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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, 2010 |
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) |
309 N. 5th St., 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 ¨ 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 26, 2010, there were 22,002,322 shares of common stock, par value $.01 per share, outstanding.
Table of Contents
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page Number | ||||
Item 1. | ||||
Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 |
3 | |||
Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 |
4 | |||
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 |
5 | |||
6 | ||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
15 | ||
Item 3. | 27 | |||
Item 4. | 27 | |||
Item 1. | 28 | |||
Item 5. | 29 | |||
Item 6. | 32 |
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Table of Contents
Item 1. | FINANCIAL STATEMENTS |
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share data)
As of | ||||||||
March 31, 2010 |
December 31, 2009 |
|||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Investments in hotel properties |
$ | 320,061 | $ | 319,770 | ||||
Less accumulated depreciation |
88,988 | 86,069 | ||||||
231,073 | 233,701 | |||||||
Cash and cash equivalents |
420 | 428 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $87 and $95 |
2,134 | 2,043 | ||||||
Prepaid expenses and other assets |
7,255 | 4,779 | ||||||
Deferred financing costs, net |
1,278 | 1,414 | ||||||
Investment in hotel properties, held for sale, net |
29,321 | 32,030 | ||||||
$ | 271,481 | $ | 274,395 | |||||
LIABILITIES AND EQUITY |
||||||||
LIABILITIES |
||||||||
Accounts payable, accrued expenses and other liabilities |
$ | 12,657 | $ | 10,340 | ||||
Debt related to hotel properties held for sale |
23,742 | 24,975 | ||||||
Long-term debt |
163,927 | 164,538 | ||||||
200,326 | 199,853 | |||||||
Redeemable noncontrolling interest in consolidated partnership, at redemption value |
511 | 511 | ||||||
Redeemable preferred stock |
||||||||
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; |
||||||||
Series A, 2,500,000 shares authorized, $.01 par value, 803,270 shares outstanding, liquidation preference of $8,033 |
8 | 8 | ||||||
Common stock, $.01 par value, 100,000,000 shares authorized; |
||||||||
22,002,322 shares outstanding. |
220 | 220 | ||||||
Additional paid-in capital |
120,165 | 120,153 | ||||||
Distributions in excess of retained earnings |
(57,798 | ) | (54,420 | ) | ||||
Total shareholders equity |
62,595 | 65,961 | ||||||
Noncontrolling interest |
||||||||
Noncontrolling interest in consolidated partnership, redemption value $277 and $237 |
387 | 408 | ||||||
Total equity |
62,982 | 66,369 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
$ | 271,481 | $ | 274,395 | |||||
See accompanying notes to consolidated financial statements.
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Table of Contents
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. | FINANCIAL STATEMENTS, CONTINUED: |
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except per share data)
Three Months Ended March 31, |
||||||||
2010 | 2009 | |||||||
REVENUES |
||||||||
Room rentals and other hotel services |
$ | 18,912 | $ | 19,979 | ||||
EXPENSES |
||||||||
Hotel and property operations |
15,973 | 15,875 | ||||||
Depreciation and amortization |
3,042 | 3,124 | ||||||
General and administrative |
999 | 971 | ||||||
20,014 | 19,970 | |||||||
EARNINGS BEFORE NET LOSS ON DISPOSITIONS OF ASSETS, OTHER INCOME, INTEREST EXPENSE AND INCOME TAXES |
(1,102 | ) | 9 | |||||
Net loss on dispositions of assets |
(18 | ) | (26 | ) | ||||
Other income |
27 | 38 | ||||||
Interest expense |
(2,601 | ) | (2,524 | ) | ||||
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
(3,694 | ) | (2,503 | ) | ||||
Income tax benefit |
863 | 781 | ||||||
LOSS FROM CONTINUING OPERATIONS |
(2,831 | ) | (1,722 | ) | ||||
Loss from discontinued operations, net of tax |
(186 | ) | (703 | ) | ||||
NET LOSS |
(3,017 | ) | (2,425 | ) | ||||
Noncontrolling interest |
7 | 87 | ||||||
NET LOSS ATTRIBUTABLE TO CONTROLLING INTERESTS |
(3,010 | ) | (2,338 | ) | ||||
Preferred stock dividends |
(368 | ) | (369 | ) | ||||
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS |
$ | (3,378 | ) | $ | (2,707 | ) | ||
NET LOSS PER COMMON SHARE - BASIC AND DILUTED |
||||||||
EPS from continuing operations |
$ | (0.14 | ) | $ | (0.10 | ) | ||
EPS from discontinued operations |
$ | (0.01 | ) | $ | (0.03 | ) | ||
EPS Basic and Diluted |
$ | (0.15 | ) | $ | (0.13 | ) | ||
AMOUNTS ATTRIBUTABLE TO COMMON SHAREHOLDERS |
||||||||
Income from continuing operations, net of tax |
$ | (3,193 | ) | $ | (2,038 | ) | ||
Discontinued operations, net of tax |
(185 | ) | (669 | ) | ||||
Net loss attributable to common shareholders |
$ | (3,378 | ) | $ | (2,707 | ) | ||
See accompanying notes to consolidated financial statements.
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Table of Contents
Part I. FINANCIAL INFORMATION, CONTINUED:
Item 1. | FINANCIAL STATEMENTS, CONTINUED: |
SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
Three Months Ended March 31, |
||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
(3,017 | ) | $ | (2,425 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
3,040 | 3,717 | ||||||
Amortization of intangible assets and deferred financing costs |
147 | 127 | ||||||
Loss on dispositions of assets |
36 | 60 | ||||||
Amortization of stock option expense |
12 | | ||||||
Writedown to fair value related to held for sale assets |
120 | 150 | ||||||
Deferred income taxes |
(1,106 | ) | (1,043 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Increase in assets |
(1,464 | ) | (277 | ) | ||||
Increase in liabilities |
2,322 | 1,646 | ||||||
Net cash provided by operating activities |
90 | 1,955 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Additions to hotel properties |
(505 | ) | (720 | ) | ||||
Acquisition and development of hotel properties |
| | ||||||
Proceeds from sale of hotel assets |
2,644 | 1,080 | ||||||
Net cash provided by investing activities |
2,139 | 360 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Deferred financing costs |
(11 | ) | (71 | ) | ||||
Principal payments on long-term debt |
(2,606 | ) | (3,669 | ) | ||||
Proceeds from long-term debt, net |
762 | 3,810 | ||||||
Distributions to noncontrolling interest |
(14 | ) | (148 | ) | ||||
Dividends paid to common shareholders |
| (1,674 | ) | |||||
Dividends paid to preferred shareholders |
(368 | ) | (369 | ) | ||||
Net cash used in financing activities |
(2,237 | ) | (2,121 | ) | ||||
Increase (decrease) in cash and cash equivalents |
(8 | ) | 194 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
428 | 712 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 420 | $ | 906 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||
Interest paid, net of amounts capitalized |
$ | 2,928 | $ | 3,026 |
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, 2010 and 2009
(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 Companys interests in 104 properties with the exception of furniture, fixtures and equipment on 78 properties held by TRS Leasing, Inc. and its subsidiaries are held directly or indirectly by E&P LP, Supertel Limited Partnership or Solomons Beacon Inn Limited Partnership (SBILP) (collectively, the Partnerships). The Companys 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, 2010 owned approximately 99% of the partnership interests in Supertel Limited Partnership. Supertel Limited Partnership is the general partner in SBILP. At March 31, 2010, 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.
