corporation (the “Company”), and RYAN A. BERTUCCI (the “Executive”), recites and provides as follows:
THIS SECOND EMPLOYMENT AGREEMENT, effective as of February 14, 2012, between SUMMIT HOTEL
W I T N E S S E T H :
WHEREAS , the Company desires to continue to employ the Executive to devote substantially all of his business time,
attention and efforts to the business of the Company and to serve as the Vice President of Acquisitions of the Company on the terms and subject to
the conditions hereinafter stated; and
WHEREAS , the Executive desires to be so employed on the terms and subject to the conditions hereinafter stated.
NOW, THEREFORE , in consideration of the premises and mutual obligations hereinafter set forth, the parties agree as
follows:
1. RECITALS . The above recitals are incorporated by reference herein and made a part hereof as set forth verbatim.
2. EMPLOYMENT . The Company shall continue to employ the Executive, and the Executive agrees to be so employed,
in the capacity of the Company’s Vice President of Acquisitions to serve for the Term (as hereinafter defined) hereof, subject to earlier
termination as hereinafter provided.
3. TERM . The Initial Term of the Executive’s employment under this Agreement (the “Initial Term”) shall be for a
period of six (6) months commencing on February 14, 2012 (the “Effective Date”), and continuing until August 13, 2012, unless terminated earlier
as provided herein. If neither the Company nor the Executive has provided the other with written notice of an intention to terminate this
Agreement at least thirty (30) days before the end of the Initial Term or any subsequent six (6) month renewal period, this Agreement will
automatically renew for a six (6) month period. For purposes of this Agreement, the word “Term” means the Initial Term and the period of any
extension of the Initial Term pursuant to the preceding sentence.
4. SERVICES . The Executive shall devote substantially all of his business time, attention and effort to the Company’s
affairs. The Company further agrees that the Executive may engage in civic and community activities and endeavors provided that such activities
do not interfere with the performance of the Executive’s duties hereunder. The Executive shall have full authority and responsibility for
formulating policies and administering the Company in all respects, subject to the general direction, approval and control of the Company’s
President and Chief Executive Officer.
5. COMPENSATION .
(a) Base Salary . During the Term, the Company shall pay the Executive for his services an annual Base Salary
equal to Two Hundred Twenty Thousand Dollars ($220,000), subject to any increases approved by the Board of Directors (the “Board”) or its
Compensation Committee (the “Committee”). Such Base Salary shall be paid in accordance with the Company’s payroll schedule. Any increase
in Base Salary shall not serve to limit or reduce any other obligations to the Executive under this Agreement.
(b) Annual Bonus . In addition to his annual Base Salary, for performance in calendar year 2012 and annually
thereafter during the Term, the Executive shall have the opportunity to earn an Annual Bonus to the extent that prescribed individual and corporate
goals established by the Committee are achieved. The individual and corporate goals established by the Committee shall provide the Executive
the opportunity to earn Annual Bonus payments of up to fifty percent (50%) of Base Salary to the extent such goals are achieved. Any Annual
Bonus that is earned under this Section 5(b) shall be paid in a single lump sum payment no later than March 15 following the calendar year in
which the Annual Bonus is earned.
6. BENEFITS . The Company agrees to provide the Executive with the following benefits:
(a) Vacation . The Executive shall be entitled each calendar year to a vacation, during which time his
compensation shall be paid in full. The time allotted for such vacation shall be an aggregate of four (4) weeks. In the year Executive terminates
employment, he shall be entitled to receive a prorated paid vacation based upon the amount of time that he has worked during the year of
termination. In the event that he has not taken his vacation time computed on a prorated basis, he shall be paid, at his regular rate of pay, for
unused vacation. In the event Executive has taken more vacation time than allotted for the year of termination, there shall be no reduction in
compensation otherwise payable hereunder.
(b) Employee Benefits . During the Term, the Executive and/or the Executive’s family, as the case may be, shall
be eligible to participate in all Company employee benefit plans in which other executive level employees of the Company and/or the members of
their families, as the case may be, are eligible to participate including, but not limited to, any retirement, pension, profit-sharing, insurance or other
plans which may now be in effect or which may hereafter be adopted by the Company. Regarding life insurance, the Executive shall have the
right to name the beneficiary of such life insurance policy.
(c) Equity Plan Participation . The Executive shall be eligible to participate in the Company’s 2011 Equity
Incentive Plan and any subsequent equity incentive plan established during the Term and shall receive awards, in such amounts and subject to
such terms, as determined by the Committee. Notwithstanding the preceding sentence, effective as of the completion of the initial public offering
of the Company’s common stock the Executive shall receive a grant of options to purchase Forty-seven Thousand (47,000) shares of the
Company’s common stock under the Company’s 2011 Equity Incentive Plan (which shall be governed solely by the terms of the option agreement
prescribed by the Committee and the terms of the Company’s 2011 Equity Incentive Plan).
7. EXPENSES . The Company recognizes that the Executive will have to incur certain out-of-pocket expenses related to
his services and the Company’s business, and the Company agrees to promptly reimburse the Executive for all reasonable expenses necessarily
incurred by him in the performance of his duties to the Company upon presentation of a voucher or documentation indicating the amount and
business purposes of any such expenses. These expenses include, but are not limited to, travel, meals and entertainment. Expenses that are
reimbursable to the Executive under this Section 7 shall be paid to the Executive in accordance with the Company’s expense reimbursement
policy but in no event later than March 15 following the calendar year in which the expense is incurred.
