Summit Hotel Properties(INN) - 2021 Q4 - Annual Report

Cautionary Statement About Forward-Looking Statements This section outlines forward-looking statements and inherent risks that could cause actual results to differ materially - The report contains forward-looking statements covered by safe harbor provisions of the Private Securities Litigation Reform Act of 1995[15] - Future plans, strategies, and expectations are based on certain assumptions and involve known and unknown risks, uncertainties, and other factors beyond the company's control[15] - Factors that may cause actual results to differ materially include the effects of the COVID-19 pandemic, financing risks, global economic conditions, travel spending levels, supply and demand factors, competition, increased operating costs, acquisition/disposition risks, tax issues, environmental uncertainties, and cybersecurity risks[16][18] PART I Item 1. Business Summit Hotel Properties, Inc. is a self-managed REIT focused on owning premium-branded, select-service hotels, detailing its portfolio, strategic growth, financing, and regulatory environment - Summit Hotel Properties, Inc. is a self-managed hotel investment company, organized in June 2010 and completed its initial public offering in February 2011, focusing on owning primarily premium-branded, select-service hotels[21] - As of December 31, 2021, the portfolio consisted of 74 hotels with 11,518 guestrooms in 23 states; 61 hotels are 100% owned, and 13 are owned through a 51% controlling interest in a joint venture[21] - Post-NCI Transaction (January 2022), the portfolio expanded to 100 hotels with 15,051 guestrooms in 24 states, with 39 hotels held through the joint venture[25] - 90% of guestrooms were located in the top 50 metropolitan statistical areas (MSAs) as of December 31, 2021, and all hotels operate under premium franchise brands (Marriott, Hilton, Hyatt, IHG)[23] - The company's business strategy includes selectively allocating capital, evolving its portfolio through asset sales and acquisitions, and intensive asset management, focusing on premium-branded hotels in the Upscale segment[30][32] - The financing strategy relies on cash from operations, working capital, borrowings under senior credit facilities, term debt, equity issuances, strategic hotel sales, and joint venture contributions, aiming for conservative debt levels[39][41] - The company faces significant competition for hotel investments and guests, which can affect occupancy, ADR, and RevPAR[43][44] - Properties are subject to various regulations, including ADA and environmental laws, requiring ongoing compliance and potential expenditures[46][47][48] - The company is committed to its Environmental, Social and Governance (ESG) program, focusing on sustainability, community engagement, and diversity[52] - As a REIT, the company cannot directly operate hotels; all hotels are leased to taxable REIT subsidiaries (TRSs) and managed by third-party companies[28][55] - As of February 11, 2022, the company had 63 corporate employees and is committed to cultivating an inclusive work environment with competitive compensation and benefits[57][60] Item 1A. Risk Factors This section outlines material risks that could adversely affect the company's business, financial condition, results of operations, and stock price - The company's business strategy and growth prospects are dependent on achieving revenue and net income growth from anticipated increases in hotel demand and general economic conditions, which are uncertain[72] - The COVID-19 pandemic has materially adversely affected and may continue to affect financial position and results, with recovery dependent on leisure travel and a slower recovery of business/group travel[73][120][121] - Fixed operating expenses may not decrease with revenue declines, and certain costs (wages, benefits, insurance) may exceed inflation, potentially reducing profitability[74][75] - Risks related to acquisitions include competition, inability to obtain financing, and failure to successfully integrate acquired hotels or achieve expected operating performance[76][79] - The company has significant debt, and its organizational documents do not limit additional indebtedness, which could reduce cash flow for operations and dividends, and increase vulnerability to adverse economic conditions[98][99] - Restrictive covenants in debt, hotel management, and franchise agreements could limit operational flexibility, and an increase in interest rates would raise costs on variable-rate debt[89][102][106] - Reliance on external capital sources (debt, equity, joint venture contributions) to fund future needs, with access dependent on market conditions and financial performance[94][95][96] - System security risks, data breaches, and cyber-attacks could disrupt operations, increase expenses, and damage reputation, despite existing cyber insurance and indemnities[112][115] - Joint venture investments carry risks such as lack of sole decision-making authority, disputes with partners, and financial condition of partners[117][118] - Failure to maintain REIT qualification would result in corporate taxation, substantially reducing funds for distributions and impairing business expansion[166][168] - The 100% prohibited transactions tax may limit the ability to dispose of properties, and successful IRS challenges could result in material tax liability[186] - The company could incur uninsured and underinsured losses from catastrophic events, terrorism, data breaches, or business disruptions, which may not be fully covered by insurance[188] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[192] Item 2. Properties This section details the company's hotel portfolio, categorized by STR Chain Scale and brand, and updates on the significant NCI Transaction - As of December 31, 2021, the portfolio consisted of 74 hotel properties with a total of 11,518 guestrooms[193] Hotel Portfolio by STR Chain Scale (December 31, 2021) | STR Chain Scale | Number of Hotels | Number of Guestrooms | | :-------------- | :--------------- | :------------------- | | Upper-upscale | 3 | 400 | | Upscale | 61 | 9,647 | | Upper-midscale | 10 | 1,471 | | Total | 74 | 11,518 | - In January 2022, the NCI Transaction significantly expanded the portfolio with the acquisition of 26 hotel properties (3,533 guestrooms) and two parking structures for $766.0 million[196] - The company owns two parcels of undeveloped land, one designated as held for sale, suitable for hotel or restaurant