Supertel Hospitality Reports 2014 Results With Improved Revenue and Adjusted EBITDA

NORFOLK, NE--(Marketwired - March 23, 2015) - Supertel Hospitality, Inc. (NASDAQ: SPPR), a real estate investment trust (REIT), today announced its results for the fourth quarter and year ended December 31, 2014. 

2014 Fourth Quarter and Full-Year Highlights 

• Net loss attributable to common shareholders was $(3.8) million for the quarter, compared to $(2.2) million in the fourth quarter 2013, and $(19.7) million for the year, compared to $(4.7) million for the prior year.
• Revenue from continuing operations in the fourth quarter was $13.2 million, an increase of 9.7 percent over the same 2013 period and $57.4 million for the full year, an increase of 6.7 percent over the prior year.
• Revenue per available room (RevPAR) for the continuing operations hotels in the fourth quarter was $36.63, an increase of 10.2 percent over the same 2013 period, and $40.39 for the year, an increase of 6.8 percent over the prior year.
• Adjusted EBITDA was $2.4 million for the quarter, compared to $2.1 million in the fourth quarter 2013, and $13.4 million for the full year 2014, compared to $12.4 million for the prior year.
• Adjusted funds from operations ("AFFO") was $(0.4) million for the quarter, compared to $(0.8) million in the fourth quarter 2013, and $1.5 million for the year, compared to $(0.4) million for the prior year.
• Sold three non-core hotels in the fourth quarter and 13 hotels for the full year.

Fourth Quarter Operating and Financial Results

Supertel's fourth quarter 2014 revenue from continuing operations rose 9.7 percent to $13.2 million compared to the same year-ago period. Revenue per available room (RevPAR) improved by 10.2 percent to $36.63 over the RevPAR for the fourth quarter 2013. Improving overall market conditions in the Washington D.C. market, increased construction projects in the Midwest and significant capital investments in core hotels have all contributed to the revenue growth.

The company had a 2014 fourth quarter net loss attributable to common shareholders of $(3.8) million, or $(0.80) per basic and diluted share primarily due to the non-cash impact of a $5.7 million change in the fair value of derivative liabilities, compared to a net loss of $(2.2) million or $(0.76) per basic and diluted share for the same 2013 period. The change in fair value is recorded as a derivative gain or loss. When the value of the derivatives increases, a loss is recorded and when it decreases, a gain is recorded. One of the key drivers of the value of the derivatives is the market value of the common stock price.

Funds from operations (FFO) was $(0.6) million for the 2014 fourth quarter, compared to $4.8 million in the same 2013 period. Adjusted funds from operations (AFFO), which is FFO adjusted to exclude gains and losses on derivative liabilities, acquisition and termination expense, and the terminated equity transactions expense, in the 2014 fourth quarter was $(0.4) million, compared to $(0.8) million in the same 2013 period.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were $(0.3) million for the 2014 fourth quarter, compared to $1.6 million in the same year-ago period. Adjusted EBITDA was $2.4 million, compared to $2.1 million for the 2013 fourth quarter. Adjusted EBITDA is EBITDA before noncontrolling interest, net gain/loss on disposition of assets, impairment, preferred stock dividends declared and undeclared, unrealized gain/loss on derivatives, acquisition and termination expense, gain on debt conversion and the expenses of the terminated equity transactions.

In the fourth quarter 2014, the 47-hotel same store portfolio reported an increase in revenue per available room (RevPAR) of 10.2 percent to $36.63, driven by a 7.4 percent improvement in occupancy to 58.4 percent, coupled with a 2.6 percent increase in average daily rate (ADR) to $62.70, compared to the 2013 fourth quarter. 

Full-Year Operating and Financial Results

Revenues from continuing operations in 2014 increased $3.6 million or 6.7 percent compared to 2013. The increase can be partially attributed to continued strength in the core midscale portfolio driven primarily by Choice branded properties. Strong construction activity in the Midwest portfolio also contributed to the increase as the mild fall/early winter weather allowed construction and railroad crews to continue working on existing projects. Additionally, the two Alexandria, Virginia properties benefited significantly from local market recovery.

Net loss attributable to common shareholders for 2014 was $(19.7) million, or $(5.05) per basic and diluted share, compared with a 2013 net loss attributable to common shareholders of $(4.7) million, or $(1.63) per basic and diluted share for the same period. Of the loss, $14.4 million was the non-cash impact of an increase in the valuation of the derivative liabilities for the year. The fair value of the derivative liabilities increased by an aggregate of $14.4 million and decreased by an aggregate of $10.0 million during 2014 and 2013, respectively. The change in fair value is recorded as a derivative gain or loss. The loss in the current year is primarily due to a change in the conversion price of the Series C Preferred stock and exercise price of the related warrants following the completion of the company's 2014 second quarter subscription rights offering.

For the full year 2014, the company recorded $2.9 million of impairment charges, including $1.6 million against discontinued operations properties and $1.3 million against continuing operations properties, compared to $7.1 million of total impairment charges in 2013.

