XNYS:INN Summit Hotel Properties Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________

FORM 10-Q
_________________


[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
 
OR

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission File Number:  001-35074 (Summit Hotel Properties, Inc.)
Commission File Number:  001-54273 (Summit Hotel OP, LP)

SUMMIT HOTEL PROPERTIES, INC.
SUMMIT HOTEL OP, LP
(Exact name of registrant as specified in its charter)
_________________
 
Maryland (Summit Hotel Properties, Inc.)
27-2962512 (Summit Hotel Properties, Inc.)
Delaware (Summit Hotel OP, LP)
27-0617340 (Summit Hotel OP, LP)
(State or other jurisdiction
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
 

2701 South Minnesota Avenue, Suite 2
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.
 
Summit Hotel Properties, Inc.  [x] Yes
[ ]  No
Summit Hotel OP, LP  [x] Yes
[ ]  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Summit Hotel Properties, Inc.  [x] Yes
[ ]  No
Summit Hotel OP, LP  [x] Yes
[ ]  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.
 
Summit Hotel Properties, Inc.
   
Large accelerated filer  [ ]
 
Accelerated filer  [ ]
Non-accelerated filer [x]
 
Smaller reporting company  [ ]
 
 
 

 
 
Summit Hotel OP, LP
   
Large accelerated filer  [ ]
 
Accelerated filer  [ ]
Non-accelerated filer [x]
 
Smaller reporting company  [ ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Summit Hotel Properties, Inc.  [ ] Yes
[x]  No
Summit Hotel OP, LP  [ ] Yes
[x]  No
 
As of May 10, 2012, the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 30,543,894 and the number of outstanding units of partnership interest in Summit Hotel OP, LP designated as “Common Units” was 37,378,000, including Common Units held by Summit Hotel Properties, Inc. and its wholly owned subsidiary which is the general partner of Summit Hotel OP, LP.
 
 
 

 
 
EXPLANATORY NOTE
 
This report combines the Quarterly Reports on Form 10-Q for the three months ended March 31, 2012 of Summit Hotel Properties, Inc., a Maryland corporation, and Summit Hotel OP, LP, a Delaware limited partnership.
 
Unless stated otherwise or the context otherwise requires, references in this report to:
 
 
“Summit REIT” mean Summit Hotel Properties, Inc., a Maryland corporation;
 
 
“Summit OP” or “our operating partnership” mean Summit Hotel OP, LP, a Delaware limited partnership, our operating partnership, and its consolidated subsidiaries; and
 
 
“we,” “our,” “us,” “our company” or “the company” mean Summit REIT, Summit OP and their consolidated subsidiaries taken together as one enterprise. When this report discusses or refers to activities occurring prior to February 14, 2011, the date on which our operations commenced, these references refer to our predecessor.
 
Summit REIT is the sole member of Summit Hotel GP, LLC, a Delaware limited liability company, which is the sole general partner (the “General Partner”) of Summit OP.  Effective as of February 14, 2011, our predecessor merged with and into Summit OP, with the former members of our predecessor exchanging their membership interests in our predecessor for common units of partnership interest of Summit OP (“Common Units”) and Summit OP succeeding to the business and assets of our predecessor.  Also, on February 14, 2011, Summit REIT completed its initial public offering (“IPO”) and a concurrent private placement of its common stock and contributed the net proceeds of the IPO and concurrent private placement to Summit OP in exchange for Common Units.  On October 28, 2011, Summit REIT completed a follow-on public offering of 2,000,000 shares of its 9.25% Series A cumulative redeemable preferred stock (“Series A Preferred Stock”).  As of March 31, 2012, Summit REIT owned approximately 73.0% of the issued and outstanding Common Units, including the sole general partnership interest held by the General Partner.  As of December 31, 2011, Summit REIT owned all of the issued and outstanding 9.25% Series A Cumulative Redeemable Preferred Units of Summit OP (“Series A Preferred Units”).  As the sole member of the General Partner, Summit REIT has exclusive control of Summit OP’s day-to-day management.  The remaining interests in Summit OP are owned by third parties, including the former members of our predecessor.
 
We believe combining the Quarterly Reports on Form 10-Q of Summit REIT and Summit OP into this single report provides the following benefits:
 
 
it enhances investors’ understanding of Summit REIT and Summit OP by enabling investors to view the business as a whole in the same manner as management views and operates the business;
 
 
it eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both Summit REIT and Summit OP; and
 
 
it creates time and cost efficiencies for both companies through the preparation of one combined report instead of two separate reports.
 
We believe it is important to understand the few differences between Summit REIT and Summit OP in the context of how Summit REIT and Summit OP operate as a consolidated company.  Summit REIT has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its short taxable year ending December 31, 2011 upon filing its federal income tax return for that year.
 
As of March 31, 2012, Summit REIT’s only material assets were its ownership of Common Units and Series A Preferred Units of Summit OP and its ownership of the membership interests in the General Partner.  As a result, Summit REIT does not conduct business itself, other than controlling, through the General Partner, Summit OP, raising capital through issuances of equity securities from time to time and guaranteeing certain debt of Summit OP and its subsidiaries.  Summit OP and its subsidiaries hold all the assets of the consolidated company.  Except for net proceeds from securities issuances by Summit REIT, which are contributed to Summit OP in exchange for partnership units of Summit OP, Summit OP and its subsidiaries generate capital from the operation of our business and through borrowings and the issuance of partnership units of Summit OP.
 
 
 

 
 
Stockholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of Summit REIT and those of Summit OP.  As of March 31, 2012, Summit OP’s capital interests include Common Units, representing general and limited partnership interests, and Series A Preferred Units.  The Common Units owned by limited partners other than Summit REIT and its subsidiaries are accounted for in partners’ capital in Summit OP’s consolidated financial statements and (within stockholders’ equity) as noncontrolling interests in Summit REIT’s consolidated financial statements.
 
In order to highlight the differences between Summit REIT and Summit OP, there are sections in this report that separately discuss Summit REIT and Summit OP, including separate financial statements and notes thereto and separate Exhibit 31 and Exhibit 32 certifications.  In the sections that combine disclosure for Summit REIT and Summit OP (i.e., where the disclosure refers to the consolidated company), this report refers to actions or holdings as our actions or holdings and, unless otherwise indicated, means the actions or holdings of Summit REIT and Summit OP and their respective subsidiaries, as one consolidated company.
 
As the sole member of the General Partner, Summit REIT consolidates Summit OP for financial reporting purposes, and Summit REIT does not have assets other than its investment in the General Partner and Summit OP.  Therefore, while stockholders’ equity and partners’ capital differ as discussed above, the assets and liabilities of Summit REIT and Summit OP are the same on their respective financial statements.
 