8. TERMINATION .
(a) Grounds . This Agreement shall terminate in the event of the Executive’s death. In the case of the
Executive’s Disability, the Company may elect to terminate the Executive’s employment as a result of such Disability. Where appropriate, the
Company also may terminate the Executive’s employment pursuant to a Termination With Cause. Finally, the Executive may terminate his
employment with the Company pursuant to either a Voluntary Termination or a Voluntary Termination for Good Reason. For purposes of this
Agreement, the terms Disability, Voluntary Termination, Voluntary Termination for Good Reason, and Termination With Cause are defined in
Section 11 of this Agreement.
(b) Notice of Termination . Any termination of employment by the Company or the Executive (other than upon
death) shall be communicated by Notice of Termination to the Executive or the Company, as applicable. For purposes of this Agreement, a
“Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon and the
specific ground for termination; (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination; and
(iii) the date of termination in accordance with Section 8(c) below.
(c) Date of Termination . For the purposes of this Agreement, “Date of Termination” means (i) if the Company
intends to treat the termination as a termination based upon the Executive’s Disability, the Executive’s employment with the Company shall
terminate effective on the thirtieth day after the date of the Notice of Termination (which may not be given before the Executive has been absent
from work on account of a physical or mental illness or physical injury for at least one hundred fifty (150) days) provided that, before such date,
the Executive shall not have returned to full-time performance of the Executive’s duties; (ii) if the Executive’s employment is terminated by
reason of Death, the Date of Termination shall be the date of death of the Executive; (iii) if the Executive’s employment is terminated by reason of
Voluntary Termination, the Date of Termination shall be thirty (30) days from the date of the Notice of Termination (and the Executive shall be
deemed to have terminated his employment by Voluntary Termination if the Executive voluntarily refuses to provide substantially all the services
described in Section 4 hereof for a period greater than four (4) consecutive weeks (excluding periods in which the Executive is not performing
services on account of vacation in accordance with Section 6(a) hereof and periods in which the Executive is not performing services on account
of the Executive’s illness or injury or the illness or injury of a member of the Executive’s immediate family); in such event, the Date of
Termination shall be the day after the last day of such four-week period); (iv) if the Company intends to treat the termination as a Termination
With Cause, the Company shall provide the Executive written notice of such grounds for termination and the Executive shall have a period of
thirty (30) days to cure such cause to the reasonable satisfaction of the Board, failing which the Date of Termination shall be the end of such thirty
(30) day period; or (v) if the Executive’s employment is terminated by reason of Voluntary Termination for Good Reason, the Date of
Termination shall be thirty (30) days after the end of the thirty (30) day cure period.
9. COMPENSATION UPON TERMINATION WITH CAUSE, VOLUNTARY TERMINATION, DEATH OR
DISABILITY . This Section 9 applies in the event that the Executive’s employment ends upon a Termination With Cause, a Voluntary
Termination, Death or Disability or any reason other than a Termination Without Cause or a Voluntary Termination With Good Reason. In any of
those events, the Executive (or the Executive’s estate in the event of his death) shall be entitled to receive the Standard Termination Benefits. The
Standard Termination Benefits are the benefits or amounts described in the following subsections (a) and (b):
accrued but unused vacation) that is earned but unpaid as of the Date of Termination.
(a) The Executive shall be entitled to receive any compensation (including Base Salary and Annual Bonus and
(b) The Executive shall be entitled to receive any benefits due him under the terms of any employee benefit plan
maintained by the Company and under the terms of any option, restricted stock or similar equity award; which benefits shall be paid in accordance
with the terms of the applicable plan and any award agreement between the Executive and the Company.
Except for the Standard Termination Benefits, the Executive shall not be entitled to receive any compensation after the Date of Termination on
account of a Termination With Cause, a Voluntary Termination, death, Disability or any reason other than a Termination Without Cause or a
Voluntary Termination With Good Reason.
10. COMPENSATION UPON TERMINATION WITHOUT CAUSE OR VOLUNTARY TERMINATION WITH
GOOD REASON . This Section 10 applies in the event that the Executive’s employment ends upon a Termination Without Cause or a Voluntary
Termination With Good Reason. In any of those events, the Executive shall be entitled to receive the benefits and amounts described in the
following subsections (a), (b), (c) and (d):
(a) The Company shall pay or provide the Standard Termination Benefits as defined in Section 10 except that all
outstanding options, shares of restricted stock and other equity awards, shall be vested and exercisable as of the Date of Termination and
outstanding options, stock appreciation rights and similar equity awards shall remain exercisable thereafter until their stated expiration date as if
the Executive’s employment had not terminated.
(b) The Company shall pay an amount equal to the product of the Multiple (as defined below) times the
Executive’s Base Salary at the rate in effect on the Date of Termination (or, in the case of a Voluntary Termination for Good Reason, at the rate in
effect before a reduction in Base Salary that constitutes Good Reason for resignation), such payment to be made in a single cash payment.
(c) The Company shall pay an amount equal to the product of the Multiple (as defined below) times the greater of
( x ) the highest annual bonus paid to the Executive for the three (3) fiscal years of the Company ended immediately before the Date of
Termination or ( y ) fifty percent (50%) of the Executive’s Base Salary at the rate in effect on the Date of Termination (or in the case of a
Voluntary Termination for Good Reason, at the rate in effect before a reduction in Base Salary that constitutes Good Reason for resignation), such
payment to be made in a single cash payment.
(d) The Company shall pay an amount equal to the product of (x) the Annual Bonus paid to the Executive for the
fiscal year of the Company ended immediately before the Date of Termination and (y) a fraction, the numerator of which is the number of days the
Executive was employed by the Company during the fiscal year that includes the Date of Termination and the denominator of which is 365, such
payment to be made in a single cash payment.