FFO for the full year 2014 was $(13.0) million, compared to $7.9 million for the same 2013 period. Adjusted FFO for 2014 was $1.5 million, compared to $(0.4) million reported at December 31, 2013, an increase of $1.9 million. The increase in adjusted FFO is primarily a result of strengthened industry demand and operating efficiencies. 

Earnings before interest, taxes, depreciation and amortization (EBITDA) was $(4.6) million compared with $12.0 million for 2013. Adjusted EBITDA, which is EBITDA before noncontrolling interest, net gain/loss on disposition of assets, impairment, preferred stock dividends, unrealized gain/loss on derivatives, acquisition expense and terminated equity transactions, increased to $13.4 million, compared to $12.4 million for 2013, an increase of $1.0 million.

The portfolio of 47 same store hotels in 2014, compared with the same period a year earlier, had a 6.8 percent increase in RevPAR to $40.39, caused by a 5.7 percent increase in occupancy to 63.3 percent, and a 1.0 percent increase in ADR to $63.78.

Transaction Highlights

On June 6, 2014, the company concluded a rights offering, a total of 1,787,204 subscription rights to purchase an equal number of common shares were exercised for $2,849,526. Real Estate Strategies (RES) applied the amount owed to it under a $2.0 million loan to purchase 1,250,000 of the common stock issued.

Disposition Program

During 2014 the company sold 13 hotels with an aggregate of 1,265 rooms for combined gross proceeds of $22.3 million. The proceeds were used to pay off underlying loans.

Following the close of the 2014 fourth quarter, the company sold the following hotels:

Proceeds from the sales were used to pay down associated debt and reduce the balance of the revolving credit facility.

Currently, the company is marketing eight hotels for sale and expects to generate approximately $24.6 million in gross proceeds.

Capital Reinvestment

The company invested $3.4 million in capital improvements throughout the portfolio in 2014 to upgrade its properties and maintain brand standards. Notable capital improvements in 2014 included a lobby and fitness center expansion and renovation at the Green Bay, Wisconsin Super 8; interior pool enhancements and exterior patio upgrades at the Fort Wayne, Indiana Comfort Suites; guestroom and lobby renovations at the Pittsburg, Kansas Super 8; and guestroom renovations at the Alexandria, Virginia Comfort Inn.

Balance Sheet

On December 30, 2014 the company converted the rate on the $4.1 million mortgage loan with GE Capital from 3.73 percent variable to 4.75 percent fixed.

In 2014, the company reduced debt by $25.4 million to $92.7 million, in connection with the sale of non-core assets. As of December 31, 2014, Supertel had $74.3 million in outstanding debt on its continuing operations hotels with an average term of 2.0 years and weighted average annual interest rate of 6.5 percent. 

After the close of the fourth quarter, the company entered into a modification agreement with GE Franchise Finance Commercial LLC (GE) to extend the maturity date of the $10.7 million loan to December 15, 2015. 

Dividends

The company did not declare a dividend on common stock in 2014. The company's board of directors elected to suspend the payment of monthly dividends commencing December 31, 2013 on the outstanding shares of its 8.00% Series A Cumulative Convertible Preferred Stock (NASDAQ: SPPRP), quarterly dividends on the outstanding shares of its 10.00% Series B Preferred Cumulative Stock (NASDAQ: SPPRO), and the quarterly dividends on the outstanding shares of its 6.25% Series C Cumulative Convertible Preferred Stock to preserve capital and improve liquidity. The board of directors will continue to monitor the dividend policy.

Outlook

"The results in the fourth quarter 2014, and full year 2014, reflect a significant improvement in the company's hotel portfolio contribution," said Bill Blackham, recently appointed Supertel Chief Executive Officer. "While the hotel portfolio RevPAR increases of 6.8 percent lagged the 8.3 percent increase for total industry chain scales in 2014, it is significant to note that the portfolio experienced a 10.2 percent RevPAR increase in the fourth quarter compared to 8.9 percent for total industry chain scales. The portfolio experienced a respectable flow through in our continuing operations hotels of 66.6 percent from increased revenues. This was enhanced by continuing operating efficiencies through asset management, causing property operating income margin expansion for the year to increase from 20.6 percent in 2013 to 24.3 percent in 2014. Additionally, the portfolio's quality improved as a result of the dispositions of non-strategic hotels in both 2014 and in prior periods.

"The true performance for the company in 2014 is also less apparent due to the $14.4 million charge for changes in the derivatives' fair value in 2014, compared to a $10 million gain in 2013, which is an ongoing GAAP required non-cash valuation adjustment affecting our income statement and is really not connected to our operating performance," Blackham noted. "Simply eliminating this and other non-cash, non-routine charges results in an Adjusted EBITDA of $13.4 million in 2014 compared to $12.4 million in 2013. It is also important to communicate that underwriting standards in the debt markets became more relaxed in 2014 with improving economic conditions and the company is in a much better position to refinance its debts going forward in the near term as maturities arise."

