Summit Hotel Properties
Annual Report 2014

Plain-text annual report

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 OR (cid:3) (cid:3) (cid:3) (cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-35074 SUMMIT HOTEL PROPERTIES, INC. (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 27-2962512 (I.R.S. Employer Identification No.) 12600 Hill Country Boulevard, Suite R-100 Austin, TX 78738 (Address of principal executive offices, including zip code) (512) 538-2300 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: 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 7.875% Series B Cumulative Redeemable Preferred Stock, par value $0.01 per share 7.125% Series C 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 New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes (cid:3) 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. (cid:3) Yes  No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes (cid:3) No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes (cid:3) 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.  Yes (cid:3) No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer  Non-accelerated filer (cid:3) Accelerated filer (cid:3) Smaller reporting company (cid:3) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:3) Yes  No The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant’s as of June 30, 2014 was $886,350,906 based on the closing sale price of the registrant’s common stock on the New York Stock Exchange as of June 30, 2014. As of February 20, 2015 the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 86,088,265. Portions of the registrant’s Definitive Proxy Statement on Schedule 14A for its 2015 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. DOCUMENTS INCORPORATED BY REFERENCE Table of Contents ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED DECEMBER 31, 2014 SUMMIT HOTEL PROPERTIES, INC. TABLE OF CONTENTS CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Item 15. Exhibits and Financial Statement Schedules INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Page 1 2 2 6 24 25 28 28 29 29 31 31 49 49 49 50 51 52 52 52 52 52 52 52 52 F-1 Table of Contents CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “forecast,” “project,” “potential,” “continue,” “likely,” “will,” “would” or similar expressions. Forward-looking statements in this report include, among others, statements about our business strategy, including acquisition and development strategies, industry trends, estimated revenues 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; • adverse changes in occupancy, average daily rate and revenue per available room and other hotel operating metrics; • hostilities, including future terrorist attacks, or fear of hostilities that affect travel; • financial condition of, and our relationships with, third-party property managers and franchisors; • the degree and nature of our competition; • increased interest rates and operating costs; • increased renovation costs, which may cause actual renovation costs to exceed our current estimates; • changes in zoning laws and increases in real property tax rates; • risks associated with potential acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no operating history, and dispositions of hotel properties; • availability of and our ability to retain qualified personnel; • our failure to maintain our qualification as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”); • changes in our business or investment strategy; • availability, terms and deployment of capital; • general volatility of the capital markets and the market price of our shares of common stock; • environmental uncertainties and risks related to natural disasters; and • 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. Table of Contents Item 1. Business. PART I Unless the context otherwise requires, all references to “we”, “us,” “our,” or the “Company” refer to Summit Hotel Properties, Inc. and its consolidated subsidiaries. Overview We focus primarily on acquiring and owning premium-branded, select-service hotels in the Upscale and Upper-midscale segments of the U.S. lodging industry, as these segments are currently defined by Smith Travel Research (“STR”). At December 31, 2014, we owned 90 hotels with a total of 11,463 guestrooms located in 21 states. Since the completion of our initial public offering (“IPO”) in February 2011 and through December 31, 2014, we have acquired 49 hotels with a total of 6,938 guestrooms for purchase prices aggregating approximately $1.0 billion, and we have sold 24 hotels containing 2,014 guestrooms, for sales prices aggregating approximately $96.2 million. As of December 31, 2014, 77.7% of our guestrooms were located in the top 50 metropolitan statistical areas, (“MSAs”), and 91.2% were located within the top 100 MSAs. Over 97.4% of our hotel guestrooms operate under premium franchise brands owned by Marriott International, Inc. (“Marriott”) (Courtyard by Marriott®, Residence Inn by Marriott®, SpringHill Suites 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 House® and Hyatt Place®). Except for six hotels, five of which are subject to ground leases and one of which is subject to a PILOT (payment in lieu of taxes) lease, we own our hotels in fee simple. Our hotels are typically located in markets with multiple demand generators such as corporate offices and headquarters, retail centers, airports, state capitols, convention centers, and leisure attractions. Since December 31, 2014, we have not acquired or disposed of any hotels. As of February 20, 2015, we owned 90 hotels with a total of 11,463 guestrooms located in 21 states. We have elected to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ended December 31, 2011. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, we lease substantially all of our hotels to wholly-owned subsidiaries of our taxable REIT subsidiary (our “TRS lessees”). All of our hotels are operated pursuant to hotel management agreements with professional third party hotel management companies. We have one reportable segment as defined by generally accepted accounting principles (see Item 8. “Financial Statements and Supplementary Data — Note 2 — Summary of Significant Accounting Policies”). Our corporate offices are located at 12600 Hill Country Boulevard, Suite R-100, Austin, TX 78738. Our telephone number is (512) 538-2300. 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. Business Strategy Our strategy focuses on increasing the cash flow of our portfolio through focused asset management, targeted capital investment and strategic 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, Select-Service Hotels . We focus on hotels in the Upscale and Upper-midscale 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 continue their positive cyclical trend. According to STR, industry conditions continued to improve during 2014. In “PwC Hospitality Directions,” PricewaterhouseCoopers, LLP projects U.S. revenue per available room (“RevPAR”) growth increases in 2015 for Upscale hotels and Upper-midscale hotels of 6.6% and 8.2%, respectively. • Stable Cash Flow Potential . Our hotels can be operated with fewer employees than full-service hotels that offer more amenities including more expansive food and beverage options, which we believe enables us to generate consistent cash flows with less volatility. 2 Table of Contents • 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, Starwood or IHG brands, which offer strong loyalty rewards program points that can be redeemed for travel. • Enhanced Diversification . Premium-branded Upscale and Upper-midscale hotels generally cost significantly less to acquire or build, 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 enable them to be performance leaders in their respective markets. Since our IPO and through December 31, 2014, we have invested $152.5 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 49 hotels acquired from February 11, 2011 through December 31, 2014. We believe these investments produce attractive returns, and we intend to continue to use available capital to upgrade our hotels through renovation. External Growth Through Acquisitions. We intend to continue to grow through acquisitions of existing hotels using a disciplined approach, while maintaining a prudent capital structure. We target Upscale and Upper-midscale hotels that meet one or more of the following acquisition criteria: • potential for strong risk-adjusted returns and are located in the top 50 MSAs and other select markets; • operate under leading franchise brands, which may include but are not limited to brands owned by Marriott, Hilton, IHG and Hyatt; • located in close proximity to multiple demand generators, such as corporate offices and headquarters, retail centers, airports, state capitols, convention centers, and leisure attractions, with a diverse source of potential guests, including corporate, government and leisure travelers; • located in markets with 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. Strategic Hotel Sales. We seek to maximize 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 hotel, particularly when we believe the proceeds from the sale can be invested in hotels that will produce more attractive returns. 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. We will consider unique opportunities to develop hotels utilizing our own resources if circumstances warrant. Our Financing Strategy We rely on cash flows from operations, issuance of debt and equity to finance our business. 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 2014, we financed our long- term growth with borrowings under our $300.0 million unsecured credit facility and secured mortgage debt 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. As of December 31, 2014, we had $626.5 million in outstanding indebtedness. When purchasing hotel properties, our operating partnership, Summit Hotel OP, LP (“Summit OP”), may issue common units of limited partnership interest (“Common Units”) or preferred units of limited partnership interest (“Preferred Units”) as full or partial consideration to sellers who may desire to take advantage of tax deferral on the sale of a property or participate in the potential appreciation in the value of our common stock. 3 Table of Contents 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, quality of the physical condition of the hotel, 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, our average daily rates (“ADR”) and our 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. 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. 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 of 1990 (“ADA”) 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, a determination to the contrary could require removal of access barriers and non-compliance could result in litigation costs, costs to remediate deficiencies, U.S. government fines or in damages to private litigants. 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 land 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 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. 4 Table of Contents Some of our properties may have contained historic uses which involved the use 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 use 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. 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. A few of our properties have experienced environmental contamination prior to our ownership, but all contamination has been remediated to the satisfaction of state regulatory agencies. 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. 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 existence of mold and other airborne contaminants above regulatory thresholds, 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, 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 or 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. Tax Status We have elected to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ended December 31, 2011. 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 stock. 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. 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 substantially all of our hotels to our current TRS lessees, which are wholly-owned subsidiaries of Summit Hotel TRS, Inc. (our “TRS”). We will lease newly acquired hotels to additional TRS’s that we may form in the future. All of our hotels are operated pursuant to hotel management agreements with third party professional hotel management companies. We believe each of the third party managers qualifies as an eligible independent contractor. 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 taxable REIT subsidiary is a corporate subsidiary of a REIT that jointly elects with the REIT to be treated as a taxable REIT subsidiary of the REIT and that pays federal income tax at regular corporate rates on its taxable income. 5 Table of Contents As a REIT, we generally will not be subject to federal income tax on our REIT taxable income that we distribute to our stockholders. 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, which does not necessarily equal net income as calculated in accordance with Generally Accepted Accounting Principles (“GAAP”). 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 unable to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT, unless we satisfy certain relief provisions. 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. We may also be subject to prohibited transaction tax on any dealer sales of property and excise taxes on predetermined rents. Additionally, any income earned by our TRS will be fully subject to federal, state and local corporate income tax. Employees As of February 20, 2015, we employ 39 full-time employees. 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, our quarterly reports on Form 10-Q 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. 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 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 — general economic setbacks could adversely affect our future results of operations and our growth prospects. Our business strategy includes achieving continued revenue and net income growth from anticipated improvement in demand for hotel rooms as the economy continues to grow. 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 grows, or if there is a setback in the general economy resulting in weakening demand, our operating results and growth prospects could be adversely affected. As a result, any slowdown in economic growth or a new economic downturn will adversely affect our future results of operations and our growth prospects. 6 Table of Contents 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 the receipt of franchisor and lender consents, and we may spend significant time and incur significant transaction costs 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 or not operating the hotels at their maximum potential; • 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; • 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. We may assume liabilities in connection with the acquisition of hotel properties, including unknown liabilities, which, if significant, could adversely affect our business. We may assume existing liabilities in connection with the acquisition of hotel properties, 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 the seller of a particular hotel property, tax liabilities, employment-related issues and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. 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. 7 Table of Contents We may not be able to cause our hotel management companies to operate any of our hotels in a manner satisfactory to us, and termination of our hotel management agreements may be costly and disruptive, all of 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 or manage our hotels. Accordingly, substantially all of our hotels are leased to TRS lessees of our TRS. 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. 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, but otherwise will 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. If we replace the hotel management company 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. 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. Certain of our hotels are managed by affiliates of the franchisors for such hotels. In these situations, the management agreement and the franchise agreement are typically combined into one document. Thus, if we desire to terminate the management agreement due to poor performance or breach of the management agreement by the management company, we also terminate our franchise license. Thus, we may have very limited options to remedy poor hotel management performance if we desire to retain the franchise license. The management of the hotels in our portfolio is currently concentrated in one hotel management company. As of December 31, 2014, Interstate Management Company, LLC (“Interstate”) or its affiliate managed 49 of our 90 hotels. Thus, a substantial portion of our revenues is generated by hotels managed by Interstate. This significant concentration of operational risk in one hotel management company makes us more vulnerable economically than if our hotel management was more diversified among 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 provide assurance 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 stock to decline. 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. 8 Table of Contents 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 TRS and our hotel management companies maintain our franchisors’ standards. Failure by us, our TRS 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. 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. Because our hotels are concentrated in a limited number of franchise brands, a loss of all of the licenses for a particular franchise could materially and adversely affect our revenue, 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. 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. 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 continue 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 unsecured credit facility, mortgage financing and other unsecured financing. Our ability to effectively implement and accomplish our business strategy will be affected by our ability to obtain and use 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 financing costs, stringent credit terms and significant volatility. We may not be able to secure first mortgage financing or increase the availability under, extend the maturity or refinance our unsecured 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 common 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 or on favorable terms. 9 Table of Contents 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, capital improvements 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 mortgage debt carries maturity dates or call dates such that the loans become due prior to their full amortization. It may be difficult to refinance or extend the maturity of such loans on terms acceptable to us, or at all, and we may not have sufficient borrowing capacity on our unsecured credit facility to repay any amounts that we are unable to refinance. Although we believe that we will be able to refinance or extend the maturity of these loans, or will have the capacity to repay them, if necessary, using draws under our unsecured credit facility, there can be no assurance that our unsecured credit facility will be available to repay such maturing debt, as draws under our unsecured credit facility are subject to limitations based upon our unencumbered assets 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 $300.0 million unsecured 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; • sell, transfer, pledge or encumber our stock or the ownership interests of our subsidiaries; • incur additional debt or place mortgages on our unencumbered hotels; • 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. 10 Table of Contents 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. Except for the borrowings under our $300.0 million unsecured credit facility, all of our other long-term debt existing as of December 31, 2014 is secured by mortgages on our hotel properties and related assets. In addition, the borrowings under our $300.0 million unsecured credit facility are subject to our maintaining a borrowing base of unencumbered hotel 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 such loans. 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. With respect to our existing and future variable-rate debt, 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.” 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. Hedging against interest rate exposure may adversely affect our financial position and results of operations. We have entered into interest rate swaps having an aggregate notional amount of $103.0 million at December 31, 2014 to hedge against interest rate increases on certain of our outstanding variable-rate indebtedness. In the future, we intend to continue to manage our exposure to interest rate volatility by using hedging arrangements, such as interest rate swaps and interest rate caps. These agreements involve the risks that these arrangements may fail to protect or adversely affect us because, among other things: • interest rate hedging can be expensive, particularly during periods of volatile interest rates; • available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought; • the duration of the hedge may not match the duration of the related liability; • the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and • the hedging counterparty owing money in the hedging transaction may default on its obligation to pay. As a result of any of the foregoing, our hedging transactions, which are intended to limit losses and exposure to interest rate volatility, could have a negative effect on our operating results. 11 Table of Contents 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. Our hotel managers and we 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. Joint venture investments could be adversely affected by a lack of sole decision-making authority with respect to such investments, disputes with joint venture partners and the financial condition of joint venture partners. 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, and as a result we may not be able to take actions which are in the best interest of our stockholders. Further, 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. 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. 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. A slowing of the current economic growth 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. 12 Table of Contents Our operating results and ability to make distributions to our stockholders may be adversely affected by the risks inherent to the ownership of hotels and the markets in which we operate. 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; • over-building of hotels in our markets, which could adversely affect occupancy and revenue at the hotels we acquire; • 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, including increased real estate and personal property taxes, due to inflation and other factors that may not be offset by increased room rates; • potential increases in labor costs at our hotels, including as a result of unionization of the labor force and increasing health care insurance expense; • adverse effects of international, national, regional and local economic and market conditions; • 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; and • events beyond our control, such as instability in the national, European or global economy, terrorist attacks, travel related health concerns including pandemics and epidemics such as H1N1 influenza (swine flu), avian bird flu, Ebola 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. We have significant ongoing needs to make capital expenditures at 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 and hotel management companies 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; • 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. 13 Table of Contents 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 and expense related to 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; • inability to raise capital; and • governmental restrictions on the nature or size of a project. To the extent we develop hotels or acquire hotels under development, we cannot provide assurance 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, acts of terrorism 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 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. Loan covenants, 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. 14 Table of Contents 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. We could incur significant costs related to government regulation and litigation over environmental, health and safety matters. Our hotels and development land 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 or former owner of the property, to perform or pay for the clean-up of contamination (including hazardous substances, waste or petroleum products) at 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 knew of, or caused the contamination. We can also be liable to private parties for costs of remediation, personal injury and death and/or property damage resulting from contamination at or emanating from our properties. 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. 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, air emissions from emergency generators, storm water and wastewater discharges, 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. 15 Table of Contents 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 which can restrict the use of our properties and increase the cost of acquisition, development and operation of our hotels. In addition, federal and state laws and regulations, including laws such as 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. We have not conducted a comprehensive audit or investigation of all of our properties to determine our compliance. As such, some of our hotels currently may 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. 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 on 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. If states and localities in which we own material amounts of property or conduct material amounts of business raise their income and property tax rates or amend their tax regimes in a manner that increases our state and local tax liabilities, we would have less cash available for distribution to our stockholders and the market price of our shares could be adversely affected. We and our subsidiaries are subject to income tax and other taxes by states and localities in which we conduct business. Additionally, we are and will continue to be subject to property taxes in states and localities in which we own property, and our TRS lessees are and will continue to be subject to state and local corporate income tax. As these states and localities seek additional sources of revenue, they may, among other steps, raise income and property tax rates and/or amend their tax regimes to eliminate for state income tax purposes the favorable tax treatment REITs enjoy for federal income tax purposes. We cannot predict when or if any states or localities would make any such changes, or what form those changes would take. If states and localities in which we own material amounts of property or conduct material amounts of business make changes to their tax rates or tax regimes that increase our state and local tax liabilities, such increases would reduce the amount of cash available for distribution to our stockholders and could adversely affect the market price of our shares. Risks Related to Conflicts of Interest 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 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. 16 Table of Contents 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. Mr. Boekelheide has certain outside business interests which may reduce the amount of time that he is 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” and “control share” provisions. 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. 17 Table of Contents Our stockholders have limited voting rights and 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 shares of common stock are the only class of our securities that carry full voting rights. Voting rights for holders of our preferred stock exist primarily with respect to the ability to elect two additional directors to our board of directors in the event that six quarterly dividends (whether or not consecutive) payable on the preferred stock are in arrears, and with respect to voting on amendments to our charter or articles supplementary relating to the preferred stock that materially and adversely affect the rights of the holders of preferred stock or create additional classes or series of senior equity securities. Further, 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 or effect other management changes that are 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. 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 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 99% of the Common Units in our operating partnership, all of the issued and outstanding 9.25% Series A Cumulative Redeemable Preferred Units of Summit OP (“Series A Preferred Units”), all of the issued and outstanding 7.875% Series B Cumulative Redeemable Preferred Units of Summit OP (“Series B Preferred Units”), and all of the issued and outstanding 7.125% Series C Cumulative Redeemable Preferred Units of Summit OP (“Series C Preferred Units,” the Series C Preferred Units, Series B Preferred Units and Series A Preferred Units collectively referred to as “Preferred Units”). 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 Preferred Units, they will not have any voting rights with respect to any such issuances or other partnership-level activities of our operating partnership. 