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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended March 31, 2012

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from              to             .

Commission File Number: 001-34087

 

 

SUPERTEL HOSPITALITY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   52-1889548

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

1800 W. Pasewalk Ave., Ste. 200, Norfolk, NE 68701

(Address of principal executive offices)

Telephone number: (402) 371-2520

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Small reporting company   x

Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of April 30, 2012, there were 23,074,752 shares of common stock, par value $.01 per share, outstanding.

 

 

 


Table of Contents

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

          Page
Number
 

Part I.

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
  

Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

     3   
  

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011

     4   
  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011

     5   
  

Notes to Consolidated Financial Statements

     6   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     42   

Item 4.

  

Controls and Procedures

     42   

Part II.

   OTHER INFORMATION   

Item 6.

   Exhibits      43   

 

2


Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share and share data)

 

     As of  
     March 31,
2012
    December 31,
2011
 
     (unaudited)        

ASSETS

    

Investments in hotel properties

   $ 256,343      $ 255,677   

Less accumulated depreciation

     77,767        76,777   
  

 

 

   

 

 

 
     178,576        178,900   

Cash and cash equivalents

     9,991        279   

Accounts receivable, net of allowance for doubtful accounts of $173 and $194

     2,251        1,891   

Prepaid expenses and other assets

     10,065        8,917   

Deferred financing costs, net

     718        850   

Investment in hotel properties, held for sale, net

     26,394        30,335   
  

 

 

   

 

 

 
   $ 227,995      $ 221,172   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

LIABILITIES

    

Accounts payable, accrued expenses and other liabilities

   $ 11,440      $ 10,704   

Derivative liabilities, at fair value

     16,902        —     

Debt related to hotel properties held for sale

     25,920        35,173   

Long-term debt

     120,564        130,672   
  

 

 

   

 

 

 
     174,826        176,549   
  

 

 

   

 

 

 

Redeemable noncontrolling interest in consolidated partnership, at redemption value

     114        114   

Redeemable preferred stock

    

10% Series B, 800,000 shares authorized; $.01 par value, 332,500 shares outstanding, liquidation preference of $8,312

     7,662        7,662   

EQUITY

    

Shareholders’ equity

    

Preferred stock, 40,000,000 shares authorized;

    

8% Series A, 2,500,000 shares authorized, $.01 par value, 803,270 shares outstanding, liquidation preference of $8,033

     8        8   

6.25% Series C, 3,000,000 shares authorized, $.01 par value, 3,000,000 shares outstanding, liquidation preference of $30,000

     30        —     

Common stock, $.01 par value, 100,000,000 shares authorized; 23,074,752 and 23,070,387 shares outstanding

     231        231   

Common stock warrants

     252        252   

Additional paid-in capital

     134,766        121,619   

Distributions and accumulated losses in excess of retained earnings

     (90,020     (85,398
  

 

 

   

 

 

 

Total shareholders’ equity

     45,267        36,712   

Noncontrolling interest

    

Noncontrolling interest in consolidated partnership, redemption value $102 and $64

     126        135   
  

 

 

   

 

 

 

Total equity

     45,393        36,847   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    
   $ 227,995      $ 221,172   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

 

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited – in thousands, except per share data)

 

     Three Months Ended
March 31,
 
     2012     2011  

REVENUES

    

Room rentals and other hotel services

   $ 16,681      $ 16,270   
  

 

 

   

 

 

 

EXPENSES

    

Hotel and property operations

     13,541        13,488   

Depreciation and amortization

     2,124        2,247   

General and administrative

     1,093        1,103   

Termination cost

     —          540   
  

 

 

   

 

 

 
     16,758        17,378   
  

 

 

   

 

 

 

EARNINGS BEFORE NET LOSS ON DISPOSITIONS OF ASSETS, OTHER INCOME, INTEREST EXPENSE AND INCOME TAXES

     (77     (1,108

Net loss on dispositions of assets

     (4     (5

Other income (expense)

     (1,212     85   

Interest expense

     (2,116     (2,336

Impairment

     381        (193
  

 

 

   

 

 

 

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     (3,028     (3,557

Income tax benefit

     464        609   
  

 

 

   

 

 

 

LOSS FROM CONTINUING OPERATIONS

     (2,564     (2,948

Loss from discontinued operations, net of tax

     (1,407     (763
  

 

 

   

 

 

 

NET LOSS

     (3,971     (3,711

Noncontrolling interest

     6        11   
  

 

 

   

 

 

 

NET LOSS ATTRIBUTABLE TO CONTROLLING INTERESTS

     (3,965     (3,700

Preferred stock dividends

     (657     (368
  

 

 

   

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS

   $ (4,622   $ (4,068
  

 

 

   

 

 

 

NET LOSS PER COMMON SHARE - BASIC AND DILUTED

    

EPS from continuing operations

   $ (0.14   $ (0.15
  

 

 

   

 

 

 

EPS from discontinued operations

   $ (0.06   $ (0.03
  

 

 

   

 

 

 

EPS basic and diluted

   $ (0.20   $ (0.18
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

 

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited – in thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

     (3,971   $ (3,711

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     2,170        2,621   

Amortization of intangible assets and deferred financing costs

     132        118   

(Gain) loss on dispositions of assets

     (490     19   

Amortization of stock option expense

     —          14   

Provision for impairment loss

     1,434        449   

Unrecognized loss on derivative instruments

     1,213        —     

Deferred income taxes

     (662     (1,073

Changes in operating assets and liabilities:

    

Increase in assets

     (558     (568

Increase in liabilities

     447        829   
  

 

 

   

 

 

 

Net cash used in operating activities

     (285     (1,302
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Additions to hotel properties

     (1,569     (990

Proceeds from sale of hotel assets

     2,720        2,237   
  

 

 

   

 

 

 

Net cash provided by investing activities

     1,151        1,247   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Deferred financing costs

     —          (47

Principal payments on long-term debt

     (21,361     (3,585

Proceeds from long-term debt, net

     2,000        4,055   

Distributions to noncontrolling interest

     (3     (14

Common stock offering

     3        —     

Issuance of preferred stock and warrants

     28,575        —     

Dividends paid to preferred shareholders

     (368     (368
  

 

 

   

 

 

 

Net cash provided by financing activities

     8,846        41   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     9,712        (14

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     279        333   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 9,991      $ 319   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

    

Interest paid, net of amounts capitalized

   $ 2,660      $ 2,985   
  

 

 

   

 

 

 

SCHEDULE OF NONCASH FINANCING ACTIVITIES

    

Dividends declared - preferred

   $ 657      $ 368   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

 

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

General

Supertel Hospitality, Inc. (SHI) was incorporated in Virginia on August 23, 1994. SHI is a self-administered real estate investment trust (REIT) for federal income tax purposes.

SHI, through its wholly owned subsidiaries, Supertel Hospitality REIT Trust and E&P REIT Trust (collectively, the “Company”) owns a controlling interest in Supertel Limited Partnership (“SLP”) and E&P Financing Limited Partnership (“E&P LP”). All of the Company’s interests in 88 properties with the exception of furniture, fixtures and equipment on 68 properties held by TRS Leasing, Inc. and its subsidiaries are held directly or indirectly by E&P LP, Supertel Limited Partnership or Solomon’s Beacon Inn Limited Partnership (SBILP) (collectively, the “Partnerships”). The Company’s interests in ten properties are held directly by either SPPR-Hotels, LLC (SHLLC), SPPR-South Bend, LLC (SSBLLC), or SPPR-BMI, LLC (SBMILLC). SHI, through Supertel Hospitality REIT Trust, is the sole general partner in Supertel Limited Partnership and at March 31, 2012 owned approximately 99% of the partnership interests in Supertel Limited Partnership. Supertel Limited Partnership is the general partner in SBILP. At March 31, 2012, Supertel Limited Partnership and SHI owned 99% and 1% interests in SBILP, respectively, and SHI owned 100% of Supertel Hospitality Management, Inc, SPPR Holdings, Inc. (SPPRHI), and SPPR-BMI Holdings, Inc. (SBMIHI). Supertel Limited Partnership and SBMIHI owned 99% and 1% of SBMILLC, respectively. Supertel Limited Partnership and SPPRHI owned 99% and 1% of SHLLC, respectively, and Supertel Limited Partnership owned 100% of SSBLLC. References to “we”, “our”, and “us”, herein refer to Supertel Hospitality, Inc., including as the context requires, its direct and indirect subsidiaries.

As of March 31, 2012, the Company owned 98 limited service hotels. All of the hotels are leased to our wholly owned taxable REIT subsidiary, TRS Leasing, Inc. (“TRS”), and its wholly owned subsidiaries (collectively “TRS Lessee”), and are managed by Hospitality Management Advisors, Inc. (“HMA”), Strand Development Company, LLC (“Strand”), Kinseth Hotel Corporation (“Kinseth”), and HLC Hotels Inc. (“HLC”).

The hotel management agreement, as amended, between TRS Lessee and Royco Hotels, the previous manager of 95 of the Company’s hotels, was terminated effective May 31, 2011. The agreement provided for Royco Hotels to operate and manage the hotels through December 31, 2011, with extension to December 31, 2016 upon achievement of average annual net operating income of at least 10% of the Company’s investment in the hotels. Under the agreement, Royco Hotels received a base management fee ranging from 4.25% to 3.0% of gross hotel revenues as revenues increased above thresholds that ranged from up to $75 million to over $100 million, and was entitled, if earned, to an annual incentive fee of 10% of up to the first $1.0 million of annual net operating income in excess of 10% of the Company’s investment in the hotels, and 20% of the excess above $1.0 million. On March 25, 2011, Royco Hotels and the Company settled a lawsuit filed by Royco Hotels against the Company. The settlement agreement between the parties provides that the Company will pay an aggregate of $590,000 in varying amounts of installments through July 1, 2013 to Royco Hotels (of which $300,000 has been paid as of March 31, 2012) as financial settlement of the lawsuit and fees owed to Royco Hotels as termination fees for hotels that have been sold.

On April 21, 2011, the Company through TRS Lessee entered into separate management agreements with HMA, Strand and Kinseth as eligible independent operators to manage 95 of the Company’s hotels (two of which were subsequently sold) commencing June 1, 2011. These hotels were previously managed by Royco Hotels.

 

6


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

HMA manages 24 Company hotels in Arkansas, Louisiana, Tennessee, Kentucky, Indiana, Virginia and Florida. Strand manages the Company’s seven economy extended-stay hotels in Georgia and South Carolina as well as 16 additional Company hotels located in Georgia, Delaware, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia. Kinseth manages 44 Company hotels in eight states primarily in the Midwest. Each of the management agreements expire on May 31, 2014 and will renew for additional terms of one year unless either party to the agreement gives the other party written notice of termination at least 90 days before the end of a term.

Each of HMA, Strand and Kinseth receives a monthly management fee with respect to the hotels they manage equal to 3.5% of the gross hotel income and 2.25% of hotel net operating income (“NOI”). NOI is equal to gross hotel income less operating expenses (exclusive of management fees, certain insurance premiums and employee bonuses, and personal and real property taxes).

SLP owns 7 hotels which are operated under the Masters Inn name. TRS, the lessee of the hotels, entered into a management agreement with HLC, an affiliate of the sellers of the 7 hotels. The management agreement, as amended, provides for HLC to operate and manage the hotels through December 31, 2013 and receive management fees equal to 5.0% of the gross revenues derived from the operation of the hotels and incentive fees equal to 10% of the annual operating income of the hotels in excess of 10.5% of the Company’s investment in the hotels.

The management agreements generally require TRS Lessee to fund debt service, working capital needs, capital expenditures and third-party operating expenses for the management companies excluding those expenses not related to the operation of the hotels. TRS Lessee is responsible for obtaining and maintaining insurance policies with respect to the hotels.

The hotel industry is seasonal in nature. Generally, occupancy rates, revenues and operating results for hotels operating in the geographic areas in which we operate are greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters of the year.

Consolidated Financial Statements

The Company has prepared the condensed consolidated balance sheet as of March 31, 2012, the condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011, and the condensed consolidated statements of cash flows for the three months ended March 31, 2012 and 2011 without audit, in conformity with U. S. generally accepted accounting principles. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position as of March 31, 2012 and the results of operations and cash flows for all periods presented. Balance sheet data as of December 31, 2011 has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Certain information and footnote disclosures, normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the operating results for the full year.

 

7


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

Derivative Liabilities

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, fair value accounting requires bifurcation of certain embedded derivative instruments such as conversion features in convertible debt or equity instruments, and their measurement at fair value for accounting purposes. The conversion feature embedded in the Series C convertible preferred stock was evaluated, and it was determined that the conversion features should be bifurcated from its host instrument and accounted for as a freestanding derivative. In addition the common stock warrants issued with the Series C convertible preferred stock were also determined to be freestanding derivatives. The following summarizes our derivative liabilities at March 31, 2012 and December 31, 2011:

 

(in thousands)    March 31,      December 31,  

Description

   2012      2011  

Series C convertible preferred embedded derivative

   $ 8,009       $ —     

Warrant derivative

     8,893         —     
  

 

 

    

 

 

 

Derivative liabilities, at fair value

   $ 16,902       $ —     
  

 

 

    

 

 

 

The Series C convertible preferred stock embedded derivative and the warrant derivative were initially recorded at their fair value of $7.1 million and $8.6 million, respectively, on the date of issuance, February 1, 2012 and February 15, 2012. At March 31, 2012 the carrying amounts of the derivatives were adjusted to their fair value of $8.0 million and $8.9 million, respectively, with a corresponding adjustment to other income (expense). The derivatives are reported as a derivative liability on the accompanying consolidated balance sheet as of March 31, 2012 and will be adjusted to their fair values at each reporting date.