(e) The Company shall pay an amount equal to the Multiple (as defined below) times the annual premium or cost
paid by the Company for the health, dental and vision insurance coverage for the Executive and the Executive’s eligible dependents as in effect on
the Date of Termination plus an amount equal to the Multiple (as defined below) times the annual premium or cost paid by the Company for the
disability and life insurance coverage for the Executive as in effect on the Date of Termination, such payment to be made in a single cash
payment.
The Multiple is “one (1.0)” if the Executive’s employment ends upon a Termination Without Cause before the date of a Change in Control and a
Change in Control does not occur within ninety (90) days after the Date of Termination or if the Executive’s employment ends upon a Voluntary
Termination With Good Reason before the date of a Change in Control. The Multiple is “two (2.0)” if the Executive’s employment ends upon a
Termination Without Cause on or after the date of a Change in Control or within the ninety (90) day period preceding the date of a Change in
Control or if the Executive’s employment ends upon a Voluntary Termination With Good Reason on or after the date of a Change in Control.
No benefits will be paid or provided to, or on behalf of, the Executive under this Section 10 unless the Executive has signed a release and waiver
of claims in a form reasonably prescribed by the Company, releasing the Company and its officers, directors and affiliates from all claims the
Executive has or may have against such parties, and such release and waiver of claims has become binding and irrevocable on or before the forty-
fifth (45 th ) day after the date the Executive’s employment ends upon a Termination Without Cause or a Voluntary Termination for Good
Reason. Subject to the Executive’s satisfaction of the requirements of the preceding sentence and subject to Section 13, the cash benefits payable
under this Section 10 shall be paid on the sixtieth (60 th ) day after the Executive’s employment ends upon a Termination Without Cause or a
Voluntary Termination for Good Reason; provided, however, that if the Executive’s employment ends upon a Termination Without Cause and
additional amounts become payable under this Section 10 because a Change in Control occurs within ninety (90) days after the Date of
Termination, such additional amounts shall be paid on the fifth (5 th ) business day after the date of the Change in Control or, if later, the sixtieth
(60 th ) day after the Executive’s employment ends upon a Termination Without Cause.
11. DEFINITIONS . For the purposes of this Agreement, the following terms shall have the following definitions:
Company’s 2011 Equity Incentive Plan.
(a) “Change in Control” for purposes of this Agreement, has the same meaning as such term is defined in the
(b) “Disability” means that the Executive is “disabled” within the meaning of Section 409A(a)(2)(C) of the
Internal Revenue Code of 1986, as amended (the “Code”).
(c) “Termination With Cause” means the termination of the Executive’s employment by act of the Company’s
Board of Directors on account of (i) the Executive’s failure to perform a material duty or the Executive’s material breach of an obligation set forth
in this Agreement or a breach of a material and written Company policy other than by reason of mental or physical illness or injury, (ii) the
Executive’s breach of Executive’s fiduciary duties to the Company, (iii) the Executive’s conduct that is demonstrably and materially injurious to
the Company, monetarily or otherwise or (iv) the Executive’s conviction of, or plea of guilty or nolo contendre to, a felony or crime involving
moral turpitude or fraud or dishonesty involving assets of the Company and that in all cases is described in a written notice from the Board and
that is not cured, to the reasonable satisfaction of the Board, within thirty (30) days after such notice is received by the Executive.
(d) “Voluntary Termination” means the Executive’s voluntary termination of his employment hereunder for any
reason other than a Voluntary Termination for Good Reason. For purposes of this Section 11, the term Voluntary Termination does not include a
voluntary refusal to perform services on account of a vacation taken in accordance with Section 6(a) hereof, the Executive’s failure to perform
services on account of his illness or injury or the illness or injury of a member of his immediate family, provided such illness is adequately
substantiated at the reasonable request of the Company, or any other absence from service with the written consent of the Board.
(e) Voluntary Termination for “Good Reason” means the Executive’s termination of his employment hereunder
on account of (i) the Company’s material breach of the terms of this Agreement or a direction from the Board that the Executive act or refrain
from acting which in either case would be unlawful or contrary to a material and written Company policy, (ii) a material diminution in the
Executive’s duties, functions and responsibilities to the Company and its affiliates without the Executive’s consent or the Company preventing the
Executive from fulfilling or exercising his material duties, functions and responsibilities to the Company and its affiliates without the Executive’s
consent, (iii) a material reduction in the Executive’s Base Salary or Annual Bonus opportunity or (iv) a requirement that the Executive relocate his
employment more than fifty (50) miles from the location of the Executive’s principal office on the date of this Agreement, without the consent of
the Executive. The Executive’s resignation shall not be deemed a “Voluntary Termination for Good Reason” unless the Executive gives the
Board written notice (delivered within thirty (30) days after the Executive knows of the event, action, etc. that the Executive asserts constitutes
Good Reason), the event, action, etc. that the Executive asserts constitutes Good Reason is not cured, to the reasonable satisfaction of the
Executive, within thirty (30) days after such notice and the Executive resigns effective not later than thirty (30) days after the expiration of such
cure period.
12. CODE SECTION 280 G . The benefits that the Executive may be entitled to receive under this Agreement and other
benefits that the Executive is entitled to receive under other plans, agreements and arrangements (which, together with the benefits provided under
this Agreement, are referred to as “Payments”), may constitute Parachute Payments that are subject to Code Sections 280G and 4999. As
provided in this Section 12, the Parachute Payments will be reduced if, and only to the extent that, a reduction will allow the Executive to receive
a greater Net After Tax Amount than the Executive would receive absent a reduction.
