Attached files
file | filename |
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EX-31.2 - SUMMIT HOTEL PROPERTIES LLC | v193875_ex31-2.htm |
EX-32.1 - SUMMIT HOTEL PROPERTIES LLC | v193875_ex32-1.htm |
EX-32.2 - SUMMIT HOTEL PROPERTIES LLC | v193875_ex32-2.htm |
EX-31.1 - SUMMIT HOTEL PROPERTIES LLC | v193875_ex31-1.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 June 30, 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 August 13, 2010, was
1,166.62 and the number of Class A-1 Membership Units outstanding as of August
13, 2010, was 437.83.
TABLE
OF CONTENTS
Page
|
||||
PART
I
|
||||
Item
1.
|
Financial
Statements
|
3
|
||
Condensed
Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December
31, 2009
|
3
|
|||
Condensed
Consolidated Statements of Operations for the three and six months ended
June 30, 2010 and 2009 (Unaudited)
|
4
|
|||
Condensed
Consolidated Statement of Changes in Members’ Equity for the six months
ended June 30, 2010 (Unaudited)
|
5
|
|||
Condensed
Consolidated Statements of Cash Flows for the six months ended June 30,
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
|
14
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
29
|
||
Item
4.
|
Controls
and Procedures
|
29
|
||
|
||||
PART
II
|
|
|||
Item
1.
|
Legal
Proceedings
|
30
|
||
Item
1A.
|
Risk
Factors
|
30
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
31
|
||
Item
3.
|
Defaults
Upon Senior Securities
|
31
|
||
Item
4.
|
Removed
and Reserved
|
31
|
||
Item
5.
|
Other
Information
|
31
|
||
Item
6.
|
Exhibits
|
32
|
||
Exhibit
2.1
|
|
|||
Exhibit
31.1
|
|
|||
Exhibit
31.2
|
|
|||
Exhibit
32.1
|
|
|||
Exhibit
32.2
|
|
2
PART
I
FINANCIAL
INFORMATION
Item
1. Financial
Statements
SUMMIT
HOTEL PROPERTIES, LLC
CONDENSED
CONSOLIDATED BALANCE SHEETS
JUNE
30, 2010 (Unaudited) AND DECEMBER 31, 2009
2010
|
2009
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 11,326,378 | $ | 8,239,225 | ||||
Restricted
cash
|
1,385,341 | 1,755,053 | ||||||
Trade
receivables
|
4,416,070 | 2,608,198 | ||||||
Prepaid
expenses and other
|
1,075,001 | 1,416,480 | ||||||
Total
current assets
|
18,202,790 | 14,018,956 | ||||||
PROPERTY
AND EQUIPMENT, NET
|
460,632,473 | 482,767,601 | ||||||
OTHER
ASSETS
|
||||||||
Deferred
charges and other assets, net
|
4,971,985 | 4,828,185 | ||||||
Land
held for sale
|
23,242,004 | 12,226,320 | ||||||
Other
noncurrent assets
|
4,043,232 | 4,074,179 | ||||||
Restricted
cash
|
615,692 | 331,190 | ||||||
Total
other assets
|
32,872,913 | 21,459,874 | ||||||
TOTAL
ASSETS
|
$ | 511,708,176 | $ | 518,246,431 | ||||
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Current
portion of long-term debt
|
$ | 134,392,600 | $ | 134,370,900 | ||||
Lines
of credit
|
20,002,943 | 21,457,943 | ||||||
Accounts
payable
|
1,144,639 | 1,088,265 | ||||||
Related
party accounts payable
|
373,260 | 494,248 | ||||||
Accrued
expenses
|
10,459,194 | 9,182,013 | ||||||
Total
current liabilities
|
166,372,636 | 166,593,369 | ||||||
LONG-TERM
DEBT, NET OF CURRENT PORTION
|
270,200,679 | 270,353,750 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
MEMBERS'
EQUITY
|
||||||||
Class
A, 1,166.62 units issued and outstanding
|
57,219,292 | 59,961,958 | ||||||
Class
A-1, 437.83 units issued and outstanding
|
33,685,897 | 34,244,056 | ||||||
Class
B, 81.36 units issued and outstanding
|
1,389,790 | 1,804,718 | ||||||
Class
C, 173.60 units issued and outstanding
|
(15,535,655 | ) | (13,086,957 | ) | ||||
Total
Summit Hotel Properties, LLC members' equity
|
76,759,324 | 82,923,775 | ||||||
Noncontrolling
interest
|
(1,624,463 | ) | (1,624,463 | ) | ||||
Total
equity
|
75,134,861 | 81,299,312 | ||||||
TOTAL
LIABILITIES AND MEMBERS' EQUITY
|
$ | 511,708,176 | $ | 518,246,431 |
See Note
to Condensed Consolidated Financial Statements
3
SUMMIT
HOTEL PROPERTIES, LLC
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR
THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
2010 |
June
30,
2009 |
June
30,
2010 |
June
30,
2009 |
|||||||||||||
REVENUES
|
||||||||||||||||
Room
revenues
|
$ | 35,258,817 | $ | 30,789,382 | $ | 65,938,663 | $ | 59,475,561 | ||||||||
Other
hotel operations revenues
|
590,909 | 502,761 | 1,273,783 | 1,118,314 | ||||||||||||
35,849,726 | 31,292,143 | 67,212,446 | 60,593,875 | |||||||||||||
COSTS
AND EXPENSES
|
||||||||||||||||
Direct
hotel operations
|
12,099,208 | 10,683,710 | 23,026,426 | 20,472,632 | ||||||||||||
Other
hotel operating expenses
|
4,519,733 | 4,032,428 | 9,177,042 | 8,150,996 | ||||||||||||
General,
selling and administrative
|
6,293,072 | 6,419,013 | 12,097,062 | 11,970,928 | ||||||||||||
Repairs
and maintenance
|
1,140,020 | 1,826,046 | 2,074,168 | 3,637,602 | ||||||||||||
Depreciation
and amortization
|
6,671,258 | 5,761,056 | 13,521,822 | 11,383,720 | ||||||||||||
30,723,291 | 28,722,253 | 59,896,520 | 55,615,878 | |||||||||||||
INCOME
FROM OPERATIONS
|
5,126,435 | 2,569,890 | 7,315,926 | 4,977,997 | ||||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
11,474 | 8,045 | 23,559 | 18,419 | ||||||||||||
Interest
(expense)
|
(7,133,904 | ) | (4,221,005 | ) | (12,701,101 | ) | (8,337,655 | ) | ||||||||
Gain
(loss) on disposal of assets
|
(1,938 | ) | 24,631 | (39,389 | ) | 24,560 | ||||||||||
(7,124,368 | ) | (4,188,329 | ) | (12,716,931 | ) | (8,294,676 | ) | |||||||||
INCOME
(LOSS) FROM CONTINUING
|
||||||||||||||||
OPERATIONS
|
(1,997,933 | ) | (1,618,439 | ) | (5,401,005 | ) | (3,316,679 | ) | ||||||||
INCOME
(LOSS) FROM
|
||||||||||||||||
DISCONTINUED
OPERATIONS
|
- | 1,696,264 | - | 1,800,544 | ||||||||||||
NET
INCOME (LOSS) BEFORE INCOME TAXES