Finally, we refer to a number of other entities in this report as follows.  Unless the context otherwise requires or indicates, references in this report to:
 
 
“the LLC” refer to summit Hotel Properties, LLC and references to “our predecessor” include the LLC and its consolidated subsidiaries, including Summit Group of Scottsdale, Arizona, LLC (“Summit of Scottsdale”);
 
 
“our TRSs” refer to Summit Hotel TRS, Inc., a Delaware corporation, and Summit Hotel TRS II, Inc., a Delaware corporation, and any other taxable REIT subsidiaries (“TRSs”) that we may form in the future;
 
 
“our TRS lessees” refer to the wholly owned subsidiaries of our TRSs that lease our hotels from Summit OP or subsidiaries of Summit OP; and
 
 
“The Summit Group” refer to The Summit Group, Inc., our predecessor’s hotel management company, Company Manager and Class C Member, which is wholly owned by our Executive Chairman, Kerry W. Boekelheide.
 
 
 

 
 
TABLE OF CONTENTS
 
     
Page
PART I — FINANCIAL INFORMATION
 
1
       
Summit Hotel Properties, Inc. and Summit Hotel Properties, LLC (Predecessor)
   
Condensed Consolidated Balance Sheets — March 31, 2012 (unaudited) and December 31, 2011  
1
Condensed Consolidated Statements of Operations (unaudited) — Three Months Ended    
March 31, 2012 and 2011  
2
Condensed Consolidated Statements of Changes in Equity (unaudited) — Three Months Ended    
March 31, 2012  
3
Condensed Consolidated Statements of Cash Flows (unaudited) — Three Months Ended    
March 31, 2012 and 2011  
4
     
Summit Hotel OP, LP and Summit Hotel Properties, LLC (Predecessor)
   
Condensed Consolidated Balance Sheets — March 31, 2012 (unaudited) and December 31, 2011  
6
Condensed Consolidated Statements of Operations (unaudited) — Three Months Ended    
March 31, 2012 and 2011  
7
Condensed Consolidated Statements of Changes in Equity (unaudited) — Three Months Ended    
March 31, 2012  
8
Condensed Consolidated Statements of Cash Flows (unaudited) — Three Months Ended    
March 31, 2012 and 2011  
9
Notes to Condensed Consolidated Financial Statements  
11
     
  24
       
  36
       
  37
       
PART II — OTHER INFORMATION
 
  39
       
  39
       
  39
       
  39
       
  39
       
  39
       
  40
 
 
 

 
 
PART I — FINANCIAL INFORMATION
 
Item 1.               Financial Statements
 
SUMMIT HOTEL PROPERTIES, INC.
MARCH 31, 2012 (UNAUDITED) AND DECEMBER 31, 2011

 
   
2012
   
2011
 
ASSETS
           
             
             
  Cash and cash equivalents
  $ 10,869,944     $ 10,537,132  
  Restricted cash
    1,542,804       1,464,032  
  Trade receivables
    6,155,365       3,424,630  
  Prepaid expenses and other
    3,704,500       4,268,393  
  Land held for development
    20,294,973       20,294,973  
  Assets held for sale
    15,901,437       -  
  Property and equipment, net
    529,775,110       498,876,238  
  Deferred charges and other assets, net
    9,152,713       8,923,906  
  Deferred tax benefit
    2,658,704       2,195,820  
  Other assets
    4,022,180       4,019,870  
          TOTAL ASSETS
  $ 604,077,730     $ 554,004,994  
                 
                 
LIABILITIES AND EQUITY
               
                 
LIABILITIES
               
  Accounts payable
  $ 1,654,708     $ 1,670,994  
  Liabilities related to assets held for sale
    5,963,960       -  
  Accrued expenses
    13,913,620       15,781,577  
  Mortgages and notes payable
    271,459,463       217,103,728  
          TOTAL LIABILITIES
    292,991,751       234,556,299  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
EQUITY
               
  Preferred stock, $.01 par value per share, 100,000,000 shares authorized,
               
            2,000,000 issued and outstanding
    20,000       20,000  
  Common stock, $.01 par value per share,  450,000,000 shares authorized,
               
            27,278,000 issued and oustanding
    272,780       272,780  
  Additional paid-in capital
    288,705,701       288,902,331  
  Accumulated deficit and distributions
    (16,979,659 )     (11,020,151 )
  Total stockholders' equity
    272,018,822       278,174,960  
  Noncontrolling interest
    39,067,157       41,273,735  
          TOTAL EQUITY
    311,085,979       319,448,695  
                 
          TOTAL LIABILITIES AND EQUITY
  $ 604,077,730     $ 554,004,994  
 
(See Notes to Condensed Consolidated Financial Statements)
 
 
1

 
 
SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 
   
Summit Hotel Properties, Inc.
   
Summit Hotel Properties, Inc.
   
Summit Hotel Properties, LLC (Predecessor)
 
   
Three months ended 03/31/12
   
Period 2/14/11 through 3/31/11
   
Period 1/1/11 through 2/13/11
 
                   
REVENUE
                 
  Room revenue
  $ 39,020,137     $ 17,938,371     $ 13,759,563  
  Other hotel operations revenue
    985,840       354,485       322,437  
Total Revenue
    40,005,977       18,292,856       14,082,000  
                         
EXPENSES
                       
Hotel operating expenses
                       
  Rooms
    11,787,043       4,737,738       4,781,588  
  Other direct
    4,774,531       2,054,291       2,590,844  
  Other indirect
    11,218,315       4,788,729       4,540,476  
  Other
    210,686       73,038       73,038  
Total hotel operating expenses
    27,990,575       11,653,796       11,985,946  
  Depreciation and amortization
    8,223,683       3,299,314       3,299,314  
  Corporate general and administrative:
                       
     Salaries and other compensation
    811,638       367,018       -  
     Other
    865,550       765,138       -  
     Equity based compensation
    125,874       126,828       -  
  Hotel property acquisition costs
    579,938       -       -  
Total Expenses
    38,597,258       16,212,094       15,285,260  
                         
INCOME (LOSS) FROM OPERATIONS
    1,408,719       2,080,762       (1,203,260 )
                         
OTHER INCOME (EXPENSE)
                       
  Interest income
    1,391       3,947       7,139  
  Interest expense
    (3,456,365 )     (3,511,129 )     (4,489,606 )
Total Other Income (Expense)
    (3,454,974 )     (3,507,182 )     (4,482,467 )
                         
INCOME (LOSS) FROM CONTINUING OPERATIONS
                 
      BEFORE INCOME TAXES
    (2,046,255 )     (1,426,420 )     (5,685,727 )
                         
INCOME TAX (EXPENSE) BENEFIT
    267,755       (172,302 )     (325,239 )
                         
INCOME (LOSS) FROM CONTINUING OPERATIONS
    (1,778,500 )     (1,598,722 )     (6,010,966 )
                         
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    (1,026,310 )     (15,399 )     (195,590 )
                         
NET INCOME (LOSS)
    (2,804,810 )     (1,614,121 )     (6,206,556 )
                         
