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SPPR > SEC Filings for SPPR > Form 10-K on 20-Mar-2013All Recent SEC Filings

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Form 10-K for SUPERTEL HOSPITALITY INC


20-Mar-2013

Annual Report


Item 7. 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-K 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.


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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 which 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, 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 which speak only as of the date of this report.

Overview

We are a self-administered REIT, and through our subsidiaries, we owned 86 limited service hotels in 22 states at December 31, 2012. Our hotels operate under several national franchise and independent brands.

Our significant events for 2012 include:

We completed a $30 million sale to Real Estate Strategies, L.P. of our Series C convertible preferred stock and warrants to purchase shares of our common stock;

We acquired a Hilton Garden Inn in Dowell, Maryland (100 rooms) for $11.5 million, excluding closing costs and fees;

We sold 15 hotels for gross proceeds of $25.5 million and used the net proceeds primarily to pay off the underlying loans;

We successfully refinanced $31.5 million of our debt which matured in 2012, including our $28.2 million Greenwich Capital loan;

As of December 31, 2012, we had 22 hotels classified as held for sale with a total net book value of $27.8 million. Gross proceeds from the sales are expected to be $32.7 million, and net proceeds will be used to pay off the underlying loans with remaining cash used to reduce short term borrowings; and

Non cash impairment charges of $10.2 million were booked against hotel properties.

As of December 31, 2012, the Company had 22 hotels classified as held for sale. At the beginning of 2012, the Company had 24 hotels held for sale and during the year classified an additional fourteen hotels as held for sale. Fifteen of these hotels were sold during 2012, and one of the hotels was reclassified as held for use due to changes in the property's market condition. Since our previously filed financial statements on Form 10-Q as of September 30, 2012, in addition to the eight hotels sold, nine hotels were reclassified as held for sale. The impact of these changes was to decrease losses from continuing operations by $2.7 million and $0.8 million for the years ended 2011 and 2010, respectively, compared to the previously filed financial statements.

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.

The discussion that follows is based primarily on our consolidated financial statements as of December 31, 2012 and 2011, and results of operations for the years ended December 31, 2012, 2011 and 2010, and should be read along with the consolidated financial statements and related notes.


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Same Store Revenue Per Available Room ("RevPAR"), Average Daily Rate ("ADR"), and Occupancy

The following table presents our RevPAR, ADR and Occupancy by region for 2012, 2011 and 2010 respectively. The comparisons of same store operations are for 63* hotels owned as of January 1, 2011. Same store calculations exclude 22 properties which are held for sale, and one property which was acquired during the second quarter of 2012 and therefore was not owned by the Company throughout each of the periods presented.

                                                 2012                                      2011                                     2010
Region                           RevPAR       Occupancy         ADR        RevPAR       Occupancy         ADR       RevPAR       Occupancy         ADR
Mountain                         $ 35.81            68.5 %    $  52.27     $ 32.05            63.8 %    $ 50.23     $ 31.75            65.0 %    $ 48.85
West North Central                 32.59            63.4 %       51.38       31.65            63.8 %      49.58       30.24            63.7 %      47.48
East North Central                 37.48            59.1 %       63.41       36.54            57.5 %      63.50       37.70            62.2 %      60.61
Middle Atlantic                    44.67            73.2 %       61.06       43.52            75.3 %      57.83       41.43            71.1 %      58.30
South Atlantic                     30.16            68.2 %       44.19       29.66            68.8 %      43.11       28.67            69.5 %      41.24
East South Central                 41.24            62.1 %       66.38       40.66            62.0 %      65.62       41.55            65.1 %      63.86
West South Central                 23.74            51.4 %       46.17       28.17            61.2 %      46.02       32.99            70.4 %      46.88

Total Same Store Hotels          $ 33.21            64.5 %    $  51.51     $ 32.58            64.8 %    $ 50.29     $ 32.23            66.4 %    $ 48.56


South Atlantic Acquisitions        85.90            69.8 %      123.03          -              0.0 %         -           -              0.0 %         -

Total Acquisitions               $ 85.90            69.8 %    $ 123.03     $    -              0.0 %    $    -      $    -              0.0 %    $    -



Total continuing operations      $ 33.79            64.5 %    $  52.36     $ 32.58            64.8 %    $ 50.29     $ 32.23            66.4 %    $ 48.56





States included in
the Regions

Mountain                 Idaho and Montana
West North Central       Iowa, Kansas, Missouri, Nebraska and South Dakota
East North Central       Indiana and Wisconsin
Middle Atlantic/New
England                  Pennsylvania
South Atlantic           Florida, Georgia, Maryland, North Carolina, South
                         Carolina, Virginia and West Virginia
East South Central       Kentucky and Tennessee
West South Central       Arkansas and Louisiana

