Attached files
file | filename |
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EX-31.2 - SUMMIT HOTEL PROPERTIES LLC | v184846_ex31-2.htm |
EX-99.1 - SUMMIT HOTEL PROPERTIES LLC | v184846_ex99-1.htm |
EX-31.1 - SUMMIT HOTEL PROPERTIES LLC | v184846_ex31-1.htm |
EX-32.2 - SUMMIT HOTEL PROPERTIES LLC | v184846_ex32-2.htm |
EX-32.1 - SUMMIT HOTEL PROPERTIES LLC | v184846_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
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
o 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: 000-51955
SUMMIT
HOTEL PROPERTIES, LLC
(Exact
name of registrant as specified in its charter)
South
Dakota
(State or
other jurisdiction
of
incorporation or organization)
20-0617340
(I.R.S.
Employer Identification No.)
2701
South Minnesota Avenue, Suite 6
Sioux
Falls, SD 57105
(Address
of principal executive
offices,
including zip code)
(605)
361-9566
(Registrant’s
telephone number,
including
area code)
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. x Yes o 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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). o Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company in
Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes x No
The
number of Class A Membership Units outstanding as of May 14, 2010, was 1,166.62
and the number of Class A-1 Membership Units outstanding as of May 14, 2010, was
437.83.
1
TABLE
OF CONTENTS
PART
I
|
||
Page
|
||
Item
1.
|
Financial
Statements
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December
31, 2009
|
3
|
|
Condensed
Consolidated Statements of Operations for the three months ended March 31,
2010 and 2009 (Unaudited)
|
4
|
|
Condensed
Consolidated Statement of Changes in Members’ Equity for the three months
ended March 31, 2010 (Unaudited)
|
5
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended March 31,
2010 and 2009 (Unaudited)
|
6
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
8
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
26
|
Item
4.
|
Controls
and Procedures
|
26
|
|
PART
II
|
|
Item
1.
|
Legal
Proceedings
|
27
|
Item
1A.
|
Risk
Factors
|
27
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
28
|
Item
3.
|
Defaults
Upon Senior Securities
|
28
|
Item
4.
|
Removed
and Reserved
|
28
|
Item
5.
|
Other
Information
|
28
|
Item
6.
|
Exhibits
|
28
|
Exhibit
31.1
|
||
Exhibit
31.2
|
||
Exhibit
32.1
|
||
Exhibit
32.2
|
||
Exhibit
99.1
|
2
PART
I
FINANCIAL
INFORMATION
Item
1. Financial
Statements
SUMMIT
HOTEL PROPERTIES, LLC
CONDENSED
CONSOLIDATED BALANCE SHEETS
MARCH
31, 2010 (UNAUDITED) AND DECEMBER 31, 2009 (AUDITED)
2010
|
2009
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 9,657,828 | $ | 8,239,225 | ||||
Restricted
cash
|
1,309,894 | 1,755,053 | ||||||
Trade
receivables
|
3,729,368 | 2,608,198 | ||||||
Prepaid
expenses and other
|
1,130,078 | 1,416,480 | ||||||
Total
current assets
|
15,827,168 | 14,018,956 | ||||||
PROPERTY
AND EQUIPMENT, NET
|
477,144,154 | 483,940,701 | ||||||
OTHER
ASSETS
|
||||||||
Deferred
charges and other assets, net
|
4,396,268 | 4,828,185 | ||||||
Land
held for sale
|
12,226,320 | 12,226,320 | ||||||
Other
noncurrent assets
|
4,058,741 | 4,074,179 | ||||||
Restricted
cash
|
292,043 | 331,190 | ||||||
Total
other assets
|
20,973,372 | 21,459,874 | ||||||
TOTAL
ASSETS
|
$ | 513,944,694 | $ | 519,419,531 | ||||
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Current
portion of long-term debt
|
$ | 135,579,300 | $ | 134,370,900 | ||||
Lines
of credit
|
20,002,943 | 21,457,943 | ||||||
Accounts
payable
|
901,532 | 1,088,265 | ||||||
Related
party accounts payable
|
41,668 | 494,248 | ||||||
Accrued
expenses
|
10,277,192 | 9,182,013 | ||||||
Total
current liabilities
|
166,802,635 | 166,593,369 | ||||||
LONG-TERM
DEBT, NET OF CURRENT PORTION
|
269,933,563 | 270,353,750 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
MEMBERS'
EQUITY
|
||||||||
Class
A, 1,166.62 units issued and outstanding
|
58,084,578 | 60,451,469 | ||||||
Class
A-1, 437.83 units issued and outstanding
|
33,839,366 | 34,330,877 | ||||||
Class
B, 81.36 units issued and outstanding
|
1,542,638 | 1,891,187 | ||||||
Class
C, 173.60 units issued and outstanding
|
(14,633,623 | ) | (12,576,658 | ) | ||||
Total
Summit Hotel Properties, LLC members' equity
|
78,832,959 | 84,096,875 | ||||||
Noncontrolling
interest
|
(1,624,463 | ) | (1,624,463 | ) | ||||
Total
equity
|
77,208,496 | 82,472,412 | ||||||
TOTAL
LIABILITIES AND MEMBERS' EQUITY
|
$ | 513,944,694 | $ | 519,419,531 |
(See
Notes to Condensed Consolidated Financial Statements)
3
SUMMIT
HOTEL PROPERTIES, LLC
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
2010
|
2009
|
|||||||
REVENUES
|
||||||||
Room
revenues
|
$ | 30,679,846 | $ | 28,686,179 | ||||
Other
hotel operations revenues
|
682,874 | 615,553 | ||||||
31,362,720 | 29,301,732 | |||||||
COSTS
AND EXPENSES
|
||||||||
Direct
hotel operations
|
10,927,218 | 9,788,922 | ||||||
Other
hotel operating expenses
|
4,657,309 | 4,118,568 | ||||||
General,
selling and administrative
|
5,803,990 | 5,551,915 | ||||||
Repairs
and maintenance
|
934,148 | 1,811,556 | ||||||
Depreciation
and amortization
|
6,850,564 | 5,622,664 | ||||||
Loss
on impairment of assets
|
1,173,100 | - | ||||||
30,346,329 | 26,893,625 | |||||||
INCOME
FROM OPERATIONS
|
1,016,391 | 2,408,107 | ||||||
OTHER
INCOME (EXPENSE)
|
||||||||
Interest
income
|
12,085 | 10,374 | ||||||
Interest
(expense)
|
(5,567,197 | ) | (4,116,650 | ) | ||||
Gain
(loss) on disposal of assets
|
(37,451 | ) | (71 | ) | ||||
(5,592,563 | ) | (4,106,347 | ) | |||||
INCOME
(LOSS) FROM CONTINUING OPERATIONS
|
(4,576,172 | ) | (1,698,240 | ) | ||||
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS
|
- | 104,280 | ||||||
NET
INCOME (LOSS) BEFORE INCOME TAXES
|
(4,576,172 | ) | (1,593,960 | ) | ||||
STATE
INCOME TAX (EXPENSE)
|
(152,483 | ) | - | |||||
NET
INCOME (LOSS)
|
(4,728,655 | ) | (1,593,960 | ) | ||||
NET
INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST
|
- | (122,988 | ) | |||||
NET
INCOME (LOSS) ATTRIBUTABLE TO SUMMIT HOTEL PROPERTIES, LLC
|
$ | (4,728,655 | ) | $ | (1,470,972 | ) | ||
BASIC
AND DILUTED EARNINGS (LOSS) PER $100,000 CAPITAL UNIT
|
$ | (2,543.09 | ) | $ | (893.97 | ) | ||
WEIGHTED
AVERAGE NUMBER OF UNITS OUTSTANDING FOR CALCULATION OF BASIC AND DILUTED
EARNINGS PER CAPITAL UNIT (based on $100,000 investment)
|
1,859.41 | 1,645.43 |
(See
Notes to Condensed Consolidated Financial Statements)
4
SUMMIT
HOTEL PROPERTIES, LLC
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY (UNAUDITED)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010
Equity
|
||||||||||||||||||||||||||||
# of
|
Atributable to
|
|||||||||||||||||||||||||||
Capital
|
Noncontrolling
|
|||||||||||||||||||||||||||
Units
|
Class A
|
Class A-1
|
Class B
|
Class C
|
Total
|
Interest
|
||||||||||||||||||||||
BALANCES,
JANUARY 1, 2010
|
1,859.41 | $ | 60,451,469 | $ | 34,330,877 | $ | 1,891,187 | $ | (12,576,658 | ) | $ | 84,096,875 | $ | (1,624,463 | ) | |||||||||||||
Net
Income (Loss)
|
(1,973,173 | ) | (349,968 | ) | (348,549 | ) | (2,056,965 | ) | (4,728,655 | ) | - | |||||||||||||||||
Distributions
to members
|
(393,718 | ) | (141,543 | ) | - | - | (535,261 | ) | - | |||||||||||||||||||
BALANCES,
MARCH 31, 2010
|
1,859.41 | $ | 58,084,578 | $ | 33,839,366 | $ | 1,542,638 | $ | (14,633,623 | ) | $ | 78,832,959 | $ | (1,624,463 | ) |
(See Notes to Condensed Consolidated Financial Statements)
5
SUMMIT
HOTEL PROPERTIES, LLC
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