NET INCOME (LOSS) ATTRIBUTABLE TO
                       
    NONCONTROLLING INTEREST
    (1,070,328 )     (435,813 )     -  
                         
NET INCOME (LOSS) ATTRIBUTABLE TO SUMMIT
                 
     HOTEL PROPERTIES, INC./PREDECESSOR
    (1,734,482 )     (1,178,308 )     (6,206,556 )
                         
PREFERRED DIVIDENDS
    (1,156,250 )     -       -  
                         
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
  $ (2,890,732 )   $ (1,178,308 )   $ (6,206,556 )
   STOCKHOLDERS/MEMBERS
                       
                         
                         
Basic and diluted net income (loss) per share
                       
   from continuing operations:
  $ (0.08 )   $ (0.04 )        
Basic and diluted net income (loss) per share
                       
   from discontinued operations:
    (0.03 )     (0.00 )        
Basic and diluted net income (loss) per share:
  $ (0.11 )   $ (0.04 )        
Weighted-average common shares outstanding:
                       
  Basic and diluted
    27,278,000       27,278,000          
 
(See Notes to Condensed Consolidated Financial Statements)
 
 
2

 
 
SUMMIT HOTEL PROPERTIES, INC.
FOR THE THREE MONTHS ENDED MARCH 31, 2012

 
   
# of Shares
         
# of Shares
         
Accumulated
   
Total
             
   
of Preferred
   
Preferred
   
of Common
   
Common
   
Additional
   
Deficit and
   
Stockholders'
   
Noncontrolling
   
Total
 
   
Stock
   
Stock
   
Stock
   
Stock
   
Paid-In Capital
   
Distributions
   
Equity
   
Interest
   
Equity
 
                                                       
                                                       
BALANCES, JANUARY 1, 2012
    2,000,000     $ 20,000       27,278,000     $ 272,780     $ 288,902,331     $ (11,020,151 )   $ 278,174,960     $ 41,273,735     $ 319,448,695  
                                                                         
Summit Hotel Properties, Inc.
                                                                 
Registration and offering costs
    -       -       -       -       (322,504 )     -       (322,504 )     -       (322,504 )
Dividends paid
    -       -       -       -       -       (4,225,026 )     (4,225,026 )     (1,136,250 )     (5,361,276 )
Equity-based compensation
    -       -       -       -       125,874       -       125,874       -       125,874  
Net income (loss)
    -       -       -       -       -       (1,734,482 )     (1,734,482 )     (1,070,328 )     (2,804,810 )
                                                                         
BALANCES, MARCH 31, 2012
    2,000,000     $ 20,000       27,278,000     $ 272,780     $ 288,705,701     $ (16,979,659 )   $ 272,018,822     $ 39,067,157     $ 311,085,979  
 
(See Notes to Condensed Consolidated Financial Statements)
 
 
3

 
 
SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 
   
2012
   
2011
 
             
OPERATING ACTIVITIES
           
  Net income (loss)
  $ (2,804,810 )   $ (7,820,677 )
  Adjustments to reconcile net income (loss) to
               
   net cash from operating activities:
               
    Depreciation and amortization
    8,480,288       6,858,431  
    Amortization of prepaid lease
    11,850       11,850  
    Loss on impairment of assets
    932,000       -  
    Equity-based compensation
    125,874       126,828  
    Deferred tax benefit
    (462,884 )     -  
  Changes in operating assets and liabilities:
               
    Trade receivables
    (2,543,735 )     (719,418 )
    Prepaid expenses and other
    563,893       4,614,137  
    Accounts payable and related party accounts payable
    5,420       (202,188 )
    Income tax receivable
    (16,316 )     -  
    Accrued expenses
    (1,644,401 )     (1,597,474 )
    Restricted cash released (funded)
    258,361       550,539  
                 
NET CASH PROVIDED BY (USED IN)
    2,905,540       1,822,028  
  OPERATING ACTIVITIES
               
INVESTING ACTIVITIES
               
  Land and hotel acquisitions
    (29,738,000 )     -  
  Purchases of other property and equipment
    (6,832,551 )     (3,087,798 )
  Proceeds from asset dispositions, net of closing costs
    2,156       4,316  
  Restricted cash released (funded)
    (337,133 )     733,035  
                 
NET CASH PROVIDED BY (USED IN)
    (36,905,528 )     (2,350,447 )
  INVESTING ACTIVITIES
               
FINANCING ACTIVITIES
               
  Proceeds from issuance of debt
    111,550,022       456,059  
  Principal payments on debt
    (70,549,589 )     (225,178,820 )
  Financing fees on debt
    (983,853 )     (82,524 )
  Proceeds from equity offerings, net of offering costs
    (322,504 )     241,250,082  
  Distributions to members and dividends paid
    (5,361,276 )     (8,282,935 )
                 
NET CASH PROVIDED BY (USED IN)
    34,332,800       8,161,862  
  FINANCING ACTIVITIES
               
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    332,812       7,633,443  
                 
CASH AND CASH EQUIVALENTS
               
  BEGINNING OF PERIOD
    10,537,132       7,977,418  
 
               
  END OF PERIOD
  $ 10,869,944     $ 15,610,861  
 
(See Notes to Condensed Consolidated Financial Statements)
 
 
4

 
 
SUMMIT HOTEL PROPERTIES, INC. AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 
   
2012
   
2011
 
             
SUPPLEMENTAL DISCLOSURE OF
           
  CASH FLOW INFORMATION:
           
    Cash payments for interest
  $ 3,387,731     $ 9,121,513  
                 
    Cash payments for state income taxes, net of refunds
  $ 119,824     $ 19,302  
 
(See Notes to Condensed Consolidated Financial Statements)
 
 
5

 
 
SUMMIT HOTEL OP, LP
MARCH 31, 2012 (UNAUDITED) AND DECEMBER 31, 2011

 
   
2012
   
2011
 
ASSETS
           
             
             
  Cash and cash equivalents
  $ 10,869,944     $ 10,537,132  
  Restricted cash
    1,542,804       1,464,032  
  Trade receivables
    6,155,365       3,424,630  
  Receivable due from affiliate
    -       -  
  Prepaid expenses and other
    3,704,500       4,268,393  
  Land held for development
    20,294,973       20,294,973  
  Assets held for sale
    15,901,437       -  
  Property and equipment, net
    529,775,110       498,876,238  
  Deferred charges and other assets, net
    9,152,713       8,923,906  
  Deferred tax benefit
    2,658,704       2,195,820  
  Other assets
    4,022,180       4,019,870  
          TOTAL ASSETS
  $ 604,077,730     $ 554,004,994  
                 
                 
LIABILITIES AND EQUITY
               
                 
LIABILITIES
               
  Accounts payable
  $ 1,654,708     $ 1,670,994  
  Liabilities related to assets held for sale
    5,963,960       -  
  Accrued expenses
    13,913,620       15,781,577  
  Mortgages and notes payable
    271,459,463       217,103,728  
          TOTAL LIABILITIES
    292,991,751       234,556,299  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
EQUITY
               
  Partners' equity:
               
