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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2011, for Summit Hotel Properties, Inc. (Summit REIT) and Summit Hotel OP, LP (Summit OP). The company is a self-advised hotel investment company that completed its Initial Public Offering (IPO) and formation transactions on February 14, 2011. As of the reporting date, the consolidated portfolio consists of 69 upscale, upper midscale, and midscale hotels with 7,010 guestrooms located in 19 states. The company operates through a taxable REIT subsidiary (TRS) structure to maintain REIT qualification.

Key Financial Metrics

Note: Six-month figures represent the combination of the Predecessor period (Jan 1 - Feb 13, 2011) and the Company period (Feb 14 - June 30, 2011).

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 7.6% for the three months ended June 30, 2011, compared to the same period in 2010. This was driven by the acquisition of four new hotels and stabilization in unseasoned properties, partially offset by declines in former Choice hotels.
• Operating Income Decline: Income from operations decreased 22.3% to $4.0 million for the quarter, primarily due to a $1.6 million increase in corporate general and administrative expenses following the IPO (salaries, equity compensation).
• Debt Reduction: Total debt decreased significantly from $420.4 million at year-end 2010 to $251.7 million at June 30, 2011. Approximately $227.2 million of IPO proceeds were used to repay outstanding mortgage indebtedness.
• Interest Expense: Interest expense decreased by approximately $4.1 million for the quarter due to the debt paydown.
• Choice Franchise Termination: The termination of franchise agreements for 11 hotels by Choice Hotels International resulted in a 29.4% decline in RevPAR for those specific properties due to loss of access to national reservation systems.

Guidance, Outlook, and Risks

• Franchise Transition: The company is actively rebranding the 11 former Choice hotels. As of the filing, nine had secured new franchise agreements (e.g., Holiday Inn, AmericInn, Marriott, Hilton). Two properties (Charleston, WV and Fort Worth, TX) were expected to secure agreements in Q3 2011.
• Capital Expenditures: The company budgeted approximately $28.7 million for capital improvements prior to June 30, 2012, including renovations for acquired hotels and franchise conversions. Approximately $11.1 million was spent in the first six months of 2011.
• Liquidity: The company maintains a $125 million senior secured revolving credit facility. As of June 30, 2011, outstanding borrowings were approximately $42.7 million, with roughly $59.8 million in borrowing capacity available.
• Management Fee Amendment: An amendment to the management agreement with Interstate Management Company reduced the base fee from 3% to 1.33% for 55 hotels for Q2 2011 to address operational challenges, with a potential incentive fee structure for future periods.
• Risks: Key risks include the continued negative impact on occupancy and RevPAR for the former Choice hotels until new franchises are fully operational, interest rate fluctuations on variable-rate debt (55.5% of total debt), and the ability to refinance maturing debt.

Investor Verification Checklist

• Choice Hotel Recovery: Verify the timeline and financial impact of rebranding the remaining former Choice hotels and their return to national reservation systems.
• Debt Maturities: Review the schedule for debt maturing within 12 months (approx. $60.5 million) and the status of refinancing negotiations.
• Capital Expenditure Funding: Confirm the funding sources for the remaining $17.6 million of budgeted capital expenditures through 2012.
• Management Fee Structure: Assess the long-term impact of the amended management fee agreement on operating margins.
• Acquisition Pipeline: Monitor the status of the three hotels under due diligence and the recent acquisition of the Courtyard by Marriott in El Paso, TX (closed July 2011).