The amendment to the Company’s articles of incorporation, setting forth the terms of the Series C convertible preferred stock, the host instrument, includes an antidilution provision that requires an adjustment in the common stock conversion ratio should subsequent issuances of the Company’s common stock be issued below the instruments’ original conversion price of $1.00 per share. Accordingly we bifurcated the embedded conversion feature which is shown as a derivative liability recorded at fair value on the accompanying consolidated balance sheet as of March 31, 2012.

The agreement setting forth the terms of the common stock warrants issued to the holders of the Series C convertible preferred stock also includes an antidilution provision that requires a reduction in the warrant’s exercise price of $1.20 should the conversion ratio of the Series C convertible preferred stock be adjusted due to antidilution provisions. Accordingly, the warrants do not qualify for equity classification, and, as a result, the fair value of the derivative is shown as a derivative liability on the accompanying consolidated balance sheets as of March 31, 2012.

The company used a Monte Carlo simulation model to value the Series C convertible preferred stock embedded derivatives and the warrants.

 

8


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities, to perform impairment assessments, and for disclosure purposes. In February 2012 the Company issued financial instruments with features that were determined to be derivative liabilities, and as a result must be measured at fair value on a recurring basis under Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820-10 Fair Value Measurements and Disclosures – Overall. In addition we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures – Overall – Subsequent Measurement, for our nonfinancial assets which include our held for sale hotels, and the disclosure of the fair value of our debt.

The Company’s financial instruments, the derivative liabilities, and the non financial assets, our held for sale hotels, are measured using inputs from level 3 of the fair value hierarchy.

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 non- financial asset valuations use unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data. Financial asset and liability valuation inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the liability; this includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Non financial assets

During the three months ending March 31, 2012, Level 3 inputs were used to determine non-cash impairment losses of $1.8 million on ten held for sale hotels and recovery of previously recorded impairment for which fair value exceeded management’s previous estimates in the amount of $0.4 million on two hotels that were reclassified into held for use. There was no impairment on held for use hotels.

During the three months ending March 31, 2011, Level 3 inputs were used to determine non-cash impairment losses of $0.1 million on five hotels held for sale, $0.2 million on three hotels subsequently sold and $0.2 million on one hotel placed that was subsequently placed back into held for use. The Company also recorded a recovery of $25,000 of previously recorded impairment loss on one hotel at the time of sale. There was no impairment on held for use hotels.

In accordance with ASC 360-10-36 Property Plant and Equipment – Overall – Subsequent Measurements, the Company determines the fair value of an asset held for sale based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales.

 

9


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

Financial instruments

As of March 31, 2012, the fair value of the derivative liabilities in connection with the February 2012 issuance was determined by the Monte Carlo simulation method. The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error.

The fair value of the Company’s financial liabilities carried at fair value and measured on a recurring basis as of March 31, 2012 are as follows (in thousands):

 

Description

   Level 1      Level 2      Level 3  

Series C convertible preferred embedded derivative

   $ —         $ —         $ 8,009   

Warrant derivative

     —           —           8,893   
  

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 16,902   
  

 

 

    

 

 

    

 

 

 

There were no transfers between levels during the three months ended March 31, 2012 and the three months ended March 31, 2011.

The following table presents changes during the three months ended March 31, 2012 in Level 3 liabilities measured at fair market value on a recurring basis, and the realized and unrealized gains (losses) recorded in the Consolidated Statement of Operations during that period. There were no level 3 assets or liabilities measured on a recurring basis during the three months ended March 31, 2011.

 

     Fair Value at
December 31,
2011
     Net Realized
and
Unrealized
(Gains) Losses
Included in
Income
     Purchases,
Sales,
Issuances
and
Settlements,
Net
     Gross
Transfers
In
     Gross
Transfers
Out
     Fair
Value at
March 31,
2012
     Changes in
Unrealized
(Gains)
Losses
Included in
Income on
Instruments
Held at
March 31,
2012
 

Series C convertible preferred embedded derivative

   $ —         $ 934       $ 7,075       $ —         $ —         $ 8,009       $ 934   

Warrant derivative

     —           279         8,614         —           —           8,893         279   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 1,213       $ 15,689       $ —         $ —         $ 16,902       $ 1,213   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The carrying value and estimated fair value of the Company’s debt as of March 31, 2012 and December 31, 2011 are presented in the table below (in thousands):

 

     Carrying Value      Estimated Fair Value  
     3/31/2012      12/31/2011      3/31/2012      12/31/2011  

Continuing operations

   $ 120,564       $ 130,672       $ 122,301       $ 132,665   

Discontinued operations

     25,920         35,173         26,879         35,781   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 146,484       $ 165,845       $ 149,180       $ 168,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Discontinued Operations - Hotel Properties Held for Sale and Sold

During the three months ended March 31, 2012, two of the Company’s held for sale hotels were reclassified as held for use. The reclassification of these hotels was due to changes in the properties’ market condition. In addition, four more properties were declared held for sale. The effect of these changes relative to our previously filed financial statements was to decrease the loss from continuing operations by $0.3 million for the three months ended March 31, 2011. At March 31, 2012 the Company had a total of twenty four hotels identified that it intends to sell and that met the Company’s criteria to be classified as held for sale. As a result of observed market activity and discussions with brokers, the Company recorded impairment loss of $1.8 million on ten of these hotels for the three months ended March 31, 2012. The Company also recorded recovery of $0.4 million of previously recorded impairment on the two hotels which were reclassified from held for sale to held for use. During the three months ended March 31, 2011, there was an impairment loss of $0.1 million on five hotels held for sale, a loss of $0.2 million on three hotels subsequently sold, and a recovery of $25,000 of previously recorded impairment loss on one hotel at the time of sale. There was also impairment of $0.2 million on one hotel that was subsequently placed back into held for use.

The fair value of an asset held for sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales. We record impairment charges and write down the carrying value of an asset if the carrying value exceeds the estimated selling price less costs to sell.

In accordance with FASB ASC 205-20 Presentation of Financial Statements – Discontinued Operations, gains, losses and impairment losses on hotel properties sold or classified as held for sale are presented in discontinued operations. The operating results of the hotels held for sale and sold are included in discontinued operations and are summarized below. The operating results for the three months ended March 31, 2012 include twenty four hotels held for sale and two hotels that were sold in 2012, and two hotels sold in 2011. The operating results for the three months ended March 31, 2011 include twenty four hotels held for sale, two hotels that were sold in 2012, and eleven hotels that were sold prior to 2012 (in thousands):

 

     Three Months Ended  
     March 31,  
     2012     2011  

Revenues

   $ 4,189      $ 5,305   

Hotel and property operations expenses

     (3,865     (5,071

Interest expense

     (562     (767

Depreciation expense

     (46     (374

Net gain (loss) on disposition of assets

     494        (14

General and administrative expense

     —          (50

Impairment loss

     (1,815     (256

Income tax benefit

     198        464   
  

 

 

   

 

 

 
   $ (1,407   $ (763
  

 

 

   

 

 

 

 

11


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of any dilutive potential common shares outstanding during the period, if any. The computation of basic and diluted earnings per common share is presented below:

 

(dollars in thousands, except per share data)    For the year ended March 31,  
     2012     2011  

Basic and Diluted Earnings per Share Calculation:

    

Numerator:

    

Net loss attributable to common shareholders:

    

* Continuing operations

   $ (3,218   $ (3,310

* Discontinued operations

     (1,404     (758
  

 

 

   

 

 

 

   Net loss attributable to common shareholders - total

   $ (4,622   $ (4,068

Denominator:

    

Weighted average number of common shares - basic and diluted

     23,070,435        22,917,509   

Basic and Diluted Earnings Per Common Share:

    

Net loss attributable to common shareholders per weighted average common share:

    

* Continuing operations

   $ (0.14   $ (0.15

* Discontinued operations

     (0.06     (0.03
  

 

 

   

 

 

 

Total - Basic and Diluted

   $ (0.20   $ (0.18
  

 

 

   

 

 

 

 

* The net loss attributable to noncontrolling interest is allocated between continuing and discontinued operations for the purpose of the EPS calculation.

Noncontrolling Interest of Common and Preferred Units in SLP

At March 31, 2012 and 2011 there were 97,008 and 158,161, respectively, of SLP common operating units outstanding held by the limited partners. These units have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts allocated to the limited partners holding common operating units (whose units are convertible on a one-to-one basis to common shares) since their share of income (loss) would be added back to income (loss). During the second quarter of 2011, 61,153 shares of common stock were issued in connection with the redemption of 61,153 common operating units. In addition, the 11,424 and 51,035 shares of SLP preferred operating units held by the limited partners, as of March 31, 2012 and 2011 respectively, are antidilutive.

Stock Options

The potential common shares represented by outstanding stock options for the three months ended March 31, 2012 and 2011 totaled 215,500 and 255,143, respectively, all of which are antidilutive.

Warrants

On February 1, 2012 and February 15, 2012, in connection with the purchase of the Series C convertible preferred stock, the Company issued warrants to purchase 30,000,000 shares of the

 

12


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

Company’s common stock. Subject to the Beneficial Ownership Limitation, these warrants are exercisable at any time on or before January 31, 2017 at an exercisable price of $1.20 per share of common stock. The exercisable price may be paid in cash, or the holder may also elect to pay the exercise price by having the Company withhold a sufficient number of shares from the exercise with a market value equal to the exercise price. These warrants are anti-dilutive due to the Company’s net losses, and are therefore excluded from the computation of diluted earnings per share.

On May 10, 2010 the Company issued warrants to purchase 299,403 shares of Company common stock. These warrants are exercisable for a period of three years from the date of issuance at an exercise price of $2.50 per share of common stock. These warrants are anti-dilutive due to the Company’s net losses, and are therefore excluded from the computation of diluted earnings per share.

Series C Convertible Preferred Stock

In two closings on February 1, 2012 and February 15, 2012, we completed the sale to Real Estate Strategies, L.P. of 3,000,000 shares of Series C convertible preferred stock in a private offering. The Series C convertible preferred stock is anti-dilutive due to the Company’s net losses, and is therefore excluded from the computation of diluted earnings per share.

Debt Financing

A summary of the Company’s long term debt as of March 31, 2012 is as follows (in thousands):

 

     Balance      Interest
Rate
    Maturity  

Fixed Rate Debt

       

Lender

       

First National Bank

   $ 840         5.00     5/2012   

GE Capital Corporation

     1,088         5.00     12/2012   

Greenwich Capital Financial Products

     28,994         7.50     12/2012   

Great Western Bank

     24,088         6.00     6/2013   

Elkhorn Valley Bank

     926         5.75     9/2013   

GE Capital Corporation

     19,399         7.17     12/2014   

Citigroup Global Markets Realty Corp

     12,940         5.97     11/2015   

Elkhorn Valley Bank

     3,026         6.25     6/2016   

GE Capital Corporation

     12,573         7.17     2/2017   

GE Capital Corporation

     12,346         7.69     6/2017   

Wachovia Bank

     8,436         7.38     3/2020   
  

 

 

      

Total Fixed Rate Debt

   $ 124,656        
  

 

 

      

Variable Rate Debt

       

Lender

       

GE Capital Corporation

     19,489         3.98     2/2018   

GE Capital Corporation

     2,339         4.54     2/2018   
  

 

 

      

Total Variable Rate Debt

   $ 21,828        
  

 

 

      

Subtotal debt

   $ 146,484        
  

 

 

      

Less: debt associated with hotel properties held for sale

     25,920        
  

 

 

      

Total Long-Term Debt

   $ 120,564        
  

 

 

      

On January 18, 2012, the Company sold a Super 8 in Fayetteville, Arkansas (83 rooms) for approximately $1.56 million with a $0.4 million gain. The proceeds were used primarily to reduce a term loan with Great Western Bank.

 

13


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

On February 2, 2012, we paid $11.8 million on the Great Western Bank revolving line of credit, bringing the balance to zero. The available capacity is expected to be used in part to fund the $20 million obligation for hotel investment. The payment was funded with a portion of the net proceeds from the Series C convertible preferred stock.

On February 3, 2012, the Company paid in full the $5.0 million balance on the revolving credit facility with Elkhorn Valley Bank, with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

On February 16, 2012, the Company paid in full the $2.1 million note payable to Fredericksburg North Investors, LLC, with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

On February 21, 2012, the Company amended its credit facilities with Great Western Bank to extend the maturity date of all loans to June 30, 2013.

On March 1, 2012, the Company amended its credit facility with First National Bank of Omaha to extend the maturity date to May 1, 2012. This debt was paid in full on April 20, 2012.

On March 27, 2012, the Company sold a Super 8 in Muscatine, Iowa (63 rooms) for approximately $1.3 million. The proceeds were used primarily to reduce a term loan with Great Western Bank, with the remaining amount used to reduce the revolving line of credit with Great Western Bank.

On March 29, 2012, the Company amended its credit facilities with General Electric Capital Corporation. These changes were reflected in the notes to the Company’s consolidated financial statements included in its Form 10-K for the year ended December 31, 2011.