     Summit Hotel Properties, Inc., 27,278,000 common units outstanding
               
                  and 2,000,000 preferred units outstanding
    272,018,822       278,174,960  
     Unaffiliated limited partners, 10,100,000 common units outstanding
    39,067,157       41,273,735  
          TOTAL EQUITY
    311,085,979       319,448,695  
                 
          TOTAL LIABILITIES AND EQUITY
  $ 604,077,730     $ 554,004,994  
 
(See Notes to Condensed Consolidated Financial Statements)
 
 
6

 
 
SUMMIT HOTEL OP, LP AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 
   
Summit Hotel
OP, LP
   
Summit Hotel
OP, LP
   
Summit Hotel Properties, LLC (Predecessor)
 
   
Three months ended 03/31/12
   
Period 2/14/11
through
03/31/11
   
Period 1/1/11
through 2/13/11
 
                   
REVENUE
                 
  Room revenue
  $ 39,020,137     $ 17,938,371     $ 13,759,563  
  Other hotel operations revenue
    985,840       354,485       322,437  
Total Revenue
    40,005,977       18,292,856       14,082,000  
                         
EXPENSES
                       
Hotel operating expenses
                       
  Rooms
    11,787,043       4,737,738       4,781,588  
  Other direct
    4,774,531       2,054,291       2,590,844  
  Other indirect
    11,218,315       4,788,729       4,540,476  
  Other
    210,686       73,038       73,038  
Total hotel operating expenses
    27,990,575       11,653,796       11,985,946  
  Depreciation and amortization
    8,223,683       3,299,314       3,299,314  
  Corporate general and administrative:
                       
     Salaries and other compensation
    811,638       367,018       -  
     Other
    865,550       765,138       -  
     Equity based compensation
    125,874       126,828       -  
  Hotel property acquisition costs
    579,938       -       -  
  Loss on impairment of assets
    -       -       -  
Total Expenses
    38,597,258       16,212,094       15,285,260  
                         
INCOME (LOSS) FROM OPERATIONS
    1,408,719       2,080,762       (1,203,260 )
                         
OTHER INCOME (EXPENSE)
                       
  Interest income
    1,391       3,947       7,139  
  Interest expense
    (3,456,365 )     (3,511,129 )     (4,489,606 )
  Gain (loss) on disposal of assets
    -       -       -  
Total Other Income (Expense)
    (3,454,974 )     (3,507,182 )     (4,482,467 )
                         
INCOME (LOSS) FROM CONTINUING OPERATIONS
                 
   BEFORE INCOME TAXES
    (2,046,255 )     (1,426,420 )     (5,685,727 )
                         
INCOME TAX (EXPENSE) BENEFIT
    267,755       (172,302 )     (325,239 )
                         
INCOME (LOSS) FROM CONTINUING OPERATIONS
    (1,778,500 )     (1,598,722 )     (6,010,966 )
                         
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    (1,026,310 )     (15,399 )     (195,590 )
                         
NET INCOME (LOSS)
    (2,804,810 )     (1,614,121 )     (6,206,556 )
                         
PREFERRED DIVIDENDS
    (1,156,250 )     -       -  
                         
NET INCOME (LOSS) ATTRIBUTABLE TO
                       
     COMMON UNIT HOLDERS
    (3,961,060 )     (1,614,121 )     (6,206,556 )
                         
                         
Basic and diluted net income (loss) per unit
                       
   from continuing operations:
  $ (0.08 )   $ (0.04 )        
Basic and diluted net income (loss) per unit
                       
   from discontinued operations:
    (0.03 )     (0.00 )        
Basic and diluted net income (loss) per unit:
  $ (0.11 )   $ (0.04 )        
Weighted-average common units outstanding:
                       
  Basic and diluted
    37,378,000       37,378,000          
 
(See Notes to Condensed Consolidated Financial Statements)
 
 
7

 
 
SUMMIT HOTEL OP, LP
FOR THE THREE MONTHS ENDED MARCH 31, 2012

 
   
Preferred
   
Common
       
               
Total
       
   
Summit Hotel
   
Summit Hotel
   
Unaffiliated Limited
   
Total
 
   
Properties, Inc.
   
Properties, Inc.
   
Partners' Equity
   
Equity
 
                         
BALANCES, JANUARY 1, 2012
  $ 47,875,094     $ 230,299,866     $ 41,273,735     $ 319,448,695  
                                 
Summit Hotel OP, LP
                               
Registration and offering costs
    -       (322,504 )     -       (322,504 )
 Distributions
    (1,156,250 )     (3,068,776 )     (1,136,250 )     (5,361,276 )
Equity-based compensation
    -       125,874       -       125,874  
 Net income (loss)
    1,156,250       (2,890,732 )     (1,070,328 )     (2,804,810 )
                                 
BALANCES, MARCH 31, 2012
  $ 47,875,094     $ 224,143,728     $ 39,067,157     $ 311,085,979  
 
(See Notes to Condensed Consolidated Financial Statements)
 
 
8

 
 
SUMMIT HOTEL OP, LP AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 
   
2012
   
2011
 
             
OPERATING ACTIVITIES
           
  Net income (loss)
  $ (2,804,810 )   $ (7,820,677 )
  Adjustments to reconcile net income (loss) to
               
   net cash from operating activities:
               
    Depreciation and amortization
    8,480,288       6,858,431  
    Amortization of prepaid lease
    11,850       11,850  
    Loss on impairment of assets
    932,000       -  
    Equity-based compensation
    125,874       126,828  
    Deferred tax benefit
    (462,884 )     -  
  Changes in operating assets and liabilities:
               
    Trade receivables
    (2,543,735 )     (719,418 )
    Prepaid expenses and other
    563,893       4,614,137  
    Accounts payable and related party accounts payable
    5,420       (202,188 )
    Income tax receivable
    (16,316 )     -  
    Accrued expenses
    (1,644,401 )     (1,597,474 )
    Restricted cash released (funded)
    258,361       550,539  
                 
NET CASH PROVIDED BY (USED IN)
    2,905,540       1,822,028  
  OPERATING ACTIVITIES
               
INVESTING ACTIVITIES
               
  Land and hotel acquisitions
    (29,738,000 )     -  
  Purchases of other property and equipment
    (6,832,551 )     (3,087,798 )
  Proceeds from asset dispositions, net of closing costs
    2,156       4,316  
  Restricted cash released (funded)
    (337,133 )     733,035  
                 
NET CASH PROVIDED BY (USED IN)
    (36,905,528 )     (2,350,447 )
  INVESTING ACTIVITIES
               
FINANCING ACTIVITIES
               
  Proceeds from issuance of debt
    111,550,022       456,059  
  Principal payments on debt
    (70,549,589 )     (225,178,820 )
  Financing fees on debt
    (983,853 )     (82,524 )
  Contributions, net of offering costs
    (322,504 )     241,250,082  
  Distributions
    (5,361,276 )     (8,282,935 )
                 
