Summit Hotel Properties, Inc. - FORM 8-K/A - EX-99.2 - EXHIBIT 99.2

Attached files

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EX-23.1 - EXHIBIT 23.1 - Summit Hotel Properties, Inc.	a50788709ex23_1.htm
EX-99.1 - EXHIBIT 99.1 - Summit Hotel Properties, Inc.	a50788709ex99_1.htm
EX-99.3 - EXHIBIT 99.3 - Summit Hotel Properties, Inc.	a50788709ex99_3.htm
8-K/A - SUMMIT HOTEL PROPERTIES, INC. 8-K/A - Summit Hotel Properties, Inc.	a50788709.htm

Exhibit 99.2

Combined Financial Statements

Ocean Park Hotels Portfolio 1

As of December 31, 2012 and 2011 and

Each of the Three Years in the Period Ended December 31, 2012 and

Nine Months Ended September 30, 2013 and 2012 (Unaudited)

With Report of Independent Auditors

Ocean Park Hotels Portfolio 1

Combined Financial Statements

As of December 31, 2012 and 2011 and

Each of the Three Years in the Period Ended December 31, 2012

and Nine Months Ended September 30, 2013 and 2012 (Unaudited)

Contents

Report of Independent Auditors	1

Combined Financial Statements

Combined Balance Sheets	3
Combined Statements of Comprehensive Income (Loss)	4
Combined Statements of Owners' Equity in Hotels	5
Combined Statements of Cash Flows	6
Notes to Combined Financial Statements	7

Report of Independent Auditors

The Board of Directors

Summit Hotel Properties, Inc.

We have audited the accompanying combined financial statements of the Ocean Park Hotels Portfolio 1 (the Portfolio), not a legal entity, which comprise the combined balance sheets as of December 31, 2012 and 2011, and the related combined statements of comprehensive income (loss), owners’ equity in hotels, and cash flows for each of the three years in the period ended December 31, 2012, and the related notes to the combined financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Ocean Park Hotels Portfolio 1 as of December 31, 2012 and 2011, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young, LLP

Austin, Texas

January 17, 2014

Ocean Park Hotels Portfolio 1

Combined Balance Sheets

	December 31						September 30
	2012			2011			2013
							(Unaudited)
Assets
Cash and cash equivalents	$	1,144,180		$	480,500		$	1,062,873
Restricted cash		156,345			125,706			185,555
Accounts receivable		121,569			123,052			248,945
Other receivables		386,832			223,108			614,957
Prepaid expenses and franchise fees		154,435			133,854			20,909
Deferred loan costs, net		202,138			265,228			171,940
		2,165,499			1,351,448			2,305,179
Property and equipment:
Land		7,405,333			7,405,333			7,405,333
Land improvements		2,365,630			2,365,630			2,365,630
Buildings		27,421,749			27,421,749			27,445,093
Building improvements		57,033			57,033			57,033
Furniture, fixtures, and equipment		8,135,281			8,076,742			8,189,429
Accumulated depreciation		(12,179,016	)		(10,320,447	)		(13,379,071	)
Total property and equipment		33,206,010			35,006,040			32,083,447
Total assets	$	35,371,509		$	36,357,488		$	34,388,626

Liabilities and owners’ equity
Accounts payable	$	342,239		$	350,171		$	456,396
Due to affiliate		37,059			81,586			–
Accrued payables		–			12,423			1,874
Accrued payroll and payroll taxes		143,170			132,890			129,495
Accrued interest		768,208			634,354			872,598
Other accrued expenses		–			–			1,982
Mortgage payable		32,049,191			32,818,721			31,313,072
Total liabilities		33,339,867			34,030,145			32,775,417
Total owners’ equity		2,031,642			2,327,343			1,613,209
Total liabilities and owners’ equity	$	35,371,509		$	36,357,488		$	34,388,626

See accompanying notes.