2010
|
2009
|
|||||||
OPERATING
ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | (4,728,655 | ) | $ | (1,593,960 | ) | ||
Adjustments
to reconcile net income to net cash from operating
activities:
|
||||||||
Depreciation
and amortization
|
6,850,564 | 5,666,740 | ||||||
Amortization
of prepaid lease
|
11,850 | - | ||||||
Loss
on impairment of assets
|
1,173,100 | - | ||||||
(Gain)
loss on disposal of assets
|
37,451 | 71 | ||||||
Changes
in current assets and liabilities:
|
||||||||
Trade
receivables
|
(1,121,170 | ) | (892,612 | ) | ||||
Prepaid
expenses and other
|
286,402 | (689,150 | ) | |||||
Accounts
payable and related party accounts payable
|
(639,313 | ) | (286,014 | ) | ||||
Accrued
expenses
|
1,095,179 | (398,067 | ) | |||||
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
2,965,408 | 1,807,008 | ||||||
INVESTING
ACTIVITIES
|
||||||||
Land
and hotel acquisitions and construction in progress
|
(204,556 | ) | (8,570,552 | ) | ||||
Purchases
of other property and equipment
|
(578,095 | ) | (2,292,063 | ) | ||||
Proceeds
from asset dispositions, net of closing costs
|
3,588 | - | ||||||
Restricted
cash released (funded)
|
484,306 | (387,257 | ) | |||||
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
(294,757 | ) | (11,249,872 | ) | ||||
FINANCING
ACTIVITIES
|
||||||||
Proceeds
from issuance of long-term debt
|
2,426,869 | - | ||||||
Principal
payments on long-term debt
|
(1,638,656 | ) | (1,584,377 | ) | ||||
Financing
fees on long-term debt
|
(50,000 | ) | (430,545 | ) | ||||
Proceeds
from issuance of notes payable and line of credit
|
- | 239,350 | ||||||
Principal
payments on notes payable and line of credit
|
(1,455,000 | ) | (276,329 | ) | ||||
Proceeds
from equity contributions
|
- | 4,793,384 | ||||||
Distributions
to members
|
(535,261 | ) | (2,843,471 | ) | ||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
(1,252,048 | ) | (101,988 | ) | ||||
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
1,418,603 | (9,544,852 | ) | |||||
CASH
AND CASH EQUIVALENTS BEGINNING OF PERIOD
|
8,239,225 | 18,153,435 | ||||||
END
OF PERIOD
|
$ | 9,657,828 | $ | 8,608,583 |
(See
Notes to Condensed Consolidated Financial Statements)
6
SUMMIT
HOTEL PROPERTIES, LLC
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
payments for interest, net of the amounts capitalized
below
|
$ | 5,451,651 | $ | 4,110,400 | ||||
Interest
capitalized
|
$ | - | $ | 928,180 | ||||
Cash
payments for state income taxes
|
$ | 12,328 | $ | 112,445 | ||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCIAL INFORMATION:
|
||||||||
Construction
in progress financed through related party accounts
payable
|
$ | - | $ | 1,642,270 | ||||
Construction
in progress financed through accounts payable
|
$ | - | $ | 3,683,672 | ||||
Construction
in progress financed through issuance of debt
|
$ | - | $ | 11,008,480 | ||||
Issuance
of long-term debt to refinance existing long-term debt
|
$ | - | $ | 8,440,000 | ||||
Conversion
of debt to equity
|
$ | - | $ | 2,449,150 |
(See
Notes to Condensed Consolidated Financial Statements)
7
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 2010
NOTE
1 -
|
SIGNIFICANT
ACCOUNTING POLICIES AND BUSINESS
|
Basis
of Presentation
The
accompanying unaudited interim financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission for
reporting on interim periods. Accordingly, certain information and
footnotes required by the accounting principles generally accepted in the United
States for complete financial statements have been omitted. Interim
results may not be indicative of fiscal year performance because of seasonal and
other factors. These interim statements should be read in conjunction with
the financial statements and notes thereto included in our Form 10-K filing for
the year ended December 31, 2009. In management’s opinion, all
adjustments made were normal and recurring in nature, and were necessary for a
fair statement of the results of the interim period. The December 31,
2009 balance sheet has been derived from the Company’s audited financial
statements included in the Company’s annual report on Form 10-K for the year
ended December 31, 2009.
The
condensed consolidated financial statements include the accounts of the Company
and Summit Group of Scottsdale, Arizona, LLC. The effects of all
intercompany accounts and transactions have been eliminated. The Company
is a Class A Member and receives a 10% priority distribution on their
capital contribution before distributions to other classes. Class A
members may also receive additional operating distributions based on their
Sharing Ratio. These additional distributions are determined by the
managing member and are based on excess cash from operations after normal
operating expenses, loan payments, priority distributions, and
reserves. Any income generated by the LLC is first allocated to Class
A members up to the 10% priority return, therefore, there was no income
allocated to the noncontrolling interest during the first quarter of
2010.
Use
of Estimates
The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Adopted
Accounting Standards
In
January 2010, the Financial Accounting Standards Board (FASB) issued an update
(ASU No. 2010-06) to Accounting Standards Codification (ASC) 820, Fair Value Measurements and
Disclosures, to improve disclosure requirements regarding transfers,
classes of assets and liabilities, and inputs and valuation
techniques. This update is effective for interim and annual reporting
periods beginning after December 15, 2009. The Company adopted this
ASC update on January 1, 2010, and it had no material impact on the consolidated
financial statements.
In
February 2010, the FASB issued an update (ASU No. 2010-09) to ASC 855, Subsequent Events, by
removing the requirement for an SEC filer to disclose the date through which
that filer had evaluated subsequent events. The Company has adopted
this change and therefore has removed the related disclosure from the “Basis of
Presentation.”
Future
Adoption of Accounting Standards
Certain
provisions of ASU No. 2010-06 to ASC 820, Fair Value Measurements and
Disclosures, related to separate line items for all purchases, sales,
issuances, and settlements of financial instruments valued using Level 3 are
effective for fiscal years beginning after December 15, 2010. The
Company does not believe that this adoption will have a material impact on the
financial statements or disclosures.
(continued
on next page)
8
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 2010
Fair
Value
The
Company adopted the provisions of FASB ASC 820, Fair Value Measurements and
Disclosures, effective January 1, 2008. FASB ASC 820 defines
fair value, establishes a framework for measuring fair value and enhances
disclosures about fair value measurements. Fair value is
defined under generally accepted accounting principles as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date. Valuation techniques used to measure fair value, as required by
Topic 820 of the FASB ASC, must maximize the use of observable inputs and
minimize the use of unobservable inputs.
Our
estimates of the fair value of financial instruments as of March 31, 2010, were
determined using available market information and appropriate valuation
methods. Considerable judgment is necessary to interpret market data
and develop estimated fair value. The use of different market
assumptions or estimation methods may have a material effect on the estimated
fair value amounts.