|
(1,997,933 | ) | 77,825 | (5,401,005 | ) | (1,516,135 | ) | |||||||||
STATE
INCOME TAX (EXPENSE)
|
(75,702 | ) | - | (228,185 | ) | - | ||||||||||
NET
INCOME (LOSS)
|
(2,073,635 | ) | 77,825 | (5,629,190 | ) | (1,516,135 | ) | |||||||||
NET
INCOME (LOSS) ATTRIBUTABLE TO
|
||||||||||||||||
NONCONTROLLING
INTEREST
|
- | (62,924 | ) | - | (185,912 | ) | ||||||||||
NET
INCOME (LOSS) ATTRIBUTABLE TO
|
||||||||||||||||
SUMMIT
HOTEL PROPERTIES, LLC
|
$ | (2,073,635 | ) | $ | 140,749 | $ | (5,629,190 | ) | $ | (1,330,223 | ) | |||||
BASIC
AND DILUTED EARNINGS
|
||||||||||||||||
PER
$100,000 CAPITAL UNIT
|
$ | (1,115.21 | ) | $ | 82.16 | $ | (3,027.41 | ) | $ | (792.13 | ) | |||||
WEIGHTED
AVERAGE NUMBER OF UNITS
|
||||||||||||||||
OUTSTANDING
FOR CALCULATION OF
|
||||||||||||||||
BASIC
AND DILUTED EARNINGS PER
|
||||||||||||||||
CAPITAL
UNIT (based on $100,000 investment)
|
1,859.41 | 1,713.14 | 1,859.41 | 1,679.29 |
See Note
to Condensed Consolidated Financial Statements
4
SUMMIT
HOTEL PROPERTIES, LLC
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 (Unaudited)
Equity
|
||||||||||||||||||||||||||||
#
of
|
Attributable
to
|
|||||||||||||||||||||||||||
Capital
|
Noncontrolling
|
|||||||||||||||||||||||||||
Units
|
Class
A
|
Class
A-1
|
Class
B
|
Class
C
|
Total
|
Interest
|
||||||||||||||||||||||
BALANCES,
JANUARY 1, 2010
|
1,859.41 | $ | 59,961,958 | $ | 34,244,056 | $ | 1,804,718 | $ | (13,086,957 | ) | $ | 82,923,775 | $ | (1,624,463 | ) | |||||||||||||
Net
Income (Loss)
|
- | (2,348,948 | ) | (416,616 | ) | (414,928 | ) | (2,448,698 | ) | (5,629,190 | ) | - | ||||||||||||||||
Distributions
to members
|
- | (393,718 | ) | (141,543 | ) | - | - | (535,261 | ) | - | ||||||||||||||||||
BALANCES,
JUNE 30, 2010
|
1,859.41 | $ | 57,219,292 | $ | 33,685,897 | $ | 1,389,790 | $ | (15,535,655 | ) | $ | 76,759,324 | $ | (1,624,463 | ) |
See Note
to Condensed Consolidated Financial Statements
5
SUMMIT
HOTEL PROPERTIES, LLC
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
2010
|
2009
|
|||||||
OPERATING
ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | (5,629,190 | ) | $ | (1,516,135 | ) | ||
Adjustments
to reconcile net income to net cash from operating
activities:
|
||||||||
Depreciation
and amortization
|
13,521,822 | 11,476,226 | ||||||
Amortization
of prepaid lease
|
23,700 | - | ||||||
Unsuccessful
project costs
|
- | 815,209 | ||||||
(Gain)
loss on disposal of assets
|
39,389 | (1,619,446 | ) | |||||
Changes
in current assets and liabilities:
|
||||||||
Trade
receivables
|
(1,807,872 | ) | (1,205,207 | ) | ||||
Prepaid
expenses and other
|
341,479 | 1,140,728 | ||||||
Accounts
payable and related party accounts payable
|
(64,614 | ) | (4,036,052 | ) | ||||
Accrued
expenses
|
1,277,181 | (1,359,951 | ) | |||||
Restricted
cash released (funded)
|
369,712 | (184,307 | ) | |||||
NET
CASH PROVIDED BY (USED IN)
|
||||||||
OPERATING
ACTIVITIES
|
8,071,607 | 3,511,065 | ||||||
INVESTING
ACTIVITIES
|
||||||||
Land
and hotel acquisitions and construction in progress
|
(604,232 | ) | (8,531,400 | ) | ||||
Purchases
of other property & equipment
|
(1,018,274 | ) | (6,376,188 | ) | ||||
Proceeds
from asset dispositions, net of closing costs
|
7,246 | 413,751 | ||||||
Restricted
cash released (funded)
|
(284,502 | ) | 601,069 | |||||
NET
CASH PROVIDED BY (USED IN)
|
||||||||
INVESTING
ACTIVITIES
|
(1,899,762 | ) | (13,892,768 | ) | ||||
FINANCING
ACTIVITIES
|
||||||||
Proceeds
from issuance of long-term debt
|
3,348,350 | - | ||||||
Principal
payments on long-term debt
|
(3,479,721 | ) | (3,307,485 | ) | ||||
Financing
fees on long-term debt
|
(963,060 | ) | (467,492 | ) | ||||
Proceeds
from issuance of notes payable and line of credit
|
- | 3,768,831 | ||||||
Principal
payments on notes payable and line of credit
|
(1,455,000 | ) | (276,329 | ) | ||||
Proceeds
from equity contributions
|
- | 9,516,002 | ||||||
Distributions
to members
|
(535,261 | ) | (5,854,031 | ) | ||||
NET
CASH PROVIDED BY (USED IN)
|
||||||||
FINANCING
ACTIVITIES
|
(3,084,692 | ) | 3,379,496 | |||||
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
3,087,153 | (7,002,207 | ) | |||||
CASH
AND CASH EQUIVALENTS
|
||||||||
BEGINNING
OF PERIOD
|
8,239,225 | 18,153,435 | ||||||
END
OF PERIOD
|
$ | 11,326,378 | $ | 11,151,228 |
See Note
to Condensed Consolidated Financial Statements
6
2010
|
2009
|
|||||||
SUPPLEMENTAL
DISCLOSURE OF
|
||||||||
CASH
FLOW INFORMATION:
|
||||||||
Cash
payments for interest, net of the amounts capitalized
below
|
$ | 12,357,600 | $ | 8,347,799 | ||||
Interest
capitalized
|
$ | - | $ | 1,827,091 | ||||
Cash
payments for state income taxes, net of refunds
|
$ | 51,386 | $ | 526,053 | ||||
SUPPLEMENTAL
DISCLOSURE OF
|
||||||||
NON-CASH
FINANCIAL INFORMATION:
|
||||||||
Construction
in progress financed through related party
|
||||||||
accounts
payable
|
$ | - | $ | 740,101 | ||||
Construction
in progress financed through accounts payable
|
$ | - | $ | 9,721,200 | ||||
Construction
in progress financed through issuance
|
||||||||
of
debt
|
$ | - | $ | 27,304,006 | ||||
Issuance
of long-term debt to refinance existing
|
||||||||
long-term
debt
|
$ | - | $ | 8,440,000 | ||||
Conversion
of debt to equity
|
$ | - | $ | 2,449,150 | ||||
Sale
proceeds used to payoff long-term debt
|
$ | - | $ | 3,510,214 |
See
Note to Condensed Consolidated Financial Statements
7
SUMMIT
HOTEL PROPERTIES, LLC
NOTE
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE
30, 2010
NOTE
1 - SELECTED
SUPPLEMENTARY INFORMATION
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 two quarters of
2010.