As of March 31, 2010, the Company owned 114 limited service hotels and one office building. 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 Royco Hotels, Inc (Royco Hotels), and HLC Hotels Inc. (HLC).
The hotel management agreement, as amended, between TRS Lessee and Royco Hotels, the manager of 102 of the Companys hotels, provides 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 Companys investment in the hotels. Under the agreement, Royco Hotels receives a base management fee ranging from 4.25% to 3.0% of gross hotel revenues as revenues increase above thresholds that range from up to $75 million to over $100 million, and an annual incentive fee of 10% of up to the first $1 million of annual net operating income in excess of 10% of the Companys investment in the hotels, and 20% of the excess above $1 million.
Supertel Limited Partnership owns 13 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 12 of the hotels. The management agreement, as amended, provides for HLC to operate and manage 12 of the hotels through December 31, 2011 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 Companys 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 Royco Hotels and HLC 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.
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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, 2010 and 2009
(Unaudited)
Consolidated Financial Statements
The Company has prepared the consolidated balance sheet as of March 31, 2010, the consolidated statements of operations for the three months ended March 31, 2010 and 2009, and the consolidated statements of cash flows for the three months ended March 31, 2010 and 2009 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, 2010 and the results of operations and cash flows for all periods presented. Balance sheet data as of December 31, 2009 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 Companys Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the operating results for the full year.
Fair Value Measurements
We currently do not have any financial instruments that must be measured on a recurring basis under ASC 820-10: however, we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures Overall Subsequent Measurement, to our nonfinancial assets which include our held for sale hotels. We measure these assets using inputs from level 3 of the fair value hierarchy.
During the months ended March 31, 2010 and 2009, Level 3 inputs were used to determine an impairment loss of $120,000 for one hotel held for sale and $150,000 for two hotels held for sale, respectively. 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 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. As of March 31, 2010, the carrying value and estimated fair value of the Companys debt, excluding debt related to hotel properties held for sale, was $163.9 million and $167.4 million, respectively. As of December 31, 2009, the carrying value and estimated fair value of the Companys debt, excluding debt related to hotel properties held for sale, was $164.5 million and $168.1 million, respectively. The carrying value of the Companys other financial instruments approximates fair value due to the short-term nature of these financial instruments.
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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, 2010 and 2009
(Unaudited)
Hotel Properties Held for Sale and Discontinued Operations
At March 31, 2010 the Company had eighteen hotels identified that it intends to sell and that met the Companys criteria to be classified as held for sale. One of the hotels had an impairment loss recognized during the three months ended March 31, 2010, in the amount of $120,000. 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, 2010 include 18 hotels held for sale and one hotel that was sold. The operating results for the three months ended March 31, 2009 include 18 hotels held for sale, one hotel that was sold in 2010, and eight hotels that were sold in 2009 (in thousands):
Three Months Ended March 31, |
||||||||
2010 | 2009 | |||||||
Revenues |
$ | 2,810 | $ | 4,395 | ||||
Hotel and property operations expenses |
(2,649 | ) | (3,984 | ) | ||||
Interest expense |
(454 | ) | (599 | ) | ||||
Depreciation expense |
2 | (593 | ) | |||||
Net loss on disposition of assets |
(18 | ) | (34 | ) | ||||
Impairment loss |
(120 | ) | (150 | ) | ||||
Income tax benefit |
243 | 262 | ||||||
$ | (186 | ) | $ | (703 | ) | |||
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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, 2010 and 2009
(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 share data) | Three months ended March 31, |
|||||||
2010 | 2009 | |||||||
Basic and Diluted Earnings per Share Calculation: |
||||||||
Numerator: |
||||||||
Net loss attributable to common shareholders: |
||||||||
Continuing operations |
$ | (3,193 | ) | $ | (2,038 | ) | ||
Discontinued operations |
(185 | ) | (669 | ) | ||||
Net loss attributable to common shareholders - total |
$ | (3,378 | ) | $ | (2,707 | ) | ||
Denominator: |
||||||||
Weighted average number of common shares - basic and diluted |
22,002,322 | 20,924,677 | ||||||
Basic and Diluted Earnings Per Common Share: |
||||||||
Net loss attributable to common shareholders per weighted average common share: |
||||||||
Continuing operations |
$ | (0.14 | ) | $ | (0.10 | ) | ||
Discontinued operations |
(0.01 | ) | (0.03 | ) | ||||
TotalBasic and Diluted |
$ | (0.15 | ) | $ | (0.13 | ) | ||
Noncontrolling Interest of Common and Preferred Units in SLP
At March 31, 2010 and 2009 there were 158,161 and 1,235,806, 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). In addition, the 51,035 and 177,786 shares of SLP preferred operating units held by the limited partners, as of March 31, 2010 and 2009, respectively, are antidilutive.
Preferred Stock of SHI
There were 803,270 shares of Series A Convertible Preferred Stock that remained outstanding at March 31, 2010 and 2009. The former convertible provision of the Series A Convertible Preferred Stock, after adjusting the numerator and denominator for the basic EPS computation, is antidilutive for the earnings per share computation for the three months ended March 31, 2010 and 2009. The conversion rights of the Series A Convertible Stock were cancelled as of February 20, 2009.
At March 31, 2010 and 2009 there were 332,500 shares of Series B preferred stock outstanding. There is no convertible provision for Series B, therefore, there is no dilutive effect on earnings per share.
Stock Options
The potential common shares represented by outstanding stock options for the three months ended March 31, 2010 and 2009 totaled 230,715 and 192,143, respectively, all of which are assumed to be purchased with proceeds from the exercise of stock options and are antidilutive.
