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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
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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.
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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.
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• 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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.”
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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.
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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
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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.
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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
$
$
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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,
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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
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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
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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
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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
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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.
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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
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(“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)