At March 31, 2012, the Company had long-term debt of $120.6 million associated with assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 3.4 years and a weighted average interest rate of 6.4%. The weighted average fixed rate was 6.9%, and the weighted average variable rate was 4.0%. Debt held on properties in continuing operations is classified as held for use. Debt is classified as held for sale if the properties collateralizing it are included in discontinued operations. Debt associated with assets held for sale is classified as a short-term liability due within the next year irrespective of whether the notes and mortgages evidencing such debt mature within the next year. Aggregate annual principal payments on debt associated with assets held for use for the remainder of 2012 and thereafter, and debt associated with assets held for sale, are as follows (in thousands):

 

     Held For Sale      Held For Use      TOTAL  

Remainder of 2012

   $ 25,920       $ 36,357       $ 62,277   

                        2013

     —           18,908         18,908   

                        2014

     —           20,674         20,674   

                        2015

     —           14,287         14,287   

                        2016

     —           4,855         4,855   

              Thereafter

     —           25,483         25,483   
  

 

 

    

 

 

    

 

 

 
   $ 25,920       $ 120,564       $ 146,484   
  

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

At March 31, 2012, the Company had $62.3 million of principal due in 2012. Of this amount, $40.9 million of the principal due is associated with either assets held for use or assets held for sale, and matures in 2012 pursuant to the notes and mortgages evidencing such debt. The remaining $21.4 million is associated with assets held for sale and is not contractually due in 2012 unless the related assets are sold. The maturities comprising the $40.9 million consist of:

 

 

a $29.0 million balance on the loan with Greenwich Capital;

 

 

a $0.8 million note payable to First National Bank of Omaha;

 

 

a $7.0 million principal prepayment required on our credit facilities with General Electric Capital Corporation:

 

 

a $1.1 million balance on a note payable to General Electric Capital Corporation; and

 

 

approximately $3.0 million of principal amortization on mortgage loans.

The $29.0 million balance of the loan with Greenwich Capital matures in December 2012. The loan is secured by 32 hotels. The Company may break up the portfolio into several tranches and secure financing with several local and / or regional banks, or it may consider other financing options. The process to identify lenders began in March 2012.

The $0.8 million note payable to First National Bank of Omaha was paid in full on April 20, 2012 with a portion of the proceeds from the sale of a Super 8 in El Dorado, Kansas (49 rooms).

On March 29, 2012, our credit facilities with General Electric Capital Corporation were amended to, among other things, require a principal prepayment of $7 million on or before December 31, 2012. This debt is expected to be funded from the proceeds of refinancing our hotels secured by Greenwich Capital.

The $1.1 million note payable to General Electric Capital Corporation is expected to be paid with available funds at the end of 2012.

We are required to comply with certain financial covenants for some of our lenders. As of March 31, 2012, the Company believes it was in compliance with all financial covenants. As a result, we believe we are not in default of any of our loans. However, the General Electric Capital Corporation (“GE”) before dividend consolidated fixed charge coverage ratio (“FCCR”) covenant allows EBITDA to be adjusted for nonrecurring expenses. As of March 31, 2012 the Company believes that all adjustments included in the covenant calculation are appropriate. If all adjustments are not accepted by GE, the Company will not have met its before dividend FCCR covenant. The cure provisions permit the Company to make a prepayment within 30 days after notice from the lender in an amount sufficient that would result in compliance with the before dividend FCCR for the period.

If a cure right is exercised, the Company estimates the debt prepayment amount would range from $0 to $1.5 million. If necessary to prepay debt in this range, the Company has the intention and ability to make such repayment within 30 days notice from GE.

Stock-Based Compensation

Options

The Company has a 2006 Stock Plan (the “Plan”) which has been approved by the Company’s shareholders. The Plan authorized the grant of stock options, stock appreciation rights, restricted stock and stock bonuses for up to 200,000 shares of common stock. At the annual shareholders meeting on May 28, 2009, the shareholders of Supertel Hospitality, Inc. approved an amendment to the Supertel 2006 Stock Plan. The amendment increases the maximum number of shares reserved for issuance under the plan from 200,000 to 300,000 and changes the definition of fair market value to mean the closing price of Supertel common stock with respect to future awards under the plan.

Share-Based Compensation Expense

The expense recognized in the condensed consolidated financial statements for the three months ended March 31, 2012 and 2011 for share-based compensation related to employees and directors was $0 and $14,400, respectively.

Impairment Losses

In accordance with FASB ASC 360-10-35 Property Plant and Equipment – Overall – Subsequent Measurement, the Company analyzes its assets for impairment when events or circumstances occur that indicate the carrying amount may not be recoverable. As part of this process, the Company utilizes a two-step analysis to determine whether a trigger event (within the meaning of ASC 360-10-35) has occurred with respect to cash flow of, or a significant adverse change in business climate for, its hotel properties. Quarterly and annually the Company reviews all of its held for use hotels to determine any property whose cash flow or operating performance significantly underperformed from budget or prior year, which the Company has set as a shortfall against budget or prior year as 15% or greater.

 

15


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

Each quarter we apply a second analysis on those properties identified in the 15% change analysis or which have had a trigger event. The analysis estimates the expected future cash flows to identify any property whose carrying amount potentially exceeded the recoverable value. In performing this analysis, the Company makes the following assumptions:

 

   

Holding periods range from three to five years, for non-core assets, and ten years for those assets considered as core.

 

   

Cash flow from trailing twelve months for the individual properties multiplied by the holding period as noted above. The Company does not assume growth rates on cash flows as part of its step one analysis.

 

   

A revenue multiplier for the terminal value based on an average of historical sales from leading industry broker of like properties was applied according to the assigned holding period.

During the three months ended March 31, 2012, no trigger events as described in ASC 360-10-35 occurred for any of our held for use hotels. We recorded impairment losses of $1.8 million on ten held for sale hotels and we recovered impairment on two hotels reclassified as held for use from held for sale in the amount of $0.4 million.

During the three months ended March 31, 2011, there was an impairment loss of $0.1 million on five hotels held for sale, a loss of $0.2 million on three hotels subsequently sold, and a recovery of $25,000 of previously recorded impairment loss on one hotel at the time of sale. There was also impairment of $0.2 million on one hotel that was subsequently placed back into held for use.

Income Taxes

The TRS Lessee income tax benefit from continuing operations for the three months ended March 31, 2012 and 2011 was approximately $0.5 million and $0.6 million, respectively. The TRS Lessee has estimated its income tax benefit using a combined federal and state rate of 38%. As of March 31, 2012, TRS had a deferred tax asset of $6.5 million primarily due to current and past years’ tax net operating losses. These loss carryforwards will begin to expire in 2022. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax asset and has determined that no valuation allowance is required.

Income taxes are accounted for under the asset and liability method in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company uses an estimate of its annual effective rate based on the facts and circumstances at the time while the actual effective rate is calculated at year-end. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and for net operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management’s evaluation of the need for a valuation allowance must consider positive and negative evidence, and the weight given to the potential effects of such positive and negative evidence is based on the extent to which it can be objectively verified.

Related to accounting for uncertainty in income taxes, we follow a process by which the likelihood of a tax position is gauged based upon the technical merits of the position, perform a subsequent measurement related to the maximum benefit and the degree of likelihood, and determine the amount of benefit to be recognized in the financial statements, if any.

 

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Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

Noncontrolling Interest in Redeemable Preferred Units

At March 31, 2012, 11,424 of SLP’s preferred operating partnership units (“Preferred OP Units”) were outstanding. The redemption value for the Preferred OP Units is $0.1 million for March 31, 2012. Each limited partner of SLP may, subject to certain limitations, require that SLP redeem all or a portion of his or her Preferred OP Units, at any time after a specified period following the date the units were acquired, by delivering a redemption notice to SLP. The Preferred OP Units are convertible by the holders into Common operating units (“Common OP Units”) on a one-for-one basis or, pursuant to an extension agreement by the holders, may be redeemed for cash at the option of the holder at $10 per unit on or after October 24, 2012.

Preferred OP Units receive a preferred dividend distribution of $1.10 per preferred unit annually, payable on a monthly basis and do not participate in the allocations of profits and losses of SLP. Distributions to holders of Preferred OP Units have priority over distributions to holders of Common OP Units. Supertel offered to each of the Preferred OP Unit holders the option to extend until October 24, 2012 their right to have units redeemed at $10 per unit, and holders of 11,424 units elected to extend. These 11,424 units will continue to be carried outside of permanent equity at redemption value.

Noncontrolling Interest Reconciliation of Common and Preferred Units

 

     Redeemable           Total  
     Noncontrolling     Noncontrolling     Noncontrolling  
     Interest     Interest     Interest  

Balance at December 31, 2011

   $ 114      $ 135      $ 249   
  

 

 

   

 

 

   

 

 

 

Partner distribution

     (3     —          (3

Noncontrolling interest

     3        (9     (6
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 114      $ 126      $ 240   
  

 

 

   

 

 

   

 

 

 

Equity Reconciliation of Parent and Noncontrolling Interest

 

(in thousands)   Preferred
A Shares
Par Value
    Preferred
C Shares
Par Value
    Common
Stock
Warrants
    Common
Shares
Par Value
    Additional
Paid-in
Capital
    Distribution
in Excess
Accumulated
Earnings
    Net
Shareholders
Equity
    Noncontrolling
Interest in
Consolidated
Partnerships
    Total
Equity
 

Balance at December 31, 2011

  $ 8      $ —        $ 252      $ 231      $ 121,619      $ (85,398   $ 36,712      $ 135      $ 36,847   

Common stock offerings

    —          —          —          —          3        —          3        —          3   

Preferred stock offering

    —          30        —          —          13,144        —          13,174        —          13,174   

Preferred dividends

    —          —          —          —          —          (657     (657     —          (657

Net loss

    —          —          —          —          —          (3,965     (3,965     (9     (3,974
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

  $ 8      $ 30      $ 252      $ 231      $ 134,766      $ (90,020   $ 45,267      $ 126      $ 45,393   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Series B Redeemable Preferred Stock

At March 31, 2012 there were 332,500 shares of 10.0% Series B preferred stock outstanding. The shares were sold on June 3, 2008 for $25.00 per share and bear a liquidation preference of $25.00 per share.

 

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Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

Dividends on the Series B preferred stock are cumulative and are payable quarterly in arrears on each March 31, June 30, September 30 and December 31, or, if not a business day, the next succeeding business day, at the annual rate of 10.0% of the $25.00 liquidation preference per share, equivalent to a fixed annual amount of $2.50 per share. Dividends on the Series B preferred stock accrue whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, whether or not such dividends are declared and whether or not such dividends are prohibited by agreement. Accrued but unpaid dividends on the Series B preferred stock will not bear interest.

The Series B preferred stock will, with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, rank senior to the Company’s common stock, senior to all classes or series of preferred stock issued by the Company and ranking junior to the Series B preferred stock with respect to dividend rights or rights upon the Company’s liquidation, dissolution or winding up, on a parity with the Company’s Series A preferred stock and Series C convertible preferred stock and with all classes or series of preferred stock issued by the Company and ranking on a parity with the Series B preferred stock with respect to dividend rights or rights upon the Company’s liquidation, dissolution or winding up and junior to all of the Company’s existing and future indebtedness.

The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares, unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for the current and all past dividend periods. The Series B preferred stock has no stated maturity and is not subject to any sinking fund or mandatory redemption (except as described below).

The Series B preferred stock is not redeemable prior to June 3, 2013, except in certain limited circumstances relating to the maintenance of the Company’s ability to qualify as a REIT as provided in the Company’s articles of incorporation or a change of control (as defined in the Company’s amendment to its articles of incorporation establishing the Series B preferred stock). The Company may redeem the Series B preferred stock, in whole or in part, at any time or from time to time on or after June 3, 2013 for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. Also, upon a change of control, each outstanding share of the Company’s Series B preferred stock will be redeemed for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. At March 31, 2012, no events have occurred that would lead the Company to believe redemption of the preferred stock, due to a change of control or failure to maintain its REIT qualification, is probable. There are no convertible provisions for Series B, therefore, there is no dilutive effect on earnings per share.

Series A Preferred Stock

On December 30, 2005, the Company offered and sold 1,521,258 shares of 8% Series A preferred stock. At March 31, 2012, 803,270 shares of Series A preferred stock remained outstanding. Dividends on the Series A preferred stock are cumulative and payable monthly in arrears on the last day of each month, at the annual rate of 8% of the $10.00 liquidation preference per share, equivalent to a fixed annual amount of $.80 per share. There are no convertible provisions for Series A, therefore, there is no dilutive effect on earnings per share.

Series C Convertible Preferred Stock

The Company entered into a Purchase Agreement dated November 16, 2011 for the issuance and sale of Supertel’s Series C convertible preferred stock and warrants under a private transaction to Real Estate Strategies, L.P. (“RES”). On January 31, 2012 at a special meeting, the shareholders of Supertel, by the requisite vote, approved the issuance and sale of up to 3,000,000 shares of the

 

18


Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

Series C convertible preferred stock of Supertel, up to 30,000,000 shares of common stock of Supertel which may be issued upon conversion of the Series C convertible preferred stock, and warrants to purchase up to an additional 30,000,000 shares of common stock, to RES pursuant to the Purchase Agreement. In two closings on February 1, 2012 and February 15, 2012, the Company completed the sale to RES of 3,000,000 shares of Series C convertible preferred stock and warrants to purchase 30,000,000 shares of common stock at an exercise price of $1.20 per common share.

Each share of Series C convertible preferred stock is entitled to a dividend of $0.625 per year payable in equal quarterly dividends. Each share of Series C convertible preferred stock has a liquidation preference of $10.00 per share, in cash, plus an amount equal to any accrued and unpaid dividends. With respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, the Series C convertible preferred stock ranks: (a) on parity with the Series A preferred stock and Series B preferred stock and other future series of preferred stock designated to rank on parity, and (b) senior to the common stock and other future series of preferred stock designated to rank junior, and (c) junior to the Company’s existing and future indebtedness.

The Series C convertible preferred stock, at the option of the holder, is convertible at any time into common stock at a conversion price of $1.00 for each share of common stock, which is equal to the rate of ten shares of common stock for each share of Series C convertible preferred stock. A holder of Series C convertible preferred stock will not have conversion rights to the extent the conversion would cause the holder and its affiliates to beneficially own more than 34% of voting stock (the “Beneficial Ownership Limitation”). “Voting stock” means capital stock having the power to vote generally for the election of directors of the Company.