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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, 2010 and 2009
(Unaudited)
Debt Financing
On January 28, 2010, we sold our Comfort Inn located in Dublin, VA (99 rooms) for approximately $2.75 million with a negligible gain. A portion of these funds were used to pay off the Companys borrowings from Village Bank, with the remaining $1.7 million of funds used to reduce the revolving line of credit with Great Western Bank.
In January, 2010, the Company borrowed $0.8 million from First National Bank of Omaha. The note has a maturity date of February 1, 2011. The note bears interest at 4% over the one month LIBOR with a floor of 5%. The borrowings were used to fund operations.
In March, 2010, covenant modifications and other amendments were obtained for our credit facilities with Great Western Bank, General Electric Capital Corporation and Wells Fargo Bank. The maturity with Wells Fargo Bank was extended from May 12, 2010 to August 12, 2010. These changes were reflected in the notes to our financial statements included in our Form 10-K for year ended December 31, 2009.
We are required to comply with certain financial covenants for some of our lenders. As of March 31, 2010, the Company was in compliance with all financial covenants. As a result, we are not in default of any of our loans.
Stock-Based Compensation
Options
The Company has a 2006 Stock Plan (the Plan) which has been approved by the Companys 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 consolidated financial statements for the three months ended March 31, 2010 for share-based compensation related to employees and directors was $12,480.
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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, 2010 and 2009
(Unaudited)
Income Taxes
The components of the TRS income tax benefit, consisting of both continuing and discontinued operations, were as follows (dollars in thousands):
Three Months Ended March 31, | ||||||
2010 | 2009 | |||||
Federal |
||||||
Deferred |
$ | 929 | $ | 836 | ||
State & Local |
||||||
Deferred |
177 | 207 | ||||
Total income tax benefit |
$ | 1,106 | $ | 1,043 | ||
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following difference (dollars in thousands):
Three Months Ended March 31, |
||||||||
2010 | 2009 | |||||||
Expected Federal tax benefit at 34% |
$ | 1,033 | $ | 909 | ||||
State income tax benefit, net of Federal income tax effect |
122 | 137 | ||||||
Other expense, net |
(49 | ) | (3 | ) | ||||
Total income tax benefit |
$ | 1,106 | $ | 1,043 | ||||
The TRS has estimated its income tax benefit using a combined federal and state rate of 38%. As of March 31, 2010, TRS had a deferred tax asset of $3.7 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. 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 bases and 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 on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
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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, 2010 and 2009
(Unaudited)
Noncontrolling Interest in Redeemable Preferred Units
At March 31, 2010, 51,035 of SLPs preferred operating partnership units (Preferred OP Units) were outstanding. The redemption value for the Preferred OP Units is $0.5 million for March 31, 2010. 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 October 24, 2010.
Supertel offered to each of the Preferred OP Unit holders the option to extend until October 24, 2010 their right to have units redeemed at $10 per unit. A total of 126,751 units were redeemed in October, 2009 at $10 each. The holders of the remaining 51,035 units elected to extend to October 24, 2010, their right to have units redeemed at $10 per unit. The remaining 51,035 units will continue to be carried outside of permanent equity at redemption value. The 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. There were no Preferred OP Units redeemed during the three months ending March 31, 2010.
Noncontrolling Interest Reconciliation of Common and Preferred Units
Preferred Redeemable Noncontrolling Interest |
Common Noncontrolling Interest |
Total Noncontrolling Interest |
|||||||
Balance @ 12/31/09 |
511 | 408 | 919 | ||||||
Partner distribution |
(14 | ) | | (14 | ) | ||||
Noncontrolling interest expense |
14 | (21 | ) | (7 | ) | ||||
Balance @ 3/31/10 |
511 | 387 | 898 | ||||||
Equity Reconciliation of Parent and Noncontrolling Interest
Preferred Shares at Par Value |
Common Shares at Par Value |
Additional Paid-in Capital |
Distribution in Excess of Accumulated Earnings |
Net Shareholders Equity |
Noncontrolling interest in consolidated partnerships |
Total Equity |
||||||||||||
Balance @ 12/31/09 |
8 | 220 | 120,153 | (54,420 | ) | 65,961 | 408 | 66,369 | ||||||||||
Deferred compensation |
| | 12 | | 12 | | 12 | |||||||||||
Preferred dividends |
| | | (368 | ) | (368 | ) | | (368 | ) | ||||||||
Net loss |
| | | (3,010 | ) | (3,010 | ) | (21 | ) | (3,031 | ) | |||||||
Balance @ 3/31/10 |
8 | 220 | 120,165 | (57,798 | ) | 62,595 | 387 | 62,982 | ||||||||||
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Item 1. | FINANCIAL STATEMENTS, CONTINUED: |
Supertel Hospitality, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)
Series B Redeemable Preferred Stock
At March 31, 2010 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. Underwriting and other costs of the offering totaled approximately $0.6 million to the Company. The proceeds were used by the Company to pay an $8.5 million bridge loan with General Electric Capital Corporation.
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 Companys liquidation, dissolution or winding up, rank senior to the Companys 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 Companys liquidation, dissolution or winding up, on a parity with the Companys Series A 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 Companys liquidation, dissolution or winding up and junior to all of the Companys 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 Companys ability to qualify as a REIT as provided in the Companys articles of incorporation or a change of control (as defined in the Companys 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 Companys 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, 2010, 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.
Commitments and Contingencies
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. Three separate lawsuits have been filed against the Company in Jefferson Circuit Court, Louisville, Kentucky; one lawsuit filed by a plaintiff on
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Item 1. | FINANCIAL STATEMENTS, CONTINUED: |
Supertel Hospitality, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
(Unaudited)
June 26, 2008, a second lawsuit filed by fourteen plaintiffs on December 15, 2008 and a third lawsuit filed by six plaintiffs on January 16, 2009. The plaintiffs in the three cases, now consolidated as one action, allege that as guests at the Companys hotel in Louisville, Kentucky, they were exposed to carbon monoxide as a consequence of a faulty water heater at the hotel. The plaintiffs have also sued the plumbing company which performed repairs on the water heater at the hotel.
Plaintiffs are seeking to recover for damages arising out of physical and mental injury, lost wages, pain and suffering, past and future medical expenses and punitive or exemplary damages. At this time, the company has settled two claims with authorization from the insurers and has recorded a liability for the amount of the claims and a receivable reflecting recoverability of the claim from the insurers.
The Company has not recorded a liability for the remaining unsettled claims as the amount of the loss contingency is not reasonably estimable. The Company will continue to evaluate the estimability of loss contingency amounts. The damages claimed by plaintiffs for the unsettled claims are in excess of $40 million. The company retains three tranches of commercial general liability insurance with aggregate limits of $51 million. There are no deductibles on two of the tranches; the third tranche has a deductible of ten thousand dollars. The company believes it has adequate coverage.