Ocean Park Hotels Portfolio 1

Combined Statements of Comprehensive Income (Loss)

	Year Ended December 31							Nine Months Ended September 30
	2012		2011			2010		2013		2012
								(Unaudited)
Revenue
Room revenue	$	11,949,807	$	11,333,061		$	10,821,606	$	9,379,027	$	9,393,980
Telephone revenue		4,709		7,342			11,171		3,498		3,626
Other revenue		224,438		232,617			228,085		140,928		167,074
Total revenue		12,178,954		11,573,020			11,060,862		9,523,453		9,564,680

Expenses
Department expense:
Rooms expense		1,052,527		1,024,707			909,584		838,777		801,419
Telephone expense		111,197		82,002			53,485		91,798		80,489
Total department expense		1,163,724		1,106,709			963,069		930,575		881,908

Operating expense:
Salaries and wages		2,011,373		1,960,215			1,929,847		1,597,837		1,518,115
Payroll taxes and benefits		425,050		393,339			423,283		347,150		333,977
Other expense		62,615		66,907			61,612		41,894		48,009
Administrative and general expense		522,937		541,198			560,182		394,825		377,612
Sales and marketing expense		966,573		887,624			815,860		751,103		746,094
Maintenance expense		297,774		325,823			154,674		138,293		231,564
Amortization/depreciation		1,921,659		2,225,236			2,105,062		1,240,907		1,441,295
Franchise fee		510,179		483,919			461,622		401,401		400,877
Management fee		422,445		403,367			376,271		347,789		346,243
Energy		379,617		381,706			373,289		302,122		289,311
Non-operating expense		614,969		616,352			710,794		469,575		451,742
Owner expenses		174,684		304,844			25,393		247,519		149,813
Interest expense		1,727,356		1,882,154			1,908,701		1,319,082		1,298,066
Total operating expense		10,037,231		10,472,684			9,906,590		7,599,497		7,632,718
Comprehensive income (loss)	$	977,999	$	(6,373	)	$	191,203	$	993,381	$	1,050,054

See accompanying notes.

Ocean Park Hotels Portfolio 1

Combined Statements of Owners’ Equity in Hotels

Balance at January 1, 2010	$	5,133,713
Comprehensive income		191,203
Distributions to owners		(1,448,767	)
Balance at December 31, 2010		3,876,149
Comprehensive loss		(6,373	)
Distributions to owners		(1,542,433	)
Balance at December 31, 2011		2,327,343
Comprehensive income		977,999
Distributions to owners		(1,273,700	)
Balance at December 31, 2012		2,031,642
Comprehensive income (unaudited)		993,381
Distributions to owners (unaudited)		(1,411,814	)
Balance at September 30, 2013 (unaudited)	$	1,613,209

See accompanying notes.

Ocean Park Hotels Portfolio 1

Combined Statements of Cash Flows

	Year Ended December 31									Nine Months Ended September 30
	2012			2011			2010			2013			2012
										(Unaudited)
Operating activities
Comprehensive net income (loss)	$	977,999		$	(6,373	)	$	191,203		$	993,381		$	1,050,054
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,858,569			2,085,131			2,033,882			1,200,053			1,391,650
Amortization		63,090			140,105			71,180			40,854			49,645
(Increase) decrease in assets:
Accounts receivable and other receivable		(162,241	)		(154,294	)		(30,653	)		(355,693	)		(227,554	)
Prepaid expenses		(20,581	)		(14,847	)		76,173			133,718			100,017
Accounts payable		(7,933	)		(16,307	)		(198,869	)		114,156			55,962
Accrued payroll and payroll taxes		10,280			2,140			34,750			(13,675	)		(11,755	)
Due to affiliated company		(44,527	)		(2,953	)		84,539			(37,059	)		(80,736	)
Other accrued expenses		121,432			130,581			71,208			108,247			85,964
Net cash provided by operating activities		2,796,088			2,163,183			2,333,413			2,183,982			2,413,247