18 Table of Contents If we are unable to maintain an effective system of internal controls, we may not be able to produce and report accurate financial information on a timely basis or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could harm our business and the value of our common shares. A system of internal controls that is well designed and properly functioning is critical for us to produce and report accurate and reliable financial information and effectively prevent fraud. At times, we may identify areas of our internal controls that are not properly functioning as designed, that need improvement or that must be developed to ensure that we have an adequate system of internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting and have our independent auditors annually issue their own opinion on our internal controls over financial reporting. We cannot be certain that we will be successful in maintaining adequate internal controls over our financial reporting and processes. Additionally, as we grow our business, our internal controls will become more complex and we will require significantly more resources to ensure that our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if promptly remedied, could reduce the market value of our common shares. Additionally, the existence of any material weakness or significant deficiency would require management to devote substantial time and incur significant expense to remediate any such conditions. There can be no assurance that management will be able to remediate any such material weaknesses or significant deficiencies in a timely manner. 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,” our 9.25% Series A Cumulative Redeemable Preferred Stock trades on the NYSE under the symbol “INNPrA,” our 7.875% Series B Cumulative Redeemable Preferred Stock trades on the NYSE under the symbol “INNPrB,” and our 7.125% Series C Cumulative Redeemable Preferred Stock trades on the NYSE under the symbol “INNPrC.” In order for our securities 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. The cash available for distribution may not be sufficient to make distributions at expected levels, and we cannot provide assurance 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. Subject to the preferential rights of the holders of our Series A, Series B and Series C preferred stock and any other class or series of our stock that are senior to our common stock with respect to distribution rights, we intend to make quarterly distributions to holders of our common stock. 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 unsecured 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 unsecured credit facility to pay distributions, we would be more limited in our ability to execute our strategy of using that unsecured 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 19 Table of Contents 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. 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 market 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. 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; • the inclusion of our common stock and preferred stock in equity indices, which could induce additional purchases; • the addition or departure of key personnel; • 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 health concerns including pandemics and epidemics such as H1N1 influenza (swine flu), avian bird flu, Ebola 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. As of February 20, 2015, a total of 764,277 Common Units are redeemable and could be converted into shares of our common stock and sold into the public market. The exchange of Common Units 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. 20 Table of Contents 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, 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. 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. The REIT rules and regulations are highly technical and complex. We believe that our organization and method of operation has 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 provide assurance that we will remain qualified as a REIT. Failure to qualify as a REIT could result from a number of situations, including, without limitation: • if the leases of our hotels to our TRS lessees are not respected as true leases for federal income tax purposes; • if our operating partnership is treated as a publicly traded partnership taxable as a corporation for federal income tax purposes; or • if our existing or future hotel management companies do not qualify as “eligible independent contractors” or if our hotels are not “qualified lodging facilities,” as required by federal income tax law. 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 could adversely affect the value of our stock. Even if we continue to qualify as a REIT, we may face other tax liabilities that reduce our cash flows. Even if we continue to qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets including, but not limited to 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 TRS is subject to regular corporate federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders. 21 Table of Contents 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. Toqualify 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. To satisfy the requirements for 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. 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 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 TRS increases our overall tax liability. Our TRS is subject to federal, state and local income tax on its taxable income, which typically 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 any hotel that is owned by a wholly-owned subsidiary of our TRS, the revenue from that hotel, net of the operating expenses. Accordingly, although our ownership of our TRS 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 TRS is available for distribution to us. 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 and other operating expenses, which would adversely affect our TRS’ 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. 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. 22 Table of Contents 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 substantially all of our hotels to our TRS lessees. 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, 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. 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 TRS 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 TRS. 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 our TRS 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. Our ownership of our TRS is subject to limitations and our transactions with our TRS 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 provide assurance 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 investment in our TRS for the purpose of ensuring compliance with TRS ownership limitations and structure our transactions with our TRS 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. 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. 23 Table of Contents 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. To qualify as a REIT for each taxable year, 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. 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. We may pay taxable dividends in 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. 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 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 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. The 100% prohibited transactions tax may limit our ability to dispose of our properties, and we could incur a material tax liability if the IRS successfully asserts that the 100% prohibited transaction tax applies to some or all of our past or future dispositions. A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We have selectively disposed of certain of our properties in the past and intend to make additional dispositions in the future. Although a safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction is available, some of our past dispositions may not have qualified for that safe harbor and some or all of our future dispositions may not qualify for that safe harbor. We believe that our past dispositions will not be treated as prohibited transactions, and we may avoid disposing of property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through our TRS, which would be subject to federal and state income taxation as a corporation. Moreover, no assurance can be provided that the IRS will not assert that some or all of our past or future dispositions are subject to the 100% prohibited transactions tax. If the IRS successfully imposes the 100% prohibited transactions tax on some or all of our dispositions, the resulting tax liability could be material. Item 1B. Unresolved Staff Comments. None. 24 Table of Contents Item 2. Properties. Our Portfolio A list of our hotel properties owned as of December 31, 2014 is included in the table below. We own our hotels in fee simple, except for six hotels that are held under ground lease or other leasehold interest, as described in “Our Hotel Operating Agreements — Ground Leases ” below. According to STR’s current chain scales, 61 of our hotel properties with 8,169 guestrooms are categorized as Upscale hotels and 29 of our hotel properties with 3,294 guestrooms are categorized as Upper-midscale hotels. All financial and room information is for the year ended December 31, 2014. Franchise/Brand Marriott Courtyard by Marriott (1) Courtyard by Marriott (1) Courtyard by Marriott (2) Courtyard by Marriott (3) Courtyard by Marriott (1) Courtyard by Marriott (3) Courtyard by Marriott (3) Courtyard by Marriott (1) Courtyard by Marriott (3) Courtyard by Marriott (3) Courtyard by Marriott (3) Fairfield Inn & Suites by Marriott (3) Fairfield Inn & Suites by Marriott (1) Fairfield Inn & Suites by Marriott (3) Fairfield Inn & Suites by Marriott (3) Fairfield Inn & Suites by Marriott (3) Fairfield Inn & Suites by Marriott (3) Fairfield Inn & Suites by Marriott (3) Residence Inn by Marriott (3) Residence Inn by Marriott (1) Residence Inn by Marriott (1) Residence Inn by Marriott (1) (4) Residence Inn by Marriott (3) Residence Inn by Marriott (3) Residence Inn by Marriott (1) SpringHill Suites by Marriott (1) SpringHill Suites by Marriott (1) SpringHill Suites by Marriott (1) SpringHill Suites by Marriott (3) SpringHill Suites by Marriott (1) SpringHill Suites by Marriott (3) SpringHill Suites by Marriott (3) SpringHill Suites by Marriott (1) SpringHill Suites by Marriott (3) TownPlace Suites by Marriott (3) Total Marriott (35 hotel properties) Hilton DoubleTree (1) DoubleTree (1) Hampton Inn (3) Hampton Inn (1) Hampton Inn (3) Hampton Inn (3) Hampton Inn (1) Hampton Inn & Suites (4) Hampton Inn & Suites (1) Hampton Inn & Suites (1) Hampton Inn & Suites (1) Hampton Inn & Suites (1) Hampton Inn & Suites (1) Hampton Inn & Suites (1) Hampton Inn & Suites (1) Location Number of Guestrooms STR Segment Flagstaff, AZ Phoenix (Scottsdale), AZ Atlanta, GA Indianapolis, IN New Orleans (Metairie), LA New Orleans (Convention), LA New Orleans (French Quarter), LA Jackson, MS Memphis (Germantown), TN Dallas (Arlington), TX El Paso, TX Denver, CO Louisville, KY Baton Rouge, LA Memphis (Germantown), TN Dallas (Fort Worth), TX Seattle (Bellevue), WA Spokane, WA Fort Wayne, IN New Orleans (Metairie), LA Jackson (Ridgeland), MS Portland, OR Memphis (Germantown), TN Dallas (Arlington), TX Salt Lake City, UT Flagstaff, AZ Phoenix (Scottsdale), AZ Denver, CO Indianapolis, IN Louisville, KY Baton Rouge, LA New Orleans, LA Minneapolis (Bloomington), MN Nashville, TN Baton Rouge, LA Baton Rouge, LA San Francisco, CA Fort Collins, CO Fort Wayne, IN Medford, OR Provo, UT Santa Barbara (Goleta), CA Austin, TX Ventura (Camarillo), CA San Diego (Poway), CA Tampa (Ybor City), FL Minneapolis (Bloomington), MN Nashville (Smyrna), TN El Paso, TX Dallas (Fort Worth), TX 164 Upscale 153 Upscale 150 Upscale 297 Upscale 153 Upscale 202 Upscale 140 Upscale 117 Upscale 93 Upscale 103 Upscale 90 Upscale 160 Upper-midscale 135 Upper-midscale 78 Upper-midscale 80 Upper-midscale 70 Upper-midscale 144 Upper-midscale 84 Upper-midscale 109 Upscale 120 Upscale 100 Upscale 124 Upscale 78 Upscale 96 Upscale 189 Upscale 112 Upscale 121 Upscale 124 Upscale 156 Upscale 198 Upscale 78 Upscale 208 Upscale 113 Upscale 78 Upscale 90 Upper-midscale 4,507 127 Upscale 210 Upscale 75 Upper-midscale 118 Upper-midscale 75 Upper-midscale 87 Upper-midscale 101 Upper-midscale 209 Upper-midscale 116 Upper-midscale 108 Upper-midscale 138 Upper-midscale 146 Upper-midscale 83 Upper-midscale 139 Upper-midscale 105 Upper-midscale Hilton Garden Inn (1) Hilton Garden Inn (4) Hilton Garden Inn (1) Hilton Garden Inn (1) Hilton Garden Inn (1) Hilton Garden Inn (3) Hilton Garden Inn (1) Hilton Garden Inn (3) Hilton Garden Inn (1) Hilton Garden Inn (3) Homewood Suites (3) Total Hilton (26 hotel properties) Houston (Energy Corridor), TX Houston (Galleria), TX Birmingham, AL Birmingham, AL Fort Collins, CO Atlanta (Duluth), GA Minneapolis (Eden Prairie), MN Greenville, SC Nashville (Smyrna), TN Dallas (Fort Worth), TX Jackson (Ridgeland), MS 25 182 Upscale 190 Upscale 130 Upscale 95 Upscale 120 Upscale 122 Upscale 97 Upscale 120 Upscale 112 Upscale 98 Upscale 91 Upscale 3,194 Location Number of Guestrooms STR Segment Table of Contents Franchise/Brand Hyatt Hyatt House (1) Hyatt Place (3) Hyatt Place (1) Hyatt Place (1) Hyatt Place (1) Hyatt Place (3) Hyatt Place (1) Hyatt Place (1) Hyatt Place (1) Hyatt Place (1) Hyatt Place (1) Hyatt Place (1) Hyatt Place (3) Hyatt Place (3) (5) Hyatt Place (3) (4) Hyatt Place (1) Hyatt Place (3) Total Hyatt (17 hotel properties) IHG Holiday Inn (3) (4) Holiday Inn Express (1) Holiday Inn Express (1) Holiday Inn Express & Suites (1) Holiday Inn Express & Suites (1) Holiday Inn Express & Suites (3) Holiday Inn Express & Suites (1) Staybridge Suites (3) Staybridge Suites (1) Total IHG (9 hotel properties) Denver (Englewood), CO Phoenix, AZ Phoenix (Scottsdale), AZ Denver (Englewood), CO Denver (Lone Tree), CO Fort Myers, FL Orlando (Convention), FL Orlando (Universal), FL Atlanta, GA Chicago (Hoffman Estates), IL Chicago (Lombard), IL Baltimore (Owing Mills), MD Minneapolis, MN Long Island (Garden City), NY Portland, OR Dallas (Arlington), TX Dallas (Las Colinas), TX Atlanta (Duluth), GA Chicago (Vernon Hills), IL Charleston, WV San Francisco, CA Minneapolis (Minnetonka), MN Dallas (Las Colinas), TX Salt Lake City (Sandy), UT Denver (Glendale), CO Jackson, MS Carlson Country Inn & Suites by Carlson (1) Total Carlson (1 hotel property) Starwood Aloft (3) Four Points (3) Total Starwood (2 hotel properties) Total Portfolio (90 hotel properties) Charleston, WV Jacksonville, FL San Francisco, CA 135 Upscale 127 Upscale 126 Upscale 126 Upscale 127 Upscale 148 Upscale 150 Upscale 150 Upscale 150 Upscale 126 Upscale 151 Upscale 123 Upscale 213 Upscale 122 Upscale 136 Upscale 127 Upscale 122 Upscale 2,359 143 Upper-midscale 119 Upper-midscale 66 Upper-midscale 252 Upper-midscale 93 Upper-midscale 128 Upper-midscale 88 Upper-midscale 121 Upscale 92 Upscale 1,102 64 Upper-midscale 64 136 Upscale 101 Upscale 237 11,463 (1) This hotel property is subject to mortgage debt at December 31, 2014. For additional information concerning our debt and lenders, see Item 7. “Management’s Discussion and Analysis of Financial Information and Results of Operations—Outstanding Indebtedness” and Item 8. “Financial Statements and Supplementary Data—Note 11—Debt” in our Consolidated Financial Statements. (2) We own a 90% controlling interest in this hotel property with the opportunity to acquire the remaining 10% interest in 2016. (3) This hotel property is unencumbered at December 31, 2014. (4) These hotel properties are subject to ground leases as described below in “Other Hotel Operating Agreements — Ground Leases. ” (5) This hotel property is subject to a PILOT (payment in lieu of taxes) lease as described below in “Other Hotel Operating Agreements — Ground Leases. ” 26 Table of Contents Since December 31, 2014, we have not acquired or disposed of any hotel properties. In addition to our hotel property portfolio, we own six parcels of land, one of which is designated as held for sale, that we believe are suitable for the development of new hotel properties, the possible expansion of existing hotel properties or the development of restaurants in proximity to certain of our hotel properties. We will consider unique opportunities to develop hotels utilizing our own resources if circumstances warrant. 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 these parcels to our TRS. Our Hotel Operating Agreements Ground Leases At December 31, 2014, five of our hotel properties are subject to ground lease agreements that cover all of the land underlying the respective hotel property. • The Residence Inn by Marriott located in Portland, OR 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 Hampton Inn & Suites located in Austin, TX is subject to a ground lease with an initial lease termination date of May 31, 2050. Annual ground rent currently is estimated to be $0.4 million for 2015. Annual rent is increased every five years with the next adjustment coming in 2020. • The Hilton Garden Inn located in Houston (Galleria Area), Texas is subject to a ground lease with an initial lease termination date of April 20, 2053 with one option to extend for an additional 10 years. Annual ground rent currently is estimated to be $0.5 million for 2015. Annual rent is increased every five years with the next adjustment coming in 2018. • The Hyatt Place located in Portland, OR 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, GA is subject to a ground lease with a lease termination date of April 1, 2069. Annual ground rent currently is estimated to be $0.2 million in 2015. Annual rent is increased annually by 3% for each successive lease year, on a cumulative basis. 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. In addition, the Hyatt Place located in Garden City, NY is subject to a PILOT (payment in lieu of taxes) lease with the Town of Hempstead Industrial Development Authority, or the IDA, as lessor. The lease expires on December 31, 2019. Upon expiration of the lease, we expect to exercise our right to acquire a fee simple interest in the Garden City hotel property from the IDA for nominal consideration. 27 Table of Contents Franchise Agreements At December 31, 2014, all of our hotel properties operate under franchise agreements with Marriott, Hilton, Hyatt, IHG, Country Inns & Suites By Carlson, Inc. (“Carlson”) or Starwood Hotels and Resorts Worldwide, Inc. (“Starwood”). 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, loyalty programs, 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 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. Hotel Management Agreements At December 31, 2014, all of our hotel properties are operated pursuant to hotel management agreements with third party hotel management companies, including the following: Management Company Interstate Management Company, LLC and its affiliate Noble Management Group, LLC Select Hotel Group, LLC Affiliates of Marriott, including Courtyard Management Corporation, SpringHill SMC Corporation and Residence Inn by Marriott White Lodging Services Corporation Kana Hotels, Inc. InterMountain Management, LLC and its affiliate, Pillar Hotels and Resorts, LP Affiliates of IHG including IHG Management (Maryland) LLC and Intercontinental Hotel Group Resources, Inc. HP Hotels Management Company, Inc. OTO Development, LLC American Liberty Hospitality, Inc. Stonebridge Realty Advisors, Inc. Total Number of Properties 49 12 6 4 3 7 2 2 (1) 2 2 1 90 Number of Guestrooms 5,523 1,681 973 786 315 723 395 225 260 372 210 11,463 (1) We entered into hotel management agreements with Interstate Management Company, LLC in January 2015 for the hotels previously managed by HP Hotels Management Company, Inc. Our typical hotel management agreement requires us to pay a base fee to our hotel manager calculated as a percentage of hotel revenues. In addition, our hotel management agreements generally provide that the hotel manager can earn an incentive fee for revenue or EBITDA over certain thresholds. Our TRS lessees may employ other hotel managers in the future. We do not, and will not, have any ownership or economic interest in any of the hotel management companies engaged by our TRS lessees. Item 3. Legal Proceedings. We are involved from time to time in litigation arising in the ordinary course of business. However, we are not currently aware of any actions against us that we believe would materially adversely affect our business, financial condition or results of operations. Item 4. Mine Safety Disclosures. Not applicable. 28 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock began trading on the NYSE on February 9, 2011 under the symbol “INN.” Prior to that time, there was no public trading market for our common stock. The last reported sale price for our common stock as reported on the NYSE on February 20, 2015 was $13.24 per share. The following table sets forth the high and low sales price per share of our common stock per quarter reported on the NYSE, and the distributions declared on our common stock for each of the quarters indicated. 2014 Fourth Quarter Third Quarter Second Quarter First Quarter 2013 Fourth Quarter Third Quarter Second Quarter First Quarter Stockholder Information High Low Distribution Declared Per Common Share/Unit 12.70 $ 11.07 $ 10.61 $ 9.48 $ 10.65 $ 10.27 $ 9.01 $ 8.68 $ 0.1175 0.1175 0.1125 0.1125 High Low Distribution Declared Per Common Share/Unit 9.36 $ 10.32 $ 10.44 $ 10.47 $ 8.60 $ 9.10 $ 9.13 $ 9.02 $ 0.1125 0.1125 0.1125 0.1125 $ $ $ $ $ $ $ $ As of February 20, 2015, our common stock was held of record by 381 holders and there were 86,088,265 shares of our common stock outstanding. Distribution Information As a REIT, we must distribute annually to our stockholders an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to income tax on our taxable income that is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates. Our cash available for distribution may be less than the amount required to meet the distribution requirements for REITs under the Code, and we 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 our Board of Directors, in its sole discretion, and declared by us based upon a variety of factors deemed relevant by our directors, including financial condition, restrictions under applicable law and loan agreements, capital requirements and the REIT requirements of the Code. Our 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. We are generally restricted from declaring or paying any distributions, or setting aside any funds for the payment of distributions, on our common stock unless full cumulative distributions on our preferred stock have been declared and either paid or set aside for payment in full for all past distribution periods. 29 Table of Contents Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information as of December 31, 2014 with respect to our securities that may be issued under existing equity compensation plans: Plan Category Equity Compensation Plans Approved by Summit REIT Stockholders (2) Equity Compensation Plans Not Approved by Summit REIT Stockholders Total 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) 846,000 $ — 846,000 $ 9.75 — 9.75 614,471 — 614,471 (1) Excludes securities reflected in the column entitled “Number of Securities to be Issued Upon Exercise of Outstanding Options.” (2) Consists of our 2011 Equity Incentive Plan, which was approved by our board of directors and our sole stockholder prior to completion of our IPO. Stock Performance Graph The following graph compares the yearly change in our cumulative total stockholder return on our common shares for the period beginning February 8, 2011 and ended December 31, 2014, with the semi-annual changes in the Standard and Poor’s 500 Stock Index (“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 stock, 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 stockholder 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 Ended 02/08/11 06/30/11 12/30/11 06/29/12 12/31/12 06/28/13 12/31/13 06/30/14 12/31/14 152.48 168.99 149.55 127.23 159.25 132.99 105.45 148.64 113.30 100.08 96.79 79.51 106.19 112.28 89.69 91.00 105.97 89.64 117.00 100.50 89.67 100.00 100.00 100.00 108.06 127.80 99.53 30 Table of Contents Item 6. Selected Financial Data. The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes thereto, appearing elsewhere in this Form 10-K. 2014 Summit Hotel Properties, Inc. 2013 2012 2/14/11 - 12/31/11 Summit Hotel Properties, LLC 1/1/11 - 2/13/11 Combined 2011 Summit Hotel Properties, LLC 2010 $ $ 380,472 22,994 403,466 $ 283,279 15,679 298,958 $ 154,600 7,100 161,700 $ 102,108 4,280 106,388 $ 10,620 519 11,139 $ 112,728 4,799 117,527 (in thousands, except per share) Statement of Operations Data Revenues: Room Other hotel operations revenue Total revenues Expenses: Hotel operating expenses: Room Other direct Other indirect Total hotel operating expenses Depreciation and amortization Corporate general and administrative Hotel property acquisition costs Loss on impairment of assets Total expenses Operating income (loss) Other income (expense): Interest expense Other income (expense) Total other expense, net Income (loss) from continuing operations before income taxes Income tax benefit (expense) Income (loss) from continuing operations Income (loss) from discontinued operations Net income (loss) Income (loss) attributable to non- controlling interests: Operating partnership Joint venture Net income (loss) attributable to Summit Hotel Properties, Inc./Predecessor Preferred dividends Net income (loss) attributable to common stockholders/members Earnings per share: Basic and diluted net income (loss) per share from continuing operations Basic and diluted net income (loss) per share from discontinued operations Basic and diluted net income (loss) per share Weighted average common shares outstanding: Basic Diluted Dividends per share Balance Sheet Data (at period end) Total assets Debt Total equity $ $ $ $ $ $ $ 101,150 55,388 104,959 261,497 65,312 19,884 769 8,847 356,309 47,157 (26,968 ) 986 (25,982 ) 21,175 (744 ) 20,431 492 20,923 51 1 80,391 39,815 78,136 198,342 51,184 12,929 1,886 1,369 265,710 33,248 (20,137 ) (1,592 ) (21,729 ) 11,519 (4,894 ) 6,625 (728 ) 5,897 (297 ) 316 20,871 (16,588 ) 4,283 $ 5,878 (14,590 ) (8,712 ) $ 45,130 21,284 44,028 110,442 30,645 9,573 3,050 660 154,370 7,330 (14,909 ) (96 ) (15,005 ) (7,675 ) 728 (6,947 ) 4,677 (2,270 ) 30,216 15,478 28,294 73,988 21,646 6,561 254 — 102,449 3,939 (9,993 ) (37 ) (10,030 ) (6,091 ) 2,259 (3,832 ) (345 ) (4,177 ) 3,674 2,288 3,642 9,604 2,651 — — — 12,255 (1,116 ) (3,435 ) 2 (3,433 ) (4,549 ) (550 ) (5,099 ) (1,108 ) (6,207 ) 33,890 17,766 31,936 83,592 24,297 6,561 254 — 114,704 2,823 (13,428 ) (35 ) (13,463 ) (10,640 ) 1,709 (8,931 ) (1,453 ) (10,384 ) (1,194 ) — (1,076 ) (4,625 ) (5,701 ) $ (1,240 ) — (2,937 ) (411 ) (3,348 ) $ — — (6,207 ) — (6,207 ) $ (1,240 ) — (9,144 ) (411 ) (9,555 ) $ 99,056 4,327 103,383 29,916 15,609 27,673 73,198 21,751 — 367 6,476 101,792 1,591 (21,575 ) (37 ) (21,612 ) (20,021 ) (195 ) (20,216 ) (704 ) (20,920 ) — — (20,920 ) — (20,920 ) 0.04 $ 0.01 0.05 $ (0.11 ) $ (0.28 ) $ (0.01 ) (0.12 ) $ 0.11 (0.17 ) $ 85,242 85,566 0.46 1,459,024 626,533 785,201 $ $ $ $ 70,327 70,327 0.45 1,294,476 435,589 822,378 $ $ $ $ 33,717 33,717 0.45 810,789 312,613 473,537 $ $ $ $ (0.11 ) (0.01 ) (0.12 ) 27,278 27,278 0.28 554,005 217,104 319,449 n/a n/a n/a $ $ $ 554,005 217,104 319,449 $ $ $ 493,009 420,437 59,844 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview We are a self-managed hotel investment company that was organized in June 2010. We focus on acquiring and owning premium- branded, select-service hotels in the Upscale and Upper-midscale segments of the U.S. lodging industry, as these segments are currently defined by STR. We had no business activities prior to completion of the IPO and the related 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 was considered the acquirer for accounting purposes and its financial statements became our financial statements upon completion of the formation transactions. From the completion of our IPO through December 31, 2014, we acquired 49 hotel properties with a total of 6,938 guestrooms for purchase prices aggregating approximately $1.0 billion. In addition, pursuant to our strategy to continually evaluate our hotel properties, since our IPO and through December 31, 2014, we sold 24 hotel properties with a total of 2,014 guestrooms. At December 31, 2014, our portfolio consisted of 90 hotel properties with a total of 11,463 guestrooms located in 21 states. 31 Table of Contents Substantially all of our assets are held by, and all of our operations are conducted through, Summit OP. Through a wholly-owned subsidiary, we are the sole general partner of Summit OP. At December 31, 2014, we owned, directly and indirectly, approximately 99% of Summit OP’s issued and outstanding Common Units, and all of Summit OP’s issued and outstanding Series A, Series B and Series C Preferred Units. Pursuant to the Summit OP partnership agreement, 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, and to make distributions to partners and to cause changes in Summit OP’s business activities. Industry Trends and Outlook Room-night demand in the U.S. lodging industry is generally correlated to macroeconomic trends. Key drivers of demand include growth in 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 led improvements in the overall economy. Although we expect that our hotel properties will realize meaningful RevPAR gains as the economy and lodging industry continue to improve, the risk exists that global and domestic economic conditions may cause the economic recovery to stall, which likely would adversely affect our growth expectations. The U.S. lodging industry experienced a positive trend through 2014 that we expect to continue into 2015 as the U.S. economy continues to improve. According to a report prepared in January 2015 by PricewaterhouseCoopers, LLP, U.S. RevPAR growth in 2015 for Upscale hotels and Upper-midscale hotels is projected to be 6.6% and 8.2%, respectively. We have a positive outlook about macro-economic conditions and their effect on room-night demand. While the supply of new hotels under construction has increased and is expected to accelerate in 2015, we expect that our near-term results will not be adversely affected by increased lodging supply in our markets at this time. Operating Performance Metrics We use a variety of operating performance indicators 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 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 hotel properties, groups of hotel properties 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 — Occupancy represents the total number of guestrooms occupied divided by the total number of guest rooms available. • Average Daily Rate (ADR) — ADR represents total room revenues divided by the total number of guestrooms occupied. • Revenue Per Available Room (RevPAR ) — RevPAR is the product of ADR and Occupancy. Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel property 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 property 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 brands. 