Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q 1 d429366d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2012

¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from to .

Commission File Number: 001-34087

SUPERTEL HOSPITALITY, INC.

(Exact name of registrant as specified in its charter)

Virginia

52-1889548

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1800 W. Pasewalk Ave., Ste. 200, Norfolk, NE 68701

(Address of principal executive offices)

Telephone number: (402) 371-2520

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of October 31, 2012 there were 23,137,202 shares of common stock, par value $.01 per share, outstanding.

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


	Page Number
Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011		3

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011		4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3. Quantitative and Qualitative Disclosures About Market Risk		54

Item 4. Controls and Procedures		54

Part II. OTHER INFORMATION

Item 5. Other Information		55

Item 6. Exhibits		55

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share and share data)


	As of
	September 30, 2012			December 31, 2011
	(unaudited)
ASSETS
Investments in hotel properties	$	258,251		$	249,763
Less accumulated depreciation		78,306			75,074

		179,945			174,689

Cash and cash equivalents		656			279
Accounts receivable, net of allowance for doubtful accounts of $195 and $194		2,718			1,891
Prepaid expenses and other assets		10,650			8,917
Deferred financing costs, net		597			850
Investment in hotel properties, held for sale, net		22,767			34,546

	$	217,333		$	221,172

LIABILITIES AND EQUITY
LIABILITIES
Accounts payable, accrued expenses and other liabilities	$	12,393		$	10,704
Derivative liabilities, at fair value		17,267			—
Debt related to hotel properties held for sale		22,285			37,904
Long-term debt		113,715			127,941

		165,660			176,549


Redeemable noncontrolling interest in consolidated partnership, at redemption value		114			114

Redeemable preferred stock 10% Series B, 800,000 shares authorized; $.01 par value, 332,500 shares outstanding, liquidation preference of $8,312		7,662			7,662
EQUITY
Shareholders’ equity
Preferred stock, 40,000,000 shares authorized; 8% Series A, 2,500,000 shares authorized, $.01 par value, 803,270 shares outstanding, liquidation preference of $8,033		8			8
6.25% Series C, 3,000,000 shares authorized, $.01 par value, 3,000,000 shares outstanding, liquidation preference of $30,000		30			—
Common stock, $.01 par value, 200,000,000 shares authorized; 23,137,202 and 23,070,387 shares outstanding		231			231
Common stock warrants		252			252
Additional paid-in capital		134,776			121,619
Distributions in excess of retained earnings		(91,527	)		(85,398	)

Total shareholders’ equity		43,770			36,712
Noncontrolling interest
Noncontrolling interest in consolidated partnership, redemption value $102 and $64		127			135

Total equity		43,897			36,847

COMMITMENTS AND CONTINGENCIES
	$	217,333		$	221,172

See accompanying notes to condensed consolidated financial statements.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited—dollars in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
REVENUES
Room rentals and other hotel services	$	22,192		$	21,199		$	59,545		$	57,089

EXPENSES
Hotel and property operations		16,132			15,475			44,200			43,108
Depreciation and amortization		2,223			2,139			6,473			6,582
General and administrative		943			906			2,957			3,010
Acquisition, termination expense		15			—			178			1
Termination cost		—			—			—			540

		19,313			18,520			53,808			53,241

EARNINGS BEFORE NET LOSS ON DISPOSITIONS OF ASSETS, OTHER INCOME, INTEREST EXPENSE AND INCOME TAXES		2,879			2,679			5,737			3,848
Net gain on dispositions of assets		11			1,139			5			1,125
Other income (expense)		(1,138	)		2			(1,478	)		107
Interest expense		(1,964	)		(1,975	)		(6,051	)		(6,344	)
Impairment		—			(2,227	)		(3,714	)		(6,010	)

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(212	)		(382	)		(5,501	)		(7,274	)
Income tax (expense) benefit		(212	)		(139	)		(111	)		339

LOSS FROM CONTINUING OPERATIONS		(424	)		(521	)		(5,612	)		(6,935	)
Gain (loss) from discontinued operations, net of tax		(1,842	)		(883	)		1,816			(2,292	)

NET LOSS		(2,266	)		(1,404	)		(3,796	)		(9,227	)
Noncontrolling interest		1			(8	)		(1	)		5

NET LOSS ATTRIBUTABLE TO CONTROLLING INTERESTS		(2,265	)		(1,412	)		(3,797	)		(9,222	)
Preferred stock dividends		(837	)		(369	)		(2,332	)		(1,105	)

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(3,102	)	$	(1,781	)	$	(6,129	)	$	(10,327	)

NET INCOME (LOSS) PER COMMON SHARE—BASIC AND DILUTED
EPS from continuing operations	$	(0.05	)	$	(0.04	)	$	(0.34	)	$	(0.35	)

EPS from discontinued operations	$	(0.08	)	$	(0.04	)	$	0.08		$	(0.10	)

EPS Basic and Diluted	$	(0.13	)	$	(0.08	)	$	(0.26	)	$	(0.45	)

See accompanying notes to condensed consolidated financial statements.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited—dollars in thousands)


	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,796	)	$	(9,227	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		6,652			7,684
Amortization of intangible assets and deferred financing costs		393			356
Gain on dispositions of assets		(5,827	)		(1,461	)
Stock-based compensation expense		27			28
Provision for impairment loss		8,249			7,823
Unrealized loss on derivative instruments		1,578			—
Amortization of warrant issuance cost		38
Deferred income taxes		(224	)		(1,239	)
Changes in operating assets and liabilities:
(Increase) decrease in assets		(2,086	)		5,246
Increase (decrease) in liabilities		1,220			(5,874	)

Net cash provided by operating activities		6,224			3,336

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to hotel properties		(4,507	)		(3,894	)
Acquisition and development of hotel properties		(11,500	)		—
Proceeds from sale of hotel assets		13,456			12,156

Net cash (used in) provided by investing activities		(2,551	)		8,262

CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs		(140	)		(56	)
Principal payments on long-term debt		(33,095	)		(19,739	)
Proceeds from long-term debt, net		3,250			9,278
Distributions to noncontrolling interest		(9	)		(42	)
Common stock offering		—			42
Preferred stock and warrants		28,561			—
Dividends paid to preferred shareholders		(1,863	)		(1,105	)

Net cash used in financing activities		(3,296	)		(11,622	)

Increase (decrease) in cash and cash equivalents		377			(24	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		279			333


CASH AND CASH EQUIVALENTS, END OF PERIOD	$	656		$	309


SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized	$	7,375		$	9,165


SCHEDULE OF NONCASH FINANCING ACTIVITIES
Dividends declared preferred	$	2,332		$	1,105

See accompanying notes to condensed consolidated financial statements.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

General

Supertel Hospitality, Inc. (SHI) was incorporated in Virginia on August 23, 1994. SHI is a self-administered real estate investment trust (REIT) for federal income tax purposes.

SHI, through its wholly owned subsidiaries, Supertel Hospitality REIT Trust and E&P REIT Trust (collectively, the “Company”) owns a controlling interest in Supertel Limited Partnership (“SLP”) and E&P Financing Limited Partnership (“E&P LP”). All of the Company’s interests in 84 properties with the exception of furniture, fixtures and equipment on 65 properties held by TRS Leasing, Inc. and its subsidiaries are held directly or indirectly by E&P LP, SLP or Solomons Beacon Inn Limited Partnership (SBILP) (collectively, the “Partnerships”). The Company’s interests in ten properties are held directly by either SPPR-Hotels, LLC (SHLLC), SPPR-South Bend, LLC (SSBLLC), or SPPR-BMI, LLC (SBMILLC). SHI, through Supertel Hospitality REIT Trust, is the sole general partner in SLP and at September 30, 2012 owned approximately 99% of the partnership interests in SLP. SLP is the general partner in SBILP. At September 30, 2012, SLP and SHI owned 99% and 1% interests in SBILP, respectively, and SHI owned 100% of Supertel Hospitality Management, Inc, SPPR Holdings, Inc. (SPPRHI), and SPPR-BMI Holdings, Inc. (SBMIHI). SLP and SBMIHI owned 99% and 1% of SBMILLC, respectively. SLP and SPPRHI owned 99% and 1% of SHLLC, respectively, and SLP owned 100% of SSBLLC. References to “we”, “our”, and “us”, herein refer to Supertel Hospitality, Inc., including as the context requires, its direct and indirect subsidiaries.

As of September 30, 2012, the Company owned 94 select service hotels. All of the hotels are leased to our wholly owned taxable REIT subsidiary, TRS Leasing, Inc. (“TRS”), and its wholly owned subsidiaries (collectively “TRS Lessee”), and are managed by Hospitality Management Advisors, Inc. (“HMA”), Strand Development Company LLC (“Strand”), Kinseth Hotel Corporation (“Kinseth”), HLC Hotels Inc. (“HLC”), and Cherry Cove Hospitality Management, LLC (“Cherry Cove”).

The hotel management agreement, as amended, between TRS Lessee and Royco Hotels, the previous manager of 95 of the Company’s hotels, was terminated effective May 31, 2011. Under the agreement, Royco Hotels received a base management fee ranging from 4.25% to 3.0% of gross hotel revenues as revenues increased above thresholds that ranged from up to $75 million to over $100 million, and was entitled, if earned, to an annual incentive fee of 10% of up to the first $1.0 million of annual net operating income in excess of 10% of the Company’s investment in the hotels, and 20% of the excess above $1.0 million. A settlement agreement between the parties with respect to a lawsuit and with respect to termination fees for sold hotels provides that the Company will pay an aggregate of $590,000 in varying amounts of installments through July 1, 2013 to Royco Hotels (of which $410,000 has been paid as of September 30, 2012).

On April 21, 2011, the Company, through TRS Lessee, entered into separate management agreements with HMA, Strand and Kinseth as eligible independent operators to manage 95 of the Company’s hotels (two of which were subsequently sold) commencing June 1, 2011. These hotels were previously managed by Royco Hotels. On May 25, 2012, SLP acquired a Hilton Garden Inn in Dowell, Maryland. In connection with the acquisition, the Company, through TRS, entered into a separate management agreement with Cherry Cove as an eligible independent operator to manage the hotel.

HMA manages 24 Company hotels in Arkansas, Louisiana, Tennessee, Kentucky, Indiana, Virginia and Florida. Strand manages the Company’s seven economy extended-stay hotels in Georgia and South Carolina as well as 16 additional Company hotels located in Georgia, Delaware, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia. Kinseth manages 40 Company hotels in eight states primarily in the Midwest. Each of the management agreements with HMA, Strand and Kinseth expire on May 31, 2014, and the management agreement with Cherry Cove expires on May 24, 2015. The management agreements renew for additional terms of one year unless either party to an agreement gives the other party written notice of termination at least 90 days before the end of a term.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

Each of HMA, Strand, Kinseth and Cherry Cove receives a monthly management fee with respect to the hotels they manage equal to 3.5% of the gross hotel revenue and 2.25% of hotel net operating income (“NOI”). NOI is equal to gross hotel income less operating expenses (exclusive of management fees, certain insurance premiums and employee bonuses, and personal and real property taxes).

SLP owns 6 hotels which are operated under the Masters Inn name. TRS, the lessee of the hotels, entered into a management agreement with HLC, an affiliate of the sellers of the six hotels. The management agreement, as amended, provides for HLC to operate and manage the hotels through December 31, 2013 and receive management fees equal to 5.0% of the gross revenues derived from the operation of the hotels and incentive fees equal to 10% of the annual operating income of the hotels in excess of 10.5% of the Company’s investment in the hotels.

The management agreements generally require TRS Lessee to fund debt service, working capital needs, capital expenditures and third-party operating expenses for the management companies, excluding those expenses not related to the operation of the hotels. TRS Lessee is responsible for obtaining and maintaining insurance policies with respect to the hotels.

The hotel industry is seasonal in nature. Generally, occupancy rates, revenues and operating results for hotels operating in the geographic areas in which we operate are greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotels located in Florida, which experience peak demand in the first and fourth quarters of the year.

Consolidated Financial Statements

The Company has prepared the condensed consolidated balance sheet as of September 30, 2012, the condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2012 and 2011 without audit, in conformity with U. S. generally accepted accounting principles. In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position as of September 30, 2012 and the results of operations and cash flows for all periods presented. Balance sheet data as of December 31, 2011 has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Certain information and footnote disclosures, normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results for the full year.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

Derivative Liabilities

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. However, fair value accounting requires bifurcation of certain embedded derivative instruments such as conversion features in convertible debt or equity instruments, and measurement at their fair value for accounting purposes. The conversion feature embedded in the Series C convertible preferred stock was evaluated, and it was determined that the conversion features should be bifurcated from its host instrument and accounted for as a freestanding derivative. In addition the common stock warrants issued with the Series C convertible preferred stock were also determined to be freestanding derivatives. The following summarizes our derivative liabilities at September 30, 2012 and December 31, 2011:


(dollars in thousands)	September 30, 2012		December 31, 2011
Series C preferred embedded derivative	$	7,957	$	—
Warrant derivative		9,310		—

Derivative liability, at fair value	$	17,267	$	—

The Series C convertible preferred stock embedded derivative and the warrant derivative were initially recorded at their fair value of $7.1 million and $8.6 million, respectively, on the date of issuance, February 1, 2012 and February 15, 2012. At September 30, 2012 the carrying amounts of the derivatives were adjusted to their fair value of $8.0 million and $9.3 million respectively, with a corresponding adjustment to other income (expense). The derivatives are reported as a derivative liability on the accompanying consolidated balance sheets as of September 30, 2012 and will be adjusted to their fair values at each reporting date.

The amendment to the Company’s articles of incorporation, setting forth the terms of the Series C convertible preferred stock, the host instrument, includes an antidilution provision that requires an adjustment in the common stock conversion ratio should subsequent issuances of the Company’s common stock be issued below the instruments’ original conversion price of $1.00 per share. Accordingly we bifurcated the embedded conversion feature which is shown as a derivative liability recorded at fair value on the accompanying consolidated balance sheets as of September 30, 2012.

The agreement setting forth the terms of the common stock warrants issued to the holders of the Series C convertible preferred stock also includes an antidilution provision that requires a reduction in the warrant’s exercise price of $1.20 should the conversion ratio of the Series C convertible preferred stock be adjusted due to antidilution provisions. Accordingly, the warrants do not qualify for equity classification, and, as a result, the fair value of the derivative is shown as a derivative liability on the accompanying consolidated balance sheets as of September 30, 2012.

The Company used a Monte Carlo simulation model to value the Series C convertible preferred stock embedded derivatives and the warrants.

Fair Value Measurements

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

basis under Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820-10 Fair Value Measurements and Disclosures – Overall. In addition we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures – Overall – Subsequent Measurement, for our nonfinancial assets which include our held for sale and impaired held for use hotels, and the disclosure of the fair value of our debt.

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 non-financial asset valuations use unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data. Financial asset and liability valuation inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the liability; this includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Non financial assets

Nonfinancial asset fair value measurements are discussed below in the note “Impairment Losses”.

Financial instruments

As of September 30, 2012, the fair value of the derivative liabilities in connection with the February 2012 issuance was determined by the Monte Carlo simulation method. The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error.

The following tables provide the fair value of the Company’s financial liabilities carried at fair value and measured on a recurring basis (in thousands):


	Fair Value at September 30, 2012		Level 1		Level 2		Level 3
Series C preferred embedded derivative	$	7,957	$	—	$	—	$	7,957
Warrant derivative		9,310		—		—		9,310

	$	17,267	$	—	$	—	$	17,267


	Fair Value at December 31, 2011		Level 1		Level 2		Level 3
Series C preferred embedded derivative	$	—	$	—	$	—	$	—
Warrant derivative		—		—		—		—

	$	—	$	—	$	—	$	—

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

There were no transfers between levels during the three and nine months ended September 30, 2012.