The Series C convertible preferred stock will vote with the common stock as one class, subject to certain voting limitations. For any vote, the voting power of the Series C convertible preferred stock will be equal to the lesser of: (a) 6.29 votes per share, or (b) an amount of votes per share such that the vote of all shares of Series C convertible preferred stock in the aggregate equal 34% of the combined voting power of all the Company voting stock, minus an amount equal to the number of votes represented by the other shares of voting stock beneficially owned by RES and its affiliates (the “Voting Limitation”).

As long as RES has the right to designate two or more directors to the Company Board of Directors pursuant to the Directors Designation Agreement, the following requires the approval of RES and IRSA Inversiones y Representaciones Sociedad Anónima (“IRSA”):

 

   

the merger, consolidation, liquidation or sale of substantially all of the assets of the Company;

 

   

the sale by the Company of common stock or securities convertible into common stock equal to 20% or more of the outstanding common stock or voting stock; or

 

   

any Company transaction of more than $120,000 in which any of its directors or executive officers or any member of their immediate family will have a material interest, exclusive of employment compensation and interests arising solely from the ownership of the Company equity securities if all holders of that class of equity securities receive the same benefit on a pro rata basis.

Equity Distribution Agreements

On March 26, 2010, the Company entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA Global Master SPV Ltd. (“YA Global”), a fund managed by Yorkville Advisors, LLC. Pursuant to the SEDA, YA Global has agreed to purchase up to $10.0 million (which could have been increased to $20.0 million upon written notice from the Company to YA Global prior to March 26, 2011) (the “Commitment Amount”) of newly issued Company common stock, par value $0.01 per share if notified to do so by the Company in accordance with the terms and conditions of the SEDA. Unless terminated earlier, the SEDA will automatically terminate on the earlier of April 1, 2012 or the date on which the aggregate purchases by YA Global under the SEDA total the Commitment Amount. The amount of common stock issued or issuable pursuant to the SEDA, in the aggregate, cannot exceed 4,400,464 shares of common stock, which is less than 20% of the aggregate number of outstanding shares of common stock. The common stock is currently sold pursuant to the Company’s registration statement on Form S-3 (333-170756). No shares were sold under this agreement during the three months ended March 31, 2012 and 2011. This agreement terminated as of April 1, 2012 by its terms.

 

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Table of Contents

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc., and Subsidiaries

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

On March 29, 2011, the Company entered into an equity distribution agreement with JMP Securities LLC (“JMP”) pursuant to which the Company may offer and sell up to 2.0 million shares of common stock from time to time through JMP. Sales of shares of the Company common stock, if any, under the agreement may be made in negotiated transactions or other transactions that are deemed to be “at the market” offerings, including sales made directly on the Nasdaq Global Market or sales made to or through a market maker other than on an exchange. The common stock will be sold pursuant to the Company’s registration statement on Form S-3 (333-170756). During the three months ended March 31, 2012 no shares were issued. During the three months ended March 31, 2011, the Company sold (with settlement in April 2011), through JMP, as its agent, an aggregate of 26,725 shares of common stock pursuant to ordinary brokers’ transactions on the Nasdaq Global Market. Gross proceeds were $43,685, commissions to agent were $2,184 and net proceeds to the Company (before expenses) were $41,501.

Commitments and Contingencies

The Company entered into a Purchase Agreement dated November 16, 2011 for the issuance and sale of Supertel’s Series C convertible preferred stock and warrants under a private transaction with RES. In the Purchase Agreement, the Company agreed that $20 million of the proceeds would be used to pursue hospitality acquisitions which are consistent with the investment strategy of the Company’s Board, as well as an additional $5 million to be used within a reasonable period. On March 27, 2012, the Company entered into an agreement to acquire the 100 room Hilton Garden Inn in Solomons Island, Maryland for $11.5 million. The purchase will be funded with capital from the preferred equity raise. The company currently has similar assets under review and anticipates that the funds will be fully deployed within the next six months.

In connection with the issuance and sale of the Series C convertible preferred stock and warrants pursuant to the Purchase Agreement with RES, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) dated February 1, 2012 with RES and IRSA. The Registration Rights Agreement requires the Company to register for resale by the holders the common stock issued upon conversion of the Series C convertible preferred stock and upon exercise of the warrants, and the warrants and the Series C convertible preferred stock. The Company is generally required to maintain the effectiveness of the registration statement for the resale of the securities except for the securities sold under the registration statement or with respect to any securities that may be sold without registration under Rule 144 of the Securities Act of 1933, as amended. If the Company fails to file the registration agreement or maintain its effectiveness during the periods required by the Registration Rights Agreement, then the Company is required to pay the holders a liquidated damage amount, without limitation, in the aggregate amount of $20,000 for each week any such failure continues.

Litigation

Various claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties. Based upon the information available, the Company believes that the resolution of any of these claims and legal proceedings should not have a material adverse affect on its consolidated financial position, results of operations or cash flows.

Subsequent Events

On April 20, 2012, we sold a Super 8 in El Dorado, Kansas (49 rooms) for approximately $1.625 million. The proceeds were used to pay off the $0.8 million loan with First National Bank of Omaha, with additional funds applied to general corporate purposes.

 

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Part I. FINANCIAL INFORMATION, CONTINUED:

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

Forward-Looking Statements

Certain information both included and incorporated by reference in this management’s discussion and analysis and other sections of this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on assumptions that management has made in light of experience in the business in which we operate, as well as management’s perceptions of historical trends, current conditions, expected future developments, and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control), and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions.

Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions, generally, and the real estate market specifically; legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts); availability of capital; risks associated with debt financing, interest rates; competition; supply and demand for hotel rooms in our current and proposed market areas; and policies and guidelines applicable to real estate investment trusts and other risks and uncertainties described herein and in our filings with the SEC from time to time. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. We caution readers not to place undue reliance on any forward-looking statements included in this report that speak only as of the date of this report.

Following is management’s discussion and analysis of our operating results as well as liquidity and capital resources which should be read together with our financial statements and related notes contained in this report and with the financial statements and management’s discussion and analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Results for the three months ended March 31, 2012 are not necessarily indicative of results that may be attained in the future.

References to “we”, “our”, “us”, “Company”, and “Supertel Hospitality” refer to Supertel Hospitality, Inc., including as the context requires, its direct and indirect subsidiaries.

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these statements requires management to make certain estimates and judgments that affect our financial position and results of operations. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

We are a self-administered real estate investment trust, and through our subsidiaries, as of March 31, 2012 we owned 98 hotels in 23 states. Our hotels operate under several national and independent brands.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

Our significant events for the three months ended March 31, 2012 include:

 

 

On January 18, 2012, we sold a Super 8 in Fayetteville, Arkansas (83 rooms) for approximately $1.56 million with a $0.4 million gain. The proceeds were used primarily to reduce a term loan with Great Western Bank.

 

 

In two closings on February 1, 2012 and February 15, 2012, we completed the sale to Real Estate Strategies, L.P. of 3,000,000 shares of Series C convertible preferred stock and warrants to purchase 30,000,000 shares of common stock at an exercise price of $1.20 per common share. The Company agreed to use $20 million of net proceeds to pursue hospitality acquisitions which are consistent with the investment strategy of the Company Board, as well as an additional $5 million within a reasonable period.

 

 

On February 2, 2012, we paid $11.8 million on the Great Western Bank revolving line of credit, bringing the balance to zero. The available capacity is expected to be used in part to fund the $20 million obligation for hotel investment. The payment was funded with a portion of the net proceeds from the Series C convertible preferred stock.

 

 

On February 3, 2012, we paid in full the $5.0 million balance on the revolving credit facility with Elkhorn Valley Bank, with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

 

 

On February 16, 2012, we paid in full the $2.1 million note payable to Fredericksburg North Investors, LLC, with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

 

 

On February 21, 2012, we amended our credit facilities with Great Western Bank to extend the maturity date of all loans to June 30, 2013.

 

 

On March 1, 2012 we amended our credit facility with First National Bank of Omaha to extend the maturity date to May 1, 2012. This debt was paid in full on April 20, 2012.

 

 

On March 27, 2012, we sold a Super 8 in Muscatine, Iowa (63 rooms) for approximately $1.3 million. The proceeds were used primarily to reduce a term loan with Great Western Bank, with the remaining amount used to reduce the revolving line of credit with Great Western Bank.

 

 

On March 27, 2012, we entered into an agreement to acquire the 100 room Hilton Garden Inn in Solomons Island, Maryland for $11.5 million. The purchase will be funded with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

 

 

On March 29, 2012, we amended our credit facilities with General Electric Capital Corporation. These changes were reflected in the notes to our consolidated financial statements included in our Form 10-K for the year ended December 31, 2011.

We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnerships, Supertel Limited Partnership and E&P Financing Limited Partnership, limited partnerships, limited liability companies or other subsidiaries of our operating partnerships. We currently own, indirectly, an approximate 99% general partnership interest in Supertel Limited Partnership and a 100% partnership interest in E&P Financing Limited Partnership.

As of March 31, 2012, we owned 98 limited service hotels. The hotels are leased to our wholly owned taxable REIT subsidiary, TRS Leasing, Inc, and its wholly owned subsidiaries (collectively “TRS Lessee”), and are managed by Hospitality Management Advisors, Inc. (“HMA”), Strand Development Company, LLC (“Strand”), Kinseth Hotel Corporation (“Kinseth”) and HLC Hotels Inc. (HLC). HLC is the manager of 7 of our hotels.

HMA manages 24 Company hotels in Arkansas, Louisiana, Tennessee, Kentucky, Indiana, Virginia and Florida. Strand manages the Company’s seven economy extended-stay hotels in Georgia and South Carolina as well as 16 additional Company hotels located in Georgia, Delaware, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia. Kinseth manages 44 Company hotels in eight states primarily in the Midwest. Each of the management agreements expire on May 31, 2014 and will renew for additional terms of one year unless either party to the agreement gives the other party written notice of termination at least 90 days before the end of a term.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

Each of HMA, Strand and Kinseth receives a monthly management fee with respect to the hotels they manage equal to 3.5% of the gross hotel income and 2.25% of hotel net operating income (“NOI”). NOI is equal to gross hotel income less operating expenses (exclusive of management fees, certain insurance premiums and employee bonuses, and personal and real property taxes). Refer to “Net Operating Income” for a discussion of NOI and a reconciliation of NOI to Earnings Before Net Loss on Disposition of Assets, Other Income, Interest Expense and Income Taxes, a GAAP measurement.

HLC receives management fees equal to 5.0% of the gross revenues derived from the operation of the hotels and incentive fees equal to 10% of the annual operating income of the hotels in excess of 10.5% of the Company’s investment in the hotels. On August 9, 2011, the management agreement with HLC was extended for a period of two years.

Overview of Discontinued Operations

The condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011 include the results of operations for the 24 hotels classified as held for sale at March 31, 2012, as well as all properties that have been sold during 2012 and prior years in accordance with ASC 205-20 Presentation of Financial Statements – Discontinued Operations.

The assets held for sale at March 31, 2012 and 2011 are separately disclosed in the Condensed Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that all our held for sale assets as of March 31, 2012 remain properly classified in accordance with ASC 205-20.

Where the carrying value of an asset held for sale exceeded the estimated fair value, net of selling costs, we reduced the carrying value and recorded an impairment charge. During the three months ended March 31, 2012, an impairment loss of $1.8 million for ten hotels held for sale was recorded by the Company. The Company also recorded recovery of $0.4 million of previously recorded impairment on two hotels which were reclassified as held for use. The fair value of an asset held for sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales.

The discontinued operations are the result of management’s strategy to reevaluate its hotels as well as the length of the period in which the company anticipates holding its properties based on new and more stringent criteria. These criteria include strategic review of debt service capability, estimated return on investment, and local market conditions.

Our continuing operations reflect the results of operations of those hotels which we are likely to retain in our portfolio for the foreseeable future as well as those assets which do not currently meet the held for sale criteria in ASC 205-20. We periodically evaluate the assets in our portfolio to ensure they continue to meet our performance objectives. Accordingly, from time to time, we could identify other assets for disposition.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

General

The discussion that follows is based primarily on the condensed consolidated financial statements of the three months ended March 31, 2012 and 2011, and should be read along with the condensed consolidated financial statements and notes.

The comparisons below reflect revenues and expenses of the company’s 98 and 105 hotels as of March 31, 2012 and 2011, respectively.