Subsequent Event
The Company has twenty hotels classified as held for sale after identifying two additional hotels to be classified as held for sale in April 2010.
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Forward-Looking Statements
Certain information both included and incorporated by reference in this managements 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 managements 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 managements 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 managements discussion and analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Results for the three months ended March 31, 2010 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, 2009.
Overview
We are a self-administered real estate investment trust, and through our subsidiaries, as of March 31, 2010 we owned 114 hotels in 23 states. Our hotels operate under several national and independent brands.
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Our significant events for the three months ended March 31, 2010 include:
| On January 28, 2010, we sold our Comfort Inn located in Dublin, VA (99 rooms) for approximately $2.75 million with a negligible gain. A portion of these funds were used to pay off the Companys borrowings from Village Bank, with the remaining $1.7 million of funds used to reduce the revolving line of credit with Great Western Bank. |
| In January, 2010, the Company borrowed $0.8 million from First National Bank of Omaha. The note has a maturity date of February 1, 2011. The note bears interest at 4% over the one month LIBOR with a floor of 5%. The borrowings were used to fund operations. |
| In March, 2010, covenant modifications and other amendments were obtained for our credit facilities with Great Western Bank, General Electric Capital Corporation and Wells Fargo Bank. The maturity with Wells Fargo Bank was extended from May 12, 2010 to August 12, 2010. These changes were reflected in the notes to our financial statements included in our Form 10-K for year ended December 31, 2009. |
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, 2010, we owned 114 limited service hotels and one office building. 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 Royco Hotels Inc (Royco Hotels) and HLC Hotels Inc. (HLC). Royco Hotels is the manager of 102 of our hotels and HLC is the manager of 12 of our hotels.
Overview of Discontinued Operations
The condensed consolidated statements of operations for discontinued operations for the three months ended March 31, 2010 and 2009 include the results of operations for the 18 hotels classified as held for sale at March 31, 2010, as well as all properties that have been sold during 2010 and 2009 in accordance with FASB ASC 205-20 Presentation of Financial Statements Discontinued Operations.
The assets held for sale at March 31, 2010 and 2009 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, 2010 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, 2010, Level 3 inputs were used to determine an impairment loss of $120,000 for one hotel held for sale. 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.
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Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED: |
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.
General
The discussion that follows is based primarily on the consolidated financial statements of the three months ended March 31, 2010 and 2009, and should be read along with the consolidated financial statements and notes.
The comparisons below reflect revenues and expenses of the companys 114 and 122 hotels as of March 31, 2010 and 2009, respectively.
Results of Operations
Comparison of the three months ended March 31, 2010 to the three months ended March 31, 2009
Operating results are summarized as follows (in thousands):
Three months ended March 31, 2010 |
Three months ended March 31, 2009 |
Continuing Operations Variance |
||||||||||||||||||||||||||
Continuing Operations |
Discontinued Operations |
Total | Continuing Operations |
Discontinued Operations |
Total | |||||||||||||||||||||||
Revenues |
$ | 18,912 | $ | 2,810 | $ | 21,722 | $ | 19,979 | $ | 4,395 | $ | 24,374 | $ | (1,067 | ) | |||||||||||||
Hotel and property operations expenses |
(15,973 | ) | (2,649 | ) | (18,622 | ) | (15,875 | ) | (3,984 | ) | (19,859 | ) | (98 | ) | ||||||||||||||
Interest expense |
(2,601 | ) | (454 | ) | (3,055 | ) | (2,524 | ) | (599 | ) | (3,123 | ) | (77 | ) | ||||||||||||||
Depreciation and amortization expense |
(3,042 | ) | 2 | (3,040 | ) | (3,124 | ) | (593 | ) | (3,717 | ) | 82 | ||||||||||||||||
General and administrative expenses |
(999 | ) | | (999 | ) | (971 | ) | | (971 | ) | (28 | ) | ||||||||||||||||
Net loss on dispositions of assets |
(18 | ) | (18 | ) | (36 | ) | (26 | ) | (34 | ) | (60 | ) | 8 | |||||||||||||||
Other income |
27 | | 27 | 38 | | 38 | (11 | ) | ||||||||||||||||||||
Impairment loss |
| (120 | ) | (120 | ) | | (150 | ) | (150 | ) | | |||||||||||||||||
Income tax benefit |
863 | 243 | 1,106 | 781 | 262 | 1,043 | 82 | |||||||||||||||||||||
Net loss |
$ | (2,831 | ) | $ | (186 | ) | $ | (3,017 | ) | $ | (1,722 | ) | $ | (703 | ) | $ | (2,425 | ) | $ | (1,109 | ) | |||||||
Revenues and Operating Expenses
Revenues from continuing operations for the three months ended March 31, 2010 compared to the three months ended March 31, 2009, decreased $1.1 million or 5.3%, which was primarily due to decreased average daily rate (ADR) resulting from unfavorable economic conditions. We refer to our entire portfolio as limited service hotels which we further describe as midscale without food and beverage hotels, economy hotels and extended stay hotels. The same store portfolio used for comparison of the first quarter of 2010 over the same period of 2009 consists of the 96 hotels in continuing operations that were owned by the Company as of January 1, 2009. Compared to the year ago period, ADR for the entire 96 same store hotel portfolio decreased 7.5% to $45.31 and RevPAR decreased 5.4% to $24.91. The occupancy for all same store hotels for the three months ended March 31, 2010 increased 2.4% from that of the year ago period. Our 29 same store midscale without food and beverage hotels reflected an ADR decrease of 6.6% to $61.75, an increase in occupancy of 2.1% and a revenue per available room (RevPAR) decrease of 4.8%
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to $32.82 for the first quarter of 2010 over the same period of 2009. Our 59 same store economy hotels reflected an ADR decrease of 6.0% to $45.31, a 3.0% decrease in occupancy and a RevPAR decrease of 8.9% to $23.17 for the first quarter of 2010 over the same period of 2009. Occupancy for the eight same store extended stay properties rose 20.9% to 73.0%, and RevPAR was up 15.1% to $17.27. This was partially offset by an ADR decrease of 4.8% to $23.64.
During the first quarter of 2010, hotel and property operations expenses from continuing operations increased $0.1 million. Payroll related expenses, repairs and maintenance, and breakfast expenses were primarily responsible for the variance, and were partially offset by savings on marketing and advertising costs.