The
carrying amounts of cash and cash equivalents, restricted cash, receivables,
accounts payable and other liabilities approximate fair value due to the
short-term nature of these instruments.
As of
March 31, 2010, the fair value of our consolidated mortgage and other secured
and unsecured loans aggregates $406,019,820, compared to the aggregate carrying
value of $425,515,806 on our consolidated balance sheet.
FASB ASC
820 also requires that non-financial assets and non-financial liabilities be
disclosed at fair value in the financial statements if these items occur
regularly, such as in determining impairment loss or the value of assets held
for sale as described below.
The
following tables summarize the changes in fair value of our Level 3
(unobservable inputs) non-financial assets for the three months ended
March 31, 2010 (refer to following sections for more details of the
transactions):
Fair Value Measurement of Non-Financial Assets Using Level 3 Inputs
|
||||
Beginning
balance at January 1, 2010
|
$ | 12,226,320 | ||
Add
property subject to impairment evaluation
|
5,748,995 | |||
Less
depreciation
|
(75,895 | ) | ||
Less
impairment
|
(1,173,100 | ) | ||
Ending
balance at March 31, 2010
|
$ | 16,726,320 | ||
Impairment
for the first quarter of 2010 included in earnings attributable to the
change in unrealized losses relating to assets not held for
sale.
|
$ | (1,173,100 | ) |
The March
31, 2010 ending balance of $16,726,320 is comprised of land held for sale with a
fair value of $12,226,320 and the Memphis, TN Courtyard with a fair value of
$4,500,000.
(continued
on next page)
9
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 2010
Long-Lived
Assets and Impairment
The
Company applies the provisions of FASB ASC 360, Property Plant and Equipment,
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. FASB ASC 360 requires a long-lived
asset to be sold to be classified as “held for sale” in the period in which
certain criteria are met, including that the sale of the asset within one year
is probable. FASB ASC 360 also requires that the results of
operations of a component of an entity that either has been disposed of or is
classified as held for sale be reported in discontinued operations if the
operations and cash flows of the component have been or will be eliminated from
the Company’s ongoing operations.
The
Company periodically reviews the carrying value of its long-term assets in
relation to historical results, current business conditions and trends to
identify potential situations in which the carrying value of assets may not be
recoverable. If such reviews indicate that the carrying value of such
assets may not be recoverable, the Company would estimate the undiscounted sum
of the expected cash flows of such assets to determine if such sum is less than
the carrying value of such assets to ascertain if an impairment exists. If
an impairment exists, the Company would determine the fair value by using quoted
market prices, if available for such assets, or if quoted market prices are not
available, the Company would discount the expected future cash flows of such
assets.
During
2009, the Company has determined that six land parcels were deemed to be
impaired and written down to their fair market value. Carrying value
of the assets exceeded fair value by $6,332,736, with fair value being
determined by reference to the estimated quoted market prices of such assets as
defined in Level 3 Inputs as discussed under previous Fair Value
paragraph. An impairment loss of that amount has been charged to
operations in 2009. During the first quarter of 2010, the
Company has determined that the Courtyard hotel in Memphis, TN was deemed to be
impaired and written down to its fair market value. An impairment
loss of $1,173,100 has been charged to operations in 2010.
Assets
Held for Sale
During
the period, the Company completed a comprehensive review of its investment
strategy and of its existing hotel portfolio to identify properties which the
Company believes is either non-core or no longer complement the business as
required by FASB ASC 360. The Company has committed to sell six
parcels of land that were originally purchased for development and thus, their
net book value, as defined in Level 3 Inputs, is recorded as assets held for
sale as of March 31, 2010.
Assets
held for sale at March 31, 2010 and December 31, 2009 are comprised of the
following:
2010
|
2009
|
|||||||
Land
|
$ | 12,226,320 | $ | 12,226,320 |
(continued on next page)
10
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 2010
Discontinued
Operations
In
accordance with FASB ASC 360, the Company classifies its condensed consolidated
financial statements of operations for the three month periods ended March 31,
2010 and 2009, and its condensed consolidated balance sheet as of March 31,
2010. This presentation reflects discontinued operations of the two
consolidated hotel properties sold, or to be sold pursuant to the plan for hotel
dispositions. This classification has no impact on the Company’s net
income or the net income per capital unit. The two hotel properties
are located in St. Joseph, MO and Ellensburg, WA. These hotels
were sold during 2009 for approximately $6,810,000.
Condensed
financial information of the results of operations for these hotel properties
included in discontinued operations for the three month periods ended March 31,
2010 and 2009 are as follows:
2010
|
2009
|
|||||||
REVENUES
|
$ | - | $ | 510,654 | ||||
COSTS
AND EXPENSES
|
||||||||
Direct
hotel operations
|
- | 159,977 | ||||||
Other
hotel operating expenses
|
- | 65,326 | ||||||
General,
selling and administrative
|
- | 100,635 | ||||||
Repairs
and maintenance
|
- | 17,705 | ||||||
Depreciation
and amortization
|
- | 44,076 | ||||||
- | 387,719 | |||||||
INCOME
FROM OPERATIONS
|
- | 122,935 | ||||||
OTHER
INCOME (EXPENSE)
|
||||||||
Interest
income
|
- | 116 | ||||||
Interest
(expense)
|
- | (18,771 | ) | |||||
- | (18,655 | ) | ||||||
(LOSS)
INCOME FROM DISCONTINUED OPERATIONS
|
$ | - | $ | 104,280 |
Acquisitions
The
Company applies the principles of FASB ASC 805, Business Combinations, in
accounting for its acquisitions. The Company determines the cost of
the acquired property based upon the fair value of assets distributed as
consideration and the fair value of liabilities incurred. The cost of
the acquired entity includes all direct costs of the business combination
whereas indirect and general expenses are expensed as incurred. The
Company allocates the cost of the acquired entity to the assets acquired and
liabilities assumed based upon their estimated fair market values at the date of
acquisition. To determine fair value of the various components
acquired, the Company engages independent valuation consultants and other
third-party real-estate appraisals as necessary. The Company
allocates the cost of the acquired property based upon the relative fair values
of the various components contained in the appraisals. In some cases,
the cost of the property acquired may be less than the fair value contained in
the appraisals. In these cases, the Company reduces the fair values
based upon the relative value of the components of the
acquisition. The excess of the cost of the acquisition over the fair
value will be assigned to intangible assets if the intangible asset is separable
and if it arises from a contractual or other legal right. Any
remaining excess of the cost of acquisition over fair values assigned to
separable assets is recognized as goodwill. Further, many of the
Company’s hotel acquisitions to date have been aggregated which in accordance
with Topic 805 of the FASB ASC has resulted in an aggregated purchase price
allocation. Since its inception, the Company’s acquisitions and
subsequent purchase price allocations have resulted in no goodwill.
(continued on next page)
11
SUMMIT
HOTEL PROPERTIES, LLC
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 2010
Accrued
Expenses
Accrued
expenses at March 31, 2010 and December 31, 2009 are as follows:
2010
|
2009
|
|||||||
Accrued
taxes
|
$ | 5,373,217 | $ | 5,238,690 | ||||
Accrued
salaries and benefits
|
1,882,518 | 1,400,729 | ||||||
Accrued
interest
|
1,419,545 | 1,303,999 | ||||||
Other
accrued expenses
|
1,601,912 | 1,238,595 | ||||||
$ | 10,277,192 | $ | 9,182,013 |
Note
Obligations
The
Fortress Credit Corp. note with a current balance of $84,753,176 has a scheduled
maturity date of March 2010, so it has been included in the current maturities
section of the balance sheet. To permit the parties to finalize
the definitive documentation for the extension, Fortress has agreed to forbear
from declaring a default or otherwise enforcing its rights under the Fortress
loan until May 17, 2010. The extension is anticipated to be for a
period of one year, with an option for an additional six month extension
contingent on meeting certain requirements.