The Accounting Firm will first determine the amount of any Parachute Payments that are payable to the Executive. The Accounting Firm
also will determine the Net After Tax Amount attributable to the Executive’s total Parachute Payments.
The Accounting Firm will next determine the largest amount of Payments that may be made to the Executive without subjecting the
Executive to tax under Code Section 4999 (the “Capped Payments”). Thereafter, the Accounting Firm will determine the Net After Tax Amount
attributable to the Capped Payments.
The Executive will receive the total Parachute Payments or the Capped Payments, whichever provides the Executive with the higher Net
After Tax Amount. If the Executive will receive the Capped Payments, the total Parachute Payments will be adjusted by first reducing the amount
of any benefits under this Agreement or any other plan, agreement or arrangement that are not subject to Section 409A of the Code (with the
source of the reduction to be directed by the Participant) and then by reducing the amount of any benefits under this Agreement or any other plan,
agreement or arrangement that are subject to Section 409A of the Code (with the source of the reduction to be directed by the Participant). The
Accounting Firm will notify the Executive and the Company if it determines that the Parachute Payments must be reduced to the Capped
Payments and will send the Executive and the Company a copy of its detailed calculations supporting that determination.
As a result of the uncertainty in the application of Code Sections 280G and 4999 at the time that the Accounting Firm makes its
determinations under this Section 12, it is possible that amounts will have been paid or distributed to the Executive that should not have been paid
or distributed under this Section 12 (“Overpayments”), or that additional amounts should be paid or distributed to the Executive under this Section
12 (“Underpayments”). If the Accounting Firm determines, based on either the assertion of a deficiency by the Internal Revenue Service against
the Company or the Executive, which assertion the Accounting Firm believes has a high probability of success or controlling precedent or
substantial authority, that an Overpayment has been made, the Executive must repay to the Company, without interest; provided, however, that no
loan will be deemed to have been made and no amount will be payable by the Executive to the Company unless, and then only to the extent that,
the deemed loan and payment would either reduce the amount on which the Executive is subject to tax under Code Section 4999 or generate a
refund of tax imposed under Code Section 4999. If the Accounting Firm determines, based upon controlling precedent or substantial authority,
that an Underpayment has occurred, the Accounting Firm will notify the Executive and the Company of that determination and the amount of that
Underpayment will be paid to the Executive promptly by the Company.
For purposes of this Section 12, the term “Accounting Firm” means the independent accounting firm engaged by the Company
immediately before the Change in Control. For purposes of this Section 12, the term “Net After Tax Amount” means the amount of any Parachute
Payments or Capped Payments, as applicable, net of taxes imposed under Code Sections 1, 3101(b) and 4999 and any State or local income taxes
applicable to the Executive on the date of payment. The determination of the Net After Tax Amount shall be made using the highest combined
effective rate imposed by the foregoing taxes on income of the same character as the Parachute Payments or Capped Payments, as applicable, in
effect on the date of payment. For purposes of this Section 12, the term “Parachute Payment” means a payment that is described in Code Section
280G(b)(2), determined in accordance with Code Section 280G and the regulations promulgated or proposed thereunder.
13. CODE SECTION 409A . This Agreement and the amounts payable and other benefits provided under this
Agreement are intended to comply with, or otherwise be exempt from, Section 409A of the Code (“Section 409A”), after giving effect to the
exemptions in Treasury Regulation section 1.409A-1(b)(3) through (b)(12). This Agreement shall be administered, interpreted and construed in a
manner consistent with Section 409A. If any provision of this Agreement is found not to comply with, or otherwise not be exempt from, the
provisions of Section 409A, it shall be modified and given effect, in the sole discretion of the Board and without requiring the Executive’s
consent, in such manner as the Board determines to be necessary or appropriate to comply with, or to effectuate an exemption from, Section 409A;
provided, however, that in exercising its discretion under this Section 13, the Board shall modify this Agreement in the least restrictive manner
necessary and without reducing any payment or benefit due under this Agreement. Each payment under this Agreement shall be treated as a
separate identified payment for purposes of Section 409A.
With respect to any reimbursement of expenses of, or any provision of in-kind benefits to, the Executive, as specified under this
Agreement, such reimbursement of expenses or provision of in-kind benefits shall be subject to the following limitations: (i) the expenses eligible
for reimbursement or the amount of in-kind benefits provided in one taxable year shall not affect the expenses eligible for reimbursement or the
amount of in-kind benefits provided in any other taxable year, except for any medical reimbursement arrangement providing for the
reimbursement of expenses referred to in Section 105(b) of the Code; (ii) the reimbursement of an eligible expense shall be made as specified in
this Agreement and in no event later than the end of the year after the year in which such expense was incurred and (iii) the right to reimbursement
or in-kind benefit shall not be subject to liquidation or exchange for another benefit.
If a payment obligation under this Agreement arises on account of a Change in Control or the Executive’s termination of employment
and such payment obligation constitutes “deferred compensation” (as defined under Treasury Regulation section 1.409A-1(b)(1), after giving
effect to the exemptions in Treasury Regulation section 1.409A-1(b)(3) through (b)(12)), it shall be payable only if the Change in Control
constitutes a change in ownership or effective control of the Company, etc. as provided in Treasury Regulation section 1.409A-3(i)(5) or after the
Executive’s separation from service (as defined under Treasury Regulation section 1.409A-1(h)); provided, however, that if the Executive is a
specified employee (as defined under Treasury Regulation section 1.409A-1(i)), any payment that is scheduled to be paid within six months after
such separation from service shall accrue without interest and shall be paid on the first day of the seventh month beginning after the date of the
Executive’s separation from service or, if earlier, within fifteen days after the appointment of the personal representative or executor of the
Executive’s estate following his death.