Use
of Estimates
The
preparation of the condensed consolidated 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 condensed consolidated
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain
prior year amounts have been reclassified to conform with current year
presentation.
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.”
8
SUMMIT
HOTEL PROPERTIES, LLC
NOTE
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE
30, 2010
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.
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 June 30, 2010, were
determined using available market information and appropriate valuation methods,
including discounted cash flow analysis. 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
June 30, 2010, the fair value of our consolidated mortgage and other secured and
unsecured loans aggregates $403,811,790, compared to the aggregate carrying
value of $424,596,222 on our condensed consolidated balance
sheet. The Company estimates the fair value of its fixed rate debt by
discounting the future cash flows of each instrument at estimated market rates
consistent with the maturity of the debt obligation with similar
terms.
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 and recorded at the lower of its carrying amount or fair value less
cost to sell. 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 and adjust the carrying amount to
fair value.
9
SUMMIT
HOTEL PROPERTIES, LLC
NOTE
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE
30, 2010
Assets
Held for Sale
As a part
of regular policy, the Company periodically reviews hotels based on established
criteria such as age of hotel property, type of franchise associated with hotel
property, and adverse economic and competitive conditions in the region
surrounding the property to determine if any hotels should be classified as held
for sale.
The
Company performs 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 nine parcels of land that were
originally purchased for development and thus, those parcels of land are
recorded as assets held for sale as of June 30, 2010.
Assets
held for sale at June 30, 2010 and December 31, 2009 are comprised of the
following:
2010
|
2009
|
|||||||
Land
|
$ | 23,242,004 | $ | 12,226,320 |
Discontinued
Operations
The
Company has reclassified its condensed consolidated financial statements of
operations for the three and six month periods ended June 30, 2009, as a
result of implementing FASB ASC 360, to reflect discontinued operations of two
consolidated hotel properties sold during the period, 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.
10
SUMMIT
HOTEL PROPERTIES, LLC
NOTE
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE
30, 2010
Condensed
financial information of the results of operations for these hotel properties
included in discontinued operations for the three and six month periods ended
June 30, 2009 are as follows:
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June 30,
2010 |
June 30,
2009 |
June 30,
2010 |
June 30,
2009 |
|||||||||||||
REVENUES
|
$ | - | $ | 456,388 | $ | - | $ | 967,042 | ||||||||
COSTS
AND EXPENSES
|
||||||||||||||||
Direct
hotel operations
|
- | 137,834 | - | 297,811 | ||||||||||||
Other
hotel operating expenses
|
- | 48,342 | - | 113,668 | ||||||||||||
General,
selling and administrative
|
- | 88,767 | - | 189,402 | ||||||||||||
Repairs
and maintenance
|
- | 15,243 | - | 32,948 | ||||||||||||
Depreciation
and amortization
|
- | 48,430 | - | 92,506 | ||||||||||||
- | 338,616 | - | 726,335 | |||||||||||||
INCOME
FROM OPERATIONS
|
- | 117,772 | - | 240,707 | ||||||||||||
OTHER
INCOME (EXPENSE)
|
||||||||||||||||
Interest
income
|
- | - | - | 116 | ||||||||||||
Interest
(expense)
|
- | (16,394 | ) | - | (35,165 | ) | ||||||||||
Gain
(loss) on disposal of assets
|
- | 1,594,886 | - | 1,594,886 | ||||||||||||
- | 1,578,492 | - | 1,559,837 | |||||||||||||
INCOME
(LOSS) FROM
|
||||||||||||||||
DISCONTINUED
OPERATIONS
|
$ | - | $ | 1,696,264 | $ | - | $ | 1,800,544 |
Acquisitions
The
Company accounts for its acquisitions of hotels as a business combination under
the acquisition method of accounting. Acquisition costs 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
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. 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.
Immaterial
Correction of an Error
In the
1st
quarter ended March 31, 2010, the Company recorded an impairment charge of
$1,173,100 to write down the carrying value of its Courtyard hotel in Memphis,
TN to fair value. Management’s evaluation of impairment for this
property as of December 31, 2009 indicated a potential impairment, however,
management concluded at that time that the amount was not material to the 2009
financial statements. Management concluded that the fair value at
December 31, 2009 was not different from the fair value that was determined in
the 1st quarter
ended March 31, 2010. Therefore, management believes the impairment
charge should have been recorded in the 4th quarter
ended December 31, 2009. The effect of the error was to overstate
Loss on Impairment of Assets for the three-months ended March 31, 2010 and, to
understate Loss on Impairment of Assets for the year ended December 31, 2009 and
to overstate Property and Equipment, net at December 31, 2009.
11
SUMMIT
HOTEL PROPERTIES, LLC
NOTE
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE
30, 2010
The
following is a summary of the effects of the correction on the Company’s
consolidated balance sheets as of March 31, 2010 and December 31, 2009 and the
consolidated statements of operations for the three-months ended March 31, 2010
and the year ended December 31, 2009:
March
31, 2010
|
December
31, 2009
|
|||||||||||||||
As
|
As
|
|||||||||||||||
Previously
|
As
|
Previously
|
As
|
|||||||||||||
Reported
|
Corrected
|
Reported
|
Corrected
|
|||||||||||||
Consolidated Balance
Sheets
|
||||||||||||||||
Property
and Equipment, net
|
$ | 477,144,154 | $ | 477,144,154 | $ | 483,940,701 | $ | 482,767,601 | ||||||||
Total
Assets
|
$ | 513,944,694 | $ | 513,944,694 | $ | 519,419,531 | $ | 518,246,431 | ||||||||
Total
Members' Equity
|
$ | 77,208,496 | $ | 77,208,496 | $ | 82,472,412 | $ | 81,299,312 | ||||||||
Total
Liabilities and Members' Equity
|
$ | 513,944,694 | $ | 513,944,694 | $ | 519,419,531 | $ | 518,246,431 | ||||||||
Consolidated
Statements of Operation
|
||||||||||||||||
Loss
on impairment of assets
|
$ | 1,173,100 | $ | - | $ | - | $ | 1,173,100 | ||||||||
Net
loss attributable to Summit Hotel
|
||||||||||||||||
Properties,
LLC
|
$ | (4,728,655 | ) | $ | (3,555,555 | ) | $ | (15,141,232 | ) | $ | (16,314,332 | ) | ||||
Basic
and diluted loss per $100,000
|
||||||||||||||||
capital
unit
|
$ | (2,543 | ) | $ | (1,912 | ) | $ | (8,716 | ) | $ | (9,392 | ) |
Accrued
Expenses
Accrued
expenses at June 30, 2010 and December 31, 2009 are as follows:
2010
|
2009
|
|||||||
Accrued
taxes
|
$ | 5,603,138 | $ | 5,238,690 | ||||
Accrued
salaries and benefits
|
1,480,515 | 1,400,729 | ||||||
Accrued
interest
|
1,647,499 | 1,303,999 | ||||||
Other
accrued expenses
|
1,728,042 | 1,238,595 | ||||||
$ | 10,459,194 | $ | 9,182,013 |
Note
Obligations
The
Fortress Credit Corp. note with a current balance of $85,419,143 has a scheduled
maturity date of March 2011, so it has been included in the current maturities
section of the condensed consolidated balance sheet. The
renewed note has an interest rate of 30 day LIBOR plus 575 bps, plus a 3%
capitalized spread. The interest rate at June 30, 2010 was
10.75%.