Interest Expense, Depreciation and Amortization Expense and General and Administrative Expense
Interest expense from continuing operations rose slightly to $2.6 million for the quarter. The increase resulted from rate adjustments on the GE loans in addition to new financings, offset partially by loans paid off with property sales, general amortization reduction and refinancings with lower interest rates. Depreciation and amortization expense from continuing operations declined $0.1 million from the first quarter of 2009 to $3.0 million. The general and administrative expense for the 2010 first quarter remained flat compared to the prior period.
Impairment loss
For the first quarter of 2010, we recorded an impairment charge of $0.1 million on one hotel classified as held for sale. There was an impairment charge of $0.2 million against two hotels that were sold in the first quarter of 2009.
Dispositions
In the first quarter of 2010, we recognized a negligible gain on the disposition of assets related to the sale of a Comfort Inn in Dublin, Virginia. The prior period results also include the sale of a hotel with a minimal gain. The net losses on dispositions of assets, excluding the above-mentioned gains, are due primarily to normal operations.
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 Lessees loss for the three months ended March 31, 2010. The income tax will vary based on the taxable earnings or loss of the TRS Lessee.
The income tax benefit from continuing operations was $0.9 million compared with a benefit of $0.8 million in the year ago period, due to an increased loss by the TRS Lessee.
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.
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The Companys 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 does not believe it is likely that these adverse economic conditions, and their effect on the hospitality industry, will improve significantly in the next two quarters.
Our business requires continued access to adequate capital to fund our liquidity needs. In 2009, 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 2010, our foremost priorities are 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. As of March 31, 2010 our revolver with Great Western Bank has an available balance of $2.5 million.
The following are our expected actual and potential sources of liquidity, which 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. |
These 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. While we believe that we will have adequate capital for our near - term uses, significant issues with access to the liquidity sources identified above could lead to our insolvency.
In the near-term, the Companys 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 potential upside when hotel fundamentals return to stabilized levels. The 18 properties held for sale as of March 31, 2010 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.
On January 28, 2010, the Company sold a Comfort Inn located in Dublin, Virginia, for approximately $2.75 million. These funds were used to pay off the Village Bank loan with the remaining $1.7 million used to reduce the revolving line of credit with Great Western Bank. With respect to the remainder of 2010, we are actively marketing the 18 properties held for sale as of March 31, 2010, which we anticipate will result in the elimination of $23.7 million of debt and generate an expected $4.0 million of proceeds for operations. We have continued to receive strong interest in our 18 held for sale properties. 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 managements 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; |
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| 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 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 Companys 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 Wells Fargo Bank. Our Great Western Bank and Wells Fargo Bank credit facilities contain cross-default provisions which would allow Great Western Bank and Wells Fargo Bank 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 Companys 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 Companys liquidity requirements. The Company believes it has the ability to repay its indebtedness when due with cash generated from operations, sales of hotels, refinancings or the issuance of securities, while at the same time continuing to be a substantial owner of limited service and economy hotels. If the economic environment does not improve in 2010, the Companys plans and actions may not be sufficient and could lead to possibly failing financial debt covenant requirements.
The Companys credit facility with Wells Fargo Bank ($8.5 million balance at March 31, 2010), previously due in May 2010, has been extended to August 12, 2010. The company intends to refinance or repay the credit facility with Wells Fargo Bank using other financing, funds from operations or proceeds from the sale of hotels.
The Company did not declare a common stock dividend for the three months ended March 31, 2010. 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
At March 31, 2010, the Company had long-term debt of $163.9 million associated with assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 4.6 years and a weighted average interest rate of 6.1% The weighted average fixed rate was 6.8%, and the weighted average variable rate was 4.5%. Debt is classified as held for sale if the properties collateralizing it are included in discontinued operations. Debt held on properties in continuing operations is classified as held for use. Aggregate annual principal payments for the remainder of 2010 and thereafter are as follows (in thousands):
Held For Sale |
Held For Use |
TOTAL | |||||||
Remainder of 2010 |
$ | 23,742 | $ | 12,380 | $ | 36,122 | |||
2011 |
| 19,063 | 19,063 | ||||||
2012 |
| 59,545 | 59,545 | ||||||
2013 |
| 3,641 | 3,641 | ||||||
2014 |
| 4,380 | 4,380 | ||||||
Thereafter |
| 64,918 | 64,918 | ||||||
$ | 23,742 | $ | 163,927 | $ | 187,669 | ||||
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Of the remaining maturities associated with assets held for use in 2010, approximately $3.4 million consist of principal amortization on mortgage loans, which we expect to fund through cash flows from operations and the sale of hotels. The remaining maturities associated with assets held for use in 2010 consist of:
| a $7.1 million balance on the credit facility with Wells Fargo Bank; and |
| a $1.9 million note payable to Elkhorn Valley Bank. |
We are required to comply with financial covenants for certain of our loan agreements. As of March 31, 2010, we were in compliance with the financial covenants. As a result, we are not in default of any of our loans.
Our credit facilities with Great Western Bank were amended on March 29, 2010 to require maintenance of (a) a consolidated debt service coverage ratio of at least 1.05 to 1, tested quarterly, through June 30, 2011 and 1.50 to 1, tested quarterly, from July 1, 2011 through the maturity of the credit facilities, (b) a loan-specific debt service coverage ratio of 1.20 to 1, tested quarterly, through June 30, 2011 and 1.50 to 1, tested quarterly, from July 1, 2011 through the maturity of the credit facilities and (c) consolidated and loan-specific loan to value ratios that do not exceed 70%, tested annually, through the maturity of the credit facilities.
The Great Western Bank amendment also: (a) modified the borrowing base so that the loans available to the Company may not exceed the lesser of (i) an amount equal to 70% of the total appraised value of the hotels securing the credit facilities and (ii) an amount that would result in a loan-specific debt service coverage ratio of less than 1.20 to 1 through June 30, 2011 and 1.50 to 1 from July 1, 2011 through the maturity of the credit facilities; (b) increased the interest rate on the revolving credit portion of the credit facilities from prime (subject to a 4.50% floor rate) to 5.50% from March 29, 2010 through June 30, 2011 and prime (subject to a 5.50% floor rate) from July 1, 2011 through the maturity of the credit facilities; and (c) gave Great Western Bank the option to increase the interest rates of the credit facilities up to 4.00% any time after June 30, 2011.