14. TAX WITHHOLDING . All payments to be made under this Agreement shall be reduced by applicable income and
employment tax withholdings.
15. COVENANTS OF THE EXECUTIVE .
(a) General Covenants of the Executive . The Executive acknowledges that (i) the principal business of the
Company is acquiring, owning, renovating and developing upscale and mid-scale hotels without food or beverage facilities (such business, and
any and all other businesses that after the date hereof, and from time to time during the Term, become material with respect to the Company’s
then-overall business, herein being collectively referred to as the “ Business ”), (ii) the Company knows of a limited number of persons who have
developed the Business; (iii) the Business is, in part, national in scope; (iv) the Executive’s work for the Company and its subsidiaries has given
and will continue to give the Executive access to the confidential affairs and proprietary information of the Company and to “trade secrets,” as
defined in the South Dakota Uniform Trade Secrets Act, of the Company and its subsidiaries; (v) the covenants and agreements of the Executive
contained in this Section 15 are essential to the business and goodwill of the Company; and (vi) the Company would not have entered into this
Agreement but for the covenants and agreements set forth in this Section 15.
(b) Covenants Against Competition . The covenant against competition herein described shall apply during the
Term and for a period of one (1) year following a termination of the Executive’s employment with the Company and its subsidiaries for any
reason (the “Restriction Period”). During the Restriction Period the Executive shall not, directly or indirectly, own, manage, control or participate
in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated with, in an executive, senior
management, strategic or professional capacity, whether as an employee, employer, consultant, agent, principal, partner, stockholder, corporate
officer, director or in any other individual or representative capacity, that is similar to an engagement in an executive, senior management,
strategic or professional capacity although otherwise named in any business or venture engaged in the Business and that owns at least twenty-five
(25) hotels, at least one of which is located within twenty-five (25) miles of any hotel acquired, owned, managed, developed or re-developed by
the Company and its subsidiary, or within twenty-five (25) miles of any hotel the Company is pursuing to acquire, own, manage, develop or re-
develop so long as the pursuit of such began prior to, and remained ongoing at the time of the termination of the Executive’s employment;
provided, however , that, notwithstanding the foregoing, (i) the Executive may own or participate in the ownership of any entity which he owned
or managed or participated in the ownership or management of prior to the Effective Date, which ownership, management or participation has
been disclosed to the Company; and (ii) the Executive may invest in securities of any entity, solely for investment purposes and without
participating in the business thereof, if (A) such securities are traded on any national securities exchange or the National Association of Securities
Dealers, Inc. Automated Quotation System or equivalent non-U.S. securities exchange, (B) the Executive is not a controlling person of, or a
member of a group which controls, such entity and (C) the Executive does not, directly or indirectly, own one percent (1%) or more of any class of
securities of such entity. Notwithstanding the foregoing, this Section 15(b) shall not apply after the Executive’s Termination without Cause or
Voluntary Termination for Good Reason.
(c) Confidentiality . During and after the Executive’s employment with the Company and its affiliates, except in
connection with the business and affairs of the Company and its affiliates: the Executive shall keep secret and retain in strictest confidence, and
shall not use for his benefit or the benefit of others, all confidential matters relating to the Business and the business of any of its affiliates and to
the Company and any of its affiliates, learned by the Executive heretofore or hereafter directly or indirectly from the Company of any of its
subsidiaries (or any predecessor of either) (the “ Confidential Company Information ”), including, without limitation, information with respect to
the Business and any aspect thereof, profit or loss figures, and the Company’s or its affiliates’ (or any of their predecessors) properties, and shall
not disclose such Confidential Company Information to anyone outside of the Company except with the Company’s express written consent and
except for Confidential Company Information which (i) at the time of receipt or thereafter becomes publicly known through no wrongful act of the
Executive; (ii) is clearly obtainable in the public domain; (iii) was not acquired by the Executive in connection with the Executive’s employment
or affiliation with the Company; (iv) was not acquired by the Executive from the Company or its representatives or from a third-party who has an
agreement with the Company not to disclose such information; (v) was legally in the possession of or developed by the Executive prior to the
Effective Date; or (vi) is required to be disclosed by rule of law or by order of a court or governmental body or agency.
(d) Nonsolicitation . During the Restriction Period, the Executive shall not, without the Company’s prior-
written consent, directly or indirectly, (i) knowingly solicit or knowingly encourage to leave the employment or other service of the Company or
any of its affiliates, any employee employed by the Company on the Date of Termination or knowingly hire (on behalf of the Executive or any
other person or entity) any employee employed by the Company on the Date of Termination who has left the employment or other service of the
Company or any of its affiliates (or any predecessor of either) within one (1) year of the termination of such employee’s or independent
contractor’s employment or other service with the Company and its affiliates; or (ii) whether for the Executive’s own account or for the account of
any other person, firm, corporation or other business organization, intentionally interfere with the Company’s or any of its affiliates, relationship
with, or endeavor to entice away from the Company or any of its affiliates, any person who during the Executive’s employment with the Company
is or was a customer or client of the Company or any of its affiliates (or any predecessor of either). Notwithstanding the above, nothing shall
prevent the Executive from soliciting loans, investment capital, or the provision of management services from third parties engaged in the
Business if the activities of the Executive facilitated thereby do not otherwise adversely interfere with the operations of the Business.