Results of Operations

Comparison of the three months ended March 31, 2012 to the three months ended March 31, 2011

Operating results are summarized as follows (in thousands):

 

     Three months ended     Three months ended        
     March 31, 2012     March 31, 2011     Continuing  
     Continuing     Discontinued           Continuing     Discontinued           Operations  
     Operations     Operations     Total     Operations     Operations     Total     Variance  

Revenues

   $ 16,681      $ 4,189      $ 20,870      $ 16,270      $ 5,305      $ 21,575      $ 411   

Hotel and property operations expenses

     (13,541     (3,865     (17,406     (13,488     (5,071     (18,559     (53

Interest expense

     (2,116     (562     (2,678     (2,336     (767     (3,103     220   

Depreciation and amortization expense

     (2,124     (46     (2,170     (2,247     (374     (2,621     123   

General and administrative expenses

     (1,093     —          (1,093     (1,103     (50     (1,153     10   

Net gain (loss) on dispositions of assets

     (4     494        490        (5     (14     (19     1   

Other income (expense)

     (1,212     —          (1,212     85        —          85        (1,297

Impairment loss

     381        (1,815     (1,434     (193     (256     (449     574   

Termination cost

     —          —          —          (540     —          (540     540   

Income tax benefit

     464        198        662        609        464        1,073        (145
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (2,564   $ (1,407   $ (3,971   $ (2,948   $ (763   $ (3,711   $ 384   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues and Operating Expenses

Revenues from continuing operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, increased $0.4 million or 2.5%, which was primarily due to increased average daily rate (“ADR”). We refer to our entire portfolio as select service hotels which we further describe as upper midscale hotels, midscale hotels, economy hotels and extended stay hotels. Prior to this quarter ended March 31, 2012, we referred to our upper midscale and midscale hotels collectively as midscale hotels. The same store portfolio used for comparison of the first quarter of 2012 over the same period of 2011 consists of the 74 hotels in continuing operations that were owned by the Company as of January 1, 2011. Compared to the year ago period, ADR for the entire 74 same store hotel portfolio increased 3.7% to $48.26 and revenue per available room (“RevPAR”) increased 1.8% to $27.96. The occupancy for all same store hotels for the three months ended March 31, 2012 decreased 1.1 percentage points from that of the year ago period. Our 21 same store upper midscale hotels reflected an ADR increase of 1.2% to $66.16, an increase in occupancy of 8.8% and a RevPAR increase of 10.2% to $40.11 for the first quarter of 2012 over the same period of 2011. Our 6 midscale hotels reported an ADR increase of 1.2% to $60.01, an occupancy decrease of 0.9%, and a RevPAR increase of 0.4% to $27.86. Our 40 same store economy hotels reflected an ADR increase of 2.4% to $47.73, a decrease in occupancy of 5.2 percentage points and a decrease in RevPAR of 2.9% to $25.44 for the first quarter of 2012 over the same period of 2011. Occupancy for the seven same store extended stay properties dropped 6.3% to 71.9%, and RevPAR was down 2.7% to $17.54. ADR increased 3.9% to $24.40.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

During the first quarter of 2012, hotel and property operations expenses from continuing operations remained essentially flat compared with the first quarter of 2011.

Interest Expense, Depreciation and Amortization Expense and General and Administrative Expense

Interest expense from continuing operations decreased $0.2 million to $2.1 million for the quarter, primarily due to the paydown of the Great Western Bank revolver and the prepayment penalty in first quarter 2011. Depreciation and amortization expense from continuing operations declined $0.1 million from the first quarter of 2011 to $2.1 million. The general and administrative expense for the 2012 first quarter was unchanged compared to the 2011 first quarter.

Other Income

The increased expense resulted from a change in the fair value of derivative liabilities. The Series C convertible Preferred embedded derivative and the common stock warrants were valued by management with the assistance of a third party at issuance on February 1 and 15, 2012, for $7.1 million and $8.6 million, respectively. Both were deemed to be derivatives. The derivatives were revalued at March 31, 2012. The fair value of the derivative liabilities increased by an aggregate of $1.2 million, due primarily to an increase in the price of the common stock.

Impairment loss

For the first quarter of 2012, we recorded a net impairment charge of $1.4 million, composed of $1.8 million taken on ten hotels classified as held for sale and offset by impairment recovery of $0.4 million on two hotels reclassified as held for use. In the prior year there was a net impairment charge of $0.4 million against five held for sale hotels, one hotel subsequently reclassed as held for use, three hotels subsequently sold and a recovery on one hotel subsequently sold.

Termination cost

Termination cost reflects financial settlement fees directly related to the Company’s termination of Royco Hotels. The onetime charge of $0.5 million reflects settlement of the lawsuit filed by Royco Hotels against the Company.

Dispositions

In the first quarter of 2012, we recognized a $0.4 million gain on the sale of a Super 8 in Fayetteville, Arkansas, and a $0.1 million gain on the sale of a Super 8 in Muscatine, Iowa. In the first quarter of 2011, we recognized a negligible gain on the disposition of assets related to the sale of a Masters Inn in Atlanta (Tucker), Georgia.

Income tax benefit

The income tax benefit from continuing operations is related to the taxable loss from our taxable subsidiary, the TRS Lessee. Management believes the combined federal and state income tax rate for the TRS Lessee will be approximately 38%. The tax benefit is a result of TRS Lessee’s loss for the three months ended March 31, 2012. The income tax will vary based on the taxable earnings or loss of the TRS Lessee.

The income tax benefit from continuing operations was $0.5 million compared with a benefit of $0.6 million in the year ago period, due to a decreased loss by the TRS Lessee.

 

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Liquidity and Capital Resources

Our income and ability to meet our debt service obligations, and make distributions to our shareholders, depends upon the operations of the hotels being conducted in a manner that maintains or increases revenue, or reduces expenses, to generate sufficient hotel operating income for TRS Lessee to pay the hotels’ operating expenses, including management fees and rents to us. We depend on rent payments from TRS Lessee to pay our operating expenses and debt service and to make distributions to shareholders.

The Company’s operating performance, as well as its liquidity position, has been and continues to be negatively affected by recent economic conditions, many of which are beyond our control. The Company anticipates that these adverse economic conditions may improve somewhat over the next year; however, in addition to our operating performance, the other sources described below will be essential to our liquidity and financial position.

Our business requires continued access to adequate capital to fund our liquidity needs. In February 2012 the Company issued 3 million shares of Series C convertible preferred stock which provided $28.6 million of net proceeds. The Company agreed to use $20 million to pursue hotel acquisitions, as well as an additional $5 million to be used within a reasonable period. In 2011, the Company reviewed its entire portfolio, identified properties considered non-core and developed timetables for disposal of those assets deemed non-core. We focused on improving our liquidity through cash generating asset sales and disposition of assets that are not generating cash at levels consistent with our investment principles. In 2012, our foremost priorities continue to be preserving and generating capital sufficient to fund our liquidity needs. Given the deterioration and uncertainty in the economy and financial markets, management believes that access to conventional sources of capital will be challenging and management has planned accordingly. We are also working to proactively address challenges to our short-term and long-term liquidity position.

The following are the expected actual and potential sources of liquidity, which if realized we currently believe will be sufficient to fund our near-term obligations:

 

   

Cash and cash equivalents;

 

   

Cash generated from operations;

 

   

Proceeds from asset dispositions;

 

   

Proceeds from additional secured or unsecured debt financings; and/or

 

   

Proceeds from public or private issuances of debt or equity securities.

The Company has significant indebtedness maturing before the end of the year, including a $29.0 million balance on a loan with Greenwich Capital maturing in December 2012. If we are not successful in negotiating the refinancing of this debt or any other maturing debt, or finding alternate sources of financing in a difficult borrowing environment, we will be unable to meet the Company’s near-term liquidity requirements.

These above sources are essential to our liquidity and financial position, and we cannot assure you that we will be able to successfully access them (particularly in the current economic environment). If we are unable to generate cash from these sources, we may have liquidity-related capital shortfalls and will be exposed to default risks. The significant issues with access to the liquidity sources identified above could lead to our insolvency.

In the near-term, the Company’s cash flow from operations is not projected to be sufficient to meet all of our liquidity needs. In response, management has identified non-core assets in our portfolio to be liquidated over a one to ten year period. Among the criteria for determining properties to be sold was the potential upside when hotel fundamentals return to stabilized levels. The properties held for sale as of March 31, 2012 were determined to be less likely to participate in increased cash flow levels when markets do improve. As such, we expect these dispositions to help us (1) preserve cash, through potential disposition of properties with current or projected negative cash flow and/or other potential near-term cash outlay requirements (including debt maturities) and (2) generate cash, through the potential disposition of strategically identified non-core assets that we believe have equity value above debt.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

We are actively marketing the 24 properties held for sale, which we anticipate will result in the elimination of $25.9 million of debt and generate an expected $2.3 million of proceeds for operations. The marketing process has been affected by deteriorating economic conditions and we have experienced some decreases in expected pricing. If this trend continues to worsen, we may be unable to complete the disposition of identified properties in a manner that would generate cash flow in line with management’s estimates as noted above. Our ability to dispose of these assets is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates. In light of the current economic conditions, we cannot predict:

 

   

whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;

 

   

whether potential buyers will be able to secure financing; and

 

   

the length of time needed to find a buyer and to close the sale of a property.

As our debt matures, our principal payment obligations also present significant future cash requirements. We expect lenders will continue to maintain tight lending standards, which could make it more difficult for us to obtain future credit facilities on terms similar to the terms of our current credit facilities or to obtain long-term financing on favorable terms or at all.

We may not be able to successfully extend, refinance or repay our debt due to a number of factors, including decreased property valuations, limited availability of credit, tightened lending standards and deteriorating economic conditions. Historically, extending or refinancing loans has required the payment of certain fees to, and expenses of, the applicable lenders. Any future extensions or refinancing will likely require increased fees due to tightened lending practices. These fees and cash flow restrictions will affect our ability to fund other liquidity uses. In addition, the terms of the extensions or refinancing may include operational and financial covenants significantly more restrictive than our current debt covenants.

The Company is required to meet various financial covenants required by its existing lenders. If the Company’s future financial performance fails to meet these financial covenants, then its lenders also have the ability to take control of its encumbered hotel assets. Defaults with lenders due to failure to repay or refinance debt when due or failure to comply with financial covenants could also result in defaults under our credit facilities with Great Western Bank and General Electric Capital Corporation. Our Great Western Bank and General Electric Capital Corporation credit facilities contain cross-default provisions which would allow Great Western Bank and General Electric Capital Corporation to declare a default and accelerate our indebtedness to them if we default on our other loans, and such default would permit that lender to accelerate our indebtedness under any such loan. If this were to happen, whether due to failure to repay or refinance debt when due or failure to comply with financial covenants, the Company’s ability to conduct business could be severely impacted as there can be no assurance that the adequacy and timeliness of cash flow would be available to meet the Company’s liquidity requirements.

Sources and Uses of Cash

At March 31, 2012, available cash was $10.0 million and the Company’s available borrowing capacity on the Great Western Bank revolver was $12.5 million. The Company projected that at December 31, 2011 cash flows from operations and the available borrowing capacity from the revolver would be insufficient to meet both short term and long term liquidity requirements. As a consequence, in November 2011 the Company entered into an agreement to sell 3.0 million shares of Series C convertible preferred stock and obtained a $5 million revolving credit facility from Elkhorn Valley Bank to fund the Company until the closing of the Series C convertible preferred stock sale.

Short term outflows include monthly operating expenses, $0.2 million of termination fees to Royco Hotels, payment of dividends on Series A and Series B preferred stock, and Series C convertible preferred stock, and estimated debt service for the remainder of 2012 of $10.8 million, assuming the refinancing of the $29.0 million December 2012 maturity on similar terms. Our long-term liquidity requirements consist primarily of the costs of renovations and other non-recurring capital expenditures that need to be made periodically with respect to hotel properties, and $62.3 million of scheduled debt repayments. On or before December 31, 2012 the Company is required to make a $7 million principal prepayment to General Electric Capital Corporation. This debt is expected to be funded with proceeds on refinancing the 32 hotels secured by Greenwich Capital.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

We have budgeted to increase our spending on capital improvements from $5 million in 2011 to $7 million on our existing hotels during 2012. The increase in capital expenditures is a result of complying with brand mandated improvements and initiating projects that we believe will generate a return on investment as we enter a period of recovery in the lodging sector. We will seek to satisfy these long-term liquidity requirements through the various sources of capital identified above, including the recently issued Series C convertible preferred stock and net proceeds on sales of non performing hotels.

In an effort to meet our short-term liquidity needs, and because of the difficulty encountered in obtaining sources of borrowing to meet such needs, on November 10, 2011 the Audit Committee of the Board of Directors approved a proposal for the purchase by four of the Company directors, Messrs. Borgmann, Dayton, Latham, and Walters (the “Purchasing Directors”), of the Amended and Restated Master Promissory Note maturing November 30, 2011 from Wells Fargo Bank, National Association (the “Wells Fargo Note”) for the balance owed of principal and interest in the amount of $2.1 million.

The Purchasing Directors purchased the Wells Fargo Note from Wells Fargo on November 21, 2011. The Wells Fargo Note was secured by two of the Company’s hotels and the Purchasing Directors released one of the hotels from security for the Wells Fargo Note so that it could be used as security by the Company to obtain a $5.0 million line of credit with Elkhorn Valley Bank. Each of the Purchasing Directors also separately guaranteed $0.75 million of the line of credit (the “Elkhorn Line of Credit”).

We completed a private offering of 3.0 million shares of Series C convertible preferred stock in February 2012. Net proceeds of the offering, less expenses, were approximately $28.6 million. $7.1 million of the net proceeds were used to repay the Wells Fargo Note held by the Purchasing Directors and to repay the Elkhorn Line of Credit, from which the Purchasing Directors were released from their personal guaranties. Each of the Purchasing Directors received approximately $13,000 in interest payments on the Wells Fargo Note and an approximate $4,000 fee for their personal guarantee of the Elkhorn Line of Credit. The remaining net proceeds from the offering will be used to acquire upper midscale and upscale hotels. In addition, management has identified non-core assets in our portfolio to be liquidated over a one to ten year period.

We project that proceeds from anticipated property sales during 2012, net of expenses and debt repayment, of $2.3 million will be available for the Company’s cash needs. We project that our operating cash flow, anticipated excess proceeds from refinancing the Greenwich Capital debt, revolving credit facility and the sources identified above will be sufficient to satisfy all of our liquidity and other capital needs for 2012.

The Company did not declare a common stock dividend for the three months ended March 31, 2012. The Company will monitor requirements to maintain its REIT status and will routinely evaluate the dividend policy. The Company intends to continue to meet its dividend requirements to retain its REIT status.

Financing

On March 29, 2011, we entered into an equity distribution agreement with JMP Securities LLC (“JMP”) pursuant to which we may offer and sell up to 2.0 million shares of common stock from time to time through JMP. Sales of shares of the Company common stock, if any, under the agreement may be made in negotiated transactions or other transactions that are deemed to be “at the market” offerings, including sales made directly on the Nasdaq Global Market or sales made to or through a market maker other than on an exchange. The common stock will be sold pursuant to our registration statement on Form S-3 (333-170756). During the three months ended March 31, 2012 no shares were issued. During the three months ended March 31, 2011, we sold (with settlement in April 2011), through JMP, as our agent, an aggregate of 26,725 shares of common stock pursuant to ordinary brokers’ transactions on the Nasdaq Global Market. Gross proceeds were $43,685.23, commissions to agent were $2,184.26 and net proceeds to us (before expenses) were $41,500.97.