Our credit facility with Wells Fargo Bank was amended on March 31, 2010 to require maintenance of a consolidated loan to value ratio that does not exceed 77.5% and a minimum tangible net worth of not less than $70 million, in each case, through the maturity of the credit facility. The amendment also reduced our quarterly minimum consolidated fixed charge coverage ratio covenant (based on a rolling twelve month period) through the maturity of the credit facility from: 0.90 to 1 after preferred dividends and 1.00 to 1 before preferred dividends; to 0.75 to 1 after preferred dividends and 0.80 to 1 before preferred dividends. The credit facility with Wells Fargo Bank was also amended on March 31, 2010 to extend the maturity date from May 12, 2010 to August 12, 2010, require a $200,000 principal payment on March 31, 2010 and require a $100,000 principal payment on April 30, 2010.
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Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED: |
On March 25, 2010, our credit facilities with General Electric Capital Corporation were amended to require us to maintain $3.9 million of total adjusted EBITDA (based on a rolling twelve month period), tested quarterly, with respect to our GE-encumbered properties through 2011, in lieu of maintenance of minimum fixed charge coverage ratios (FCCRs). This required minimum level of total adjusted EBITDA will be reduced by the pro rata percentage of total adjusted EBITDA attributable to any GE-encumbered properties that are sold, if certain conditions are satisfied. Commencing in 2012 and continuing for the term of the loans, we are required to maintain, with respect to our GE-encumbered properties, a before dividend FCCR (based on a rolling twelve month period) of 1.3 to 1 and after dividend FCCR (based on a rolling twelve month period) of 1.0 to 1.
The GE amendment also: (a) reduced our consolidated debt service coverage ratio covenant (based on a rolling twelve month period) from 1.5 to 1 each quarter for the term of the loans to 1.05 to 1 each quarter through 2011 and 1.5 to 1 each quarter thereafter for the term of the loans; (b) deferred prepayment fees with respect to prepayments required as a result of the sale of any of our Masters Inn hotels until January 1, 2012; and (c) implemented a quarterly cash flow sweep, equal to the amount by which our consolidated debt service coverage ratio exceeds 1.75 to 1, to pay deferred prepayment fees. In connection with previous amendments and waivers, the interest rates of the loans under our credit facilities with GE have increased by 1.5%. If our FCCR with respect to our GE-encumbered properties equals or exceeds 1.3 to 1 before dividends and 1.0 to 1 after dividends for two consecutive quarters, the cumulative 1.5% increase in the interest rate of the loans will be eliminated.
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 Wells Fargo Bank credit facilities contain cross-default provisions which would allow Great Western Bank and Wells Fargo Bank 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 are not in default of any of our loans.
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Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED: |
A summary of the Companys long term debt as of March 31, 2010 is as follows (in thousands):
Balance | Interest Rate |
Maturity | ||||||
Fixed Rate Debt |
||||||||
Lender |
||||||||
Elkhorn Valley Bank Revolver |
$ | 1,950 | 6.75 | % | 10/2010 | |||
First National Bank |
840 | 5.00 | % | 2/2011 | ||||
Great Western Bank |
13,508 | 5.50 | % | 12/2011 | ||||
Great Western Bank |
9,766 | 5.50 | % | 5/2012 | ||||
Greenwich Capital Financial Products |
32,063 | 7.50 | % | 12/2012 | ||||
Elkhorn Valley Bank |
929 | 6.50 | % | 4/2014 | ||||
Citigroup Global Markets Realty Corp |
13,614 | 5.97 | % | 11/2015 | ||||
GE Capital |
33,593 | 7.17 | % | 9/2016 - 3/2017 | ||||
GE Capital |
22,312 | 7.69 | % | 6/2017 | ||||
Wachovia Bank |
9,754 | 7.38 | % | 3/2020 | ||||
Total Fixed Rate Debt |
$ | 138,329 | ||||||
Variable Rate Debt |
||||||||
Lender |
||||||||
Wells Fargo |
8,489 | 4.00 | % | 8/2010 | ||||
Great Western Bank |
17,487 | 5.50 | % | 2/2012 | ||||
GE Capital |
20,896 | 3.75 | % | 2/2018 | ||||
GE Capital |
2,468 | 4.31 | % | 2/2018 | ||||
Total Variable Rate Debt |
$ | 49,340 | ||||||
Subtotal debt |
187,669 | |||||||
Less: debt associated with hotel properties held for sale |
23,742 | |||||||
Total Long-Term Debt |
$ | 163,927 | ||||||
On January 28, 2010, we sold our Comfort Inn located in Dublin, VA (99 rooms) for approximately $2.75 million with a negligible gain. A portion of these funds were used to pay off the Companys borrowings from Village Bank, with the remaining $1.7 million of funds used to reduce the revolving line of credit with Great Western Bank.
In January, 2010, the Company borrowed $0.8 million from First National Bank of Omaha. The note has a maturity date of February 1, 2011. The note bears interest at 4% over the one month LIBOR with a floor of 5%. The borrowings were used to fund operations.
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Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED: |
Redemption of Noncontrolling Preferred and Common Operating Partnership Units
At March 31, 2010, Supertel Limited Partnership had 51,035 preferred operating units outstanding. The preferred units are convertible into common operating partnership units of the partnership on a one-for-one basis, additionally the holders have the right to require the Company to redeem the preferred units at $10 each on October 24, 2010. The Company expects to fund any cash redemptions from the sources of liquidity discussed above.
Capital Commitments
Below is a summary of certain obligations that will require capital (in thousands):
Payments Due by Period | |||||||||||||||
Contractual Obligations |
Total | Less than 1 Year |
1-3 Years | 4-5 Years | More than 5 years | ||||||||||
Long-term debt including interest |
$ | 204,738 | $ | 19,782 | $ | 94,952 | $ | 16,429 | $ | 73,575 | |||||
Land leases |
5,126 | 53 | 143 | 148 | 4,782 | ||||||||||
Total contractual obligations |
$ | 209,864 | $ | 19,835 | $ | 95,095 | $ | 16,577 | $ | 78,357 | |||||
The column titled Less than 1 Year represents payments due for the balance of 2010.
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. In addition, the Company has management agreements with Royco Hotels and HLC Hotels, providing for the management and operation of the hotels, which is discussed further within this document.
Fair Value of Financial Instruments
Disclosures about fair value of financial instruments are based on pertinent information available to management as of the valuation date. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold or settled. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
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. As of March 31, 2010, the carrying value and estimated fair value of the Companys debt, excluding debt related to hotel properties held for sale, was $163.9 million and $167.4 million, respectively. As of December 31, 2009, the carrying value and estimated fair value of the Companys debt, excluding debt related to hotel properties held for sale, was $164.5 million and $168.1 million, respectively. The carrying value of the Companys other financial instruments approximates fair value due to the short-term nature of these financial instruments.
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
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Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED: |
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.