development[197] - As of December 31, 2021, four hotel properties are subject to ground lease agreements, requiring rental payments and other charges[198][199][202] - All hotel properties operate under franchise agreements (10-20 year terms) with Marriott, Hilton, Hyatt, or IHG, which provide access to reservation systems, marketing, and loyalty programs[200][201] - All hotel properties are operated by professional third-party management companies; as of December 31, 2021, Aimbridge Hospitality managed 35 of 74 hotels, increasing to 61 of 100 hotels post-NCI Transaction (February 11, 2022)[203] Item 3. Legal Proceedings The company is involved in routine litigation but currently has no pending legal actions expected to materially affect its financial position or results of operations - The company is involved from time to time in litigation arising in the ordinary course of business[205] - There are currently no pending legal actions that the company believes would have a material adverse effect on its financial position or results of operations[205] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[206] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section provides information on the trading market for the company's common stock, stockholder details, and distribution policies, highlighting the suspension of common stock dividends - The company's common stock began trading on the NYSE on February 9, 2011, under the symbol "INN"[209] - The last reported sale price for common stock on the NYSE as of February 11, 2022, was $9.85 per share[209] - As of February 11, 2022, there were 106,340,958 shares of common stock outstanding, held by 280 record holders[9][210] - As a REIT, the company must distribute annually at least 90% of its REIT taxable income to stockholders[211] - The company suspended the declaration and payment of dividends on common stock and operating partnership units beginning in Q1 2020 due to the negative financial effects of the Pandemic[214] - Restrictions from credit facility modifications prevent declaring and paying common stock dividends (other than those required for REIT status) through March 31, 2022[214] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[215] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, focusing on the impact of the COVID-19 pandemic, strategic responses, and performance metrics - U.S. lodging industry demand is generally correlated to macroeconomic trends (GDP, corporate profits, employment) and affected by travel-related health and safety restrictions[216] - The COVID-19 Pandemic caused a significant downturn in the global and U.S. economies, and the travel and lodging industries, leading to a substantial decline in revenues, profitability, and cash flows from operations[217] - During 2021, the company experienced significant business improvement, primarily driven by leisure travel and modest recovery in other demand segments, but is still recovering to pre-Pandemic performance levels[218] - Management took actions to mitigate Pandemic effects, including adjusting operational costs, enhancing liquidity through convertible notes, preferred share offerings, and joint venture contributions, and implementing health and safety protocols[220][221][222][223][225] - Key operating performance indicators include Occupancy, Average Daily Rate (ADR), and Revenue Per Available Room (RevPAR), which are used to evaluate individual and overall hotel performance[226]227 - The company continuously evaluates acquisitions and dispositions to refine its portfolio, including the NCI Transaction in January 2022, which added 26 hotels[228][231] - Revenues are primarily from room sales, with operating expenses including fixed costs (e.g., property taxes, insurance) and variable costs (e.g., labor, supplies); cost reduction initiatives partially offset expense increases[233][234][235] Key Operating Metrics (Total Portfolio) 2021 vs. 2020 (in thousands, except percentages) | Metric | 2021 | 2020 | Dollar Change | Percentage Change | | :-------------------- | :------- | :------- | :------------ | :---------------- | | Room Revenue | $334,338 | $215,506 | $118,832 | 55.1% | | Food and Beverage Revenue | $7,299 | $6,444 | $855 | 13.3% | | Other Revenue | $20,289 | $12,513 | $7,776 | 62.1% | | Total Revenues | $361,926 | $234,463 | $127,463 | 54.4% | | Room Expense | $74,781 | $53,784 | $20,997 | 39.0% | | Food and Beverage Expense | $4,856 | $5,416 | $(560) | (10.3)% | | Other Hotel Operating Expenses | $123,626 | $96,506 | $27,120 | 28.1% | | Total Expenses | $203,263 | $155,706 | $47,557 | 30.5% | | Occupancy | 62.3% | 43.3% | n/a | 43.6% | | ADR | $129.70 | $120.36 | $9.34 | 7.8% | | RevPAR | $80.74 | $52.16 | $28.58 | 54.8% | Other Consolidated Income and Expenses 2021 vs. 2020 (in thousands) | Item | 2021 | 2020 | Dollar Change | Percentage Change | | :-------------------------------- | :------- | :------- | :------------ | :---------------- | | Property taxes, insurance and other | $41,350 | $44,691 | $(3,341) | (7.5)% | | Management fees | $9,858 | $6,276 | $3,582 | 57.1% | | Depreciation and amortization | $105,955 | $109,619 | $(3,664) | (3.3)% | | Corporate general and administrative | $29,428 | $20,985 | $8,443 | 40.2% | | Transaction costs | $3,849 | $0 | $3,849 | (1) | | (Reversal of) provision for credit losses | $(2,632) | $4,821 | $(7,453) | (1) | | Loss on impairment and write-off of assets | $4,361 | $1,759 | $2,602 | 147.9% | | Gain (loss) on disposal of assets, net | $240 | $(16) | $256 | (1) | | Interest expense | $43,368 | $43,300 | $68 | 0.2% | | Other income, net | $9,523 | $4,841 | $4,682 | 96.7% | | Income tax expense | $1,473 | $1,376 | $97 | 7.0% | FFO and AFFO (in thousands, except per share/unit amounts) | Metric | 2021 | 2020 | 2019 | | :------------------------------------ | :------- | :------- | :------- | | Net (loss) income applicable to common shares and common units | $(83,829) | $(158,448) | $67,929 | | FFO applicable to common shares and common units | $17,300 | $(53,463) | $122,491 | | AFFO applicable to common shares and common units | $36,782 | $(38,569) | $130,356 | | FFO per common share/common unit | $0.16 | $(0.51) | $1.17 | | AFFO per common share/common unit | $0.35 | $(0.37) | $1.25 | EBITDA, EBITDAre and Adjusted EBITDAre (in thousands) | Metric | 2021 | 2020 | 2019 | | :-------------------- | :------- | :------- | :------- | | Net (loss) income | $(68,584) | $(149,245) | $82,348 | | EBITDA | $82,204 | $4,905 | $224,045 | | EBITDAre | $86,325 | $6,680 | $181,148 | | Adjusted EBITDAre | $90,495 | $14,414 | $185,263 | - Adjusted Funds From Operations (AFFO) increased by $75.4 million in 2021 over the prior year, and Adjusted EBITDAre increased by $76.1 million, both primarily due to improved business performance driven by leisure travel and modest recovery in other demand segments[255][264] - Short-term liquidity requirements include operating expenses, capital expenditures, interest payments, and debt principal; long-term requirements include acquisitions, renovations, and dividend distributions[268][269] - As of February 11, 2022, total outstanding indebtedness was $1.1 billion, including $287.5 million in Convertible Notes and $143.5 million under the Joint Venture Credit Facility[280][281] - The company funded $20.4 million in capital expenditures in 2021 and anticipates spending $60.0 million to $80.0 million in 2022, funded by cash on hand, working capital, or borrowings[290] Cash Flow Summary (in thousands) | Activity | 2021 | 2020 | Change | | :------------------------------------ | :------- | :------- | :------- | | Net cash provided by (used in) operating activities | $66,051 | $(42,052) | $108,103 | | Net cash used in investing activities | $(74,244) | $(30,710) | $(43,534) | | Net cash provided by financing activities | $66,241 | $41,825 | $24,416 | | Net change in cash, cash equivalents and restricted cash | $58,048 | $(30,937) | $88,985 | - Operating cash flow increased significantly in 2021 due to reduced net loss and increased operating activity; investing cash use increased due to hotel acquisitions and escrow deposits, partially offset by mezzanine loan repayments[292] - Financing cash flow increased due to joint venture contributions and preferred stock issuance, partially offset by preferred stock redemption and debt repayments[292] - Critical accounting estimates, particularly asset impairment, involve substantial management judgment due to Pandemic-related volatility in revenue forecasts[294] - The company manages cybersecurity risks with franchisors and property managers, maintaining cyber insurance and indemnifications, and has not experienced material cyber incidents[295] - Recent developments include management and board transitions, the NCI Transaction, and the declaration of cash dividends for preferred stock and Series Z Preferred Units[296][297][298][299] Item 7A. Quantitative and Qualitative Disclosures about Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk, and its strategies for managing this risk through derivative financial instruments - The primary market risk exposure is interest rate risk, specifically to 30-day LIBOR[301] - The company uses derivative financial instruments, such as interest rate swaps, to manage interest rate volatility and add stability to interest expense[109][301] - LIBOR will cease to be available after 2021, and the transition to SOFR or another benchmark interest rate may result in a different calculation of variable interest rates, potentially increasing costs[107][302] - Credit facilities (2018 Senior Credit Facility, 2018 Term Loan, 2017 Term Loan, Joint Venture Credit Facility) have been amended to accommodate the transition from LIBOR to SOFR[302] - As of December 31, 2021, the company was party to four interest rate swaps with an aggregate notional amount of $400.0 million[303] - After giving effect to interest rate derivatives, 77.9% of the company's debt had fixed interest rates and 22.1% had variable interest rates at December 31, 2021 (compared to 49.5% fixed and 50.5% variable at December 31, 2020)[303] - A 1.0% increase or decrease in interest rates would decrease or increase, respectively, cash flows by approximately $2.4 million per year[303] Item 8. Financial Statements and Supplementary Data This item incorporates by reference the company's audited financial statements and supplementary data, including consolidated balance sheets, statements of operations, and cash flows - The financial statements and supplementary data required by this item are included on pages F-1 through F-46 of this Annual Report on Form 10-K[305] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure matters - There were no changes in and disagreements with accountants on accounting and financial disclosure[306] Item 9A. Controls and Procedures Management evaluated the effectiveness of disclosure controls and internal control over financial reporting as of December 31, 2021, concluding they were effective - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of December 31, 2021[307] - Management concluded that the company had effective internal control over financial reporting as of December 31, 2021, based on criteria established in the Internal Control—Integrated Framework (2013) by COSO[310] - Ernst & Young LLP, the independent registered public accounting firm, issued an unqualified auditor's attestation report on management's assessment of the effectiveness of internal control over financial reporting[311] - There were no material changes in internal control over financial reporting during the three months ended December 31, 2021[312] Item 9B. Other Information The company filed articles supplementary on February 22, 2022, to reclassify 5,000,000 authorized but unissued shares of Series D Preferred Stock as preferred stock without designation - On February 22, 2022, the company filed articles supplementary to reclassify 5,000,000 authorized but unissued shares of Series D Preferred Stock as shares of preferred stock without designation[313] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - This item is not applicable[314] PART III Item 10. Directors, Executive Officers and Corporate Governance This item incorporates information from the 2022 Proxy Statement and notes recent transitions in the executive management team and board of directors - Information required by this item is incorporated by reference to the company's Definitive Proxy Statement on Schedule 14A for the 2022 Annual Meeting of Stockholders[317] - Daniel P. Hansen, Executive Chairman, retired effective January 1, 2022, and will continue to serve as a non-employee director[318] - Jeffrey W. Jones was appointed non-executive Chairman of the Board, effective January 1, 2022[319] Item 11. Executive Compensation This item incorporates information regarding executive compensation by reference to the company's 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's 2022 Proxy Statement[320] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides details on securities authorized for issuance under equity compensation plans and common shares retained for employee taxes upon vesting of equity awards Securities Authorized for Issuance Under Equity Compensation Plans (December 31, 2021) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options | Weighted Average Exercise Price of Outstanding Options | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | | :------------ | :--------------------------------------------------- | :------------------------------------- | :----------------------------------------------------------------- | | Approved by Stockholders | — | $0.00 | 3,662,423 | Common Shares Retained for Employee Taxes Upon Vesting of Equity Awards (Year Ended December 31, 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | | :----- | :--------------------- | :--------------------------- | | March 1, 2021 - March 31, 2021 | 155,605 | $10.29 | | December 1, 2021 - December 31, 2021 | 111,863 | $9.76 | | Total | 267,468 | | - Other information required by this item is incorporated by reference to the company's 2022 Proxy Statement[322] Item 13. Certain Relationships and Related Transactions, and Director Independence This item incorporates information regarding certain relationships, related transactions, and director independence by reference to the company's 2022 Proxy Statement - Information required by this item is incorporated by reference to the company's 2022 Proxy Statement[323] Item 14. Principal Accountant Fees and Services This item incorporates information regarding principal accountant fees and services by reference to the company's 2022 Proxy Statement - Information required by this item regarding the principal accountant, Ernst & Young LLP, is incorporated by reference to the company's 2022 Proxy Statement[324] PART IV Item 15. Exhibits and Financial Statement Schedules This item lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K - Financial Statements are included on pages F-1 through F-42[326] - Financial Statement Schedule III — Real Estate and Accumulated Depreciation is included on pages F-43 through F-46[327] - A comprehensive list of exhibits, including organizational documents, debt agreements, equity incentive plans, and employment agreements, is filed as part of this report[329][330][331][332][333][334] SIGNATURES This section confirms the report's signing date and lists the key individuals who signed it - The report was signed on February 23, 2022[339] - Signatories include Jonathan P. Stanner (President, CEO, and Director), William H. Conkling (Executive Vice President and Chief Financial Officer), Paul Ruiz (Senior Vice President and Chief Accounting Officer), Jeffrey W. Jones (Chairman of the Board), and other Directors[339][340] INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Reports of Independent Registered Public Accounting Firm Ernst & Young LLP provided an unqualified opinion on the company's consolidated financial statements and the effectiveness of its internal control over financial reporting - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements of Summit Hotel Properties, Inc. as of December 31, 2021 and 2020, and for the three years ended December 31, 2021[345] - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[346][355] - The critical audit matter identified was the impairment assessment for investment in hotel properties, due to the subjective auditor judgment required in evaluating management's identification and assessment of impairment indicators[351] Consolidated Balance Sheets The consolidated balance sheets present the company's financial position as of December 31, 2021, and 2020, showing assets, liabilities, and equity Consolidated Balance Sheet Highlights (in thousands) | Item | December 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------------ | :------------------ | | Total assets | $2,264,902 | $2,233,019 | | Investment in hotel properties, net | $2,091,973 | $2,105,946 | | Cash and cash equivalents | $64,485 | $20,719 | | Restricted cash | $32,459 | $18,177 | | Investment in real estate loans, net | $0 | $23,689 | | Total liabilities | $1,157,710 | $1,180,956 | | Debt, net of debt issuance costs | $1,069,797 | $1,094,745 | | Total equity | $1,107,192 | $1,052,063 | Consolidated Statements of Operations The consolidated statements of operations show the company's financial performance for the years ended December 31, 2021, 2020, and 2019, reporting a net loss in 2021 and 2020 with a significant reduction in loss in 2021 Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Item | 2021 | 2020 | 2019 | | :------------------------------------ | :------- | :------- | :------- | | Total revenues | $361,926 | $234,463 | $549,348 | | Total expenses | $395,432 | $343,857 | $475,360 | | Operating (loss) income | $(33,266) | $(109,410) | $119,406 | | Net (loss) income | $(68,584) | $(149,245) | $82,348 | | Net (loss) income attributable to common stockholders | $(83,714) | $(158,177) | $67,772 | | Basic and diluted (loss) earnings per share | $(0.80) | $(1.52) | $0.65 | | Dividends per common share | $0 | $0.18 | $0.72 | Consolidated Statements of Comprehensive Income (Loss) The consolidated statements of comprehensive income (loss) present the net income (loss) and other comprehensive income (loss) for the years ended December 31, 2021, 2020, and 2019, showing a significant reduction in comprehensive loss in 2021 Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Item | 2021 | 2020 | 2019 | | :------------------------------------ | :------- | :------- | :------- | | Net (loss) income | $(68,584) | $(149,245) | $82,348 | | Changes in fair value of derivative financial instruments | $15,127 | $(14,673) | $(14,596) | | Comprehensive (loss) income | $(53,457) | $(163,918) | $67,752 | | Comprehensive (loss) income attributable to common stockholders | $(68,608) | $(172,825) | $53,210 | Consolidated Statements of Changes in Equity The consolidated statements of changes in equity detail movements in stockholders' equity and non-controlling interests for the years ended December 31, 2021, 2020, and 2019, reflecting preferred stock issuances and redemptions, joint venture contributions, and net losses Total Equity (in thousands) | Year | Amount | | :--- | :------- | | 2021 | $1,107,192 | | 2020 | $1,052,063 | | 2019 | $1,243,390 | - Net proceeds from the sale of preferred stock in 2021 amounted to $96,617 thousand[371] - Redemption of preferred stock in 2021 totaled $(75,000) thousand[371] - Contribution by non-controlling interest in joint venture in 2021 was $115,546 thousand[371] - Net loss attributable to common stockholders in 2021 was $(83,714) thousand[366] Consolidated Statements of Cash Flows The consolidated statements of cash flows provide a summary of cash flows from operating, investing, and financing activities for the years ended December 31, 2021, 2020, and 2019, showing a significant increase in cash from operating activities in 2021 Consolidated Statements of Cash Flows Summary (in thousands) | Activity | 2021 | 2020 | 2019 | | :------------------------------------ | :------- | :------- | :------- | | Net cash provided by (used in) operating activities | $66,051 | $(42,052) | $148,478 | | Net cash used in investing activities | $(74,244) | $(30,710) | $(182,164) | | Net cash provided by financing activities | $66,241 | $41,825 | $30,963 | | Net change in cash, cash equivalents and restricted cash | $58,048 | $(30,937) | $(2,723) | | Cash, cash equivalents and restricted cash (End of period) | $96,944 | $38,896 | $69,833 | - Net cash provided by operating activities increased by $108,103 thousand in 2021 compared to 2020, primarily due to a decrease in net loss and an increase in accruals at hotel properties[291][292] - Net cash used in investing activities increased by $43,534 thousand in 2021, mainly due to hotel acquisitions ($59.0 million) and increased escrow deposits, partially offset by mezzanine loan repayments[291][292] - Net cash provided by financing activities increased by $24,416 thousand in 2021, driven by joint venture partner contributions ($115.5 million) and preferred stock issuance ($96.6 million), partially offset by preferred stock redemption and debt repayments[291][292] Notes to Consolidated Financial Statements These notes provide detailed disclosures on the company's accounting policies, financial instruments, and specific balance sheet and income statement items, offering further context to the consolidated financial statements NOTE 1 –– DESCRIPTION OF BUSINESS This note describes Summit Hotel Properties, Inc. as a self-managed hotel investment company, its portfolio, strategic transactions, and the impact of the COVID-19 Pandemic - Summit Hotel Properties, Inc. is a self-managed hotel investment company, organized in June 2010, focusing on premium-branded hotels in the Upscale segment[376][377] - As of December 31, 2021, the portfolio comprised 74 hotels (11,518 guestrooms) in 23 states, with 90% in top 50 MSAs and all operating under major franchise brands (Marriott, Hilton, Hyatt, IHG)[377][378] - In January 2022, the company significantly expanded its portfolio through the NCI Transaction, acquiring 26 hotel properties and two parking structures for $766.0 million, with one additional hotel expected in Q1 2022[379] - Post-NCI Transaction (February 11, 2022), the portfolio consists of 100 hotels (15,051 guestrooms) in 24 states, with 86% in top 50 MSAs[380] - The company has elected to be taxed as a REIT, leasing all hotels to taxable REIT subsidiaries (TRS Lessees) for third-party management[381] - The COVID-19 Pandemic has had a significant negative effect on the company's revenues, profitability, and cash flows, though 2021 saw improvement driven by leisure travel[382][383] - Management believes it has sufficient cash and liquidity to meet obligations for at least the next twelve months and pursue growth opportunities, despite ongoing Pandemic uncertainties[385] NOTE 2 –– BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's accounting principles, consolidation policies, asset valuation, depreciation methods, impairment assessments, and revenue recognition - The consolidated financial statements are prepared in conformity with U.S. GAAP, requiring estimates and assumptions[386] - The company consolidates entities where it has a controlling financial interest, including its joint venture with GIC, and has one reportable segment for real estate investment[387][388][389] - Hotel properties are recorded at cost less accumulated depreciation, with purchase prices allocated to land, building, furniture, fixtures, equipment, and identifiable intangibles based on fair value[390][392] - Depreciation is calculated using the straight-line method over estimated useful lives (6-40 years for buildings, 2-15 years for FF&E)[393] - Assets are evaluated for impairment quarterly; if the carrying amount is not recoverable, the asset is written down to its estimated fair value[396] - Assets classified as 'Held for Sale' are no longer depreciated and are carried at the lower of carrying amount or fair value less selling costs[399] - The company has elected to be taxed as a REIT, generally exempting it from federal income tax on distributed income, while its TRSs are subject to corporate income tax[423][425] - A valuation allowance was recorded against substantially all deferred tax assets at December 31, 2021, due to certain TRSs incurring cumulative operating losses and uncertain realizability[428] - Revenue from hotel operations is recognized when guestrooms are occupied, services rendered, or fees earned, disaggregated into room, food and beverage, and other revenues[415] - The company adopted ASU No. 2020-06 (Convertible Instruments) effective January 1, 2021, recording convertible notes entirely as a liability and using the if-converted method for diluted EPS calculations[437] NOTE 3 –– INVESTMENT IN HOTEL PROPERTIES, NET This note details the composition of investment in hotel properties, including land, buildings, and equipment, and outlines acquisition and impairment activities Investment in Hotel Properties, net (in thousands) | Component | 2021 | 2020 | | :-------------------------- | :------- | :------- | | Land | $323,276 | $319,603 | | Hotel buildings and improvements | $2,127,782 | $2,066,986 | | Furniture, fixtures and equipment | $167,245 | $173,351 | | Construction in progress | $18,321 | $8,903 | | Intangible assets | $10,834 | $11,231 | | Real estate development loan | $27,595 | $16,508 | | Less - accumulated depreciation | $(583,080) | $(490,636) | | Total | $2,091,973 | $2,105,946 | - Depreciation expense was $105.5 million in 2021, $109.2 million in 2020, and $99.0 million in 2019[439] - In 2021, the company acquired two hotel properties (Residence Inn Steamboat Springs, CO and Embassy Suites Tucson, AZ) through its Joint Venture for an aggregate purchase price of $58.5 million[441] - On May 1, 2021, the company contributed