As of
June 30, 2010, the Company has $154,395,543 of debt due in the next twelve
months, of which $147,242,264 represents maturing debt and $7,153,279 represents
other scheduled principal payments. We intend to pay scheduled
principal payments with available cash flow from operations. In
addition, we intend to either refinance or extend the terms of those debt
instruments maturing in the next twelve months.
Approximately
$40,400,000 of debt due to First National Bank of Omaha is due August 15, 2010,
pursuant to an amendment to the loan agreement executed on July 24,
2010. We expect to execute an agreement with the lender which would
allow an extension of the maturity date to July 31, 2011.
12
SUMMIT
HOTEL PROPERTIES, LLC
NOTE
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE
30, 2010
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 six months ended June 30, 2010 and 2009, the
Company reimbursed management expenses of $1,610,980 and $1,693,900,
respectively. These expenses are located in the general, selling and
administrative section of the statement of operations.
The
Company reimbursed accounting services of $328,950 and $306,375 for the six
months ended June 30, 2010 and 2009, respectively. The Company also
reimbursed for maintenance and purchases services of $103,522 and $306,916 for
the six months ended June 30, 2010 and 2009,
respectively. These expenses are located in the general,
selling and administrative section of the statements of operations.
As of
June 30, 2010 and December 31, 2009, the Company had accounts payable to The
Summit Group, Inc. for $373,260 and $494,248 relating to reimbursement of
management and development expenses.
Subsequent
Events
On August
9, 2010, Summit Hotel OP, LP filed with the Securities and Exchange Commission
(SEC) a Form S-4 seeking to register its securities and Summit Hotel Properties,
Inc. filed with the SEC a Form S-11 seeking to register its
securities. As described in these registration statements, upon
receipt of proper approval from our members, and third parties whose approval
may be required, we plan to merge with and into Summit Hotel OP,
LP. Summit Hotel OP, LP will be the operating partnership for Summit
Hotel Properties, Inc., a hotel real estate investment trust
(REIT). Summit Hotel Properties, Inc. intends to list its stock with
the New York Stock Exchange. If these transactions are approved and
completed as described in the registration statements, the successor company
will have improved access to capital through the public trading
markets.
13
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 future operations as well as the Merger. 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, failure of closing conditions 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.
Recent
Developments
On August 5, 2010, Summit
Hotel Properties, LLC (the “Company”) entered into an Agreement and Plan of
Merger (the “Merger Agreement”) with Summit Hotel OP, LP, a newly-formed
Delaware limited partnership (the “OP”). The sole general
partner of the OP is Summit Hotel Properties, Inc. (“Summit REIT”), a newly
formed Maryland corporation that will elect to be treated as a real estate
investment trust, or REIT, for U.S. federal income tax
purposes. Summit REIT intends to undertake an underwritten initial
public offering (“IPO”) of its common stock and will apply to list its common
stock on the New York Stock Exchange. The OP will be the operating partnership
of Summit REIT, in a structure utilized by many other publicly traded REITs, and
will continue the Company’s hotel ownership business. Each of the OP
and Summit REIT are affiliates of the Company and were organized to effect the
reorganization of the Company contemplated by the Merger Agreement and related
transactions.
14
Pursuant to the Merger Agreement,
assuming the conditions to closing are satisfied or waived, at
closing:
|
·
|
the
Company will merge with and into the OP with the OP as the surviving
entity (the “Merger”);
|
|
·
|
the
OP will be the successor to the assets and liabilities of the
Company;
|
|
·
|
the
current members of the Company will receive an aggregate of 9,993,992
common units of a single class of limited partnership interests in the OP
(“OP units”);
|
|
·
|
Class
A and Class A-1 members of the Company will receive accrued and unpaid
priority returns on their membership interests through August 31,
2010;
|
|
·
|
accrued
and unpaid returns priority returns on Class A and Class A-1 membership
interests of the Company for the period of September 1, 2010 through the
closing of the Merger may be paid with any available cash after satisfying
working capital requirements, reserve requirements and payments to lenders
in the discretion of management of the Company; and
|
·
|
the
Company will cease to exist, the membership interests of the Company will
become null and void and the former members of the Company will become
limited partners of the OP.
|
The members of the Company will receive
a fixed number of OP units in the Merger based on the number of OP units
allocated to each class of membership interest in the Company owned by the
member and the ratio of that member’s adjusted capital contribution to the class
to the total adjusted capital contributions to the class. The
following table describes the total number of OP units to be received in the
Merger by each class of membership interests in the Company:
Aggregate
Adjusted Capital Contributions
as
of
June
30, 2010
|
Total
OP units
to be issued
in the Merger
|
|||||||
Class
A
|
$ | 119,138,717 | 6,283,197 | |||||
Class
A-1
|
44,237,893 | 2,433,040 | ||||||
Class
B
|
6,687,944 | 352,712 | ||||||
Class
C
|
17,540,183 | 925,043 | ||||||
Total
|
$ | 187,604,737 | 9,993,992 |
Beginning 12 months after completion of
the merger, OP units will be redeemable by the holder, on the first day of each
calendar quarter after 60 days’ advance written notice, for cash based on an
average of the then-current market prices of Summit REIT common stock or, at the
election of the OP, shares of Summit REIT common stock, on a one-for-one
basis.
15
The Merger Agreement includes customary
representations and warranties of the parties. Completion of the
Merger is subject to satisfaction of a number of conditions, including (i)
approval by the required members of the Company of (a) an amendment to the Third
Amended and Restated Operating Agreement for the Company to clarify the vote
required to approve a merger of the Company (the “Amendment”) and (b) the Merger
Agreement and (ii) completion of the IPO.
The Merger Agreement permits the OP to
terminate the Merger Agreement if the IPO is not completed. The Company may
terminate the Merger Agreement if the Merger has not been completed by September
30, 2011. The Amendment and the Merger Agreement and related
transactions were approved unanimously by the full board of managers of the
Company.
The foregoing description of certain
terms of the Merger Agreement does not purport to be complete and is qualified
in its entirety by reference to the full text of the Merger Agreement, a copy of
which is attached as Exhibit 2.1 to this Quarterly Report on Form 10-Q and is
incorporated by reference herein.
Where the following Management’s
Discussion and Analysis discusses the Company’s future plans, strategies and
activities, the discussion assumes that the Merger is not, and will not be,
completed.
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.