* The following properties have been moved from the same store portfolio during the reporting period and classified as held for sale:

        Louisville, KY Comfort Suites         Fort Madison, IA Super 8
        Omaha, NE Sleep Inn                   Jefferson City, MO Super 8
        Louisville, KY Sleep Inn              Shawano, WI Super 8
        Fredericksburg, VA (South) Days Inn   Ellenton, FL Guesthouse Inn
        Shreveport, LA Days Inn


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Our RevPAR, ADR and Occupancy, by franchise affiliation, for 2012, 2011 and 2010 were as follows:

                                                          2012                                         2011                                        2010
Brand                                    RevPAR        Occupancy          ADR         RevPAR        Occupancy          ADR        RevPAR        Occupancy          ADR
Select Service
Upper Midscale
Comfort Inn/ Comfort Suites                45.58             65.3 %        69.81        44.25             64.0 %       69.12        43.15             65.0 %       66.36
Other Upper Midscale (1)                   57.05             73.2 %        77.98        55.23             72.0 %       76.66        50.19             69.1 %       72.66

Total Upper Midscale                     $ 47.11             66.3 %     $  71.01      $ 45.71             65.1 %     $ 70.24      $ 44.09             65.6 %     $ 67.24

Midscale
Quality Inn                                33.88             47.1 %        71.95        29.49             43.9 %       67.18        37.69             53.2 %       70.79
Baymont Inn                                28.26             54.2 %        52.09        24.90             44.3 %       56.16        26.93             49.6 %       54.34

Total Midscale                           $ 31.92             49.6 %     $  64.37      $ 27.88             44.0 %     $ 63.30      $ 33.95             52.0 %     $ 65.34

Economy
Days Inn                                   32.02             60.8 %        52.65        32.86             62.4 %       52.68        33.79             63.7 %       53.00
Super 8                                    31.06             62.7 %        49.58        30.71             63.4 %       48.47        30.12             64.7 %       46.55
Other Economy (2)                          59.26             65.8 %        90.01        54.45             64.0 %       85.08        48.42             60.3 %       80.35

Total Economy                            $ 32.17             62.3 %     $  51.67      $ 32.00             63.1 %     $ 50.70      $ 31.65             64.3 %     $ 49.22

Total Upper Midscale/Midscale/Economy    $ 37.23             63.1 %     $  59.00      $ 36.47             63.0 %     $ 57.93      $ 35.97             64.2 %     $ 56.02

Economy Extended Stay (3)                $ 17.27             69.9 %     $  24.70      $ 17.14             72.0 %     $ 23.79      $ 17.41             75.0 %     $ 23.21

Total Same Store                         $ 33.21             64.5 %     $  51.51      $ 32.58             64.8 %     $ 50.29      $ 32.23             66.4 %     $ 48.56


Upscale Acquisitions
Hilton Garden Inn                        $ 85.90             69.8 %     $ 123.03      $    -               0.0 %     $    -       $    -               0.0 %     $    -

Total Upscale Acquisitions               $ 85.90             69.8 %     $ 123.03      $    -               0.0 %     $    -       $    -               0.0 %     $    -

Total continuing operations              $ 33.79             64.5 %     $  52.36      $ 32.58             64.8 %     $ 50.29      $ 32.23             66.4 %     $ 48.56

(1) Includes Hampton and Independent brands

(2) Includes Key West Inns and Independent brands

(3) Includes Savannah Suites

Key Performance Indicators

Earnings Before Interest, Taxes, Depreciation, Amortization, Noncontrolling Interest and Preferred Stock Dividends

The Company's EBITDA for the three years ending December 31, 2012, 2011, and 2010 was $11.1 million, $1.6 million and $10.1 million, respectively. Adjusted EBITDA for the three years ending December 31, 2012, 2011, and 2010 was $17.1 million, $16.0 million and $18.6 million, respectively.

Please refer to Item 6. Selected Financial Data for a reconciliation of EBITDA and Adjusted EBITDA.


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Funds from Operations

The Company's funds from operations ("FFO") for the three years ending December 31, 2012, 2011, and 2010 was $(2.3) million, $3.9 million and $6.6 million, respectively. The Company's Adjusted FFO for the three years ending December 31, 2012, 2011, and 2010 was $(1.8) million, $4.1 million and $6.6 million, respectively. Diluted FFO per share and diluted Adjusted FFO per share are computed after adjusting the numerator and denominator of the basic computation for the effects of any dilutive potential common shares outstanding during the period. The Company's outstanding warrants to purchase common stock, stock options, Series C convertible preferred stock, and restricted stock would be antidilutive and are not included in the dilution computation. 11,424 Preferred Operating Units are also not included in the dilution computation.