Related
Parties
Pursuant
to a management agreement, The Summit Group, Inc. (a related party through
common ownership and management control) provides management and accounting
services for the Company. The agreement provides for the Company to
reimburse The Summit Group, Inc. for its actual overhead costs and expenses
relating to the managing of the hotel properties. At no time are the
reimbursed management expenses to exceed 4.5% of annual gross
revenues. For the three months ended March 31, 2010 and 2009, the
Company reimbursed management expenses of $754,634 and $839,258,
respectively. The Company reimbursed accounting services of
$163,008 and $153,256 for the three months ended March 31, 2010 and 2009,
respectively. The Company also reimbursed for maintenance and purchases
services of $25,783 and $166,296 for the three months ended March 31, 2010 and
2009, respectively.
As of
March 31, 2010 and December 31, 2009, the Company had accounts payable to The
Summit Group, Inc. for $41,668 and $494,248 relating to reimbursement of
management and development expenses.
12
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements
This
report includes “forward-looking” statements, as that term is defined in the
Private Securities Litigation Reform Act of 1995 or by the Securities and
Exchange Commission in its rules, regulations and releases. Forward-looking
statements are any statements other than statements of historical fact,
including statements regarding our expectations, beliefs, hopes, intentions or
strategies regarding the future. In some cases, forward-looking statements can
be identified by the use of words such as “may,” “will,” “expects,” “intends,”
“should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,”
“potential,” “continue,” or other words of similar meaning. Forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those discussed in, or implied by, the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, general economic conditions, our financial and business
prospects, our capital requirements, our financing prospects, and those
disclosed as risks in other reports filed by us with the Securities and Exchange
Commission, including those described in Item 1A. of our annual report filed on
Form 10-K. We caution readers that any such statements are based on currently
available operational, financial and competitive information, and they should
not place undue reliance on these forward-looking statements, which reflect
management’s opinion only as of the date on which they were made. Except as
required by law, we disclaim any obligation to review or update these
forward-looking statements to reflect events or circumstances as they
occur.
Overview
Management’s
discussion and analysis of financial conditions and results of operations
(“MD&A”) discusses our condensed consolidated financial statements, which
have been prepared in accordance with United States generally accepted
accounting principles. The preparation of these condensed
consolidated financial statements requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and costs and expenses
during the reporting periods. On an ongoing basis, management
evaluates its estimates and judgments, including those related to revenue
recognition, bad debts, investments, plant, property and equipment and
intangible assets, income taxes, financing operations, self-insurance claims
payable, contingencies, and litigation.
Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of the
assets and liabilities that are not readily available from other
sources. Actual results may differ from these estimates under
different assumptions and conditions.
13
Critical
Accounting Policies
Property and
Equipment
Property and equipment are stated at
cost less accumulated depreciation. We periodically review the
carrying value of property and equipment and other long-lived assets for
indications that the carrying value of such assets may not be
recoverable. This review consists of a comparison of the carrying
value of the assets with the expected future undiscounted cash
flows. If the respective carrying values exceed the expected future
undiscounted cash flows, the impairment is measured using fair value measures to
the extent available or discounted cash flows.
Capitalized Development and
Interest Costs
The Company capitalizes all hotel
development costs and other direct overhead costs related to the purchase and
construction of hotels. Additionally, the Company capitalizes the
interest costs associated with constructing new hotels. Capitalized
development, direct overhead and interest are depreciated over the estimated
lives of the respective assets once the assets are placed in
service. Organization and start-up costs are expensed as
incurred. For the three month periods ended March 31, 2010 and 2009,
the Company capitalized interest of $0 and $928,180, respectively.
Impairment of Long-Lived
Assets
We consider each individual hotel to be
an identifiable component of our business. In accordance with FASB
ASC 360 “Property, Plant and Equipment” we do not consider a hotel as “held for
sale” until the potential transaction has been approved by our Board, as may be
required, and it is probable that the sale will be completed within one year. We
do not consider a sale to be probable until a buyer’s due diligence review is
completed and all substantive conditions to the buyer’s performance have been
satisfied. Once a hotel is “held for sale,” the operations related to
the hotel will be included in discontinued operations.
We do not depreciate hotel assets while
they are classified as “held for sale.” Upon designation of a hotel
as being “held for sale,” and quarterly thereafter, we review the carrying value
of the hotel and, as appropriate, adjust its carrying value to the lesser of
depreciated cost or fair value less cost to sell, in accordance with ASC
360. Any such adjustment in the carrying value of a hotel classified
as “held for sale” will be reflected in discontinued operations. We
will include in discontinued operations the operating results of hotels
classified as “held for sale” or that have been sold.
We
periodically review the carrying value of certain long-lived assets in relation
to historical results, current business conditions and trends to identify
potential situations in which the carrying value of assets may not be
recoverable. If such reviews indicate that the carrying value of such
assets may not be recoverable, we estimate the undiscounted sum of the expected
cash flows of such assets to determine if such sum is less than the carrying
value of such assets to ascertain if an impairment exists. If an
impairment exists, we determine the fair value by using quoted market prices, if
available for such assets, or if quoted market prices are not available, we
would discount the expected future cash flows of such assets.
14
Management has identified six land
parcels that the Company intends to sell and no longer develop. These
parcels were deemed to be impaired and written down to their fair market value
during the year ended December 31, 2009. An impairment loss of $6.3
million was recognized.
In addition, during the first quarter
of 2010, the Company determined that its Memphis, Tennessee Courtyard hotel was
impaired and was written down to the fair market value. An impairment
loss of $1.2 million was recognized.
Consolidation
Policy
The consolidated financial statements
include the accounts of the Company and its variable interest entity, Summit
Group of Scottsdale, Arizona, LLC. All significant intercompany
accounts and transactions have been eliminated.
The Company adopted FASB ASC 810,
“Consolidations” beginning October 1, 2004. This ASC requires that we
present any variable interest entities in which we have a majority variable
interest on a consolidated basis in our financial statements. Under
Topic 810, variable interest entities (“VIEs”) are required to be consolidated
by their primary beneficiaries if they do not effectively disperse risks among
the parties involved. The primary beneficiary of a VIE is the party
that absorbs a majority of the entity’s expected losses, receives a majority of
its expected residual returns, or both, as a result of holding variable
interests. In applying Topic 810, management has utilized available
information and reasonable assumptions and estimates in evaluating whether an
entity is a VIE and which party is the primary beneficiary. These
assumptions and estimates are subjective and the use of different assumptions
could result in different conclusions.
Revenue
Recognition
The
revenue from the operation of a hotel is recognized as part of the hotel
operations segment when earned. Typically, cash is collected from the
guest at the time of check-in or checkout or the guest pays by credit card which
is typically reimbursed within 2-3 days; however, we also extend credit to
selected corporate customers.
Results
of Operations
The
following discussion presents an analysis of results of our operations for the
three months ended March 31, 2010 and March 31, 2009.
Our
operating results declined for the three months ended March 31, 2010 compared to
the three months ended March 31, 2009. Because the Company owned four more
hotels we generated higher revenues in the three months ended March 31, 2010
compared to the three months ended March 31, 2009. The Company
completed construction of six new hotels during 2009, and the revenues generated
from these hotels have not yet stabilized. Even though these new
hotels have generated additional revenues, they did not generate revenues
sufficient to pay for all of the expenses incurred in operating these new
hotels, causing a decline in Net Income.
15
All of
our revenues are derived from guestroom rentals at our hotels, and revenues from
services related to guestroom rentals. In addition to guestroom
rental revenue, our hotels derived revenues from fees to guests for telephone
usage, hotel meeting room rentals, restaurant and lounge receipts, hotel laundry
and valet services, revenues from concessions and other fees charged to hotel
users for similar services. All revenues were generated from hotels
located in the United States.
Management
utilizes a variety of indicators to compare the financial and operating
performance of the hotels between periods, as well as the performance of
individual hotels or groups of hotels. The key indicators we use
include: occupancy percentage rate which is the percentage of hotel guestrooms
occupied divided by the number of guestrooms available for occupancy; average
daily rate (ADR) which is the average rental rate charged to guests; and revenue
per available room (RevPAR) which is the product of the occupancy rate and
ADR. Each of these indicators is also commonly used throughout the
hotel industry. Because the number of hotels we own each year is
variable, we believe these indicators give a better indication of our
performance.