32 Table of Contents Hotel Property Portfolio Activity Acquisitions We acquired six hotel properties in 2014 and 19 hotel properties in 2013. A summary of these acquisitions is as follows (dollars in thousands, except Cost per Key): Franchise/Brand Location Guestrooms as of December 31, 2014 Purchase Price Renovation Cost Cost per Key Date Acquired 2014: January 9 January 10 January 24 March 14 August 15 September 9 Hilton Garden Inn Hampton Inn Four Points by Sheraton DoubleTree by Hilton Hilton Garden Inn Hampton Inn & Suites Total for the year ended December 31, 2014 2013: January 22 January 22 January 22 February 11 March 11 March 11 March 11 March 11 March 11 April 30 May 21 May 21 May 23 May 23 May 23 May 23 October 1 October 8 December 31 Hyatt Place Hyatt Place Hyatt Place IHG / Holiday Inn Express & Suites SpringHill Suites by Marriott Courtyard by Marriott Courtyard by Marriott Courtyard by Marriott Residence Inn by Marriott Hilton Garden Inn IHG / Holiday Inn Express & Suites Hilton Garden Inn Fairfield Inn & Suites by Marriott SpringHill Suites by Marriott Courtyard by Marriott SpringHill Suites by Marriott Hampton Inn & Suites Hampton Inn & Suites Hyatt Place Total for the year ended December 31, 2013 Houston (Galleria), TX Santa Barbara (Goleta), CA San Francisco, CA San Francisco, CA Houston (Energy Corridor), TX Austin, TX 6 hotel properties Chicago (Hoffman Estates), IL Orlando (Convention), FL Orlando (Universal), FL San Francisco, CA New Orleans, LA New Orleans (Convention), LA New Orleans (French Quarter), LA New Orleans (Metairie), LA New Orleans (Metairie), LA Greenville, SC Minneapolis (Minnetonka), MN Minneapolis (Eden Prairie), MN Louisville, KY Louisville, KY Indianapolis, IN Indianapolis, IN Ventura (Camarillo), CA San Diego (Poway), CA Minneapolis, MN 19 hotel properties 182 $ 101 101 210 190 209 993 $ 126 $ 150 150 252 208 202 140 153 120 120 93 97 135 198 297 156 116 108 213 $ 37,500 27,900 (1) 21,250 39,060 36,000 53,000 $ $ 214,710 9,230 12,252 11,843 60,500 33,095 30,827 25,683 23,539 19,890 15,250 6,900 10,200 25,023 39,138 58,634 30,205 15,750 15,150 32,506 3,400 (3) $ 2,100 (3) 1,400 (3) 4,500 (3) 3,200 (3) 2,400 (3) 17,000 $ 1,400 (3) $ 1,900 (2) 1,900 (2) 4,200 (2) —(2) 2,400 (2) 100 (2) 2,500 (2) —(2) 100 (2) 1,600 (2) 2,300 (2) 2,500 (3) 3,600 (3) —(2) —(2) 3,000 (3) 300 (3) —(2) 3,034 $ 475,615 $ 27,800 $ 225,000 297,000 224,000 207,000 206,000 265,000 233,000 84,000 94,000 92,000 257,000 159,000 164,000 184,000 170,000 166,000 128,000 91,000 129,000 204,000 216,000 197,000 194,000 162,000 143,000 153,000 166,000 (1) The purchase price for this hotel included the issuance of 412,174 Common Units in our Operating Partnership valued at the time of issuance at $3.7 million. (2) The amounts reflect actual total renovation costs. (3) The amounts reflect actual-to-date and estimated remaining costs to complete. The purchase price and renovation costs are funded by mortgage debt, advances on our senior unsecured revolving line of credit facility, cash and the issuance of Operating Partnership Common Units described in footnote 1 to the table above. Additional information about the mortgage debt financing is provided below in “Outstanding Indebtedness — Mortgage Loans.” Of the total renovation costs detailed in the table above, $26.2 million have been incurred as of December 31, 2014. There is no assurance that our actual renovation costs will not exceed our estimates. Dispositions Pursuant to our strategy to periodically evaluate our hotel properties and land held for development, we sold four hotel properties and three parcels of land held for development in 2014 and 15 hotel properties and five parcels of land held for development in 2013. Historically, when a property was identified as being held for sale, we reclassified the property on our consolidated balance sheets, evaluated for potential impairment and, in the case of a hotel property, reported historical and future results of operations in discontinued operations. 33 Table of Contents As discussed in the footnotes to the consolidated financial statements, we have elected to early adopt ASU No. 2014-08, which changes the criteria for discontinued operations to include only disposals that represent a strategic shift in operations with a major effect on operations and results. While we have elected early adoption of ASU No. 2014-08, the sale of the AmericInn Hotel & Suites, Aspen Hotel & Suites and Hampton Inn in Fort Smith, AR has been included in discontinued operations as these hotels were classified as held for sale in prior periods. Under this ASU, the Company anticipates that the majority of future property sales will not be classified as discontinued operations. One hotel was recorded in discontinued operations during the year ended December 31, 2014, for which a $0.4 million impairment charge was recorded during the period. Additional impairments of approximately $8.9 million were recorded during the year ended December 31, 2014 for properties that were not recorded as discontinued operations as a result of the early adoption of ASU No. 2014-08. In 2013, we recognized impairment charges of $7.7 million on hotel properties and $1.4 million related to land held for development. A summary of the dispositions in 2014 and 2013 follows (dollars in thousands): Disposition Date 2014: January 17 September 9 October 21 Total 2014 2013: January 15 February 15 February 27 May 1 May 30 August 8 August 21 August 29 September 30 October 30 November 1 November 1 November 8 November 12 November 18 December 19 Total 2013 Franchise/Brand Location Gross Sales Price AmericInn Hotel & Suites and Aspen Hotel & Suites Hampton Inn Country Inn & Suites and adjacent land parcels AmericInn Hotel & Suites Hampton Inn Land parcel Holiday Inn and Holiday Inn Express Courtyard by Marriott SpringHill Suites Land parcel Fairfield Inn Fairfield Inn Fairfield Inn SpringHill Suites Land parcel Fort Smith, AR Fort Smith, AR San Antonio, TX Golden, CO Denver, CO Jacksonville, FL Boise, ID $ $ $ Memphis, TN Lithia Springs, GA Missoula, MT Lewisville, TX Lakewood, CO Emporia, KS Little Rock, AR El Paso, TX Salina, KS Fairfield Inn and AmericInn Hotel & Suites Hampton Inn, Fairfield Inn and land parcel Land parcel Holiday Inn Express Boise, ID Houston, TX Emporia, KS $ 3,080 (1) 8,800 (1) 7,900 (2) 19,780 2,600 5,500 1,900 12,600 4,225 2,400 750 1,960 2,800 1,650 (3) 4,500 2,400 3,000 8,090 2,500 1,775 (3) 58,650 (1) The sale of these hotel properties included the assignment of the related ground leases. (2) The sale of this property included three adjacent land parcels totaling 5.64 acres. (3) We provided seller financing in the form of mortgage loans on these sales totaling $2.4 million. These mortgage loans mature in the first quarter of 2015. 34 Table of Contents Other Hotel Property Investment Activities We have entered into a purchase agreement with a hotel property developer to acquire a Hampton Inn & Suites in downtown Minneapolis, MN for $38.7 million, which price includes change orders to date. The purchase is subject to certain conditions, including the completion of construction of the hotel in accordance with agreed upon architectural and engineering designs, receipt of a Hampton Inn & Suites franchise, and receipt of a certificate of occupancy. Therefore, there is no assurance that the acquisition will be completed. In January 2014, we issued a standby letter of credit for $13.1 million in support of this purchase agreement. This letter of credit was issued under our senior unsecured credit facility. We anticipate acquiring this hotel property in the first half of 2015. For additional information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”. Non-GAAP Financial Measures We consider funds from operations (“FFO”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”), both of which are non-GAAP financial measures, to be useful to investors as key supplemental measures of our operating performance. We caution investors that amounts presented in accordance with our definitions of FFO and EBITDA may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. FFO and EBITDA should be considered along with, but not as alternatives to, net income (loss) as a measure of our operating performance. FFO and EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, debt service obligations and other commitments and uncertainties. Although we believe that FFO and EBITDA can enhance the understanding of our financial condition and results of operations, these non-GAAP financial measures are not necessarily better indicators of any trend as compared to a comparable GAAP measure such as net income (loss). Funds From Operations As defined by the National Association of Real Estate Investment Trusts, (“NAREIT”), FFO represents net income or loss (computed in accordance with GAAP), excluding preferred dividends, gains (or losses) from sales of property, impairment, items classified by GAAP as extraordinary, the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operational performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and impairment losses, it provides a performance measure that, when compared year over year, reflects the effect to operations from trends in occupancy, room rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. Our computation of FFO differs from the NAREIT definition and may differ from the methodology for calculating FFO used by other equity REITs and, accordingly, may not be comparable to such other REITs because the amount of depreciation and amortization we add back to net income or loss includes amortization of deferred financing costs and amortization of franchise application fees. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. 35 Table of Contents The following is a reconciliation of our GAAP net income to FFO for the years ended December 30, 2014, 2013 and 2012 (in thousands, except per share/unit data): Net income (loss) Preferred dividends Depreciation and amortization Loss on impairment of assets Gain on disposal of assets Noncontrolling interest in joint venture Adjustments related to joint venture Funds from operations FFO per common share/unit 2014 2013 2012 $ $ $ 20,923 $ (16,588 ) 65,325 9,247 (446 ) (1 ) (204 ) 78,256 0.90 $ $ 5,897 $ (14,590 ) 53,144 9,044 (4,308 ) (316 ) (315 ) 48,556 0.66 $ $ (2,270 ) (4,625 ) 34,871 2,965 (2,811 ) — — 28,130 0.69 Weighted average diluted common shares/units (1) 86,590 73,241 40,912 (1) Includes Common Units in Summit Hotel OP, LP, the Company’s operating partnership, held by limited partners (other than us and our subsidiaries) because the Common Units are redeemable for cash or, at our election, shares of our common stock. During the year ended December 31, 2014, FFO increased by $29.7 million, or 61%, over the prior year primarily due to an increase in revenues of $104.5 million during the year ended December 31, 2014 in comparison with the prior year, which resulted in an increase in net income for the year ended December 31, 2014 of $15.0 million over the prior year. The increase in revenues was the result of increases in Occupancy and ADR as discussed below under “Results of Operations.” Earnings Before Interest, Taxes, Depreciation and Amortization EBITDA represents net income or loss, excluding: (i) interest, (ii) income tax expense and (iii) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our asset base (primarily depreciation and amortization) from our operating results. Our management also uses EBITDA as one measure in determining the value of acquisitions and dispositions. The following is a reconciliation of our GAAP net income to EBITDA for the years ended December 31, 2014, 2013 and 2012 (in thousands): Net income (loss) Depreciation and amortization Interest expense Interest income Income tax expense (benefit) Noncontrolling interest in joint venture Adjustments related to joint venture EBITDA 2014 2013 2012 $ 20,923 $ 65,325 26,968 (690 ) 718 (1 ) (204 ) $ 113,039 $ 5,897 $ 53,144 20,311 (83 ) 4,357 (316 ) (315 ) 82,995 $ (2,270 ) 34,871 15,764 (35 ) (1,289 ) — — 47,041 During the year ended December 31, 2014, EBITDA increased by $30.0 million, or 36%, over the prior year primarily due to an increase in net income before depreciation and amortization of $27.2 million during the year ended December 31, 2014 in comparison with the prior year. The increase in net income before depreciation and amortization was primarily driven by an increase in revenues of $104.5 million during the year ended December 31, 2014 in comparison with the prior year. The increase in revenues was the result of increases in Occupancy and ADR as discussed below under “Results of Operations.” 36 Table of Contents Hotel Revenues and Operating Expenses Our revenues are derived from hotel operations and consist of room revenue and other hotel operations revenue. As a result of our focus on select-service hotels in the Upscale and Upper-midscale segments of the U.S. lodging industry, substantially all of our revenues are related to the sales of hotel rooms. Our other hotel operations revenue consists of ancillary revenues related to food and beverage sales, meeting rooms and other guest services provided at our hotel properties. Our hotel operating expenses consist primarily of expenses incurred in the day-to-day operation of our hotel properties. 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 revenues at our hotel properties decrease. 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), and other indirect expenses (real and personal property taxes, insurance, travel agent and credit card commissions, hotel management fees, and franchise fees). Results of Operations The comparisons that follow should be reviewed in conjunction with the consolidated financial statements included elsewhere in this Form 10-K. Hotel properties classified as discontinued operations prior to our adoption of ASU 2014-08 are not included in the discussion below. Comparison of 2014 to 2013 The following table contains key operating metrics for our total portfolio and our same-store portfolio for 2014 compared with 2013 (dollars in thousands, except ADR and RevPAR). We define same-store hotels as properties that we own as of the current reporting date and that we have owned for the entire prior fiscal year. 2014 2013 Dollar Change Total revenues Hotel operating expenses Occupancy ADR RevPAR Total Portfolio (90 hotels) $ $ $ $ 403,466 261,497 75.7 % 122.52 92.71 Same-Store Portfolio (65 hotels) $ 240,627 $ 159,034 75.4 % $ 111.94 $ 84.42 Total Portfolio (85 hotels) $ $ $ $ 298,958 198,342 73.4 % 110.37 81.03 Same-Store Portfolio (65 hotels) $ 219,489 $ 147,298 73.2 % $ 105.22 $ 76.98 Total Portfolio (90/85 hotels) $ $ $ $ 104,508 63,155 n/a 12.15 11.68 Same-Store Portfolio (65 hotels) $ 21,138 $ 11,736 n/a $ 6.72 $ 7.44 Percentage Change Total Portfolio (90/85 hotels) Same-Store Portfolio (65 hotels) 35.0 % 31.8 % 3.1 % 11.0 % 14.4 % 9.6 % 8.0 % 3.1 % 6.4 % 9.7 % The total portfolio information above includes revenues and expenses from the six hotels we acquired in 2014 (the “2014 Acquired Hotels”) and the 19 hotel properties we acquired in 2013 (the “2013 Acquired Hotels”) from the date of acquisition through December 31, 2014, and operating information (occupancy, ADR, and RevPAR) for the period each hotel was owned. Accordingly, the information does not reflect a full twelve months of operations in 2014 for the 2014 Acquired Hotels or a full twelve months of operations in 2013 for the 2013 Acquired Hotels. The combined 2014 Acquired Hotels and 2013 Acquired Hotels are referred to as the “2014/2013 Acquired Hotels.” Revenues . Total revenues increased $104.5 million, or 35.0%, to $403.5 million in 2014, compared with $299.0 million in 2013. The growth was due to a $21.1 million increase in same-store revenues and an $83.7 million increase in revenues at the 2014/2013 Acquired Hotels. The same-store revenue increase of 9.6%, to $240.6 million in 2014 compared with $219.5 million in 2013, was due to a 220 basis point increase in occupancy in 2014 compared with 2013, and a 6.4% increase in ADR in 2014 compared with 2013. The increases in occupancy and ADR resulted in a 9.7% increase in same-store RevPAR to $84.42 in 2014 compared with $76.98 in 2013. These increases were due to the improving economy, our strong revenue and asset management programs, hotel industry fundamentals and renovations made at our hotel properties. 37 Table of Contents Hotel Operating Expenses . Hotel operating expenses increased $63.2 million in 2014 compared with 2013. The increase is due in part to an increase in operating expenses at the 2014/2013 Acquired Hotels of $51.8 million. In addition, the increase in same-store hotel operating expenses is due to $11.7 million of variable costs related to the increase in revenue. Expenses at the same-store hotels declined as a percentage of revenue from 67.1% in 2013 to 66.1% in 2014, due to consistent fixed expenses and increasing revenues at the same-store hotel properties. The following table summarizes our hotel operating expenses for our same-store (65 hotels) portfolio for 2014 and 2013 (dollars in thousands): 2014 2013 Percentage Change Percentage of Revenue 2013 2014 Rooms expense Other direct expense Other indirect expense Total hotel operating expenses $ $ 62,752 $ 33,193 63,089 159,034 $ 59,781 29,620 57,897 147,298 5.0 % 12.1 % 9.0 % 8.0 % 26.1 % 13.8 % 26.2 % 66.1 % 27.2 % 13.5 % 26.4 % 67.1 % Depreciation and Amortization . Depreciation and amortization expense increased $14.1 million, or 27.6%, to $65.3 million in 2014 compared with 2013, primarily due to depreciation associated with the 2014/2013 Acquired Hotels and increased amortization of capitalized renovation costs at existing hotel properties. The 2014 depreciation and amortization expense includes $63.3 million of fixed asset depreciation, $1.5 million of financing costs amortization, and $0.5 million of franchise fees amortization. The 2013 depreciation and amortization expense includes $48.9 million of fixed asset depreciation, $1.9 million of financing costs amortization, and $0.4 million of franchise fees amortization. Corporate General and Administrative . Corporate general and administrative expenses increased by $7.0 million, or 53.4%, to $19.9 million in 2014 compared with 2013. The increase is primarily due to an increase in equity-based compensation of $1.4 million, an increase in salaries and bonus expense of $2.7 million and increased professional fees of $2.6 million related to internal controls improvements and other matters. Other Income/Expense. Other expense, net increased $4.3 million, or 19.6%, in 2014 compared with 2013 primarily due to an increase in interest expense due to higher average debt outstanding. This increase was slightly offset by a reduction in debt transaction costs and an increase in interest income. Income Tax Expense/Benefit. Our total income tax expense (related to continuing operations and discontinued operations) in 2014 of $0.7 million consists of Alternative Minimum Tax (Federal) of $0.1 million and state taxes of $0.6 million. Included in state taxes are franchise taxes due in Texas of $0.4 million, which are based on gross receipts, and taxes due in other states of $0.2 million. Net operating losses of $6.6 million have been used in the current year to reduce our tax expense. Our total income tax expense (related to continuing operations and discontinued operations) in 2013 of $4.4 million is primarily due to our establishment of a valuation allowance related to net operating losses (“NOLs”) incurred by our TRS in 2011, 2012 and 2013. Comparison of 2013 to 2012 The following table contains key operating metrics for our total portfolio and our same-store portfolio for 2013 compared with 2012 (dollars in thousands, except ADR and RevPAR). We define same-store hotels as properties that we own as of the current reporting date and that we have owned for the entire prior fiscal year. Total revenues Hotel operating expenses Occupancy ADR RevPAR 2013 2012 Percentage Change Total Portfolio (85 hotels) Same-Store Portfolio (47 hotels) Total Portfolio (66 hotels) Same-Store Portfolio (47 hotels) $ $ $ $ 298,958 $ 198,342 $ 73.4 % 110.37 $ 81.03 $ 146,078 $ 99,329 $ 72.3 % 102.03 $ 73.79 $ 161,700 $ 110,442 $ 70.9 % 98.52 $ 69.88 $ 136,775 93,855 70.9 % 97.26 68.98 Total Portfolio (85/66 hotels) 84.9 % 79.6 % 2.5 % 12.0 % 16.0 % Same-Store Portfolio (47 hotels) 6.8 % 5.8 % 1.4 % 4.9 % 7.0 % The total portfolio information above includes revenues and expenses from the 2013 Acquired Hotels and the 19 hotel properties we acquired in 2012 (the “2012 Acquired Hotels”) from the date of acquisition through December 31, 2013, and operating information (occupancy, ADR, and RevPAR) for the period each hotel was owned. Accordingly, the information does not reflect a full 38 Table of Contents twelve months of operations in 2013 for the 2013 Acquired Hotels or a full twelve months of operations in 2012 for the 2012 Acquired Hotels. The combined 2013 Acquired Hotels and 2012 Acquired Hotels are referred to as the “2013/2012 Acquired Hotels.” Revenues . Total revenues increased $137.3 million, or 84.9%, to $299.0 million in 2013, compared with $161.7 million in 2012. The growth was due to a $9.3 million increase in same-store revenues and a $128.0 million increase in revenues at the 2013/2012 Acquired Hotels. The same-store revenue increase of 6.8%, to $146.1 million in 2013 compared with $136.8 million in 2012, was due to a 140 basis point increase in occupancy in 2013 compared with 2012, and a 4.9% increase in ADR in 2013 compared with 2012. The increases in occupancy and ADR resulted in a 7.0% increase in same-store RevPAR to $73.79 in 2013 compared with $68.98 in 2012. These increases were due to the improving economy and hotel industry fundamentals and renovations made at 13 hotel properties in 2012. Hotel Operating Expenses . Hotel operating expenses increased $87.9 million in 2013 compared with 2012. The increase is due in large part to an increase in operating expenses at the 2013/2012 Acquired Hotels of $82.4 million. In addition, the increase in same-store hotel operating expenses is due to $5.5 million of variable costs related to the increase in revenue. Expenses at the same-store hotels declined as a percentage of revenue from 68.6% in 2012 to 68.0% in 2013, due to stability in expenses despite increasing revenues at the same-store hotel properties. The following table summarizes our hotel operating expenses for our same-store (47 hotels) portfolio for 2013 and 2012 (dollars in thousands): Rooms expense Other direct expense Other indirect expense Other expense Total hotel operating expenses $ $ 2013 2012 39,762 $ 19,698 39,281 588 99,329 $ 38,316 17,757 37,183 599 93,855 Percentage Change 3.8 % 10.9 % 5.6 % (1.8 )% 5.8 % Percentage of Revenue 2012 2013 27.2 % 13.5 % 26.9 % 0.4 % 68.0 % 28.0 % 13.0 % 27.2 % 0.4 % 68.6 % Depreciation and Amortization . Depreciation and amortization expense increased $20.5 million, or 67.0%, to $51.2 million in 2013 compared with 2012, primarily due to renovations at existing hotel properties and depreciation associated with the 2013/2012 Acquired Hotels. The 2013 depreciation and amortization expense includes $48.9 million of fixed asset depreciation, $1.9 million of financing costs amortization, and $0.4 million of franchise fees amortization. The 2012 depreciation and amortization expense includes $28.0 million of fixed asset depreciation, $2.3 million of financing costs amortization, and $0.4 million of franchise fees amortization. Corporate General and Administrative . Corporate general and administrative expenses increased by $3.4 million, or 35.1%, to $12.9 million in 2013 compared with 2012. The increase is primarily due to an increase in equity-based compensation of $0.9 million, costs related to the development of corporate functions that did not exist prior to our IPO of $0.9 million, and costs related to the move of our corporate headquarters from Sioux Falls, SD, to Austin, TX of $0.6 million. Other Income/Expense. Our other income/expense increased $6.7 million, or 44.8%, in 2013 compared with 2012. The major component of other income/expense is interest expense, and the increase is primarily due to interest expense on new debt related to our 2013/2012 Acquisition Hotels. Income Tax Expense/Benefit. Our total income tax expense (in continuing operations and discontinued operations) in 2013 of $4.4 million is primarily due to our establishment of a valuation allowance related to net operating losses (“NOLs”) incurred at our TRS in 2011, 2012 and 2013. As a result of consecutive loss years we determined that it is more likely than not that we will not be able to recognize our NOLs before they expire. Our total income tax benefit (in continuing operations and discontinued operations) in 2012 of $1.3 million was the result of NOLs at our TRS. The net operating losses were primarily the result of the disruption at the several hotel properties rebranded in 2011. 39 Table of Contents Discontinued Operations Pursuant to our strategy, we periodically evaluate our hotel properties for potential sale and redeployment of capital. When a hotel property was sold or identified as being held for sale, we reported its historical and future results of operations, including impairment charges, in discontinued operations until we adopted ASU 2014-08 in the first quarter of 2014. Discontinued operations include the following hotel properties that have been sold: • Hampton Inn, Holiday Inn Express, and AmericInn in Twin Falls, ID — sold May 2012; • AmericInn Hotel & Suites in Missoula, MT — sold August 2012; • Courtyard by Marriott in Missoula, MT — sold December 2012; • AmericInn Hotel & Suites in Golden, CO — sold January 2013; • Hampton Inn in Denver, CO — sold February 2013; • Holiday Inn and Holiday Inn Express in Boise, ID — sold May 2013; • Courtyard by Marriott in Memphis, TN — sold May 2013; • SpringHill Suites in Lithia Springs, GA — sold August 2013; • Fairfield Inn in Lewisville, TX — sold August 2013; • Fairfield Inn in Lakewood, CO — sold September 2013; • Fairfield Inn in Emporia, KS — sold October 2013; • SpringHill Suites in Little Rock, AR — sold November 2013; • Fairfield Inn and AmericInn Hotel & Suites in Salina, KS — sold November 2013; • Hampton Inn and Fairfield Inn & Suites in Boise, ID — sold November 2013; • Holiday Inn Express in Emporia, KS — sold December 2013; • AmericInn Hotel & Suites and Aspen Hotel & Suites in Fort Smith, AR - sold on January 17, 2014; and • Hampton Inn in Fort Smith, AR — sold on September 9, 2014. A summary of results from our hotel properties included in discontinued operations follows (in thousands): Revenues Hotel operating expenses Depreciation and amortization Loss on impairment of assets Operating income (loss) Interest expense Other income Income (loss) before taxes Income tax benefit Income (loss) from discontinued operations 2014 2013 2012 3,128 $ 2,304 13 400 411 — 55 466 26 492 $ 19,458 $ 14,859 1,960 7,675 (5,036 ) (174 ) 3,945 (1,265 ) 537 (728 ) $ 33,193 24,701 4,226 2,305 1,961 (855 ) 3,010 4,116 561 4,677 $ $ 40 Table of Contents Liquidity and Capital Resources Liquidity Requirements Our short-term liquidity requirements consist primarily of operating expenses and other expenditures directly associated with our hotel properties, recurring maintenance and capital expenditures necessary to maintain our hotel properties in accordance with brand standards, capital expenditures to improve our hotel properties, acquisitions, interest expense and scheduled principal payments on outstanding indebtedness, note funding obligations, restricted cash funding obligations and distributions to our stockholders. Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovations and other nonrecurring capital expenditures that periodically are made with respect to our hotel properties, and scheduled debt payments, including maturing loans. To satisfy the requirements for qualification as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding any net capital gains. We intend to distribute a sufficient amount of our taxable income to maintain our status as a REIT and to avoid tax on undistributed income. Therefore, if sufficient funds are not available to us from hotel dispositions, our senior unsecured revolving credit facility and additional mortgage and other loans, we will need to raise additional capital to grow our business and invest in additional hotel properties. We expect to satisfy our liquidity requirements with cash provided by operations, working capital, short-term borrowings under our senior unsecured revolving credit facility and the release of restricted cash upon satisfaction of the usage requirements. In addition, we may fund the purchase price of hotel acquisitions and cost of required capital improvements by borrowing under our senior unsecured revolving credit facility, assuming existing mortgage debt, issuing securities (including Common Units issued by the Operating Partnership), or incurring other mortgage or other types of debt. Further, we may seek to raise capital through public or private offerings of our equity or debt securities. However, certain factors may have a material adverse effect on our ability to access these capital sources, including our degree of leverage, the value of our unencumbered hotel properties, borrowing restrictions imposed by lenders and market conditions. We will continue to analyze which sources of capital are most advantageous to us at any particular point in time, but financing may not be consistently available to us on terms that are attractive, or at all. We believe that our cash provided by operations, working capital, borrowings available under our senior unsecured revolving credit facility and other sources of funds available to us will be sufficient to meet our ongoing liquidity requirements for at least the next 12 months. At December 31, 2014, we have $3.5 million of mortgage debt maturing in 2015. We have scheduled principal debt payments in 2015 totaling $14.6 million. Although we believe we will have the capacity to satisfy these debt maturities and pay these scheduled principal debt payments, or we will be able to fund them using draws under our senior unsecured credit facility, there can be no assurances that our credit facility will be available to repay such amortizing debt, as draws under our senior unsecured credit facility are subject to certain financial covenants. We anticipate making renovations and other non-recurring capital expenditures with respect to our hotel properties pursuant to property improvement plans required by our franchisors. We expect 2015 capital expenditures for these activities at hotel properties we own as of February 20, 2015 to be in the range of $28.0 million to $38.0 million. Actual amounts may differ from our expectations. We may also make renovations and incur other non-recurring capital expenditures in 2015 at hotel properties we acquire in the future. Cash Flows The increase in net cash provided by operating activities of $29.7 million from 2013 to 2014 primarily resulted from an increase in net income of $28.6 million, after adjusting for non-cash items. Additionally, prepaid expenses decreased by $3.6 million during 2014 compared to an increase of $3.7 million during 2013 as a result of lower acquisition activity during 2014, which resulted in lower escrow balances related to the acquisition of properties during the period. Partially offsetting these increases were changes in accounts payable and accrued expenses, which increased by $1.1 million during 2014 compared with a $9.3 million increase in 2013 due to the timing of vendor payments. The $266.9 million reduction in net cash used in investing activities in 2014 compared with 2013 resulted from a decrease in hotel property acquisitions of $263.8 million and a $38.6 million change in restricted cash due to net cash reserves of $16.3 million being released in 2014. These changes were partially offset by a decrease in proceeds from asset dispositions of $33.6 million. 