Please refer to Item 6. Selected Financial data for a reconciliation of FFO and adjusted FFO.


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Net Operating Income

NOI is one of the performance indicators the Company uses to assess and measure operating results. The Company believes that NOI is a useful additional measure of operating performance of its hotels because it provides a measure of core operations that is unaffected by depreciation, amortization, financing and general and administrative expense. NOI is also an important performance measure used to determine the amount of the management fees paid by the Company to the operators of its hotels.

NOI is a non-GAAP measure, and is not necessarily indicative of available earnings and should not be considered an alternative to Earnings Before Net Gain
(Loss) on Dispositions of Assets, Other Income, Interest Expense and Income Taxes. NOI is reconciled to Earnings Before Net Gain (Loss) on Dispositions of Assets, Other Income, Interest Expense and Income Taxes as follows (dollars in thousands):

                                                                 Twelve months ended
                                                                    December 31,
                                                               2012              2011
Earnings Before Net Gains(Losses) on Dispositions of
Assets, Other Income, Interest Expense, and Income
Taxes                                                        $   6,799         $   5,121
Add back:
Acquisition, termination expense                                   240               124
General and administrative                                       3,908             3,884
Depreciation and amortization                                    7,705             7,855
Hotel operating revenue - discontinued                          24,777            30,876
Hotel operating expenses - discontinued                        (22,561 )         (27,496 )
Other expenses *                                                10,314            11,025

NOI                                                          $  31,182         $  31,389

* Other Expenses include both continuing and discontinued operations for Management Fees, Bonus Wages, Insurance, Real Estate and Personal property taxes, and miscellaneous expenses.

Property Operating Income

POI is a non-GAAP financial measure, and should not be considered as an alternative to loss from continuing operations or loss from discontinued operations, net of tax. The Company believes that the presentation of hotel property operating results (POI) is helpful to investors, and represents a more useful description of its core operations, as it better communicates the comparability of its hotels' operating results for all of the company's hotel properties.


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POI from continuing operations is reconciled to net loss as follows (in thousands):

                                                                 Twelve months ended
                                                                    December 31,
                                                               2012              2011
Net loss                                                     $ (10,220 )       $ (17,477 )
Depreciation and amortization, including discontinued
operations                                                       8,787             9,996
Net gain on disposition of assets, including
discontinued operations                                         (7,833 )          (1,452 )
Other income                                                       144              (107 )
Interest expense, including discontinued operations             10,060            12,402
General and administrative expense                               3,908             3,934
Acquisition expense                                                240               124
Impairment losses                                               10,172            14,308
Termination cost                                                    -                540
Income tax expense (benefit), including discontinued
operations                                                       5,610            (1,904 )
Room rentals and other hotel services - discontinued
operations                                                     (24,777 )         (30,876 )
Hotel and property operations expense - discontinued
operations                                                      22,561            27,496

POI - continuing operations                                  $  18,652         $  16,984

POI from discontinued operations is reconciled to loss from discontinued operations, net of tax, as follows (in thousands):

                                                                   Twelve months ended
                                                                      December 31,
                                                                  2012              2011

Gain (loss) from discontinued operations                       $    1,039         $ (9,242 )
Depreciation and amortization from discontinued
operations                                                          1,082            2,141
Net gain on disposition of assets from discontinued
operations                                                         (7,830 )           (317 )
Interest expense from discontinued operations                       2,610            4,696
General and administrative expense from discontinued
operations                                                             -                50
Impairment losses from discontinued operations                      6,342            7,795
Income tax benefit from discontinued operations                    (1,027 )         (1,743 )

POI - discontinued operations                                  $    2,216         $  3,380


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Results of Operations

Comparison of the year ended December 31, 2012 to the year ended December 31, 2011

Operating results are summarized as follows for the years ended December 31 (table in thousands):