Funds from Operations
The Companys funds from operations (FFO) for the three months ended March 31, 2010 was $(0.3) million, representing a decrease of $1.4 million from FFO reported for the three months ended March 31, 2009. FFO is reconciled to net loss as follows (in thousands):
Three months ended March 31, |
||||||||
2010 | 2009 | |||||||
Net loss attributable to common shareholders |
$ | (3,378 | ) | $ | (2,707 | ) | ||
Depreciation and amortization |
3,040 | 3,717 | ||||||
Net loss on disposition of real estate assets |
36 | 60 | ||||||
FFO available to common shareholders |
$ | (302 | ) | $ | 1,070 | |||
FFO is a non-GAAP financial measure. We consider FFO to be a market accepted measure of an equity REIT's operating performance, which is 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. FFO does not represent amounts available for managements discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. All REITs do not calculate FFO in the same manner; therefore, our calculation may not be the same as the calculation of FFO for similar REITs.
We use FFO as a performance measure to facilitate a periodic evaluation of our operating results relative to those of our peers, who, like us, are typically members of NAREIT. We consider FFO a useful additional measure of performance for an equity REIT because it facilitates 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 provides a meaningful indication of our performance.
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, 2010 and 2009, respectively. The comparisons of same store operations (excluding Held For Sale hotels) are for 96 hotels owned as of January 1, 2009.
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Part I. FINANCIAL INFORMATION, CONTINUED:
Item 2. | MANAGEMENTS DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED: |
Three months ended March 31, 2010 | Three months ended March 31, 2009 | |||||||||||||||||||||
Same Store Region |
Room Count |
RevPAR | Occupancy | ADR | Room Count |
RevPAR | Occupancy | ADR | ||||||||||||||
Mountain |
214 | $ | 25.58 | 56.5 | % | $ | 45.30 | 214 | $ | 26.73 | 55.8 | % | $ | 47.89 | ||||||||
West North Central |
2,670 | 22.56 | 49.7 | % | 45.35 | 2,670 | 24.73 | 53.2 | % | 46.48 | ||||||||||||
East North Central |
1,081 | 28.02 | 49.2 | % | 56.97 | 1,081 | 30.55 | 51.5 | % | 59.37 | ||||||||||||
Middle Atlantic/New England |
142 | 27.66 | 46.9 | % | 59.02 | 142 | 31.40 | 50.7 | % | 61.94 | ||||||||||||
South Atlantic |
2,772 | 24.37 | 61.9 | % | 39.38 | 2,772 | 25.00 | 55.6 | % | 44.93 | ||||||||||||
East South Central |
822 | 26.97 | 47.9 | % | 56.24 | 822 | 29.68 | 51.1 | % | 58.04 | ||||||||||||
West South Central |
456 | 29.77 | 72.0 | % | 41.33 | 456 | 25.86 | 55.3 | % | 46.72 | ||||||||||||
Total Same Store |
8,157 | $ | 24.91 | 55.0 | % | $ | 45.31 | 8,157 | $ | 26.32 | 53.7 | % | $ | 48.99 | ||||||||
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/New England | Pennsylvania | |
South Atlantic | Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia | |
East South Central | Alabama, Kentucky and Tennessee | |
West South Central | Arkansas and Louisiana |
Our RevPAR, ADR, and Occupancy, by franchise affiliation, for the three months ended March 31, 2010 and 2009, were as follows:
Three months ended March 31, 2010 | Three months ended March 31, 2009 | |||||||||||||||||||||
Same Store Brand |
Room Count |
RevPAR | Occupancy | ADR | Room Count |
RevPAR | Occupancy | ADR | ||||||||||||||
Limited Service |
||||||||||||||||||||||
Midscale w/o F&B** |
||||||||||||||||||||||
Comfort Inn/ Comfort Suites |
1,669 | $ | 31.10 | 51.1 | % | $ | 60.90 | 1,669 | $ | 32.80 | 49.1 | % | $ | 66.74 | ||||||||
Hampton Inn |
135 | 42.95 | 60.1 | % | 71.44 | 135 | 42.13 | 54.7 | % | 77.04 | ||||||||||||
Holiday Inn Express |
125 | 38.69 | 59.7 | % | 64.77 | 125 | 44.29 | 65.8 | % | 67.31 | ||||||||||||
Other Midscale (1) |
291 | 35.46 | 59.0 | % | 60.07 | 291 | 36.23 | 62.3 | % | 58.17 | ||||||||||||
Total Midscale w/o F&B** |
2,220 | 32.82 | 53.2 | % | 61.75 | 2,220 | 34.47 | 52.1 | % | 66.10 | ||||||||||||
Economy |
||||||||||||||||||||||
Days Inn |
1,146 | 25.28 | 55.7 | % | 45.35 | 1,146 | 24.86 | 47.7 | % | 52.15 | ||||||||||||
Super 8 |
3,308 | 21.99 | 49.7 | % | 44.26 | 3,308 | 24.86 | 54.4 | % | 45.74 | ||||||||||||
Other Economy (2) |
258 | 29.02 | 49.6 | % | 58.54 | 258 | 35.21 | 54.4 | % | 64.67 | ||||||||||||
Total Economy |
4,712 | 23.17 | 51.1 | % | 45.31 | 4,712 | 25.43 | 52.7 | % | 48.22 | ||||||||||||
Total Midscale/Economy |
6,932 | 26.26 | 51.8 | % | 50.71 | 6,932 | 28.32 | 52.5 | % | 53.90 | ||||||||||||
Extended Stay (3) |
1,225 | 17.27 | 73.0 | % | 23.64 | 1,225 | 15.00 | 60.4 | % | 24.82 | ||||||||||||
Total Same Store |
8,157 | $ | 24.91 | 55.0 | % | $ | 45.31 | 8,157 | $ | 26.32 | 53.7 | % | $ | 48.99 | ||||||||
1 Includes Ramada Limited, Baymont Inn and Sleep Inn brands |
2 Includes Guesthouse Inn and independent hotels |
3 Includes Savannah Suites and Tara Inn |
** w/o F&B indicates without food and beverage |
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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, 2009.
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 Companys 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 Companys 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 Commissions rules and forms. No changes in the Companys 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 Companys internal control over financial reporting.
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Item 1. | Legal Proceedings |
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. Three separate lawsuits have been filed against the Company in Jefferson Circuit Court, Louisville, Kentucky; one lawsuit filed by a plaintiff on June 26, 2008, a second lawsuit filed by fourteen plaintiffs on December 15, 2008 and a third lawsuit filed by six plaintiffs on January 16, 2009. The plaintiffs in the three cases, now consolidated as one action, allege that as guests at the Companys hotel in Louisville, Kentucky, they were exposed to carbon monoxide as a consequence of a faulty water heater at the hotel. The plaintiffs have also sued the plumbing company which performed repairs on the water heater at the hotel.