(e) Company Property . During and after the Executive’s employment with the Company and its affiliates, all
memoranda, notes, lists, records, property and any other tangible product and documents (and all copies thereof) made, produced or compiled by
the Executive or made available to the Executive during the Term concerning the Business of the Company and its affiliates shall be the
Company’s property and shall be delivered to the Company at any time on request. Notwithstanding the above, the Executive’s contacts and
contact data base shall not be the Company’s property. Notwithstanding the above, software, methods and material developed by the Executive
prior to the Term of the Agreement shall not be the Company’s property.
(f) Rights and Remedies upon Breach . The Executive acknowledges and agrees that any breach by him of any
of the provisions of this section 15 (the “Covenants”) would result in irreparable injury and damage for which money damages, would not provide
an adequate remedy. Therefore, if the Executive breaches, or threatens to commit a breach of, any of the Covenants, the Company and its
affiliates shall have the right and remedy to have the Covenants specifically enforced (without posting bond and without the need to prove
damages) by any court having equity jurisdiction, including, without limitation, the right to an entry against the Executive of restraining orders
and injunctions (preliminary, mandatory, temporary and permanent) against violations, threatened or actual, and whether or not then continuing, of
such covenants. This right and remedy shall be in addition to, and not in lieu of, any other rights and remedies available to the Company and its
affiliates under law or in equity (including, without limitation, the recovery of damages). The existence of any claim or cause of action by the
Executive, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement of the Covenants. The Company
has the right to cease making the payments or benefits to the Executive in the event of a material breach of any of the Covenants that, if capable of
cure and not willful, is not cured within thirty (30) days after receipt of notice thereof from the Company.
(g) Severability . The Executive acknowledges and agrees that the Executive has had an opportunity to seek
advice of counsel in connection with this Agreement; and that the Covenants are reasonable in geographical and temporal scope and in all other
respects. If it is determined that any of the provisions of this Agreement, including, without limitation, any of the Covenants, or any part thereof,
is invalid or unenforceable, the remainder of the provisions of this Agreement shall not thereby be affected and shall be given full affect, without
regard to the invalid portions.
(h) Duration and Scope of Covenants . If any court or other decision maker of competent jurisdiction
determines that any of the Covenants, including, without or any part thereof are unenforceable because of the duration or geographical scope of
such provision, then, after such determination has become final and unappealable, the duration or scope of such provision, as the case may be,
shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be
enforced.
(i) Enforceability of Restrictive Covenants; Jurisdictions . The Company and the Executive intend to and hereby
consent to jurisdiction to enforce the Covenants upon the courts of any jurisdiction within the geographical scope of the Covenants. If the courts
of any one or more of such jurisdictions hold the Covenants wholly unenforceable by reason of breadth of scope or otherwise it is the intention of
the Company and the Executive that such determination not bar or in any way affect the Company’s right, or the right of any of its affiliates, to the
relief provided above in the courts of any other jurisdiction within the geographical scope of such Covenants, as to breaches of such Covenants in
such other respective jurisdictions, such Covenants as they relate to each jurisdiction’s being, for this purpose, severable, diverse and independent
covenants, subject, where appropriate, to the doctrine of res judicata .
16. NOTICES . All notices or deliveries authorized or required pursuant to this Agreement shall be deemed to have been
given when in writing and personally delivered or three (3) days following the date when deposited in the U.S. mail, certified, return receipt
requested, postage prepaid, addressed to the parties at the following addresses or to such other addresses as either may designate in writing to the
other party:
To the Company:
Summit Hotel Properties, Inc.
Attn: Corporate Secretary
2701 South Minnesota Avenue, Suite 6
Sioux Falls, South Dakota 57105
To the Executive:
Ryan A. Bertucci
1823 Harney Street, Suite 301
Omaha, Nebraska 68102
17. ENTIRE AGREEMENT . This Agreement contains the entire understanding between the parties hereto with respect
to the subject matter hereof and shall not be modified in any manner except by instrument in writing signed, by or on behalf of, the parties
hereto. This Agreement shall be binding upon and inure to the benefit of the heirs, successors and assigns of the parties hereto.
18. ARBITRATION . Any claim or controversy arising out of, or relating to, this Agreement or its breach, shall be
settled by arbitration in Sioux Falls, South Dakota in accordance with the governing rules of the American Arbitration Association. Judgment
upon the award rendered may be entered in any court of competent jurisdiction. In the event one of the parties hereto requests an arbitration
proceeding under this Agreement, such proceeding shall commence within 30 days from the date of such request. The prevailing party shall be
entitled to reasonable attorney’s fees and costs.
South Dakota.
19. APPLICABLE LAW . This Agreement shall be governed and construed in accordance with the laws of the State of
20. NO SETOFF . The Company’s obligation to make the payments provided for in this Agreement and otherwise to
perform its obligations hereunder shall not be affected by a setoff, counterclaim, recoupment, defense or other claim, right or action which the
Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take other action by
way of mitigation of the amounts payable to the Executive under the provisions of this Agreement.
21. ASSIGNMENT . The Executive acknowledges that his services are unique and personal. Accordingly, the Executive
may not assign his rights or delegate his duties or obligations under this Agreement. The Executive’s rights and obligations under this Agreement
shall insure to the benefit of and shall be binding upon the Executive’s successors and assigns.
provisions.