Three
Months Ended March 31, 2010 Compared with Three Months Ended March 31,
2009
Revenues
Total revenue from continuing
operations for the three months ended March 31, 2010 was $31.4 million, compared
to $29.3 million during the three months ended March 31, 2009. This
is an increase of 7.0%. The increase was primarily caused by revenues
generated by the six new hotels opened by the Company during 2009, despite the
sale of two hotels during 2009.
The key indicators for the Company’s
hotel performance for the three months ended March 31, 2010 and 2009 are set
forth in the following table.
Three
Months Ended
|
Three
Months Ended
|
|||||||||||
March
31,
|
March
31,
|
|||||||||||
2010
|
2009
|
Increase/(Decrease)
|
||||||||||
All
Company Hotels
|
||||||||||||
RevPAR
|
$ | 52.18 | $ | 55.18 | $ | (3.00 | ) | |||||
Average
Daily Rate
|
$ | 87.49 | $ | 91.44 | $ | (3.95 | ) | |||||
Occupancy
Rate
|
59.64 | % | 60.35 | % | (0.71 | %) |
Management
attributes a significant portion of the decline in occupancy rates and average
daily rates (ADRs) at our hotels to the nationwide recession and its effects on
the hotel industry. Due to the significant decline in the national
economy, many business and leisure travelers have cancelled or postponed travel
plans. As a result, occupancy rates at hotels throughout the United
States have declined. Because of the lower occupancy rates, many
hotel operators have lowered their room rates in an attempt to be more
competitive. Consequently, we were also forced to lower room rates
throughout 2009 to remain competitive in our markets. In addition,
new hotels generally open with lower occupancy rates and ADRs, as was the case
with the Company’s six new hotels opened during 2009. Thus, these new
hotels caused a further reduction in our portfolio occupancy rates and
ADR. Although occupancy rates and ADRs declined throughout 2009,
these rates started to stabilize during the first quarter of 2010 and management
anticipates that these rates will continue to stabilize through the remainder of
2010.
16
We continue to focus our efforts on
revenue management to ensure that each of our hotels maximizes its revenues each
day by attaining the optimum balance between ADR and occupancy
rate. Further, we continue to emphasize marketing at our newer hotels
so that they continue to stabilize, despite the challenges caused by the
economy.
Hotel Operating
Expenses
Our hotel
operating expenses increased as a percentage of revenues, and totaled $30.3
million for the three months ended March 31, 2010, which was 96.8% of our
revenues, compared to $26.9 million for the three months ended March 31, 2009,
which was 91.8% of our revenues. The increase in the percentage of operating
expenses to revenues was for three primary reasons: first, the new hotels opened
by the Company during 2009 are not yet generating sufficient revenues to cover
their operating expenses; second, depreciation and amortization expense
increased by over $1.2 million from the first quarter of 2009 to the first
quarter of 2010 due to the six new hotels constructed by the Company during
2009; and third, an impairment loss of $1.2 million was charged to operations
during the quarter ended March 31, 2010.
Hotel
operating expenses consist primarily of expenses incurred in the day-to-day
operation of our hotels such as hotel staff salaries and wages, hotel utility
expenses, hotel real estate taxes, and royalty and other fees charged by our
franchisors. Many of our expenses are fixed, such as essential hotel
staff, real estate taxes, insurance, depreciation, and certain types of
franchise fees, and these expenses do not decrease even if the revenues at our
hotels decrease.
Due to
the decline in occupancy rates and ADR, management has re-focused its efforts on
operating our hotels efficiently and reducing expenses, but without sacrificing
a high-quality guest experience. Despite the increase in the percentage of
operating expenses to revenues during the three months ended March 31, 2010
compared to the three months ended March 31, 2009, because of the Company’s
efforts to reduce expenses, the Company continues to generate positive Net Cash
from Operations (as defined below).
Net Cash From Operations –
Non-GAAP Financial Measure
The
Company generated Net Cash from Operations of $2.2 million during the three
months ended March 31, 2010, compared to $0.6 million during the three months
ended March 31, 2009. Net Cash from Operations as defined in the Company’s
Operating Agreement is gross cash proceeds from the Company’s operations and
disposition of assets, less the portion used to pay the established reserves,
debt payments, capital improvements, replacements and contingencies, all as
determined by the Company Manager. Management believes this non-GAAP financial
measure is significant because many members are highly interested in the
Company’s cash flow, which reflects its ability to reinstate distributions to
its members including the Priority Return payments. The amended
Fortress loan provisions are anticipated to require the Company to suspend all
distribution to members. The Company will reinstate making Priority
Return payments at such time as management determines it is prudent and the
Company is no longer subject to loan covenants restricting such payments. Please
see the attached Exhibit 99.1 for a reconciliation of Net Cash from Operations
to Net Income (Loss).
17
Depreciation
Our depreciation and amortization
expenses totaled $6.9 million for the three months ended March 31, 2010, and
$5.6 million for the three months ended March 31, 2009. Our buildings
and major improvements are recorded at cost and depreciated using the
straight-line method over 27 to 40 years, the estimated useful lives of the
assets. Hotel equipment, furniture and fixtures are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the related assets of 2 to 15 years. Periodically, we adjust the estimated
useful life of an asset based upon our current assessment of the remaining
utility of such asset.
Management Expense
We reimburse The Summit Group, Inc. for
the expenses it incurs in the management of our hotels and as Company
Manager. During the three months ended March 31, 2010, we reimbursed
The Summit Group $754,634 in hotel management and Company Manager expenses,
which was 2.41% of our total revenues from continuing operations. In
the three months ended March 31, 2009, we reimbursed The Summit Group $839,258
in hotel management and Company Manager expenses, which was 2.86% of our total
revenues from continuing operations. The reduction in management
expense is due to the Company’s efforts to reduce expenses during the economic
downturn.
Repairs and Maintenance
We incurred $0.9 million in repair and
maintenance expenses for the three months ended March 31, 2010, and $1.8 million
in repair and maintenance expenses for the three months ended March 31,
2009. Our repair and maintenance expense has declined because the
Company has not yet scheduled any renovations for 2010. Normal maintenance and
repair costs are expensed as they are incurred. Hotel development
costs and other direct overhead costs related to the purchase and construction
of hotels are capitalized. Expenses related to remodeling hotels are
expensed to the extent permitted by generally accepted accounting
principles. The Company has seven hotels which are scheduled for
regular franchise-required renovations during 2010. The Company has
obtained extensions of the renovation schedule for four of these properties,
such that the renovations will not be due until 2011. The Company and
franchise companies are still negotiating concerning the scope of the remaining
three renovations.
18
Net Income
(Loss)
Net Income (Loss) Attributable to
Summit Hotel Properties, LLC for the three months ended March 31, 2010 was ($4.7
million) compared to ($1.5 million) for the three months ended March 31,
2009. Income (Loss) from Continuing Operations decreased from ($1.7
million) for the three months ended March 31, 2009 to ($4.6 million) for the
three months ended March 31, 2010. We generated Earnings (Loss) Per
Unit of ($2,543) for the three months ended March 31, 2010 compared to ($894)
for the three months ended March 31, 2009. Net Income (Loss)
Attributable to Summit Hotel Properties, LLC decreased during the three months
ended March 31, 2010 compared to the three months ended March 31, 2009 primarily
due to the Company’s six new hotels which have not yet stabilized revenues, a
$1.2 million loss on impairment of assets during the first quarter of 2010, a
$1.2 million increase in depreciation and amortization expense in the first
quarter 2010 compared to the first quarter 2009, and a $1.5 million increase in
interest expense due to the additional debt on the six new hotels.
Seasonality and
Diversification
The hotel
and leisure industry is seasonal in nature; however, the periods during which
our properties experience higher hotel revenue activities vary from property to
property and depend principally upon location. Our revenues historically have
generally been lower in the first and fourth quarters than in the second or
third quarters.