About Supertel Hospitality, Inc.

Supertel Hospitality, Inc. (NASDAQ: SPPR) is a self-administered real estate investment trust that specializes in the ownership of select-service hotels. The company currently owns 52 hotels comprising 4,502 rooms in 20 states. Supertel's hotels are franchised by a number of the industry's most well-regarded brand families including Hilton, Choice and Wyndham. For more information or to make a hotel reservation, visit www.supertelinc.com.

Forward Looking Statement

Certain matters within this press release are discussed using forward-looking language as specified in the Private Securities Litigation Reform Act of 1995, and, as such, may involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance to differ from those projected in the forward-looking statement. These risks are discussed in the Company's filings with the Securities and Exchange Commission.

FFO and Adjusted FFO ("AFFO") are non-GAAP financial measures. We consider FFO and AFFO to be market accepted measures of an equity REIT's operating performance, which are necessary, along with net earnings (loss), for an understanding of our operating results. FFO, as defined under the National Association of Real Estate Investment Trusts (NAREIT) standards, consists of net income computed in accordance with GAAP, excluding gains (or losses) from sales of real estate assets, plus depreciation, amortization and impairment of real estate assets. We believe our method of calculating FFO complies with the NAREIT definition. AFFO is FFO adjusted to exclude gains or losses on derivative liabilities and gain on debt conversion, which are non-cash charges against income and which do not represent results from our core operations. AFFO also adds back acquisition costs and equity offering expense. FFO and AFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO and AFFO should not be considered as alternatives to net income (loss) (computed in accordance with GAAP) as an indicator of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. All REITs do not calculate FFO and AFFO in the same manner; therefore, our calculation may not be the same as the calculation of FFO and AFFO for similar REITs.

Diluted FFO per share and diluted Adjusted FFO per share are computed after adjusting the numerator and denominator of the basic computation for the effects of any dilutive potential common shares outstanding during the period. The Company's outstanding stock options and certain warrants to purchase common stock would be antidilutive and are not included in the dilution computation.

We use FFO and AFFO as performance measures to facilitate a periodic evaluation of our operating results relative to those of our peers. We consider FFO and AFFO to be useful additional measures of performance for an equity REIT because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assume that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, we believe that FFO and AFFO provide a meaningful indication of our performance.

EBITDA and Adjusted EBITDA are financial measures that are not calculated in accordance with accounting principles generally accepted in the United States of America ("GAAP"). We calculate EBITDA and Adjusted EBITDA by adding back to net earnings (loss) available to common shareholders certain non-operating expenses and non-cash charges which are based on historical cost accounting and we believe may be of limited significance in evaluating current performance. We believe these adjustments can help eliminate the accounting effects of depreciation and amortization and financing decisions and facilitate comparisons of core operating profitability between periods, even though EBITDA and Adjusted EBITDA also do not represent an amount that accrues directly to common shareholders. In calculating Adjusted EBITDA, we add back noncontrolling interest, net (gain) loss on disposition of assets, preferred stock dividends, acquisition expenses and equity offering expense which are cash charges. We also add back impairment and unrealized gain or loss on derivatives and gain on debt conversion, which are non-cash charges.

EBITDA and Adjusted EBITDA do not represent cash generated from operating activities determined by GAAP and should not be considered as alternatives to net income, cash flow from operations or any other operating performance measure prescribed by GAAP. EBITDA and Adjusted EBITDA are not measures of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make cash distributions. Neither do the measurements reflect cash expenditures for long-term assets and other items that have been and will be incurred. EBITDA and Adjusted EBITDA may include funds that may not be available for management's discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or the evaluation of our operating performance. EBITDA and Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.

Property Operating Income (POI) - Continuing and Discontinued Operations

This presentation includes non-GAAP financial measures, and should not be considered as an alternative to loss from continuing operations or loss from discontinued operations, net of tax. The company believes that the presentation of hotel property operating income (POI) is helpful to investors, and represents a more useful description of its core operations, as it better communicates the comparability of its hotels' operating results. Same store results for the quarter are for 47 hotels in continuing operations.

Results of Operations
For three and twelve months ended December 31, 2014 and 2013, respectively

The following table represents our RevPAR, ADR and occupancy by region and by chain scale for the three and twelve months ended December 31, 2014 and 2013, respectively. The comparisons of same store operations are for 47* hotels owned as of October 1, 2013 and January 1, 2013, respectively and include 44 held for use hotels and three held for sale hotels that are classified in continuing operations. Same store calculations exclude nine properties which are held for sale and included in discontinued operations.

*The following properties have been removed from the same store continuing operations portfolio during the 2014 reporting period and classified as held for sale in discontinued operations:

Boise, Idaho Super 8
Columbus, Georgia Super 8
Terre Haute, Indiana Super 8
Green Bay, Wisconsin Super 8

The following property has been removed from the held for sale portfolio during the reporting period and reclassified as held for use, and is now included in the continuing operations presentation:

Sioux Falls, South Dakota (Airport) Days Inn