NET CASH PROVIDED BY (USED IN)
    34,332,800       8,161,862  
  FINANCING ACTIVITIES
               
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    332,812       7,633,443  
                 
CASH AND CASH EQUIVALENTS
               
  BEGINNING OF PERIOD
    10,537,132       7,977,418  
 
               
  END OF PERIOD
  $ 10,869,944     $ 15,610,861  
 
(See Notes to Condensed Consolidated Financial Statements)
 
 
9

 
 
SUMMIT HOTEL OP, LP AND SUMMIT HOTEL
PROPERTIES, LLC (PREDECESSOR)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

 
   
2012
   
2011
 
             
SUPPLEMENTAL DISCLOSURE OF
           
  CASH FLOW INFORMATION:
           
    Cash payments for interest
  $ 3,387,731     $ 9,121,513  
                 
    Cash payments for state income taxes, net of refunds
  $ 119,824     $ 19,302  
 
(See Notes to Condensed Consolidated Financial Statements)
 
 
10

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
MARCH 31, 2012

 
NOTE 1 -                      SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS

Basis of Presentation
 
Summit Hotel Properties, Inc. (the “Company”) is a self-advised hotel investment company that was organized on June 30, 2010 as a Maryland corporation.  The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010.  On February 14, 2011, the Company closed on its initial public offering (“IPO”) of 26,000,000 shares of common stock and a concurrent private placement of 1,274,000 shares of common stock.  Effective February 14, 2011, the Operating Partnership and Summit Hotel Properties, LLC (the Predecessor”) completed the merger of the Predecessor with and into the Operating Partnership (the “Merger”). At the effective time of the Merger, the outstanding Class A, Class A-1, Class B and Class C membership interests in the Predecessor were issued and converted into, and cancelled in exchange for, a total of 9,993,992 common units of limited partnership interest in the Operating Partnership (“Common Units”), and the members of the Predecessor were admitted as limited partners of the Operating Partnership. Also effective February 14, 2011, The Summit Group, Inc., the parent company of the Predecessor (“The Summit Group”), contributed its 36% Class B membership interest in Summit Group of Scottsdale, Arizona LLC (“Summit of Scottsdale”) to the Operating Partnership in exchange for 74,829 Common Units and an unaffiliated third-party investor contributed its 15% Class C membership interest in Summit of Scottsdale to the Operating Partnership in exchange for 31,179 Common Units.  Effective February 14, 2011, the Company contributed the net proceeds of the IPO and the concurrent private placement to the Operating Partnership in exchange for an aggregate of 27,274,000 Common Units, including Common Units representing the sole general partnership interest in the Operating Partnership, which are held by a wholly owned subsidiary of the Company as the sole general partner of the Operating Partnership.  Unless the context otherwise requires, “we” and “our” refer to the Company and the Operating Partnership collectively.
 
While the Operating Partnership was the survivor of and the legal acquirer of the Predecessor in the merger, for accounting and financial reporting purposes, the Predecessor is considered the accounting acquirer in the Merger. As a result, the historical consolidated financial statements of the Predecessor are presented as the historical consolidated financial statements of the Company and the Operating Partnership after completion of the Merger and the contributions of the Class B and C membership interests in Summit of Scottsdale to the Operating Partnership (collectively, the “Reorganization Transaction”).
 
As a result of the Reorganization Transaction, the Operating Partnership and its subsidiaries acquired sole ownership of the 65 hotels in its initial portfolio. In addition, the Operating Partnership and its subsidiaries assumed the liabilities, including indebtedness, of the Predecessor and its subsidiaries.
 
As of March 31, 2012, our real estate investment portfolio consists of 73 upscale, upper midscale and midscale hotels with a total of 7,469 guestrooms located in small, mid-sized and suburban markets in 20 states (see Note 3 for new acquisitions).  The hotels are leased to subsidiaries (“TRS Lessees”) of the Company’s taxable REIT subsidiaries (“TRSs”).  The Company indirectly owns 100% of the outstanding equity interests in the TRS Lessees.
 
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on interim periods.  Accordingly, certain information and footnotes required by Generally Accepted Accounting Principles (“GAAP”) for complete financial statements have been condensed or 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 combined Annual Report on Form 10-K for the year ended December 31, 2011.  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.
 
 
11

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
Use of Estimates
 
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Consolidation
 
The accompanying consolidated financial statements of the Company include the accounts of the Company, the Operating Partnership, and the Operating Partnership’s subsidiaries.  The accompanying consolidated financial statements of the Operating Partnership include the accounts of the Operating Partnership and its subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
 
Reclassifications
 
Certain prior year amounts have been reclassified to conform to the current year presentation with no impact to net income, shareholders’ equity or cash flows.
 
Recent Accounting Pronouncements
 
In May 2011, FASB issued an update (ASU No. 2011-04) to ASC 820, Fair Value Measurements and Disclosures, to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and IFRS.  This update is effective for interim and fiscal years beginning after December 15, 2011.  Adoption of this ASU did not have a material impact on the consolidated financial statements.
 
In June 2011, FASB issued ASU 2011-05, Presentation of Comprehensive Income.  ASU 2011-05 requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in equity.  ASU 2011-05 is effective for interim and fiscal years beginning after December 15, 2011.  In December 2011, the FASB decided to defer the effective date of those changes in ASU 2011-05 that relate only to the presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive income in Accounting Standards Update 2011-05. The adoption of this ASU did not have an impact on the consolidated financial statements.
 
 
12

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
Revenue Recognition
 
Revenue is recognized when rooms are occupied and services have been rendered.
 
Fair Value
 
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 GAAP 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 must maximize the use of observable inputs and minimize the use of unobservable inputs.
 
Our estimates of the fair value of financial instruments as of March 31, 2012 were determined using available market information and appropriate valuation methods.  Considerable judgment is necessary to interpret market data and develop estimated fair value.  The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.
 
The carrying amounts of cash and cash equivalents, restricted cash, receivables, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments.
 
As of March 31, 2012, the aggregate fair value of our consolidated mortgages and notes payable, which includes the mortgage classified in liabilities related to assets held for sale, (Level 2) is approximately $279.0 million, compared to the aggregate carrying value of approximately $277.1 million on our consolidated balance sheet.  As of December 31, 2011, the aggregate fair value was approximately $217.4 million compared to the aggregate carrying value of approximately $217.1 million.
 
FASB ASC 820 also requires that non-financial assets and non-financial liabilities be disclosed at fair value in the financial statements if these items are measured at fair value on a non-recurring basis, such as in determining impairment loss or the value of assets held for sale as described below.
 