Investing activities
Restricted cash		(30,639	)		87,340			(25,106	)		(29,210	)		38,232
Capital expenditures for property and equipment		(58,540	)		(155,313	)		(214,615	)		(77,492	)		(53,391	)
Net cash used in investing activities		(89,179	)		(67,973	)		(239,721	)		(106,702	)		(15,159	)

Financing activities
Proceeds from issuance of debt		–			12,500,000			–			–			–
Pay-off of debt		–			(12,173,534	)		–			–			–
Principal payments on debt		(769,529	)		(685,774	)		(669,956	)		(736,119	)		(571,425	)
Distributions to members		(1,273,700	)		(1,542,433	)		(1,448,767	)		(1,411,814	)		(882,913	)
Deferred loan costs		–			(194,278	)		–			(10,654	)		–
Net cash used in financing activities		(2,043,229	)		(2,096,019	)		(2,118,723	)		(2,158,587	)		(1,454,338	)

Net change in cash and cash equivalents		663,680			(809	)		(25,031	)		(81,307	)		943,750
Cash, beginning of year		480,500			481,309			506,340			1,144,180			480,500
Cash, end of year	$	1,144,180		$	480,500		$	481,309		$	1,062,873		$	1,424,250

Supplemental cash flow information
Cash paid for interest	$	959,148		$	1,247,800		$	1,389,598		$	446,484		$	566,894

See accompanying notes.

Ocean Park Hotels Portfolio 1

Notes to Combined Financial Statements

1. Description of Business and Basis of Presentation

The combined financial statements presented herein are for three hotels (the Portfolio) owned by Ocean Park Hotels-LLO, LLC, LLO Operator, Inc., Ocean Park Hotels-PWY, LLC, and Ocean Park Hotels-SBA, LLC (collectively, the Owners) located in Camarillo, Poway, and Goleta, California. The hotels include (i) a 115-room Hampton Inn and Suites hotel located in Camarillo, California (Camarillo), (ii) a 108-room Hampton Inn and Suites hotel located in Poway, California (Poway), and (iii) a 98-room Hampton Inn hotel located in Goleta, California (Goleta).

These combined financial statements present the combined balance sheets, statements of comprehensive income (loss), statements of owners’ equity in hotels, and statements of cash flows of the Ocean Park Hotels Portfolio 1, not a legal entity.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of the combined financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and the accompanying notes. Actual results could differ from those estimates and assumptions. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. Intercompany accounts and transactions have been eliminated in combination.

Cash

Cash includes cash held in depository bank accounts.

Restricted Cash

Restricted cash consists of funds placed in escrow with mortgage lenders to pay property taxes and capital expenditures.

Concentrations of Credit Risk

The Owners maintain their cash and cash equivalents in bank deposit accounts, which, at times, may exceed federally insured limits. The Portfolio has not experienced any losses in such accounts.

Ocean Park Hotels Portfolio 1

Notes to Combined Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Investment in Hotel Properties

Investments in hotel properties and related assets are recorded at cost, less accumulated depreciation. The Portfolio capitalizes the costs of significant additions and improvements that materially extend a property’s life. These costs may include hotel refurbishment, renovation, and remodeling expenditures. All costs of repairs and maintenance are expensed as incurred.

Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives are as follows:

Classification	Estimated Useful Lives

Buildings and improvements	40
Land improvements	15
Furnishings and equipment	5

When depreciable property and equipment are retired or disposed of, the related costs and accumulated depreciation are removed from the combined balance sheets, and any gain or loss is reflected in current operations.

Impairment of Investment in Hotel Properties

If events or circumstances indicate that the carrying value of a hotel property to be held and used may be impaired, a recoverability analysis is performed based on estimated undiscounted future cash flows to be generated from the property. If the analysis indicates that the carrying value is not recoverable from future cash flows, the excess of the net book value over the estimated fair value is charged to earnings.