Liquidity
and Capital Resources
Cash From Operating
Activities
Cash
generated from hotel operations is the primary source of funding for operational
expenses, debt service and distributions to members. We anticipate
that cash flow from operations will be sufficient to fund operational expenses
and debt service. Based upon the negotiated terms of a loan extension
with Fortress Credit Corp., we anticipate reserving all excess cash for the
purpose of paying down our debt. We maintain a cash reserve to fund
anticipated and unanticipated shortfalls in liquidity. The cash
reserve balance is reviewed and adjusted on a monthly basis to reflect
anticipated decreases in revenues resulting from seasonal fluctuations, declines
in revenues resulting from significant events affecting the projected industry
revenues, and planned major capital expenditures. Our line of credit
that has been used to fund acquisition, construction or working capital needs
does not have additional funds available at this time.
We
generated $3.0 million in cash from operating activities during the three months
ended March 31, 2010 compared to $1.8 million during the three months ended
March 31, 2009. The increase in cash generated from operations,
despite the decline in Net Income, was primarily due to the increase in the
non-cash expenses of Depreciation and Amortization expense and Loss on
Impairment of Assets, as well as an increase of $1.5 million in accrued
expenses.
19
The
Company experienced declining occupancy rates in 2008 and 2009 due to the
nationwide recession and because of over-building of hotels in many
markets. As occupancy rates declined, we were forced to reduce room
rates at many of our hotels in order to remain competitive. In
addition, due to our rapid pace of construction and acquisition of new hotels
beginning in 2007 continuing through 2009, the total amount of our debt
increased quickly. Because these new hotels recently opened, however,
they are not yet generating sufficient cash to fund their operations and debt
payments. The stabilization period for our new hotels has been
significantly longer than was originally projected because of the severe
nationwide downturn in the hotel industry. As construction has been
completed on all of our new hotels, the construction loans have begun
amortizing. Consequently, the Company’s monthly requirements for
principal and interest payments have increased.
In order
to combat the effects of the recession and over-building in many markets, we
continue to focus on remaining highly competitive within our markets, and
engaging in the direct sales process. Furthermore, our hotels have
intensified efforts to provide a quality guest-experience, but with reduced
expenses. Hotel staffs have been reduced, primarily through
attrition. Expenses are very closely monitored and controlled, but
with a focus on not reducing guest satisfaction. As a result of these
efforts, management expects that our revenues and expenses will stabilize in
2010. Therefore, for the foreseeable future, management anticipates
that we will have sufficient resources to fund hotel operating expenses, make
all debt service payments, and make capital improvements.
Cash From Investing
Activities
The
Company used only $0.3 million of cash in investing activities during the
quarter ended March 31, 2010, compared to $11.2 million of cash used in
investing activities during the quarter ended March 31, 2009. The
primary reason for the significant decline is that six hotels were under
construction during the first quarter of 2009, but no hotels were under
construction during the first quarter of 2010. Thus, the Company was
not required to fund costs and expenses related to new hotel
construction. In addition, certain of our borrowing arrangements
require that we maintain cash reserves for payment of property taxes, insurance
and maintenance expenses of our hotels. These restricted funds are
for use only at the hotels financed by the respective lender requiring the
reserve. As of March 31, 2010, $1.6 million of cash on our balance
sheet was classified as restricted. We had a net cash decrease of
$0.5 million during the three months ended March 31, 2010 due to cash being
released from restricted accounts to fund property insurance and
taxes.
Management periodically reviews our
hotel investments to determine whether any assets no longer meet our investment
standards, are located in markets in which we no longer desire to own hotels, or
no longer complement our core business. In such cases we take steps
to dispose of such hotels at commercially reasonable prices and
terms. We can provide no assurance that we will be able to complete
such dispositions in reasonable time frames or upon reasonable
terms. During the three month periods ended March 31, 2010 and 2009,
the Company did not dispose of any hotel assets.
Due to the economic recession and
decline in the hotel industry that occurred during 2008 and 2009, as well as the
increasing difficulty in obtaining financing for hotel projects, the Company has
sought to reduce its exposure to costs, expenses and financing requirements
related to construction and development activities. Thus, the Company did not
acquire additional parcels of land for development during 2009 or the three
months ended March 31, 2010. In addition, the Company did not start
any new hotel construction during 2009 or the three months ended March 31,
2010. For additional information, see Construction and Development
Requirements below.
20
Cash From Financing
Activities
Proceeds
from the issuance of long-term debt and Notes Payable generated $2.4 million
during the three months ended March 31, 2010 and $0.2 million during the three
months ended March 31, 2009. The Company also received proceeds from
equity contributions in the amount of $0 and $4.8 million during the three
months ended March 31, 2010 and 2009, respectively. These funds were
primarily used to fund new hotel construction.
We have
historically made monthly Priority Return distributions to Class A and Class A-1
members. In addition, prior to 2009 during April, July and October,
we have distributed excess cash resulting from hotel operations to Class A,
Class A-1, Class B and Class C members. Distributions to members were
made in the amounts of $0.5 million and $2.8 million during the three months
ended March 31, 2010 and 2009, respectively. The reduction in
distributions was because effective January 1, 2010, the members’ Priority
Return payments were reduced to 25% of the regular amount, and as of March 31,
2010, the payments were suspended. The unpaid Priority Returns
continue to accrue and will be paid at such time as is permitted by the
Company’s lenders and sufficient cash is available.
Additional
Information Concerning Sources and Uses of Cash
Major
capital improvements on existing hotels and the acquisition or construction of
new hotels is funded primarily through financing with commercial lenders and
equity contributions. At this time, the Company does not anticipate
acquiring, or starting construction on any new hotels until such time as the
United States economy strengthens and debt and equity financing are in place.
The Company did not acquire any hotels and did not start any new hotel
construction projects during 2009 or the three months ended March 31,
2010. As of May 14, 2010, the Company does not have any hotels under
contract for purchase and no new hotel construction is yet scheduled for
2010.
Construction
was completed on six hotels during 2009, and the Company does not currently have
any hotels under construction. There are final expenses on a few of
the construction projects completed in 2009 remaining to be paid, and these are
funded by the Company’s bank loans, including the following:
·
|
We
have a loan with Fortress Credit Corp. for the purpose of financing our
equity requirements for the acquisition, development and construction of
real estate and hotel properties. This loan has matured and Fortress and
the Company are in the process of finalizing documents to refinance the
loan. As of March 31, 2010, the outstanding balance of the loan
was $84.8 million. The loan carries a variable interest rate of
30-day LIBOR plus 875 basis points, of which LIBOR plus 575 basis points
is paid current, and the remainder accrues until maturity. The
parties are negotiating a twelve-month maturity date extension, with an
additional six-month extension possible based upon compliance with certain
covenants. The loan is secured by a pledge of 49% of the
membership interests of our wholly-owned subsidiaries. For
additional information concerning the Fortress loan, see Recent
Developments below.
|
21
|
·
|
We
have a $28.2 million line of credit with First National Bank of Omaha for
the purpose of temporarily funding acquisitions and construction of new
hotels (“Acquisition Line of Credit”). The Acquisition Line of
Credit carries an interest rate at 90-day LIBOR plus 4.0%, with a floor of
5.5%. The borrowings under the Acquisition Line of Credit are repaid as
permanent financing and equity sources for such acquisitions are
secured. Two hotels are currently financed by the Acquisition
Line. The outstanding balance on the Acquisition Line of Credit
as of March 31, 2010 was $22.1 million and $10.1 million on March 31,
2009. The $28.2 million available under the Acquisition Line is
roughly equivalent to the principal balance outstanding plus amounts
outstanding under letters of credit issued by First National Bank of
Omaha. As a result, we will
need to refinance or otherwise pay down the principal balance on the
Acquisition Line of Credit prior to being able to access the Line for
additional funds. We are required to maintain a minimum aggregate
debt service coverage ratio of 1.50 to 1.00, and may not incur more than
$450 million in debt without lender approval. The Acquisition
Line of Credit matures on June 24, 2010. We anticipate
extending the maturity date prior to June 24,
2010.
|
|
·
|
In
addition, we have a $35 million credit pool with First National Bank of
Omaha for the permanent financing of hotels. We will be unable
to finance additional hotels from the credit pool until we have refinanced
or otherwise paid down loans currently financed under the credit pool.