Depreciation and Amortization
 
Hotels are carried at cost and depreciated using the straight-line method over an estimated useful life of 27 to 40 years for buildings and two to 15 years for furniture, fixtures and equipment. We are required to make subjective assessments as to the useful lives and classification of our properties for purposes of determining the amount of depreciation expense to reflect each year with respect to the assets.  Depreciation and amortization expense consists of depreciation of real property, amortization of deferred financing costs and amortization of franchise fees.  Depreciation expense was $7,575,242 and $6,137,999 for the three months ended March 31, 2012 and 2011, respectively.  Amortization of deferred financing costs was $765,333 and $279,387 for the three months ended March 31, 2012 and 2011, respectively.  Amortization of franchise fees was $139,713 and $441,045 for the three months ended March 31, 2012 and 2011, respectively.
 
 
13

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
Long-Lived Assets and Impairment
 
We apply 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.
 
We monitor events and changes in circumstances for indicators that the carrying value of a hotel and related assets may be impaired. Factors that could trigger an impairment analysis include, among others: (1) significant underperformance relative to historical or projected operating results, (2) significant changes in the manner of use of a hotel or the strategy of our overall business, (3) a significant increase in competition, (4) a significant adverse change in legal factors or regulations or (5) significant negative industry or economic trends. When such factors are identified, we prepare an estimate of the undiscounted future cash flows, without interest charges, of the specific hotel and determine if the investment in such hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment is made to the carrying value of the hotel to reflect the hotel at fair value.
 
During the first quarter of 2012, the Company entered into a purchase and sale agreement to dispose of three hotels located in Twin Falls, ID for a purchase price of $16.5 million.  As a result of entering into this agreement, we have recorded an impairment loss of approximately $932,000 for those consolidated assets as the anticipated net proceeds are less than the carrying value.
 
Assets Held for Sale
 
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.  If assets are classified as held for sale, they are carried at the lower of carrying amount or fair value, less costs 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 our ongoing operations.
 
As a part of routine procedures, we periodically review 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.  During the period, we completed a comprehensive review of our investment strategy and of our existing hotel portfolio and our land held for development to identify properties which we believe are either non-core or no longer complement the business as required by FASB ASC 360.  We have reclassified three hotels located in Twin Falls, ID as held for sale as we have entered into a purchase and sale agreement on these hotels and plan to close on the sale during the second quarter of 2012.  (see Note 5 for discontinued operations)
 
 
14

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
Assets and liabilities held for sale consisted of the following as of March 31, 2012:
 
   
2012
 
       
Land
  $ 2,744,033  
Building
    11,853,540  
Furniture, fixtures and equipment
    1,303,864  
    $ 15,901,437  
         
Accounts payable
  $ 21,706  
Accrued expenses
    286,556  
Mortgage
    5,655,698  
    $ 5,963,960  
 
Acquisitions
 
We allocate the purchase price of acquisitions based on the fair value of the acquired assets and assumed liabilities. We determine the acquisition-date fair values of all assets and assumed liabilities using methods similar to those used by independent appraisers, for example, using a discounted cash flow analysis that utilizes appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions (see Note 3 for new acquisitions).  Acquisition costs are expensed as incurred.
 
Equity-Based Compensation
 
Effective as of the closing of the IPO, we adopted the 2011 Equity Incentive Plan, which provides for the grants of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other stock-based awards, or any combination of the foregoing. In accordance with FASB ASC 718, Equity-based compensation is recognized as an expense in the financial statements over the vesting period and measured at the fair value of the award on the date of grant. The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the equity-based award and the application of accounting guidance.
 
Income Taxes
 
We elected to be taxed as a REIT under the Code commencing with our short taxable year ending December 31, 2011. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, which does not necessarily equal net income as calculated in accordance with GAAP. As a REIT, we generally will not be subject to federal income tax (other than taxes paid by our TRSs) to the extent we currently distribute 100% of our REIT taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for the four taxable years following the year during which qualification is lost unless we satisfy certain relief provisions.
 
 
15

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
Commencing on February 14, 2011, we began to account for federal and state income taxes with respect to our TRSs using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statements’ carrying amounts of existing assets and liabilities and respective tax bases and operating losses and tax-credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

NOTE 2 -                      EQUITY

Common Shares
 
On February 14, 2011, the Company completed an underwritten public offering of 27,274,000 common shares, par value of $.01 per share.  Upon completion of the offering, the Company issued 4,000 common shares to our independent directors pursuant to the 2011 Equity Incentive Plan.  Effective February 14, 2011, the Company granted options to purchase 940,000 common shares (see Note 7).  The Company paid dividends of $.1125 per share on February 28, 2012.
 
Preferred Shares
 
On October 28, 2011, the Company completed an underwritten public offering of 2,000,000 shares of 9.25% Series A Cumulative Redeemable Preferred Stock, par value of $.01 per share.  Dividends are payable quarterly in arrears on or about the last day of February, May, August and November of each year.  The Company paid dividends of $.578125 per share on February 28, 2012.

NOTE 3 -                      ACQUISITIONS

We acquired five hotels during 2011. We purchased the Homewood Suites in Ridgeland, MS on April 15, 2011 for approximately $7.3 million, the Staybridge Suites in Glendale, CO on April 27, 2011 for approximately $10.0 million, the Holiday Inn in Duluth, GA on April 27, 2011 for approximately $7.0 million, and the Hilton Garden Inn in Duluth, GA for approximately $13.4 million on May 25, 2011.  We purchased the Courtyard by Marriott in El Paso, TX on July 28, 2011 for approximately $12.4 million.  The purchases were financed with borrowings under our revolving credit facility.  We did not acquire any intangibles or assume any debt related to these five acquisitions.
 
We have acquired three hotels during the first quarter of 2012.  We purchased the Courtyard by Marriott in Atlanta, GA on January 12, 2012 for approximately $28.5 million, the Hilton Garden Inn in Birmingham, AL for approximately $11.5 million on February 28, 2012, and another Hilton Garden Inn in Birmingham, AL for approximately $8.6 million on February 28, 2012.  The allocations of fair value for the assets acquired and liabilities assumed for the Courtyard by Marriott in Atlanta, GA are estimated based on available information, however, we are still in the process of finalizing our accounting for this transaction.
 
 
16

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
The following table illustrates our initial allocation of the aggregated purchase prices for the hotel acquisitions discussed above during 2011 and 2012:
 
   
2012
   
2011
 
   
(in thousands)
   
(in thousands)
 
             
Land
  $ 4,850     $ 7,254  
Hotel buildings and improvements
    40,950       41,368  
Furniture, fixtures and equipment
    2,825       1,428  
Current assets
    187       365  
Total assets acquired
  $ 48,812     $ 50,415  
Current liabilities
    63       398  
Debt acquired
    19,011       -  
Total liabilities acquired
    19,074       398  
Net assets acquired
  $ 29,738     $ 50,017  
 
Total revenues and net income (loss) for the three months ended March 31, 2012 of hotels acquired during the three months ended March 31, 2012 and the year ended December 31, 2011, included in the accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 2012, were as follows (in thousands):
 
   
 
 
   
For the three
months ended
 
2012 Acquisitions  
March 31, 2012
 
Revenue
  $ 1,781  
Net income
  $ 385  
         
       
   
