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SPPR > SEC Filings for SPPR > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for SUPERTEL HOSPITALITY INC

Form 10-Q for SUPERTEL HOSPITALITY INC


14-Nov-2012

Quarterly Report


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

Forward-Looking Statements

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

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

Following is management's discussion and analysis of our operating results as well as liquidity and capital resources which should be read together with our financial statements and related notes contained in this report and with the financial statements and management's discussion and analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Results for the three and nine months ended September 30, 2012 are not necessarily indicative of results that may be attained in the future.

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

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

Overview

We are a self-administered real estate investment trust, and through our subsidiaries, as of September 30, 2012 we owned 94 hotels in 23 states. Our hotels operate under several national and independent brands.


Part I. FINANCIAL INFORMATION, CONTINUED:

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

Our significant events for the nine months ended September 30, 2012 include:

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

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

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

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

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

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

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

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

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

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

On May 15, 2012, we borrowed $1.25 million from Elkhorn Valley Bank. The note was refinanced on October 10, 2012. The new loan amount is $1.15 million with a maturity of October 15, 2014. The note bears interest at 5.5% and is secured by a Days Inn hotel located in Fredericksburg, Virginia (North).

On May 25, 2012, the Company acquired a Hilton Garden Inn in Dowell, Maryland (100 rooms) for $11.5 million, excluding closing costs and fees. The purchase was funded with a portion of the net proceeds from the sale of the Series C convertible preferred stock.


Part I. FINANCIAL INFORMATION, CONTINUED:

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

On May 29, 2012, the Company sold a Super 8 in Sedalia, Missouri (87 rooms) for approximately $1.8 million. Proceeds were used primarily to reduce a term loan with Great Western Bank, with the remaining amount used to reduce the revolving line of credit with Great Western Bank.

On June 1, 2012, the Company sold a Super 8 in Wichita, Kansas (119 rooms) for approximately $4.1 million. Proceeds were used primarily to reduce a term loan with Great Western Bank, with the remaining funds applied to general corporate purposes.

On June 15, 2012, the Company sold a Masters Inn in Tampa, Florida (127 rooms) for approximately $2.1 million. Proceeds were used to pay down mortgage debt with General Electric Capital Corporation.

On July 25, 2012, we sold a Super 8 in Watertown, South Dakota (57 rooms) for approximately $1.55 million. Proceeds were used to pay the mortgage with Elkhorn Valley Bank with the remaining proceeds used to reduce short term borrowings.

As of September 30, 2012, the amount available on our revolving credit facility with Great Western Bank was reduced from $12.5 million to $12.0 million.

On June 29, 2012, the Company received a notice from the NASDAQ Stock Market stating that the minimum bid price of its common stock was below $1.00 per share for 30 consecutive business days, and that the Company was therefore not in compliance with Marketplace Rule 5450(a)(1). The notification letter has no immediate effect on the listing of the Company's common stock on the NASDAQ Global Market. The Company's common stock continued to trade on the NASDAQ Global Market under the symbol SPPR. On September 25, 2012 the Company received a letter from the NASDAQ Stock Market stating that the Company has regained compliance with the continued listing requirement for the NASDAQ Global Market.

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

As of September 30, 2012, we owned 94 select service hotels. The hotels are leased to our wholly owned taxable REIT subsidiary, TRS Leasing, Inc, and its wholly owned subsidiaries (collectively "TRS Lessee"), and are managed by Hospitality Management Advisors Inc. ("HMA"), Strand Development Company LLC ("Strand"), Kinseth Hotel Corporation ("Kinseth"), Cherry Cove Hospitality Management, LLC ("Cherry Cove"), and HLC Hotels Inc. ("HLC").

Cherry Cove is the manager of our Hilton Garden Inn in Dowell, Maryland. HLC is the manager of our six Masters Inn hotels located in Alabama, Florida, Georgia and South Carolina.

HMA manages 24 Company hotels in Arkansas, Louisiana, Tennessee, Kentucky, Indiana, Virginia and Florida. Strand manages the Company's seven economy extended-stay hotels in Georgia and South Carolina as well as 16 additional Company hotels located in Georgia, Delaware, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia. Kinseth manages 40 Company hotels in eight states primarily in the Midwest. Each of the management agreements with HMA, Strand, and Kinseth expire on May 31, 2014. The management agreement with Cherry Cove expires May 24, 2015. These management agreements renew for additional terms of one year unless either party to the agreement gives the other party written notice of termination at least 90 days prior to the end of the initial term or the then current renewal term.

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


Part I. FINANCIAL INFORMATION, CONTINUED:

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

HLC receives management fees equal to 5.0% of the gross revenues derived from the operation of the hotels and incentive fees equal to 10% of the annual operating income of the hotels in excess of 10.5% of the Company's investment in the hotels. On August 9, 2011, the term of the management agreement with HLC was extended to December 31, 2013.