41 Table of Contents The $337.4 million decrease in net cash provided by financing activities in 2014 compared with 2013 resulted from a reduction in borrowings of $338.6 million, a reduction in proceeds from equity offerings of $381.8 million, a reduction in proceeds from joint venture partners of $7.5 million and an increase in dividends paid of $9.0 million. These changes were partially offset by a reduction in principal payments on debt of $397.0 million. The increase in net cash provided by operating activities of $37.7 million from 2012 to 2013 primarily resulted from an increase in net income of $37.7 million, after adjusting for non-cash items. The $234.4 million increase in net cash used in investing activities in 2013 compared with 2012 resulted from an increase in hotel property acquisitions of $224.7 million and an increase in hotel property improvements and additions of $23.8 million; partially offset by an increase in proceeds from asset dispositions of $27.0 million. The $226.0 million increase in net cash provided by financing activities in 2013 compared with 2012 resulted from a net increase in debt in 2013 of $89.4 million compared with an increase in 2012 of $48.3 million. In addition, we received net proceeds of $389.3 million from the issuance of equity in 2013 compared with net proceeds of $178.9 million in 2012. The 2013 proceeds related to our January 14 and September 19, 2013 common stock offerings and our March 20, 2013 preferred stock offering and the 2012 proceeds related to our October 3, 2012 common stock offering and our December 11, 2012 preferred stock offering. Dividends and distributions paid to members increased $24.5 million in 2013. Outstanding Indebtedness At December 31, 2014, we had $426.5 million in outstanding indebtedness secured by first priority mortgage liens on 49 hotel properties. We also had $200.0 million borrowed on our $300.0 million senior unsecured credit facility that was supported by 36 hotel properties included in the credit facility borrowing base. The hotel properties in the borrowing base must remain unencumbered by mortgage debt. In addition, we have five other hotel properties containing 777 guestrooms, unencumbered by mortgage debt that are available to be used as collateral for future loans. We intend to secure or assume term loan financing or use our senior unsecured credit facility, together with other sources of financing, to fund future acquisitions and capital improvements. We may not succeed in obtaining new financing on favorable terms, or at all, and we cannot predict the size or terms of future financings. Our failure to obtain new financing could adversely affect our ability to grow our business. We intend to 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 EBITDA to no more than six to one. For purposes of calculating this ratio, we exclude preferred stock from indebtedness. In 2014, we obtained financing through debt financing having staggered maturities and intend to continue to do so in the future. Our debt includes, and may include in the future, debt secured by first priority mortgage liens on hotel properties and unsecured debt. As of December 31, 2014, we were in compliance with the covenants under our debt agreements. We do not currently anticipate any change in circumstances that would impair our ability to continue to comply with these covenants. We believe we will have adequate liquidity to meet requirements for scheduled maturities and principal repayments. 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. 42 Table of Contents A summary of our debt at December 31, 2014 follows (dollars in thousands): Lender Senior Unsecured Credit Facility Interest Rate (1) Amortization Period (Years) Maturity Date Number of Properties Encumbered Principal Amount Outstanding 2.07% Variable 3.94% Fixed (2) n/a n/a October 10, 2017 October 10, 2018 n/a n/a $ 125,000 75,000 Deutsche Bank AG New York Branch $225 Million Revolver $75 Million Term Loan Total Senior Unsecured Credit Facility Mortgage Loans ING Life Insurance and Annuity 6.10% Fixed KeyBank National Association Bank of America Commercial Mortgage Merrill Lynch Mortgage Lending Inc. GE Capital Financial Inc. MetaBank Bank of Cascades Goldman Sachs Compass Bank General Electric Capital Corp. AIG Greenwich Capital Financial Products, Inc. Wells Fargo Bank, National Association U.S. Bank, NA Total Mortgage Loans Total Debt 4.55% Fixed 4.46% Fixed 4.52% Fixed 4.30% Fixed 4.95% Fixed 6.41% Fixed 6.38% Fixed 5.39% Fixed 5.39% Fixed 4.25% Fixed 2.17% Variable 4.30% Fixed 5.67% Fixed 4.57% Fixed (3) 2.57% Variable 5.39% Fixed 5.39% Fixed 4.82% Fixed 5.03% Fixed 6.11% Fixed 6.20% Fixed 5.53% Fixed 5.57% Fixed 6.22% Fixed 6.13% Fixed 5.98% Fixed 20 25 30 30 30 30 25 30 25 25 20 25 25 25 20 25 25 25 20 25 20 30 25 25 30 25 30 March 1, 2019 March 1, 2019 February 1, 2023 April 1, 2023 April 1, 2023 August 1, 2023 14 (cross-collateralized with other ING loan) 4 3 3 2 September 1, 2017 1 August 1, 2016 April 1, 2020 April 1, 2020 August 1, 2018 December 19, 2024 December 19, 2024 July 6, 2016 May 17, 2018 May 6, 2020 April 1, 2020 April 1, 2020 April 1, 2018 March 1, 2019 January 1, 2016 January 6, 2016 October 1, 2015 January 1, 2016 November 1, 2016 November 11, 2021 March 8, 2016 1 1 1 1 1 (cross-collateralized with other Bank of Cascades note) 2 1 3 1 1 1 1 1 1 1 1 1 1 1 49 49 200,000 62,327 32,995 28,489 22,061 21,403 37,939 8,157 5,151 9,300 5,007 7,104 9,800 9,800 13,787 12,505 24,637 5,266 6,167 7,213 9,775 12,938 22,711 3,523 6,038 17,536 11,819 13,085 426,533 $ 626,533 (1) The interest rates at December 31, 2014 above give effect to our use of interest rate derivatives, where applicable. (2) We entered into an interest rate derivative to effectively produce a fixed interest rate, however, the interest rate spread over LIBOR may change based upon our Leverage Ratio, as defined in the credit facility documents. (3) An interest rate derivative instrument effectively converts 85% of this loan to a fixed rate. Senior Unsecured Credit Facility At December 31, 2014, we have a $300.0 million senior unsecured credit facility. Deutsche Bank AG New York Branch (“Deutsche Bank”) is the administrative agent and Deutsche Bank Securities Inc. is the sole lead arranger. The syndication of lenders includes Deutsche Bank, Bank of America, N.A., Royal Bank of Canada, Key Bank, Regions Bank, Fifth Third Bank, Raymond James Bank, N.A., and U.S. Bank National Association. Our existing and future subsidiaries that own or lease a hotel property that is included in the unencumbered borrowing base supporting the facility are required to guaranty this credit facility. The senior unsecured credit facility is comprised of a $225.0 million revolving credit facility (the “$225 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”). This credit facility has an accordion feature which will allow us to increase the commitments by an aggregate of $100.0 million on the $225 Million Revolver and the $75 Million Term Loan prior to October 10, 2017. The $225 Million Revolver will mature on October 10, 2017, which can be extended to October 10, 2018 at our option, subject to certain conditions. The $75 Million Term Loan will mature on October 10, 2018. 43 Table of Contents Outstanding borrowings on this credit facility are limited to the least of (i) the aggregate commitments of all of the lenders, (ii) the aggregate value of the unencumbered assets multiplied by 60%, less our consolidated unsecured indebtedness, all as calculated pursuant to the terms of the credit facility documentation, and (iii) the principal amount that when drawn under the credit facility would result in an unsecured interest expense, calculated on a pro forma basis for the next consecutive four fiscal quarters after taking such draws into account, equal to 50% of the net operating income of the unencumbered assets, as adjusted pursuant to the credit facility documentation. At December 31, 2014, the maximum amount of borrowing permitted under the senior unsecured credit facility was $300.0 million, of which, we had $200.0 million borrowed, $13.8 million in standby letters of credit, and $86.2 million available to borrow. At February 20, 2015, 36 of our unencumbered hotel properties are included in the borrowing base supporting the senior unsecured credit facility. Thus, none of these properties is available to be leveraged with other indebtedness while included in the borrowing base. As a result, the maximum amount of borrowing permitted under the senior unsecured credit facility was $300.0 million, of which, we had $195.0 million borrowed, $13.8 million in standby letters of credit and $91.2 million available to borrow. Payment Terms. We are obligated to pay interest at the end of each selected interest period, but not less than quarterly, with all outstanding principal and accrued but unpaid interest due at the maturity. We have the right to pay all or any portion of the outstanding borrowings from time to time without penalty or premium. We pay interest on advances at varying rates, based upon, at our option, either (i) 1, 2, 3, or 6-month LIBOR, plus a LIBOR margin between 1.75% and 2.50%, depending upon our leverage ratio (as defined in the credit facility documentation), or (ii) the applicable base rate, which is the greatest of the administrative agent’s prime rate, the federal funds rate plus 0.50%, or 1-month LIBOR plus 1.00%, plus a base rate margin between 0.75% and 1.50%, depending upon our leverage ratio. In addition, on a quarterly basis, we are required to pay a fee on the unused portion of the credit facility equal to the unused amount multiplied by an annual rate of either (i) 0.30%, if the unused amount is equal to or greater than 50% of the maximum aggregate amount of the credit facility, or (ii) 0.20%, if the unused amount is less than 50% of the maximum aggregate amount of the credit facility. Financial and Other Covenants. We are required to comply with a series of financial and other covenants to borrow under this credit facility. The material financial covenants include a maximum leverage ratio, a minimum consolidated tangible net worth, a maximum dividend payout ratio, a minimum consolidated fixed charge coverage ratio, a maximum ratio of secured indebtedness to total asset value, a maximum ratio of secured recourse indebtedness to total asset value, a maximum ratio of consolidated unsecured indebtedness to total unencumbered asset value, and a maximum ratio of unencumbered adjusted net operating income to assumed unsecured interest expense. We are also subject to other customary covenants, including restrictions on investment and limitation on liens and maintenance of properties. This credit facility also contains customary events of default, including, among others, the failure to make payments when due under any of the credit facility documentation, breach of any covenant continuing beyond any cure period, and bankruptcy or insolvency. Unencumbered Assets . This credit facility is unsecured; however, borrowings are limited by the value of hotel properties that qualify as unencumbered assets supporting this credit facility. At December 31, 2014, 36 of our hotel properties qualify as, and are deemed to be, unencumbered assets that support this credit facility. Among other conditions, unencumbered assets must not be subject to liens or security interests, and the owner and operating lessee of such unencumbered asset must execute a guaranty supplement pursuant to which the owner and operating lessee become subsidiary guarantors of the credit facility. In addition, hotel properties may be added to or removed from the unencumbered asset pool at any time so long as there is a minimum of 20 hotel properties in the unencumbered asset pool, the unencumbered assets meet certain diversity requirements (such as limits on concentrations in any particular market), and the then-current borrowings on the credit facility do not exceed the maximum available under the credit facility given the availability limitations described above. Further, to be eligible as an unencumbered asset, the hotel property must: be franchised with a nationally-recognized franchisor; have been in operation a minimum of one year; satisfy certain ownership, management and operating lessee criteria; and not be subject to material defects, such as liens, title defects, environmental contamination and other standard lender criteria. 44 Table of Contents Mortgage Loans At December 31, 2014, we had $426.5 million in mortgage loans. These loans are secured by first priority mortgage liens on hotel properties. On January 9, 2014, as part of our acquisition of the 182-guestroom Hilton Garden Inn in Houston, TX, we assumed a $17.8 million mortgage loan with a fixed interest rate of 6.22%, an amortization period of 30 years, and a maturity date of November 1, 2016. On January 10, 2014, as part of our acquisition of the 98-guestroom Hampton Inn in Santa Barbara (Goleta), CA, we assumed a $12.0 million mortgage loan with a fixed interest rate of 6.133%, an amortization period of 25 years, and a maturity date of November 11, 2021. On March 14, 2014, as part of our acquisition of the 210-guestroom DoubleTree by Hilton in San Francisco, CA, we assumed a $13.3 million mortgage loan with a fixed interest rate of 5.98%, an original amortization period of 30 years, and a maturity date of March 8, 2016. On March 28, 2014, we amended two loans with GE Capital Financial which are cross-collateralized by the Courtyard by Marriott and the SpringHill Suites by Marriott, both located in Scottsdale, AZ. The loans were amended to bear interest at a fixed rate of 5.39% and the maturity dates were extended to April 1, 2020. On March 28, 2014, we amended two loans with General Electric Capital Corp. which are cross-collateralized by the Hilton Garden Inn (Lakeshore) and the Hilton Garden Inn (Liberty Park), both located in Birmingham, AL. Both loans were amended to bear interest at a fixed rate of 5.39% and the maturity dates were extended to April 1, 2020. On May 6, 2014, we closed on a $25.0 million loan with Compass Bank. The loan carries a variable rate of 30-day LIBOR plus 240 basis points, amortizes over 25 years, and has a May 6, 2020 maturity date. The loan is secured by first mortgage liens on the Hampton Inn & Suites hotels located in San Diego (Poway), CA, Ventura (Camarillo), CA and Fort Worth, TX. The net proceeds from this loan were used to pay down the $225 Million Revolver. On December 19, 2014, we refinanced our loan with Bank of the Cascades and increased the amount financed by $7.9 million. As part of the refinance the loan was split into two notes. Note A carries a variable interest rate of 30-day LIBOR plus 200 basis points and Note B carries a fixed interest rate of 4.30%. Both notes have an outstanding balances of $9.8 million, amortization periods of 25 years and maturity dates of December 19, 2024. For additional information regarding our mortgage loans, please read our audited consolidated financial statements and related notes thereto, appearing elsewhere in this Form 10-K. Equity Transactions On January 14, 2013, we completed an underwritten public offering of 17,250,000 shares of our common stock. Net proceeds were $148.1 million, after the underwriting discount and offering-related expenses. We used the proceeds for hotel property acquisitions and to pay down our term debt and our senior secured revolving credit facility. On March 20, 2013, we completed an underwritten public offering of 3,400,000 shares of 7.125% Series C Cumulative Redeemable Preferred Stock for net proceeds of $81.7 million, after the underwriting discount and offering-related expenses. We used the proceeds to pay down the principal balance of our senior secured revolving credit facility. On September 19, 2013, we completed an underwritten public offering of 17,250,000 shares of common stock. Net proceeds were $152.0 million, after the underwriting discount and offering-related expenses of $6.5 million. We used the proceeds to fund hotel property acquisitions, pay off our senior secured interim loan, and reduce the outstanding balances under our senior secured revolving credit facility. 45 Table of Contents Capital Expenditures In 2014, we spent $35.6 million on renovations, including $22.0 million on hotel properties that we owned prior to 2013 and $13.6 million on hotel properties acquired since the beginning of 2013. We currently have renovations underway at 10 of our hotel properties. We anticipate spending a total of $28.0 million to $38.0 million on hotel property renovations in 2015. We expect to fund these renovations with cash provided by operations, working capital, borrowings under our senior unsecured credit facility, and other potential sources of capital, to the extent available to us. In addition, the Company capitalized $6.9 million of other capital improvements at our hotels in 2014. Off-Balance Sheet Arrangements From time to time, we enter into off-balance sheet arrangements. At December 31, 2014, we had $13.8 million in outstanding stand-by letters of credit, of which $0.7 million was supporting performance bonds and $13.1 million was supporting a purchase agreement for the Hampton Inn & Suites in downtown Minneapolis, MN described in “Contractual Obligations” below. Contractual Obligations The following table outlines the timing of required payments related to our long-term debt and other contractual obligations at December 31, 2014 (dollars in thousands): Debt obligations (1) Operating lease obligations (2) Purchase obligations (3) Other long-term liabilities (4) Total Less than One Year Payments Due By Period One to Three Years Total Four to Five Years More than Five Years $ $ 779,782 $ 54,681 7,086 2,634 844,183 $ 41,530 $ 841 7,086 2,634 52,091 $ 282,547 $ 1,728 — — 284,275 $ 150,471 $ 1,452 — — 151,923 $ 305,234 50,660 — — 355,894 (1) Amounts shown include amortization of principal, maturities, and estimated interest payments. Interest payments on our variable rate debt have been estimated using the interest rates in effect at December 31, 2014, after giving effect to our interest rate swaps. (2) Primarily ground leases and corporate office leases. (3) This amount represents purchase orders and executed contracts for renovation projects at our hotel properties. (4) This represents the remaining amounts to be advanced under a note funding obligation carrying an interest rate of 10.0% per annum paid monthly, an initial maturity date of May 13, 2017 with an option to extend the maturity date until May 13, 2018. We have entered into a purchase agreement with a hotel property developer to acquire a Hampton Inn & Suites in downtown Minneapolis, MN for $38.7 million, which price includes change orders to date. The purchase is subject to certain conditions, including the completion of construction of the hotel in accordance with agreed upon architectural and engineering designs, receipt of a Hampton Inn & Suites franchise, and receipt of a certificate of occupancy. Therefore, there is no assurance that the acquisition will be completed. In January 2014, we issued a standby letter of credit for $13.1 million in support of this purchase agreement. This letter of credit was issued under our senior unsecured credit facility. We anticipate acquiring this hotel property in the first half of 2015. Inflation Operators of hotel properties, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates. 46 Table of Contents Critical Accounting Policies The preparation of financial statements in conformity with GAAP requires us 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 revenues 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 on an ongoing basis. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates: Investment in Hotel Properties 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 uses 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 our investment in hotel properties or intangible assets, which can affect depreciation and/or amortization expense and our results of operations. D epreciation and Amortization. Hotel properties are recorded at cost and depreciated using the straight-line method over an estimated useful life of 25 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 of our assets for purposes of determining the amount of depreciation expense to reflect each year. While we believe our estimates are reasonable, a change in the estimated useful lives could affect our results of operations. Impairment of Hotel Properties. We monitor events and changes in circumstances for indicators that the carrying value of a hotel property or land held for development may be impaired. Additionally, we perform quarterly reviews to monitor the factors that could trigger an impairment. Factors that could trigger an impairment analysis include, among others: i) significant underperformance relative to historical or projected operating results, ii) significant changes in the manner of use of a property or the strategy of our overall business, iii) a significant increase in competition, iv) a significant adverse change in legal factors or regulations, and v) 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 property and determine if our investment is recoverable based on the undiscounted future cash flows. If impairment is indicated, we estimate the fair value of the property and an adjustment is made to reduce the carrying value of the property to fair value. These assessments may affect the results of our operations. Variable Interest Entities We consolidate variable interest entities (“VIE”) if we determine that we are the primary beneficiary of the entity. When evaluating the accounting for a VIE, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance relative to other economic interest holders. We determine our rights, if any, to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE by considering the economic interest in the entity, regardless of form, which may include debt, equity, management and servicing fees, or other contractual arrangements. We consider relevant factors of the entity’s design including the entity’s capital structure, contractual rights to earnings (losses), subordination of our interests relative to those of other investors, contingent payments, and other contractual arrangements that may be economically significant. Evaluating the accounting for a VIE requires the exercise of significant professional judgment. Revenue Recognition Our revenues are comprised of room revenue and other hotel operations revenue, which includes revenues from the sale of food and beverages and other ancillary amenities. We recognize revenues, net of any sales and occupancy taxes collected from guests, when rooms are occupied and services are rendered. All rebates and discounts are recorded as a reduction in revenue. Appropriate allowances are made for doubtful accounts and are recorded as bad debt expense. The allowances are calculated as a percentage of aged accounts receivable and take into consideration past collection history and specific customer information. Cash received prior to guest arrival is recorded as an advance from the customer and is recognized as revenue at the time of occupancy. 47 Table of Contents Equity-Based Compensation Our 2011 Equity Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other stock-based awards. We account for equity-based compensation using the Black-Scholes option- pricing model for stock options and the grant date fair value of our common stock for all other awards. Some of the awards we issue are market- based awards and are valued using a Monte Carlo simulation model. We expense these awards over the vesting period. The amount of the expense may be subject to adjustment in future periods due to a change in forfeiture assumptions. Income Taxes Commencing with our short taxable year ended December 31, 2011, we elected to be taxed as a REIT under certain provisions of the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our 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 TRS) 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 be unable to re-elect REIT status until the fifth calendar year after the year in which we failed to quality as a REIT, 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. We account for federal and state income taxes of our TRS using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between carrying amounts of existing assets and liabilities based on GAAP and respective carrying amounts for tax purposes, and operating losses and tax-credit carry forwards. However, deferred tax assets are only recognized to the extent that it is more likely than not that they will be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In the event that these assumptions change, the deferred taxes may change. New Accounting Standards Adopted In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The ASU changed the criteria for reporting discontinued operations while enhancing related disclosures. Criteria for discontinued operations will now include only disposals that represent a strategic shift in operations with a major effect on operations and financial results. The ASU is to be applied on a prospective basis and would be effective for us beginning January 1, 2015; however, we have elected early adoption in the first quarter of 2014, which is permitted for disposals and classifications as held for sale, which have not been reported previously. While we have elected early adoption for our consolidated financial statements and footnote disclosures, the AmericInn Hotel & Suites, Aspen Hotel & Suites and Hampton Inn in Fort Smith, AR will be included in discontinued operations as these hotels were classified as held for sale in our consolidated financial statements in prior periods. The AmericInn Hotel & Suites and Aspen Hotel & Suites were sold in January 2014. The Hampton Inn in Fort Smith, AR was sold in September 2014. On May 28, 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017 and early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our consolidated financial statements. In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. This guidance is effective for us on January 1, 2017. 48 Table of Contents Recent Developments Equity On January 2, 2015, we redeemed 20,691 Common Units, which had been tendered on December 15, 2014, for 20,691 shares of our common stock. On February 2, 2015, 94,256 Common Units were tendered for redemption, which we intend to redeem for 94,256 shares of our common stock on April 1, 2015. 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 exposed is interest rate risk. Our primary interest rate exposure is to 30-day LIBOR. We primarily use fixed interest rate financing to manage our exposure to fluctuations in interest rates. On a limited basis we also use derivative financial instruments to manage interest rate risk. At December 31, 2014, we were party to four interest rate derivative agreements, with a total notional amount of $103.0 million, where we receive variable-rate payments in exchange for making fixed-rate payments. These agreements are accounted for as cash flow hedges and have a termination value of $2.1 million. At December 31, 2014, after giving effect to our interest rate derivative agreements, $465.2 million, or 74.3%, of our debt had fixed interest rates and $161.3 million, or 25.7%, had variable interest rates. At December 31, 2013, after giving effect to our interest rate derivative agreements, $358.6 million, or 82.3%, of our debt had fixed interest rates and $77.0 million, or 17.7%, had variable interest rates. Assuming no increase in the level of our variable rate debt outstanding as of December 31, 2014, if interest rates increased by 1.0% our cash flow would decrease by approximately $1.6 million per year. As our fixed-rate debts mature, they will become subject to interest rate risk. In addition, as our variable-rate debts mature, lenders may impose interest rate floors on new financing arrangements because of the low interest rates experienced during the past few years. At December 31, 2014, we have $3.5 million of debt maturing in 2015. We have scheduled principal debt payments in 2015 totaling $14.6 million, of which $13.6 million has fixed interest rates. Item 8. Financial Statements and Supplementary Data. The financial statements and supplementary data required by this item are included on pages F-1 through F-39 of this Annual Report on Form 10-K and are incorporated by reference herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 49 Table of Contents Item 9A. Controls and Procedures. Controls and Procedures Disclosure Controls and Procedures Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2014. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2014, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Management’s Report on the Effectiveness of Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and our Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that: • pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that our receipts and our expenditures are being made only in accordance with authorizations of our management and our board of directors; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our 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 connection with the preparation of this Annual Report on Form 10-K, our management, under the supervision of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) established by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, our management concluded that we had effective internal control over financial reporting as of December 31, 2014. Ernst & Young LLP, our independent registered public accounting firm, has issued an auditor’s attestation report on our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014. This report is included in Part II, Item 8 of this Annual Report on Form 10-K. 50 Table of Contents Changes in Internal Control Over Financial Reporting We have implemented significant changes to our internal control over financial reporting throughout the course of the year ended December 31, 2014 to strengthen and improve our overall internal control structure. The changes to our internal control over financial reporting include the following: • Designing and implementing processes and procedures to perform monthly reconciliations of accounting information related to our hotels, which is included in our final consolidated financial statements, to the accounting information provided by our third party property managers for each individual hotel. • Designing and implementing processes and procedures to have our accounting staff perform monthly reconciliations of intercompany accounts. • Designing and implementing processes and procedures for the review of our consolidated financial statements and the accounting for acquisitions and dispositions of hotel properties and land held for development including, among others, a monthly review of undeveloped land inventory, and a more extensive, formalized review of acquisition and disposition transactions. • Hiring and developing additional finance and accounting personnel with the requisite experience and skills to maintain and improve our processes, procedures and internal control environment. We believe that we have designed and implemented internal controls to remedy the material weakness identified in our Annual Report on Form 10-K filed for the year ended December 31, 2013. We continue to work diligently to design and implement procedures and controls that we believe will further strengthen and improve our internal control structure and environment. Item 9B. Other Information. Additional Material Federal Income Tax Considerations The following is a summary of additional material federal income tax considerations with respect to the ownership of our stock. This summary supplements and should be read together with the discussion under “Material Federal Income Tax Considerations” in the prospectus dated March 29, 2013 and filed as part of a registration statement on Form S-3 (No. 333-187624). Asset Tests As discussed in the prospectuses referenced above under “Additional Material Federal Income Tax Considerations” previously issued IRS guidance established a safe harbor addressing when a mortgage loan may be treated as a real estate asset for purpose of the 75% REIT asset test. IRS Revenue Procedure 2014-51 replaced that safe harbor with a new safe harbor. Under the new safe harbor, the IRS will not challenge a REIT’s treatment of a loan as being, in part, a qualifying real estate asset in an amount equal to the lesser of (1) the fair market value of the loan on the date of the relevant quarterly REIT asset testing date or (2) the greater of (a) the fair market value of the real property securing the loan on the date of the relevant quarterly REIT asset testing date or (b) the fair market value of the real property securing the loan determined as of the date the REIT committed to acquire the loan. We intend to invest in any mortgage loans in a manner that will enable us to continue to satisfy the asset test requirements. Taxation of Taxable U.S. Stockholders A U.S. withholding tax at a 30% rate will be imposed on dividends paid on our stock received by U.S. stockholders who own their stock through foreign accounts or foreign intermediaries if certain disclosure requirements related to U.S. accounts or ownership are not satisfied. In addition, if those disclosure requirements are not satisfied, a U.S. withholding tax at a 30% rate will be imposed on proceeds from the sale of our stock received after December 31, 2016 by U.S. stockholders who own their stock through foreign accounts or foreign intermediaries. We will not pay any additional amounts in respect of any amounts withheld. Taxation of Non-U.S. Stockholders A U.S. withholding tax at a 30% rate will be imposed on dividends paid on our stock received by certain non-U.S. stockholders if they held our stock through foreign entities that fail to meet certain disclosure requirements related to U.S. persons that either have accounts with such entities or own equity interests in such entities. In addition, if those disclosure requirements are not satisfied, a U.S. withholding tax at a 30% rate will be imposed on proceeds from the sale of our stock received after December 31, 51 Table of Contents 2016 by certain non-U.S. stockholders. If payment of withholding taxes is required, non-U.S. stockholders that are otherwise eligible for an exemption from, or reduction of, U.S. withholding taxes with respect of such dividends and proceeds will be required to seek a refund from the Internal Revenue Service to obtain the benefit or such exemption or reduction. We will not pay any additional amounts in respect of any amounts withheld. Item 10. Directors, Executive Officers and Corporate Governance. PART III The information required by this item is incorporated by reference to our Definitive Proxy Statement on Schedule 14A (the “2015 Proxy Statement”) for the 2015 Annual Meeting of Stockholders. Item 11. Executive Compensation. The information required by this item is incorporated by reference to the 2015 Proxy Statement. 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 the 2015 Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item is incorporated by reference to the 2015 Proxy Statement. Item 14. Principal Accountant Fees and Services. The information required by this item is incorporated by reference to the 2015 Proxy Statement. PART IV Item 15. Exhibits and Financial Statement Schedules. 1. Financial Statements: Included herein at pages F-1 through F-35 2. Financial Statement Schedules: The following financial statement schedule is included herein at pages F-36 - F-39. Schedule III — Real Estate and Accumulated Depreciation 3. Exhibits: See the Exhibit Index that appears after the signature page to this Annual Report on Form 10-K, which is incorporated herein by reference. 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. 52 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 2, 2015 SUMMIT HOTEL PROPERTIES, INC. (registrant) 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 registrant and in the capacities and on the dates indicated. Signature /s/ Kerry W. Boekelheide Kerry W. Boekelheide /s/ Daniel P. Hansen Daniel P. Hansen /s/ Greg A. Dowell Greg A. Dowell /s/ Paul Ruiz Paul Ruiz /s/ Bjorn R. L. Hanson Bjorn R. L. Hanson /s/ Jeffrey W. Jones Jeffrey W. Jones /s/ Kenneth J. Kay Kenneth J. Kay /s/ Thomas W. Storey Thomas W. Storey Wayne W. Wielgus Title Executive Chairman of the Board President, Chief Executive Officer and Director (principal executive officer) Executive Vice President, Chief Financial Officer and Treasurer Date March 2, 2015 March 2, 2015 March 2, 2015 Vice President and Chief Accounting Officer March 2, 2015 Director Director Director Director Director 53 March 2, 2015 March 2, 2015 March 2, 2015 March 2, 2015 March 2, 2015 Table of Contents Exhibit Number 3.1 3.2 4.1 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 EXHIBIT INDEX Description of Exhibit Articles of Amendment and Restatement of Summit Hotel Properties, Inc. (incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K filed by Summit Hotel Properties, Inc. on February 28, 2012) 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) 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) 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) $300,000,000 Credit Agreement dated October 10, 2013 among Summit Hotel OP, LP, Summit Hotel Properties, Inc., the subsidiary guarantors party thereto, Deutsche Bank AG New York Branch, Bank of America, N.A., Royal Bank of Canada, Key Bank National Association, Regions Bank, Fifth Third Bank, Raymond James Bank, N.A., and U.S. Bank National Association (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on October 15, 2013) 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) First Modification of Consolidated, Amended and Restated Loan Agreement among Summit Hotel OP, LP, as borrower, and ING Life Insurance and Annuity Company, as lender, dated August 1, 2013 (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q filed by Summit Hotel Properties, Inc. on August 6, 2013) 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) 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 Incentive Award Agreement between Summit Hotel Properties, Inc. and its executive officers (incorporated by reference to Exhibit 10.2 to Quarterly Report of Form 10Q filed by Summit Hotel Properties, Inc. on May 5, 2012)* Form of Stock Award Agreement (Performance Based Shares) between Summit Hotel Properties, Inc. and its executive officers (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q filed by Summit Hotel Properties, Inc. on May 5, 2012)* Form of Stock Award Agreement (Service-Based Shares) between Summit Hotel Properties, Inc. and its executive officers (incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q filed by Summit Hotel Properties, Inc. on May 5, 2012)* Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Kerry W. Boekelheide (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed by Summit Hotel Properties, Inc. on August 6, 2014)* Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Daniel P. Hansen (incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q filed by Summit Hotel Properties, Inc. on August 6, 2014)* Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Craig J. Aniszewski (incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q filed by Summit Hotel Properties, Inc. on August 6, 2014)* Employment Agreement, dated May 28, 2014, between Summit Hotel Properties, Inc. and Christopher R. Eng (incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q filed by Summit Hotel Properties, Inc. on August 6, 54 Confidential Severance and Release Agreement, dated June 16, 2014, between Summit Hotel Properties, Inc. and Stuart J. Becker (incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q filed by Summit Hotel Properties, Inc. on August 6, 2014)* Employment Agreement, dated September 11, 2014 and effective as of October 1, 2014, between Summit Hotel Properties, Inc. and Greg A. Dowell (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed by Summit Hotel Properties, Inc. on September 11, 2014)* Calculation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends List of Subsidiaries of Summit Hotel Properties, Inc. Consent of KPMG LLP Consent of Ernst & Young, 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 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 Table of Contents 2014)* 10.18 10.19 12.1† 21.1† 23.1† 23.2† 31.1† 31.2† 32.1† 32.2† 101.INS 101.SCH 101.CAL 101.DEF 101.LAB 101.PRE XBRL Instance Document XBRL Taxonomy Extension Schema Document XBRL Taxonomy Extension Calculation Linkbase Document XBRL Taxonomy Extension Definition Linkbase Document XBRL Taxonomy Extension Labels Linkbase Document XBRL Taxonomy Presentation Linkbase Document * Management contract or compensatory plan or arrangement. † Filed herewithin 55 Table of Contents SUMMIT HOTEL PROPERTIES, INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULE Reports of Independent Registered Public Accounting Firms Consolidated Balance Sheets at December 31, 2014 and 2013 Consolidated Statements of Operations for the years ended December 31, 2014, 2013, and 2012 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2014, 2013 and 2012 Consolidated Statements of Changes in Equity for the years ended December 31, 2014, 2013 and 2012 Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 Notes to Consolidated Financial Statements Schedule III - Real Estate and Accumulated Depreciation Page F-2 F-5 F-6 F-7 F-8 F-9 F-10 F-36 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Summit Hotel Properties, Inc. We have audited the accompanying consolidated balance sheets of Summit Hotel Properties, Inc. (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the years ended December 31, 2014 and 2013. Our audits also included the financial statement schedule III as it relates to information included therein as of and for each of the two years in the period ending December 31, 2014. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and 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 audits 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 consolidated financial position of Summit Hotel Properties, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the information as of and for each of the two years in the period ending December 31, 2014 included in the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 21 to the consolidated financial statements, the Company changed its method for reporting discontinued operations effective during the first quarter of 2014. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework), and our report dated March 2, 2015 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Austin, Texas March 2, 2015 F-2 Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Summit Hotel Properties, Inc. We have audited Summit Hotel Properties, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Summit Hotel Properties, Inc.’s 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 included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and 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, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Summit Hotel Properties, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the two years in the period ended December 31, 2014 of Summit Hotel Properties, Inc. and our report dated March 2, 2015 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Austin, Texas March 2, 2015 F-3 Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Summit Hotel Properties, Inc.: We have audited the accompanying consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows of Summit Hotel Properties, Inc. and subsidiaries (the Company) for the year ended December 31, 2012.These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the results of Summit Hotel Properties, Inc. and subsidiaries’ operations and their cash flows for the year ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Chicago, Illinois February 26, 2013 except as to notes 21 and 22, which are as of March 25, 2014 /s/ KPMG LLP F-4 Table of Contents Summit Hotel Properties, Inc. Consolidated Balance Sheets (in thousands, except share amounts) ASSETS Investment in hotel properties, net Investment in hotel properties under development Land held for development Assets held for sale Cash and cash equivalents Restricted cash Trade receivables Prepaid expenses and other Derivative financial instruments Deferred charges, net Deferred tax asset, net Other assets Total assets LIABILITIES AND EQUITY Liabilities: Debt Accounts payable Accrued expenses Derivative financial instruments Total liabilities Commitments and contingencies (Note 13) Equity: Preferred stock, $.01 par value per share, 100,000,000 shares authorized: 9.25% Series A - 2,000,000 shares issued and outstanding at December 31, 2014 and 2013 (aggregate liquidation preference of $50,398 at December 31, 2014 and 2013) 7.875% Series B - 3,000,000 shares issued and outstanding at December 31, 2014 and 2013 (aggregate liquidation preference of $75,324 at December 31, 2014 and 2013) 7.125% Series C - 3,400,000 shares issued and outstanding at December 31, 2014 and 2013 (aggregate liquidation preference of $85,522 at December 31, 2014 and 2013) Common stock, $.01 par value per share, 500,000,000 shares authorized, 86,149,720 and 85,402,408 shares issued and outstanding at December 31, 2014 and 2013, respectively Additional paid-in capital Accumulated other comprehensive loss Accumulated deficit and distributions Total stockholders’ equity Noncontrolling interests in operating partnership Noncontrolling interests in joint venture Total equity Total liabilities and equity See Notes to Consolidated Financial Statements F-5 December 31, 2014 2013 1,339,415 $ 253 8,183 300 38,581 34,395 7,681 6,181 66 9,641 176 14,152 1,459,024 $ 1,149,967 — 13,748 12,224 46,706 38,498 7,231 8,876 253 10,270 49 6,654 1,294,476 626,533 $ 7,271 38,062 1,957 673,823 435,589 7,583 27,154 1,772 472,098 20 30 34 20 30 34 861 888,191 (1,746 ) (107,779 ) 779,611 5,590 — 785,201 1,459,024 $ 854 882,858 (1,379 ) (72,577 ) 809,840 4,722 7,816 822,378 1,294,476 $ $ $ $ Summit Hotel Properties, Inc. Consolidated Statements of Operations (in thousands, except per share amounts) Table of Contents Revenues: Room Other hotel operations revenue Total revenues Expenses: Hotel operating expenses: Room Other direct Other indirect Total hotel operating expenses Depreciation and amortization Corporate general and administrative Hotel property acquisition costs Loss on impairment of assets Total expenses Operating income Other income (expense): Interest expense Other income (expense) Total other expense, net Income (loss) from continuing operations before income taxes Income tax benefit (expense) Income (loss) from continuing operations Income (loss) from discontinued operations Net income (loss) Income (loss) attributable to non-controlling interests: Operating partnership Joint venture Net income (loss) attributable to Summit Hotel Properties, Inc. Preferred dividends Net income (loss) attributable to common stockholders Earnings per share: Basic and diluted net income (loss) per share from continuing operations Basic and diluted net income (loss) per share from discontinued operations Basic and diluted net income (loss) per share Weighted average common shares outstanding: Basic Diluted Dividends per share See Notes to Consolidated Financial Statements F-6 For the Years Ended December 31, 2013 2014 2012 $ 380,472 $ 22,994 403,466 283,279 $ 15,679 298,958 154,600 7,100 161,700 101,150 55,388 104,959 261,497 65,312 19,884 769 8,847 356,309 47,157 (26,968 ) 986 (25,982 ) 21,175 (744 ) 20,431 492 20,923 51 1 20,871 (16,588 ) 4,283 $ 0.04 $ 0.01 0.05 $ 80,391 39,815 78,136 198,342 51,184 12,929 1,886 1,369 265,710 33,248 (20,137 ) (1,592 ) (21,729 ) 11,519 (4,894 ) 6,625 (728 ) 5,897 (297 ) 316 5,878 (14,590 ) (8,712 ) $ (0.11 ) $ (0.01 ) (0.12 ) $ $ $ $ 85,242 85,566 70,327 70,327 $ 0.46 $ 0.45 $ 45,130 21,284 44,028 110,442 30,645 9,573 3,050 660 154,370 7,330 (14,909 ) (96 ) (15,005 ) (7,675 ) 728 (6,947 ) 4,677 (2,270 ) (1,194 ) — (1,076 ) (4,625 ) (5,701 ) (0.28 ) 0.11 (0.17 ) 33,717 33,717 0.45 Table of Contents Summit Hotel Properties, Inc. Consolidated Statements of Comprehensive Income (Loss) (in thousands) Net income (loss) Other comprehensive loss, net of tax: Changes in fair value of derivative financial instruments Total other comprehensive loss Comprehensive income (loss) Comprehensive income (loss) attributable to non-controlling interests: Operating partnership Joint venture Comprehensive income (loss) attributable to Summit Hotel Properties, Inc. Preferred dividends Comprehensive income (loss) attributable to common stockholders For the Years Ended December 31, 2013 2014 2012 $ 20,923 $ 5,897 $ (371 ) (371 ) 20,552 47 1 20,504 (16,588 ) 3,916 $ (881 ) (881 ) 5,016 (327 ) 316 5,027 (14,590 ) (9,563 ) $ $ (2,270 ) (639 ) (639 ) (2,909 ) (1,305 ) — (1,604 ) (4,625 ) (6,229 ) See Notes to Consolidated Financial Statements F-7 Table of Contents Summit Hotel Properties, Inc. Consolidated Statements of Changes in Equity For the Years Ended December 31, 2014, 2013 and 2012 (in thousands, except share amounts) Balance at December 31, 2011 Net proceeds from sale of common stock Net proceeds from sale of preferred stock redemption of common units Dividends paid Equity-based Common stock compensation Other comprehensive income (loss) Net income (loss) Balance at December 31, 2012 Net proceeds from sale of common stock Net proceeds from sale of preferred stock redemption of common units Common stock Contribution by noncontrolling interests in joint venture Dividends paid Equity-based compensation Other comprehensive income (loss) Net income (loss) Balance at December 31, 2013 Common stock redemption of common units Common units issued for acquisition Acquisition of non- controlling interest in joint venture compensation Dividends paid Equity-based Other Other comprehensive income (loss) Net income 2014 Balance at December 31, Shares of Shares of Preferred Preferred Common Stock Stock Stock 27,278,000 $ 2,000,000 $ 20 13,800,000 — — — 30 3,000,000 Accumulated Common Stock Paid-In Capital Income (Loss) Distributions Accumulated Other Noncontrolling Interests Joint Comprehensive Deficit and Shareholders’ Operating Partnership Total Equity Additional 273 $ 138 — 288,902 $ 106,267 72,423 — $ — — (11,020 ) $ — — 278,175 $ 106,405 72,453 Total Venture Equity — $ 319,449 106,405 — 72,453 — 41,274 $ — — — — — — — 5,000,000 — 3,400,000 — — — — — — 8,400,000 — — — — — — — — 8,400,000 $ — — — — — 50 — 34 — — — — — — 84 — — — — — — — — 84 4,873,625 — 208,027 — — 46,159,652 34,500,000 — 4,414,950 — — 327,806 — — 49 — 2 — — 462 345 — 44 — — 3 — — 205 — 1,023 — — 468,820 299,727 81,689 30,574 — — 2,048 — — 85,402,408 854 882,858 438,631 — — — 321,269 (12,588 ) — — 4 — — — 3 — — — 2,425 — (415 ) — 3,479 (156 ) — — 86,149,720 $ 861 $ 888,191 $ — — — (528 ) — (528 ) — — — — — — (851 ) — (1,379 ) — — — (19,889 ) — — (1,076 ) (31,985 ) — — 254 (19,889 ) 1,025 (528 ) (1,076 ) (254 ) (3,177 ) 180 (111 ) (1,194 ) 436,819 36,718 300,072 81,723 — — — 30,618 (30,618 ) — — — — — — — — — — (23,066 ) 1,205 (639 ) (2,270 ) 473,537 300,072 81,723 — — (46,470 ) — — 5,878 (72,577 ) — — — (46,470 ) 2,051 (851 ) 5,878 — (1,124 ) 73 (30 ) (297 ) 7,500 — — — 316 7,500 (47,594 ) 2,124 (881 ) 5,897 809,840 4,722 7,816 822,378 2,429 — (415 ) (56,073 ) 3,482 (156 ) (367 ) 20,871 (2,429 ) 3,685 — (477 ) 42 — (4 ) 51 — — — 3,685 (7,817 ) — — — — 1 (8,232 ) (56,550 ) 3,524 (156 ) (371 ) 20,923 779,611 $ 5,590 $ — $ 785,201 — — — — (367 ) — (1,746 ) $ — (56,073 ) — — — 20,871 (107,779 ) $ See Notes to Consolidated Financial Statements F-8 Table of Contents Summit Hotel Properties, Inc. Consolidated Statements of Cash Flows (in thousands) OPERATING ACTIVITIES Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Amortization of prepaid lease Loss on impairment of assets Equity-based compensation Deferred tax asset Gain on disposal of assets (Gain) loss on derivative financial instruments Changes in operating assets and liabilities: Restricted cash - operating Trade receivables Prepaid expenses and other Accounts payable and accrued expenses NET CASH PROVIDED BY OPERATING ACTIVITIES INVESTING ACTIVITIES Acquisitions of hotel properties Acquisition of non-controlling interest in joint venture Investment in hotel properties under development Acquisition of land held for development Improvements and additions to hotel properties Amounts extended under note funding obligation Purchases of office furniture and equipment Proceeds from asset dispositions, net of closing costs (Increase) decrease in restricted cash - FF&E reserve NET USED IN INVESTING ACTIVITIES FINANCING ACTIVITIES Proceeds from issuance of debt Principal payments on debt Financing fees on debt Proceeds from equity offerings, net of offering costs Proceeds from contribution by joint venture partner Dividends paid Other NET CASH PROVIDED BY FINANCING ACTIVITIES Net change in cash and cash equivalents CASH AND CASH EQUIVALENTS Beginning of period End of period SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash payments for interest Capitalized interest Cash payments for income taxes, net of refunds Mortgage debt assumed for acquisitions of hotel properties Fair value of common units issued for acquisition of hotel For the Years Ended December 31, 2013 2014 2012 $ 20,923 $ 5,897 $ (2,270 ) 65,325 47 9,247 3,524 (127 ) (446 ) 1 (631 ) (419 ) 3,618 1,077 102,139 (177,820 ) (8,232 ) (253 ) — (42,432 ) (7,366 ) — 19,280 16,275 (200,548 ) 263,601 (115,829 ) (782 ) — — (56,550 ) (156 ) 90,284 (8,125 ) 53,143 47 9,044 2,124 3,948 (4,308 ) (2 ) (1,309 ) (1,753 ) (3,654 ) 9,259 72,436 (441,573 ) — — (2,800 ) (53,222 ) — (398 ) 52,850 (22,291 ) (467,434 ) 587,245 (497,801 ) (3,421 ) 381,795 7,500 (47,594 ) — 427,724 32,726 46,706 13,980 $ 38,581 $ 46,706 $ 34,871 73 2,965 1,205 (1,801 ) (2,811 ) 2 (69 ) (1,424 ) (1,043 ) 5,005 34,703 (216,892 ) — (10,303 ) — (29,396 ) — (210 ) 25,887 (2,091 ) (233,005 ) 130,659 (82,312 ) (2,394 ) 178,858 — (23,066 ) — 201,745 3,443 10,537 13,980 $ $ $ $ $ 26,744 $ 19,989 $ 15,592 253 $ 926 $ 400 $ 681 $ 53 433 43,172 $ 33,532 $ 47,162 3,685 $ — $ — See Notes to Consolidated Financial Statements F-9 Table of Contents SUMMIT HOTEL PROPERTIES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS Summit Hotel Properties, Inc. (the “Company”) is a self-managed hotel investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. On February 14, 2011, the Company closed on its initial public offering (“IPO”) and completed certain formation transactions, including the merger of Summit Hotel Properties, LLC (the “Predecessor”) with and into the Operating Partnership (the “Merger”). Unless the context otherwise requires, “we”, “us”, and “our” refer to the Company and its subsidiaries. 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 after completion of the Merger and the related transactions (collectively, the “Reorganization Transaction”). At December 31, 2014, our portfolio consists of 90 Upscale and Upper-midscale hotels with a total of 11,463 guestrooms located in 21 states. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes commencing with our short taxable year ended December 31, 2011. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, substantially all of our hotels are leased to subsidiaries (“TRS Lessees”) of our taxable REIT subsidiary (“TRS”). We indirectly own 100% of the outstanding equity interests in all of our TRS Lessees. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements of the Company consolidate the accounts of the Company and all entities that are controlled by ownership of a majority voting interest as well as variable interest entities for which the company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), which requires us 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 in the reporting period. Actual results could differ from those estimates. Segment Disclosure Accounting Standards Codification (“ASC”), ASC 280, Segment Reporting , establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we have one reportable segment, with activities related to investing in real estate. Our investments in real estate are geographically diversified and the chief operating decision makers evaluate operating performance on an individual asset level. As each of our assets has similar economic characteristics, the assets have been aggregated into one reportable segment. Investment in Hotel Properties We allocate the purchase price of hotel 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 uses 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. Our hotel properties and related assets are recorded at cost, less accumulated depreciation. We capitalize the costs of significant additions and improvements that materially extend a property’s life. These costs may include hotel refurbishment, renovation, and remodeling expenditures. We expense the cost of repairs and maintenance. F-10 Table of Contents We generally depreciate our hotel properties and related assets using the straight-line method over their estimated useful lives as follows: Classification Buildings and improvements Furniture, fixtures and equipment Estimated Useful Lives 25 to 40 years 2 to 15 years We periodically re-evaluate asset lives based on current assessments of remaining utilization, which may result in changes in estimated useful lives. Such changes are accounted for prospectively and will increase or decrease future depreciation expense. When depreciable property and equipment is retired or disposed of, the related costs and accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in current operations. On a limited basis, we provide financing to developers of hotel properties for development or major renovation projects. We evaluate these arrangements to determine if we participate in residual profits of the hotel property through the loan provisions or other agreements. Where we conclude that these arrangements are more appropriately treated as an investment in the hotel property, we reflect the loan as an investment in hotel properties under development in our consolidated balance sheets. If classified as hotel properties under development, no interest income is recognized on the loan and interest expense is capitalized on our investment in the hotel property during the construction or renovation period. We monitor events and changes in circumstances for indicators that the carrying value of a hotel property or land held for development may be impaired. Additionally, we perform a quarterly formalized review to monitor the factors that could trigger an impairment. Factors that could trigger an impairment analysis include, among others: i) significant underperformance relative to historical or projected operating results, ii) significant changes in the manner of use of a property or the strategy of our overall business, including changes in the estimated holding periods for hotel properties and land parcels, iii) a significant increase in competition, iv) a significant adverse change in legal factors or regulations, and v) significant negative industry or economic trends. When such factors are identified, we prepare an estimate of the undiscounted future cash flows of the specific property and determine if the investment is recoverable. If impairment is indicated, we estimate the fair value of the property based on discounted cash flows or sales price if the property is under contract and an adjustment is made to reduce the carrying value of the property to fair value. Assets Held for Sale and Discontinued Operations We classify assets as held for sale in the period in which certain criteria are met, including when the sale of the asset within one year is probable. Assets held for sale are no longer depreciated and are carried at the lower of carrying amount or fair value, less selling costs. Historically, we presented the results of operations of hotel properties that had been sold or otherwise qualified as assets held for sale in discontinued operations if the operations and cash flows of the hotel properties had been or would be eliminated from our ongoing operations. Following adoption of ASU 2014-08 (see “New Accounting Standards” below) in the first quarter of 2014, we anticipate that the majority of future property sales will not be classified as discontinued operations. We periodically review our hotel properties and our land held for development based on established criteria such as age, type of franchise, adverse economic and competitive conditions, and strategic fit, to identify properties which we believe are either non-strategic or no longer complement our business. Variable Interest Entities We consolidate variable interest entities (“VIE”) if we determine that we are the primary beneficiary of the entity. When evaluating the accounting for a VIE, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance relative to other economic interest holders. We determine our rights, if any, to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE by considering the economic interest in the entity, regardless of form, which may include debt, equity, management and servicing fees, or other contractual arrangements. We consider relevant factors of the entity’s design including the entity’s capital structure, contractual rights to earnings (losses), subordination of our interests relative to those of other investors, contingent payments, and other contractual arrangements that may be economically significant. Evaluating the accounting for a VIE requires the exercise of significant professional judgment. F-11 Table of Contents Cash and Cash Equivalents We consider 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. We maintain our cash with high credit quality financial institutions. 