At March 31, 2012, the Company had long-term debt of $120.6 million associated with assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 3.4 years and a weighted average interest rate of 6.4%. The weighted average fixed rate was 6.9%, and the weighted average variable rate was 4.0%. Debt held on properties in continuing operations is classified as held for use. Debt is classified as held for sale if the properties collateralizing it are included in discontinued operations. Debt associated with assets held for sale is classified as a short-term liability due within the next year irrespective of whether the notes and mortgages evidencing such debt mature within the next year. Aggregate annual principal payments on debt associated with assets held for use for the remainder of 2012 and thereafter, and debt associated with assets held for sale, are as follows (in thousands):

 

     Held For
Sale
     Held For
Use
     TOTAL  

Remainder of 2012

   $ 25,920       $ 36,357       $ 62,277   

2013

     —           18,908         18,908   

2014

     —           20,674         20,674   

2015

     —           14,287         14,287   

2016

     —           4,855         4,855   

Thereafter

     —           25,483         25,483   
  

 

 

    

 

 

    

 

 

 
   $ 25,920       $ 120,564       $ 146,484   
  

 

 

    

 

 

    

 

 

 

 

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At March 31, 2012, the Company had $62.3 million of principal due in 2012. Of this amount, $40.9 million of the principal due is associated with either assets held for use or assets held for sale, and matures in 2012 pursuant to the notes and mortgages evidencing such debt. The remaining $21.4 million is associated with assets held for sale and is not contractually due in 2012 unless the related assets are sold. The maturities comprising the $40.9 million consist of:

 

   

a $29.0 million balance on the loan with Greenwich Capital;

 

   

a $0.8 million note payable to First National Bank of Omaha;

 

   

a $7.0 million principal prepayment required on our credit facilities with General Electric Capital Corporation;

 

   

a $1.1 million balance on a note payable to General Electric Capital Corporation; and

 

   

approximately $3.0 million of principal amortization on mortgage loans.

The $29.0 million balance of the loan with Greenwich Capital matures in December 2012. The loan is secured by 32 hotels. The Company intends to break up the portfolio into several tranches and secure financing with several local and / or regional banks, or it may consider other financing options. The process to identify lenders began in March 2012.

The $0.8 million note payable to First National Bank of Omaha was paid in full on April 20, 2012 with a portion of the proceeds from the sale of a Super 8 in El Dorado, Kansas (49 rooms).

On March 29, 2012, our credit facilities with General Electric Capital Corporation were amended to, among other things, require a principal prepayment of $7 million on or before December 31, 2012. This debt is expected to be funded from the proceeds of refinancing our hotels secured by Greenwich Capital.

The $1.1 million note payable to General Electric Capital Corporation is expected to be paid with available funds at the end of 2012.

The key financial covenants for certain of our loan agreements and compliance calculations as of March 31, 2012 are discussed below (each such covenant is calculated pursuant to the applicable loan agreement). As of March 31, 2012, we believe we were in compliance with the financial covenants. As a result, we believe we are not in default of any of our loans. However, the General Electric Capital Corporation (“GE”) before dividend consolidated fixed charge coverage ratio (“FCCR”) covenant allows EBITDA to be adjusted for nonrecurring expenses. As of March 31, 2012 the Company believes that all adjustments included in the covenant calculation are appropriate. If all adjustments are not accepted by GE, the Company will not have met its before dividend FCCR covenant. The cure provisions permit the Company to make a prepayment within 30 days after notice from the lender in an amount sufficient that would result in compliance with the before dividend FCCR for the period.

If a cure right is exercised, the Company estimates the debt prepayment amount would range from $0 to $1.5 million. If necessary to prepay debt in this range, the Company has the intention and ability to make such repayment within 30 days notice from GE.

 

(dollars in thousands)            

Great Western Bank Covenants

   March 31,
2012
Requirement
   March 31,
2012
Calculation
 

Consolidated debt service coverage ratio calculated as follows: *

   ³0.9:1   

Adjusted NOI (A) / Debt service (B)

     

Net loss per financial statements

      $ (17,737

Net adjustments per loan agreement

        37,939   
     

 

 

 

Adjusted NOI per loan agreement (A)

      $ 20,202   
     

 

 

 

Interest expense per financial statements - continuing operations

        8,796   

Interest expense per financial statements - discontinued operations

        3,181   
     

 

 

 

Total interest expense per financial statements

      $ 11,977   

Net adjustments per loan agreement

        6,542   
     

 

 

 

Debt service per loan agreement (B)

      $ 18,519   
     

 

 

 

Consolidated debt service coverage ratio

        1.09:1   

 

* Calculations based on prior four quarters

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

(dollars in thousands)            

Great Western Bank Covenants

   March 31,
2012
Requirement
   March 31,
2012
Calculation
 

Loan-specific debt service coverage ratio calculated as follows: *

   ³0.9:1   

Adjusted NOI (A) / Debt service (B)

     

Net loss per financial statements

      $ (17,737

Net adjustments per loan agreement

        21,624   
     

 

 

 

Adjusted NOI per loan agreement (A)

      $ 3,887   
     

 

 

 

Interest expense per financial statements - continuing operations

        8,796   

Interest expense per financial statements - discontinued operations

        3,181   
     

 

 

 

Total interest expense per financial statements

      $ 11,977   

Net adjustments per loan agreement

        (8,512
     

 

 

 

Debt service per loan agreement (B)

      $ 3,465   
     

 

 

 

Loan-specific debt service coverage ratio

        1.12:1   

 

* Calculations based on prior four quarters

 

Great Western Bank Covenants

   March 31,
2012
Requirement
   March 31,
2012
Calculation
 

Consolidated leverage ratio calculated as follows:

   £ 4.25   

Total liabilities (A) / Tangible net worth (B)

     

Total liabilities per financial statements and loan agreement (A)

      $ 174,826   

Total assets per financial statements

        227,995   

Total liabilities per financial statements

        174,826   
     

 

 

 

Tangible net worth per loan agreement (B)

      $ 53,169   

Consolidated Leverage Ratio:

        3.29   

The Great Western Bank credit facilities also require maintenance of consolidated and loan-specific loan to value ratios that do not exceed 70%, tested annually commencing on December 31, 2012, and that we not pay dividends in excess of 75% of our funds from operations per year. The consolidated and loan-specific debt service coverage ratios for the credit facilities remain at 0.9 to 1, tested quarterly, through June 29, 2012. The consolidated debt service coverage ratio increases to 1.05 to 1, tested quarterly, from June 30, 2012 through the maturity of the credit facilities. The loan-specific debt service coverage ratio increases to 1.05 to 1, tested quarterly, from June 30, 2012 through December 30, 2012 and 1.20 to 1, tested quarterly, from December 31, 2012 through the maturity of the credit facilities.

The credit facilities with Great Western Bank currently consist of a $12.5 million revolving credit facility and term loans of $14 million, $10 million and $7.5 million. All loans under the credit facilities mature on June 30, 2013. The interest rate on the revolving credit portion of the credit facilities is 5.95% and the interest rate on the term loan portion of the credit facilities is 6.00%.

 

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The credit facilities provide for $12.5 million of availability under the revolving credit facility through June 30, 2012, after which the loans available to us through the revolving credit facility and term loans may not exceed the lesser of (a) an amount equal to 70% of the total appraised value of the hotels securing the credit facilities and (b) an amount that would result in a loan-specific debt service coverage ratio of less than 1.05 to 1 from July 1, 2012 through December 30, 2012 and 1.20 to 1 from December 31, 2012 through the maturity of the credit facilities. If the availability of the credit facilities as of March 31, 2012 was subject to the post-June 30, 2011 borrowing base formula, the credit facilities would have remained fully available to the Company. The credit facilities require a $500,000 reduction in the availability of the revolving credit facility by September 30, 2012 and an additional $500,000 reduction by December 31, 2012.

(dollars in thousands)

 

GE Covenants

   March 31,
2012
Requirement
   March 31,
2012
Calculation
 

Loan-specific fixed charge coverage ratio calculated as follows: *

   ³ 0.85:1   

Adjusted EBITDA (A) / Fixed charges (B)

     

Net loss per financial statements

      $ (17,737

Net adjustments per loan agreement

        23,882   
     

 

 

 

Adjusted EBITDA per loan agreement (A)

      $ 6,145   
     

 

 

 

Interest expense per financial statements - continuing operations

        8,796   

Interest expense per financial statements -discontinued operations

        3,181   
     

 

 

 

Total interest expense per financial statements

      $ 11,977   

Net adjustments per loan agreement

        (5,299

Fixed charges per loan agreement (B)

      $ 6,678   
     

 

 

 

Loan-specific fixed charge coverage ratio

        0.92:1   

 

* Calculations based on prior four quarters

 

GE Covenants

   March 31,
2012
Requirement
  March 31,
2012
Calculation
 

Loan-specific loan to value ratio calculated as follows:

   £ 100%  

Loan balance (A) / Value (B)

    

Loan balance (A)

     $ 66,146   

Value (B)

     $ 68,805   

Loan-specific loan to value ratio

       96.1

 

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(in thousands)            

GE Covenants

   March 31,
2012
Requirement
   March 31,
2012
Calculation
 

Before dividend consolidated fixed charge coverage ratio calculated as follows: *

   ³ 0.95:1   

Adjusted EBITDA (A) / Fixed charges (B)

     

Net loss per financial statements

      $ (17,737

Net adjustments per loan agreement

        33,109   
     

 

 

 

Adjusted EBITDA per loan agreement (A)

      $ 15,372   
     

 

 

 

Interest expense per financial statements - continuing operations

        8,796   

Interest expense per financial statements - discontinued operations

        3,181   
     

 

 

 

Total interest expense per financial statements

      $ 11,977   

Net adjustments per loan agreement

        4,202   

Fixed charges per loan agreement (B)

        16,179   
     

 

 

 

Before dividend consolidated fixed charge coverage ratio

        0.95:1   

 

* Calculations based on prior four quarters

 

GE Covenants

   March 31,
2012
Requirement
   March 31,
2012
Calculation
 

After dividend consolidated fixed charge coverage ratio calculated as follows: *

   ³ 0.75:1   

Adjusted EBITDA (A) / Fixed charges (B)

     

Net loss per financial statements

      $ (17,737

Net adjustments per loan agreement

        33,109   
     

 

 

 

Adjusted EBITDA per loan agreement (A)

      $ 15,372   
     

 

 

 

Interest expense per financial statements - continuing operations

        8,796   

Interest expense per financial statements - discontinued operations

        3,181   
     

 

 

 

Total interest expense per financial statements

      $ 11,977   

Net adjustments per loan agreement

        5,965   

Fixed charges per loan agreement (B)

      $ 17,942   
     

 

 

 

After dividend consolidated fixed charge coverage ratio

        0.86:1   

 

* Calculations based on prior four quarters

On March 29, 2012, our credit facilities with General Electric Capital Corporation (“GE”) were amended to replace existing financial covenant requirements with new financial covenant requirements. The new financial covenants require that, through the term of the loans, we maintain: (a) a minimum before dividend fixed charge coverage ratio (FCCR) with respect to our GE-encumbered properties (based on a rolling 12-month period) of 0.85:1 as of March 31, 2012, which requirement increases quarterly thereafter to 1.30:1 as of December 31, 2015; (b) a maximum loan to value ratio with respect to our GE-encumbered properties of 100% as of March 31, 2012, which requirement decreases quarterly thereafter to 60% as of December 31, 2015; (c) a minimum before dividend consolidated FCCR (based on a rolling 12-month period) of 0.95:1 as of March 31, 2012, which requirement increases quarterly thereafter to 1.30:1 as of December 31, 2014; and (d) a minimum after dividend consolidated FCCR (based on a rolling 12-month period) of 0.75:1 as of March 31, 2012, which requirement increases quarterly thereafter to 1.00:1 as of December 31, 2013.

 

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The GE amendment, among other things, also: (a) shortens the maturity date of the loans secured by the Masters Inn hotels and Savannah Suites hotels to December 31, 2014; (b) requires a principal prepayment of $7 million on or before December 31, 2012; (c) provides that the previous increases to the interest rates on the loans will remain in effect and will not be reduced in the future if we achieve a particular FCCR; (d) adds cross-default provisions with our other material debt and most favored lender provisions; and (e) implements restrictions on the prepayment of other debt.

In May 2008, we converted the interest rates on certain of our GE loans to fixed rates. Because interest rates have since decreased, there are yield maintenance costs associated with prepayments of those loans. The yield maintenance cost associated with the most recent Masters Inn sale was 16.5% of the amount prepaid. The GE amendment implements fixed prepayment fees on the loans secured by the Masters Inn hotels and Savannah Suites hotels (in lieu of the yield maintenance costs) which start at 2.5% of the amount prepaid in 2012 and increase over time up to 10% of the amount prepaid.

If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness and ultimately lose our hotels through lender foreclosure if we are unable to obtain alternative sources of financing with acceptable terms. Our Great Western Bank and GE credit facilities contain cross-default provisions which would allow Great Western Bank and GE to declare a default and accelerate our indebtedness to them if we default on our other loans, and such default would permit that lender to accelerate our indebtedness under any such loan. We believe we are not in default of any of our loans. However, the General Electric Capital Corporation (“GE”) before dividend consolidated fixed charge coverage ratio (“FCCR”) covenant allows EBITDA to be adjusted for nonrecurring expenses. As of March 31, 2012 the Company believes that all adjustments included in the covenant calculation are appropriate. If all adjustments are not accepted by GE, the Company will not have met its before dividend FCCR covenant. The cure provisions permit the Company to make a prepayment within 30 days after notice from the lender in an amount sufficient that would result in compliance with the before dividend FCCR for the period.