Overview of Discontinued Operations

The condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 include the results of operations for the 21 hotels classified as held for sale at September 30, 2012, as well as all properties that have been sold during 2012 and 2011 in accordance with FASB ASC 205-20 Presentation of Financial Statements - Discontinued Operations.

The assets held for sale at September 30, 2012 and 2011 are separately disclosed in the Condensed Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that all our held for sale assets as of September 30, 2012 remain properly classified in accordance with ASC 205-20.

Where the carrying value of an asset held for sale exceeded the estimated fair value, net of selling costs, we reduced the carrying value and recorded an impairment charge. Level 3 inputs were used during the three months ended September 30, 2012. Level 3 inputs were used during the three months ended March 31, 2012 to determine impairment loss of $1.8 million on eight held for sale hotels, one hotel reclassified as held for sale, one hotel subsequently sold, and recovery of previously recorded impairment on two hotels in the amount of $0.4 million that were reclassified into held for use. For the three months ending June 30, 2012, $4.1 million of impairment was recorded on two hotels that were reclassified as held for use. In the three months ending June 30, 2012, the Company recorded impairment loss of $0.1 million on eight hotels held for sale, $0.1 million of recovery on two hotels held for sale and approximately $6,000 of recovery on one hotel subsequently sold. During the three months ended September 30, 2012, impairment of $2.7 million was taken on eight hotels held for sale and two hotels reclassified to held for sale.

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

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

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


Part I. FINANCIAL INFORMATION, CONTINUED:

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

General

The discussion that follows is based primarily on the condensed consolidated financial statements of the three and nine months ended September 30, 2012 and 2011, and should be read along with the condensed consolidated financial statements and notes.

The comparisons below reflect revenues and expenses of the company's 94 and 101 hotels as of September 30, 2012 and 2011, respectively.

Results of Operations

Comparison of the three months ended September 30, 2012 to the three months
ended September 30, 2011

Operating results are summarized as follows (in thousands):



                                                   Three months ended                                      Three months ended
                                                   September 30, 2012                                      September 30, 2011                        Continuing
                                     Continuing         Discontinued                         Continuing         Discontinued                         Operations
                                     Operations          Operations           Total          Operations          Operations           Total           Variance
Revenues                            $     22,192       $        4,714       $  26,906       $     21,199       $        6,552       $  27,751       $        993
Hotel and property operations
expenses                                 (16,132 )             (4,065 )       (20,197 )          (15,475 )             (5,570 )       (21,045 )             (657 )
Interest expense                          (1,964 )               (408 )        (2,372 )           (1,975 )             (1,487 )        (3,462 )               11
Depreciation and amortization
expense                                   (2,223 )                (33 )        (2,256 )           (2,139 )               (281 )        (2,420 )              (84 )
General and administrative
expenses                                    (943 )                 -             (943 )             (906 )                 -             (906 )              (37 )
Acquisition, termination expense             (15 )                 -              (15 )               -                    -               -                 (15 )
Net gain (loss) on dispositions
of assets                                     11                  553             564              1,139                  (13 )         1,126             (1,128 )
Other income (expense)                    (1,138 )                 -           (1,138 )                2                   -                2             (1,140 )
Impairment loss                               -                (2,732 )        (2,732 )           (2,227 )               (334 )        (2,561 )            2,227
Income tax (expense) benefit                (212 )                129             (83 )             (139 )                250             111                (73 )

Net income (loss)                   $       (424 )     $       (1,842 )     $  (2,266 )     $       (521 )     $         (883 )     $  (1,404 )     $         97

The hotel industry continued to regain some of its lost momentum in the third quarter. With demand somewhat outpacing supply, our operators were able to increase the average daily rate "ADR" in the third quarter with modest sacrifice to occupancy. ADR for the same store portfolio was up 1.3% from the prior year, with occupancy down 0.9%. The overall result was a rise in revenue per available room "RevPAR" of 0.5%. We refer to our entire portfolio as select service hotels which we further describe as upscale hotels, upper midscale hotels, midscale hotels, economy hotels and extended stay hotels. Results for our same store portfolio are presented below under "Revenue Per Available Room ("RevPAR"), Average Daily Rate ("ADR"), and Occupancy".

Revenues and Operating Expenses

Revenues from continuing operations for the three months ended September 30, 2012 increased $1.0 million or 4.7% compared to the same period in 2011. The variance was due to the purchase of a Hilton Garden Inn during the second quarter of 2012.

During the third quarter of 2012, hotel and property operations expenses from continuing operations increased $0.7 million, which was due to the acquisition mentioned above.

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

Interest expense from continuing operations was essentially unchanged from the third quarter of last year. Depreciation and amortization expense from continuing operations increased $0.1 million to $2.2 million. The general and administrative expense for the 2012 third quarter was also flat compared to the prior period, remaining at $0.9 million.