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. Trade Receivables and Credit Policies We grant credit to qualified customers generally without collateral, in the form of trade accounts receivable. We believe our risk of loss is minimal due to our periodic evaluations of the credit worthiness of our customers. Trade receivables result 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. We review the collectability of our trade receivables monthly. A provision for losses is determined on the basis of previous loss experience and current economic conditions. Our allowance for doubtful accounts was $0.1 million and $0.2 million at December 31, 2014 and 2013, respectively. Bad debt expense was $0.4 million in 2014, $0.6 million in 2013 and $0.2 million in 2012. Deferred Charges Our deferred charges 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. Non-controlling Interests Non-controlling interests represent the portion of equity in a subsidiary held by owners other than the consolidating parent. Non-controlling interests are reported in the consolidated balance sheets within equity, separately from stockholders’ equity. Revenue, expenses and net income (loss) attributable to both the Company and the non-controlling interests are reported in the consolidated statements of operations. Our consolidated financial statements include non-controlling interests related to common units of limited partnership interests (“Common Units”) in the Operating Partnership held by unaffiliated third parties and, prior to the second quarter of 2014, third-party ownership of a 19% interest in a consolidated joint venture. Revenue Recognition We recognize revenue when rooms are occupied and services have been rendered. Revenues are recorded net of any sales and other taxes collected from customers. All rebates or discounts are recorded as a reduction to revenue. Cash received prior to guest arrival is recorded as an advance from the customer and is recognized at the time of occupancy. Sales and Other Taxes We have operations in states and municipalities that impose sales and/or other taxes on certain sales. We collect these taxes from our customers and remit the entire amount to the various governmental units. The taxes collected and remitted are excluded from revenues and are included in accrued expenses until remitted. Equity-Based Compensation Our 2011 Equity Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other stock-based awards. We account for equity-based compensation using the Black-Scholes option-pricing model for stock options and the grant date fair value of our common stock for all other awards. Restricted stock awards with performance-based vesting conditions are market-based awards and are valued using a Monte Carlo simulation model. We expense awards under our 2011 Equity Incentive Plan over the vesting period. The amount of the expense may be subject to adjustment in future periods due to a change in forfeiture assumptions. F-12 Table of Contents Derivative Financial Instruments and Hedging All derivative financial instruments are recorded at fair value and reported as a derivative financial instrument asset or liability in our consolidated balance sheets. We use interest rate derivatives to hedge our risks on variable-rate debt. Interest rate derivatives could include swaps, caps and floors. We assess the effectiveness of each hedging relationship by comparing changes in fair value or cash flows of the derivative financial instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For interest rate derivatives designated as cash flow hedges the effective portion of changes in fair value is initially reported as a component of accumulated other comprehensive income (loss) in the equity section of our consolidated balance sheets and reclassified to interest expense in our consolidated statements of operations in the period in which the hedged item affects earnings. The ineffective portion of changes in fair value is recognized directly in earnings through gain (loss) on derivative financial instruments in the consolidated statements of operations. Income Taxes We have elected to be taxed as a REIT under certain provisions of the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our 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 TRS) to the extent we 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 be unable to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT, unless we satisfy certain relief provisions. We account for federal and state income taxes of our TRS using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between carrying amounts of existing assets and liabilities based on GAAP and respective carrying amounts for tax purposes, and operating losses and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of the change in tax rates. However, deferred tax assets are recognized only to the extent that it is more likely than not they will be realized based on consideration of available evidence, including future reversals of taxable temporary differences, future projected taxable income and tax planning strategies. Fair Value Measurement Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Level 2: Level 3: Observable inputs such as quoted prices in active markets. Directly or indirectly observable inputs, other than quoted prices in active markets. Unobservable inputs in which there is little or no market data, which require a reporting entity to develop its own assumptions. Assets and liabilities measured at fair value are based on one or more of the following valuation techniques: Market approach: Cost approach: Income approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Amount required to replace the service capacity of an asset (replacement cost). Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models). Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. We elected not to use the fair value option for cash and cash equivalents, restricted cash, trade receivables, prepaid expenses and other, debt, accounts payable, and accrued expenses. With the exception of our fixed-rate debt (See Note 11 — Debt), the carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates. F-13 Table of Contents Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts reported in previous periods have been reclassified to conform to the current presentation and industry practice. New Accounting Standards In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The ASU changed the criteria for reporting discontinued operations while enhancing related disclosures. Criteria for discontinued operations will now include only disposals that represent a strategic shift in operations with a major effect on operations and financial results. The ASU is to be applied on a prospective basis and would be effective for us beginning January 1, 2015; however, we have elected early adoption in the first quarter of 2014, which is permitted for disposals and classifications as held for sale, which have not been reported previously. While we have elected early adoption for our consolidated financial statements and footnote disclosures, the AmericInn Hotel & Suites, Aspen Hotel & Suites and Hampton Inn in Fort Smith, AR will be included in discontinued operations as these hotels were classified as held for sale in our consolidated financial statements in prior periods. The AmericInn Hotel & Suites and Aspen Hotel & Suites were sold in January 2014. The Hampton Inn in Fort Smith, AR was sold in September 2014. On May 28, 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers ” , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017 and early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our consolidated financial statements. In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. This guidance is effective for us on January 1, 2017. F-14 Table of Contents NOTE 3 - HOTEL PROPERTY ACQUISITIONS Hotel property acquisitions in 2014 and 2013 are as follows (in thousands): Date Acquired 2014: January 9 January 10 January 24 March 14 August 15 September 9 Total 2014 2013: January 22 January 22 January 22 February 11 March 11 March 11 March 11 March 11 March 11 April 30 May 21 May 21 May 23 May 23 May 23 May 23 October 1 October 8 December 31 Total 2013 Franchise/Brand Location Purchase Price Debt Assumed Hilton Garden Inn Hampton Inn Four Points by Sheraton DoubleTree by Hilton Hilton Garden Inn Hampton Inn & Suites $ Houston, TX Santa Barbara (Goleta), CA San Francisco, CA San Francisco, CA Houston (Energy Corridor), TX Austin, TX 37,500 $ 27,900 21,250 39,060 36,000 53,000 6 hotel properties $ 214,710 $ $ Chicago (Hoffman Estates), IL Orlando (Convention), FL Orlando (Universal), FL San Francisco, CA New Orleans, LA New Orleans (Convention), LA New Orleans (French Quarter), LA New Orleans (Metairie), LA New Orleans (Metairie), LA Greenville, SC Minneapolis (Minnetonka), MN Minneapolis (Eden Prairie), MN Hyatt Place Hyatt Place Hyatt Place Holiday Inn Express & Suites SpringHill Suites by Marriott Courtyard by Marriott Courtyard by Marriott Courtyard by Marriott Residence Inn by Marriott Hilton Garden Inn Holiday Inn Express & Suites Hilton Garden Inn Fairfield Inn & Suites by Marriott Louisville, KY Louisville, KY SpringHill Suites by Marriott Indianapolis, IN Courtyard by Marriott SpringHill Suites by Marriott Indianapolis, IN Hampton Inn & Suites Hampton Inn & Suites Hyatt Place Ventura (Camarillo), CA San Diego (Poway), CA Minneapolis, MN 9,230 $ 12,252 11,843 60,500 33,095 30,827 25,683 23,539 19,890 15,250 6,900 10,200 25,023 39,138 58,634 30,205 15,750 15,150 32,506 19 hotel properties $ 475,615 $ 17,846 12,037 — 13,289 — — 43,172 — — — 23,423 — — — — — — 3,724 6,385 — — — — — — — 33,532 The allocation of the aggregate purchase prices to the fair value of assets and liabilities acquired for the above acquisitions is as follows (in thousands): Land Hotel buildings and improvements Furniture, fixtures and equipment Other assets Total assets acquired Less debt assumed Less lease liability assumed Less other liabilities Net assets acquired 2014 2013 $ $ 11,400 $ 199,573 5,489 11,625 228,087 (43,172 ) (1,752 ) (2,671 ) 180,492 $ 61,776 395,543 18,296 11,273 486,888 (33,532 ) — (1,480 ) 451,876 In connection with our acquisition of the Hyatt Place in Minneapolis, MN on December 31, 2013, the outstanding principal balance of our first mortgage loan receivable and related capitalized interest, totaling $20.7 million, was credited to us as part of the purchase price consideration. F-15 Table of Contents Total revenues and net income for hotel properties acquired in 2014 and 2013, which are included in our consolidated statements of operations for the years ended December 31, 2014 and 2013, are as follows (in thousands): 2014 Acquisitions 2014 2013 Acquisitions 2014 2013 Revenues Net income $ $ 37,655 4,977 $ $ 122,732 21,974 $ $ 76,675 13,399 The results of operations of acquired hotel properties are included in the consolidated statements of operations beginning on their respective acquisition dates. The following unaudited condensed pro forma financial information presents the results of operations as if the 2014 and 2013 acquisitions had taken place on January 1, 2013. The unaudited condensed pro forma information excludes discontinued operations and disposed properties after the adoption of ASU 2014-08 which were not classified as discontinued operations, is for comparative purposes only, and is not necessarily indicative of what actual results of operations would have been had the hotel acquisitions taken place on January 1, 2013. This information does not purport to represent results of operations for future periods. The unaudited condensed pro forma financial information for 2014 and 2013, assuming the hotel properties acquired in 2014 and 2013 were acquired at the beginning of 2013, are as follows (in thousands, except per share): Revenues Net income Net income attributable to common stockholders Net income per share attributable to common stockholders - basic and diluted NOTE 4 - INVESTMENT IN HOTEL PROPERTIES 2014 (unaudited) 2013 419,595 23,419 6,656 $ $ $ 379,606 17,750 2,979 0.08 $ 0.04 $ $ $ $ Investment in hotel properties at December 31, 2014 and 2013 are as follows (in thousands): 2014 2013 Land Hotel buildings and improvements Construction in progress Furniture, fixtures and equipment Less accumulated depreciation $ $ 164,570 $ 1,202,451 15,609 136,456 1,519,086 179,671 1,339,415 $ 154,831 993,372 24,242 142,976 1,315,421 165,454 1,149,967 Depreciation expense was $63.3 million, $48.9 million and $28.0 million for 2014, 2013 and 2012, respectively. NOTE 5 - INVESTMENT IN HOTEL PROPERTIES UNDER DEVELOPMENT We have entered into a purchase agreement with a hotel property developer to acquire a Hampton Inn & Suites in downtown Minneapolis, MN for $38.7 million, which price includes change orders to date. The purchase is subject to certain conditions, including the completion of construction of the hotel in accordance with agreed upon architectural and engineering designs, receipt of a Hampton Inn & Suites franchise, and receipt of a certificate of occupancy. Therefore, there is no assurance that the acquisition will be completed. In January 2014, we issued a standby letter of credit for $13.1 million in support of this purchase agreement. This letter of credit was issued under our senior unsecured credit facility. F-16 Table of Contents NOTE 6 - ASSETS HELD FOR SALE Assets held for sale at December 31, 2014 and 2013 include (in thousands): Land Hotel building and improvements Furniture, fixtures and equipment 2014 2013 $ $ 300 $ — — 300 $ 1,183 10,290 751 12,224 At December 31, 2014, assets held for sale is comprised of a land parcel in Spokane, WA. At December 31, 2013, assets held for sale include the AmericInn Hotel & Suites and the Aspen Hotel & Suites in Fort Smith, AR, which were sold on January 17, 2014, the Hampton Inn in Fort Smith, AR, which was sold on September 9, 2014, and a land parcel in Spokane, WA. NOTE 7 - RESTRICTED CASH Restricted cash at December 31, 2014 and 2013 includes (in thousands): Property taxes Insurance FF&E reserves Other funds in escrow 2014 2013 $ $ 2,600 $ 508 30,301 986 34,395 $ 2,124 59 35,823 492 38,498 NOTE 8 - PREPAID EXPENSES AND OTHER Prepaid expenses and other at December 31, 2014 and 2013 include (in thousands): Earnest money and funds in escrow Prepaid insurance Other NOTE 9 - DEFERRED CHARGES 2014 2013 $ $ 1,738 $ 1,122 3,321 6,181 $ 5,115 1,316 2,445 8,876 Deferred charges at December 31, 2014 and 2013 include (in thousands): Initial franchise fees Deferred financing costs Less accumulated amortization Total 2014 2013 $ $ 6,435 $ 8,628 15,063 5,422 9,641 $ F-17 5,957 7,846 13,803 3,533 10,270 Table of Contents Amortization expense for 2014, 2013 and 2012 was (in thousands): Initial franchise fees Deferred financing costs 2014 2013 2012 $ $ 485 1,549 2,034 $ $ 411 1,854 2,265 $ $ 355 2,288 2,643 Future amortization expense is expected to be (in thousands): 2015 2016 2017 2018 2019 Thereafter $ $ 2,052 1,740 1,412 922 629 2,886 9,641 NOTE 10 - OTHER ASSETS Other assets at December 31, 2014 and 2013 include (in thousands): Prepaid land lease Notes receivable Other 2014 2013 $ $ 3,373 $ 10,779 — 14,152 $ 3,420 3,121 113 6,654 At December 31, 2014, the notes receivable balance detailed above includes amounts drawn under a note funding obligation carrying an interest rate of 10.0% per annum paid monthly, an initial maturity date of May 31, 2017 and an option to extend the maturity date until May 13, 2018. Of the total $10.0 million note funding obligation, $7.4 million had been advanced at December 31, 2014. On October 30, 2013, we sold the Fairfield Inn in Emporia, KS for $1.7 million and on December 19, 2013, we sold the Holiday Inn Express in Emporia, KS for $1.8 million. We provided seller financing in the form of mortgage loans on these sales totaling $2.4 million. These mortgage loans mature in the first quarter of 2015 and are included in notes receivable in the table above at December 31, 2014 and 2013. F-18 Table of Contents NOTE 11 - DEBT At December 31, 2014, our indebtedness is comprised of borrowings under a $300.0 million senior unsecured credit facility and indebtedness secured by first priority mortgage liens on various hotel properties. At December 31, 2014 and 2013 our outstanding indebtedness included (in thousands): Lender Senior Unsecured Credit Facility Deutsche Bank AG New York Branch $225 Million Revolver $75 Million Term Loan Total Senior Unsecured Credit Facility Mortgage Loans ING Life Insurance and Annuity KeyBank National Association Bank of America Commercial Mortgage Inc. Merrill Lynch Mortgage Lending GE Capital Financial Inc. MetaBank Bank of Cascades Goldman Sachs Compass Bank General Electric Capital Corporation AIG Greenwich Capital Financial Wells Fargo Bank, National Products, Inc. Association U.S. Bank, NA Total Mortgage Loans Total Debt Note Reference Interest Rate (a) Amortization Period (Years) Maturity Date Number of Properties Encumbered at December 31, 2014 2014 2013 (b) (c) (c) (d) (e) (f) (g) (h) (i) (j) (j) (k) (l) (l) (l) (m) (n) (o) (p) (p) (q) (q) (r) (s) (t) (u) (v) (w) (x) 2.07% Variable 3.94% Fixed n/a n/a October 10, 2017 October 10, 2018 n/a n/a 6.10% Fixed 4.55% Fixed 4.46% Fixed 4.52% Fixed 4.30% Fixed 4.95% Fixed 6.41% Fixed 6.38% Fixed 5.39% Fixed 5.39% Fixed 4.25% Fixed 4.66% Fixed 2.17% Variable 4.30% Fixed 5.67% Fixed 4.57% Fixed 2.57% Variable 5.39% Fixed 5.39% Fixed 4.82% Fixed 5.03% Fixed 6.11% Fixed 6.20% Fixed 5.53% Fixed 5.57% Fixed 6.22% Fixed 6.13% Fixed 5.98% Fixed 20 25 30 30 30 30 25 30 25 25 20 25 25 25 25 20 25 25 25 20 25 20 30 25 25 30 25 30 March 1, 2019 March 1, 2019 February 1. 2023 April 1, 2023 April 1, 2023 August 1, 2023 September 1, 2017 August 1, 2016 April 1, 2020 April 1, 2020 August 1, 2018 September 30, 2021 December 19, 2024 December 19, 2024 July 6, 2016 May 17, 2018 May 6, 2020 April 1, 2020 April 1, 2020 April 1, 2018 March 1, 2019 January 1, 2016 January 6, 2016 October 1, 2015 January 1, 2016 November 1, 2016 November 11, 2021 March 8, 2016 14 (cross-collateralized with other ING loan) 4 3 3 2 1 1 1 1 1 n/a 1 (cross-collateralized with other Bank of Cascades note) 2 1 3 1 1 1 1 1 1 1 1 1 1 1 49 49 $ 125,000 75,000 $ — 75,000 200,000 75,000 62,327 32,995 28,489 22,061 21,403 37,939 8,157 5,151 9,300 5,007 7,104 — 9,800 9,800 13,787 12,505 24,637 5,266 6,167 7,213 9,775 12,938 22,711 3,523 6,038 17,536 11,819 13,085 426,533 $ 626,533 64,309 33,754 28,965 22,421 21,767 38,497 8,382 5,249 9,476 5,103 7,348 11,986 — — 14,090 13,325 — 5,371 6,290 7,612 10,108 13,516 23,107 3,652 6,261 — — — 360,589 $ 435,589 Notes: (a) Interest rates at December 31, 2014 give effect to our use of interest rate swaps, where applicable. (b) On October 10, 2013, we replaced our $150.0 million senior secured revolving credit facility with a $300.0 million senior unsecured credit facility. The unsecured credit facility is comprised of a $225.0 million revolving credit facility (the “$225 Million Revolver”) and a $75.0 million term loan (the “$75 Million Term Loan”), and has an accordion feature which will allow us to increase the commitments by an aggregate of $100.0 million on the $225 Million Revolver and the $75 Million Term Loan. F-19 Table of Contents The senior unsecured credit facility requires that no less than 20 of our hotel properties remain unencumbered, as defined in the credit facility documentation, and also requires compliance with covenants customary among our industry peers. The $225 Million Revolver matures on October 10, 2017 and can be extended to October 10, 2018 at our option, subject to certain conditions. The $75 Million Term Loan matures on October 10, 2018. We pay interest on advances at varying rates, based upon, at our option, either (i) 1, 2, 3, or 6-month LIBOR, plus a LIBOR margin between 1.75% and 2.50%, depending upon our leverage ratio (as defined in the credit facility documentation), or (ii) the applicable base rate, which is the greatest of the administrative agent’s prime rate, the federal funds rate plus 0.50%, or 1-month LIBOR plus 1.00%, plus a base rate margin between 0.75% and 1.50%, depending upon our leverage ratio. Unused Fees are payable quarterly and are assessed at 0.30% per annum if the unused portion of the credit facility is equal to or greater than 50%, or 0.20% per annum if the unused portion of the credit facility is less than 50%. On December 27, 2013, we fully drew the $75 Million Term Loan. On September 5, 2013, we entered into an interest rate derivative with a notional value of $75.0 million that became effective on January 2, 2014 and matures on October 1, 2018. This interest rate derivative was designated a cash flow hedge and effectively fixes LIBOR at 2.04%. The interest rate on the $75 Million Term Loan was 3.94% at January 2, 2014. At December 31, 2014, 36 of our unencumbered hotel properties were included in the borrowing base for the senior unsecured credit facility, and are required to remain unencumbered. As a result, the maximum amount of borrowing permitted under the senior unsecured credit facility was $300.0 million, of which, we had $200.0 million borrowed, $13.8 million in standby letters of credit, and $86.2 million available to borrow. (c) On August 1, 2013, we entered into a new $34.0 million loan with ING with a fixed rate of 4.55% and a maturity of August 1, 2038. ING has the right to call the loan in full on March 1st of 2019, 2024, 2029 and 2034. Simultaneously, we amended our existing loan with ING to (i) remove the Fairfield Inn & Suites and the Residence Inn, Germantown, TN; the Hampton Inn, Fort Smith, AR; and the Fairfield Inn, Lewisville, TX from the collateral and (ii) remove $3.9 million in letters of credit from the collateral. We also added the Courtyard by Marriott, Jackson, MS; the Hampton Inn & Suites, Ybor, FL; and the Courtyard by Marriott and the Residence Inn, Metairie, LA as collateral to the two notes, such that both ING loans are secured by the same 14 hotel properties and are cross-defaulted. (d) On January 25, 2013, we closed on a $29.4 million loan with a fixed rate of 4.46% and a maturity of February 1, 2023. This loan is secured by four of the Hyatt Place hotels we acquired in October 2012. These hotels are located in Chicago (Lombard), IL; Denver (Lone Tree), CO; Denver (Englewood), CO; and Dallas (Arlington), TX. This loan is subject to defeasance if prepaid. (e) On March 7, 2013, we closed on a $22.7 million loan with a fixed rate of 4.52% and a maturity of April 1, 2023. This loan is secured by three of the Hyatt hotels we acquired in October 2012. These hotels include a Hyatt House in Denver (Englewood), CO and Hyatt Place hotels in Baltimore (Owings Mills), MD and Scottsdale, AZ. This loan is subject to defeasance if prepaid. (f) On March 8, 2013, we closed on a $22.0 million loan with a fixed rate of 4.30% and a maturity of April 1, 2023. This loan is secured by the three Hyatt Place hotels we acquired in January 2013. These hotels are located in Chicago (Hoffman Estates), IL; Orlando (Convention), FL; and Orlando (Universal), FL. This loan is subject to defeasance if prepaid. (g) On July 22, 2013, we closed on a $38.7 million loan with a fixed rate of 4.95% and a maturity of August 1, 2023. This loan is secured by two Marriott hotels we acquired in May 2013. These hotels include a Fairfield Inn & Suites and SpringHill Suites in Louisville, KY. This loan is subject to defeasance if prepaid. (h) On May 16, 2012, we assumed a loan in our acquisition of the Hilton Garden Inn in Smyrna, TN. This loan is subject to defeasance if prepaid. (i) On June 21, 2012, we assumed a loan in our acquisition of the Hampton Inn & Suites in Smyrna, TN. This loan is subject to defeasance if prepaid. (j) On March 28, 2014, we amended two loans with GE Capital Financial, which are cross-collateralized by the Courtyard by Marriott and the SpringHill Suites by Marriott, both located in Scottsdale, AZ. The loans were amended to bear interest at a fixed rate of 5.39% and the maturity dates were extended to April 1, 2020. (k) On July 26, 2013, we closed on a $7.4 million loan with a fixed rate of 4.25% and a maturity of August 1, 2018. This loan is secured by the Hyatt Place in Atlanta, GA. We may receive additional proceeds of $1.3 million after the Hyatt Place attains a required F-20 Table of Contents performance level prior to November 2015. This loan has a prepayment penalty of: (i) 3% until July 26, 2015, (ii) 2% until July 26, 2017, and (iii) 1% until February 1, 2018. (l) On December 19, 2014, we refinanced our loan with Bank of the Cascades and increased the amount financed by $7.9 million. As part of the refinance the loan was split into two notes. Note A carries a variable interest rate of 30-day LIBOR plus 200 basis points and Note B carries a fixed interest rate of 4.30%. Both notes have an outstanding balances of $9.8 million, amortization periods of 25 years and maturity dates of December 19, 2024. (m) This loan is secured by the SpringHill Suites by Marriott and the Hampton Inn & Suites in Bloomington, MN. This loan is subject to defeasance if prepaid. (n) This loan is secured by the Courtyard by Marriott in Flagstaff, AZ and has a variable interest rate of 30-day LIBOR plus 350 basis points (3.67% at December 31, 2014). On October 11, 2012, we entered into an interest rate derivative that effectively converted 85% of this loan to a fixed rate. (o) On May 6, 2014, we closed on a $25.0 million loan with Compass Bank. The loan carries a variable rate of 30-day LIBOR plus 240 basis points, amortizes over 25 years, and has a May 6, 2020 maturity date. The loan is secured by first mortgage liens on the Hampton Inn & Suites hotels located in San Diego (Poway), CA, Ventura (Camarillo), CA and Fort Worth, TX. (p) On March 28, 2014, we amended two loans with General Electric Capital Corp., which are cross - collateralized by the Hilton Garden Inn (Lakeshore) and the Hilton Garden Inn (Liberty Park), both located in Birmingham, AL. Both loans were amended to bear interest at a fixed rate of 5.39% and the maturity dates were extended to April 1, 2020. (q) These loans are secured by the SpringHill Suites by Marriott in Denver, CO and the Double Tree in Baton Rouge, LA. These loans have a variable interest rate of 90-day LIBOR plus 350 basis points. On May 4, 2012, we entered into interest rate derivatives that effectively converted these loans to a fixed rate. These loans are cross-defaulted and cross-collateralized. (r) On December 20, 2012, we assumed a loan in our acquisition of the Residence Inn by Marriott in Salt Lake City, UT. This loan has a prepayment penalty of the greater of 1% or the yield maintenance premium. (s) On February 11, 2013, we assumed a loan in our acquisition (through a joint venture) of the Holiday Inn Express & Suites in San Francisco, CA. This loan has an interest rate of 6.20% and a maturity date of January 6, 2016. This loan is subject to defeasance if prepaid. (t) On May 21, 2013, we assumed a loan in our acquisition of the Holiday Inn Express & Suites in Minneapolis (Minnetonka), MN. This loan has an interest rate of 5.53% and a maturity date of October 1, 2015. This loan is subject to defeasance if prepaid. (u) On May 21, 2013, we assumed a loan in our acquisition of the Hilton Garden Inn in Minneapolis (Eden Prairie), MN. This loan has an interest rate of 5.57% and a maturity date of January 1, 2016. This loan is subject to defeasance if prepaid. (v) On January 9, 2014, as part of our acquisition of the 182-guestroom Hilton Garden Inn in Houston, TX, we assumed a $17.8 million mortgage loan with a fixed interest rate of 6.22%, an amortization period of 30 years, and a maturity date of November 1, 2016. (w) On January 10, 2014, as part of our acquisition of the 98-guestroom Hampton Inn in Santa Barbara (Goleta), CA, we assumed a $12.0 million mortgage loan with a fixed interest rate of 6.133%, an amortization period of 25 years, and a maturity date of November 11, 2021. (x) On March 14, 2014, as part of our acquisition of the 210-guestroom DoubleTree by Hilton in San Francisco, CA, we assumed a $13.3 million mortgage loan with a fixed interest rate of 5.98%, an amortization period of 30 years, and a maturity date of March 8, 2016. On May 23, 2013, we closed on a $92.0 million variable rate senior secured interim loan with KeyBank and Regions Bank, with a maturity of November 23, 2013. In the third quarter of 2013, we paid off the senior secured interim loan using proceeds from a new mortgage loan with KeyBank and proceeds from our September 19, 2013 common stock offering. F-21 Table of Contents Our total fixed-rate and variable-rate debt at December 31, 2014 and 2013, after giving effect to our interest rate derivatives, are as follows (in thousands): Fixed-rate debt Variable-rate debt 2014 2013 $ $ 465,220 161,313 626,533 $ $ 358,590 76,999 435,589 Maturities of long-term debt for each of the next five years are as follows (in thousands): 2015 2016 2017 2018 2019 Thereafter $ $ 14,638 98,021 141,893 105,310 16,318 250,353 626,533 The weighted average interest rate for all borrowings was 4.35% and 5.03% at December 31, 2014 and 2013, respectively. Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands): 2014 2013 Carrying Value Fair Value Carrying Value Fair Value Valuation Technique Fixed-rate debt $ 362,602 $ 349,517 $ 329,544 $ 319,429 Level 2 - Market approach At December 31, 2014 and 2013, we had $102.6 million and $104.0 million, respectively, of debt with variable interest rates that had been converted to fixed interest rates through derivative financial instruments which are carried at fair value. Differences between carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value as a result of changes in the current market rate of interest on the valuation date. For additional information on our use of derivatives as interest rate hedges, refer to “Note 18 - Derivative Financial Instruments and Hedging.” NOTE 12 - ACCRUED EXPENSES Accrued expenses at December 31, 2014 and 2013 include (in thousands): Accrued taxes Accrued salaries and benefits Accrued interest Accrued expenses at hotels and other 2014 2013 $ $ 13,346 8,863 2,095 13,758 38,062 $ $ 10,359 7,178 1,721 7,896 27,154 F-22 Table of Contents NOTE 13 - COMMITMENTS AND CONTINGENCIES Ground Leases We lease land for one hotel property in Duluth, GA under the terms of an operating ground lease agreement expiring April 1, 2069. We also have two prepaid land leases for two hotel properties in Portland, OR which expire in June of 2084 and have a remaining prepaid balance of $3.4 million and $3.4 million at December 31, 2014 and 2013, respectively. We have one option to extend these leases for an additional 14 years. We lease land for one hotel property in Houston (Galleria Area), TX under the terms of an operating ground lease agreement with an initial termination date of April 20, 2053 with one option to extend for an additional 10 years. We lease land for one hotel property in Austin, TX with an initial lease termination date of May 31, 2050. Total rent expense for these leases for 2014, 2013 and 2012 was $1.1 million, $0.5 million and $0.5 million and, respectively. Future minimum rental payments for noncancelable operating leases with a remaining term in excess of one year are as follows (in thousands): 2015 2016 2017 2018 2019 Thereafter $ $ 817 830 836 728 719 50,660 54,590 In addition, we lease land for one hotel property in Garden City, NY under a PILOT (payment in lieu of taxes) lease. We pay a reduced amount of property tax each year of the lease as rent. The lease expires on December 31, 2019. Upon expiration of the lease, we expect to exercise our right to acquire a fee simple interest in the hotel for nominal consideration. Franchise Agreements All of our hotel properties operate under franchise agreements with major hotel franchisors. The terms of our franchise agreements generally range from 10 to 20 years with various extension provisions. Each franchisor receives franchise fees ranging from 2% to 6% of each hotel property’s gross revenue, and some agreements require that we pay marketing fees of up to 4% of gross revenue. In addition, some of these franchise agreements require that we deposit a percentage of the hotel property’s gross revenue, generally not more than 5%, into a reserve fund for capital expenditures. In 2014, 2013 and 2012, we expensed fees related to our franchise agreements of $33.6 million, $27.7 million and $20.7 million, respectively. Management Agreements Our hotel properties operate pursuant to management agreements with various third-party management companies. The terms of our management agreements range from three to twenty-five years with various extension provisions. Each management company receives a base management fee, generally a percentage of total hotel property revenues. In some cases there are also monthly fees for certain services, such as accounting, based on number of rooms. Generally there are also incentive fees based on attaining certain financial thresholds. In 2014, 2013 and 2012, we expensed fees related to our hotel management agreements of $16.1 million, $13.5 million and $9.2 million, respectively. Pending Hotel Property Acquisitions We have a purchase agreement with a hotel property developer to acquire a Hampton Inn & Suites in downtown Minneapolis, MN for $38.7 million, which price includes change orders to date. The purchase is subject to certain conditions including the completion of construction of the hotel in accordance with agreed upon architectural and engineering designs, receipt of a Hampton Inn & Suites franchise, and receipt of a certificate of occupancy. As this acquisition is contingent upon the satisfaction of these customary closing conditions, there is no assurance that it will be completed. Departure of Executive Officer As previously reported, at the end of May 2014, Stuart J. Becker resigned from his position as Executive Vice President, Chief Financial Officer and Treasurer of the Company. On June 16, 2014, in connection with Mr. Becker’s resignation, the Company entered into a severance and release agreement with Mr. Becker (the “Agreement”). The Agreement became effective on June 19, 2014 and provided for Mr. Becker’s F-23 Table of Contents resignation effective as of May 27, 2014. The Agreement also provides for the following: (i) a release by Mr. Becker of all claims against the Company, its affiliates and other parties; (ii) a covenant by Mr. Becker not to solicit the Company’s employees for employment for a period of one year, and confidentiality and non-disparagement covenants; (iii) a severance payment to Mr. Becker in the gross amount of $348,289 (equal to Mr. Becker’s 2013 base salary plus payment for all accrued and unused vacation), less applicable payroll deductions, all of which was paid in a single lump sum in July 2014; (iv) payment to Mr. Becker for up to twelve months of COBRA premiums; and (v) accelerated vesting of all restricted shares of common stock and options previously awarded to Mr. Becker. Litigation We are involved from time to time in litigation arising in the ordinary course of business; however, we are not currently aware of any actions against us that we believe would have a material effect on our financial condition or results of operations. NOTE 14 - EQUITY Common Stock The Company is authorized to issue up to 500,000,000 shares of common stock, $0.01 par value per share. Holders of our common stock are entitled to receive dividends on such stock when, as and if authorized by our board of directors out of assets legally available therefor and declared by us and to share ratably in the assets of our company legally available for distribution to our stockholders in the event of our liquidation, dissolution or winding up after payment of or adequate provision is made for all known debts and liabilities of our company. Each outstanding share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as may be provided with respect to any other class or series of stock, the holders of such shares possess the exclusive voting power. During the year ended December 31, 2014, we issued 438,631 shares of common stock to limited partners of the Operating Partnership upon redemption of their Common Units. On May 28, 2014, we issued 278,916 shares of common stock to our executive officers and employees pursuant to our 2011 Equity Incentive Plan. Of the total shares issued on May 28, 2014, 1,756 were forfeited during 2014. During the year ended December 31, 2014, we issued 32,317 shares of common stock to our directors pursuant to our 2011 Equity Incentive Plan, 7,539 shares of common stock to one of our independent directors in lieu of cash for director fees, and 4,253 shares of common stock upon the cashless exercise of outstanding stock options with an exercise price of $9.75 per share. Upon vesting of outstanding restricted stock, 12,588 shares were withheld to cover employee tax obligations. During the year ended December 31, 2013, we issued 4,414,950 shares of common stock to limited partners of the Operating Partnership upon redemption of their Common Units. On September 19, 2013, we completed an underwritten public offering of 17,250,000 shares of common stock. Net proceeds were $152.0 million, after the underwriting discount and offering-related expenses of $6.5 million. We used the proceeds to fund hotel property acquisitions, to pay off our senior secured interim loan, and to pay down our senior secured revolving credit facility. On March 1, 2013, we issued 292,090 shares of common stock to our executive officers and employees pursuant to our 2011 Equity Incentive Plan. During the year ended December 31, 2013, we issued 29,228 shares of common stock to our directors pursuant to our 2011 Equity Incentive Plan and 6,488 shares of common stock to one of our independent directors in lieu of cash for director fees. On January 14, 2013, we completed an underwritten public offering of 17,250,000 shares of common stock. Net proceeds were $148.1 million, after the underwriting discount and offering-related expenses of $7.2 million. We used the proceeds to fund hotel property acquisitions and to pay down our mortgage debt and our senior secured revolving credit facility. Preferred Stock The Company is authorized to issue up to 100,000,000 shares of preferred stock, $0.01 par value per share, of which 2,000,000 shares have been designated as 9.25% Series A Cumulative Redeemable Preferred Stock (the “Series A preferred shares”), 3,000,000 shares have been designated as 7.875% Series B Cumulative Redeemable Preferred Stock (the “Series B preferred shares”) and 3,400,000 shares have been designated as 7.125% Series C Cumulative Redeemable Preferred Stock (the “Series C preferred shares”). The Series A preferred shares, Series B preferred shares and Series C preferred shares (collectively, the “Preferred Shares”) rank senior to our common stock and on parity with each other with respect to the payment of dividends and distributions of assets in the event of a liquidation, dissolution, or winding up. The Preferred Shares do not have any maturity date and are not subject to mandatory redemption or sinking fund requirement. The Company may not redeem the Series A preferred shares, Series B preferred shares or Series C preferred shares prior to F-24 Table of Contents October 28, 2016, December 11, 2017, and March 20, 2018, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or in connection with certain changes in control. After those dates, the Company may, at its option, redeem the applicable Preferred Shares, in whole or from time to time in part, by payment of $25 per share, plus any accumulated, accrued and unpaid distributions to, but not including, the date of redemption. If the Company does not exercise its rights to redeem the Preferred Shares upon certain changes in control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common stock based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each Series A preferred share is 5.92417 shares of common stock, each Series B preferred share is 5.6497 shares of common stock, and each Series C preferred share is 5.1440 shares of common stock, subject to certain adjustments. On March 20, 2013, we completed a public offering of 3,400,000 Series C preferred shares for net proceeds of $81.7 million, after the underwriting discount and offering-related expenses of $3.3 million. The Company pays dividends at an annual rate of $2.3125 for each Series A preferred share, $1.96875 for each Series B preferred share, and $1.78125 for each Series C preferred share. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year. Non-controlling Interests in Operating Partnership Pursuant to the limited partnership agreement of our Operating Partnership, beginning on February 14, 2012, the unaffiliated third parties who hold Common Units in our Operating Partnership have the right to cause us to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of common stock at the time of redemption; however, the Company has the option to redeem with shares of our common stock on a one-for-one basis. The number of shares of our common stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations. At December 31, 2014 and 2013, unaffiliated third parties owned 784,968 and 811,425, respectively, of Common Units of the Operating Partnership, representing an approximate 1% limited partnership interest in the Operating Partnership. We classify outstanding Common Units held by unaffiliated third parties as non-controlling interests in the Operating Partnership, a component of equity in the Company’s consolidated balance sheets. The portion of net income (loss) allocated to these Common Units is reported on the Company’s consolidated statement of operations as net income (loss) attributable to non-controlling interests of the Operating Partnership. Non-controlling Interests in Joint Venture On February 11, 2013, we formed a joint venture with an affiliate of IHG to purchase a Holiday Inn Express & Suites in San Francisco, CA. Prior to June 30, 2014, we owned an 81% controlling interest in the joint venture and our partner owned a 19% interest, which we classified as non-controlling interest in joint venture on our consolidated balance sheets. For the periods prior to June 30, 2014, the portion of net income (loss) allocated to our partner was reported on our consolidated statements of operations as net income (loss) attributable to non-controlling interests in joint venture. On June 30, 2014, we acquired the remaining non-controlling interest for $8.2 million and the hotel property became wholly-owned by us. Other Joint Venture Interests We own a majority interest in a joint venture that owns a fee simple interest in a hotel property and we also own a minority interest in a related joint venture (“Leasehold Venture”) that holds a leasehold interest in the property. We control the Leasehold Venture as we are the managing member of the entity. Additionally, the majority of the profits and losses of the Leasehold Venture are absorbed by us. As a result, we have concluded that the Leasehold Venture represents a variable interest entity that should be consolidated into our consolidated financial statements. As such, all of the net assets and operating results of the Leasehold Venture are included in our consolidated financial statements for the periods presented. NOTE 15 - BENEFIT PLANS On August 1, 2011, we initiated 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 years ended December 31, 2014, 2013 and 2012 was $0.2 million, $0.1 million and $0.1 million, respectively. NOTE 16 - EQUITY-BASED COMPENSATION Our equity-based awards were issued under our 2011 Equity Incentive Plan, which provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based awards or incentive F-25 Table of Contents awards. Stock options granted may be either incentive stock options or nonqualified stock options. Vesting terms may vary with each grant, and stock option terms are generally five to ten years. We have outstanding equity-based awards in the form of stock options and restricted stock awards. All of our existing equity-based awards are classified as equity awards. At December 31, 2014 and 2013, the Company had reserved 9,669,896 and 10,485,951 shares of common stock, respectively, for the issuance of common stock (i) upon the exercise of stock options, issuance of time-based restricted stock awards, issuance of performance-based restricted stock awards, grants of director stock awards, or other awards issued pursuant to the Company’s 2011 Equity Incentive Plan, (ii) upon redemption of Common Units, or (iii) under the ATM offering. Stock Options Concurrent with the completion of our IPO, we granted options to our executive officers to purchase 940,000 shares of common stock. These options have an exercise price of $9.75 per share, the market value of the common stock on the date of grant, and vest ratably over five years based on continued service, or upon a change in control. The fair value of stock options granted was estimated using a Black-Scholes valuation model and the following assumptions: Expected dividend yield Expected stock price volatility Risk-free interest rate Expected life of options (in years) 2011 5.09 % 56.6 % 2.57 % 6.5 Weighted average estimated fair value of options at grant date per share $ 3.48 The expected dividend yield was calculated based on our annual expected dividend payments at the time the options were granted. The expected volatility was based on historical price changes of a peer group of comparable entities based on the expected life of the options at the date of grant. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the date of grant. The expected life of options is the average number of years we estimate that options will be outstanding. The following table summarizes stock option activity under our 2011 Equity Incentive Plan for 2014 and 2013: Outstanding at December 31, 2012 Outstanding at December 31, 2013 Granted Exercised Forfeited Granted Exercised Forfeited Outstanding at December 31, 2014 Exercisable at December 31, 2014 Number of Options Weighted Average Exercise Price (per share) Weighted Average Remaining Contractual Terms (in years) Aggregate Intrinsic Value (Current Value Less Exercise Price) (in thousands) 893,000 — — — 893,000 — (47,000 ) — 846,000 $ 507,600 $ 9.75 — — — 9.75 — 9.75 — 9.75 9.75 6.2 $ 6.2 $ 2,276 1,365 All stock options outstanding at December 31, 2014 are vested or expected to vest. During the years ended December 31, 2014, 2013, and 2012, the total fair value of stock options that vested was $0.7 million, $0.6 million and $0.6 million, respectively. The intrinsic value of outstanding options and exercisable options at December 31, 2014 was $2.3 million and $1.4 million, respectively. At December 31, 2013, the exercise price of our outstanding options exceeded the market price of our common stock, resulting in no intrinsic value. F-26 Table of Contents Time-Based Restricted Stock Awards On May 28, 2014, we awarded time-based restricted stock awards for 116,981 shares of common stock to our executive officers and management. These awards vest over a three year period based on continued service (25% on May 27, 2015 and 2016 and 50% on May 27, 2017), or upon a change in control. On March 1, 2013, we awarded time-based restricted stock awards for 106,518 shares of common stock to our executive officers. These awards vest over a three year period based on continued service (25% on February 28, 2014 and 2015 and 50% on February 28, 2016), or upon a change in control. On April, 25, 2012, we awarded time-based restricted stock awards for 110,137 shares of common stock to our executive officers. These awards vest over a three year period based on continued service (25% at December 31, 2012 and 2013 and 50% at December 31, 2014), or upon a change in control. The holders of these awards have the right to vote the related shares of common stock and receive all dividends declared and paid whether or not vested. The fair value of time-based restricted stock awards granted is calculated based on the market value on the date of grant. The following table summarizes time-based restricted stock activity under our 2011 Equity Incentive Plan for 2014 and 2013: Non-vested December 31, 2012 Non-vested December 31, 2013 Granted Vested Forfeited Granted Vested Forfeited Non-vested December 31, 2014 Number of Shares Weighted Average Grant Date Fair Value (per share) Aggregate Current Value (in thousands) 82,603 $ 106,518 (27,534 ) — 161,587 116,981 (95,696 ) (1,756 ) 181,116 $ 7.78 9.78 7.78 — 9.10 9.82 8.63 9.82 9.81 $ 2,253 The severance and release agreement between the Company and Stuart J. Becker described above, provided for accelerated vesting of all restricted shares of common stock previously granted to Mr. Becker. On the effective date of the severance and release agreement, the restrictions lapsed on 23,035 common shares granted under time-based restricted stock awards. During the years ended December 31, 2014, 2013, and 2012, the total fair value of time-based restricted stock awards that vested was $0.8 million, $0.2 million and $0.2 million, respectively. Performance-Based Restricted Stock Awards On May 28, 2014, March 1, 2013 and April 25, 2012 we awarded performance-based restricted stock awards for 161,935, 185,572 and 82,602 shares, respectively, of common stock to our executive officers. These awards vest ratably on January 1 in each year of the three-year period following the grant date subject to the attainment of certain performance goals and continued service, or upon a change in control. The severance and release agreement between the Company and Stuart J. Becker described above, provided for accelerated vesting of all restricted shares of common stock previously granted to Mr. Becker. On the effective date of the severance and release agreement, the restrictions lapsed on 45,551 common shares granted under performance-based restricted stock awards. Other than the accelerated vesting detailed in the previous paragraph, no performance-based restricted stock awards vested during 2014 or 2013 because performance goals were not met. The holders of these awards have the right to vote the related shares of common stock and any dividends declared will be accumulated and will be subject to the same vesting conditions as the awards. Our performance-based restricted stock awards are market-based awards and are accounted for based on the grant date fair value of our common stock. These awards vest based on a performance measurement that requires the Company’s total stockholder return F-27 Table of Contents (“TSR”) to exceed the TSR for the SNL U.S. Lodging REIT Index for a designated one, two or three year performance period. The fair value of performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model and the following assumptions: Expected dividend yield Expected stock price volatility Risk-free interest rate Monte Carlo iterations Weighted average estimated fair value of performance-based restricted stock awards 2014 2013 4.48% 27.9% 0.06 - 0.60% 100,000 4.52% 38.5% 0.147 - 0.513% 100,000 $ 7.12 $ 7.09 The expected dividend yield was calculated based on our annual expected dividend payments at the time of grant. The expected volatility was based on historical price changes of our common stock for a period comparable to the performance period. The risk-free interest rates were interpolated from the Federal Reserve Bond Equivalent Yield rates for “on-the-run” U.S. Treasury securities. The following table summarizes performance-based restricted stock activity under our 2011 Equity Incentive Plan for 2014 and 2013: Non-vested December 31, 2012 Non-vested December 31, 2013 Granted Vested Forfeited Granted Vested Forfeited Non-vested December 31, 2014 Director Stock Awards Number of Shares Weighted Average Grant Date Fair Value (per share) Aggregate Current Value (in thousands) 82,602 $ 185,572 — — 268,174 161,935 (45,551 ) — 384,558 $ 7.78 7.09 — — 6.48 7.12 6.50 — 6.75 $ 4,784 In 2014 and 2013, we granted 32,317 and 29,228 shares of common stock, respectively, to our non-employee directors as a part of our director compensation program. These grants were made under our 2011 Equity Incentive Plan and were vested upon grant. Our non-employee directors have the option to receive shares of our common stock in lieu of cash for their director fees. In 2014 and 2013, we issued 7,539 and 6,488 shares of common stock, respectively, for director fees. Equity-Based Compensation Expense Equity-based compensation expense included in corporate general and administrative in the Consolidated Statements of Operations for 2014, 2013, and 2012 was (in thousands): Stock options Time-based restricted stock Performance-based restricted stock Director stock 2014 2013 2012 675 $ 960 1,483 406 3,524 $ 622 $ 611 548 343 2,124 $ 700 214 171 120 1,205 $ $ F-28 Table of Contents We recognize equity-based compensation expense ratably over the vesting terms. The amount of expense may be subject to adjustment in future periods due to a change in the forfeiture assumptions. Unrecognized equity-based compensation expense for all non-vested awards was $2.8 million at December 31, 2014. We expect to recognize this cost over a remaining weighted-average period of 0.9 years with $2.0 million, $0.7 million and $0.1 million being recognized in 2015, 2016 and 2017, respectively. NOTE 17 - LOSS ON IMPAIRMENT OF ASSETS In 2014, we recognized a loss on impairment of assets of $0.4 million related to the Hampton Inn in Fort Smith, AR. This property was classified as held for sale prior to the Company’s adoption of ASU No. 2014-08 and its operating results, including impairment charges, were included in discontinued operations. In addition, during 2014, we recognized a loss on impairment of assets of $8.2 million related to the Country Inn & Suites and three adjacent land parcels totaling 5.64 acres in San Antonio, TX, which was sold in the fourth quarter of 2014, and a loss on impairment of $0.7 million related to a land parcel in Spokane, WA. These losses on impairment of assets were charged to operations. In 2013, we recognized a loss on impairment of assets totaling $7.7 million related to the Courtyard by Marriott in Memphis, TN; the SpringHill Suites in Lithia Springs, GA; the Hampton Inn, the AmericInn Hotel & Suites and the Aspen Hotel & Suites in Fort Smith, AR; the AmericInn Hotel & Suites in Salina, KS and the Fairfield Inn and Holiday Inn Express in Emporia, KS. These hotel properties were sold in 2013 or classified as held for sale at December 31, 2013, and their operating results, including the loss on impairment, are included in discontinued operations. In addition, we recognized a loss on impairment of assets related to a land parcel in El Paso, TX that was sold in 2013 and a land parcel in Spokane, WA that was held for sale at December 31, 2013. As a result, a loss on impairment of assets totaling $1.4 million was charged to operations. In 2012, we recognized a loss on impairment of assets totaling $2.3 million related to the AmericInns in Twin Falls, ID, Missoula, MT and Lakewood, CO. These hotel properties were sold in 2012 or 2013, and their operating results, including the loss on impairment, are included in discontinued operations. In addition, in conjunction with the sale of our Missoula, MT hotel properties, we determined that a land parcel in Missoula was impaired. As a result, a loss on impairment of assets totaling $0.7 million was charged to operations. NOTE 18 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING We are exposed to interest rate risk through our variable-rate debt. We manage this risk primarily by managing the amount, sources, and duration of our debt funding and through the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage our exposure to known or expected cash payments related to our variable-rate debt. The maximum length of time over which we have hedged our exposure to variable interest rates with our existing derivative financial instruments is approximately six years. Our objectives in using derivative financial instruments are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Our interest rate swaps designated as cash flow hedges involve the receipt of variable-rate payments from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Our agreements with our derivative counterparties contain a provision where if we default, or are capable of being declared in default, on any of our indebtedness, then we could also be declared in default on our derivative financial instruments. On September 5, 2013, we entered into an interest rate swap with a notional value of $75.0 million that became effective on January 2, 2014 and matures on October 10, 2018. This interest rate derivative was designated a cash flow hedge and effectively fixes LIBOR at 2.04%. The interest rate on the $75 Million Term Loan was 3.94% at January 2, 2014. On October 31, 2013, we paid off a term loan and terminated a related interest rate swap that had a notional value of $10.3 million. We incurred termination costs of less than $0.1 million, which were charged to debt transaction costs. F-29 Table of Contents Information about our derivative financial instruments at December 31, 2014 and 2013 follows (dollar amounts in thousands): Number of Instruments December 31, 2014 Notional Amount Fair Value Number of Instruments December 31, 2013 Notional Amount Fair Value Interest rate swaps (asset) Interest rate swaps (liability) 3 $ 1 $ 4 28,002 $ 75,000 103,002 $ 66 (1,957 ) (1,891 ) 3 $ 1 $ 4 29,273 $ 75,000 104,273 $ 253 (1,772 ) (1,519 ) All of our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At December 31, 2014 and 2013, three of our interest rate swaps were in an asset position and one was in a liability position. We have not posted any collateral related to these agreements and are not in breach of any financial provisions of the agreements. If we had breached any agreement provisions at December 31, 2014, we could have been required to settle our obligation under the agreement that was in a liability position at its termination value of $2.1 million. The table below details the location in the financial statements of the gain or loss recognized on derivative financial instruments designated as cash flow hedges (in thousands). Loss recognized in accumulated other comprehensive income on derivative financial instruments (effective portion) Loss reclassified from accumulated other comprehensive income to interest expense Gain (loss) recognized in gain (loss) on derivative financial instruments (ineffective (effective portion) portion) 2014 2013 2012 (2,112 ) $ (1,240 ) $ (1,741 ) $ (359 ) $ (1 ) $ $ 2 (786 ) (147 ) (2 ) $ $ $ Amounts reported in accumulated other comprehensive income related to derivative financial instruments will be reclassified to interest expense as interest payments are made on the hedged variable-rate debt. In 2015, we estimate that an additional $1.5 million will be reclassified from other comprehensive income as an increase to interest expense. NOTE 19 - INCOME TAXES Our earnings (losses), other than from our TRS, are not generally subject to federal corporate and state income taxes due to our REIT election. At December 31, 2014 and 2013, the net operating loss carry forwards (“NOLs”) of our TRS for federal and state income tax reporting purposes were $7.6 million and $15.2 million (after a true-up of the prior year tax provision of approximately $1.0 million), respectively. We have a deferred tax asset at December 31, 2014 and 2013 of $3.8 million and $5.8 million, respectively, which relate primarily to the NOLs of our TRS. Our deferred tax liability at December 31, 2014 and 2013 of $1.1 million and $0.7 million, respectively, relate to differences in the carrying amounts of investments in joint ventures and franchise fees. In 2013, we recorded a valuation allowance of $5.0 million. During the year ended December 31, 2014, we reduced this valuation allowance by $2.6 million. ASC Topic 740, “Income Taxes” (“ASC Topic 740”) requires that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more-likely-than-not that some portion or all of the recorded deferred tax assets will not be realized in a future period. We have concluded that it is more-likely-than-not that our deferred tax assets will not be realized in their entirety, and therefore, we have retained a valuation allowance against substantially all the deferred tax assets. In our assessment of the need for a valuation allowance, we heavily weighed the following negative evidence: (i) a lack of a history of consistent operational profitability and (ii) the Company operates in a highly cyclical industry. Our NOLs will begin to expire in 2032 for federal tax purposes and in the period from 2017 to 2033 for state tax purposes, if not used. If our TRS were to experience a change in control as defined in Section 382 of the Internal Revenue Code, the ability to use NOLs after the change in control would be limited. There were $6.6 million of NOLs used during the year ended December 31, 2014. The valuation allowance at December 31, 2014 and 2013 was $2.4 million and $5.0 million, respectively. F-30 Table of Contents We had no unrecognized tax benefits at December 31, 2014 or in the three year period then ended. The Company recognizes interest expense and penalties associated with uncertain tax positions as a component of income tax expense. We have no material interest or penalties relating to unrecognized tax benefits in the consolidated statements of operations for 2014, 2013 or 2012 or in the consolidated balance sheets as of December 31, 2014 or 2013. Current tax liabilities related to the Operating Partnership of $0.5 million and $0.3 million at December 31, 2014 and 2013, respectively, are included in accrued expenses in the accompanying consolidated balance sheets and relate to state and local tax expense. A reconciliation of the federal statutory rate to the effective income tax rate for the TRS follows (in thousands): Tax provision (benefit) at U.S. statutory rates on TRS income (loss) subject to tax State income tax, net of federal income tax benefit Effect of permanent differences and other Increase (decrease) in valuation allowance Other TRS income tax expense (benefit) 2014 2013 $ $ 2,024 $ 77 1,326 (2,580 ) (599 ) 248 $ (809 ) (120 ) (152 ) 5,029 — 3,948 A reconciliation for 2012 is not presented herein as the tax expense differed from that computed using the statutory rate by less than 5% of income before tax in total and there were no components of the reconciliation over 5% of income before tax. The components of income tax expense (benefit) for 2014, 2013 and 2012 are as follows (in thousands): Current: Federal State and local Deferred: Federal State and local Total provision (benefit) Income tax expense (benefit) From continuing operations From discontinued operations Total provision (benefit) 2014 2013 2012 $ $ $ $ 133 $ 712 — (127 ) 718 $ 744 $ (26 ) 718 $ — $ 408 3,352 597 4,357 $ 4,894 $ (537 ) 4,357 $ — 512 (1,531 ) (270 ) (1,289 ) (728 ) (561 ) (1,289 ) For federal income tax purposes, the cash distributions paid to our common and preferred stockholders may be characterized as ordinary income, return of capital (generally non-taxable) or capital gains. We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. We currently have no open audits related to our income tax returns. In general, we are not subject to tax examinations by tax authorities for years before 2012. F-31 Table of Contents NOTE 20 — FAIR VALUE The following table presents information about our financial instruments measured at fair value on a recurring basis as of December 31, 2014 and 2013. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, we classify assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Disclosures concerning financial instruments measured at fair value are as follows (in thousands): Assets: Assets held for sale Interest rate swaps (asset) Liabilities: Interest rate swaps (liability) Assets: Assets held for sale Interest rate swaps (asset) Liabilities: Interest rate swaps (liability) Level 1 Level 1 $ $ Fair Value Measurements at December 31, 2014 using Level 2 Level 3 — $ — — 300 $ 66 1,957 — $ — — Fair Value Measurements at December 31, 2013 using Level 2 Level 3 Total 300 66 1,957 Total — $ — — 12,224 $ 253 1,772 — $ — — 12,224 253 1,772 There were no transfers between Level 1 and Level 2 of the fair value hierarchy during 2014 or 2013. NOTE 21 - DISCONTINUED OPERATIONS We have adjusted our consolidated statements of operations for 2014, 2013 and 2012 to reflect the operations of hotel properties that have been sold or are classified as held for sale in discontinued operations. Discontinued operations include the following hotel properties that have been sold: • Hampton Inn, Holiday Inn Express and AmericInn in Twin Falls, ID — sold May 2012; • AmericInn Hotel & Suites in Missoula, MT — sold August 2012; • Courtyard by Marriott in Missoula, MT — sold December 2012; • AmericInn Hotel & Suites in Golden, CO — sold January 2013; • Hampton Inn in Denver, CO — sold February 2013; • Holiday Inn and Holiday Inn Express in Boise, ID — sold May 2013; • Courtyard by Marriott in Memphis, TN — sold May 2013; • SpringHill Suites in Lithia Springs, GA — sold August 2013; • Fairfield Inn in Lewisville, TX — sold August 2013; • Fairfield Inn in Lakewood, CO — sold September 2013; • Fairfield Inn in Emporia, KS — sold October 2013; • SpringHill Suites in Little Rock, AR — sold November 2013; • Fairfield Inn and AmericInn Hotel & Suites in Salina, KS — sold November 2013; • Hampton Inn and Fairfield in Boise, ID — sold November 2013; • Holiday Inn Express in Emporia, KS — sold December 2013; • AmericInn Hotel & Suites and Aspen Hotel & Suites in Fort Smith, AR — sold January 17, 2014; and • Hampton Inn in Fort Smith, AR — sold September 9, 2014. F-32 Table of Contents Condensed results for the hotel properties included in discontinued operations follows (in thousands): Revenues Hotel operating expenses Depreciation and amortization Loss on impairment of assets Operating income (loss) Interest expense Other income Income (loss) before taxes Income tax benefit Income (loss) from discontinued operations Income (loss) from discontinued operations attributable to non- controlling interest Income (loss) from discontinued operations attributable to common stockholders NOTE 22 - EARNINGS (LOSS) PER SHARE 2014 2013 2012 3,128 $ 2,304 13 400 411 — 55 466 26 492 $ $ 6 486 $ 19,458 $ 14,859 1,960 7,675 (5,036 ) (174 ) 3,945 (1,265 ) 537 (728 ) $ (25 ) $ (703 ) $ 33,193 24,701 4,226 2,305 1,961 (855 ) 3,010 4,116 561 4,677 807 3,870 $ $ $ $ We apply the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for our non-vested time-based restricted stock awards with non-forfeitable dividends and for our common stock. Our non-vested time-based restricted stock awards with non-forfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Our non-vested time-based restricted stock awards with nonforfeitable dividends do not have such an obligation so they are not allocated losses. At December 31, 2014, 2013 and 2012, we had 846,000, 893,000 and 893,000 stock options outstanding, respectively, which were not included in the computation of diluted earnings per share, as the effect would have been anti-dilutive. In 2013 and 2012, our basic and diluted earnings per share are based on basic weighted average common shares outstanding due to our loss attributable to common stockholders, net of amount allocated to participating securities. F-33 Table of Contents Below is a summary of the components used to calculate basic and diluted earnings per share (in thousands, except per share): Numerator: Income (loss) from continuing operations Less: Preferred dividends Allocation to participating securities Attributable to noncontrolling interest Income (loss) from continuing operations attributable to common stockholders Income (loss) from discontinued operations attributable to common stockholders Net income (loss) attributable to common stockholders, net of amount allocated to participating securities Denominator: Weighted average common shares outstanding - basic Dilutive effect of equity-based compensation awards Weighted average common shares outstanding - diluted Earnings per common share - basic and diluted: Net income (loss) from continuing operations Net income (loss) from discontinued operations Net income (loss) 2014 2013 2012 $ 20,431 $ 16,588 94 46 3,703 486 $ 4,189 $ 85,242 324 85,566 0.04 $ 0.01 0.05 $ $ $ 6,625 $ 14,590 73 44 (8,082 ) (703 ) (8,785 ) $ 70,327 — 70,327 (0.11 ) $ (0.01 ) (0.12 ) $ (6,947 ) 4,625 37 (2,001 ) (9,608 ) 3,870 (5,738 ) 33,717 — 33,717 (0.28 ) 0.11 (0.17 ) NOTE 23 - SUBSEQUENT EVENTS Equity Transactions On January 1, 2015, 128,185 of our outstanding performance-based restricted stock awards vested as the Company’s TSR for 2014 exceeded the TSR for the U.S. Lodging REIT Index. Additionally, accrued dividends of $0.1 million were paid as a result of this vesting. On January 2, 2015, we redeemed 20,691 Common Units, which had been tendered December 15, 2014, for shares of our common stock. On February 2, 2015, 94,256 Common Units were tendered for redemption, which we intend to redeem for shares of our common stock on April 1, 2015. On January 30, 2015, our board of directors declared cash dividends of $0.1175 per share of common stock, $0.578125 per share of 9.25% Series A Cumulative Redeemable Preferred Stock, $0.4921875 per share of 7.875% Series B Cumulative Redeemable Preferred Stock, and $0.4453125 per share of 7.125% Series C Cumulative Redeemable Preferred Stock. These dividends were paid February 27, 2015 to stockholders of record on February 16, 2015. F-34 Table of Contents NOTE 24 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected consolidated quarterly financial data for 2014 and 2013 follows (in thousands, except per share): First Quarter Second Quarter Third Quarter Fourth Quarter 2014 Total revenues Income from continuing operations Income (loss) from discontinued operations Net income Net income attributable to Summit Hotel Properties, Inc. Earnings per share: Basic and diluted net income (loss) per share from continuing operations Basic and diluted net income (loss) per share from discontinued operations Basic and diluted net income (loss) per share $ $ $ $ $ $ $ 89,544 $ 2,947 $ 378 $ 3,325 $ 3,458 $ (0.01 ) $ — (0.01 ) $ 105,525 $ 9,201 $ (41 ) $ 9,160 $ 8,975 $ 0.06 $ — 0.06 $ 2013 109,256 $ 3,766 $ (59 ) $ 3,707 $ 3,713 $ (0.01 ) $ — (0.01 ) $ 99,141 4,517 214 4,731 4,725 0.01 — 0.01 First Quarter Second Quarter Third Quarter Fourth Quarter Total revenues $ Income (loss) from continuing operations $ Income (loss) from discontinued operations $ Net income (loss) $ Net income (loss) attributable to Summit Hotel Properties, Inc. $ Earnings per share: Basic and diluted net income (loss) per share from continuing operations Basic and diluted net income (loss) per share from discontinued operations Basic and diluted net (loss) income per share $ $ F-35 59,723 $ 1,517 $ 357 $ 1,874 $ 1,940 $ (0.03 ) $ 0.01 (0.02 ) $ 79,105 $ 6,126 $ 545 $ 6,671 $ 6,459 $ 0.03 $ 0.01 0.04 $ 82,174 $ 2,837 $ (3,410 ) $ (573 ) $ (662 ) $ (0.02 ) $ (0.05 ) (0.07 ) $ 77,956 (3,855 ) 1,780 (2,075 ) (1,859 ) (0.09 ) 0.02 (0.07 ) Table of Contents SUMMIT HOTEL PROPERTIES, INC Schedule III - Real Estate and Accumulated Depreciation December 31, 2014 (in thousands) Year Acquired/ Initial Cost Cost Capitalized Total Cost Total Cost Net of Accumulated Mortgage Franchise Constructed Land Building & Improvements Subsequent to Acquisition Land Building & Improvements Total Depreciation Accumulated Depreciation Debt Location Arlington, TX Arlington, TX Arlington, TX Hyatt Place Courtyard by Marriott Residence Inn by Marriott Atlanta, GA Hyatt Place Courtyard by Marriott Hampton Inn and Suites Atlanta, GA Austin, TX Baltimore, MD Baton Rouge, Hyatt Place Baton Rouge, Baton Rouge, LA LA LA DoubleTree Fairfield Inn and Suites by Marriott SpringHill Suites by Marriott Baton Rouge, LA Bellevue, WA TownePlace Suites Fairfield Inn and Suites by Marriott Hilton Garden Inn Hilton Garden Inn SpringHill Suites by Marriott Hampton Inn and Suites Birmingham, Birmingham, AL AL MN Bloomington, Bloomington, MN Charleston, WV Charleston, WV Denver, CO Holiday Inn Express Denver, CO Hyatt Place Fairfield Inn and Suites by Marriott SpringHill Suites by Marriott Denver, CO Denver, CO Hyatt Place Denver, CO Hyatt House Duluth, GA Holiday Inn Duluth, GA Hilton Garden Inn Eden Prairie, MN El Paso, TX El Paso, TX Flagstaff, AZ Hilton Garden Inn Hampton Inn and Suites Courtyard by Marriott Courtyard by Marriott 2012 650 8,405 1,370 650 9,775 10,425 (1,590 ) 8,835 28,489 (4) 2012 1,497 13,503 50 1,497 13,553 15,050 (1,202 ) 13,848 — 2012 1,646 2006 1,154 13,854 9,605 107 1,646 2,504 1,154 13,961 15,607 12,109 13,263 (1,338 ) (2,700 ) 14,269 10,563 — 7,104 2012 2,050 26,850 2014 — 53,760 506 2,050 272 — 27,356 29,406 (2,905 ) 26,501 54,032 54,032 (403 ) 53,629 — — 2012 2,100 8,135 1,555 2,100 9,690 11,790 (1,238 ) 10,552 22,061 (2) 2008 1,100 14,063 (1,833 ) 1,100 12,230 13,330 (2,144 ) 11,186 9,775 2004 345 3,057 2004 448 3,729 2004 259 3,743 2004 2,705 12,944 2012 1,400 7,225 2012 1,400 10,100 2007 1,658 14,071 2007 1,658 14,596 2004 907 2012 1,300 2,903 9,230 2004 1,566 6,783 2007 1,076 2012 2,000 2012 2,700 2011 — 2011 2,200 11,079 9,515 10,780 7,000 11,150 2,170 345 2,037 448 1,843 259 3,141 2,705 1,760 1,400 1,020 1,400 782 1,658 699 1,658 1,581 1,042 2,109 907 2,409 1,300 3,379 1,566 (1,564 ) 1,076 2,374 2,000 3,656 2,700 330 — 1,075 2,200 5,227 5,572 (1,695 ) 5,766 6,214 (1,818 ) 5,586 5,845 (1,723 ) 3,877 4,396 4,122 16,085 18,790 (5,546 ) 13,244 — — — — 8,985 10,385 (1,543 ) 8,842 5,266 11,120 12,520 (1,434 ) 11,086 6,167 14,853 16,511 (2,771 ) 13,740 13,787 (1) 15,295 16,953 (2,887 ) 14,066 —(1) 5,070 6,112 (1,473 ) 4,639 95,322 (5) 5,012 5,919 11,639 12,939 (1,705 ) (1,672 ) 4,214 11,267 —(5) —(4) 10,162 11,728 (3,597 ) 8,131 — 9,515 10,591 11,889 13,889 14,436 17,136 7,330 7,330 12,225 14,425 (1,837 ) (1,652 ) (1,293 ) (1,224 ) (1,738 ) 8,754 12,237 15,843 6,106 12,687 7,213 —(4) —(2) — — 2013 1,800 8,400 2,453 1,800 10,853 12,653 (724 ) 11,929 6,038 2005 2,055 10,745 2011 1,640 10,710 2,684 2,055 878 1,640 13,429 15,484 (4,116 ) 11,368 —(5) 11,588 13,228 (1,688 ) 11,540 — 2009 2,361 20,785 (2,864 ) 2,361 17,921 20,282 (2,568 ) 17,714 12,505 F-36 Country Inn & Suites 2004 1,042 3,489 Table of Contents Year Acquired/ Initial Cost Cost Capitalized Total Cost Total Cost Net of Accumulated Mortgage Constructed Land Building & Improvements Subsequent to Acquisition Land Building & Improvements Total Depreciation Accumulated Depreciation Debt Location Franchise SpringHill Suites by Marriott Flagstaff, AZ Ft. Collins, CO Hampton Inn Ft. Collins, CO Hilton Garden Inn Ft. Myers, FL Hyatt Place Ft. Wayne, IN Hampton Inn and Suites Residence Inn by Marriott Ft. Wayne, IN Ft. Worth, TX Hampton Inn SpringHill Suites by Marriott Ft. Worth, TX Ft. Worth, TX Hilton Garden Inn Garden City, NY Germantown, TN Germantown, TN Germantown, TN Hyatt Place Courtyard by Marriott Fairfield Inn and Suites by Marriott Residence Inn by Marriott Glendale, CO Staybridge Suites Goleta, CA Greenville, SC Hilton Garden Inn Hoffman Hampton Inn Estates, IL Houston, TX Houston, TX Indianapolis, IN Indianapolis, IN Jackson, MS Jackson, MS Jacksonville, FL Las Colinas, TX Las Colinas, TX Lombard, IL Louisville, KY Hyatt Place Hilton Garden Inn Hilton Garden Inn SpringHill Suites by Marriott Courtyard by Marriott Courtyard by Marriott Staybridge Suites Aloft Hyatt Place Holiday Inn Express and Suites Hyatt Place Fairfield Inn and Suites by Marriott SpringHill Suites by Marriott Louisville, KY Medford, OR Hampton Inn Minneapolis, MN Minnetonka, MN Nashville, TN New Orleans, LA New Orleans, LA New Orleans, LA Hyatt Place Holiday Inn Express and Suites SpringHill Suites by Marriott Courtyard by Marriott Courtyard by Marriott Courtyard by Marriott 2008 1,398 2004 738 2007 1,300 2009 1,878 9,352 4,363 11,804 16,583 2006 786 6,564 2006 914 2007 1,500 2004 553 2012 903 6,736 8,184 2,698 6,226 4,897 1,398 1,610 738 (840 ) 1,300 (3,870 ) 1,878 14,249 15,647 5,973 6,711 10,964 12,264 12,713 14,591 (4,921 ) (1,859 ) (1,722 ) (1,813 ) 10,726 4,852 10,542 12,778 —(5) — —(5) — 1,732 786 2,518 914 1,263 1,500 2,827 553 3,134 903 8,296 9,082 (2,623 ) 6,459 —(5) 9,254 10,168 9,447 10,947 (1,794 ) (2,670 ) 8,374 8,277 24,637 (3) — 5,525 6,078 9,360 10,263 (1,700 ) (1,043 ) 4,378 9,220 2012 4,200 26,800 69 4,200 26,869 31,069 (1,789 ) 29,280 2005 1,860 5,448 2005 767 2,700 2005 1,083 2011 2,100 2014 4,100 2013 1,200 2013 1,900 2014 — 2014 2,800 5,200 7,900 23,800 14,050 7,330 38,492 33,200 2013 4,012 26,193 2013 7,788 50,846 2005 1,301 2007 698 7,322 8,454 2009 1,700 15,775 2007 781 5,729 2007 898 2012 1,550 6,689 15,475 2013 3,120 21,903 2013 4,880 2004 1,230 34,258 4,788 2,409 1,860 2,124 767 2,273 1,083 1,682 2,100 521 4,100 187 1,200 1,088 1,900 1,682 — 52 2,800 32 4,012 63 7,788 2,424 1,301 2,288 698 268 1,700 2,696 781 1,385 898 1,679 1,550 1,924 3,120 2,656 4,880 1,625 1,230 — — — — — 7,857 9,717 (2,627 ) 4,824 5,591 (1,077 ) 7,090 4,514 7,473 8,556 9,582 11,682 24,321 28,421 14,237 15,437 8,418 10,318 40,174 40,174 33,252 36,052 (1,892 ) (1,557 ) (1,132 ) (917 ) (1,034 ) (1,299 ) (330 ) —(5) 6,664 10,125 — 27,289 11,819 — 14,520 9,284 21,403 (6) 38,875 17,536 — 35,722 26,225 30,237 (1,534 ) 28,703 50,909 58,697 (2,977 ) 55,720 — — 9,746 11,047 10,742 11,440 (3,498 ) (2,829 ) 7,549 8,611 —(5) — 16,043 17,743 (5,148 ) 12,595 8,425 9,206 (2,772 ) 6,434 — — 8,074 8,972 17,154 18,704 (3,127 ) (2,143 ) 5,845 16,561 — —(4) 23,827 26,947 (1,392 ) 25,555 37,939 (7) 36,914 41,794 6,413 7,643 (2,176 ) (1,651 ) 39,618 5,992 —(7) — — 2013 — 32,506 3 — 32,509 32,509 (1,303 ) 31,206 2013 1,000 5,900 2004 777 3,576 2013 1,944 23,739 2013 1,860 21,679 2013 2,490 28,337 1,674 1,000 1,713 777 207 1,944 3,108 1,860 2,626 2,490 7,574 8,574 (650 ) 7,924 3,523 5,289 6,066 (1,776 ) 4,290 23,946 25,890 (2,197 ) 23,693 — — 24,787 26,647 (2,002 ) 24,645 —(5) 30,963 33,453 (2,592 ) 30,861 — F-37 Table of Contents Year Acquired/ Initial Cost Cost Capitalized Total Cost Total Cost Net of Accumulated Mortgage Location New Franchise Constructed Land Building & Improvements Subsequent to Acquisition Land Building & Improvements Total Depreciation Accumulated Depreciation Debt Orleans, LA New Orleans, LA Orlando, FL Orlando, FL Phoenix, AZ Portland, OR Portland, OR Residence Inn by Marriott SpringHill Suites by Marriott Hyatt Place Hyatt Place Hyatt Place Hyatt Place Residence Inn by Marriott Provo, UT Hampton Inn Residence Inn Ridgeland, by Marriott MS Homewood Ridgeland, MS Suites Salt Lake City, UT Residence Inn by Marriott San Diego, CA San Francisco, CA Hampton Inn and Suites Holiday Inn Express and Suites San Francisco, CA DoubleTree San Francisco, CA Four Points by Sheraton Holiday Inn Express and Suites Sandy, UT Scottsdale, AZ Scottsdale, AZ Scottsdale, AZ Smyrna, TN Smyrna, TN Spokane, WA Ventura, CA Vernon Hills, IL Hyatt Place Courtyard by Marriott SpringHill Suites by Marriott Hampton Inn and Suites Hilton Garden Inn Fairfield Inn and Suites by Marriott Hampton Inn and Suites Holiday Inn Express Yrbor City, FL Austin, TX Land Hampton Inn and Suites Corporate Office 2013 1,790 18,099 362 1,790 18,462 20,252 (1,481 ) 18,771 —(5) 2013 2,046 31,049 207 2,046 31,256 33,302 (2,261 ) 31,041 — 2013 3,100 9,152 2013 5,516 9,043 2,024 3,100 2,045 5,516 11,176 14,276 (2,003 ) 12,273 —(6) 11,088 16,604 (1,990 ) 14,614 —(6) 2012 582 4,438 147 582 4,585 5,167 (674 ) 4,493 2009 — 16,713 (3,594 ) — 13,119 13,119 (1,862 ) 11,257 — — 2009 2004 — 909 16,409 2,862 697 2,106 — 909 17,106 4,968 17,106 5,877 (4,864 ) (1,740 ) 12,242 19,600 — 4,137 2007 1,050 10,040 (343 ) 1,050 9,697 10,747 (1,734 ) 9,013 —(5) 2011 1,314 6,036 1,580 1,314 7,616 8,930 (1,414 ) 7,516 — 2012 2,392 17,567 6,915 2,392 24,482 26,874 (2,250 ) 24,624 12,938 2013 2,300 12,850 163 2,300 13,013 15,313 (779 ) 14,534 —(3) 2013 15,545 44,955 4,323 15,545 49,278 64,823 (3,924 ) 60,899 22,711 2014 3,300 35,760 1,618 3,300 37,378 40,678 (1,881 ) 38,797 13,085 2014 1,200 20,050 768 1,200 20,818 22,018 (1,065 ) 20,953 — 2004 720 1,768 1,280 720 3,048 3,768 (960 ) 2,808 —(5) 2012 1,500 9,030 1,012 1,500 10,042 11,542 (1,552 ) 9,990 —(2) 2004 3,225 10,152 2,254 3,225 12,406 15,631 (4,043 ) 11,588 9,300 2004 2,195 7,120 2,314 2,195 9,434 11,629 (3,216 ) 8,413 5,007 2012 1,145 6,855 2012 1,188 10,312 787 1,145 872 1,188 7,642 8,787 (731 ) 8,056 5,151 11,184 12,372 (1,085 ) 11,287 8,157 2004 1,637 3,669 2,263 1,637 5,932 7,569 (2,340 ) 5,229 — 2013 2,200 13,550 1,535 2,200 15,085 17,285 (663 ) 16,622 —(3) 2005 1,198 6,099 203 1,198 6,302 7,500 (1,825 ) 5,675 —(5) 2012 3,600 17,244 1,911 3,600 19,155 22,755 (1,358 ) 21,397 —(5) 2012 — 210 1,014 — 1,224 1,224 (186 ) 1,038 — Parcels 6,675 173,053 — 1,231,841 122,674 — 6,675 173,053 — 1,354,516 6,675 1,527,569 — (179,671 ) 6,675 1,347,898 — 426,533 (1) Properties cross-collateralize the related loan. (2) Properties cross-collateralize the related loan. (3) Properties cross-collateralize the related loan. (4) Properties cross-collateralize the related loan. (5) Properties cross-collateralize the related loan. (6) Properties cross-collateralize the related loan. (7) Properties cross-collateralize the related loan. F-38 Table of Contents SUMMIT HOTEL PROPERTIES, INC. / SUMMIT HOTEL OP, LP Notes to Schedule III - Real Estate and Accumulated Depreciation As of December 31, 2014 (in thousands) ASSET BASIS (a) Balance at December 31, 2011 Additions to land, buildings and improvements Disposition of land, buildings and improvements Impairment loss Balance at December 31, 2012 Additions to land, buildings and improvements Disposition of land, buildings and improvements Impairment loss Balance at December 31, 2013 Additions to land, buildings and improvements Disposition of land, buildings and improvements Impairment loss Balance at December 31, 2014 ACCUMULATED DEPRECIATION (b) Balance at December 31, 2011 Depreciation for the period ended December 31, 2012 Depreciation on assets sold or disposed Balance at December 31, 2012 Depreciation for the period ended December 31, 2013 Depreciation on assets sold or disposed Balance at December 31, 2013 Depreciation for the period ended December 31, 2014 Depreciation on assets sold or disposed Balance at December 31, 2014 $ $ $ $ $ $ $ $ 645,339 294,310 (35,477 ) (2,965 ) 901,207 531,207 (74,282 ) (9,044 ) 1,349,088 263,182 (75,454 ) (9,247 ) 1,527,569 126,168 31,732 (11,693 ) 146,207 50,445 (23,503 ) 173,149 63,291 (56,769 ) 179,671 (c) The aggregate cost of land, buildings, furniture and equipment for Federal income tax purposes is approximately $1,168 million. (d) Depreciation is computed based upon the following useful lives: Buildings and improvements 25-40 years Furniture and equipment 2-15 years (e) (f) We have mortgages payable on the properties as noted. Additional mortgage information can be found in Note 11 - Debt to the consolidated financial statements. The negative balance for costs capitalized subsequent to acquisition could include out-parcels sold, disposal of assets, and impairment loss that was recorded. F-39 Summit Hotel Properties, Inc. Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (Dollars in Thousands) Year Ended 12/31/2014 Year Ended 12/31/2013 Year Ended 12/31/2012 For the Period 2/14/11 through 12/31/2011 For the Period 1/1/11 through 2/13/2011 Year Ended 12/31/2010 Exhibit 12.1 $ $ $ $ $ 21,175 $ 26,968 1,549 463 50,155 $ 26,968 $ 253 1,549 28,770 $ 11,519 $ 20,137 1,854 581 34,091 $ 20,137 $ 400 1,854 22,391 $ (7,675 ) $ 14,909 2,288 599 10,121 $ 14,909 $ 53 2,288 17,250 $ (6,091 ) $ 9,993 1,199 524 5,625 $ 9,993 $ — 1,199 11,192 $ (4,549 ) $ 3,435 94 75 (945 ) $ 3,435 $ — 94 3,529 $ (20,021 ) 21,575 1,602 599 3,755 21,575 — 1,602 23,177 16,588 $ 14,590 $ 4,625 $ 411 $ — $ — 1.11 (1) 0.92 (2) 0.46 (3) 0.48 (4) (0.27) (5) 0.16 (6) 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 Amortization of financing costs Total Fixed Charges Preferred Dividends Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (1) Earnings were more than fixed charges and preferred stock dividends. The total amount of fixed charges and preferred stock dividends for this period was approximately $45.4 million and the total amount of earnings was approximately $50.2 million. The amount of the adequacy, or the amount of earnings in excess of fixed charges and preferred stock dividends, was approximately $4.8 million. (2) 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 $37.0 million and the total amount of earnings was approximately $34.1 million. The amount of the deficiency, or the amount of fixed charges and preferred stock dividends in excess of earnings, was approximately $2.9 million. (3) 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 $21.9 million and the total amount of earnings was approximately $10.1 million. The amount of the deficiency, or the amount of fixed charges and preferred stock dividends in excess of earnings, was approximately $11.8 million. (4) 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 $11.6 million and the total amount of earnings was approximately $5.6 million. The amount of the deficiency, or the amount of fixed charges and preferred stock dividends in excess of earnings, was approximately $6.0 million. (5) 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 $3.5 million and the total amount of earnings was approximately ($0.9) million. The amount of the deficiency, or the amount of fixed charges and preferred stock dividends in excess of earnings, was approximately $4.5 million. (6) 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 $23.2 million and the total amount of earnings was approximately $3.8 million. The amount of the deficiency, or the amount of fixed charges and preferred stock dividends in excess of earnings, was approximately $19.4 million. List of Subsidiaries of Summit Hotel Properties, Inc. Exhibit 21.1 ENTITY Summit Hotel TRS, Inc. Summit Hotel GP, LLC Summit Hotel OP, LP Summit Hospitality I, LLC Summit Hospitality V, LLC Summit Hospitality VI, LLC Summit Hospitality VII, LLC Summit Hospitality VIII, LLC Summit Hospitality IX, LLC Summit Hospitality X, LLC Summit Hospitality XI, LLC Summit Hospitality XII, LLC Summit Hospitality XIII, LLC Summit Hospitality XIV, LLC Summit Hospitality XV, LLC Summit Hospitality 17, LLC Summit Hospitality 18, LLC Summit Hospitality 19, LLC Summit Hospitality 20, LLC Summit Hospitality 21, LLC Summit Hospitality 22, LLC Summit Hospitality 23, LLC Summit Hospitality 24, LLC Summit Hospitality 25, LLC Summit Hospitality 26, LLC Summit Hospitality 009, LLC Summit Hospitality 026 AZ, LLC Summit Hospitality 039, LLC Summit Hospitality 057, LLC Summit Hospitality 060, LLC Summit Hospitality 066, LLC Summit Hospitality 079, LLC Summit Hospitality 081, LLC Summit Hospitality 082, LLC Summit Hospitality 084, LLC Summit Hospitality 085, LLC Summit Hospitality 093, LLC Summit Hospitality 100, LLC Summit Hospitality 102, LLC Summit Hospitality 104, LLC Summit Hospitality 110, LLC Summit Hospitality 111, LLC Summit Hospitality 114, LLC Summit Hospitality 115, LLC Summit Hospitality 116, LLC Summit Hospitality 117, LLC Summit Hospitality 118, LLC Summit Hospitality 119, LLC Summit Hospitality 120, LLC Summit Hospitality 121, LLC Summit Hospitality 122, LLC Summit Hospitality 123, LLC Summit Hospitality 124, LLC Summit Hospitality 125, LLC STATE OF INCORPORATION OR ORGANIZATION Delaware Delaware Delaware Delaware South Dakota Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware ENTITY Summit Group of Scottsdale, Arizona LLC Summit IHG JV, LLC San Fran JV, LLC Carnegie Hotels, LLC Carnegie Hotel MT, LLC STATE OF INCORPORATION OR ORGANIZATION South Dakota Delaware Delaware Georgia Georgia Consent of Independent Registered Public Accounting Firm Exhibit 23.1 The Board of Directors Summit Hotel Properties, Inc.: We consent to the incorporation by reference in the registration statements (No. 333-179503 and No. 333-187624) on Form S-3 and the registration statement (No. 333-172145) on Form S-8 of Summit Hotel Properties, Inc. of our report dated February 26, 2013, except as to notes 21 and 22, which are as of March 25, 2014, with respect to the consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows of Summit Hotel Properties, Inc. and subsidiaries for the year ended December 31, 2012, which report appears in the December 31, 2014 annual report on Form 10-K of Summit Hotel Properties, Inc. /s/ KPMG LLP Chicago, Illinois March 2, 2015 We consent to the incorporation by reference in the following Registration Statements: Consent of Independent Registered Public Accounting Firm (1) Registration Statement (Form S-3 No. 333-179503) of Summit Hotel Properties, Inc., (2) Registration Statement (Form S-3 No. 333-187624) of Summit Hotel Properties, Inc., and (3) Registration Statement (Form S-8 No. 333-172145) pertaining to the 2011 Equity Incentive Plan of Summit Hotel Properties, Inc. of our reports dated March 2, 2015, with respect to the consolidated financial statements and Schedule III of Summit Hotel Properties, Inc. and the effectiveness of internal control over financial reporting of Summit Hotel Properties, Inc. included in this Annual Report (Form 10-K) of Summit Hotel Properties, Inc. for the year ended December 31, 2014. Exhibit 23.2 /s/ Ernst & Young LLP Austin, Texas March 2, 2015 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.; EXHIBIT 31.1 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: March 2, 2015 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, Greg A. Dowell, certify that: 1. I have reviewed this Annual Report on Form 10-K of Summit Hotel Properties, Inc.; EXHIBIT 31.2 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: March 2, 2015 Summit Hotel Properties, Inc. By: /s/ Greg A. Dowell Greg A. Dowell Executive Vice President, Chief Financial Officer and Treasurer (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, 2014 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: March 2, 2015 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, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Greg A. Dowell, Executive Vice President, Chief Financial Officer and Treasurer 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: March 2, 2015 Summit Hotel Properties, Inc. By: /s/ Greg A. Dowell Greg A. Dowell Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer) 

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