22. HEADINGS . Headings in this Agreement are for convenience only and shall not be used to interpret or construe its
IN WITNESS WHEREOF, the parties have executed this Agreement as of the 14th day of February, 2012.
SUMMIT HOTEL PROPERTIES, INC.
By: /s/ Christopher Eng
Title: VP and General Counsel
RYAN A. BERTUCCI
/s/ Ryan A. Bertucci
Summit Hotel Properties, Inc.
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
(Dollars in Thousands)
Exhibit 12.1
Summit Hotel
Properties, Inc.
For the Period
February 14,
2011
through
December 31,
2011
For the
Period
January 1,
2011
through
February
13, 2011
Earnings
Pre-tax income (loss) from
continuing operations
$
Interest expense
Amortization of financing costs
Amortization of capitalized
interest
Total Earnings
Fixed Charges
Interest expense
Capitalized interest
$
$
(6,502 ) $
13,193
2,053
524
9,268 $
(5,868 )
4,666
154
75
(973 )
13,193 $
—
4,666
—
$
$
$
Summit Hotel Properties, LLC
(Predecessor)
Year Ended December 31,
2010
2009
2008
2007
2006
(20,718 ) $
26,362
1,841
(17,779 ) $
18,321
2,029
4,011 $
17,025
1,575
3,918 $
14,214
1,678
7,914
11,135
754
599
8,084 $
599
3,170 $
443
23,054 $
252
20,062 $
28
19,831
26,362 $
—
18,321 $
3,142
17,025 $
3,829
14,214 $
4,490
11,135
573
Amortization of financing costs
$
Total Fixed Charges
2,053
15,246 $
154
4,820
$
1,841
28,203 $
2,029
23,492 $
1,575
22,429 $
1,678
20,382 $
754
12,462
Preferred Dividends
$
411
—
—
—
—
—
—
Ratio of Earnings to
Combined Fixed Charges and
Preferred Stock Dividends
0.59 (1)
(0.20 ) (2)
0.29 (3)
0.13 (4)
1.03
0.98 (5)
1.59
_____
(1) For this period, earnings were less than fixed charges and preferred stock dividends. The total amount of fixed charges and preferred stock
dividends for this period was approximately $15,657,000 and the total amount of earnings was approximately $9,268,000. The amount of
the deficiency, or the amount of fixed charges and preferred stock dividends in excess of earnings, was approximately $6,389,000.
(2) For this period, earnings were less than fixed charges. The total amount of fixed charges for this period was approximately $4,820,000 and
the total amount of earnings was approximately $(973,000). The amount of the deficiency, or the amount of fixed charges in excess of
earnings, was approximately $5,793,000.
(3) For this period, earnings were less than fixed charges. The total amount of fixed charges for this period was approximately $28,203,000
and the total amount of earnings was approximately $8,084,000. The amount of the deficiency, or the amount of fixed charges in excess of
earnings, was approximately $20,119,000.
(4) For this period, earnings were less than fixed charges. The total amount of fixed charges for this period was approximately $23,492,000
and the total amount of earnings was approximately $3,170,000. The amount of the deficiency, or the amount of fixed charges in excess of
earnings, was approximately $20,322,000.
(5) For this period, earnings were less than fixed charges. The total amount of fixed charges for this period was approximately $20,382,000
and the total amount of earnings was approximately $20,062,000. The amount of the deficiency, or the amount of fixed charges in excess
of earnings, was approximately $320,000.
EXHIBIT 21.1
List of Subsidiaries of Summit Hotel Properties, Inc.
Name
1. Summit Hotel OP, LP
2. Summit Hotel TRS, Inc.
3. Summit Hotel TRS II, Inc.
4. Summit Hotel GP, LLC
5. Summit Hospitality I, LLC
6. Summit Hospitality V, LLC
7. Summit Hospitality VI, LLC
State of Incorporation or Organization
Delaware
Delaware
Delaware
Delaware
Delaware
South Dakota
Delaware
EXHIBIT 21.2
List of Subsidiaries of Summit Hotel OP, LP.
Name
1. Summit Hotel TRS, Inc.
2. Summit Hotel TRS II, Inc.
3. Summit Hospitality I, LLC
4. Summit Hospitality V, LLC
5. Summit Hospitality VI, LLC
State of Incorporation or Organization
Delaware
Delaware
Delaware
South Dakota
Delaware
Exhibit 23.1
The Board of Directors
Summit Hotel Properties, Inc.:
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the registration statements on Form S-3 (File No. 333-179503) and Form S-8 (File No. 333-
172145) of Summit Hotel Properties, Inc. of our reports dated February 28, 2012, with respect to the consolidated balance sheet of Summit Hotel
Properties, Inc. and subsidiaries as of December 31, 2011, and the consolidated balance sheet of Summit Hotel Properties, LLC and subsidiaries
(Predecessor) as of December 31, 2010, and the related consolidated statements of operations and changes in equity of Summit Hotel Properties,
Inc. and subsidiaries for the period from February 14, 2011 (commencement of operations) through December 31, 2011, the related consolidated
statements of operations and changes in equity of Summit Hotel Properties, LLC and subsidiaries (Predecessor) for the period from January 1,
2011 through February 13, 2011 and the year ended December 31, 2010, the related combined statement of cash flows of Summit Hotel
Properties, Inc. and subsidiaries and Summit Hotel Properties, LLC and subsidiaries (Predecessor) for the year ended December 31, 2011, and the
related consolidated statement of cash flows of Summit Hotel Properties, LLC and subsidiaries (Predecessor) for the year ended December 31,
2010, and the related financial statement schedule III; the consolidated balance sheet of Summit Hotel OP, LP and subsidiaries as of December 31,
2011, and the consolidated balance sheet of Summit Hotel Properties, LLC and subsidiaries (Predecessor) as of December 31, 2010, and the
related consolidated statements of operations and changes in equity of Summit Hotel OP, LP and subsidiaries for the period from February 14,
2011 (commencement of operations) through December 31, 2011, the related consolidated statements of operations and changes in equity of
Summit Hotel Properties, LLC and subsidiaries (Predecessor) for the period from January 1, 2011 through February 13, 2011 and the year ended
December 31, 2010, the related combined statement of cash flows of Summit Hotel OP, LP and subsidiaries and Summit Hotel Properties, LLC
and subsidiaries (Predecessor) for the year ended December 31, 2011, and the related consolidated statement of cash flows of Summit Hotel
Properties, LLC and subsidiaries (Predecessor) for the year ended December 31, 2010, and the related financial statement schedule III; which
reports appear in the December 31, 2011 annual report on Form 10-K of Summit Hotel Properties, Inc. and Summit Hotel OP, LP.
