Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011, for Summit Hotel Properties, Inc. (Summit REIT) and Summit Hotel OP, LP (Summit OP). The filing combines the reports for both entities. A significant corporate event occurred during the period: on February 14, 2011, the company completed its Initial Public Offering (IPO) and a concurrent private placement, netting approximately $241.3 million. On the same date, the predecessor entity (Summit Hotel Properties, LLC) merged into Summit OP. As of March 31, 2011, the consolidated portfolio consisted of 65 hotels with 6,533 guestrooms across 19 states.
Key Financial Metrics
| Metric | Q1 2011 (Combined) | Q1 2010 (Predecessor) |
|---|---|---|
| Total Revenue | $33.4 million | $31.4 million |
| Net Income (Loss) | $(7.8) million | $(3.6) million |
| Net Loss to Common Stockholders | $(1.2) million | $(3.6) million |
| Funds from Operations (FFO) | $(0.96) million | $3.3 million |
| EBITDA | $7.7 million | $9.0 million |
| Cash from Operating Activities | $1.3 million | $3.0 million |
| Total Debt (Mortgages & Notes) | $195.7 million | $420.4 million (Dec 31, 2010) |
| Cash and Cash Equivalents | $15.6 million | $8.0 million (Dec 31, 2010) |
Note: Q1 2011 results combine the period from Feb 14–Mar 31, 2011 (post-IPO) and Jan 1–Feb 13, 2011 (predecessor operations).
Material Changes vs. Prior Period
- Debt Reduction: Total debt decreased significantly from $420.4 million at year-end 2010 to $195.7 million at March 31, 2011. Approximately $227.2 million of IPO proceeds were used to repay mortgage indebtedness, including full payoffs of loans from Fortress Credit Corp., Lehman Brothers Bank, Marshall & Isley Bank, and First National Bank of Omaha.
- Revenue Growth: Total revenue increased 6.5% year-over-year. This was driven by a 13.5% revenue increase in the "unseasoned" hotel portfolio (newer properties) and a 2.8% increase in the "seasoned" portfolio.
- Operating Performance: Revenue per Available Room (RevPAR) for the total portfolio increased 6.6% to $55.64, driven by a 5.1% increase in Average Daily Rate (ADR) and a 1.4% increase in occupancy.
- One-Time Expenses: Net loss widened primarily due to one-time costs associated with the IPO and formation transactions, including approximately $1.3 million in corporate general and administrative expenses and defeasance/exit fees related to debt payoffs.
Guidance, Outlook, Risks, and Unusual Items
- Franchise Disputes: On March 23, 2011, Choice Hotels International terminated franchise agreements for 11 of the company's hotels. The company filed for arbitration claiming wrongful termination, while Choice filed suit for trademark infringement. As of the filing date, the company had reflagged six of these properties with other brands (IHG, AmericInn) and was negotiating for the remaining five.
- Financing: On March 31, 2011, the company entered a $30 million unsecured revolving credit facility. Subsequently, on April 29, 2011, this was replaced by a $100 million senior secured revolving credit facility (later increased to $125 million), which was used to fund recent acquisitions.
- Acquisitions: Post-period acquisitions included a Homewood Suites in Ridgeland, MS ($7.3 million), a Staybridge Suites in Glendale, CO ($10.0 million), and a Holiday Inn in Duluth, GA ($7.0 million). The company also has contracts to purchase two additional hotels totaling approximately $23.9 million.
- Capital Expenditures: The company has budgeted approximately $32.7 million for capital improvements through June 30, 2012, with $5.3 million of IPO proceeds deposited into a reserve account for this purpose.
- Risk Factors: Key risks include the outcome of the Choice Hotels litigation, the ability to refinance maturing debt (approx. $52.9 million maturing in the next 12 months), and general economic conditions affecting the lodging industry.
Investor Verification Checklist
- Franchise Resolution: Verify the status of the remaining five hotels formerly franchised by Choice Hotels and the terms of the new franchise agreements.
- Debt Maturities: Review the schedule for the $52.9 million of debt maturing within 12 months and the company's refinancing strategy.
- Capital Expenditure Funding: Confirm the funding sources for the remaining $27.4 million of budgeted capital improvements beyond the IPO reserve.
- Acquisition Pipeline: Monitor the closing of the two contracted hotel acquisitions (Minneapolis and Duluth, GA) and the associated renovation costs.
- REIT Qualification: Ensure the company maintains compliance with REIT distribution requirements (90% of taxable income) to avoid corporate taxation.