If a cure right is exercised, the Company estimates the debt prepayment amount would range from $0 to $1.5 million. If necessary to prepay debt in this range, the Company has the intention and ability to make such repayment within 30 days notice from GE.

A summary of the Company’s long term debt as of March 31, 2012 is as follows (in thousands):

 

     Balance      Interest
Rate
    Maturity

Fixed Rate Debt

       

Lender

       

First National Bank

   $ 840         5.00   5/2012

GE Capital

     1,088         5.00   12/2012

Greenwich Capital Financial Products

     28,994         7.50   12/2012

Great Western Bank

     24,088         6.00   6/2013

Elkhorn Valley Bank

     926         5.75   9/2013

GE Capital

     19,399         7.17   12/2014

Citigroup Global Markets Realty Corp

     12,940         5.97   11/2015

Elkhorn Valley Bank

     3,026         6.25   6/2016

GE Capital

     12,573         7.17   2/2017

GE Capital

     12,346         7.69   6/2017

Wachovia Bank

     8,436         7.38   3/2020
  

 

 

      

Total Fixed Rate Debt

   $ 124,656        
  

 

 

      

Variable Rate Debt

       

Lender

       

GE Capital

     19,489         3.98   2/2018

GE Capital

     2,339         4.54   2/2018
  

 

 

      

Total Variable Rate Debt

   $ 21,828        
  

 

 

      

Subtotal debt

   $ 146,484        
  

 

 

      

Less: debt associated with hotel properties held for sale

     25,920        
  

 

 

      

Total Long-Term Debt

   $ 120,564        
  

 

 

      

 

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On January 18, 2012, the Company sold a Super 8 in Fayetteville, Arkansas (83 rooms) for approximately $1.56 million with a $0.4 million gain. The proceeds were used primarily to reduce a term loan with Great Western Bank.

In two closings on February 1, 2012 and February 15, 2012, the Company completed the sale to Real Estate Strategies, L.P. of 3,000,000 shares of Series C convertible preferred stock and warrants to purchase 30,000,000 shares of common stock at an exercise price of $1.20 per common share. Net proceeds after issuance cost were $28.6 million. The Company agreed to use $20 million of net proceeds to pursue hospitality acquisitions which are consistent with the investment strategy of the Company Board, as well as an additional $5 million within a reasonable period.

On February 2, 2012, we paid $11.8 million on the Great Western Bank revolving line of credit, bringing the balance to zero. The available capacity is expected to be used in part to fund the $20 million obligation for hotel investment. The payment was funded with a portion of the net proceeds from the Series C convertible preferred stock.

On February 3, 2012, the Company paid in full the $5.0 million balance on the revolving credit facility with Elkhorn Valley Bank, with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

On February 16, 2012, the Company paid in full the $2.1 million note payable to Fredericksburg North Investors, LLC, with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

On February 21, 2012, the Company amended its credit facilities with Great Western Bank to extend the maturity date of all loans to June 30, 2013.

On March 1, 2012, the Company amended its credit facility with First National Bank of Omaha to extend the maturity date to May 1, 2012. This debt was paid in full on April 20, 2012.

On March 27, 2012, the Company sold a Super 8 in Muscatine, Iowa (63 rooms) for approximately $1.3 million. The proceeds were used primarily to reduce a term loan with Great Western Bank, with the remaining amount used to reduce the revolving line of credit with Great Western Bank.

On March 27, 2012, the Company entered into an agreement to acquire the 100 room Hilton Garden Inn in Solomons Island, Maryland for $11.5 million. The purchase will be funded with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

On March 29, 2012, the Company amended its credit facilities with General Electric Capital Corporation. These changes were reflected in the notes to the Company’s consolidated financial statements included in its Form 10-K for the year ended December 31, 2011.

Redemption of Noncontrolling Preferred Operating Partnership Units

At March 31, 2012, 11,424 of SLP’s preferred operating partnership units (“Preferred OP Units”) were outstanding. The redemption value for the Preferred OP Units is $0.1 million for March 31, 2012. Each limited partner of SLP may, subject to certain limitations, require that SLP redeem all or a portion of his or her Preferred OP Units, at any time after a specified period following the date the units were acquired, by delivering a redemption notice to SLP. The Preferred OP Units are convertible by the holders into Common operating units (“Common OP Units”) on a one-for-one basis or, pursuant to an extension agreement by the holders, may be redeemed for cash at the option of the holder at $10 per unit on or after October 24, 2012.

Supertel offered to each of the Preferred OP Unit holders the option to extend until October 24, 2012 their right to have units redeemed at $10 per unit. Holders of 11,424 units elected to extend at a redemption value of $114,240.

There were no Preferred OP Units redeemed during the three months ending March 31, 2012.

 

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Contractual Commitments

Below is a summary of certain obligations that will require capital (in thousands):

 

Contractual Obligations

   Total      Payments Due by Period  
      Less than
1 Year
     1-3 Years      4-5 Years      More than
5 years
 

Long-term debt including interest

   $ 140,600       $ 42,124       $ 48,382       $ 23,361       $ 26,733   

Land leases

     5,763         178         481         470         4,634   

Other

     404         264         140         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 146,767       $ 42,566       $ 49,003       $ 23,831       $ 31,367   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The column titled Less than 1 Year represents payments due for the balance of 2012. Long-term debt includes debt on properties classified in continuing operations. The debt related to properties held for sale (and expected to be sold in the next 12 months, with the respective debt paid) of $25.9 million is not included in the table above.

We have various standing or renewable contracts with vendors. These contracts are all cancelable with immaterial or no cancellation penalties. Contract terms are generally one year or less. The land leases reflected in the table above represent continuing operations. In addition, the Company has two land leases associated with properties in discontinued operations. These two properties are expected to be sold in the next 12 months. The annual lease payments of $105,000 are not included in the table above. We also have management agreements with HMA, Strand, Kinseth and HLC Hotels, providing for the management and operation of the hotels.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities, to perform impairment assessments, and for disclosure purposes. In February 2012 the Company issued financial instruments with features that were determined to be derivative liabilities, and as a result must be measured at fair value on a recurring basis under Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820-10 Fair Value Measurements and Disclosures – Overall. In addition we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures – Overall – Subsequent Measurement, for our nonfinancial assets which include our held for sale hotels, and the disclosure of the fair value of our debt.

The Company’s financial instruments, the derivative liabilities, and the non financial assets, our held for sale hotels, are measured using inputs from level 3 of the fair value hierarchy.

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 non- financial asset valuations use unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data. Financial asset and liability valuation inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the liability; this includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

Non financial assets

During the three months ending March 31, 2012, Level 3 inputs were used to determine non-cash impairment losses of $1.8 million on ten held for sale hotels and recovery of previously recorded impairment for which fair value exceeded management’s previous estimates in the amount of $0.4 million on two hotels that were reclassified into held for use. There was no impairment on held for use hotels.

During the three months ending March 31, 2011, Level 3 inputs were used to determine non-cash impairment losses of $0.1 million on five hotels held for sale, $0.2 million on three hotels subsequently sold and $0.2 million on one hotel placed that was subsequently placed back in held for use. The Company also recorded a recovery of $25,000 of previously recorded impairment loss on one hotel at the time of sale. There was no impairment on held for use hotels.

In accordance with ASC 360-10-36 Property Plant and Equipment – Overall – Subsequent Measurements, the Company determines the fair value of an asset held for sale based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales.

Financial instruments

As of March 31, 2012, the fair value of the derivative liabilities in connection with the February 2012 issuance was determined by the Monte Carlo simulation method. The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error.

The fair value of the Company’s financial liabilities carried at fair value and measured on a recurring basis as of March 31, 2012 are as follows (in thousands):

 

Description

   Level 1      Level 2      Level 3  

Series C convertible preferred embedded derivative

   $ —         $ —         $ 8,009   

Warrant derivative

     —           —           8,893   
  

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 16,902   
  

 

 

    

 

 

    

 

 

 

There were no transfers between levels during the three months ended March 31, 2012 and the three months ended March 31, 2011.

The following table presents changes during the three months ended March 31, 2012 in Level 3 liabilities measured at fair market value on a recurring basis. At March 31, 2012 there was a $1.2 million unrealized loss, a non-cash charge, recorded in the Consolidated Statement of Operations. There were no level 3 assets or liabilities measured on a recurring basis during the three months ended March 31, 2011.

 

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Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

     Fair
Value
at
December 31, 2011
     Net Realized
and
Unrealized
(Gains) Losses
Included

in Income
     Purchases,
Sales,
Issuances
and
Settlements,
Net
     Gross
Transfers
In
     Gross
Transfers
Out
     Fair
Value
at
March 31, 2012
     Changes in
Unrealized
(Gains) Losses
Included in
Income on
Instruments
Held

at
March 31, 2012
 

Series C convertible preferred embedded derivative

   $ —         $ 934       $ 7,075       $ —         $ —         $ 8,009       $ 934   

Warrant derivative

     —           279         8,614         —           —           8,893         279   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 1,213       $ 15,689       $ —         $ —         $ 16,902       $ 1,213   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The carrying value and estimated fair value of the Company’s debt as of March 31, 2012 and December 31, 2011 are presented in the table below (in thousands):

 

     Carrying Value      Estimated Fair Value  
     3/31/2012      12/31/2011      3/31/2012      12/31/2011  

Continuing operations

   $ 120,564       $ 130,672       $ 122,301       $ 132,665   

Discontinued operations

     25,920         35,173         26,879         35,781   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 146,484       $ 165,845       $ 149,180       $ 168,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other

To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual amount of any future dividends will be determined by the Board of Directors based on our actual results of operations, economic conditions, capital expenditure requirements and other factors that the Board of Directors deems relevant.

Off Balance Sheet Financing Transactions

We have not entered into any off balance sheet financing transactions.

Key Performance Indicators

Earnings Before Interest, Taxes, Depreciation, Amortization, Noncontrolling Interest and Preferred Stock Dividends

The Company’s Adjusted EBITDA for the three months ended March 31, 2012, was $0.2 million, representing a decrease of $0.7 million from the three months ended March 31, 2011. Adjusted EBITDA is reconciled to net loss as follows (in thousands):

 

Unaudited-In thousands, except statistical data:    Three months ended
March 31,
 
     2012     2011  

RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA

    

Net loss attributable to common shareholders

   $ (4,622   $ (4,068

Interest expense, including discontinued operations

     2,678        3,103   

Income tax benefit, including discontinued operations

     (662     (1,073

Depreciation and amortization, including discontinued operations

     2,170        2,621   
  

 

 

   

 

 

 

EBITDA

     (436     583   

Noncontrolling interest

     (6     (11

Preferred stock dividend

     657        368   
  

 

 

   

 

 

 

ADJUSTED EBITDA

   $ 215      $ 940   
  

 

 

   

 

 

 

Adjusted EBITDA is a financial measure that is not calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We calculate Adjusted EBITDA by adding back to net earnings (loss) available to common shareholders certain non-operating expenses and non-cash charges which are based on historical cost accounting and we believe may be of limited significance in evaluating current performance. We believe these adjustments can help eliminate the accounting effects of depreciation and amortization and financing decisions and facilitate comparisons of core operating profitability between periods, even though Adjusted EBITDA also does not represent an amount that accrues directly to common shareholders. In calculating Adjusted EBITDA, we also add back preferred stock dividends and noncontrolling interests, which are cash charges.

Adjusted EBITDA doesn’t represent cash generated from operating activities determined by GAAP and should not be considered as an alternative to net income, cash flow from operations or any other operating performance measure prescribed by GAAP. Adjusted EBITDA is not a measure of our liquidity, nor is Adjusted EBITDA indicative of funds available to fund our cash needs, including our ability to make cash distributions. Neither does the measurement reflect cash expenditures for long-term assets and other items that have been and will be incurred. Adjusted EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or the evaluation of our operating performance. Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.

Funds from Operations

The Company’s funds from operations (“FFO”) for the three months ended March 31, 2012 was $(1.5) million, representing a decrease of $0.5 million from FFO reported for the three months ended March 31, 2011. The Company’s Adjusted FFO for the three months ended March 31, 2012 was $(0.3) million, which is an increase of $0.7 million over the $(1.0) million reported at March 31, 2011. The weighted average number of shares outstanding for the calculation of FFO basic and diluted were 23,070,435 and 22,917,509 for the three months ending March 31, 2012 and 2011, respectively. FFO is reconciled to net loss as follows (in thousands)

 

     Three months ended
March 31,
 
     2012     2011  

Net loss attributable to common shareholders

   $ (4,622   $ (4,068

Depreciation and amortization, including discontinued operations

     2,170        2,621   

Net (gain) loss on disposition of real estate assets, including discontinued operations

     (490     19   

Impairment, including discontinued operations

     1,434        449   
  

 

 

   

 

 

 

FFO

   $ (1,508   $ (979

Unrealized loss on derivatives

     1,213        —     
  

 

 

   

 

 

 

Adjusted FFO

   $ (295   $ (979
  

 

 

   

 

 

 

FFO per share-basic and diluted

   $ (0.07   $ (0.04
  

 

 

   

 

 

 

Adjusted FFO per share - basic and diluted

   $ (0.01   $ (0.04
  

 

 

   

 

 

 

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

FFO and Adjusted FFO (“AFFO”) are non-GAAP financial measures. We consider FFO and AFFO to be market accepted measures of an equity REIT’s operating performance, which are necessary, along with net earnings (loss), for an understanding of our operating results. FFO, as defined under the National Association of Real Estate Investment Trusts (NAREIT) standards, consists of net income computed in accordance with GAAP, excluding gains (or losses) from sales of real estate assets, plus depreciation and amortization of real estate assets. We believe our method of calculating FFO complies with the NAREIT definition. Adjusted FFO excludes the unrealized loss on derivative liabilities, which is a non-cash charge against income and which does not represent results from our core operations. FFO and AFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO and AFFO should not be considered as alternatives to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. All REITs do not calculate FFO and AFFO in the same manner; therefore, our calculation may not be the same as the calculation of FFO and AFFO for similar REITs.