For the three
months ended
 
2011 Acquisitions  
March 31, 2012
 
Revenue
  $ 3,972  
Net income
  $ 601  
 
The following unaudited condensed pro forma financial information presents the results of operations as if the 2012 and 2011 acquisitions had taken place on January 1, 2011.  The condensed pro forma financial information excludes discontinued operations and is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had taken place on January 1, 2011, nor does it purport to represent the results of operations for future periods.  The unaudited condensed pro forma financial information, excluding discontinued operations, is as follows (in thousands, except per share data):
 
 
17

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
   
For the three months ended
 
   
March 31, 2012
   
March 31, 2011
 
Revenue
  $ 41,091     $ 37,961  
Net income (loss)
  $ (4,095 )   $ (8,210 )
Net income (loss) per share
               
  attributable to common
               
  shareholders - basic and diluted
  $ (0.11 )   $ (0.22 )
 
 
NOTE 4 -                      DEBT OBLIGATIONS

Mortgage loans and notes payable at March 31, 2012 and December 31, 2011, are comprised of the following (dollars in millions):
 
   
2012
   
2011
 
   
(in millions)
   
(in millions)
 
             
Fixed-rate mortgage loans
  $ 158.3     $ 122.6  
Variable-rate mortgage loans
    118.8       94.5  
    $ 277.1     $ 217.1  
 
 
On February 14, 2012, we refinanced the MetaBank loan of $7.0 million.  It now matures February 1, 2017, is amortized over approximately 17 years and bears an annual interest rate of 4.95%.  There is a prepayment penalty of 3% if the loan is paid off in the first two years, 2% in year 3 and 1% in years 4 and 5.  The loan is collateralized by a first mortgage lien on two hotels containing 197 rooms.
 
On March 2, 2012, we entered into a $5.55 million term loan with General Electric Capital Corporation to purchase the 95-unit Hilton Garden Inn in Birmingham, Alabama.  The interest rate is fixed for three years at 5.51%.  On the third anniversary of the notice, the rate will convert to a variable rate of 90-day LIBOR plus 5.28%. The note matures on April 1, 2017, and is secured by a first priority lien on the 95-unit Hilton Garden Inn in Birmingham, Alabama.  The loan may not be prepaid during the first 12 months, and may be prepaid with a 2% prepayment fee during the second loan year, and 1% prepayment during the third loan year.  The note is cross-defaulted and cross-collateralized with the $6.5 million note on the 130-unit Hilton Garden Inn in Birmingham, Alabama.
 
On March 2, 2012, we entered into a $6.5 million term loan with General Electric Capital Corporation to purchase the 130-unit Hilton Garden Inn in Birmingham, Alabama.  The interest rate is fixed for three years at 5.51%.  On the third anniversary of the notice, the rate will convert to a variable rate of 90-day LIBOR plus 5.28%. The note matures on April 1, 2017, and is secured by a first priority lien on the 130-unit Hilton Garden Inn in Birmingham, Alabama.  The loan may not be prepaid during the first 12 months, and may be prepaid with a 2% prepayment fee during the second loan year, and 1% prepayment during the third loan year.  The note is cross-defaulted and cross-collateralized with the $5.55 million note on the 95-unit Hilton Garden Inn in Birmingham, Alabama.
 
 
18

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
On February 13, 2012, we closed on the consolidation and refinance of our four loans with ING Life Insurance and Annuity, which four loans collectively had an aggregate outstanding balance of approximately $69.5 million as of December 31, 2011.  The loans were consolidated into a single term loan with a principal balance of $67.5 million, maturity date of March 1, 2032, amortized over 20 years and bearing an annual interest rate of 6.10%, collateralized by first mortgage liens on 16 properties containing 1,639 guestrooms. The lender has the right to call the loan so as to be payable in full at March 1, 2019, March 1, 2024 or March 1, 2029.  If the loan is repaid prior to maturity, other than if called by the lender, there is a prepayment penalty equal to the greater of (i) 1% of the principal being repaid and (ii) the yield maintenance premium. Pursuant to the consolidation, the mortgages on the Courtyard by Marriott, Missoula, MT and the Courtyard by Marriott, Memphis, TN were released and new mortgages were taken on the Country Inn & Suites and the Holiday Inn Express in Charleston, West Virginia.
 
On January 12, 2012, the Company entered into a $19.0 million term loan with Empire Financial Services, Inc.  The interest rate is 6.00% fixed.  The loan matures February 1, 2017 and is secured by a first mortgage lien on the Courtyard by Marriott hotel in Atlanta, Georgia. The loan carries a prepayment penalty of one percent (1%) for prepayments occurring before January 13, 2013.

NOTE 5 -                      DISCONTINUED OPERATIONS

The Company has reclassified its consolidated financial statements of operations for the three months ended March 31, 2012 and 2011 to reflect discontinued operations of three consolidated hotel properties classified as held for sale during this period pursuant to the plan for hotel dispositions.  This reclassification has no impact on the Company’s net income or the net income per share.
 
 
19

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
Condensed results of operations for these hotel properties included in discontinued operations are as follows:
 
   
2012
   
2/14/11 to 3/31/11
   
1/1/11 to 2/13/11
 
                   
REVENUE
  $ 976,482     $ 516,293     $ 516,293  
                         
EXPENSES
                       
  Rooms
    334,644       178,862       178,862  
  Other direct
    113,705       66,916       66,916  
  Other indirect
    293,771       145,799       145,798  
  Corporate general and administrative
    18,165       10,214       -  
  Loss on impairment of assets
    932,000       -       -  
  Depreciation and amortization
    256,605       129,901       129,902  
      1,948,890       531,692       521,478  
                         
INCOME FROM OPERATIONS
    (972,408 )     (15,399 )     (5,185 )
                         
OTHER INCOME (EXPENSE)
                       
  Interest expense
    (69,138 )     -       (176,610 )
                         
INCOME (LOSS) BEFORE TAXES
    (1,041,546 )     (15,399 )     (181,795 )
                         
INCOME TAX (EXPENSE) BENEFIT
    15,236       -       (13,795 )
                         
INCOME (LOSS) FROM
                       
    DISCONTINUED OPERATIONS
  $ (1,026,310 )   $ (15,399 )   $ (195,590 )
                         
NET INCOME (LOSS) FROM DISCONTINUED
                 
    OPERATIONS ATTRIBUTABLE TO
                       
    NONCONTROLLING INTEREST
  $ (277,322 )   $ (4,161 )   $ (52,851 )
NET INCOME (LOSS) FROM DISCONTINUED
                 
    OPERATIONS ATTRIBUTABLE TO
                       
    COMMON STOCKHOLDERS/MEMBERS
  $ (748,988 )   $ (11,238 )   $ (142,739 )
 
NOTE 6 -                      NONCONTROLLING INTERESTS

As of March 31, 2012, limited partners of the Operating Partnership other than the Company owned 10,100,000 Common Units representing an approximate 27% limited partnership interest in the Operating Partnership.  Beginning on or after February 14, 2012, pursuant to the limited partnership agreement, redemption rights of the limited partners other than the Company enable those limited partners, at their election, to cause the Operating Partnership to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of shares of the Company’s common stock at the time of redemption, or at the Company’s option, shares of the Company’s common stock, on a one-for-one basis.  The number of shares of the Company’s common stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividends, share subdivisions or combinations.
 