The following tables present a reconciliation of the beginning and ending balances of items measured at fair market value on a recurring basis in the table above that used significant unobservable inputs (Level 3), and the realized and unrealized gains (losses) recorded in the Consolidated Statement of Operations in Other income (expense) during the periods. There were no Level 3 assets or liabilities measured on a recurring basis during the three or nine month periods ended September 30, 2011.


(dollars in thousands)	Fair Value at 6/30/2012		Net Realized and Unrealized Gains (Losses) Included in Income			Purchases, Sales, Issuances and Settlements, Net		Gross Transfers In		Gross Transfers Out		Fair Value at 9/30/2012		Changes in Realized Gains (Losses) Included in Income on Instruments Held at 9/30/2012		Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at 9/30/2012
Series C preferred embedded derivative	$	7,701	$	(256	)		—		—		—	$	7,957		—	$	(256	)
Warrant derivative		8,334		(976	)		—		—		—		9,310		—		(976	)

	$	16,035	$	(1,232	)	$	—	$	—	$	—	$	17,267	$	—	$	(1,232	)


(dollars in thousands)	Fair Value at 12/31/2011		Net Realized and Unrealized Gains (Losses) Included in Income			Purchases, Sales, Issuances and Settlements, Net		Gross Transfers In		Gross Transfers Out		Fair Value at 9/30/2012		Changes in Realized Gains (Losses) Included in Income on Instruments Held at 9/30/2012		Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at 9/30/2012
Series C preferred embedded derivative	$	—	$	(882	)	$	7,075		—		—	$	7,957		—	$	(882	)
Warrant derivative		—		(696	)		8,614		—		—		9,310		—		(696	)

	$	—	$	(1,578	)	$	15,689	$	—	$	—	$	17,267	$	—	$	(1,578	)

The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The inputs utilized in estimating the fair value of debt are classified in Level 2 of the hierarchy. The carrying value and estimated fair value of the Company’s debt as of September 30, 2012 and December 31, 2011 are presented in the table below (dollars in thousands):

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)


	Carrying Value				Estimated Fair Value
	9/30/2012		12/31/2011		9/30/2012		12/31/2011
Continuing operations	$	113,715	$	127,941	$	115,773	$	129,740
Discontinued operations		22,285		37,904		22,610		38,706

Total	$	136,000	$	165,845	$	138,383	$	168,446

Hotel Acquisitions

During the nine months ended September 30, 2012 we acquired the following wholly-owned property.


(dollars in thousands)	Dowell, Maryland Hilton Garden Inn
Acquisition date		May 25, 2012
Land	$	1,400
Building and improvements		9,735
Furniture and equipment		365

Investment in hotel	$	11,500

Purchase price	$	11,500

Acquisition costs, included in Acquisition, termination expense	$	162

The fair values for the assets acquired are preliminary as the Company continues to finalize their acquisition date fair value determination. Included in the consolidated statement of operations for the three months ended September 30, 2012 are total revenues of $1.0 million and total net income of $0.3 million. For the nine months ended September 30, 2012, total revenues of $1.4 million and total net income of $0.4 million are included for the hotel we acquired 100% interest in since the date of acquisition.

Discontinued Operations—Hotel Properties Held for Sale and Sold

During the three months ended September 30, 2012, two of the Company’s held for use hotels were reclassified as held for sale. The effect of this change relative to our previously filed financial statements was to decrease the income from continuing operations by approximately $0.1 million, to a loss of $0.5 million for the three months ended September 30, 2011. At December 31, 2011, the Company had 24 hotels identified that it intends to sell and that met the Company’s criteria to be classified as held for sale (the “Sale Hotels”). During the nine months ended September 30, 2012, seven hotels were sold, with an aggregate net gain of $5.9 million. The gain consisted of: $2.9 million from the sale of a Super 8 in Wichita, Kansas; $1.0 million from the sale of a Super 8 in El Dorado, Kansas; and a total of $1.4 million from the sales of Super 8 hotels in Fayetteville, Arkansas; Muscatine, Iowa, and Sedalia, Missouri. There was no gain on the sale of a Masters Inn in Tampa, Florida. There was a $0.6 million gain on the sale of a Super 8 in Watertown, South Dakota. Two of the hotels were sold in the first quarter of 2012, four were sold in the second quarter of 2012, and one was sold in the third quarter of 2012. Due to changes in the market during the first quarter, two hotels were reclassified as held for use and four hotels were reclassified as held for sale. In the third quarter two hotels were reclassified as held for sale, bringing the total number of hotels classified as held for sale to 21 as of September 30, 2012.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

In accordance with FASB ASC 205-20 Presentation of Financial Statements – Discontinued Operations, gains, losses and impairment losses on hotel properties sold or classified as held for sale are presented in discontinued operations. The operating results of the hotels held for sale and sold are included in discontinued operations and are summarized below. The operating results for the three months ended September 30, 2012 include 21 hotels held for sale and one hotel that was sold in the third quarter of 2012. The operating results for the three months ended September 30, 2011 include 21 hotels held for sale, seven hotels that were sold in 2012, and three hotels that were sold prior to 2012. The operating results for the nine months ended September 2012 include 21 hotels held for sale and seven hotels that were sold in 2012. The operating results for the nine months ended September 2011 include 21 hotels held for sale, seven hotels sold in 2012, and six hotels sold in 2011:


(dollars in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues	$	4,714		$	6,552		$	14,641		$	18,984
Hotel and property operations expenses		(4,065	)		(5,570	)		(12,721	)		(16,464	)
Interest expense		(408	)		(1,487	)		(1,548	)		(3,082	)
Depreciation expense		(33	)		(281	)		(179	)		(1,102	)
Net gain (loss) on disposition of assets		553			(13	)		5,822			336
General and administrative expense		—			—			—			(50	)
Impairment loss		(2,732	)		(334	)		(4,535	)		(1,813	)
Income tax benefit		129			250			336			899

	$	(1,842	)	$	(883	)	$	1,816		$	(2,292	)

Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of any dilutive potential common shares outstanding during the period, if any. The computation of basic and diluted earnings per common share is presented below:


(dollars in thousands, except per share data)	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Basic and Diluted Earnings per Share Calculation:
Numerator:
Net earnings (loss) attributable to common shareholders:
Continuing operations	$	(1,262	)	$	(901	)	$	(7,943	)	$	(8,045	)
Discontinued operations		(1,840	)		(880	)		1,814			(2,282	)

Net loss attributable to common shareholders—total	$	(3,102	)	$	(1,781	)	$	(6,129	)	$	(10,327	)

Denominator:
Weighted average number of common shares—basic and diluted		23,083,572			23,005,387			23,076,311			22,962,662
Basic and Diluted Earnings Per Common Share:
Net earnings (loss) attributable to common shareholders per weighted average common share:
Continuing operations	$	(0.05	)	$	(0.04	)	$	(0.34	)	$	(0.35	)
Discontinued operations		(0.08	)		(0.04	)		0.08			(0.10	)

Total Basic and Diluted	$	(0.13	)	$	(0.08	)	$	(0.26	)	$	(0.45	)

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

The net income (loss) attributable to noncontrolling interest is allocated between continuing and discontinued operations. Additionally, unvested stock awards, warrants, the Series C Convertible Preferred stock, and the preferred operating units have been omitted from the denominator for the purpose of computing diluted earnings per share for the three months ended September 30, 2012 and 2011, since the effects of including these awards in the denominator would be antidilutive to loss from continuing operations applicable to common shareholders.

The following table summarizes potentially dilutive securities that have been excluded from the denominator for the purpose of computing diluted earnings per share:


	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Preferred Operating Units		11,424		51,035		11,424		51,035
Outstanding Stock Options		178,000		215,500		178,000		215,500
Unvested Stock Awards Outstanding		7,105		—		2,566		—
Warrants		30,299,403		299,403		26,445,388		299,403
Series C Preferred Stock		30,000,000		—		26,145,985		—

Total potentially dilutive securities excluded from the denominator		60,495,932		565,938		52,783,363		565,938

Noncontrolling Interest of Common and Preferred Units in SLP

At September 30, 2012 and 2011 there were 97,008 SLP common operating units outstanding being held by the limited partners. These units have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts allocated to the limited partners holding common operating units (whose units are convertible on a one-to-one basis to common shares) since their share of income (loss) would be added back to income (loss). During the second quarter of 2011, 61,153 shares of common stock were issued in connection with the redemption of 61,153 common operating units. In addition, there were 11,424 and 51,035 shares of SLP preferred operating units held by the limited partners as of September 30, 2012 and 2011, respectively.

Stock-Based Compensation

The potential common shares represented by outstanding stock options for the three and nine months ended September 30, 2012 totaled 178,000, and for the three and nine months ended September 30, 2011 totaled 215,500, all of which are antidilutive.

There were 45,000 unvested stock awards as of September 30, 2012. There were no unvested stock awards during the three and nine months ended September 30, 2011.

Warrants

On February 1, 2012 and February 15, 2012, in connection with the purchase of the Series C convertible preferred stock, the Company issued warrants to purchase 30,000,000 shares of the Company’s common stock. Subject to the Beneficial Ownership Limitation, these warrants are exercisable at any time on or before January 31, 2017 at an exercisable price of $1.20 per share of common stock. The exercisable price may be paid in cash, or the holder may also elect to pay the exercise price by having the Company withhold a sufficient number of shares from the exercise with a market value equal to the exercise price.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

On May 10, 2010 the Company issued warrants to purchase 299,403 shares of Company common stock. These warrants are exercisable for a period of three years from the date of issuance at an exercise price of $2.50 per share of common stock.

Series C Convertible Preferred Stock

Debt Financing

A summary of the Company’s long term debt as of September 30, 2012 is as follows (dollars in thousands):


	Balance		Interest Rate			Maturity
Fixed Rate Debt
Lender
Elkhorn Valley Bank	$	1,250		5.25	%		10/2012
GE Capital Corporation		1,088		5.00	%		12/2012
Greenwich Capital Financial Products		28,159		7.50	%		12/2012
Great Western Bank		18,954		6.00	%		6/2013
GE Capital Corporation		19,167		7.17	%		12/2014
GE Capital Corporation		9,907		7.69	%		12/2014
Citigroup Global Markets Realty Corp		12,761		5.97	%		11/2015
Elkhorn Valley Bank		2,958		6.25	%		6/2016
GE Capital Corporation		12,369		7.17	%		2/2017
Wachovia Bank		8,077		7.38	%		3/2020

Total Fixed Rate Debt	$	114,690


Variable Rate Debt
Lender
GE Capital Corporation		19,049		3.92	%		2/2018
GE Capital Corporation		2,261		4.48	%		2/2018

Total Variable Rate Debt	$	21,310

Subtotal debt		136,000

Less: debt associated with hotel properties held for sale		22,285

Total Long-Term Debt	$	113,715

On January 18, 2012, the Company sold a Super 8 in Fayetteville, Arkansas (83 rooms) for approximately $1.56 million. The proceeds were used primarily to reduce a term loan with Great Western Bank.

In two closings on February 1, 2012 and February 15, 2012, the Company completed the sale to Real Estate Strategies, L.P. of 3,000,000 shares of Series C convertible preferred stock and warrants to purchase 30,000,000 shares of common stock at an exercise price of $1.20 per common share. The Company agreed to use $20 million of net proceeds to pursue hospitality acquisitions which are consistent with the investment strategy of the Company Board of Directors, as well as an additional $5 million to pursue hospitality acquisitions within a reasonable period thereafter.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

On February 2, 2012, the Company paid $11.8 million on the Great Western Bank revolving line of credit, bringing the balance to zero. The available capacity is expected to be used in part to fund the $20 million obligation for hotel investment. The payment was funded with a portion of the net proceeds from the Series C convertible preferred stock.

On February 3, 2012, the Company paid in full the $5.0 million balance on the revolving credit facility with Elkhorn Valley Bank, with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

On February 16, 2012, the Company paid in full the $2.1 million note payable to Fredericksburg North Investors, LLC, with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

On February 21, 2012, the Company amended its credit facilities with Great Western Bank to extend the maturity date of all loans to June 30, 2013.

On March 1, 2012, the Company amended its credit facility with First National Bank of Omaha to extend the maturity date to May 1, 2012. This debt was paid in full on April 20, 2012.

On March 27, 2012, the Company sold a Super 8 in Muscatine, Iowa (63 rooms) for approximately $1.3 million. The proceeds were used primarily to reduce a term loan with Great Western Bank, with the remaining amount used to reduce the revolving line of credit with Great Western Bank.

On March 29, 2012, the Company amended its credit facilities with General Electric Capital Corporation. These changes were reflected in the notes to the Company’s consolidated financial statements included in its Form 10-K for the year ended December 31, 2011.

On April 20, 2012, the Company sold a Super 8 in El Dorado, Kansas (49 rooms) for approximately $1.625 million. The proceeds were used to pay off the $0.8 million loan with First National Bank of Omaha, with additional funds applied to general corporate purposes.

On May 15, 2012, the Company borrowed $1.25 million from Elkhorn Valley Bank. The note was refinanced on October 10, 2012. The new loan amount is $1.15 million with a maturity of October 15, 2014. The note bears interest at 5.5% and is secured by a Days Inn hotel located in Fredericksburg, Virginia (North).

On May 25, 2012, the Company acquired a Hilton Garden Inn in Dowell, Maryland (100 rooms) for $11.5 million, excluding closing costs and fees. The purchase was funded with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

On May 29, 2012, the Company sold a Super 8 in Sedalia, Missouri (87 rooms) for approximately $1.8 million. Proceeds were used primarily to reduce a term loan with Great Western Bank, with the remaining amount used to reduce the revolving line of credit with Great Western Bank.

On June 1, 2012, the Company sold a Super 8 in Wichita, Kansas (119 rooms) for approximately $4.1 million. Proceeds were used primarily to reduce a term loan with Great Western Bank, with the remaining funds applied to general corporate purposes.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

On June 15, 2012, the Company sold a Masters Inn in Tampa, Florida (127 rooms) for approximately $2.1 million. Proceeds were used to pay down mortgage debt with General Electric Capital Corporation.

On July 25, 2012, the Company sold a Super 8 in Watertown, South Dakota (57 rooms) for approximately $1.55 million. Proceeds were used to pay the mortgage with Elkhorn Valley Bank with the remaining proceeds used to reduce short term borrowings.

As of September 30, 2012, the amount available on our revolving credit facility with Great Western Bank was reduced from $12.5 million to $12.0 million.

At September 30, 2012, the Company had long-term debt of $113.7 million associated with assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 3.0 years and a weighted average interest rate of 6.4%. The weighted average fixed rate was 6.9%, and the weighted average variable rate was 4.0%. Debt held on properties in continuing operations is classified as held for use. Debt is classified as held for sale if the properties collateralizing it are included in discontinued operations. Debt associated with assets held for sale is classified as a short-term liability due within the next year irrespective of whether the notes and mortgages evidencing such debt mature within the next year. Aggregate annual principal payments on debt associated with assets held for use for the remainder of 2012 and thereafter, and debt associated with assets held for sale, are as follows (in thousands):


	Held For Sale		Held For Use		TOTAL
Remainder of 2012	$	22,285	$	31,038	$	53,323
2013		—		17,270		17,270
2014		—		20,815		20,815
2015		—		14,288		14,288
2016		—		4,855		4,855
Thereafter		—		25,449		25,449

	$	22,285	$	113,715	$	136,000

At September 30, 2012, the Company had $53.3 million of principal due in 2012. Of this amount, $38.5 million of the principal due is associated with either assets held for use or assets held for sale, and matures in 2012 pursuant to the notes and mortgages evidencing such debt. The remaining $14.8 million is associated with assets held for sale and is not contractually due in 2012 unless the related assets are sold. The maturities comprising the $38.5 million consist of:

•

a $28.2 million balance on the loan with Greenwich Capital;

•

a $7.0 million principal prepayment required on our credit facilities with General Electric Capital Corporation;

•

a $1.1 million balance on a note payable to General Electric Capital Corporation;

•

a $1.25 million note payable to Elkhorn Valley Bank; and

•

approximately $1.0 million of principal amortization on mortgage loans.