six hotels to its consolidated joint venture, with GIC contributing $84.3 million in cash for its 49% interest[444] - In January 2022, the NCI Transaction was completed, acquiring 26 hotel properties and two parking structures for $766.0 million, with one additional hotel expected in Q1 2022 for $56.0 million[446][447] - Loss on impairment and write-off of assets totaled $4.4 million in 2021 and $1.8 million in 2020, related to purchase options on real estate development loans[448] NOTE 4 — INVESTMENT IN REAL ESTATE LOANS This note details the company's real estate loan portfolio, including mezzanine and seller-financing loans, and related credit loss allowances Investment in Real Estate Loans, net (in thousands) | Component | 2021 | 2020 | | :-------------------- | :------- | :------- | | Real estate loans | $2,350 | $28,671 | | Allowance for credit losses | $(2,350) | $(4,982) | | Total | $0 | $23,689 | - Two mezzanine loans on real estate development projects were fully repaid in Q4 2021, leading to a reversal of $2.6 million in allowance for credit losses and a $4.4 million loss on impairment for related purchase options[451][452] - A remaining mezzanine loan for a mixed-use development project had $27.7 million funded as of December 31, 2021, with a 9.0% stated interest rate and a May 15, 2022 maturity date[453] - Seller-financing loans had $2.4 million outstanding as of December 31, 2021; terms were amended in June 2021, extending maturity to December 31, 2022, with a 9.00% interest rate (5.00% cash, 4.00% paid-in-kind)[454][455] NOTE 5 — SUPPLEMENTAL BALANCE SHEET INFORMATION This note provides additional details on balance sheet items such as assets held for sale, restricted cash, prepaid expenses, and accrued expenses - Assets held for sale consist of a land parcel in Flagstaff, AZ, being marketed for sale[456] Restricted Cash (in thousands) | Component | 2021 | 2020 | | :---------------- | :------- | :------- | | FF&E reserves | $23,587 | $16,094 | | Property taxes | $2,132 | $1,469 | | Other | $6,740 | $614 | | Total | $32,459 | $18,177 | - Marriott allowed the use of $1.6 million from FF&E Reserve Accounts for working capital and released $8.9 million for general corporate purposes in 2020, and suspended monthly FF&E reserve funding through December 31, 2021[458][459] Prepaid Expenses and Other (in thousands) | Component | 2021 | 2020 | | :-------------------------- | :------- | :------- | | Deferred acquisition costs | $6,763 | $0 | | Prepaid insurance | $6,713 | $4,123 | | Escrow deposits | $6,000 | $0 | | Other | $3,329 | $3,018 | | Prepaid taxes | $1,691 | $2,622 | | Total | $24,496 | $9,763 | - Deferred charges (initial franchise fees, net) were $4,347 thousand in 2021, with amortization expense of $0.5 million in 2021 and 2020[462] Accrued Expenses and Other (in thousands) | Component | 2021 | 2020 | | :-------------------------------- | :------- | :------- | | Accrued property, sales and income taxes | $17,448 | $17,713 | | Derivative financial instruments | $15,723 | $30,850 | | Accrued salaries and benefits | $13,679 | $6,632 | | Other accrued expenses at hotels | $11,880 | $5,922 | | Other | $4,794 | $2,793 | | Accrued interest | $2,695 | $1,189 | | Total | $66,219 | $65,099 | NOTE 6 –– DEBT This note provides a comprehensive overview of the company's debt structure, including senior credit facilities, term loans, convertible notes, and mortgage indebtedness, along with compliance with covenants and LIBOR transition updates - Total indebtedness was $1,081,315 thousand at December 31, 2021, with a weighted average interest rate of 3.35% (after derivatives)[465][502] - The $600 Million Senior Credit Facility includes a $400 Million Revolver (matures March 31, 2023) and a $200 Million Term Loan (matures April 1, 2024); amendments provided covenant waivers through March 31, 2022, and modified financial covenants through December 31, 2023[466][467][472] - The Joint Venture Credit Facility (total $200.0 million) includes a $125 Million Revolver and a $75 Million Term Loan, both maturing October 8, 2023; amendments provided covenant waivers and adjustments[485][487][488][492] - The company has a $225.0 million 2018 Term Loan (matures February 14, 2025) and a $225.0 million 2017 Term Loan with a principal balance of $62.0 million (matures November 2022)[473][479] - Convertible Notes totaling $287.5 million were issued in January 2021, bearing 1.50% fixed interest, maturing February 15, 2026; capped call transactions were entered into to reduce potential dilution[496][497][499] - Secured mortgage indebtedness totaled $163.3 million at December 31, 2021, across 16 properties[502] - All credit facilities have been amended to accommodate the transition from LIBOR to SOFR[467][476][482][489] - The company and its Joint Venture were in compliance with all loan covenants at December 31, 2021[284][471][477][483] Contractual Principal Payments for Debt (in thousands) | Year | Amount | | :--- | :------- | | 2022 | $66,308 | | 2023 | $232,183 | | 2024 | $216,365 | | 2025 | $226,594 | | 2026 | $289,169 | | Thereafter | $50,696 | | Total | $1,081,315 | NOTE 7 –– LEASES This note describes the company's operating lease arrangements for land, corporate office, and equipment, as well as its role as a lessor for retail and restaurant spaces - The company has operating leases for land under certain hotel properties, conference centers, parking spaces, automobiles, its corporate office, and other equipment, with terms ranging from 1 to 77 years[512] - The company also leases retail or restaurant space to third-party tenants, recording gross tenant income of $2.2 million in 2021[513] - Rent deferrals were granted to third-party tenants due to the Pandemic, accounted for as short-term lease receivables[514] - The company adopted ASC No. 842, Leases, on January 1, 2019, recognizing right-of-use assets and related liabilities, with a weighted average incremental borrowing rate of 4.9% as of December 31, 2021[515] Operating Lease Costs and Cash Outflows (in thousands) | Year | Total Operating Lease Cost | Operating Cash Outflows from Operating Leases | | :--- | :------------------------- | :-------------------------------------------- | | 2021 | $3,300 | $3,100 | | 2020 | $3,100 | $2,800 | | 2019 | $3,300 | $3,000 | - The weighted average operating lease term was 28.25 years as of December 31, 2021[516] Operating Lease Maturities (in thousands) | Year | Amount | | :--- | :------- | | 2022 | $1,845 | | 2023 | $974 | | 2024 | $913 | | 2025 | $914 | | 2026 | $925 | | Thereafter | $27,069 | | Total Lease Payments | $32,640 | NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING This note details the company's use of interest rate derivatives, primarily interest rate swaps, to manage exposure to variable-rate debt and stabilize interest expense - The company uses interest rate derivatives, primarily interest rate swaps, to manage exposure to variable-rate debt and stabilize interest expense[517][518] - Interest rate swaps are designated as cash flow hedges and are recorded at fair value in the Consolidated Balance Sheets[518][520] Derivative Financial Instruments (in thousands) | Contract Date | Expiration Date | Notional Amount (Dec 31, 2021) | Fair Value (Dec 31, 2021) | Fair Value (Dec 31, 2020) | | :------------ | :-------------- | :----------------------------- | :------------------------ | :------------------------ | | October 2, 2017 | January 31, 2023 | $100,000 | $(1,617) | $(3,831) | | October 2, 2017 | January 31, 2023 | $100,000 | $(1,629) | $(3,853) | | June 11, 2018 | September 30, 2024 | $75,000 | $(3,831) | $(7,371) | | June 11, 2018 | December 31, 2025 | $125,000 | $(8,646) | $(15,795) | | Total | | $400,000 | $(15,723) | $(30,850) | - Changes in the fair value of hedging instruments are deferred in Other comprehensive income and reclassified to Interest expense when the hedged item affects earnings; an estimated $8.0 million will be reclassified in 2022[521] NOTE 9 — EQUITY This note outlines the company's authorized and outstanding common and preferred stock, recent preferred stock transactions, and details regarding its joint venture and non-controlling interests - The company is authorized to issue up to 500,000,000 shares of common stock ($0.01 par value), with 106,337,724 shares outstanding at December 31, 2021[523][526] - The company is authorized to issue up to 100,000,000 shares of preferred stock ($0.01 par value), including 6,400,000 Series E and 4,000,000 Series F shares[527] - In August 2021, 4,000,000 Series F preferred shares were offered for net proceeds of $96.6 million[528] - In September 2021, all 3,000,000 outstanding 6.45% Series D Cumulative Redeemable Preferred Stock were redeemed for $75.0 million, plus accrued dividends, resulting in a $2.7 million premium on redemption[529] - On January 13, 2022, in connection with the NCI Transaction, 1,958,429 Series Z Preferred Units were issued, entitled to 5.25% annual distributions[532] - Unaffiliated third parties hold Common Units in the Operating Partnership, representing less than a 1% limited partnership interest at December 31, 2021, which are redeemable for cash or common stock[534] - The company's joint venture with GIC (formed July 2019) involves the company as general partner and asset manager, investing 51% of equity capitalization, with GIC investing 49%[536] NOTE 10 — FAIR VALUE MEASUREMENT This note provides information on financial instruments measured at fair value, including purchase options related to real estate loans and interest rate swaps, categorized by valuation input levels Financial Instruments Measured at Fair Value (in thousands) | Instrument | Level | December 31, 2021 Total | December 31, 2020 Total | | :-------------------------------- | :---- | :------------------------ | :------------------------ | | Purchase options related to real estate loans | Level 3 | $2,800 | $7,161 | | Interest rate swaps | Level 2 | $15,723 | $30,850 | - Purchase options related to real estate loans are measured at cost less impairment, with fair value estimated using a Black-Scholes model (Level 3 inputs)[431][541][542] - A Loss on impairment and write-off of assets of $4.4 million was recorded in 2021 due to the company electing not to exercise purchase options on repaid real estate loans[543] - Interest rate swaps are valued using a market approach (Level 2 valuation technique)[520] - There were no transfers between Level 1 and Level 2 of the fair value hierarchy during 2021 or 2020[544] NOTE 11 — COMMITMENTS AND CONTINGENCIES This note outlines the company's commitments under franchise and management agreements, including associated fees, and addresses ongoing litigation - All hotel properties operate under franchise agreements (10-20 year terms) with fees ranging from 2% to 6% of gross revenue, plus marketing fees and capital expenditure reserve funds[545] - Franchise fees expensed were $25.0 million in 2021, $20.7 million in 2020, and $47.8 million in 2019[545] - Hotel properties operate under management agreements (month-to-month to 25-year terms) with third-party companies, involving base management fees and potential incentive fees[546] - Management fees expensed were $9.9 million in 2021, $6.3 million in 2020, and $16.6 million in 2019[546] - The company is involved in ordinary course litigation but is not aware of any actions that would have a material effect on its financial condition or results of operations[547] NOTE 12 — EQUITY-BASED COMPENSATION This note details the company's equity-based compensation plans, including stock options, restricted stock awards, and director stock awards, along with associated expenses and vesting information - The company's Equity Plan provides for various equity-based awards, including stock options, restricted stock, and director stock awards[548] - All 235,000 stock options outstanding at December 31, 2020, expired unexercised on February 13, 2021[550] - Non-vested time-based restricted stock awards totaled 605,470 shares at December 31, 2021, with a weighted average grant date fair value of $9.98 per share[552] - The total fair value of time-based restricted stock awards that vested was $5.3 million in 2021, including $1.5 million from accelerated vesting due to the Executive Chairman's retirement[555] - Non-vested performance-based restricted stock awards totaled 1,002,866 shares at December 31, 2021, valued using a Monte Carlo simulation model based on percentile ranking within the SNL U.S. REIT Hotel Index[556][557][560] - Director stock awards of 60,546 shares in 2021 and 93,810 shares in 2020 were granted to non-employee directors and vested upon grant[561] Equity-Based Compensation Expense (in thousands) | Component | 2021 | 2020 | 2019 | | :-------------------------- | :------- | :------- | :------- | | Time-based restricted stock | $4,784 | $2,470 | $2,327 | | Performance-based restricted stock | $5,314 | $3,559 | $3,396 | | Director stock | $583 | $447 | $496 | | Total | $10,681 | $6,476 | $6,219 | - Unrecognized equity-based compensation expense for all non-vested awards was $8.0 million at December 31, 2021[563] - The retirement of the Executive Chairman resulted in $2.9 million of additional stock-based compensation expense recorded in 2021[563] NOTE 13 — BENEFIT PLANS This note describes the company's qualified contributory retirement plan (401(k) Plan) and the associated employer contributions - The company initiated a qualified contributory retirement plan (401(k) Plan) on August 1, 2011, covering all eligible full-time employees[564] - The plan is a Safe Harbor Plan requiring a mandatory employer contribution, which was $0.3 million in each of 2021, 2020, and 2019[564] NOTE 14 — INCOME TAXES This note details the company's income tax expense, deferred tax assets and liabilities, net operating losses, and the impact of recent tax legislation, considering its REIT status - As a REIT, the company is generally not subject to corporate income taxes on taxable income distributed to shareholders, but its TRSs are subject to federal, state, and local taxes[565][566] Components of Income Tax Expense (Benefit) (in thousands) | Component | 2021 | 2020 | 2019 | | :---------------- | :------- | :------- | :------- | | Current Federal | $1,036 | $(904) | $869 | | Current State and local | $456 | $224 | $643 | | Deferred Federal | $(19) | $1,548 | $(32) | | Deferred State and local | $0 | $508 | $20 | | Income tax expense | $1,473 | $1,376 | $1,500 | - A valuation allowance of $13.0 million was recorded against deferred tax assets at December 31, 2021, due to certain TRSs incurring a three-year cumulative loss and uncertain realizability[568] - At December 31, 2021, TRSs had federal net operating losses of $40.5 million (no expiration) and state net operating losses of $41.9 million (expire beginning 2025)[569] - The American Rescue Plan Act of 2021 extended the employee retention tax credit (resulting in $1.1 million credit in 2021) and expanded executive compensation deduction limits[572][573] - For 2021, Preferred D, Preferred E, and Preferred F dividends were 100% return of capital[574] NOTE 15 — EARNINGS PER SHARE This note explains the company's method for computing earnings per share, including the two-class method and the treatment of participating and antidilutive securities - The company applies the two-class method for computing earnings per share, which requires separate calculations for non-vested time-based restricted stock awards with non-forfeitable dividends and common stock[577] - Net losses are not allocated to participating securities unless there is a contractual obligation to share in losses[577] - Unvested performance-based restricted stock awards (1,002,866 shares in 2021) and outstanding convertible notes were excluded from diluted EPS calculations as they were antidilutive or had not met vesting conditions[578] Basic and Diluted (Loss) Earnings Per Share | Year | EPS | | :--- | :-- | | 2021 | $(0.80) | | 2020 | $(1.52) | | 2019 | $0.65 | - Weighted average common shares outstanding (basic and diluted) were 104,471 thousand in 2021[579] NOTE 16 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) This note presents selected unaudited quarterly financial data for 2021 and 2020, including total revenues, net loss, and loss per share Selected Quarterly Financial Data (in thousands, except per share amounts) | Quarter | 2021 Total Revenues | 2021 Net Loss | 2021 Loss per Share | 2020 Total Revenues | 2020 Net Loss | 2020 Loss per Share | | :------ | :------------------ | :------------ | :------------------ | :------------------ | :------------ | :------------------ | | First | $57,854 | $(32,871) | $(0.34) | $108,385 | $(16,214) | $(0.18) | | Second | $86,524 | $(20,569) | $(0.21) | $25,436 | $(52,548) | $(0.52) | | Third | $110,686 | $(4,239) | $(0.10) | $52,412 | $(35,775) | $(0.37) | | Fourth | $106,862 | $(10,905) | $(0.15) | $48,230 | $(44,708) | $(0.45) | NOTE 17 — SUBSEQUENT EVENTS This note discloses significant events occurring after the balance sheet date, including the NCI Transaction, new credit facilities, and dividend declarations - In January 2022, the NCI Transaction was completed, acquiring 26 hotels for $766.0 million through the Joint Venture, with one additional hotel expected in Q1 2022 for $56.0 million[581] - In connection with the NCI Transaction, the Joint Venture entered into a $410.0 million senior secured term loan facility (NCI Credit Facility) on January 13, 2022, maturing January 13, 2026, with a floating interest rate (SOFR + 2.86%)[582] - As part of the NCI Transaction, 15,314,494 Common Units and 1,958,429 Series Z Preferred Units were issued on January 13, 2022[583] - On January 28, 2022, the Board of Directors declared cash dividends for Series E and F Preferred Stock, and Series Z Cumulative Perpetual Preferred Units, payable February 28, 2022[584][585] Schedule III - Real Estate and Accumulated Depreciation This schedule provides a detailed breakdown of the company's real estate assets and accumulated depreciation as of December 31, 2021, including the cost capitalized, subsequent improvements, and reconciliation of changes in asset basis and accumulated depreciation - The total cost of real estate (land, buildings, and improvements) was $2,638,549 thousand at December 31, 2021[592] - Total accumulated depreciation was $583,080 thousand at December 31, 2021[592] Reconciliation of Land, Buildings and Improvements (in thousands) | Item | 2021 | 2020 | 2019 | | :-------------------------------- | :------- | :------- | :------- | | Balance at beginning of period | $2,570,768 | $2,553,428 | $2,406,269 | | Additions | $80,496 | $19,918 | $336,480 | | Disposition | $(12,715) | $(2,578) | $(186,800) | | Impairment loss | $0 | $0 | $(2,521) | | Balance at end of period | $2,638,549 | $2,570,768 | $2,553,428 | Reconciliation of Accumulated Depreciation (in thousands) | Item | 2021 | 2020 | 2019 | | :-------------------------------- | :------- | :------- | :------- | | Balance at beginning of period | $490,326 | $383,763 | $351,821 | | Depreciation | $105,462 | $109,159 | $99,013 | | Depreciation on assets sold or disposed | $(12,708) | $(2,596) | $(67,071) | | Balance at end of period | $583,080 | $490,326 | $383,763 | - Depreciation is computed based on useful lives of 6-40 years for buildings and improvements, and 2-15 years for furniture and equipment[598] - The aggregate cost of real estate for Federal income tax purposes was approximately $2,448 million[597](ind