Critical
Accounting Policies
Capitalized Development and
Interest Costs
The Company capitalizes all hotel
development costs and other direct overhead costs related to the 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 six month
periods ended June 30, 2010 and 2009, the Company capitalized interest of $0 and
$1,827,091, respectively.
16
Assets Held For
Sale
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.
Impairment of Long-Lived
Assets
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 and adjust the
carrying amount to fair value.
Consolidation
Policy
The consolidated financial statements
include the accounts of the Company and its controlled variable interest entity
(VIE), Summit Group of Scottsdale, Arizona, LLC. All significant
intercompany accounts and transactions have been eliminated.
The Company’s condensed consolidated
financial statements are prepared on the accrual basis of
accounting. The financial statements reflect the accounts of the
Company and its consolidated subsidiaries.
17
The Company implemented new accounting
guidance effective January 1, 2010 regarding its variable interest entities
(VIEs). In accordance with the guidance, the Company re-evaluated its
equity investments and all other potential variable interests to determine if
they are VIEs. For each of these investments, the Company has
evaluated (1) the sufficiency of the entities’ equity investments at risk to
permit the entity to finance its activities without additional subordinated
financial support; (2) that as a group the holders of the equity investments at
risk have (a) the power through voting rights or similar rights to direct the
entities’ activities that most significantly impact the entity’s economic
performance, (b) the obligation to absorb the expected losses of the entity and
their obligations are not protected directly or indirectly and (c)
the right to receive the expected residual return of the entity and their rights
are not capped and (3) the voting rights of these investors are not proportional
to their obligations to absorb the expected losses of the entity, their rights
to receive the expected returns of the entity, or both, and that substantially
all of the entities’ activities do not involve or are not conducted on behalf of
an investor that has disproportionately few voting rights.
If an investment is determined to be a
VIE, the Company then performs an analysis to determine if the Company is the
primary beneficiary of the VIE. Generally Accepted Accounting
Principles require a VIE to be consolidated by its primary
beneficiary. The primary beneficiary is the party that has a
controlling financial interest in an entity. In order for a party to
have a controlling financial interest in an entity it must have (1) the power to
direct the activities of a VIE that most significantly impact the entity’s
economic performance, and (2) the obligation to absorb losses of an entity that
could potentially be significant to the VIE or the right to receive benefits
from the entity that could potentially be significant to the VIE.
The Company’s consolidated VIE was
determined to be a VIE primarily because the entity’s equity holders’ obligation
to absorb losses is protected and their equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
financial support. The Company determined that it was the primary
beneficiary of this VIE as it has a controlling financial interest in the
entity.
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.
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.
18
Industry
Trends and Outlook
In
mid-2008, U.S. lodging demand started to decline as a result of the economic
recession which caused industry-wide RevPAR to decline for the year, as reported
by Smith Travel Research. Throughout 2009, the decrease in lodging demand
accelerated, with RevPAR down 16.7% for the year according to Smith Travel
Research. In the first quarter of 2010, we saw trends of improved fundamentals
in the U.S. lodging industry with demand for rooms showing signs of
stabilization, and even growth in many of the major markets, as general economic
indicators have begun to experience positive improvement. With supply of
available rooms expected to rise at a significantly slower pace over the next
several years than during 2006-2008 and demand for rooms expected to increase as
the U.S. economy rebounds, we expect meaningful growth in RevPAR to start in
2011 and to continue for several years thereafter.
While we
believe the trends in room demand and supply growth will result in improvement
in lodging industry fundamentals, we can provide no assurances that the U.S.
economy will strengthen at projected levels and within the expected time
periods. If the economy does not improve or if any improvements do not continue
for any number of reasons, including, among others, an economic slowdown and
other events outside of our control, such as terrorism, lodging industry
fundamentals may not improve as expected. In the past, similar events have
adversely affected the lodging industry and if these events recur, they may
adversely affect the lodging industry in the future.
Results
of Operations
We use a
variety of operating and other information to evaluate the financial condition
and operating performance of our business. These key indicators include
financial information that is prepared in accordance with GAAP, as well as other
financial information that is not prepared in accordance with GAAP. In addition,
we use other information that may not be financial in nature, including
statistical information and comparative data. We use this information to measure
the performance of individual hotels, groups of hotels and/or our business as a
whole. We periodically compare historical information to our internal budgets as
well as industry-wide information. These key indicators include occupancy rate;
Average Daily Rate (or ADR); and Revenue per Available Room (or
RevPAR).
Occupancy,
ADR and RevPAR are commonly used measures within the hotel industry to evaluate
operating performance. RevPAR, which is calculated as the product of ADR and
occupancy percentage, is an important statistic for monitoring operating
performance at the individual hotel level and across our business as a whole. We
evaluate individual hotel RevPAR performance on an absolute basis with
comparisons to budget and prior periods, as well as on a company-wide and
regional basis. ADR and RevPAR include only room revenue. Room revenue is
dictated by demand, as measured by occupancy percentage, pricing, as measured by
ADR, and our available supply of hotel rooms. Our ADR, occupancy percentage and
RevPAR performance may be impacted by macroeconomic factors such as regional and
local employment growth, personal income and corporate earnings, office vacancy
rates and business relocation decisions, airport and other business and leisure
travel, new hotel construction and the pricing strategies of competitors. In
addition, our ADR, occupancy percentage and RevPAR performance is dependent on
the continued success of our franchisors and their brands.
19
Three
Months Ended June 30, 2010 Compared with Three Months Ended June 30,
2009
Loss
from Continuing Operations.
Loss from
continuing operations increased by $0.4 million, or 23.5%, to ($2.0) million for
the three months ended June 30, 2010 from ($1.6) million for the three months
ended June 30, 2009. This increase in loss was due to the $2.9
million increase in interest expense, primarily due to the increased interest
rate on the Fortress loan, and due to the additional debt on the six hotels
opened during 2009.
Because
the Company owned four more hotels, we generated higher revenues in the three
months ended June 30, 2010 compared to the three months ended June 30,
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 slight increase in
Net Loss from Continuing Operations.
Revenues.
The key indicators for the Company’s
hotel performance for the three months ended June 30, 2010 and 2009 are set
forth in the following table.
Three
Months Ended
June 30,
2010
|
Three
Months Ended
June 30,
2009
|
Increase/(Decrease)
|
||||||||||
All
Company Hotels
|
||||||||||||
RevPAR
|
$ | 59.30 | $ | 58.04 | $ | 1.26 | ||||||
Average
Daily Rate
|
$ | 87.07 | $ | 86.97 | $ | 0.10 | ||||||
Occupancy
Rate
|
68.11 | % | 66.73 | % | 1.38 | % |
Revenues
increased by $4.5 million, or 14.6%, from $31.3 million for the three months
ended June 30, 2009 to $35.8 million for the three months ended June 30, 2010.
The increase was primarily due to the opening of six new hotels during the third
and fourth quarters of 2009.
Due to
the ongoing recovery of the national economy and the improvement in the U.S.
hotel industry fundamentals experienced during the past four months, we
anticipate that RevPAR at our hotels will continue to improve. In
addition, as our 19 unseasoned hotels continue to stabilize, we anticipate they
will generate revenue growth for the Company.
Operating
Expenses.
Total
operating expenses from continuing operations increased by $2.0 million, or
6.9%, to $30.7 million for the three months ended June 30, 2010 from $28.7
million for the three months ended June 30, 2009 as a result of increased
operating expenses from the six new hotels opened in the third and fourth
quarter of 2009. Of this increase, direct hotel operations expense
increased by 12.5% to $12.0 million for the three months ended June 30, 2010
from $10.7 million for the three months ended June 30, 2009. The
increased operating expenses were in direct relationship to the increase in
revenues from the six new hotels opened during the third and fourth quarter of
2009. Non-capitalizable hotel renovation costs during early 2009
caused repairs and maintenance for the three months ended June 30, 2009 to be
$0.9 million higher than repairs and maintenance in the three months ended June
30, 2010.
20
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.
Depreciation
and Amortization.
Total
depreciation and amortization expense from continuing operations increased by
$0.9 million, or 15.8%, from $5.8 million for the three months ended June
30, 2009 to $6.7 million for the three months ended June 30,
2010. This increase was primarily due to the six additional hotels
opened during the third and fourth quarter of 2009.
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 June 30, 2010, we reimbursed
The Summit Group $856,346 in hotel management and Company Manager expenses,
which was 2.4% of our total revenues from continuing operations. In
the three months ended June 30, 2009, we reimbursed The Summit Group $854,642 in
hotel management and Company Manager expenses, which was 2.7% of our total
revenues from continuing operations. The reduction in management
expense as a percentage of revenues is due to the Company’s efforts to reduce
expenses during the economic downturn. Management expense is
contained within the general, selling and administrative section of the
condensed consolidated statement of operations.
Six
Months Ended June 30, 2010 Compared with Six Months Ended June 30,
2009
Loss
from Continuing Operations.
Loss from
continuing operations increased by $2.1 million, or 62.8%, to ($5.4) million for
the six months ended June 30, 2010 from ($3.3) million for the six months ended
June 30, 2009. This increase was primarily due to an increase in
interest expense of $4.4 million due to the increased interest rate on the
Fortress loan, and the increased interest expense resulting from the additional
debt on the six hotels opened during 2009.
21
Revenues.
The key indicators for the Company’s
hotel performance for the six months ended June 30, 2010 and 2009 are set forth
in the following table.
Six
Months Ended
June 30,
2010
|
Six
Months Ended
June 30,
2009
|
Increase/(Decrease)
|
||||||||||
All
Company Hotels
|
||||||||||||
$ | 55.76 | $ | 56.62 | $ | (0.86 | ) | ||||||
$ | 87.26 | $ | 89.07 | $ | (1.81 | ) | ||||||
Occupancy
Rate
|
63.90 | % | 63.57 | % | 0.33 | % |
Revenues
increased by $6.6 million, or 10.9%, from $60.6 million for the six months ended
June 30, 2009 to $67.2 million for the six months ended June 30, 2010. The
increase was primarily due to the opening of six new hotels during the third and
fourth quarters of 2009.
Operating
Expenses.
Total
operating expenses from continuing operations increased by $4.3 million, or
7.6%, to $59.9 million for the six months ended June 30, 2010 from $55.6 million
for the prior period as a result of increased operating expenses from the six
new hotels opened in the third and fourth quarter of 2009. Of this
increase, direct hotel operations expense increased by 12.4% to $23.0 million
for the six months ended June 30, 2010 from $20.5 million for the prior
period. The increased operating expenses were in direct relationship
to the increase in revenues from the six new hotels opened during the third and
fourth quarter of 2009. Non-capitalizable hotel renovation costs
during early 2009 caused repairs and maintenance for the six month period ended
June 30, 2009 to be $1.6 million higher than repairs and maintenance in the six
month period ended June 30, 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.
Depreciation
and Amortization.
Total
depreciation and amortization expense from continuing operations increased by
$2.1 million, or 18.8%, from $11.4 million for the six months ended June
30, 2009 to $13.5 million for the six months ended June 30,
2010. This increase was primarily due to the six additional hotels
opened during the third and fourth quarter of 2009.
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 six months ended June 30, 2010, we reimbursed The
Summit Group $1,610,980 in hotel management and Company Manager expenses, which
was 2.4% of our total revenues from continuing operations. In the six
months ended June 30, 2009, we reimbursed The Summit Group $1,693,900 in hotel
management and Company Manager expenses, which was 2.8% 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. Management expense is contained within the general, selling
and administrative section of the condensed consolidated statement of
operations.
22
Seasonality and
Diversification
Certain
segments of the hotel industry are very seasonal. Leisure travelers
tend to travel more during the summer. Business travelers occupy
hotels relatively consistently throughout the year, but decreases in business
travel occur during summer and the winter holidays.
The hotel
industry is also seasonal based upon geography. Hotels in the south
tend to have high occupancy rates during the winter months. Hotels in
the north have higher occupancy rates during the summer months. On
balance, the hotel industry experiences its highest occupancies during summer,
and its lowest occupancy rates from December through February. To
provide for more stable revenues throughout the year, we strive to maintain
geographic diversity of our hotels. As a result, our revenues do not
vary significantly from quarter to quarter.
Liquidity
and Capital Resources
Our
short-term liquidity requirements consist primarily of funds necessary to pay
for operating expenses and other expenditures directly associated with our hotel
properties, including recurring maintenance and capital expenditures necessary
to maintain our hotel properties in accordance with franchise brand standards,
capital expenditures to improve our hotel properties, interest expense and
scheduled principal payments on outstanding indebtedness.
We expect
to satisfy these short-term liquidity requirements through working capital and
cash provided by operations. Based upon the improving U.S. lodging
industry fundamentals, and our hotel portfolio’s improving performance as hotel
demand recovers and our unseasoned properties continue to stabilize, we believe
that our working capital and cash provided by operations will be sufficient to
meet our ongoing short-term liquidity requirements for at least the next 12
months.
Our
long-term liquidity requirements consist primarily of funds necessary to pay for
the costs of acquiring or developing additional hotel properties, major hotel
renovations, loan maturities and other non-recurring capital expenditures that
need to be made periodically with respect to our hotel properties and scheduled
debt payments. We anticipate satisfying these long-term liquidity
requirements through various sources of capital, including existing working
capital, cash provided by operations, equity contributions and long-term hotel
mortgage indebtedness and other borrowings. However, certain factors
may have a material adverse effect on our ability to access these capital
sources, including the current difficulty obtaining mortgage financing, our
degree of leverage, the value of our unencumbered hotel properties and borrowing
restrictions imposed by lenders. We will continue to analyze which
source of capital is most advantageous to us at any particular point in time,
but the capital markets may not be consistently available to us on terms that
are attractive, or at all.
23
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 any hotels and did not start any new hotel construction projects during
2009 or the six months ended June 30, 2010. As of August 13, 2010,
the Company does not have any hotels or land under contract for purchase and no
new hotel construction is yet scheduled for 2010.
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.