Each loan from the credit pool is classified as either a Pool One loan or
a Pool Two loan. Loans from Pool One pay interest only for a
maximum of two years, and carry an interest rate of 90 -day LIBOR plus
4.0%, with a floor of 5.5%. Loans from Pool Two are for a term
of five years, and principal and interest payments are based upon a
twenty-year amortization schedule. The Pool Two loans carry an
interest rate of 90-day LIBOR plus 4.0%, with a floor of
5.25%. The outstanding balance on the Credit Pool as of March
31, 2010 was $45.0 million and $49.0 million on March 31,
2009. We are required to maintain a minimum aggregate debt
service coverage ratio of 1.50 to 1.00, and may not incur more than $450
million in debt without lender
approval.
|
|
·
|
On
June 29, 2009, the Company entered into a loan with Bank of the Ozarks to
fund the land acquisition and construction of the Hyatt Place hotel
located in Portland, Oregon. The loan is in the amount of $7.4
million, but based on the hotel’s performance, the Company has the
opportunity to increase the loan amount to $10.8 million. The
loan carries a variable interest rate of the three-month LIBOR plus 400
basis points, with a floor of 6.75%. The loan matures in June
2012, with two one-year extensions available. The outstanding
balance as of March 31, 2010 was approximately $6.4
million.
|
|
·
|
On
October 3, 2008, the Company entered into a loan with Bank of the Cascades
in the amount of $13.27 million to fund the land acquisition and
construction of the Residence Inn hotel located in Portland,
Oregon. The loan carries a variable interest rate of the Bank
of the Cascades prime rate, with a floor of 6%, and matures in September
2011, with a one-year extension available. The outstanding
balance as of March 31, 2010 was $12.6
million.
|
22
|
·
|
On
September 17, 2008, the Company entered into a loan with Compass Bank in
the amount of $19.3 million to fund the construction of a Courtyard by
Marriott hotel located in Flagstaff, Arizona. The loan carried
a variable rate of the prime rate minus 25 basis points, and matures in
May 2018. The outstanding principal balance as of March 31,
2010 was $16.0 million.
|
|
·
|
On
December 9, 2009, the Company entered into two loans with National Western
Life Insurance Company in the amount of $5.35 million to refinance the
debt on the Springhill Suites, and in the amount of $8.65 million to
refinance the debt on the Courtyard by Marriott, both located in
Scottsdale, Arizona. The loans carry a fixed rate of interest
at 8%, and they mature on January 1, 2015, with one ten-year extension
available. The outstanding principal balances as of March 31,
2010 were $5.3 million and $8.6
million.
|
In
addition to the above, we have long-term financing with regional or national
banks for our existing hotels. As of March 31, 2010, 48.87% of our
long-term debt on the hotels carried a fixed interest rate. Certain
of these loans may contain provisions requiring maintenance of specific leverage
ratios or replacement reserves.
We have
$135.6 million in outstanding debt maturing during 2010, which includes $7.4
million in regular principal payments due, but does not include amounts
outstanding on our lines of credit. Of this, $84.8 million was due as
of March 31, 2010 on the Fortress Credit Corp. (“Fortress”) loan which matured
March 5, 2010. The Company and Fortress have reached agreement
concerning the major terms for an extension of the maturity date. As
a result, Fortress granted a forbearance, and extensions of the forbearance, to
the Company until May 17, 2010 so that the Company and Fortress have sufficient
time to finalize negotiations of the extension documents. A portion
of the available funds under the Fortress loan were advanced to pay interest
payments on the loan. Thus, the Company did not pay interest on the
Fortress loan from cash flow. It is anticipated that the interest
rate on the Fortress loan will increase to 30-day LIBOR plus 875 basis points,
with LIBOR plus 575 basis points being paid current, and the remainder accruing
until maturity. There is also a LIBOR floor of 2.0%. Thus,
beginning March 5, 2010, the Company started making an additional $6.5 million
in annual interest payments.
In
addition to the Fortress loan, the Company has $43.4 million of loans with other
lenders maturing during 2010. Credit is increasingly difficult to
obtain for hotel projects. The Company anticipates that the maturing
loans will be refinanced by the lenders who currently hold the loans, although
the terms of the refinanced loans may be somewhat more onerous than exist in the
current loans. The Company has not yet identified replacement lenders
for any of these maturing loans and has not yet received commitments from the
existing lenders to refinance these loans, however, the Company continues to
make all required debt payments on all of its debt. Thus, we believe
these loans have a good possibility of being refinanced by the existing
lenders. We also anticipate that we will generate funds from
operations or from asset sales which may be used to pay down loans that cannot
be refinanced. However, financing is increasingly difficult to obtain and there
is no assurance that we will be able to refinance our indebtedness as it becomes
due, and if we are able to secure financing, that it will be on favorable
terms.
23
We cannot provide assurance that our
business will continue to generate cash flow sufficient to service our debt
payments. If we are unable to generate sufficient cash flow from
operations in the future to service our debt, we may be required to sell assets
at below-market values, reduce capital expenditures, or seek to obtain
additional financing. Our ability to make scheduled principal
payments, and to pay interest on or to refinance our indebtedness depends on our
future performance and financial results, which, to a certain extent, are
subject to general conditions affecting the hotel industry and to general
economic, financial, competitive, and other factors beyond our
control.
Due to our significant reliance on
financing for the acquisition and construction of hotels, changes in interest
rates and underwriting parameters may affect our ability to acquire or build
hotels which meet our investment objectives. As a result of the
current conditions in the banking industry and general economy, many lenders are
not offering new commercial loans, or if they do offer such loans, the terms and
conditions are restrictive. We have experienced increasing
difficulties obtaining financing for our hotels, particularly construction
financing, on reasonable terms and conditions. Furthermore, upon the
scheduled maturity of existing indebtedness we may be unable to obtain financing
at terms similar to those on credit facilities currently financing our
hotels. As of March 31, 2010, approximately 51.13% of our long-term
indebtedness carried variable interest rates which increase or decrease with
general interest rates changes.
Construction and Development
Requirements
We have
several parcels of land that are held for future development and construction,
or sale. The properties under construction and held for development
as of March 31, 2010 are described in the table below:
|
Acquisition
|
Opening
|
||||||||
Location
|
# Rooms(2)
|
Franchise(2)
|
Status
|
Date
|
Date (1)
|
|||||
Houston, TX
|
118
|
Springhill Suites
|
Future Construction
|
2/15/07
|
TBD
|
|||||
El Paso, TX
|
101
|
Hampton Inn & Suites
|
Future Construction
|
7/16/07
|
TBD
|
|||||
El Paso, TX
|
121
|
Courtyard by Marriott
|
Future Construction
|
7/16/07
|
TBD
|
|||||
Boise, ID
|
120
|
Holiday Inn Express
&Suites
|
Future Construction
|
10/1/04
|
TBD
|
|||||
Twin Falls, ID
|
116
|
Courtyard by Marriott
|
Future Construction
|
12/9/08
|
TBD
|
|||||
Spokane, WA
|
105
|
Courtyard by Marriott
|
Future Construction
|
7/31/08
|
TBD
|
|||||
Spokane, WA
|
108
|
Springhill Suites
|
Future Construction
|
7/31/08
|
TBD
|
(1)
|
Construction
will not begin on any hotel until debt and equity financing are in place
and management has determined that market conditions are
appropriate. Thus, no hotels are scheduled for construction as
of May 14, 2010.
|
(2)
|
Number
of units and franchise indicate our plans as of May 14, 2010, which are
subject to change.
|
The
hotels to be constructed are expected to be financed through future loans from
commercial lenders, proceeds received from the sale of a hotel, or equity
contributions.
24
Recent
Developments
The Company and Fortress Credit Corp.
(“Fortress”) have agreed to the material terms of an extension of the Company’s
loan with Fortress (“Fortress Loan”). In March 2007 the Company
entered into the Fortress Loan, in the amount of $99.7 million and with a
maturity date of March 5, 2010. To permit the parties to finalize
definitive documentation for the extension, Fortress agreed to forbear from
declaring a default or otherwise enforcing its rights under the Fortress
Loan. As of May 14, 2010, such forbearance has been extended through
May 17, 2010. The loan extension is anticipated to be for a period of
one (1) year, with an option for an additional six (6) month extension
contingent on meeting certain requirements. Furthermore, the interest
rate will be 30-day LIBOR plus 8.75%, subject to a LIBOR floor of
2.0%. LIBOR plus 5.75% will be paid current, and the remainder will
be accrued until maturity.