The Company classifies these Common Units as noncontrolling interests as a component of permanent equity on the March 31, 2012 consolidated balance sheet. The share of net loss allocated to these Common Units is reported on the accompanying consolidated statement of operations for three months ended March 31, 2012 and the period of February 14, 2011 through March 31, 2011 as net loss attributable to noncontrolling interests. For the three months ended March 31, 2012 and the period from February 14, 2011 through March 31, 2011, no Common Units were redeemed.
 
 
20

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
NOTE 7 -                      EQUITY-BASED COMPENSATION

The Company measures and recognizes compensation expense for all equity-based payments.  The compensation expense is recognized based on the grant-date fair value of those awards.  All of the Company’s existing stock option awards have been determined to be equity-classified awards.
 
The Company’s 2011 Equity Incentive Plan provides for the granting of options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based award or incentive award up to an aggregate of 2,318,290 shares of the Company’s common stock.  Options granted may be either incentive stock options or nonqualified stock options.  Vesting terms may vary with each grant, and option terms are generally five to ten years.
 
Concurrent with the completion of the IPO, the Company granted options to purchase 940,000 shares of the Company’s common stock.  Options to purchase shares of common stock were granted with exercise prices equal to $9.75 per share, the fair value of the common stock on the date of grant.  Options vest on a ratable basis over a five year period following the date of grant and option terms are generally five to ten years following the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following assumptions:
 
   
2011
 
       
Expected dividend yield at date of grant
    5.09 %
Expected stock price volatility
    56.6 %
Risk-free interest rate
    2.57 %
Expected life of options (in years)
    6.5  
 
The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant.  The expected volatility was based on historical monthly price changes of a peer group of comparable entities based on the expected life of the options at the date of grant.  The expected life of options is the average number of years the Company estimates that options will be outstanding.  The Company considers groups of associates that have similar historical exercise behavior separately for valuation purposes.
 
 
21

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
The following table summarizes stock option activity under the Company’s 2011 Equity Incentive Plan for the three months ended March 31, 2012:
 
   
Number of
Options
   
Weighted
Average Exercise
Price
   
Weighted
Average
Remaining
Contractual
Terms (years)
   
Aggregate
Intrinsic Value
(in thousands)
 
                           
Outstanding at December 31, 2011
    940,000     $ 9.75       9.1     $ -    
Granted
    -     $ -       -     $ -    
Exercised
    -     $ -       -     $ -    
Cancelled
    -     $ -       -     $ -    
Outstanding at March 31, 2012
    940,000     $ 9.75       8.9     $ -   (1)
Exercisable at March 31, 2012
    188,000     $ 9.75       -     $ -    
                                   
(1) Exercise price exceeds our market price at March 31, 2012.
                           
 
Concurrent with the completion of the IPO, the Company granted 4,000 shares of stock to directors of the Company under the 2011 Equity Incentive Plan and recognized $39,000 of compensation expense. These shares vested concurrent with the grant.

NOTE 8 -                      EARNINGS (LOSS) PER SHARE

Diluted loss per share was the same as basic loss per share for the three months ended March 31, 2012 and 2011 as options to purchase 940,000 shares of common stock were anti-dilutive.

NOTE 9 -                      COMMITMENTS AND CONTINGENCIES

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 have entered into purchase agreements for the acquisition of several existing hotels and are currently engaged in performing due diligence investigations for some of properties.
 
In December 2011 and January 2012, arbitration hearings were held to determine our claim against Choice Hotels International, Inc. (“Choice”) that Choice wrongfully terminated 11 of our franchise agreements, and Choice’s counterclaims of fraudulent inducement, negligent misrepresentation, breach of contract and trademark infringement.  On April 4, 2012, the arbitration panel determined, among other things, that Choice improperly terminated the 11 franchise agreements, that Choice is not entitled to recover liquidated damages in connection with the 11 hotels and that the Company did not make any materially false or misleading statements to Choice or omit any material information. The panel awarded the Company damages in amount of $298,090 as full settlement of all claims submitted in the arbitration. Neither the Company nor Choice was entitled to recover attorney’s fees in connection with the matter. 
 
 
22

 
 
SUMMIT HOTEL PROPERTIES, INC., SUMMIT HOTEL OP, LP, AND SUMMIT HOTEL PROPERTIES, LLC (PREDECESSOR)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2012

 
NOTE 10 -                      SUBSEQUENT EVENTS

On April 4, 2012, we refinanced the National Western Life Insurance and Annuity loan on the SpringHill Suites by Marriott in Scottsdale, Arizona with a $5.25 million term loan with GE Capital Financing Inc.  The interest rate is 6.05%.  The loan matures May 1, 2017 and is secured by a first mortgage lien on the SpringHill by Marriott hotel in Scottsdale, Arizona. The loan carries a prepayment penalty of one percent (1%) plus defeasance.  The loan is cross-defaulted and cross-collateralized with the $9.75 million loan on the Courtyard by Marriott in Scottsdale, Arizona.
 
On April 4, 2012, we refinanced the National Western Life Insurance and Annuity loan on the Courtyard by Marriott in Scottsdale, Arizona with a $9.75 million term loan with GE Capital Financing Inc.  The interest rate is 6.05%.  The loan matures May 1, 2017 and is secured by a first mortgage lien on the Courtyard by Marriott hotel in Scottsdale, Arizona. The loan carries a prepayment penalty of one percent (1%) plus defeasance.  The loan is cross-defaulted and cross-collateralized with the $5.25 million loan on the SpringHill Suites by Marriott in Scottsdale, Arizona.
 
Pursuant to the terms of the First Amended and Restated Agreement of Limited Partnership of Summit Hotel OP, LP, as amended, the holders of the Common Units, beginning on February 14, 2012, may exercise their right to tender their Common Units for redemption. Any Common Units tendered for redemption will be redeemed either for shares of our common stock, on a one-for-one basis, or a cash amount based upon a ten day average of the closing sale price of our common stock on the New York Stock Exchange. Pursuant to our prospectus filed with the Securities Exchange Commission on March 1, 2012, holders of 3,265,894 Common Units tendered their Common Units for redemption, and these were redeemed on a one-for-one basis with shares of our common stock on April 5, 2012.
 
On April 25, 2012, the Compensation Committee approved the elements of the 2012 executive compensation program. The key elements of the program are annual base salary, a cash bonus opportunity in the form of an incentive award made pursuant to the Company’s 2011 Equity Incentive Plan and equity incentives in the form of both time-based and performance-based stock awards granted pursuant to the Company’s 2011 Equity Incentive Plan.