Plaintiffs are seeking to recover for damages arising out of physical and mental injury, lost wages, pain and suffering, past and future medical expenses and punitive or exemplary damages. At this time, the company has settled two claims with authorization from the insurers and has recorded a liability for the amount of the claims and a receivable reflecting recoverability of the claim from the insurers.
The Company has not recorded a liability for the remaining unsettled claims as the amount of the loss contingency is not reasonably estimable. The Company will continue to evaluate the estimability of loss contingency amounts. The damages claimed by plaintiffs for the unsettled claims are in excess of $40 million. The company retains three tranches of commercial general liability insurance with aggregate limits of $51 million. There are no deductibles on two of the tranches; the third tranche has a deductible of ten thousand dollars. The company believes it has adequate coverage.
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Part II. OTHER INFORMATION, CONTINUED:
Item 5. | Other Information |
Summary Financial Data
The following sets forth summary financial data that has been prepared by the Company without audit. The Company believes the following data should be used as a supplement to the consolidated statements of operations and should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
(In thousands, except per share and statistical data)
Three months ended March 31, |
||||||||
2010 | 2009 | |||||||
Loss from continuing operations before income taxes |
$ | (3,694 | ) | $ | (2,503 | ) | ||
Net loss available to common shareholders |
$ | (3,378 | ) | $ | (2,707 | ) | ||
Earnings per share from continuing operations - basic |
$ | (0.14 | ) | $ | (0.10 | ) | ||
Earnings per share from discontinued operations - basic |
$ | (0.01 | ) | $ | (0.03 | ) | ||
Earnings per share - basic |
$ | (0.15 | ) | $ | (0.13 | ) | ||
Earnings per share - diluted |
$ | (0.15 | ) | $ | (0.13 | ) | ||
Adjusted EBITDA (1) |
$ | 1,972 | $ | 3,372 | ||||
FFO attributable to common shareholders (2) |
$ | (302 | ) | $ | 1,070 | |||
FFO per share - basic |
(0.01 | ) | 0.05 | |||||
FFO per share - diluted |
(0.01 | ) | 0.05 | |||||
Net cash flow: |
||||||||
Provided by operating activities |
$ | 90 | $ | 1,955 | ||||
Provided by investing activities |
$ | 2,139 | $ | 360 | ||||
Used in financing activities |
$ | (2,237 | ) | $ | (2,121 | ) | ||
Weighted average number of shares outstanding for: |
||||||||
calculation of earnings per share - basic |
22,002 | 20,925 | ||||||
calculation of earnings per share - diluted |
22,002 | 20,925 | ||||||
Weighted average number of shares outstanding for: |
||||||||
calculation of FFO per share - basic |
22,002 | 20,925 | ||||||
calculation of FFO per share - diluted |
22,002 | 20,925 | ||||||
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Part II. OTHER INFORMATION, CONTINUED:
Item 5. | Other Information, continued: |
(In thousands, except per share and statistical data)
Three months ended March 31, |
||||||||
2010 | 2009 | |||||||
RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA |
||||||||
Net loss attributable to common shareholders |
$ | (3,378 | ) | $ | (2,707 | ) | ||
Interest, including disc ops |
3,055 | 3,123 | ||||||
Income tax benefit, including disc ops |
(1,106 | ) | (1,043 | ) | ||||
Depreciation and amortization, including disc ops |
3,040 | 3,717 | ||||||
EBITDA |
1,611 | 3,090 | ||||||
Noncontrolling interest |
(7 | ) | (87 | ) | ||||
Preferred stock dividends |
368 | 369 | ||||||
Adjusted EBITDA (1) |
$ | 1,972 | $ | 3,372 | ||||
RECONCILIATION OF NET LOSS TO FFO |
||||||||
Net loss attributable to common shareholders |
$ | (3,378 | ) | $ | (2,707 | ) | ||
Depreciation and amortization |
3,040 | 3,717 | ||||||
Net loss on disposition of assets |
36 | 60 | ||||||
FFO available to common shareholders (2) |
$ | (302 | ) | $ | 1,070 | |||
ADDITIONAL INFORMATION |
||||||||
Average Daily Rate |
$ | 45.31 | $ | 48.99 | ||||
Revenue Per Available Room |
$ | 24.91 | $ | 26.32 | ||||
Occupancy |
55.0 | % | 53.7 | % |
(1) | 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 doesnt 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 managements 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.
(2) | FFO is a non-GAAP financial measure. We consider FFO to be a market accepted measure of an equity REIT's operating performance, which is 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 |
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Table of Contents
Part II. OTHER INFORMATION, CONTINUED:
Item 5. | Other Information, continued: |
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. FFO does not represent amounts available for managements discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. All REITs do not calculate FFO in the same manner; therefore, our calculation may not be the same as the calculation of FFO for similar REITs.
We use FFO as a performance measure to facilitate a periodic evaluation of our operating results relative to those of our peers, who, like us, are typically members of NAREIT. We consider FFO a useful additional measure of performance for an equity REIT because it facilitates 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 provides a meaningful indication of our performance.
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Part II. OTHER INFORMATION, CONTINUED:
Item 6. | Exhibits |
Exhibit |
Description | |
10.1 |
Second Amendment to Amended and Restated Loan Agreement dated as of March 29, 2010 by and between Supertel Hospitality, Inc. and Great Western Bank. | |
10.2 |
Loan Modification Agreement dated as of March 25, 2010 by and between General Electric Capital Corporation, Supertel Limited Partnership, SPPR-South Bend, LLC, Supertel Hospitality REIT Trust and Supertel Hospitality, Inc. | |
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 |
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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 6th day of May, 2010
By: | /s/ CORRINE L. SCARPELLO | |
Corrine L. Scarpello | ||
Chief Financial Officer and Secretary |
Dated this 6th day of May, 2010
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Table of Contents
Supertel Hospitality, Inc., and Subsidiaries
Exhibits
Exhibit |
Description | |
10.1 |
Second Amendment to Amended and Restated Loan Agreement dated as of March 29, 2010 by and between Supertel Hospitality, Inc. and Great Western Bank. | |
10.2 |
Loan Modification Agreement dated as of March 25, 2010 by and between General Electric Capital Corporation, Supertel Limited Partnership, SPPR-South Bend, LLC, Supertel Hospitality REIT Trust and Supertel Hospitality, Inc. | |
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 |
34