As a condition of the Fortress Loan
extension, the Company agreed that all cash generated by the Company and not
required for payment of hotel operational expenses, principal and interest
payments on the Company’s loans, capital expenditures, and other expenses
related to owning and operating the Company, will be reserved and used to pay
down Company debts. Additional anticipated covenants of the
refinanced loan include, but are not limited to: covenants limiting the
Company’s ability to sell or refinance assets, incur debt or obtain equity
without Fortress’s prior approval; restrictions on distributions to members;
granting first mortgages to Fortress on all unencumbered land and one hotel
property, as well as a second mortgage on one encumbered hotel property; and a
requirement that the Company maintain a 1.10:1.00 debt service coverage ratio
through March 5, 2011, and a 1.15:1.00 debt service coverage ratio after March
5, 2011 through final maturity of the loan. As the definitive
documents are not yet finalized, additional restrictive terms and conditions may
be required.
Acquisitions and
Dispositions
Since
December 31, 2009, we have not entered into any contracts to acquire or sell
development land or hotels.
Commitments
and Contingencies
As of March 31, 2010, the Company does
not have any material outstanding construction
contracts. Construction will not begin on any new properties until
such time as construction financing and equity are in place and management has
determined that market conditions are appropriate.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements that are likely to have a material impact on
our assets, liabilities, revenues or operating expenses.
25
Item
3. Quantitative and
Qualitative Disclosures About Market Risk
Market
risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments. In pursuing our business
strategies, the primary market risk to which we are currently exposed, and to
which we expect to be exposed in the future, is interest rate
risk. Our primary interest rate exposure is to the 30-day LIBOR
rate. We use fixed interest rate financing to manage our exposure to
fluctuations in interest rates. We do not use any hedge or other
instruments to manage interest rate risk.
As of March 31, 2010, 48.87% of our
debt carried fixed interest rates, and 51.13% carried variable interest
rates. As of March 31, 2010, our fixed interest rate debt totaled
$207.9 million. Our variable interest rate debt totaled $217.6
million as of March 31, 2010, which included amounts outstanding under our lines
of credit, and not the total available under the lines of
credit. Assuming no increase in the amount of our variable rate debt,
if the interest rates on our variable rate long-term debt were to increase by
1.0%, our cash flow would decrease by approximately $2,176,000 per
year.
As the
hotels that are recently acquired or constructed mature, we anticipate
refinancing these hotels with permanent loans. To the extent the
Company is able to obtain fixed-rate financing with reasonable terms, the
permanent financing will be fixed-rate loans. As the Company
continues to acquire and build hotels, however, it anticipates that the debt
required will be variable-rate debt until such properties are stabilized, and
can be refinanced with appropriate fixed-rate instruments, if
available.
As our
debts mature, the financing arrangements which carry fixed interest rates will
become subject to interest rate risk. None of our fixed interest rate
debt matures during 2010.
Item
4. Controls and
Procedures
Our
management conducted an evaluation, under the supervision and with the
participation of our principal executive and principal financial officers, of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end
of the period covered by this report. Based on the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures were
effective in enabling us to record, process, summarize and report in a timely
manner the information required to be disclosed in reports we file under the
Exchange Act.
There
were no changes in our internal control over financial reporting or in other
factors that occurred during the quarter ended March 31, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
26
PART
II
OTHER
INFORMATION
Item
1. Legal
Proceedings
In its
Quarterly Report filed on Form 10-Q on May 15, 2009, the Company reported the
filing of a civil complaint by a former employee against the Company, The Summit
Group, Inc., Kerry W. Boekelheide and Trent Peterson. On July 10, 2009 Kerry W.
Boekelheide was dismissed from the lawsuit, as reported in the Company’s
Quarterly Report filed on Form 10-Q on August 14, 2009. During the
three months ended March 31, 2010, there were no material developments
concerning this proceeding.
In
addition, the Company reported in its Quarterly Report filed on Form 10-Q on May
15, 2009 that the Company had a complaint filed against it with the US
Department of Labor/Occupational Safety and Health Administration by
a former employee. During the three months ended March 31, 2010,
there were no material developments concerning this proceeding.
We are
involved from time to time in litigation arising in the ordinary course of
business, however, we are not currently aware of any actions against us that we
believe would materially adversely affect our business, financial condition or
results of operations. We may be subject to future claims which could
cause us to incur significant expenses or damages. We have assumed
liability for past events at the hotels and for entities previously acquired by
the Company, including lawsuits that have not yet materialized. If we
acquire or consolidate additional entities in the future, we may assume
obligations and liabilities of such entities. We operate in an
industry susceptible to personal injury claims and significant personal injury
claims could be asserted against us in the future arising out of events not
known to us at this time.
Item
1A. Risk
Factors
The
Company’s annual report on Form 10-K filed on or about March 31, 2010 (the
“annual report”) sets forth a number of risk factors and other information which
should be carefully considered. In addition to the risks described in the annual
report, management believes that another risk factor has developed as described
below. Furthermore, in addition to the risks described in the annual
report, we are subject to a number of other risks and uncertainties which we may
not be aware of or which we currently deem to be immaterial to our business
operations. If any of such risks or other risks occur, our business,
financial condition, operating results and cash flows could be adversely
affected.
New
governmental regulations and noncompliance therewith could adversely affect our
operations and financial condition.
We are
subject to certain requirements and potential liabilities under various federal,
state and local laws, ordinances and regulations. A number of regulatory
measures that could significantly affect our business have recently been passed
or are under consideration. For example, recently enacted health
care reform legislation, known as the Patient Protection and Affordable Care Act
(“PPACA”), initiates sweeping changes to health care in the United States.
We may be required to amend our health care plans to provide affordable coverage
to all of our employees, which may result in a significant increase in the
employee benefit expense incurred by the Company. Furthermore, Congress is
currently considering significant financial reform legislation which could
significantly affect our ability to obtain affordable bank financing, and
potentially increase the time and cost of securing additional equity for our
hotel projects. The costs and administrative burdens associated with
compliance with new or amended laws and regulations could negatively affect our
business, financial condition, results of operations and our ability to
reinstate distributions to our members.
27
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior
Securities
Not
Applicable.
Item
4. Removed and
Reserved
Item
5. Other
Information
None.
Item
6. Exhibits
The
following Exhibits are filed as part of this Form 10-Q:
Exhibit
Number
|
Description
of Exhibit
|
|
|
31.1
|
Certification
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 – Chief
Executive Officer.
|
|
31.2
|
Certification
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 - Chief
Financial Officer.
|
|
32.1
|
Certification
pursuant to Section 1350 of Chapter 63 of Title 18 of the United
States Code – Chief Executive
Officer.
|
|
32.2
|
Certification
pursuant to Section 1350 of Chapter 63 of Title 18 of the United
States Code - Chief Financial
Officer.
|
|
99.1
|
Reconciliation
of Non-GAAP Financial Measure
|
28
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.
SUMMIT HOTEL PROPERTIES, LLC | |||
Date:
May 14, 2010
|
By:
|
/s/ Kerry W. Boekelheide | |
Kerry
W. Boekelheide
|
|||
Chief
Executive Officer and Manager
|
|||
Date:
May 14, 2010
|
By:
|
/s/ Daniel P. Hansen | |
Daniel
P. Hansen
|
|||
Chief Financial Officer and Manager | |||
29
EXHIBIT
INDEX
|
31.1
|
Certification
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 – Chief
Executive Officer.
|
|
31.2
|
Certification
pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 - Chief
Financial Officer.
|
|
32.1
|
Certification
pursuant to Section 1350 of Chapter 63 of Title 18 of the United
States Code – Chief Executive
Officer.
|
|
32.2
|
Certification
pursuant to Section 1350 of Chapter 63 of Title 18 of the United
States Code - Chief Financial
Officer.
|
|
99.1
|
Reconciliation
of Non-GAAP Financial Measure
|
30