Ocean Park Hotels Portfolio 1

Notes to Combined Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Income Taxes

No provision or liability for income taxes or income tax positions has been made in the accompanying combined financial statements since the combined financial statements do not contemplate the type of legal or tax entity that holds the Portfolio.

Advertising Costs

Advertising costs are expensed as incurred, and are included in sales and promotion expenses in the accompanying combined statements of comprehensive income.

Revenue Recognition

Revenues are recognized when rooms are occupied and the services are provided. Revenues consist of mainly room sales and food and beverage sales. Additionally, the Portfolio collects sales, use, occupancy, and similar taxes, which are presented on a net basis in the accompanying combined statements of operations.

Accounts Receivable

Accounts receivable, which primarily represent amounts due from hotel guests, are recorded at management’s estimate of the amounts that will be ultimately collected. The Portfolio provides for an allowance for doubtful accounts, which is based on specific identification and management’s historical experience.

Due to Affiliated Company

Due to affiliates represents the amounts payable to an affiliate of the Portfolio for services rendered related to management fees and reimbursable expenses.

Ocean Park Hotels Portfolio 1

Notes to Combined Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Deferred Loan Cost, Net

Certain loan costs are deferred and amortized to interest expense using the straight-line method, which approximates the amount to be amortized using the effective interest method. At the time of any repurchases or retirements of debt, a proportionate amount of net deferred loan costs is written off. The Portfolio recognized amortization of deferred loan costs totaling $60,475, $136,529, and $67,605 for the years ended December 31, 2012, 2011, and 2010, respectively, and $38,893 and $46,965, respectively, for the nine months ended September 30, 2013 and 2012 (unaudited).

Fair Value of Financial Instruments

Financial assets and liabilities with carrying amounts approximating fair value include cash, accounts receivable, other receivables, prepaid expenses and deposits, accounts payable, and accrued expenses. The carrying amounts of these financial assets and liabilities approximate fair value because of their short maturities. The carrying amounts of the Portfolio’s debt and other long-term liabilities approximate their fair values. The fair value of debt was based upon management’s best estimate of interest rates that would be available for similar debt obligations as of December 31, 2012 and 2011.

The accounting guidance defines fair value 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. The accounting standard establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Ocean Park Hotels Portfolio 1

Notes to Combined Financial Statements (continued)

3. Franchise Agreements

Upon opening of the hotels, the Owners entered into franchise agreements with Hilton Hotels Corporation. The agreements are for a 20-year period from the opening date of each hotel. Franchise fees are computed at 4.0%, 4.0%, and 5.0% of the gross room revenues for Camarillo, Goleta, and Poway, respectively, as defined in the agreement. Franchise fees for the years ended December 31, 2012, 2011, and 2010 were $510,179, $483,919, and $461,622, respectively, and were $401,401 and $400,877 for the nine months ended September 30, 2013 and 2012, respectively (unaudited).

4. Mortgages Payable

The Owners had the following mortgages payable at December 31:

	2012		2011
Note payable dated September 21, 2007, in the original amount of $1,585,000 with a 6.58% interest rate per annum. The note is payable annually each March 31 in an amount equal to the defined cash flow, per the agreement; however, if there is a defined cash flow shortage, no payment is due. As of December 31, 2012, no payments have been required on the note payable. The note payable will be due in full on October 22, 2028.	$	1,585,000	$	1,585,000
Note payable dated September 20, 2007, with a total commitment amount of $11,745,000 with principal and interest payments of $89,594 for thirty-five months and the remaining balance due on October 1, 2012. The loan was modified in January 2013, and commencing on February 1, 2013, principal and interest are payable in eleven equal installments, with a final payment of the entire balance due on January 1, 2014. The original loan had an interest rate of the prime rate, and the modification has an interest rate of prime plus 0.75%, with a minimum of 4.00%. The interest rate at December 31, 2012 was 3.25%. The loan is secured by the property and general assets.		10,735,499		11,065,085
Note payable dated December 16, 2005, with a total commitment amount of $12,225,000 with principal and interest monthly payments of $89,500 with a 7.45% interest rate and the remaining balance due on December 1, 2015. The loan was refinanced on November 9, 2011, with a total commitment amount of $12,500,000, with principal and interest monthly payments of $81,557, along with additional reserve and escrow payments as defined in the agreement, with a final payment of the entire balance due on November 11, 2021. The refinanced loan interest rate is 6.133%. The loan is guaranteed by related parties of the Owners.		12,276,131		12,482,328