The $28.2 million balance of the loan with Greenwich Capital, which matures in December 2012 and was secured by 32 hotels, was refinanced on November 2, 2012 with a $30.6 million loan with Morgan Stanley Mortgage Capital Holdings LLC (Morgan Stanley), as noted in the subsequent events section below. The Morgan Stanley loan is secured by 22 hotels, bears interest at 5.83% and matures on December 1, 2017. As a result of the refinancing, 10 of the hotels previously secured by the Greenwich Capital loan became unencumbered, two of which were subsequently pledged as additional security for the Company’s credit facilities with General Electric Capital Corporation.

On March 29, 2012, our credit facilities with General Electric Capital Corporation were amended to, among other things, require a principal prepayment of $7 million on or before December 31, 2012. A $1.1 million note payable to General Electric Capital Corporation is also due on December 31, 2012. These payments to General Electric Capital Corporation are expected to be funded from (a) the sale of unencumbered hotels expected to be sold and/or refinanced in the fourth quarter of 2012, or (b) funds the Company planned to use solely for acquisitions, however the Company cannot be certain as to whether it can obtain all necessary approvals to redirect these funds. If neither of these sources of funds are available or sufficient for these repayments and to provide liquidity for the Company during the first quarter of 2013, General Electric Capital Corporation and/or other Company lenders may declare a default on our loans, and accelerate our indebtedness under the loans. If this were to happen, whether due to failure to repay or refinance debt when due or failure to comply with financial covenants, the Company’s ability to conduct business could be severely impacted as there can be no assurance that the adequacy and timeliness of cash flow would be available to meet the Company’s liquidity requirements.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

The $1.25 million note with Elkhorn Valley Bank was refinanced on October 10, 2012. The new loan amount is $1.15 million with a maturity of October 15, 2014. The note bears interest at 5.5% and is secured by a Days Inn hotel located in Fredericksburg, Virginia (North).

We are required to comply with certain financial covenants for some of our lenders. As of September 30, 2012, we were either in compliance with our financial covenants or obtained waivers for non-compliance (as discussed below). As a result, we are not in default of any of our loans.

Our credit facilities with General Electric Capital Corporation require us to maintain a minimum before dividend consolidated fixed charge coverage ratio (as defined in the loan agreement). For the third quarter of 2012, the requirement was 1.05:1. As of September 30, 2012, our before dividend consolidated fixed charge coverage ratio (as defined in the loan agreement) was 1.02:1. On November 14, 2012, the Company received a waiver for non-compliance with this covenant in return for pledging an additional two previously unencumbered properties as security for the General Electric Capital Corporation credit facilities and payment of $200,000.

Stock-Based Compensation

The Company has a 2006 Stock Plan (the “Plan”) which has been approved by the Company’s shareholders. The Plan authorizes the grant of stock options, stock appreciation rights, restricted stock and stock bonuses for up to 500,000 shares of common stock. At the annual shareholders meeting on May 22, 2012, the shareholders of the Company approved an amendment which (a) removed the restrictions in the Plan that prohibit more than 20% of the awards being given to any one participant or to the independent directors as a group, or prohibiting more than 20% of the awards being made in restricted stock or bonus shares, and (b) increased the number of shares available under the Plan from 300,000 shares to 500,000 shares.

Non Vested Share Awards

On May 22, 2012 share awards totaling 45,000 shares were made to two executive officers of the Company in accordance with the Plan at a grant date price of $0.90. The shares vest based on continued employment of the executive, and the restrictions lapse in 50% increments on each of the first and second anniversary of issuance.

Investment Committee Share Compensation

In March 2012 the Board of Directors approved the recommendation by the Compensation Committee that the independent directors serving as members of the Investment Committee receive their monthly Investment Committee fees in the form of shares of the Company’s Common Stock issued under the 2006 Stock Plan, priced as the average of the closing price of the stock for the first 20 trading days for the calendar year. The shares issued to the independent directors of the Investment Committee for the three and nine months ended September 30, 2012 were 8,725 and 21,815, respectively.

Share-Based Compensation Expense

The expense recognized in the consolidated financial statements for the nine months ended September 30, 2012 and 2011 for share-based compensation related to employees and directors was approximately $27,600 and $28,800, respectively.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

Impairment Losses

Held for use

In accordance with FASB ASC 360-10-35 Property Plant and Equipment – Overall – Subsequent Measurement, the Company analyzes its assets for impairment when events or circumstances occur that indicate the carrying amount may not be recoverable. As part of this process, the Company utilizes a two-step analysis to determine whether a trigger event (within the meaning of ASC 360-10-35) has occurred with respect to cash flow of, or a significant adverse change in business climate for, its hotel properties. Quarterly and annually the Company reviews all of its held for use hotels to determine any property whose cash flow or operating performance significantly underperformed from budget or prior year, which the Company has set as a shortfall against budget or prior year as 15% or greater.

Each quarter we apply a second analysis on those properties identified in the 15% change analysis or which have had a trigger event. The analysis estimates the expected future cash flows to identify any property whose carrying amount potentially exceeded the recoverable value. In performing this analysis, the Company makes the following assumptions:

•

Holding periods range from three to five years for non-core assets, and ten years for those assets considered as core.

•

Cash flow from trailing twelve months for the individual properties multiplied by the holding period as noted above. The Company does not assume growth rates on cash flows as part of its step one analysis.

•

A revenue multiplier for the terminal value based on an average of historical sales from leading industry brokers of like properties was applied according to the assigned holding period.

During the three months ended September 30, 2012, no trigger events as described in ASC 360-10-35 occurred for any of our held for use hotels. However, a trigger event, as described in ASC 360-10-35, occurred in the second quarter of 2012 for two hotel properties held for use in which the carrying value of the hotel exceeded the sum of the undiscounted cash flows expected over its remaining anticipated holding period and from its disposition. The properties were then tested to determine if their carrying amounts were recoverable. When testing the recoverability for a property, in accordance with FASB ASC 360-10-35 35-29 Property Plant and Equipment – Overall—Subsequent Measurement, Estimates of Future Cash Flows Used to Test a Long-Lived Asset for Recoverability, the Company uses estimates of future cash flows associated with the individual properties over their expected holding period and eventual disposition. In estimating these future cash flows, the Company incorporates its own assumptions about its use of the hotel property and expected hotel performance. Assumptions used for the individual hotels were determined by management, based on discussions with our asset management group and our third party management companies. The properties were then subjected to a probability-weighted cash flow analysis as described in FASB ASC 360-10-55 Property Plant and Equipment – Overall – Implementation. In this analysis, the Company completed a detailed review of the hotels’ market conditions and future prospects, which incorporated specific detailed cash flow and revenue multiplier assumptions over the remaining expected holding periods, including the probability that the property will be sold. Based on the results of this analysis, it was determined that the Company’s investment in the subject properties was not fully recoverable; accordingly, impairment of $4.1 million was recognized.

To determine the amount of impairment on the hotel properties identified above, in accordance with FASB ASC 360-10-55, the Company calculated the excess of the carrying value of the properties in comparison to their fair market value as of June 30, 2012. Based on this calculation, the Company determined total impairment of $4.1 million existed as of June 30, 2012 on the two hotel properties. Fair market value was determined with the assistance of independent real estate brokers and revenue multiples based on the Company’s experience with hotel sales in the current year as well as available industry information, considered Level 3 inputs. As the fair market value of the properties impaired for the quarter ending September 30, 2012 was determined in part by management estimates, a reasonable possibility exists that future changes to inputs and assumptions could affect the accuracy of management’s estimates and such future changes could lead to recovery of impairment or further possible impairment in the future. No held for use properties had impairment charges during the first quarter ended March 31, 2012. There was $0.4 million of impairment recovery on two properties subsequently reclassified as held for use.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

For the three months ended September 30, 2011, impairment of $2.2 million was recorded on three hotels classified as held for use. For the quarter ending June 30, 2011, impairment of $0.8 million was recorded on two hotels that were reclassified from held for sale into held for use, and $2.8 million was recorded on one hotel classified as held for use. This impairment was determined using Level 3 inputs. For the three months ended March 31, 2011, no impairment was taken on held for use hotels. Impairment of $0.2 million was taken on a held for sale property which was subsequently reclassified as held for use.

Held for sale

During the three months ending March 31, 2012, Level 3 inputs were used to determine non-cash impairment losses of $1.8 million on eight held for sale hotels, one hotel subsequently reclassified as held for sale, and one hotel subsequently sold, and recovery of previously recorded impairment for which fair value exceeded management’s previous estimates in the amount of $0.4 million on two hotels that were reclassified into held for use. During the three months ended June 30, 2012 impairment losses of $0.1 million were recorded on eight held for sale hotels offset by $0.1 million of recovery on two held for sale hotels and approximately $6,000 of recovery on one sold hotel. During the three months ended September 2012, impairment of $2.7 million was taken on eight held for sale hotels and two hotels reclassified to held for sale.

During the three months ending March 31, 2011, Level 3 inputs were used to determine non-cash impairment losses of approximately $47,000 on four hotels held for sale, $0.2 million on four hotels subsequently sold and $0.2 million on one hotel that was subsequently placed back into held for use. The Company also recorded a recovery of approximately $26,000 of previously recorded impairment loss on one hotel at the time of sale. During the three months ended June 30, 2011 the Company recorded impairment loss of $0.7 million on six hotels held for sale, $0.6 million on one property reclassified as held for sale, approximately $29,000 of impairment loss on three sold hotels and approximately $22,000 of recovery on one hotel sold and approximately $86,000 of recovery on one hotel subsequently sold. During the three months ended September 30, 2011, impairment of $0.4 million was recorded on eight held for sale hotels. A recovery of approximately $56,000 was received on one hotel reclassified as held for sale, and a loss of $15,000 on one hotel subsequently reclassified as held for sale. In addition, there was an impairment recovery of approximately $64,000 on two hotels sold and losses of $37,000 on two properties subsequently sold.

In accordance with ASC 360-10-35 Property Plant and Equipment—Overall—Subsequent Measurement, the Company determines the fair value of an asset held for sale based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales.

Income Taxes

The TRS Lessee income tax expense from continuing operations for the three months ended September 30, 2012 and 2011 was $0.2 million and $0.1 million, respectively. The TRS Lessee income tax expense (benefit) from continuing operations for the nine months ended September 30, 2012 and 2011 was approximately $0.1 million and $(0.3) million, respectively. The TRS Lessee has estimated its income tax expense/benefit using a combined federal and state rate of 38%. As of September 30, 2012, TRS had a deferred tax asset of $6.1 million primarily due to current and past years’ tax net operating losses. These loss carryforwards will begin to expire in 2022. While the Company continues to believe that it is more likely than not that the deferred tax assets will be realizable, it is possible that this judgment may change as the Company continues to evaluate both the positive and negative evidence.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

Income taxes are accounted for under the asset and liability method in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company uses an estimate of its annual effective rate based on the facts and circumstances at the time while the actual effective rate is calculated at year-end. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and for net operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management’s evaluation of the need for a valuation allowance must consider positive and negative evidence, and the weight given to the potential effects of such positive and negative evidence is based on the extent to which it can be objectively verified.

Related to accounting for uncertainty in income taxes, we follow a process by which the likelihood of a tax position is gauged based upon the technical merits of the position, perform a subsequent measurement related to the maximum benefit and the degree of likelihood, and determine the amount of benefit to be recognized in the financial statements, if any.

Noncontrolling Interest in Redeemable Preferred Units

At September 30, 2012, 11,424 of SLP’s preferred operating partnership units (“Preferred OP Units”) remained outstanding. The redemption value for the Preferred OP Units is $0.1 million at September 30, 2012. The Preferred OP Units are convertible by the holders into Common operating units (“Common OP Units”) on a one-for-one basis or, pursuant to an extension agreement by the holders with SLP, may be redeemed for cash at the option of the holder at $10 per unit on or after October 24, 2012. All holders elected to have their Units redeemed on October 24, 2012.

Preferred OP Units receive a preferred dividend distribution of $1.10 per preferred unit annually, payable on a monthly basis and do not participate in the allocations of profits and losses of SLP. Distributions to holders of Preferred OP Units have priority over distributions to holders of Common OP Units. The Preferred Op Units are carried outside of permanent equity at redemption value.

Noncontrolling Interest Reconciliation of Common and Preferred Units


(dollars in thousands)	Redeemable Noncontrolling Interest			Noncontrolling Interest			Total Noncontrolling Interest
Balance at June 30, 2012	$	114		$	131		$	245
Partner distribution		(3	)		—			(3	)
Noncontrolling interest		3			(4	)		(1	)

Balance at September 30, 2012	$	114		$	127		$	241

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

Equity Reconciliation of Parent and Noncontrolling Interest


(dollars in thousands)	Preferred A Shares Par Value		Preferred C Shares Par Value		Common Stock Warrants		Common Shares Par Value		Additional Paid-in Capital		Distribution in Excess Accumulated Earnings			Net Shareholders Equity			Noncontrolling Interest in Consolidated Partnerships			Total Equity
Balance at June 30, 2012	$	8	$	30	$	252	$	231	$	134,762	$	(88,425	)	$	46,858		$	131		$	46,989

Stock-based compensation		—		—		—		—		14		—			14			—			14
Preferred dividends		—		—		—		—		—		(837	)		(837	)		—			(837	)
Net loss		—		—		—		—		—		(2,265	)		(2,265	)		(4	)		(2,269	)

Balance at September 30, 2012	$	8	$	30	$	252	$	231	$	134,776	$	(91,527	)	$	43,770		$	127		$	43,897

Series B Redeemable Preferred Stock

At September 30, 2012 there were 332,500 shares of 10.0% Series B preferred stock outstanding. The shares were sold on June 3, 2008 for $25.00 per share and bear a liquidation preference of $25.00 per share.

Dividends on the Series B preferred stock are cumulative and are payable quarterly in arrears on each March 31, June 30, September 30 and December 31, or, if not a business day, the next succeeding business day, at the annual rate of 10.0% of the $25.00 liquidation preference per share, equivalent to a fixed annual amount of $2.50 per share. Dividends on the Series B preferred stock accrue whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, whether or not such dividends are declared and whether or not such dividends are prohibited by agreement. Accrued but unpaid dividends on the Series B preferred stock will not bear interest.

The Series B preferred stock will, with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, rank: (a) senior to the Company’s common stock, (b) senior to all classes or series of preferred stock issued by the Company and ranking junior to the Series B preferred stock with respect to dividend rights or rights upon the Company’s liquidation, dissolution or winding up, (c) on a parity with the Company’s Series A preferred stock and Series C convertible preferred stock and with all classes or series of preferred stock issued by the Company and ranking on a parity with the Series B preferred stock with respect to dividend rights or rights upon the Company’s liquidation, dissolution or winding up and (d) junior to all of the Company’s existing and future indebtedness.