Part I. FINANCIAL INFORMATION, CONTINUED:

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

Other Income/Expense

The increased expense resulted from a change in the fair value of derivative liabilities. The Series C convertible preferred embedded derivative and the common stock warrants, both derivatives, were revalued at September 30, 2012. The fair value of the derivative liabilities increased by $1.2 million, due primarily to an increase in the price of the common stock.

Impairment loss

For the third quarter of 2012, we recorded impairment charges of $2.7 million on ten hotels classified as held for sale. There was no impairment taken against hotels classified as held for use. In the third quarter of 2011, $0.3 million of net impairment was taken against ten hotels held for sale, with $37,000 of impairment taken on two properties subsequently sold and $64,000 of impairment recovered on two properties at the time of sale. Impairment of $2.2 million was taken on three held for use properties.

Dispositions

In the third quarter of 2012, we recognized a gain of $0.6 million on the sale of a Super 8 in Watertown, South Dakota. In the third quarter of 2011, we recognized a $1.1 million gain on the disposition of assets related to the sale of the office building in Norfolk, Nebraska. Two hotels were sold in the 2011 third quarter with no gain or loss.

Income Tax Benefit

The income tax expense/benefit from continuing operations is related to the taxable income/loss from our taxable subsidiary, the TRS Lessee. Management believes the combined federal and state income tax rate for the TRS Lessee will be approximately 38%. The tax expense is a result of TRS Lessee's income for the three months ended September 30, 2012. The income tax will vary based on the taxable earnings or loss of the TRS Lessee.

The income tax expense from continuing operations increased by was $0.1 million compared to the year ago period, due to increased income by the TRS Lessee.

Comparison of the nine months ended September 30, 2012 to the nine months ended September 30, 2011

Operating results are summarized as follows (in thousands):

                                                     Nine months ended                                    Nine months ended
                                                    September 30, 2012                                   September 30, 2011                      Continuing
                                       Continuing        Discontinued                       Continuing        Discontinued                       Operations
                                       Operations         Operations          Total         Operations         Operations          Total          Variance
Revenues                              $     59,545      $       14,641      $  74,186      $     57,089      $       18,984      $  76,073      $      2,456
Hotel and property operations
expenses                                   (44,200 )           (12,721 )      (56,921 )         (43,108 )           (16,464 )      (59,572 )          (1,092 )
Interest expense                            (6,051 )            (1,548 )       (7,599 )          (6,344 )            (3,082 )       (9,426 )             293
Depreciation and amortization
expense                                     (6,473 )              (179 )       (6,652 )          (6,582 )            (1,102 )       (7,684 )             109
General and administrative expenses         (2,957 )                -          (2,957 )          (3,010 )               (50 )       (3,060 )              53
Acquisition, termination expense              (178 )                -            (178 )              (1 )                -              (1 )            (177 )
Net gain (loss) on dispositions of
assets                                           5               5,822          5,827             1,125                 336          1,461            (1,120 )
Other income (expense)                      (1,478 )                -          (1,478 )             107                  -             107            (1,585 )
Impairment loss                             (3,714 )            (4,535 )       (8,249 )          (6,010 )            (1,813 )       (7,823 )           2,296
Termination cost                                -                   -              -               (540 )                -            (540 )             540
Income tax (expense) benefit                  (111 )               336            225               339                 899          1,238              (450 )

                                      $     (5,612 )    $        1,816      $  (3,796 )    $     (6,935 )    $       (2,292 )    $  (9,227 )    $      1,323

The majority of our brands have seen the benefits of the increased demand for hotel rooms year to date. As a whole, the industry has seen greater recovery of ADR than occupancy. For the same store portfolio year to date 2012, our ADR is up 2.6%, occupancy is down 0.6%, and RevPAR is up 1.9%. Results for our same store portfolio are presented below under "Revenue Per Available Room ("RevPAR"), Average Daily Rate ("ADR"), and Occupancy".


Part I. FINANCIAL INFORMATION, CONTINUED:

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

Revenues and Operating Expenses

Revenues from continuing operations for the nine months ended September 30, 2012 increased $2.5 million or 4.3 percent. Approximately $1.4 million of the variance was due to the purchase of a Hilton Garden Inn during the second quarter of 2012. The remainder was caused by increased ADR and slightly offset by decreased occupancy.

During the nine months ended September 30, 2012, hotel and property operations expenses from continuing operations increased $1.1 million. The Hilton Garden Inn acquisition accounted for $0.9 million of the variance. The remainder was primarily caused by franchise related expenses.

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

Interest expense from continuing operations decreased by $0.3 million for the nine months ended September 30, 2012 compared to the year ago period. This is primarily due to the refinancing and reduction of debt. The depreciation and amortization expense from continuing operations decreased $0.1 million for the nine months ended September 30, 2012 compared to the year ago period. The general and administrative expense from continuing operations for the same period decreased $0.1 million.

Acquisition, termination expense

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