Ocean Park Hotels Portfolio 1

Notes to Combined Financial Statements (continued)

4. Mortgages Payable (continued)

	2012		2011
Note payable dated October 25, 2004, in the original amount of $9,000,000 with principal and interest monthly payments of $57,833, with a 5.92% interest rate and the remaining balance due on November 6, 2014.	$	7,452,561	$	7,686,308
Total	$	32,049,191	$	32,818,721

At December 31, 2012, the aggregate maturities for mortgages payable are as follows:

Year ending December 31:
2013	$	3,326,138
2014		16,819,290
Thereafter		11,903,763
Total	$	32,049,191

5. Related-Party Transactions

The Owners have management agreements with Ocean Park Hotels, Inc., an entity related through common ownership. Ocean Park Hotels, Inc., and LLO Operator, Inc., which is the lessee to Ocean Park Hotels-LLO, LLC, entered into a management agreement as of September 25, 2003, which has a three-year term with renewal options. The agreement has been renewed each year with no changes to the terms. The agreement provides for base management fees that are calculated as 4% of adjusted gross revenue, as defined. Ocean Park Hotels, Inc., and Ocean Park Hotels-SBA, LLC, entered into a management agreement as of December 26, 2005, which has a one-year term with renewal options. The agreement has been renewed each year with no changes to the terms. The agreement provides for base management fees that are calculated as 4% room revenues, as defined, up to $3.7 million and 2% of any excess in each fiscal year. Ocean Park Hotels, Inc., and Ocean Park Hotels-PWY, LLC, entered into a management agreement as of September 20, 2007, which has a five-year term with renewal options. The agreement has been renewed each year with no changes to the terms. The agreement provides for basic management fees equal to 4% of adjusted gross revenue, as defined, in each fiscal year during the term, subject to certain conditions that bring the management fee down to 3% of adjusted gross revenue.

Management fees for the years ended December 31 2012, 2011, and 2010 were $422,445, $403,367, and $376,271, respectively. Management fees for the nine months ended September 30, 2013 and 2012 were $347,789 and $346,243 (unaudited), respectively.

Ocean Park Hotels Portfolio 1

Notes to Combined Financial Statements (continued)

5. Related-Party Transactions (continued)

Under the terms of the management agreements, the Owners are required to deposit into a furniture, fixtures, and equipment reserve a percentage of the gross revenues. The percentage through first year was 2%, the second year 3%, and the third year going forward 4%.

6. Commitments and Contingencies

The nature of the Portfolio’s operations exposes it to the risk of claims and litigation in the normal course of its business. Although the outcome of such matters cannot be determined, management believes the ultimate resolution of these matters will not have a material effect on the combined financial position, results of operations, or cash flows of the Portfolio.

7. Subsequent Events

Management has evaluated subsequent events through January 17, 2014, the date the accompanying combined financial statements were available to be issued.

On July 10, 2013, the Owners entered into a definitive purchase and sale agreement to sell the Ocean Park Hotels-SBA, LLC to Summit Hotel Properties, Inc. through its operating partnership, Summit Hotel O.P. L.P., and on January 10, 2014, the hotel was sold for an aggregate sales price of $28 million, subject to closing prorations and adjustments.

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Summit Hotel Properties, Inc. Reports

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