                                                              2012                                                 2011                             Continuing
                                          Continuing        Discontinued                       Continuing        Discontinued                       Operations
                                          Operations         Operations          Total         Operations         Operations          Total          Variance
Revenues                                 $     70,573      $       24,777      $  95,350      $     67,031      $       30,876      $  97,907      $      3,542
Hotel and property operations expenses        (51,921 )           (22,561 )      (74,482 )         (50,047 )           (27,496 )      (77,543 )          (1,874 )
Interest expense                               (7,450 )            (2,610 )      (10,060 )          (7,706 )            (4,696 )      (12,402 )             256
Depreciation and amortization expense          (7,705 )            (1,082 )       (8,787 )          (7,855 )            (2,141 )       (9,996 )             150
General and administrative expenses            (3,908 )                -          (3,908 )          (3,884 )               (50 )       (3,934 )             (24 )
Acquisition, termination expense                 (240 )                -            (240 )            (124 )                -            (124 )            (116 )
Termination costs                                  -                   -              -               (540 )                -            (540 )             540
Impairment losses                              (3,830 )            (6,342 )      (10,172 )          (6,513 )            (7,795 )      (14,308 )           2,683
Net gains on dispositions of assets                 3               7,830          7,833             1,135                 317          1,452            (1,132 )
Other income                                     (144 )                -            (144 )             107                  -             107              (251 )
Income tax benefit (expense)                   (6,637 )             1,027         (5,610 )             161               1,743          1,904            (6,798 )

                                         $    (11,259 )    $        1,039      $ (10,220 )    $     (8,235 )    $       (9,242 )    $ (17,477 )    $     (3,024 )

The hotel industry made considerable progress during 2012, with demand continuing to outpace supply, and RevPAR increasing over the prior year, according to data from Smith Travel Research. The Company's ADR for the same store portfolio was up 2.4% from the prior year, with occupancy down 0.5%. The overall result was a rise in RevPAR of 1.9%. 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 above in Item 7 under Same Store Revenue Per Available Room ("RevPAR"), Average Daily Rate ("ADR") and Occupancy.

Revenues and Operating Expenses

Loss from continuing operations for the twelve months ended December 31, 2012 was $(11.3) million, compared to loss from continuing operations of $(8.2) million for 2011. After recognition of discontinued operations, noncontrolling interests and dividends for preferred stock shareholders, the net loss attributable to common shareholders was $(13.4) million or $(0.58) per diluted share, for the year ended December 31, 2012, compared to net loss attributable to common shareholders of $(18.9) million or $(0.82) per diluted share for 2011.

During 2012 revenues from continuing operations rose $3.5 million or 5.3% compared to 2011. Of this $2.2 million was due to the purchase of a Hilton Garden Inn during the second quarter of 2012. The additional increase is due to improved ADR.

Hotel and property operations expenses from continuing operations for the year ended 2012 increased $1.9 million or 3.7 percent. The majority of the expense variance was due to the acquisition mentioned above.

Interest Expense, Depreciation and Amortization Expense and General and Administration Expense

Interest expense from continuing operations decreased by $0.3 million, due primarily to declining principal balances. The depreciation and amortization expense from continuing operations decreased $0.2 million for 2012 over 2011, which was primarily caused by furniture, fixtures and equipment from acquisitions becoming fully depreciated. The general and administration expense from continuing operations for 2012 remained essentially flat.


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Impairment Losses

In 2012 we had $3.8 million of impairment losses in continuing operations and $6.4 million of impairment losses in discontinued operations for the year. In 2011 we had $6.5 million of impairment losses in continuing operations and $7.8 million of impairment losses in discontinued operations for the year. Discontinued operations consist of hotels held for sale at December 31, 2012 or sold during 2011 or 2012. See Note 6 in the footnotes to the consolidated financial statements for additional information including a discussion of our impairment analysis of our hotel assets.

Dispositions

In 2012, the $7.8 million of net gains on disposition of assets consists primarily of gains realized on nine property sales. In 2011, the $1.1 million of net gains on dispositions of assets in continuing operations is primarily related to the sale of the corporate office building. The $0.3 million in discontinued operations in 2011 is due mainly to the gain on the sale of Wichita North.

Income Tax

The income tax expense from continuing operations is the net result of the benefit related to the taxable loss from our taxable REIT subsidiary, the TRS Lessee, offset by a $6.3 million increase in the tax valuation allowance. Management believes the federal and state income tax rate for the TRS Lessee will be approximately 38%. The income tax benefit (expense) will vary based on the taxable earnings or loss of the TRS Lessee, a C corporation.

The income tax expense from continuing operations increased by approximately $6.8 million during 2012 compared to the year ago period. This is primarily the result of a $6.3 million tax valuation allowance determined as of December 31, 2012, in addition to an increased benefit resulting from a loss in continuing operations by the TRS Lessee in 2012. See Note 8 in the footnotes to the consolidated financial statements for additional information including a discussion of our tax valuation allowance.


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Comparison of the year ended December 31, 2011 to the year ended December 31, 2010

Operating results are summarized as follows for the years ended December 31 (table in thousands):

. . .

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