24
First
mortgage financing with commercial lenders provides the primary source of
liquidity for financing the acquisition and construction of
hotels. As of June 30, 2010, our mortgage debt consisted of the
following:
Lender
|
Outstanding
Principal Balance as of June
30, 2010 (dollars
in thousands)
|
Interest
Rate as of June 30, 2010(1)
|
Amortization
(years)
|
Maturity
Date
|
|||||
Bank
of the Cascades(2)
|
$ |
12,623
|
Prime
rate, subject to a floor of 6.00%
|
25
|
09/30/11
|
||||
ING
Investment Management(3)
|
29,503
|
5.60%
|
20
|
07/01/25
|
|||||
MetaBank
|
7,395
|
Prime
rate, subject to a floor of 5.00%
|
20
|
03/01/12
|
|||||
Chambers
Bank
|
1,636
|
6.50%
|
20
|
06/24/12
|
|||||
Bank
of the Ozarks(4)
|
6,444
|
90-day
LIBOR + 4.00%, subject to a floor of 6.75%
|
25
|
06/29/12
|
|||||
ING
Investment Management(5)(11)
|
8,011
|
6.34%
|
20
|
07/01/12
|
|||||
ING
Investment Management(5)
|
29,877
|
6.10%
|
20
|
07/01/12
|
|||||
BNC
National Bank(13)
|
5,816
|
5.01%
|
20
|
11/01/13
|
|||||
First
National Bank of Omaha(6)
|
24,475
|
90-day
LIBOR + 4.00%, subject to a floor of 5.25%
|
20
|
07/01/13
|
|||||
ING
Investment Management(7)(12)
|
6,326
|
6.61%
|
20
|
11/01/28
|
|||||
General
Electric Capital Corp.(8)(14)
|
11,345
|
90-day
LIBOR + 2.55%
|
25
|
04/01/14
|
|||||
National
Western Life Insurance(9)
|
13,836
|
8.00%
|
17
|
01/01/15
|
|||||
BNC
National Bank(13)
|
5,814
|
Prime
rate – 0.25%
|
20
|
04/01/16
|
|||||
Compass
Bank
|
16,225
|
Prime
rate – 0.25%, subject to a floor of 4.50%
|
20
|
05/17/18
|
|||||
General
Electric Capital Corp.(14)
|
8,903
|
90-day
LIBOR + 1.75%
|
20
|
04/01/18
|
|||||
General
Electric Capital Corp.(10)(14)
|
11,210
|
90-day
LIBOR + 1.80%
|
25
|
03/01/19
|
|||||
Fortress
Credit Corp.
(15)
|
85,419
|
30-day
LIBOR + 8.75%
|
N/A
|
03/05/11
|
|||||
Lehman
Brothers Bank
|
77,913
|
5.40%
|
25
|
01/01/12
|
|||||
Marshall
& Illsley Bank
|
21,420
|
30-day
LIBOR + 2.55%
|
N/A
|
12/31/10
|
|||||
First
National Bank of Omaha (16)
|
20,400
|
90-day
LIBOR + 4.00%
|
N/A
|
08/15/10
|
|||||
First
National Bank of Omaha (16)
|
20,003
|
90-day
LIBOR + 4.00%
|
N/A
|
08/15/10
|
|||||
Total
|
$ |
424,596
|
(1)
|
As
of June 30, 2010, the Prime rate was 3.25% and the 90-day LIBOR rate was
0.53%.
|
25
(2)
|
The
maturity date may be extended to September 30, 2012, subject to the
Company achieving a debt service coverage ratio of 1.25:1.00 on the
property secured.
|
(3)
|
The
lender has the right to call the loan at January 1, 2012, January 1, 2017
and January 1, 2022. At January 1, 2012, the loan begins to
amortize according to a 19.5 year amortization schedule. If this loan is
repaid prior to maturity, there is a prepayment penalty equal to the
greater of (i) 1% of the principal being repaid and the (ii) the yield
maintenance premium. There is no prepayment penalty if the loan is prepaid
60 days prior to any call date.
|
(4)
|
The
maturity date may be extended to June 20, 2014 based on the exercise of
two, one-year extension options, subject to the satisfaction of certain
conditions. If this loan is repaid prior to June 29, 2011, there is a
prepayment penalty equal to 1% of the principal being
repaid.
|
(5)
|
If
this loan is repaid prior to maturity, there is a prepayment penalty equal
to the greater of (i) 1% of the principal being repaid and the (ii) the
yield maintenance premium.
|
(6)
|
Consists
of three loans with cross-collateralization and cross-default provisions
secured by three hotel properties: the Hyatt Place, Atlanta, Georgia; the
Courtyard by Marriott, Germantown, Tennessee; and the Courtyard by
Marriott, Jackson, Mississippi. The maturity date of the loan
secured by the Hyatt Place located in Atlanta, Georgia is February 1,
2014.
|
(7)
|
The
lender has the right to call the loan at November 1, 2013, 2018 and 2023.
If this loan is repaid prior to maturity, there is a prepayment penalty
equal to the greater of (i) 1% of the principal being repaid and the (ii)
the yield maintenance premium. There is no prepayment penalty if the loan
is prepaid 60 days prior to any call date.
|
(8)
|
If
this loan is repaid prior to April 1, 2011, there is a prepayment penalty
equal to 0.75% of the principal being repaid. After this date, there is no
prepayment penalty. A portion of the loan can be prepaid without penalty
at any time to bring the loan-to-value ratio to no less than
65%.
|
(9)
|
Consists
of two mortgage loans with cross-collateralization and cross-default
provisions. Prior to February 1, 2011, these loans cannot be prepaid. If
these loans are prepaid after February 1, 2011, there is a prepayment
penalty ranging from 5% to 1% of the principal being
prepaid.
|
(10)
|
If
this loan is repaid prior to February 27, 2011, there is a prepayment
penalty equal to 0.75% of the principal being repaid. After this date,
there is no prepayment penalty. A portion of the loan can be prepaid
without penalty at any time to bring the loan-to-value ratio to no less
than 65%.
|
(11)
|
This
loan is cross-collateralized with the other ING Investment Management loan
with the July 1, 2012 maturity date.
|
(12)
|
This
loan is cross-collateralized with the ING Investment Management loan with
the July 1, 2025 maturity date.
|
(13)
|
The
two BNC loans have cross-default provisions.
|
26
(14)
|
The
three General Electric Capital Corp. loans have cross-default
provisions.
|
(15)
|
Interest
is paid monthly at the 30-day LIBOR rate plus 5.75%, and additional
interest accrues at the annual rate of 30-day LIBOR plus 3.00% and is
deferred until the maturity date. As a result, the outstanding principal
balance will increase prior to the date of repayment. The loan was
extended for a period of one (1) year, to March 5, 2011, with an option
for an additional six (6) month extension contingent on meeting certain
requirements. 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 covenants 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; and
restrictions on distributions to members.
|
(16)
|
The
maturity date was extended to August 15, 2010 pursuant to an amendment to
the loan agreement executed by the parties on July 24, 2010. We expect to
execute an agreement with the lender, which would allow an extension of
the maturity date to July 31, 2011.
|
As of
June 30, 2010, the Company has $154,395,543 of debt due in the next twelve
months, of which $147,242,264 represents maturing debt and $7,153,279 represents
other scheduled principal payments. We intend to pay scheduled
principal payments with available cash flow from operations. In
addition, we intend to either refinance or extend the terms of those debt
instruments maturing in the next twelve months.