/s/ KPMG LLP
Omaha, Nebraska
February 28, 2012
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.2
To the Board of Directors
Summit Hotel Properties, Inc.
We consent to the incorporation by reference in the registration statements on Form S-3 (File No. 333-179503) and Form S-8 (File No. 333-
172145) of our report dated March 31, 2010 with respect to the consolidated statements of operations, changes in members’ equity, and cash flows
of Summit Hotel Properties, LLC, for the year ended December 31, 2009 and our report dated March 31, 2010 related to the internal control over
financial reporting as of December 31, 2009 of Summit Hotel Properties, LLC, which reports appear in the annual report on Form 10-K for the
year ended December 31, 2011 of Summit Hotel Properties, Inc. and Summit Hotel OP, LP.
/s/ Eide Bailly LLP
Greenwood Village, Colorado
February 27, 2012
EXHIBIT 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Daniel P. Hansen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Summit Hotel Properties, 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 the
financial statement 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 the 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.
Date: February 28, 2012
Summit Hotel Properties, Inc.
By: /s/ Daniel P. Hansen
Daniel P. Hansen
President and Chief Executive Officer
(principal executive officer)
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Stuart J. Becker, certify that:
EXHIBIT 31.2
1. I have reviewed this Annual Report on Form 10-K of Summit Hotel Properties, 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 the
financial statement 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 the 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.
Date: February 28, 2012
Summit Hotel Properties, Inc.
By: /s/ Stuart J. Becker
Stuart J. Becker
Executive Vice President and Chief Financial Officer
(principal financial officer)
EXHIBIT 31.3
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Daniel P. Hansen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Summit Hotel OP, LP;
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 the
financial statement 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 the 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.
Summit Hotel OP, LP
By: Summit Hotel GP, LLC, its general partner
By: Summit Hotel Properties, Inc., its sole member
Date: February 28, 2012
By: /s/ Daniel P. Hansen
Daniel P. Hansen
President and Chief Executive Officer
(principal executive officer)
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Stuart J. Becker, certify that:
EXHIBIT 31.4
1. I have reviewed this Annual Report on Form 10-K of Summit Hotel OP, LP;
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 the
financial statement 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 the 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.
Summit Hotel OP, LP
By: Summit Hotel GP, LLC, its general partner
By: Summit Hotel Properties, Inc., its sole member
Date: February 28, 2012
By: /s/ Stuart J. Becker
Stuart J. Becker
Executive Vice President and Chief Financial Officer
(principal financial officer)
Certification Pursuant To
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
EXHIBIT 32.1
In connection with the Annual Report of Summit Hotel Properties, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel P. Hansen, President and
Chief Executive Officer of the Company, 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 the
Company.
Date: February 28, 2012
Summit Hotel Properties, Inc.
By: /s/ Daniel P. Hansen
Daniel P. Hansen
President and Chief Executive Officer
(principal executive officer)
Certification Pursuant To
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
EXHIBIT 32.2
In connection with the Annual Report of Summit Hotel Properties, Inc. (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stuart J. Becker, Executive Vice
President and Chief Financial Officer of the Company, 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 the
Company.
Date: February 28, 2012
Summit Hotel Properties, Inc.
By: /s/ Stuart J. Becker
Stuart J. Becker
Executive Vice President and Chief Financial Officer
(principal financial officer)
Certification Pursuant To
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
EXHIBIT 32.3
In connection with the Annual Report of Summit Hotel OP, LP (the “Company”) on Form 10-K for the fiscal year ended December 31,
2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel P. Hansen, President and Chief Executive
Officer of the Company, 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 the
Company.
Summit Hotel OP, LP
By: Summit Hotel GP, LLC, its general partner
By: Summit Hotel Properties, Inc., its sole member
Date: February 28, 2012
By: /s/ Daniel P. Hansen
Daniel P. Hansen
President and Chief Executive Officer
(principal executive officer)
Certification Pursuant To
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
EXHIBIT 32.4
In connection with the Annual Report of Summit Hotel OP, LP (the “Companies”) on Form 10-K for the fiscal year ended December 31,
2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stuart J. Becker, Executive Vice President and
Chief Financial Officer of the Company, 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 the
Company.
Summit Hotel OP, LP
By: Summit Hotel GP, LLC, its general partner
By: Summit Hotel Properties, Inc., its sole member
Date: February 28, 2012
By: /s/ Stuart J. Becker
Stuart J. Becker
Executive Vice President and Chief Financial Officer
(principal financial officer)