The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares, unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for the current and all past dividend periods. The Series B preferred stock has no stated maturity and is not subject to any sinking fund or mandatory redemption (except as described below).

The Series B preferred stock is not redeemable prior to June 3, 2013, except in certain limited circumstances relating to the maintenance of the Company’s ability to qualify as a REIT as provided in the Company’s articles of incorporation or a change of control (as defined in the Company’s amendment to its articles of incorporation establishing the Series B preferred stock). The Company may redeem the Series B preferred stock, in whole or in part, at any time or from time to time on or after June 3, 2013 for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. Also, upon a change of

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

control, each outstanding share of the Company’s Series B preferred stock will be redeemed for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. At September 30, 2012, no events have occurred that would lead the Company to believe redemption of the preferred stock, due to a change of control or failure to maintain its REIT qualification, is probable.

Series A Preferred Stock

On December 30, 2005, the Company offered and sold 1,521,258 shares of 8% Series A preferred stock. At September 30, 2012, 803,270 shares of Series A preferred stock remained outstanding. Dividends on the Series A preferred stock are cumulative and payable monthly in arrears on the last day of each month, at the annual rate of 8% of the $10.00 liquidation preference per share, equivalent to a fixed annual amount of $.80 per share. The Company may redeem the Series A preferred stock, in whole or part, at any time and from time to time for cash at a redemption price of $10.00 per share, plus accrued and unpaid dividends.

Series C Convertible Preferred Stock

The Company entered into a Purchase Agreement dated November 16, 2011 for the issuance and sale of Supertel’s Series C convertible preferred stock and warrants under a private transaction to Real Estate Strategies, L.P. (“RES”). On January 31, 2012 at a special meeting, the shareholders of Supertel, by the requisite vote, approved the issuance and sale of up to 3,000,000 shares of the Series C convertible preferred stock of Supertel, up to 30,000,000 shares of common stock of Supertel which may be issued upon conversion of the Series C convertible preferred stock, and warrants to purchase up to an additional 30,000,000 shares of common stock, to RES pursuant to the Purchase Agreement. In two closings on February 1, 2012 and February 15, 2012, the Company completed the sale to RES of 3,000,000 shares of Series C convertible preferred stock and warrants to purchase 30,000,000 shares of common stock at an exercise price of $1.20 per common share.

Each share of Series C convertible preferred stock is entitled to a dividend of $0.625 per year payable in equal quarterly dividends. Each share of Series C convertible preferred stock has a liquidation preference of $10.00 per share, in cash, plus an amount equal to any accrued and unpaid dividends. With respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, the Series C convertible preferred stock ranks: (a) on parity with the Series A preferred stock and Series B preferred stock and other future series of preferred stock designated to rank on parity, and (b) senior to the common stock and other future series of preferred stock designated to rank junior, and (c) junior to the Company’s existing and future indebtedness.

The Series C convertible preferred stock, at the option of the holder, is convertible at any time into common stock at a conversion price of $1.00 for each share of common stock, which is equal to the rate of ten shares of common stock for each share of Series C convertible preferred stock. A holder of Series C convertible preferred stock will not have conversion rights to the extent the conversion would cause the holder and its affiliates to beneficially own more than 34% of voting stock (the “Beneficial Ownership Limitation”). “Voting stock” means capital stock having the power to vote generally for the election of directors of the Company.

The Series C convertible preferred stock will vote with the common stock as one class, subject to certain voting limitations. For any vote, the voting power of the Series C convertible preferred stock will be equal to the lesser of: (a) 6.29 votes per share, or (b) an amount of votes per share such that the vote of all shares of Series C convertible preferred stock in the aggregate equal 34% of the combined voting power of all the Company voting stock, minus an amount equal to the number of votes represented by the other shares of voting stock beneficially owned by RES and its affiliates (the “Voting Limitation”).

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

As long as RES has the right to designate two or more directors to the Company Board of Directors pursuant to the Directors Designation Agreement, the following requires the approval of RES and IRSA Inversiones y Representaciones Sociedad Anónima (“IRSA”):

•

the merger, consolidation, liquidation or sale of substantially all of the assets of the Company;

•

the sale by the Company of common stock or securities convertible into common stock equal to 20% or more of the outstanding common stock or voting stock; or

•

any Company transaction of more than $120,000 in which any of its directors or executive officers or any member of their immediate family will have a material interest, exclusive of employment compensation and interests arising solely from the ownership of the Company equity securities if all holders of that class of equity securities receive the same benefit on a pro rata basis.

Equity Distribution Agreement

On March 29, 2011, the Company entered into an equity distribution agreement with JMP Securities LLC (“JMP”) pursuant to which the Company may offer and sell up to 2.0 million shares of common stock from time to time through JMP. Sales of shares of the Company common stock, if any, under the agreement may be made in negotiated transactions or other transactions that are deemed to be “at the market” offerings, including sales made directly on the Nasdaq Global Market or sales made to or through a market maker other than on an exchange. The common stock will be sold pursuant to the Company’s registration statement on Form S-3 (333-170756). During the nine months ended September 30, 2012, no shares were sold under this agreement. During the nine months ended September 30, 2011, the Company sold through JMP, as its agent, an aggregate of 26,725 shares of common stock pursuant to ordinary brokers’ transactions on the Nasdaq Global Market. Gross proceeds were $43,685, commissions to agent were $2,184 and net proceeds to the Company (before expenses) were $41,501.

Commitments and Contingencies

The Company entered into a Purchase Agreement dated November 16, 2011 for the issuance and sale of Supertel’s Series C convertible preferred stock and warrants under a private transaction with RES. In the Purchase Agreement, the Company agreed that $20 million of the proceeds would be used to pursue hospitality acquisitions which are consistent with the investment strategy of the Company’s Board of Directors, as well as an additional $5 million to be used to pursue hospitality acquisitions within a reasonable period thereafter. On May 25, 2012, the Company acquired a 100 room Hilton Garden Inn in Dowell, Maryland for $11.5 million. The purchase was funded with capital from the sale of the Series C convertible preferred stock. On September 24, 2012, the Company announced that it has entered into an agreement to acquire the TownePlace Suites (116 rooms), located in Johnston (Urbandale), Iowa for a purchase price of $10.2 million.

In connection with the issuance and sale of the Series C convertible preferred stock and warrants pursuant to the Purchase Agreement with RES, the Company entered into a registration rights agreement (the “Registration Rights Agreement”) dated February 1, 2012 with RES and IRSA. The Registration Rights Agreement requires the Company to register for resale by the holders of the common stock issued upon conversion of the Series C convertible preferred stock and upon exercise of the warrants, and the warrants and the Series C convertible preferred stock. The Company is generally required to maintain the effectiveness of the registration statement for the resale of the securities except for the securities sold under the registration statement or with respect to any securities that may be sold without registration under Rule 144 of the Securities Act of 1933, as amended. If the Company fails to

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 1. FINANCIAL STATEMENTS, CONTINUED:

Supertel Hospitality, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended September 30, 2012 and 2011

(Unaudited)

maintain its effectiveness during the periods required by the Registration Rights Agreement, then the Company is required to pay the holders a liquidated damage amount, without limitation, in the aggregate amount of $20,000 for each week any such failure continues.

Litigation

Various claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties. Based upon the information available, the Company believes that the resolution of any of these claims and legal proceedings should not have a material adverse affect on its consolidated financial position, results of operations or cash flows.

Subsequent Events

On October 12, 2012, the Company obtained a $6.15 million loan with Cantor Commercial Real Estate Lending, L.P., collateralized by the Hilton Garden Inn in Dowell, Maryland. The loan bears interest at 4.247% and matures on November 6, 2017. Proceeds will be used to fund future acquisitions.

On November 2, 2012, the Company obtained a $30.6 million loan with Morgan Stanley Mortgage Capital Holdings LLC. The loan is secured by 22 hotels, bears interest at 5.83% and matures on December 1, 2017. Proceeds of the loan were used to repay the $28.2 million balance of the loan with Greenwich Capital which matured in December 2012 and was secured by 32 hotels.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

Forward-Looking Statements

Certain information both included and incorporated by reference in this management’s discussion and analysis and other sections of this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on assumptions that management has made in light of experience in the business in which we operate, as well as management’s perceptions of historical trends, current conditions, expected future developments, and other factors believed to be appropriate under the circumstances. These statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control), and assumptions. Management believes that these forward-looking statements are based on reasonable assumptions.

Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: economic conditions, generally, and the real estate market specifically; legislative/regulatory changes (including changes to laws governing the taxation of real estate investment trusts); availability of capital; risks associated with debt financing, interest rates; competition; supply and demand for hotel rooms in our current and proposed market areas; and policies and guidelines applicable to real estate investment trusts and other risks and uncertainties described herein and in our filings with the SEC from time to time. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. We caution readers not to place undue reliance on any forward-looking statements included in this report that speak only as of the date of this report.

Following is management’s discussion and analysis of our operating results as well as liquidity and capital resources which should be read together with our financial statements and related notes contained in this report and with the financial statements and management’s discussion and analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Results for the three and nine months ended September 30, 2012 are not necessarily indicative of results that may be attained in the future.

References to “we”, “our”, “us”, “Company”, and “Supertel Hospitality” refer to Supertel Hospitality, Inc., including as the context requires, its direct and indirect subsidiaries.

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these statements requires management to make certain estimates and judgments that affect our financial position and results of operations. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

We are a self-administered real estate investment trust, and through our subsidiaries, as of September 30, 2012 we owned 94 hotels in 23 states. Our hotels operate under several national and independent brands.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Our significant events for the nine months ended September 30, 2012 include:

•

On January 18, 2012, we sold a Super 8 in Fayetteville, Arkansas (83 rooms) for approximately $1.56 million. The proceeds were used primarily to reduce a term loan with Great Western Bank.

•

In two closings on February 1, 2012 and February 15, 2012, we completed the sale to Real Estate Strategies, L.P. of 3,000,000 shares of Series C convertible preferred stock and warrants to purchase 30,000,000 shares of common stock at an exercise price of $1.20 per common share. The Company agreed to use $20 million of net proceeds to pursue hospitality acquisitions which are consistent with the investment strategy of the Company Board of Directors, as well as an additional $5 million to pursue hospitality acquisitions within a reasonable period thereafter.

•

On February 2, 2012, we paid $11.8 million on the Great Western Bank revolving line of credit, bringing the balance to zero. The available capacity is expected to be used in part to fund the $20 million obligation for hotel investment. The payment was funded with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

•

On February 3, 2012, we paid in full the $5.0 million balance on the revolving credit facility with Elkhorn Valley Bank, with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

•

On February 16, 2012, we paid in full the $2.1 million note payable to Fredericksburg North Investors, LLC, with a portion of the net proceeds from the sale of the Series C convertible preferred stock.

•

On February 21, 2012, we amended our credit facilities with Great Western Bank to extend the maturity date of all loans to June 30, 2013.

•

On March 1, 2012 we amended our credit facility with First National Bank of Omaha to extend the maturity date to May 1, 2012. This debt was paid in full on April 20, 2012.

•

On March 27, 2012, we sold a Super 8 in Muscatine, Iowa (63 rooms) for approximately $1.3 million. The proceeds were used primarily to reduce a term loan with Great Western Bank, with the remaining amount used to reduce the revolving line of credit with Great Western Bank.

•

On March 29, 2012, we amended our credit facilities with General Electric Capital Corporation. These changes were reflected in the notes to our consolidated financial statements included in our Form 10-K for the year ended December 31, 2011.

•

On April 20, 2012, we sold a Super 8 in El Dorado, Kansas (49 rooms) for approximately $1.625 million. The proceeds were used to pay off the $0.8 million loan with First National Bank of Omaha, with additional funds applied to general corporate purposes.

•

On May 15, 2012, we borrowed $1.25 million from Elkhorn Valley Bank. The note was refinanced on October 10, 2012. The new loan amount is $1.15 million with a maturity of October 15, 2014. The note bears interest at 5.5% and is secured by a Days Inn hotel located in Fredericksburg, Virginia (North).

•

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

•

On June 15, 2012, the Company sold a Masters Inn in Tampa, Florida (127 rooms) for approximately $2.1 million. Proceeds were used to pay down mortgage debt with General Electric Capital Corporation.

•

On July 25, 2012, we sold a Super 8 in Watertown, South Dakota (57 rooms) for approximately $1.55 million. Proceeds were used to pay the mortgage with Elkhorn Valley Bank with the remaining proceeds used to reduce short term borrowings.

•

As of September 30, 2012, the amount available on our revolving credit facility with Great Western Bank was reduced from $12.5 million to $12.0 million.

On June 29, 2012, the Company received a notice from the NASDAQ Stock Market stating that the minimum bid price of its common stock was below $1.00 per share for 30 consecutive business days, and that the Company was therefore not in compliance with Marketplace Rule 5450(a)(1). The notification letter has no immediate effect on the listing of the Company’s common stock on the NASDAQ Global Market. The Company’s common stock continued to trade on the NASDAQ Global Market under the symbol SPPR. On September 25, 2012 the Company received a letter from the NASDAQ Stock Market stating that the Company has regained compliance with the continued listing requirement for the NASDAQ Global Market.

We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnerships, Supertel Limited Partnership and E&P Financing Limited Partnership, limited partnerships, limited liability companies or other subsidiaries of our operating partnerships. We currently own, indirectly, an approximate 99% general partnership interest in Supertel Limited Partnership and a 100% partnership interest in E&P Financing Limited Partnership.

As of September 30, 2012, we owned 94 select service hotels. The hotels are leased to our wholly owned taxable REIT subsidiary, TRS Leasing, Inc, and its wholly owned subsidiaries (collectively “TRS Lessee”), and are managed by Hospitality Management Advisors Inc. (“HMA”), Strand Development Company LLC (“Strand”), Kinseth Hotel Corporation (“Kinseth”), Cherry Cove Hospitality Management, LLC (“Cherry Cove”), and HLC Hotels Inc. (“HLC”).

Cherry Cove is the manager of our Hilton Garden Inn in Dowell, Maryland. HLC is the manager of our six Masters Inn hotels located in Alabama, Florida, Georgia and South Carolina.

HMA manages 24 Company hotels in Arkansas, Louisiana, Tennessee, Kentucky, Indiana, Virginia and Florida. Strand manages the Company’s seven economy extended-stay hotels in Georgia and South Carolina as well as 16 additional Company hotels located in Georgia, Delaware, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia. Kinseth manages 40 Company hotels in eight states primarily in the Midwest. Each of the management agreements with HMA, Strand, and Kinseth expire on May 31, 2014. The management agreement with Cherry Cove expires May 24, 2015. These management agreements renew for additional terms of one year unless either party to the agreement gives the other party written notice of termination at least 90 days prior to the end of the initial term or the then current renewal term.

Each of HMA, Strand, Kinseth and Cherry Cove receive a monthly management fee with respect to the hotels they manage equal to 3.5% of the gross hotel income and 2.25% of hotel net operating income (“NOI”). NOI is equal to gross hotel income less operating expenses (exclusive of management fees, certain insurance premiums and employee bonuses, and personal and real property taxes).

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

HLC receives management fees equal to 5.0% of the gross revenues derived from the operation of the hotels and incentive fees equal to 10% of the annual operating income of the hotels in excess of 10.5% of the Company’s investment in the hotels. On August 9, 2011, the term of the management agreement with HLC was extended to December 31, 2013.

Overview of Discontinued Operations

The condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 include the results of operations for the 21 hotels classified as held for sale at September 30, 2012, as well as all properties that have been sold during 2012 and 2011 in accordance with FASB ASC 205-20 Presentation of Financial Statements – Discontinued Operations.

The assets held for sale at September 30, 2012 and 2011 are separately disclosed in the Condensed Consolidated Balance Sheets. Among other criteria, we classify an asset as held for sale if we expect to dispose of it within one year, we have initiated an active marketing plan to sell the asset at a reasonable price and it is unlikely that significant changes to the plan to sell the asset will be made. While we believe that the completion of these dispositions is probable, the sale of these assets is subject to market conditions and we cannot provide assurance that we will finalize the sale of all or any of these assets on favorable terms or at all. We believe that all our held for sale assets as of September 30, 2012 remain properly classified in accordance with ASC 205-20.

Where the carrying value of an asset held for sale exceeded the estimated fair value, net of selling costs, we reduced the carrying value and recorded an impairment charge. Level 3 inputs were used during the three months ended September 30, 2012. Level 3 inputs were used during the three months ended March 31, 2012 to determine impairment loss of $1.8 million on eight held for sale hotels, one hotel reclassified as held for sale, one hotel subsequently sold, and recovery of previously recorded impairment on two hotels in the amount of $0.4 million that were reclassified into held for use. For the three months ending June 30, 2012, $4.1 million of impairment was recorded on two hotels that were reclassified as held for use. In the three months ending June 30, 2012, the Company recorded impairment loss of $0.1 million on eight hotels held for sale, $0.1 million of recovery on two hotels held for sale and approximately $6,000 of recovery on one hotel subsequently sold. During the three months ended September 30, 2012, impairment of $2.7 million was taken on eight hotels held for sale and two hotels reclassified to held for sale.

The fair value of an asset held for sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales.

The discontinued operations are the result of management’s strategy to reevaluate its hotels as well as the length of the period in which the company anticipates holding its properties based on new and more stringent criteria. These criteria include strategic review of debt service capability, estimated return on investment, and local market conditions.

Our continuing operations reflect the results of operations of those hotels which we are likely to retain in our portfolio for the foreseeable future as well as those assets which do not currently meet the held for sale criteria in ASC 205-20. We periodically evaluate the assets in our portfolio to ensure they continue to meet our performance objectives. Accordingly, from time to time, we could identify other assets for disposition.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

General

The discussion that follows is based primarily on the condensed consolidated financial statements of the three and nine months ended September 30, 2012 and 2011, and should be read along with the condensed consolidated financial statements and notes.

The comparisons below reflect revenues and expenses of the company’s 94 and 101 hotels as of September 30, 2012 and 2011, respectively.

Results of Operations

Comparison of the three months ended September 30, 2012 to the three months ended September 30, 2011

Operating results are summarized as follows (in thousands):


	Three months ended September 30, 2012									Three months ended September 30, 2011									Continuing
	Continuing Operations			Discontinued Operations			Total			Continuing Operations			Discontinued Operations			Total			Operations Variance
Revenues	$	22,192		$	4,714		$	26,906		$	21,199		$	6,552		$	27,751		$	993
Hotel and property operations expenses		(16,132	)		(4,065	)		(20,197	)		(15,475	)		(5,570	)		(21,045	)		(657	)
Interest expense		(1,964	)		(408	)		(2,372	)		(1,975	)		(1,487	)		(3,462	)		11
Depreciation and amortization expense		(2,223	)		(33	)		(2,256	)		(2,139	)		(281	)		(2,420	)		(84	)
General and administrative expenses		(943	)		—			(943	)		(906	)		—			(906	)		(37	)
Acquisition, termination expense		(15	)		—			(15	)		—			—			—			(15	)
Net gain (loss) on dispositions of assets		11			553			564			1,139			(13	)		1,126			(1,128	)
Other income (expense)		(1,138	)		—			(1,138	)		2			—			2			(1,140	)
Impairment loss		—			(2,732	)		(2,732	)		(2,227	)		(334	)		(2,561	)		2,227
Income tax (expense) benefit		(212	)		129			(83	)		(139	)		250			111			(73	)

Net income (loss)	$	(424	)	$	(1,842	)	$	(2,266	)	$	(521	)	$	(883	)	$	(1,404	)	$	97

The hotel industry continued to regain some of its lost momentum in the third quarter. With demand somewhat outpacing supply, our operators were able to increase the average daily rate “ADR” in the third quarter with modest sacrifice to occupancy. ADR for the same store portfolio was up 1.3% from the prior year, with occupancy down 0.9%. The overall result was a rise in revenue per available room “RevPAR” of 0.5%. We refer to our entire portfolio as select service hotels which we further describe as upscale hotels, upper midscale hotels, midscale hotels, economy hotels and extended stay hotels. Results for our same store portfolio are presented below under “Revenue Per Available Room (“RevPAR”), Average Daily Rate (“ADR”), and Occupancy”.

Revenues and Operating Expenses

Revenues from continuing operations for the three months ended September 30, 2012 increased $1.0 million or 4.7% compared to the same period in 2011. The variance was due to the purchase of a Hilton Garden Inn during the second quarter of 2012.

During the third quarter of 2012, hotel and property operations expenses from continuing operations increased $0.7 million, which was due to the acquisition mentioned above.

Interest Expense, Depreciation and Amortization Expense and General and Administrative Expense

Interest expense from continuing operations was essentially unchanged from the third quarter of last year. Depreciation and amortization expense from continuing operations increased $0.1 million to $2.2 million. The general and administrative expense for the 2012 third quarter was also flat compared to the prior period, remaining at $0.9 million.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Other Income/Expense

The increased expense resulted from a change in the fair value of derivative liabilities. The Series C convertible preferred embedded derivative and the common stock warrants, both derivatives, were revalued at September 30, 2012. The fair value of the derivative liabilities increased by $1.2 million, due primarily to an increase in the price of the common stock.

Impairment loss

For the third quarter of 2012, we recorded impairment charges of $2.7 million on ten hotels classified as held for sale. There was no impairment taken against hotels classified as held for use. In the third quarter of 2011, $0.3 million of net impairment was taken against ten hotels held for sale, with $37,000 of impairment taken on two properties subsequently sold and $64,000 of impairment recovered on two properties at the time of sale. Impairment of $2.2 million was taken on three held for use properties.

Dispositions

In the third quarter of 2012, we recognized a gain of $0.6 million on the sale of a Super 8 in Watertown, South Dakota. In the third quarter of 2011, we recognized a $1.1 million gain on the disposition of assets related to the sale of the office building in Norfolk, Nebraska. Two hotels were sold in the 2011 third quarter with no gain or loss.

Income Tax Benefit

The income tax expense/benefit from continuing operations is related to the taxable income/loss from our taxable subsidiary, the TRS Lessee. Management believes the combined federal and state income tax rate for the TRS Lessee will be approximately 38%. The tax expense is a result of TRS Lessee’s income for the three months ended September 30, 2012. The income tax will vary based on the taxable earnings or loss of the TRS Lessee.

The income tax expense from continuing operations increased by was $0.1 million compared to the year ago period, due to increased income by the TRS Lessee.

Comparison of the nine months ended September 30, 2012 to the nine months ended September 30, 2011

Operating results are summarized as follows (in thousands):


	Nine months ended September 30, 2012									Nine months ended September 30, 2011									Continuing Operations Variance
	Continuing Operations			Discontinued Operations			Total			Continuing Operations			Discontinued Operations			Total			Continuing Operations Variance
Revenues	$	59,545		$	14,641		$	74,186		$	57,089		$	18,984		$	76,073		$	2,456
Hotel and property operations expenses		(44,200	)		(12,721	)		(56,921	)		(43,108	)		(16,464	)		(59,572	)		(1,092	)
Interest expense		(6,051	)		(1,548	)		(7,599	)		(6,344	)		(3,082	)		(9,426	)		293
Depreciation and amortization expense		(6,473	)		(179	)		(6,652	)		(6,582	)		(1,102	)		(7,684	)		109
General and administrative expenses		(2,957	)		—			(2,957	)		(3,010	)		(50	)		(3,060	)		53
Acquisition, termination expense		(178	)		—			(178	)		(1	)		—			(1	)		(177	)
Net gain (loss) on dispositions of assets		5			5,822			5,827			1,125			336			1,461			(1,120	)
Other income (expense)		(1,478	)		—			(1,478	)		107			—			107			(1,585	)
Impairment loss		(3,714	)		(4,535	)		(8,249	)		(6,010	)		(1,813	)		(7,823	)		2,296
Termination cost		—			—			—			(540	)		—			(540	)		540
Income tax (expense) benefit		(111	)		336			225			339			899			1,238			(450	)

	$	(5,612	)	$	1,816		$	(3,796	)	$	(6,935	)	$	(2,292	)	$	(9,227	)	$	1,323

The majority of our brands have seen the benefits of the increased demand for hotel rooms year to date. As a whole, the industry has seen greater recovery of ADR than occupancy. For the same store portfolio year to date 2012, our ADR is up 2.6%, occupancy is down 0.6%, and RevPAR is up 1.9%. Results for our same store portfolio are presented below under “Revenue Per Available Room (“RevPAR”), Average Daily Rate (“ADR”), and Occupancy”.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Revenues and Operating Expenses

Revenues from continuing operations for the nine months ended September 30, 2012 increased $2.5 million or 4.3 percent. Approximately $1.4 million of the variance was due to the purchase of a Hilton Garden Inn during the second quarter of 2012. The remainder was caused by increased ADR and slightly offset by decreased occupancy.

During the nine months ended September 30, 2012, hotel and property operations expenses from continuing operations increased $1.1 million. The Hilton Garden Inn acquisition accounted for $0.9 million of the variance. The remainder was primarily caused by franchise related expenses.

Interest Expense, Depreciation and Amortization Expense and General and Administrative Expense

Interest expense from continuing operations decreased by $0.3 million for the nine months ended September 30, 2012 compared to the year ago period. This is primarily due to the refinancing and reduction of debt. The depreciation and amortization expense from continuing operations decreased $0.1 million for the nine months ended September 30, 2012 compared to the year ago period. The general and administrative expense from continuing operations for the same period decreased $0.1 million.

Acquisition, termination expense

The $0.2 million variance is primarily caused by the acquisition costs associated with the Hilton Garden Inn purchased in May, 2012.

Other Income/Expense

The increased expense primarily resulted from a change in the fair value of derivative liabilities. The Series C convertible preferred embedded derivative and the common stock warrants, both derivatives, were revalued at September 30, 2012. For the nine months ending September 30, 2012, the fair value of the derivative liabilities increased by $1.6 million, due primarily to an increase in the price of the common stock.

Impairment loss

During the nine months ending September 30, 2012, we recognized net impairment charges of $4.5 million on twelve hotels classified as held for sale. There was an impairment charge of $4.1 million taken against two hotels classified as held for use. There was a recovery of $0.4 million of previously recorded impairment on two properties subsequently reclassified as held for use. There was a net impairment charge of $1.7 million recorded on ten hotels classified as held for sale during the first nine months of 2011, in addition to a net $0.1 million taken against properties which were subsequently sold. A charge of $6.0 million was taken against four properties held for use.

Termination cost

Termination cost reflects financial settlement fees directly related to the Company’s termination of Royco Hotels. The one time charge of $0.5 million reflects settlement of the lawsuit filed by Royco Hotels against the Company.

Dispositions

During the nine months ended September 30, 2012, the Company sold its interests in seven hotels, recognizing gains of approximately $5.9 million on six of the properties. During the nine months ended September 30, 2011, the Company sold its interests in five hotels, recognizing a gain on one property of approximately $0.4 million. There was no gain on the sale of the other four properties.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Income Tax Benefit

The income tax expense/benefit from continuing operations is related to the taxable income/loss from the TRS Lessee. The tax expense/benefit is a result of TRS Lessee’s losses for the nine months ended September 30, 2012 and the year ago period. The income tax expense/benefit will vary based on the taxable earnings/losses of the TRS Lessee.

The income tax expense from continuing operations was $0.1 million during the nine months ended September 30, 2012, compared with a benefit of $0.3 million for the year ago period, due to increased income by the TRS Lessee for the same period.

Liquidity and Capital Resources

Our income and ability to meet our debt service obligations, and make distributions to our shareholders, depends upon the operations of the hotels being conducted in a manner that maintains or increases revenue, or reduces expenses, to generate sufficient hotel operating income for TRS Lessee to pay the hotels’ operating expenses, including management fees and rents to us. We depend on rent payments from TRS Lessee to pay our operating expenses and debt service and to make distributions to shareholders.

The Company’s operating performance, as well as its liquidity position, has been and continues to be negatively affected by current economic conditions, many of which are beyond our control. The Company anticipates that these adverse economic conditions are likely to continue for a period of time but could abate somewhat over the next year; however, in addition to our operating performance, the other sources described below will be essential to our liquidity and financial position.

Our business requires continued access to adequate capital to fund our liquidity needs. In February 2012 the Company issued 3 million shares of Series C convertible preferred stock which provided $28.6 million of net proceeds. The Company agreed to use $20 million to pursue hospitality acquisitions, as well as an additional $5 million to pursue hospitality acquisitions within a reasonable period thereafter. In 2011, the Company reviewed its entire portfolio, identified properties considered non-core and developed timetables for disposal of those assets deemed non-core. We focused on improving our liquidity through cash generating asset sales and disposition of assets that are not generating cash at levels consistent with our investment principles. In 2012, our foremost priorities continue to be preserving and generating capital sufficient to fund our liquidity needs. Given the deterioration and uncertainty in the economy and financial markets, management believes that access to conventional sources of capital will be challenging and management has planned accordingly. We are also working to proactively address challenges to our short-term and long-term liquidity position.

The following are the expected actual and potential sources of liquidity, which if realized we currently believe will be sufficient to fund our near-term obligations:

•

Cash and cash equivalents;

•

Cash generated from operations;

•

Proceeds from asset dispositions;

•

Proceeds from additional secured or unsecured debt financings; and/or

•

Proceeds from public or private issuances of debt or equity securities.

The Company has significant indebtedness maturing before the end of the year. On March 29, 2012, our credit facilities with General Electric Capital Corporation were amended to, among other things, require a principal prepayment of $7 million on or before December 31, 2012. A $1.1 million note payable to General Electric Capital Corporation is also due on December 31, 2012. These payments to General Electric Capital Corporation are expected to be funded from (a) the sale of unencumbered hotels expected to be sold and/or refinanced in the fourth quarter of 2012, or (b) funds the Company planned to use solely for acquisitions, however the Company cannot be certain as to whether it can obtain all necessary approvals to redirect these funds. If neither of these sources of funds are available or sufficient for these repayments and to provide liquidity for the Company during the first quarter of 2013, General Electric Capital Corporation and/or other Company lenders may declare a default on our loans, and accelerate our indebtedness under the loans. If this were to happen, whether due to failure to repay or refinance debt when due or failure to comply with financial covenants, the Company’s ability to conduct business could be severely impacted as there can be no assurance that the adequacy and timeliness of cash flow would be available to meet the Company’s liquidity requirements.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

These sources are essential to our liquidity and financial position, and we cannot assure you that we will be able to successfully access them (particularly in the current economic environment). If we are unable to generate cash from these sources, we may have liquidity-related capital shortfalls and will be exposed to default risks. The significant issues with access to the liquidity sources identified above could lead to our insolvency.

In the near-term, the Company’s cash flow from operations is not projected to be sufficient to meet all of our liquidity needs. In response, management has identified non-core assets in our portfolio to be liquidated over a one to ten year period. Among the criteria for determining properties to be sold was the potential upside when hotel fundamentals return to stabilized levels. The 21 properties held for sale as of September 30, 2012 were determined to be less likely to participate in increased cash flow levels when markets do improve. As such, we expect these dispositions to help us (1) preserve cash, through potential disposition of properties with current or projected negative cash flow and/or other potential near-term cash outlay requirements (including debt maturities) and (2) generate cash, through the potential disposition of strategically identified non-core assets that we believe have equity value above debt.

We are actively marketing the 21 properties held for sale, which we anticipate will result in the elimination of an estimated $22.3 million of debt. The marketing process has been affected by challenging economic conditions and we have experienced some decreases in expected pricing. If this trend continues to worsen, we may be unable to complete the disposition of identified properties in a manner that would generate cash flow in line with management’s estimates as noted above. Our ability to dispose of these assets is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates. In light of the current economic conditions, we cannot predict:

•

whether we will be able to find buyers for identified assets at prices and/or other terms acceptable to us;

•

whether potential buyers will be able to secure financing; and

•

the length of time needed to find a buyer and to close the sale of a property.

As our debt matures, our principal payment obligations also present significant future cash requirements. We expect lenders will continue to maintain tight lending standards, which could make it more difficult for us to obtain future credit facilities on terms similar to the terms of our current credit facilities or to obtain long-term financing on favorable terms or at all.

We may not be able to successfully extend, refinance or repay our debt due to a number of factors, including decreased property valuations, limited availability of credit, tightened lending standards and challenging economic conditions. Historically, extending or refinancing loans has required the payment of certain fees to, and expenses of, the applicable lenders. Any future extensions or refinancing will likely require increased fees due to tightened lending practices. These fees and cash flow restrictions will affect our ability to fund other liquidity uses. In addition, the terms of the extensions or refinancing may include operational and financial covenants significantly more restrictive than our current debt covenants.

The Company is required to meet various financial covenants required by its existing lenders. If the Company’s future financial performance fails to meet these financial covenants, then its lenders also have the ability to take control of its encumbered hotel assets. Defaults with lenders due to failure to repay or refinance debt when due or failure to comply with financial covenants could also result in defaults under our credit facilities with Great Western Bank and General Electric Capital Corporation. Our Great Western Bank and General Electric Capital Corporation credit facilities contain cross-default provisions which would allow Great Western Bank and General Electric Capital Corporation to declare a default and accelerate our indebtedness to them if we default on our other loans, and such default would permit that lender to accelerate our indebtedness under any such loan. If this were to happen, whether due to failure to repay or refinance debt when due or failure to comply with financial covenants, the Company’s ability to conduct business could be severely impacted as there can be no assurance that the adequacy and timeliness of cash flow would be available to meet the Company’s liquidity requirements.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Sources and Uses of Cash

At September 30, 2012, available cash was $0.7 million and the Company’s available borrowing capacity on the Great Western Bank revolver was $12.0 million. The Company projected that at December 31, 2011 cash flows from operations and the available borrowing capacity from the revolver would be insufficient to meet both short term and long term liquidity requirements. As a consequence, in November 2011 the Company entered into an agreement to sell 3.0 million shares of Series C convertible preferred stock and obtained a $5 million revolving credit facility from Elkhorn Valley Bank to fund the Company until the closing of the Series C convertible preferred stock sale.

Short term outflows include monthly operating expenses, $60,000 of termination fees to Royco Hotels, payment of dividends on Series A and Series B preferred stock, and Series C convertible preferred stock, and estimated debt service for the remainder of 2012 of $3.4 million. Our long-term liquidity requirements consist primarily of the costs of renovations and other non-recurring capital expenditures that need to be made periodically with respect to hotel properties, and $53.3 million of scheduled debt repayments. $28 million was refinanced in November, 2012 with Morgan Stanley.

We have budgeted to increase our spending on capital improvements from $5 million in 2011 to $6 million on our existing hotels during 2012. The increase in capital expenditures is a result of complying with brand mandated improvements and initiating projects that we believe will generate a return on investment as we enter a period of recovery in the lodging sector. We will seek to satisfy these long-term liquidity requirements through the various sources of capital identified above, including the recently issued Series C convertible preferred stock and net proceeds on sales of non performing hotels.

In an effort to meet our short-term liquidity needs, and because of the difficulty encountered in obtaining sources of borrowing to meet such needs, on November 10, 2011 the Audit Committee of the Board of Directors approved a proposal for the purchase by four of the Company directors, Messrs. Borgmann, Dayton, Latham, and Walters (the “Purchasing Directors”), of the Amended and Restated Master Promissory Note maturing November 30, 2011 from Wells Fargo Bank, National Association (the “Wells Fargo Note”) for the balance owed of principal and interest in the amount of $2.1 million.

The Purchasing Directors purchased the Wells Fargo Note from Wells Fargo on November 21, 2011. The Wells Fargo Note was secured by two of the Company’s hotels and the Purchasing Directors released one of the hotels from security for the Wells Fargo Note so that it could be used as security by the Company to obtain a $5.0 million line of credit with Elkhorn Valley Bank. Each of the Purchasing Directors also separately guaranteed $0.75 million of the line of credit (the “Elkhorn Line of Credit”).

We completed a private offering of 3.0 million shares of Series C convertible preferred stock in February 2012. Net proceeds of the offering, less expenses, were approximately $28.6 million. We agreed to use $20 million of the net proceeds to pursue hospitality acquisitions which are consistent with the investment strategy of the Company Board of Directors, as well as an additional $5 million to pursue hospitality acquisitions within a reasonable period thereafter. In May 2012, $11.7 million of the net proceeds were used to acquire a 100 room Hilton Garden Inn in Dowell, Maryland. In February, 2012, a portion of the net proceeds were used to pay down the Great Western Bank revolver to $0. We plan to use a portion of the Great Western Bank revolver as a source of funds for the required hospitality acquisitions.

$7.1 million of the net proceeds from the sale of the Series C convertible preferred stock were used in February 2012 to repay the Wells Fargo Note held by the Purchasing Directors and to repay the Elkhorn Line of Credit, from which the Purchasing Directors were released from their personal guaranties. Each of the Purchasing Directors received approximately $13,000 in interest payments on the Wells Fargo Note and an approximate $4,000 fee for their personal guarantee of the Elkhorn Line of Credit.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

In addition, management has identified noncore assets in our portfolio to be liquidated over a one to ten year period. We project that proceeds from anticipated property sales during 2012, net of expenses and debt repayment, of $5.4 million will be available for the Company’s cash needs. We project that our operating cash flow, anticipated excess proceeds from refinancing the Greenwich Capital debt, revolving credit facility and the sources identified above will be sufficient to satisfy all of our liquidity and other capital needs for 2012.

The Company did not declare a common stock dividend for the three months ended September 30, 2012. The Company will monitor requirements to maintain its REIT status and will routinely evaluate the dividend policy. The Company intends to continue to meet its dividend requirements to retain its REIT status.

Financing

On March 29, 2011, we entered into an equity distribution agreement with JMP Securities LLC (“JMP”) pursuant to which we may offer and sell up to 2.0 million shares of common stock from time to time through JMP. Sales of shares of the Company common stock, if any, under the agreement may be made in negotiated transactions or other transactions that are deemed to be “at the market” offerings, including sales made directly on the Nasdaq Global Market or sales made to or through a market maker other than on an exchange. The common stock will be sold pursuant to our registration statement on Form S-3 (333-170756). During the nine months ended September 30, 2012 no shares were issued.


	Held For Sale		Held For Use		TOTAL
Remainder of 2012	$	22,285	$	31,038	$	53,323
2013		—		17,270		17,270
2014		—		20,815		20,815
2015		—		14,288		14,288
2016		—		4,855		4,855
Thereafter		—		25,449		25,449

	$	22,285	$	113,715	$	136,000

•

a $28.2 million balance on the loan with Greenwich Capital;

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

•

a $7.0 million principal prepayment required on our credit facilities with General Electric Capital Corporation;

•

a $1.1 million balance on a note payable to General Electric Capital Corporation;

•

a $1.25 million note payable to Elkhorn Valley Bank; and

•

approximately $1.0 million of principal amortization on mortgage loans.

The $28.2 million balance of the loan with Greenwich Capital, which matured in December 2012 and was secured by 32 hotels, was refinanced on November 2, 2012 with a $30.6 million loan with Morgan Stanley Mortgage Capital Holdings LLC (Morgan Stanley). The Morgan Stanley loan is secured by 22 hotels, bears interest at 5.83% and matures on December 1, 2017. As a result of the refinancing, 10 of the hotels previously secured by the Greenwich Capital loan became unencumbered, two of which were subsequently pledged as additional security for the Company’s credit facilities with General Electric Capital Corporation.

The key financial covenants for certain of our loan agreements and compliance calculations as of September 30, 2012 are discussed below (each such covenant is calculated pursuant to the applicable loan agreement). As of September 30, 2012, we were either in compliance with our financial covenants or obtained waivers for non-compliance (as discussed below). As a result, we are not in default of any of our loans.


(dollars in thousands) Great Western Bank Covenants	September 30, 2012 Requirement		September 30, 2012 Calculation
Consolidated debt service coverage ratio calculated as follows: *		³1.05:1
Adjusted NOI (A) / Debt service (B)
Net loss per financial statements				(12,047	)
Net adjustments per loan agreement				32,337

Adjusted NOI per loan agreement (A)			$	20,290

Interest expense per financial statements - continuing operations				8,313
Interest expense per financial statements - discontinued operations				2,260

Total interest expense per financial statements			$	10,573
Net adjustments per loan agreement				6,235

Debt service per loan agreement (B)			$	16,808

Consolidated debt service coverage ratio				1.21: 1

*	Calculations based on prior four quarters

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:


(dollars in thousands) Great Western Bank Covenants	September 30, 2012 Requirement		September 30, 2012 Calculation
Loan-specific debt service coverage ratio calculated as follows: *		³1.05:1
Adjusted NOI (A) / Debt service (B)
Net loss per financial statements				(12,047	)
Net adjustments per loan agreement				15,531

Adjusted NOI per loan agreement (A)			$	3,484

Interest expense per financial statements - continuing operations				8,313
Interest expense per financial statements - discontinued operations				2,260

Total interest expense per financial statements			$	10,573
Net adjustments per loan agreement				(7,440	)

Debt service per loan agreement (B)			$	3,133

Loan-specific debt service coverage ratio				1.11: 1

*	Calculations based on prior four quarters


(dollars in thousands) Great Western Bank Covenants	September 30, 2012 Requirement		September 30, 2012 Calculation
Consolidated leverage ratio calculated as follows: *		£4.25
Total liabilities (A) / Tangible net worth (B)
Total liabilities per financial statements and loan agreement (A)			$	165,660
Total assets per financial statements				217,333
Total liabilities per financial statements				165,660

Tangible net worth per loan agreement (B)			$	51,673
Consolidated Leverage Ratio:				3.21

The Great Western Bank credit facilities also require maintenance of consolidated and loan-specific loan to value ratios that do not exceed 70%, tested annually, commencing on December 31, 2012, and that we not pay dividends in excess of 75% of our funds from operations per year. The loan-specific debt service coverage ratio remains at 1.05 to 1, tested quarterly, through December 30, 2012 and increases to 1.20 to 1, tested quarterly, from December 31, 2012 through the maturity of the credit facilities. The credit facilities with Great Western Bank currently consist of a $12 million revolving credit facility and term loans in the original principal amount of $14 million, $10 million and $7.5 million. All loans under the credit facilities mature on June 30, 2013. The interest rate on the revolving credit portion of the credit facilities is 5.95% and the interest rate on the term loan portion of the credit facilities is 6.00%.

The credit facilities provide for $12 million of availability under the revolving credit facility, subject to the limitation that the loans available to us through the revolving credit facility and term loans may not exceed the lesser of (a) an amount equal to 70% of the total appraised value of the hotels securing

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

the credit facilities and (b) an amount that would result in a loan-specific debt service coverage ratio of less than 1.05 to 1 from July 1, 2012 through December 30, 2012 and 1.20 to 1 from December 31, 2012 through the maturity of the credit facilities. At September 30, 2012, the credit facilities remained fully available to the Company, and the outstanding balance under the revolving credit facility was $0. The credit facilities require a $500,000 reduction in the availability of the revolving credit facility by December 31, 2012.


(dollars in thousands) GE Covenants	September 30, 2012 Requirement		September 30, 2012 Calculation
Loan-specific fixed charge coverage ratio calculated as follows: *		³0.95:1
Adjusted EBITDA (A) / Fixed charges (B)
Net loss per financial statements				(12,047	)
Net adjustments per loan agreement				18,222

Adjusted EBITDA per loan agreement (A)			$	6,175

Interest expense per financial statements - continuing operations				8,313
Interest expense per financial statements - discontinued operations				2,260

Total interest expense per financial statements			$	10,573
Net adjustments per loan agreement				(4,220	)
Fixed charges per loan agreement (B)				6,353

Loan-specific fixed charge coverage ratio				0.97 : 1

*	Calculations based on prior four quarters


GE Covenants	September 30, 2012 Requirement			September 30, 2012 Calculation
Loan-specific loan to value ratio calculated as follows:		£100	%
Loan balance (A) / Value (B)
Loan balance (A)				$	62,753

Value (B)				$	66,530

Loan-specific loan to value ratio					94.3	%

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:


GE Covenants	September 30, 2012 Requirement		September 30, 2012 Calculation
Before dividend consolidated fixed charge coverage ratio calculated as follows: *		³1.05:1
Adjusted EBITDA (A) / Fixed charges (B)
Net loss per financial statements				(12,047	)
Net adjustments per loan agreement				27,429

Adjusted EBITDA per loan agreement (A)			$	15,382

Interest expense per financial statements - continuing operations				8,313
Interest expense per financial statements - discontinued operations				2,260

Total interest expense per financial statements			$	10,573
Net adjustments per loan agreement				4,468
Fixed charges per loan agreement (B)				15,041

Before dividend consolidated fixed charge coverage ratio				1.02:1

*	Calculations based on prior four quarters


GE Covenants	September 30, 2012 Requirement		September 30, 2012 Calculation
After dividend consolidated fixed charge coverage ratio calculated as follows: *		³0.85:1
Adjusted EBITDA (A) / Fixed charges (B)
Net loss per financial statements				(12,047	)
Net adjustments per loan agreement				27,429

Adjusted EBITDA per loan agreement (A)			$	15,382

Interest expense per financial statements - continuing operations				8,313
Interest expense per financial statements - discontinued operations				2,260

Total interest expense per financial statements			$	10,573
Net adjustments per loan agreement				7,168
Fixed charges per loan agreement (B)				17,741

After dividend consolidated fixed charge coverage ratio				0.87:1

*	Calculations based on prior four quarters

The financial covenants under our credit facilities with General Electric Capital Corporation (“GE”) require that, through the term of the loans, we maintain: (a) a minimum before dividend fixed charge coverage ratio (FCCR) with respect to our GE encumbered properties (based on a rolling 12-month period) of 0.95:1 as of September 30, 2012, which requirement increases quarterly thereafter to 1.30:1 as of December 31, 2015; (b) a maximum loan to value ratio with respect to our GE-encumbered properties of 100% as of September 30, 2012, which requirement decreases quarterly thereafter to 60% as of December 31, 2015; (c) a minimum before dividend consolidated FCCR (based on a rolling 12-month period) of 1.05:1 as

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

of September 30, 2012, which requirement increases quarterly thereafter to 1.30:1 as of December 31, 2014; and (d) a minimum after dividend consolidated FCCR (based on a rolling 12-month period) of 0.85:1 as of September 30, 2012, which requirement increases quarterly thereafter to 1.00:1 as of December 31, 2013.

As of September 30, 2012, our before dividend consolidated FCCR was 1.02:1. On November 14, 2012, the Company received a waiver for non-compliance with this covenant in return for pledging an additional two previously unencumbered properties as security for the General Electric Capital Corporation credit facilities and payment of $200,000.

The GE FCCR requirements increase for the fourth quarter of 2012 as follows: GE loan specific FCCR increases to 1.00:1.00 at December 31, 2012; GE before dividend consolidated FCCR increases to 1.10:1.00 at December 31, 2012; and GE after dividend consolidated FCCR increases to 0.90:1.00 at December 31, 2012. The GE loan specific loan to value requirement increases to 80.0% at December 31, 2012.

If we fail to pay our indebtedness when due, fail to comply with covenants or otherwise default on our loans, unless waived, we could incur higher interest rates during the period of such loan defaults, be required to immediately pay our indebtedness and ultimately lose our hotels through lender foreclosure if we are unable to obtain alternative sources of financing with acceptable terms. Our Great Western Bank and GE credit facilities contain cross-default provisions which would allow Great Western Bank and GE to declare a default and accelerate our indebtedness to them if we default on our other loans, and such default would permit that lender to accelerate our indebtedness under any such loan. We are not in default of any of our loans.

A summary of the Company’s long term debt as of September 30, 2012 is as follows (in thousands):


	Balance		Interest Rate			Maturity
Fixed Rate Debt
Lender
Elkhorn Valley Bank	$	1,250		5.25	%		10/2012
GE Capital Corporation		1,088		5.00	%		12/2012
Greenwich Capital Financial Products		28,159		7.50	%		12/2012
Great Western Bank		18,954		6.00	%		6/2013
GE Capital Corporation		19,167		7.17	%		12/2014
GE Capital Corporation		9,907		7.69	%		12/2014
Citigroup Global Markets Realty Corp		12,761		5.97	%		11/2015
Elkhorn Valley Bank		2,958		6.25	%		6/2016
GE Capital Corporation		12,369		7.17	%		2/2017
Wachovia Bank		8,077		7.38	%		3/2020

Total Fixed Rate Debt	$	114,690


Variable Rate Debt
Lender
GE Capital Corporation		19,049		3.92	%		2/2018
GE Capital Corporation		2,261		4.48	%		2/2018

Total Variable Rate Debt	$	21,310

Subtotal debt		136,000

Less: debt associated with hotel properties held for sale		22,285

Total Long-Term Debt	$	113,715

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

On January 18, 2012, the Company sold a Super 8 in Fayetteville, Arkansas (83 rooms) for approximately $1.56 million. The proceeds were used primarily to reduce a term loan with Great Western Bank.

On February 2, 2012, the Company paid $11.8 million on the Great Western Bank revolving line of credit, bringing the balance to zero. A portion of the available capacity is expected to be used in part to fund the $20 million obligation for hotel investment. The payment was funded with a portion of the net proceeds from the Series C convertible preferred stock.

On February 21, 2012, the Company amended its credit facilities with Great Western Bank to extend the maturity date of all loans to June 30, 2013.

On March 1, 2012, the Company amended its credit facility with First National Bank of Omaha to extend the maturity date to May 1, 2012. This debt was paid in full on April 20, 2012.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

On June 15, 2012, the Company sold a Masters Inn in Tampa, Florida (127 rooms) for approximately $2.1 million. Proceeds were used to pay down mortgage debt with General Electric Capital Corporation.

As of September 30, 2012, the amount available on our revolving credit facility with Great Western Bank was reduced from $12.5 million to $12.0 million.

Redemption of Noncontrolling Preferred Operating Partnership Units

At September 30, 2012, Supertel Limited Partnership had 11,424 preferred operating units (“Preferred OP Units”) outstanding. The redemption value for the Preferred OP Units is $0.1 million for September 30, 2012. The Preferred OP Units are convertible by the holders into Common operating units (“Common OP Units”) on a one-for-one basis or, pursuant to an extension agreement by the holders with SLP, may be redeemed for cash at the option of the holder at $10 per unit on or after October 24, 2012.

There were no Preferred OP Units redeemed during the three or nine months ending September 30, 2012. All 11,424 Preferred OP Units were subsequently redeemed on October 24, 2012.

Capital Commitments

Below is a summary of certain obligations that will require capital (dollars in thousands):


			Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		4-5 Years		More than 5 years
Long-term debt including interest	$	129,584	$	32,710	$	46,839	$	23,346	$	26,689
Land leases		5,645		60		481		470		4,634
Other		294		154		140		—		—

Total contractual obligations	$	135,523	$	32,924	$	47,460	$	23,816	$	31,323

The column titled Less than 1 Year represents payments due for the balance of 2012. Long-term debt includes debt on properties classified in continuing operations. The debt related to properties held for sale (and expected to be sold in the next 12 months, with the respective debt paid) of $22.3 million is not included in the table above.

We have various standing or renewable contracts with vendors. These contracts are all cancelable with immaterial or no cancellation penalties. Contract terms are generally one year or less. The land leases reflected in the table above represent continuing operations. In addition, the Company has two land leases associated with properties in discontinued operations. These two properties are expected to be sold in the next 12 months. The annual lease payments of $105,400 are not included in the table above. The Company also has management agreements with HMA, Strand, Kinseth, HLC Hotels, and Cherry Cove providing for the management and operation of the hotels.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities, to perform impairment assessments, and for disclosure purposes. In February 2012 the Company issued financial instruments with features that were determined to be derivative liabilities, and as a result must be measured at fair value on a recurring basis under Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820-10 Fair Value Measurements and Disclosures – Overall. In addition we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures – Overall – Subsequent Measurement, for our nonfinancial assets which include our held for sale and impaired held for use hotels, and the disclosure of the fair value of our debt.

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Non financial assets

During the three months ending March 31, 2012, Level 3 inputs were used to determine non-cash impairment losses of $1.8 million on eight held for sale hotels, one property reclassified as held for sale, and one hotel subsequently sold and recovery of previously recorded impairment for which fair value exceeded management’s previous estimates in the amount of $0.4 million on two hotels that were reclassified into held for use. During the three months ended June 30, 2012, impairment losses of approximately $0.1 million were recorded on eight held for sale hotels offset by approximately $0.1 million of recovery on two held for sale hotel and approximately $6,000 of recovery on one sold hotel. In addition, $4.1 million of impairment loss was recorded on two hotels classified as held for use. During the three months ended September 30, 2012, impairment losses of $1.6 million and $1.1 million were recorded on eight hotels held for sale and two hotels that were reclassified as held for sale, respectively.

During the three months ending March 31, 2011, Level 3 inputs were used to determine non-cash impairment losses of approximately $47,000 on four hotels held for sale, $0.2 million on four hotels subsequently sold and $0.2 million on one hotel that was subsequently placed back into held for use. The Company also recorded a recovery of approximately $26,000 of previously recorded impairment loss on one hotel at the time of sale. During the three months ended June 30, 2011 the Company recorded impairment loss of $0.7 million on six hotels held for sale, approximately $29,000 of impairment loss on three sold hotels and approximately $22,000 of recovery on one hotel sold and approximately $86,000 of recovery on one hotel subsequently sold. In addition impairment of $0.8 million was recorded on two hotels that were reclassified from held for sale into held for use, $0.6 million on one property reclassified as held for sale, and $2.8 million on one hotel classified as held for use. During the three months ended September 30, 2011, impairment of $0.4 million was recorded on eight held for sale hotels, a recovery of approximately $56,000 on one hotel reclassified as held for sale, and a loss of $15,000 on one hotel which was subsequently reclassified as held for sale. In addition, an impairment recovery of approximately $64,000 was recorded on two hotels sold and losses of $37,000 on two properties subsequently sold. Impairment of $2.2 million was also recorded on three held for use hotels.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

In accordance with ASC 360-10-36 Property Plant and Equipment – Overall – Subsequent Measurements, the Company determines the fair value of an asset held for sale based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales.

Financial instruments

The following tables provide the fair value of the Company’s financial liabilities carried at fair value and measured on a recurring basis (in thousands):


	Fair Value at September 30, 2012		Level 1		Level 2		Level 3
Series C preferred embedded derivative	$	7,957	$	—	$	—	$	7,957
Warrant derivative		9,310		—		—		9,310

	$	17,267	$	—	$	—	$	17,267


	Fair Value at December 31, 2011		Level 1		Level 2		Level 3
Series C preferred embedded derivative	$	—	$	—	$	—	$	—
Warrant derivative		—		—		—		—

	$	—	$	—	$	—	$	—

There were no transfers between levels during the three and nine months ended September 30, 2012 and the three and nine months ended September 30, 2011.

The following tables present a reconciliation of the beginning and ending balances of items measured at fair market value on a recurring basis in the table above that used significant unobservable inputs (Level 3), and the realized and unrealized gains (losses) recorded in the Consolidated Statement of Operations during the periods. There were no Level 3 assets or liabilities measured on a recurring basis during the three or nine month periods ended September 30, 2011.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:


(dollars in thousands)	Fair Value at 6/30/2012		Net Realized and Unrealized Gains (Losses) Included in Income			Purchases, Sales, Issuances and Settlements, Net		Gross Transfers In		Gross Transfers Out		Fair Value at 9/30/2012		Changes in Realized Gains (Losses) Included in Income on Instruments Held at 9/30/2012		Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at 9/30/2012
Series C preferred embedded derivative	$	7,701	$	(256	)		—		—		—	$	7,957		—	$	(256	)
Warrant derivative		8,334		(976	)		—		—		—		9,310		—		(976	)

	$	16,035	$	(1,232	)	$	—	$	—	$	—	$	17,267	$	—	$	(1,232	)


(dollars in thousands)	Fair Value at 12/31/2011		Net Realized and Unrealized Gains (Losses) Included in Income			Purchases, Sales, Issuances and Settlements, Net		Gross Transfers In		Gross Transfers Out		Fair Value at 9/30/2012		Changes in Realized Gains (Losses) Included in Income on Instruments Held at 9/30/2012		Changes in Unrealized Gains (Losses) Included in Income on Instruments Held at 9/30/2012
Series C preferred embedded derivative	$	—	$	(882	)	$	7,075		—		—	$	7,957		—	$	(882	)
Warrant derivative		—		(696	)		8,614		—		—		9,310		—		(696	)

	$	—	$	(1,578	)	$	15,689	$	—	$	—	$	17,267	$	—	$	(1,578	)

The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The carrying value and estimated fair value of the Company’s debt as of September 30, 2012 and December 31, 2011 are presented in the table below (in thousands):


	Carrying Value				Estimated Fair Value
	9/30/2012		12/31/2011		9/30/2012		12/31/2011
Continuing operations	$	113,715	$	127,941	$	115,773	$	129,740
Discontinued operations		22,285		37,904		22,610		38,706

Total	$	136,000	$	165,845	$	138,383	$	168,446

Other

To maintain our REIT tax status, we generally must distribute at least 90% of our taxable income to our shareholders annually. In addition, we are subject to a 4% non-deductible excise tax if the actual amount distributed to shareholders in a calendar year is less than a minimum amount specified under the federal income tax laws. We have a general dividend policy of paying out approximately 100% of annual REIT taxable income. The actual amount of any future dividends will be determined by the Board of Directors based on our actual results of operations, economic conditions, capital expenditure requirements and other factors that the Board of Directors deems relevant.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Off Balance Sheet Financing Transactions

We have not entered into any off balance sheet financing transactions.

Key Performance Indicators

Earnings Before Interest, Taxes, Depreciation, Amortization, Noncontrolling Interest and Preferred Stock Dividends

The Company’s EBITDA for the three and nine months ended September 30, 2012 was $1.6 million and $7.9 million, respectively, representing a decrease of $2.4 million and an increase of $2.4 million from EBITDA reported for the three and nine months ended September 30, 2011, respectively. Adjusted EBITDA for the three and nine months ended September 30, 2012 was $5.9 million and $14.4 million, respectively.


	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
RECONCILIATION OF NET LOSS TO ADJUSTED EBITDA
Net loss attributable to common shareholders	$	(3,102	)	$	(1,781	)	$	(6,129	)	$	(10,327	)
Interest expense, including discontinued operations		2,372			3,462			7,599			9,426
Income tax expense (benefit), including discontinued operations		83			(111	)		(225	)		(1,238	)
Depreciation and amortization, including discontinued operations		2,256			2,420			6,652			7,684

EBITDA		1,609			3,990			7,897			5,545
Noncontrolling interest		(1	)		8			1			(5	)
Net gain on disposition of assets		(564	)		(1,126	)		(5,827	)		(1,461	)
Impairment		2,732			2,561			8,249			7,823
Preferred stock dividend		837			369			2,332			1,105
Unrealized loss on derivatives		1,232			—			1,578			—
Acquisition expense		15			—			178			1

ADJUSTED EBITDA	$	5,860		$	5,802		$	14,408		$	13,008

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 and acquisition expenses, which are cash charges. We also add back impairment and unrealized gain or loss on derivatives, 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. Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Funds from Operations

The Company’s funds from operations (“FFO”) for the three and nine months ended September 30, 2012 was $1.3 million, and $2.9 million, respectively, representing a decrease of $0.8 million and $0.8 million from FFO as reported for the three and nine months ended September 30, 2011, respectively. The Company’s Adjusted FFO for the three and nine months ended September 30, 2012 was $2.6 million and $4.7 million, respectively. 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. Up to 30,000,000 shares of common stock may be issued upon conversion of the Series C convertible preferred stock, and adjustments are made for these shares in the computation of diluted FFO per share and diluted Adjusted FFO per share. Up to 7,105 shares of restricted stock are included in the computation of diluted FFO per share and diluted Adjusted FFO per share. The Company’s outstanding warrants to purchase common stock and stock options would be antidilutive and are not included in the dilution computation. 11,424 Preferred Operating Units are also not included in the dilution computation. FFO and Adjusted FFO are reconciled to net loss as follows (dollars in thousands):


	Three months ended September 30,						Nine Months ended September 30,
	2012			2011			2012			2011
RECONCILIATION OF NET LOSS TO FFO
Net loss attributable to common shareholders	$	(3,102	)	$	(1,781	)	$	(6,129	)	$	(10,327	)
Depreciation and amortization		2,256			2,420			6,652			7,684
Net gain on disposition of assets		(564	)		(1,126	)		(5,827	)		(1,461	)
Impairment		2,732			2,561			8,249			7,823

FFO available to common shareholders	$	1,322		$	2,074		$	2,945		$	3,719
Unrealized loss on derivatives		1,232			—			1,578			—
Acquisition expense		15			—			178			1

Adjusted FFO	$	2,569		$	2,074		$	4,701		$	3,720

FFO available to common shareholders	$	1,322		$	2,074		$	2,945		$	3,719
Dividends paid on series C convertible preferred stock		469			—			1,227			—

FFO for FFO per share - diluted	$	1,791		$	2,074		$	4,172		$	3,719

Adjusted FFO available to common shareholders	$	2,569		$	2,074		$	4,701		$	3,720
Dividends paid on series C convertible preferred stock		469			—			1,227			—

Adjusted FFO for Adjusted FFO per share - diluted	$	3,038		$	2,074		$	5,928		$	3,720

Weighted average number of shares outstanding for:
calculation of FFO per share - basic		23,084			23,005			23,076			22,963

calculation of FFO per share - diluted		53,091			23,005			49,225			22,963

FFO per share - basic	$	0.06		$	0.09		$	0.13		$	0.16

Adjusted FFO per share - basic	$	0.11		$	0.09		$	0.20		$	0.16

FFO per share - diluted	$	0.03		$	0.09		$	0.08		$	0.16

Adjusted FFO per share - diluted	$	0.06		$	0.09		$	0.12		$	0.16

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

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 and amortization of real estate assets. We believe our method of calculating FFO complies with the NAREIT definition. AFFO is FFO adjusted to include gain or exclude losses on derivative liabilities, which is a non-cash charge against income and which does not represent results from our core operations. AFFO also adds back acquisition costs. 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.

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 they facilitate 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.

Net Operating Income

NOI is one of the performance indicators the Company uses to assess and measure operating results. The Company believes that NOI is a useful additional measure of operating performance of its hotels because it provides a measure of core operations that is unaffected by depreciation, amortization, financing and general and administrative expense. NOI is also an important performance measure used to determine the amount of the management fees paid by the Company to the operators of its hotels.

NOI is a non-GAAP measure, and is not necessarily indicative of available earnings and should not be considered an alternative to Earnings Before Net Gain (Loss) on Dispositions of Assets, Other Income, Interest Expense and Income Taxes. NOI is reconciled to Earnings Before Net Gain (Loss) on Dispositions of Assets, Other Income, Interest Expense and Income Taxes as follows (dollars in thousands):


	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Earnings Before Net Loss on Dispositions of Assets,
Other Income, Interest Expense, and Income Taxes	$	2,879		$	2,679		$	5,737		$	3,848
Add back:
Termination Cost/Acquisition, termination expense		15			—			178			541
General And Administrative		943			906			2,957			3,010
Depreciation and Amortization		2,223			2,139			6,473			6,582
Hotel Operating Revenue—discontinued		4,714			6,552			14,641			18,984
Hotel Operating Expenses—discontinued		(4,065	)		(5,570	)		(12,721	)		(16,464	)
Other Expenses *		2,789			2,884			7,946			8,600

NOI	$	9,498		$	9,590		$	25,211		$	25,101

*	Other Expenses include both continuing and discontinued operations for Management Fees, Bonus Wages, Insurance, Real Estate and Personal property taxes, and miscellaneous expenses.

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Property Operating Income

POI is a non-GAAP financial measure, 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 results (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 for all of the company’s hotel properties.

POI from continuing operations is reconciled to net loss as follows (dollars in thousands):


RECONCILIATION OF NET LOSS FROM CONTINUING OPERATIONS TO POI FROM CONTINUING OPERATIONS	Three months ended September 30						Nine months ended September 30
	2012			2011			2012			2011
Net loss from continuing operations	$	(424	)	$	(521	)	$	(5,612	)	$	(6,935	)
Depreciation and amortization		2,223			2,139			6,473			6,582
Net loss on disposition of assets.		(11	)		(1,139	)		(5	)		(1,125	)
Other (income) expense		1,138			(2	)		1,478			(107	)
Interest expense		1,964			1,975			6,051			6,344
General and administrative expense		943			906			2,957			3,010
Acquisition, termination expense		15			—			178			1
Termination cost		—			—			—			540
Income tax (benefit) expense		212			139			111			(339	)
Impairment expense		—			2,227			3,714			6,010

POI - continuing operations	$	6,060		$	5,724		$	15,345		$	13,981

POI from discontinued operations is reconciled to gain (loss) from discontinued operations, net of tax, as follows (dollars in thousands):


Reconciliation of gain (loss) from discontinued operations to POI - discontinued operations:	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Gain (loss) from discontinued operations	$	(1,842	)	$	(883	)	$	1,816		$	(2,292	)
Depreciation and amortization from discontinued operations		33			281			179			1,102
Net gain on disposition of assets from discontinued operations		(553	)		13			(5,822	)		(336	)
Interest expense from discontinued operations		408			1,487			1,548			3,082
General and administrative expense from discontinued operations		—			—			—			50
Impairment losses from discontinued operations		2,732			334			4,535			1,813
Income tax benefit from discontinued operations		(129	)		(250	)		(336	)		(899	)

POI—discontinued operations	$	649		$	982		$	1,920		$	2,520

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Same Store Revenue Per Available Room (“RevPAR”), Average Daily Rate (“ADR”), and Occupancy

The following table presents our RevPAR, ADR and Occupancy, by region, for the three months ended September 30, 2012 and 2011, respectively. The comparisons of same store operations are for 72 hotels owned as of July 1, 2011. Same store calculations exclude 21 properties which are held for sale, and one property which was acquired during the second quarter of 2012 and therefore was not owned by the Company throughout each of the periods presented.


	Three months ended September 30, 2012									Three months ended September 30, 2011
Region	Room Count		RevPAR		Occupancy			ADR		Room Count		RevPAR		Occupancy			ADR
Mountain		214	$	46.72		82.4	%	$	56.68		214	$	44.27		80.9	%	$	54.70
West North Central		1,559		37.53		70.5	%		53.27		1,559		36.79		70.5	%		52.21
East North Central		978		45.99		68.5	%		67.19		978		44.17		66.2	%		66.76
Middle Atlantic		142		48.58		77.7	%		62.50		142		50.60		83.1	%		60.92
South Atlantic		2,388		30.08		66.8	%		45.04		2,388		30.01		67.1	%		44.70
East South Central		563		42.62		65.3	%		65.26		563		43.41		66.9	%		64.93
West South Central		373		22.12		50.0	%		44.19		373		26.89		59.4	%		45.29

Total Same Store		6,217	$	36.12		67.6	%	$	53.40		6,217	$	35.93		68.2	%	$	52.71

South Atlantic Acquisitions		100	$	94.53		76.6	%	$	123.43		—	$	—		0.0	%	$	—

Total Acquisitions		100	$	94.53		76.6	%	$	123.43		—	$	—		0.0	%	$	—

Total Continuing Operations		6,317	$	37.05		67.8	%	$	54.66		6,217	$	35.93		68.2	%	$	52.71


States included in the Regions
Mountain		Idaho and Montana
West North Central		Iowa, Kansas, Missouri, Nebraska and South Dakota
East North Central		Indiana and Wisconsin
Middle Atlantic		Pennsylvania
South Atlantic		Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
East South Central		Kentucky and Tennessee
West South Central		Arkansas and Louisiana

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Our RevPAR, ADR, and Occupancy, by franchise affiliation, for the three months ended September 30, 2012 and 2011, were as follows:


	Three months ended September 30, 2012									Three months ended September 30, 2011
Brand	Room Count		RevPAR		Occupancy			ADR		Room Count		RevPAR		Occupancy			ADR
Select Service
Upper Midscale
Comfort Inn/ Comfort Suites		1,350	$	50.50		70.3	%	$	71.82		1,350	$	51.12		71.3	%	$	71.66
Other Upper Midscale (1)		197		62.71		77.7	%		80.67		197		59.80		76.2	%		78.51

Total Upper Midscale		1,547	$	52.04		71.2	%	$	73.04		1,547	$	52.23		72.0	%	$	72.58

Midscale
Sleep Inn		153		32.64		57.6	%		56.63		153		31.50		51.8	%		60.82
Quality Inn		122		48.34		60.6	%		79.75		122		42.44		57.6	%		73.68
Baymont Inn		65		30.99		64.1	%		48.37		65		25.18		45.4	%		55.50

Total Midscale		340	$	37.99		59.9	%	$	63.39		340	$	34.19		52.6	%	$	64.97

Economy
Days Inn		1,026		30.31		58.6	%		51.74		1,026		31.88		61.7	%		51.71
Super 8		2,062		36.39		70.4	%		51.66		2,062		35.95		71.0	%		50.65
Other Economy (2)		144		42.86		58.7	%		72.95		144		37.91		52.7	%		71.92

Total Economy		3,232	$	34.76		66.2	%	$	52.53		3,232	$	34.75		67.2	%	$	51.71

Total Upper Midscale/Midscale/Economy		5,119	$	40.20		67.3	%	$	59.74		5,119	$	39.99		67.7	%	$	59.10

Economy Extended Stay (3)		1,098	$	17.16		69.3	%	$	24.77		1,098	$	16.98		70.5	%	$	24.08

Total Same Store		6,217	$	36.12		67.6	%	$	53.40		6,217	$	35.93		68.2	%	$	52.71

Upscale Acquisitions
Hilton Garden Inn		100	$	94.53		76.6	%	$	123.43		—	$	—		0.0	%	$	—

Total Upscale Acquisitions		100	$	94.53		76.6	%	$	123.43		—	$	—		0.0	%	$	—

Total Continuing Operations		6,317	$	37.05		67.8	%	$	54.66		6,217	$	35.93		68.2	%	$	52.71

1	Includes Hampton and Holiday Inn Express brands

2	Includes Guesthouse and Independent brands

3	Includes Savannah Suites

The following properties have been moved from the same store portfolio during the reporting period and classified as held for sale:

Ramada Inn, Ellenton FL

Comfort Suites, Dover DE

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

The following table presents our RevPAR, ADR and Occupancy, by region, for the nine months ended September 30, 2012 and 2011, respectively. The comparisons of same store operations (excluding Held For Sale hotels) are for 72 hotels owned as of January 1, 2011. Same store calculations exclude 21 properties which are held for sale, and one property which was acquired during the second quarter of 2012 and therefore was not owned by the Company throughout each of the periods presented.


	Nine months ended September 30, 2012									Nine months ended September 30, 2011
Region	Room Count		RevPAR		Occupancy			ADR		Room Count		RevPAR		Occupancy			ADR
Mountain		214	$	37.46		71.4	%	$	52.46		214	$	34.29		67.6	%	$	50.74
West North Central		1,559		32.95		64.1	%		51.38		1,559		32.03		64.3	%		49.79
East North Central		978		37.62		59.9	%		62.76		978		36.87		59.1	%		62.40
Middle Atlantic		142		44.78		73.9	%		60.64		142		43.32		74.3	%		58.30
South Atlantic		2,388		30.25		68.0	%		44.49		2,388		29.56		68.5	%		43.14
East South Central		563		40.66		61.9	%		65.73		563		38.89		59.5	%		65.35
West South Central		373		23.49		53.7	%		43.75		373		28.53		64.8	%		44.03

Total Same Store		6,217	$	33.22		64.6	%	$	51.41		6,217	$	32.59		65.0	%	$	50.10

South Atlantic Acquisitions		100	$	94.10		75.8	%	$	124.16		—	$	—		0.0	%	$	—

Total Acquisitions		100	$	94.10		75.8	%	$	124.16		—	$	—		0.0	%	$	—

Total Continuing Operations		6,317	$	33.68		64.7	%	$	52.05		6,217	$	32.59		65.0	%	$	50.10


States included in the Regions
Mountain		Idaho and Montana
West North Central		Iowa, Kansas, Missouri, Nebraska and South Dakota
East North Central		Indiana and Wisconsin
Middle Atlantic		Pennsylvania
South Atlantic		Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia and West Virginia
East South Central		Kentucky and Tennessee
West South Central		Arkansas and Louisiana

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED:

Our RevPAR, ADR, and Occupancy, by franchise affiliation, for the nine months ended September 30, 2012 and 2011, were as follows:


	Nine months ended September 30, 2012									Nine months ended September 30, 2011
Brand	Room Count		RevPAR		Occupancy			ADR		Room Count		RevPAR		Occupancy			ADR
Select Service
Upper Midscale
Comfort Inn/ Comfort Suites		1,350	$	46.78		67.1	%	$	69.69		1,350	$	44.99		65.1	%	$	69.12
Other Upper Midscale (1)		197		59.22		75.4	%		78.56		197		56.14		73.3	%		76.60

Total Upper Midscale		1,547	$	48.37		68.2	%	$	70.94		1,547	$	46.41		66.1	%	$	70.18

Midscale
Sleep Inn		153		34.41		54.5	%		63.08		153		33.00		53.0	%		62.26
Quality Inn		122		34.79		47.8	%		72.72		122		29.35		43.8	%		66.97
Baymont Inn		65		30.21		57.7	%		52.40		65		25.47		44.6	%		57.07

Total Midscale		340	$	33.74		52.7	%	$	63.98		340	$	30.25		48.1	%	$	62.87

Economy
Days Inn		1,026		29.08		58.6	%		49.64		1,026		30.77		62.3	%		49.37
Super 8		2,062		31.18		63.6	%		49.05		2,062		30.97		64.5	%		48.05
Other Economy (2)		144		47.70		63.4	%		75.18		144		41.27		57.4	%		71.88

Total Economy		3,232	$	31.26		62.0	%	$	50.43		3,232	$	31.37		63.5	%	$	49.43

Total Upper Midscale/Midscale/Economy		5,119	$	36.60		63.2	%	$	57.87		5,119	$	35.84		63.2	%	$	56.66

Economy Extended Stay (3)		1,098	$	17.47		71.0	%	$	24.62		1,098		17.45		73.4	%		23.76

Total Same Store		6,217	$	33.22		64.6	%	$	51.41		6,217	$	32.59		65.0	%	$	50.10

Upscale Acquisitions
Hilton Garden Inn		100	$	94.10		75.8	%	$	124.16		—	$	—		0.0	%	$	—

Total Upscale		100	$	94.10		75.8	%	$	124.16		—	$	—		0.0	%	$	—

Total Continuing Operations		6,317	$	33.68		64.7	%	$	52.05		6,217	$	32.59		65.0	%	$	50.10

1	Includes Hampton and Holiday Inn Express brands

2	Includes Guesthouse and Independent Brands

3	Includes Savannah Suites

The following properties have been moved from the same store portfolio during the reporting period and classified as held for sale:

Ramada Inn, Ellenton FL

Comfort Suites, Dover DE

Part I. FINANCIAL INFORMATION, CONTINUED:

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no material change in our market risk exposure subsequent to December 31, 2011.

Item 4. CONTROLS AND PROCEDURES

Evaluation was performed under the supervision of management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934 was (1) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. No changes in the Company’s internal control over financial reporting occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. OTHER INFORMATION

Item 5. Other Information

Because this Quarterly Report on Form 10-Q is being filed within four business days after the applicable triggering events, the information below is being disclosed under this Item 5 instead of under Item 1.01 (Entry into a Material Definitive Agreement) of Form 8-K.

The Company received a waiver for non-compliance with a financial covenant with General Electric Capital Corporation on November 14, 2012, as described in, and incorporated herein by reference from, Item 2 of this Quarterly Report on Form 10-Q under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Item 6. Exhibits


Exhibit No.		Description

31.1		Section 302 Certificate of Chief Executive Officer

31.2		Section 302 Certificate of Chief Financial Officer

32.1		Section 906 Certifications of Chief Executive Officer and Chief Financial Officer

101.1		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) Notes to Condensed Consolidated Financial Statements

Supertel Hospitality, Inc., and Subsidiaries

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


SUPERTEL HOSPITALITY, INC.

By:		/s/ Kelly A. Walters
		Kelly A. Walters
		President and Chief Executive Officer

Dated this 14^th day of November, 2012



By:		/s/ Corrine L. Scarpello
		Corrine L. Scarpello
		Chief Financial Officer and Secretary

Dated this 14^th day of November, 2012

Supertel Hospitality, Inc., and Subsidiaries

Exhibits


Exhibit No.		Description

31.1		Section 302 Certificate of Chief Executive Officer

31.2		Section 302 Certificate of Chief Financial Officer

32.1		Section 906 Certifications of Chief Executive Officer and Chief Financial Officer

101.1		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) Notes to Condensed Consolidated Financial Statements