Summit Hotel Properties, Inc. (the “Company”) is a self-managed 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. Unless the context otherwise requires, “we,” “us,” and “our” refer to the Company and its consolidated subsidiaries.

 

We focus on owning primarily premium-branded select-service hotels.hotels with efficient operating models primarily in the Upscale segment of the lodging industry. At June 30, 2019,March 31, 2020, our portfolio consisted of 6972 hotels with a total of 10,71511,288 guestrooms located in 2423 states. As of March 31, 2020, we own 100% of the outstanding equity interests in 67 of our 72 hotels. We own a 51% controlling interest in 5 hotels that we acquired in 2019 through a joint venture. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, all of our hotels are leased to our taxable REIT subsidiaries (“TRS Lessees”).

The COVID-19 pandemic has caused the Company to temporarily suspend operations at 6 hotels containing 934 guestrooms. An additional 9 hotels, containing 1,278 guestrooms, each of which is adjacent to another of our taxable REIT subsidiary (“TRS”). We indirectly own 100%hotels, continue to accept reservations, but guests are being directed to stay at the adjacent properties. The Company has taken several actions to mitigate the effects of the outstanding equity interests inCOVID-19 pandemic on the Company, including the following:

 

 

We prepare our Condensed Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X ofunder the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the three and six months ended June 30, 2019March 31, 2020 may not be indicative of the results that may be expected for the full year of 2019.2020. For further information, please read the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.2019.

 

 

The Company allocates the purchase price of acquired hotel properties based on the fair value of the acquired land, land improvements, building, furniture, fixtures and equipment, identifiable intangible assets or liabilities, other assets and assumed liabilities. Intangible assets may include certain value associated with the on-going operations of the hotel business being acquired as part of the hotel property acquisition. Acquired intangible assets that derive their values from real property or an interest in real property, are inseparable from that real property or interest in real property, and do not produce or contribute to the production of income other than consideration for the use or occupancy of space, are recorded as a component of the related real estate asset in our Condensed Consolidated Financial Statements. We determineallocate the acquisition-date fair valuespurchase price of all assetsacquired hotel properties to land, building and assumed liabilities using methods similar to those used by independent appraisers, including using a discounted cash flow analysis that uses appropriate discount or capitalization ratesfurniture, fixtures and available market information.  Estimates of future cash flows areequipment based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. third-party independent appraisals.

If substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, the asset or asset group is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired hotel properties.

Our hotel properties and related assets are recorded at cost, less accumulated depreciation. We capitalize hotel development costs and the costs of significant additions and improvements that materially upgrade, increase the value or extend the useful life of the property. These costs may include hotel development, refurbishment, renovation, and remodeling expenditures, as well as certain indirect internal costs related to construction projects. If an asset requires a period of time in which to carry out the activities necessary to bring it to the condition necessary for its intended use, the interest cost incurred during that period as a result of expenditures for the asset is capitalized as part of the cost of the asset. We expense the cost of repairs and maintenance as incurred.

We monitor events and changes in circumstances for indicators that the carrying value of a hotel property or undeveloped land may be impaired. Additionally, we perform at least annual reviews to monitor the factors that could trigger an impairment.  Factors that we consider for an impairment analysis include, among others: i) significant underperformance relative to historical or anticipated operating results, ii) significant changes in the manner of use of a property or the strategy of our overall business, including changes in the estimated holding periods for hotel properties and land parcels, iii) a significant increase in competition, iv) a significant adverse change in legal factors or regulations, v) changes in values of comparable land or hotel sales, and vi) significant negative industry or economic trends. When such factors are identified, we prepare an estimate of the undiscounted future cash flows of the specific property and determine if the carrying amount of the asset is recoverable. If an impairment is identified, we estimate the fair value of the property based on discounted cash flows or sales price if the property is under contract and an adjustment is made to reduce the carrying value of the property to its estimated fair value. Due to the adverse effects of the COVID-19 pandemic across our entire portfolio of hotel properties, our impairment evaluation was completed for all of our hotel properties and we identified no impairment at March 31, 2020.

 

 

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At times, cash on deposit may exceed the federally insured limit. We maintain our cash with high credit quality financial institutions.