We use FFO and AFFO as performance measures to facilitate a periodic evaluation of our operating results relative to those of our peers. We consider FFO and AFFO useful additional measures of performance for an equity REIT because they facilitate an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assume that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO and AFFO provide a meaningful indication of our performance.

Net Operating Income

NOI is one of the performance indicators the Company uses to assess and measure operating results. The Company believes that NOI is a useful additional measure of operating performance of its hotels because it provides a measure of core operations that is unaffected by depreciation, amortization, financing and general and administrative expense. NOI is also an important performance measure used to determine the amount of the management fees paid by the Company to the operators of its hotels.

NOI is a non-GAAP measure, and is not necessarily indicative of available earnings and should not be considered an alternative to Earnings Before Net Gain (Loss) on Dispositions of Assets, Other Income, Interest Expense and Income Taxes. NOI is reconciled to Earnings Before Net Gain (Loss) on Dispositions of Assets, Other Income, Interest Expense and Income Taxes as follows (in thousands):

 

     Three months ended
March 31,
 
     2012     2011  

Earnings Before Net Loss on Dispositions of Assets, Other Income, Interest Expense, and Income Taxes

   $ (77   $ (1,108

Add back:

    

Termination Cost

     —          540   

General and Administrative

     1,093        1,103   

Depreciation and Amortization

     2,124        2,247   

Hotel Operating Revenue - discontinued

     4,189        5,305   

Hotel Operating Expenses - discontinued

     (3,865     (5,071

Other Expenses *

     2,512        2,708   
  

 

 

   

 

 

 

NOI

   $ 5,976      $ 5,724   
  

 

 

   

 

 

 

 

* Other Expenses include both continuing and discontinued operations for Management Fees, Bonus Wages, Insurance, Real Estate and Personal property taxes, and miscellaneous expenses.

Property Operating Income

POI is a non-GAAP financial measure, and should not be considered as an alternative to loss from continuing operations or loss from discontinued operations, net of tax. The Company believes that the presentation of hotel property operating results (POI) is helpful to investors, and represents a more useful description of its core operations, as it better communicates the comparability of its hotels’ operating results for all of the company’s hotel properties.

 

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Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

POI from continuing operations is reconciled to net loss as follows (in thousands):

 

RECONCILIATION OF NET LOSS FROM CONTINUING OPERATIONS TO POI from
continuing operations
   Three months ended
March 31,
 
     2012     2011  

Net loss from continuing operations

   $ (2,564   $ (2,948

Depreciation and amortization

     2,124        2,247   

Net loss on disposition of assets

     4        5   

Other (income) expense

     1,212        (85

Interest expense

     2,116        2,336   

General and administrative expense

     1,093        1,103   

Termination cost

     —          540   

Income tax benefit

     (464     (609

Impairment (recovery) expense

     (381     193   
  

 

 

   

 

 

 

POI-continuing operations

   $ 3,140      $ 2,782   
  

 

 

   

 

 

 

POI from discontinued operations is reconciled to loss from discontinued operations, net of tax, as follows (in thousands):

 

Reconciliation of loss from discontinued operations to POI - discontinued operations:    Three months ended
March 31,
 
     2012     2011  

Loss from discontinued operations

   $ (1,407   $ (763

Depreciation and amortization from discontinued operations

     46        374   

Net (gain) loss on disposition of assets from discontinued operations

     (494     14   

Interest expense from discontinued operations

     562        767   

General and administrative expense from discontinued operations

     —          50   

Impairment losses from discontinued operations

     1,815        256   

Income tax benefit from discontinued operations

     (198     (464
  

 

 

   

 

 

 

POI-discontinued operations

   $ 324      $ 234   
  

 

 

   

 

 

 

Revenue Per Available Room (“RevPAR”), Average Daily Rate (“ADR”), and Occupancy

The following table presents our RevPAR, ADR and Occupancy, by region, for the three months ended March 31, 2012 and 2011, respectively. The comparisons of same store operations (excluding Held For Sale hotels) are for 74* hotels owned as of January 1, 2011.

 

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Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

     Room
Count
     Three months ended March 31, 2012      Room
Count
     Three months ended March 31, 2011  

Region

      RevPAR      Occupancy     ADR         RevPAR      Occupancy     ADR  

Mountain

     214       $ 25.49         53.8   $ 47.35         214       $ 23.35         52.3   $ 44.66   

West North Central

     1,559         25.15         51.9     48.41         1,559         25.47         55.0     46.30   

East North Central

     978         29.01         50.2     57.74         978         28.48         49.5     57.56   

Middle Atlantic

     142         34.61         61.8     56.01         142         31.54         59.8     52.76   

South Atlantic

     2,525         28.49         66.4     42.93         2,525         27.28         66.8     40.82   

East South Central

     563         33.31         52.1     63.98         563         31.93         49.5     64.45   

West South Central

     373         24.07         55.7     43.22         373         28.45         65.6     43.36   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Same Store

     6,354       $ 27.96         57.9   $ 48.26         6,354       $ 27.46         59.0   $ 46.54   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

States included in the Regions
Mountain    Idaho and Montana
West North Central    Iowa, Kansas, Missouri, Nebraska and South Dakota
East North Central    Indiana and Wisconsin
Middle Atlantic    Pennsylvania
South Atlantic    Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
East South Central    Kentucky and Tennessee
West South Central    Arkansas and Louisiana

Our RevPAR, ADR, and Occupancy, by franchise affiliation, for the three months ended March 31, 2012 and 2011, were as follows:

 

     Room
Count
     Three months ended March 31, 2012      Room
Count
     Three months ended March 31, 2011  

Brand

      RevPAR      Occupancy     ADR         RevPAR      Occupancy     ADR  

Select Service

                     

Upper Midscale **

                     

Comfort Inn/ Comfort Suites

     1,414       $ 38.54         59.7   $ 64.51         1,414       $ 34.75         54.4   $ 63.84   

Other Upper Midscale (1)

     197         51.27         66.9     76.66         197         48.19         64.7     74.49   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Upper Midscale

     1,611       $ 40.11         60.6   $ 66.16         1,611       $ 36.39         55.7   $ 65.35   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Midscale

                     

Sleep Inn

     153         29.46         47.8     61.62         153         30.91         53.0     58.30   

Quality Inn

     122         18.79         30.4     61.79         122         17.89         31.3     57.18   

Other Midscale (2)

     138         34.07         59.0     57.76         138         32.92         53.6     61.46   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Midscale

     413       $ 27.86         46.4   $ 60.01         413       $ 27.74         46.8   $ 59.28   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Economy

                     

Days Inn

     1,026         25.60         55.8     45.87         1,026         27.18         58.3     46.61   

Super 8

     2,062         23.55         51.2     46.01         2,062         24.20         54.4     44.45   

Other Economy (3)

     144         51.45         65.9     78.09         144         47.61         66.3     71.84   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Economy

     3,232       $ 25.44         53.3   $ 47.73         3,232       $ 26.19         56.2   $ 46.60   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Upper Midscale/ Midscale/Economy

     5,256       $ 30.13         55.0   $ 54.78         5,256       $ 29.44         55.3   $ 53.23   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Economy Extended Stay (4)

     1,098         17.54         71.9     24.40         1,098         18.02         76.7     23.48   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Same Store

     6,354       $ 27.96         57.9   $ 48.26         6,354       $ 27.46         59.0   $ 46.54   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

1 Includes Hampton and Holiday Inn Express brands
2 Includes Baymont Inn and Ramada Limited
3 Includes Guesthouse and Independent brands
4 Includes Savannah Suites

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

 

* The following properties have been moved from the same store portfolio during the reporting period and classified as held for sale:

Pella, IA Super 8

Clinton, IA Super 8

Jackson, TN Guesthouse Inn

Wichita, KS Super 8

The following properties which were included in discontinued operations (held for sale) as of fiscal 2011 were subsequently reclassified as held for use and moved back to the same store portfolio:

Bossier City, LA Days Inn

Fredericksburg (South), VA Days Inn

 

** Chain brand categories for Midscale have been updated to correspond with the 2012 Smith Travel Research classifications for Midscale and Upper Midscale.

 

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Part I. FINANCIAL INFORMATION, CONTINUED:

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in our market risk exposure subsequent to December 31, 2011.

Item 4. CONTROLS AND PROCEDURES

Evaluation was performed under the supervision of management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 was (1) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. No changes in the Company’s internal control over financial reporting occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

Part II. OTHER INFORMATION:

 

Item 6. Exhibits

 

Exhibit
No.

  

Description

  10.1    Loan Modification Agreement dated as of March 29, 2012 by and between Supertel Limited Partnership, SPPR-South Bend, LLC, Supertel Hospitality, Inc. and Supertel Hospitality REIT Trust and GE Capital Commercial of Utah, LLC and GE Franchise Finance Commercial LLC. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 29, 2012).
  10.2    Fifth Amendment to Amended and Restated Loan Agreement dated February 21, 2012 by and between Supertel Hospitality, Inc. and Great Western Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 21, 2012).
  10.3    Employment Agreement of Kelly Walters, dated February 1, 2012 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 1, 2012).
  10.4    Employment Agreement of Steven C. Gilbert, dated February 1, 2012 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 1, 2012).
  10.5    Employment Agreement of Corrine L. Scarpello, dated February 1, 2012 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated February 1, 2012).
  10.6    Employment Agreement of David L. Walter dated February 1, 2012 (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated February 1, 2012).
  10.7    Purchase Agreement, dated November 16, 2011, by and among Supertel Hospitality, Inc., Supertel Limited Partnership and Real Estate Strategies, L.P. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A dated November 16, 2011).
  10.8    Warrants issued to Real Estate Strategies, L.P. dated February 1, 2012 and February 15, 2012 (incorporated herein by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011).
  10.9    Investor Rights and Conversion Agreement dated February 1, 2012, by and among Supertel Hospitality, Inc., Real Estate Strategies, L.P. and IRSA Inversiones y Representaciones Sociedad Anónima (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated January 30, 2012).
  10.10    Registration Rights Agreement dated February 1, 2012, by and among Supertel Hospitality, Inc., Real Estate Strategies, L.P. and IRSA Inversiones y Representaciones Sociedad Anónima (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated January 30, 2012).
  10.11    Directors Designation Agreement dated February 1, 2012, by and among Supertel Hospitality, Inc., Real Estate Strategies, L.P. and IRSA Inversiones y Representaciones Sociedad Anónima (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated January 30, 2012).
  31.1    Section 302 Certificate of Chief Executive Officer
  31.2    Section 302 Certificate of Chief Financial Officer
  32.1    Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
101.1    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.

 

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Supertel Hospitality, Inc., and Subsidiaries

SIGNATURES

Pursuant to the requirements 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.

 

SUPERTEL HOSPITALITY, INC.
By:  

/s/ Kelly A. Walters

  Kelly A. Walters
  President and Chief Executive Officer

Dated this 15th day of May, 2012

 

By:  

/s/ Corrine L. Scarpello

  Corrine L. Scarpello
  Chief Financial Officer and Secretary

Dated this 15th day of May, 2012

 

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Supertel Hospitality, Inc., and Subsidiaries

Exhibits

 

Exhibit
No.

  

Description

  10.1    Loan Modification Agreement dated as of March 29, 2012 by and between Supertel Limited Partnership, SPPR-South Bend, LLC, Supertel Hospitality, Inc. and Supertel Hospitality REIT Trust and GE Capital Commercial of Utah, LLC and GE Franchise Finance Commercial LLC. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 29, 2012).
  10.2    Fifth Amendment to Amended and Restated Loan Agreement dated February 21, 2012 by and between Supertel Hospitality, Inc. and Great Western Bank (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 21, 2012).
  10.3    Employment Agreement of Kelly Walters, dated February 1, 2012 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 1, 2012).
  10.4    Employment Agreement of Steven C. Gilbert, dated February 1, 2012 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 1, 2012).
  10.5    Employment Agreement of Corrine L. Scarpello, dated February 1, 2012 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated February 1, 2012).
  10.6    Employment Agreement of David L. Walter dated February 1, 2012 (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated February 1, 2012).
  10.7    Purchase Agreement, dated November 16, 2011, by and among Supertel Hospitality, Inc., Supertel Limited Partnership and Real Estate Strategies, L.P. (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A dated November 16, 2011).
  10.8    Warrants issued to Real Estate Strategies, L.P. dated February 1, 2012 and February 15, 2012 (incorporated herein by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011).
  10.9    Investor Rights and Conversion Agreement dated February 1, 2012, by and among Supertel Hospitality, Inc., Real Estate Strategies, L.P. and IRSA Inversiones y Representaciones Sociedad Anónima (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated January 30, 2012).
  10.10    Registration Rights Agreement dated February 1, 2012, by and among Supertel Hospitality, Inc., Real Estate Strategies, L.P. and IRSA Inversiones y Representaciones Sociedad Anónima (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated January 30, 2012).
  10.11    Directors Designation Agreement dated February 1, 2012, by and among Supertel Hospitality, Inc., Real Estate Strategies, L.P. and IRSA Inversiones y Representaciones Sociedad Anónima (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated January 30, 2012).
  31.1    Section 302 Certificate of Chief Executive Officer
  31.2    Section 302 Certificate of Chief Financial Officer
  32.1    Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
101.1    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements.