Reshaping Our Portfolio 2012 Annual Report Hilton Garden Inn Solomons (above and right), located within the Washington, D.C., market, joined our portfolio in May of 2012. Featured on the Cover: (clockwise from top right): Hilton Garden Inn Solomons, Comfort Suites of Lafayette, Comfort Inn & Suites of Warsaw, Hilton Garden Inn Solomons. 2012: Year in Review STRENGTHENED the balance sheet, adding $30 million in new equity and refinancing $31.5 million of debt, reducing total annual debt service obligations by approximately $1.1 million. INCREASED 2012 revenues from continuing operations 5.3 percent to $70.6 million. ACQUIRED first upscale segment hotel, a 100-room Hilton Garden Inn. SOLD 15 hotels, generating a total of $25.5 million in gross proceeds. CORPORATE PROFILE Supertel is a self-administered real estate investment trust (REIT) that invests in select-service hotels. Supertel trades on the NASDAQ under the symbols SPPR, SPPRO, and SPPRP. As of March 31, 2013, the company owned 84 hotels aggregating 7,431 rooms located in 22 states. OUR MISSION To consistently generate a competitive rate of return for our shareholders through a disciplined approach to hotel investments. A Letter to Our Shareholders Supertel remains very much in the process of executing its business plan of transition by strengthening its balance sheet and rebuilding its hotel portfolio. We have a long way to go before anyone will declare us victors and we must bring our “A” game every day. One of my management team colleagues often reminds us that when this ship is sailing smoothly, we will have our shareholders to thank for the opportunity. This year’s letter will give you a good deep discounting offered across all As a result, margins associated with sense of how the company’s leader- segments as hotels fought to stabilize our portfolio of economy and mid- ship is approaching the hospitality their market share. scale hotels have contracted to a business both in the short- and point that it has become very chal- As demand slowed and hotels long-term. lenging for us to compete in our reduced rate to maintain occupancy, markets as an institutional owner RECESSION THROUGH lodgers were swayed by the superior against small owner/operators, who 2012 price/value offered by upper-scale have a lower cost and operating hotels. We no longer could compete The recession that began in 2008 structure. exposed inherent weaknesses in our on price alone. former business model, which was The economic recovery to date has As demand recovers, some of our deeply rooted in the economy hotel partially restored profi tability to the markets have been slow in their segment. When the demand bubble industry, but pre-recession margins ability to increase rates to pre-reces- burst some fi ve years ago, it created have yet to fully return, especially in sion levels and remain competitive. a room rate “race to the bottom” with the economy sector. Changing brand standards have rendered many fi rst generation franchised hotels less effi cient, and often ineligible for a DEBT BALANCE $202.8 retrofi t to meet the guest’s evolving (dollars in millions) $189.5 $175.0 expectations. As mid-scale hotels age, $165.8 $132.8 they quite often convert to economy fl ags resulting in even more margin compression within the sector. 2008 2009 2010 2011 2012 Comfort Inn & Suites of Warsaw, Indiana This “new reality” for the economy segment made us realize that Supertel must adapt its model and move up the chain scale years to reduce our outstanding continuum toward hotels that command a higher average daily debt. In 2012, we stayed the course, rate and carry a materially stronger profi t margin. favoring debt reduction to more rapid acquisitions. This is expected This “new reality” for the economy our portfolio. Operationally, our to enhance our access to the credit segment made us realize that Supertel operators’ performance in 2012 markets to effectively implement must adapt its model and move up continued to validate our change to our acquisition strategy. the chain scale continuum toward multiple regional hotel management hotels that command a higher aver- companies. We believe that our Last year, we strengthened the bal- age daily rate and carry a materially strategy has moved the company in ance sheet with $30 million in new stronger profi t margin. This led to a the proper direction. Still, much equity through the sale of preferred new business strategy and plan in work remains to be done and our shares and sourced $39.2 million of 2009 and began a transformation management team is committed to new lending with more favorable that continues today. achieving the company’s objectives. interest rates and covenants to refi - nance maturing debt and to facili- 2012 IN REVIEW Our relative debt levels in 2009 tate the acquisition of our fi rst exceeded many of our hotel industry We made meaningful strides in exe- upscale property. cuting our business plan in 2012 by peers and set us on the path to focusing on stabilizing and strength- reduce our debt load. We have used We continued our planned divest- ening our balance sheet and revamping the proceeds from the sale of our ment of non-core hotels in 2012, non-core hotels over the past fi ve selling 15 properties which further ROOMS UNDER 22.4 << 63% = Upscale & Upper Midscale CONSTRUCTION 20.4 BY SCALE Total United States (in thousands, as of 12/2012) 8.8 7.3 1.1 4.5 3.3 Source: Smith Travel Research Upper Upper Luxury Upscale Upscale Midscale Midscale Economy Unaffi liated TRANSITIONING CONTINUING PORTFOLIO BY OPERATIONS CHAIN SCALE BY SECTORS (number of hotels owned) (64 Hotels, as of 12/31/2012) % of Change % of Change 2012 2011 ADR 2012/2011 RevPAR 2012/2011 UPSCALE 1 0 UPSCALE $ 123.03 N/A $ 85.90 N/A UPPER MIDSCALE 20 22 UPPER MIDSCALE 71.01 1.1% 47.11 3.1% MIDSCALE 6 6 MIDSCALE 64.37 1.7% 31.92 14.5% ECONOMY 52 65 ECONOMY 51.67 1.9% 32.17 0.5% EXTENDED STAY 7 7 EXTENDED STAY 24.70 3.8% 17.27 0.8% TOTAL 86 100 TOTAL $ 52.36 4.1% $ 33.79 3.7% reduced our debt by $22.5 million. in excess of 100,000, anchored by every year since 2010. In 2012, we These non-core hotels, generally stable demand generators. invested approximately $5.7 million smaller, older properties in sec- in property upgrades. We plan to We took the fi rst step to implement ondary markets, do not match up increase our renovation program our revised acquisition strategy, well with our REIT structure and to approximately $8 million in acquiring the 100-room Hilton business plan. 2013, nearly twice the 2010 invest- Garden Inn in Dowell, (Solomons ment. We believe this investment Sale of our non-core hotels are at a Island) Md. in May. The owner- will allow us to generate improved measured pace, averaging about ship transition was seamless as we RevPAR performance and achieve one closing per month. Year-to- retained the management company more compelling operating returns. date through March 31, 2013, we that developed and then operated have sold two non-core hotels and the hotel since it opened. This type Our hotels outperformed the hotel have 20 hotels classifi ed as held of transaction is our desired proto- industry in occupancy by approxi- for sale. Over the past fi ve years we type for growing our company. mately 3.1 percentage points last have sold 42 hotels. year. This permitted some increase We also stepped up investment in in room rates, which accounted for As we transition our portfolio, we our existing core hotels. We have all of our revenue per available expect to acquire hotels as market increased our property upgrades room (RevPAR) improvement. Our conditions warrant and allow. The hotels we seek will have at least 80 rooms and will be located in grow- We took the fi rst step to implement our revised acquisition ing communities with populations strategy, acquiring the 100-room Hilton Garden Inn in Dowell, (Solomons Island) Md. in May. Comfort Suites of South Bend, Indiana direction to our hotel management the results across our entire portfolio. do not contribute meaningfully to companies is to continuously moni- During 2013, we will continue to our bottom line. tor each property and its market pursue improved fi nancial results We thank our fellow associates for conditions and make adjustments from our portfolio, both core and their enthusiastic embrace and exe- for the optimum mix between rate non-core, by working even closer cution of our business plan, as well and occupancy. with our management companies. as the board for their thoughtful The recovery in most markets is THE OUTLOOK FOR 2013 guidance and support. Our greatest improving with only the West South The business plan for Supertel over thanks and respect is reserved for Central region rebounding more the next 12 months is aggressive, but our shareholders, who make this slowly than the portfolio as a whole. not unrealistic. By addressing our transformation possible. Together, Many of our current markets, primarily balance sheet issues over the past we have made great progress in small towns, have been hard hit, four years, we believe we have laid strengthening our company and which does not allow as much fl exi- the foundation for the company to remain confi dent in our plan and the bility in raising rate. Our properties grow properly through the coming future. Our goal is to deliver to you a outperform the industry in occupancy, business cycle.