 

 

Restricted cash consists of certain funds maintained in escrow for property taxes, insurance, and certain capital expenditures. Funds may be disbursed from the account upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.

 

 

 

 

 

We use interest rate derivatives to hedge our risks on variable-rate debt. Interest rate derivatives could include swaps, caps, collars, and floors. We assess the effectiveness of each hedging relationship by comparing changes in fair value or cash flows of the derivative financial instrument with the changes in fair value or cash flows of the designated hedged item or transaction. All derivative financial instruments are recorded at fair value as a net asset or liability in our Condensed Consolidated Balance Sheets.

 

The change in the fair value of the hedging instruments is recorded in Other comprehensive income. Amounts deferred in Other comprehensive income will be reclassified to Interest expense in our Condensed Consolidated Statements of Operations in the period in which the hedged item affects earnings.

We have elected to be taxed as a REIT under certain provisions of the Internal Revenue Code. 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 TRS Lessees at regular corporate income tax rates) to the extent we 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 be unable to re-

 

Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

 

Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:

 

Our estimates of fair value 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. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.

 

We have elected a measurement alternative for equity investments, such as our purchase options, that do not have readily determinable fair values. Under the alternative, our purchase options are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, if any.

 

The preparation of financial statementsOur Condensed Consolidated Financial Statements are prepared in conformity with GAAP, which requires managementus to make certainestimates based on assumptions about current and, for some estimates, future economic and market conditions that affect reported amounts and related disclosures in our Condensed Consolidated Financial Statements. Although our current estimates contemplate current and expected future conditions, as applicable, it is reasonably possible that actual conditions could materially differ from our expectations, which could materially affect our expectations for our consolidated financial position and results of operations. In particular, a number of estimates have been and will continue to be affected by the ongoing COVID-19 pandemic.

The severity, magnitude and duration, of the COVID-19 pandemic, as well as its economic consequences, are uncertain, rapidly changing and difficult to predict. As such, there can be no assurance that our forecasts and underlying assumptions will be realized. As a result, our accounting estimates and assumptions that affectmay change over time, and actual results may differ materially from our expectations. We will continue to monitor the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dateeffects of the financial statements and the reported amounts of revenue and expenses during the reporting period. ActualCOVID-19 pandemic in future quarters. If actual results could differ from those estimates.our forecasts, this may result in future impairments of hotel properties, intangible assets, right-of-use assets, or investment securities such as our purchase options, or in incremental credit losses on our notes receivables.

 

Investment in hotel properties, net at June 30, 2019 and December 31, 2018 is as follows (in thousands):

 

On April 17, 2019, we completed the sale of sixWe did not sell any hotel properties as follows:

On February 12, 2019, we completed the sale of two2 hotel properties, the Country Inn & Suites - Charleston, WV and the Holiday Inn Express - Charleston, WV, for an aggregate sales price of $11.6 million. The sale of these properties resulted in the realization of an aggregate gain of $4.2 million.

We did not acquire any hotel properties during the sixthree months ended June 30, 2019 and 2018.

The results of operations of acquired properties are included in the Condensed Consolidated Statements of Operations beginning on their respective acquisition dates. The following unaudited pro forma information includes operating results for 6972 hotels owned as of June 30, 2019March 31, 2020 as if all such hotels had been owned by us since January 1, 2018.2019.  For hotels acquired by us after January 1, 20182019 (the "Acquired Hotels"), we have included in the pro forma information the financial results of each of the Acquired Hotels for the period prior to acquisition by us (the "Preacquisition"Pre-acquisition Period"). The financial results for the Pre-Acquisition Period were provided by the third-party owner of such Acquired Hotel prior to purchase by us and such information has not been audited or reviewed by our auditors or adjusted by us. For hotels sold by us between January 1, 20182019 and June 30, 2019March 31, 2020 (the "Disposed Hotels"), the unaudited pro forma information excludes the financial results, including gains on disposal of assets, of each of the Disposed Hotels for the period of ownership by us from January 1, 20182019 through the date that the Disposed Hotels were sold by us. The unaudited pro forma information is included to enable comparison of results for the current reporting period to results for the comparable period of the prior year and is not indicative of what actual results of operations would have been had the hotel acquisitions and dispositions taken place on or before January 1, 2018.2019. The pro forma amounts exclude the gain or loss on the sale of hotel properties during the three and six months ended June 30, 2019March 31, 2020 and 2018.2019. This information does not purport to be indicative of or represent results of operations for future periods.