We
believe that we will have adequate liquidity to meet requirements for scheduled
maturities. However, we can provide no assurances that we will be able to
refinance our indebtedness as it becomes due and, if refinanced, whether such
refinancing will be available on favorable terms.
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 June 30, 2010, approximately 59.3% of our long-term
indebtedness carried variable interest rates which increase or decrease with
general interest rates changes.
27
Construction and Development
Requirements
We own
the following parcels of vacant land that we believe are suitable for the
development of new hotels, the possible expansion of existing hotels or the
development of restaurants in proximity to certain hotels we own:
Location
|
Potential
Use
|
Acres
|
||
Flagstaff,
Arizona
|
Development
of one restaurant pad
|
3.0
|
||
Ft.
Myers, Florida
|
Development
of one or two restaurant pads
|
3.1
|
||
Boise,
Idaho
|
Development
of one hotel
|
3.1
|
||
Boise,
Idaho
|
Possible
expansion of existing hotel
|
2.3
|
||
Boise,
Idaho
|
Possible
expansion of existing hotel
|
1.0
|
||
San
Antonio, Texas
|
Development
of two restaurant pads
|
3.0
|
At this
time, we have no intention of developing new hotels or restaurants or expanding
any of our existing hotels at these parcels. We may in the future sell these
parcels when market conditions warrant. If we do develop these
parcels, construction will not begin on any hotel until debt and equity
financing are in place and management has determined that market conditions are
appropriate.
Acquisitions and
Dispositions
We own
the following parcels of vacant land for which we have entered into a contract
to sell to an unaffiliated hotel developer for an aggregate purchase price of
$30.4 million:
Location
|
Potential
Use
|
Acres
|
||
Jacksonville,
Florida
|
One
hotel
|
3.2
|
||
Twin
Falls, Idaho
|
One
hotel
|
2.5
|
||
Missoula,
Montana
|
One
hotel
|
2.2
|
||
El
Paso, Texas
|
Two
hotels
|
5.0
|
||
Houston,
Texas
|
One
hotel
|
2.8
|
||
San
Antonio, Texas
|
One
hotel
|
2.6
|
||
San
Antonio, Texas
|
Two
hotels
|
6.0
|
||
Spokane,
Washington
|
Two
hotels
|
4.6
|
The
purchaser intends to develop 11 new hotels located at these parcels. As a
condition to closing, we will contribute approximately $15.0 million of the
purchase price to a joint venture formed with the purchaser to hold title to the
parcels and the hotels, if any are developed. In exchange for our contribution,
we will receive a 10% ownership interest in the joint venture. Closing of this
transaction is scheduled for October 15, 2010, but remains subject to customary
closing conditions, including lender consents. These parcels are
listed as Assets Held for Sale on the condensed consolidated balance
sheet.
28
Commitments
and Contingencies
Other than the contract to sell the
eight parcels of vacant land, as of June 30, 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.
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,
the 90-day LIBOR rate and the Prime rate. We primarily 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 June 30, 2010, 40.7% of our debt
carried fixed interest rates, and 59.3% carried variable interest
rates. As of June 30, 2010, our fixed interest rate debt totaled
$172.9 million. Our variable interest rate debt totaled $251.7
million as of June 30, 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 $2,517,000 per
year.
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 June 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
29
PART
II
OTHER
INFORMATION
Item
1. Legal
Proceedings
Peter J.
Poulos, a former employee of the Company, filed a complaint against us, Mr.
Boekelheide and others with the U.S. Department of Labor/Occupational Safety and
Health Administration, or OSHA. The administrative file was opened on
April 6, 2009. The complaint alleges that, as a result of one
circumstance of a payment being applied to incorrect accounts, we engaged in a
scheme to perpetuate fraud and that the employee’s subsequent termination was
retaliatory and in violation of the Corporate and Criminal Fraud Accountability
Act of 2002, or CCFA. The only relief sought under the complaint is
an administrative finding that we violated the CCFA. We vehemently
deny these allegations and are vigorously defending the claim. OSHA
has completed its investigation and we are awaiting its findings.
On May
12, 2009, Mr. Poulos filed a complaint in the United States District Court,
Southern District of South Dakota against the Company, Mr. Boekelheide and Trent
Peterson, our Director of Operations—Eastern United States. The
complaint is based upon the same set of circumstances as in the OSHA complaint
described above. The relief sought includes damages, including front
and back pay, compensatory damages, punitive damages and other relief, in excess
of $10.0 million. We vehemently deny these allegations and are
vigorously defending the claim. On July 10, 2009, Mr. Boekelheide was dismissed
from the lawsuit. Discovery is proceeding in this case. A pre-trial
conference and motions hearing is scheduled for August 6, 2010. The trial is
scheduled for August 2010 but will be rescheduled for November or December 2010
based on the court’s trial schedule.
Although
we cannot be certain of the outcome of the above actions, at this time we do not
believe the above actions against us will have a material adverse affect on our
business, financial conditions or results of operations.
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”) and the Company’s quarterly report on Form 10-Q filed on or
about May 14, 2010 (the “quarterly 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 and quarterly report, management believes
that additional risk factors have developed related to the proposed merger
transactions described above, with such risk factors described
below. Furthermore, in addition to the risks described in the annual
report and quarterly 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.
30
We cannot assure you that the Company
will complete the Merger.
On August 5, 2010, the Company entered
into the Merger Agreement with the OP, as described under Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Numerous third party approvals are needed to complete the merger, including
approvals of lenders, lessors and hotel franchisors. Although the Company has
commenced the process of seeking the necessary third-party approvals, it
currently does not have all the necessary third-party approvals and we cannot
assure you that the Company will be able to obtain these third-party approvals.
The merger may not be completed if these approvals are not obtained. There may
be costs and delays in obtaining the approvals.
The Merger and the IPO may divert
management's attention from the Company's operations.
Because our employees will likely be
required to divert significant attention to merger-related activities, our
ability to capitalize on growth opportunities and other business opportunities,
make other capital expenditures, sell assets and reduce our indebtedness will be
limited, which could have a material adverse effect on our future results of
operations or financial condition.
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.
31
Item
6. Exhibits
The
following Exhibits are filed as part of this Form 10-Q:
Exhibit
|
||
Number
|
Description of Exhibit
|
|
2.1
|
Agreement
and Plan of Merger dated August 5, 2010 (incorporated by reference to
the Company’s Current Report on Form 8-K filed with the SEC August 11,
2010)
|
|
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.
|
32
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: August 16, 2010 |
By:
|
/s/ Kerry W. Boekelheide | |
Kerry W. Boekelheide | |||
Chief Executive Officer | |||
Date: August
16, 2010
|
By:
|
/s/ Daniel P. Hansen | |
Daniel P. Hansen | |||
Chief Financial Officer | |||
33
EXHIBIT
INDEX
2.1
|
Agreement
and Plan of Merger dated August 5, 2010 (incorporated by reference to
the Company’s Current Report on Form 8-K filed with the SEC August 11,
2010)
|
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.
|
34