The unaudited condensed pro forma financial information for the 6972 hotel properties owned at June 30, 2019March 31, 2020 for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 is as follows (in thousands, except per share):

 

Assets held for sale at June 30, 2019 consists of a land parcel in Flagstaff, AZ. Assets held for sale atMarch 31, 2020 and December 31, 20182019 included a land parcel in Flagstaff, AZ and two properties that were sold on February 12, 2019. Assets heldwith a carrying amount of $0.4 million. The land parcel is currently under contract for sale were as follows (in thousands):and is expected to close prior to December 31, 2020.

Investment in real estate loans, net at June 30, 2019 and December 31, 2018 is as follows (in thousands):

We are a mezzanine lender on threeThe amortized cost bases of our Investment in real estate loans, net approximate their fair value. The amortized cost bases and fair value of our Investment in real estate loans, net at March 31, 2020, by contractual maturity are as follows: $27.0 million in 2020 and $2.0 million in 2021.

We provided a mezzanine loan to fund up to $28.9 million for a mixed-use development project that includes a hotel property, retail space, and parking. The loan closed in the third quarter of 2019 and 2018has a stated interest rate of 9% and $1.0an initial term of 30 months. The loan is secured by a second mortgage on the development project and a pledge of the equity in the project owner. As of March 31, 2020, we have funded $9.5 million duringof the sixloan commitment. Upon completion of construction, we have an option to purchase a 90% interest in the hotel (the “Initial Purchase Option”). We also have the right to purchase the remaining interest in the hotel five years after the completion of construction. We have issued a $10.0 million letter of credit under our senior unsecured credit facility to secure the exercise of the Initial Purchase Option. As such, we have classified the loan as Investment in hotel properties, net in our Condensed Consolidated Balance Sheets at March 31, 2020. Interest income on the mezzanine loan will be recorded in our Consolidated Statement of Operations as it is earned. We have recorded the aggregate estimated fair value of the Initial Purchase Option totaling $2.8 million in Other assets and as a contra-asset to Investment in hotel properties, net. The contra-asset will be amortized as a component of non-cash interest income over the term of the real estate development loan using the straight-line method, which approximates the interest method. During the three months ended June 30, 2019 and 2018.March 31, 2020, we amortized $0.3 million as non-cash interest income.

On June 29, 2018 we sold the Holiday Inn in Duluth, GA and the Hilton Garden Inn in Duluth, GA for an aggregate selling price of $24.9 million. We provided seller financing oftotaling $3.6 million on the sale of these properties under two three-and-a-half-year second mortgage2, 3.5-year notes with a blended interest rate of 7.38%. The amortized cost bases secured by a $3.0 million second mortgage. As of these loans were $2.8March 31, 2020, there was $2.6 million at June 30, 2019.outstanding on the seller-financing loans.

We evaluated our Investment in Real Estate Loans approximate their fair value. The amortized cost bases andnotes receivable for potential credit losses by estimating the fair value of our Investment in Real Estate Loansthe collateral supporting each note receivable at June 30, 2019, by contractual maturityMarch 31, 2020 based on assumptions related to the expected future performance of the collateral assets and the resulting anticipated net selling value of the assets at capitalization rates that are common for the asset class. Our current estimate of credit losses of $2.5 million is recorded as follows: $2.4 million in 2019, $27.3 million inan allowance for credit losses at March 31, 2020 and $2.2 million in 2021.as a result of the effects of the COVID-19 pandemic.

 

At June 30, 2019March 31, 2020 and December 31, 2018,2019, our indebtedness was comprised of borrowings under our 2018 Unsecured Credit Facility (as defined below), the 2018 Term Loan (as defined below), the 2017 Term Loan (as defined below), the Joint Venture Credit Facility (as defined below), and indebtedness secured by first priority mortgage liens on various hotel properties. The weighted average interest rate, after giving effect to our interest rate derivatives, for all borrowings was 4.21%3.48% at June 30, 2019March 31, 2020 and 4.27%3.95% at December 31, 2018.2019.

Debt, net of debt issuance costs, is as follows (in thousands):

 

Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands):