Summit Hotel Properties, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2020. Summit is a lodging REIT focused primarily on premium-branded, select-service hotels. Its portfolio included 72 hotels and 11,288 rooms in 23 states; six hotels were temporarily closed by May 11, and operations at nine additional hotels were consolidated with nearby sister properties.
Financial and operating performance
- Revenue: $108.4 million, down 22.0% from $139.0 million. Same-store revenue fell 22.8%.
- Hotel operating results: Income from hotel operations was $29.7 million versus $53.8 million on a pro forma comparable basis. Approximate hotel operating margin was 27.4%, versus 38.0%.
- Hotel metrics: Same-store RevPAR declined 24.6% to $95.05, as occupancy fell 15.2 percentage points to 61.3% and ADR declined 5.9% to $155.05.
- Profitability: GAAP net loss was $16.2 million, compared with net income of $12.9 million; loss attributable to common stockholders was $19.0 million, or $0.18 per share, versus income of $9.2 million, or $0.09 per share. The quarter included a $2.5 million credit-loss provision, $0.8 million impairment charge, and $2.1 million noncash deferred-tax valuation allowance.
- Cash flow: Operating cash flow was $7.3 million, down from $30.2 million. Investing used $12.7 million; financing provided $95.4 million, principally reflecting increased borrowing. Cash, cash equivalents and restricted cash rose $90.0 million to $159.9 million; unrestricted cash at quarter-end was $131.3 million.
- Debt and liquidity: Debt, net of issuance costs, was $1.135 billion at quarter-end, versus $1.016 billion at December 31, 2019. Weighted-average borrowing cost after derivatives was 3.48%. Debt was 52% variable-rate and 48% fixed-rate after hedges. Restricted cash was $28.6 million. The company reported covenant compliance at March 31 and no debt maturities in the next 12 months, with $3.8 million of scheduled principal amortization.
- REIT supplemental measures: FFO was $9.8 million ($0.09 per share/unit), versus $30.5 million ($0.29); AFFO was $13.3 million ($0.13), versus $32.3 million ($0.31). Adjusted EBITDAre was $26.8 million, down 42.8% from $46.7 million.
Material changes versus the prior comparable period
- COVID-19 drove a steep late-quarter drop in hotel demand and same-store RevPAR. Management fees and hotel operating expenses declined, but not enough to offset lower revenue.
- Operating cash flow decreased $22.9 million. Net financing cash flow improved by $117.0 million, mainly due to higher net borrowing.
- Debt increased by about $119.1 million gross from year-end. The company borrowed a net $100 million on its revolving facility during the quarter as a precautionary liquidity measure.
- Unlike Q1 2019, the quarter had no hotel sale gain; Q1 2019 included a $4.2 million gain from two property sales.
Outlook, management actions, and risks
- Management said the pandemic was expected to materially adversely affect full-year 2020 results and that the duration and pace of recovery were highly uncertain. Its estimates assumed recovery beginning in the second half of 2020 and gradual improvement over several years; this is an assumption, not firm guidance.
- Management expected available cash and borrowing capacity to fund needs for at least 12 months, while cautioning that prolonged disruption could weaken liquidity or constrain access to capital.
- In May 2020, amendments to the unsecured credit facility and term loans provided covenant waivers through March 31, 2021, adjusted certain later covenants, and added up to $150 million of borrowing capacity. Amendments also imposed restrictions, liquidity requirements and pledges related to unencumbered-property entities. The company reported $144.3 million of unrestricted cash and $150 million of undrawn revolver availability at April 30.
- Common-stock and operating-partnership-unit dividends were suspended, expected to conserve about $19 million quarterly. Preferred dividends continued; the board declared May 2020 Series D and E preferred dividends.
- Nonessential 2020 capital projects were postponed. Management expected 2020 capital expenditures of about $25 million, at least $35 million below prior plans. Cost measures included labor and service reductions, executive and director fee cuts, corporate furloughs, and a hiring freeze.
- Marriott allowed use of $1.6 million of certain FF&E reserves for hotel working capital and returned $8.9 million for general operations, subject to future replenishment. Monthly reserve funding was suspended through August 31, 2020.
- COVID-19 increased risks to hotel demand, asset values, borrower repayment, financing access and covenant flexibility. Management found no impairment of hotel properties or intangible assets at quarter-end, but recorded an impairment on one real-estate-loan purchase option and a credit-loss allowance on notes receivable. Further losses or impairments remained possible.
Important facts for investors to verify
- Subsequent hotel demand, occupancy, ADR and RevPAR, including the timing and durability of any recovery.
- Actual liquidity, borrowing availability, covenant terms and compliance under amended facilities, including any collateral or dividend restrictions.
- The status and cash-flow effects of suspended common dividends, preferred distributions and FF&E reserve repayments.
- Whether credit-loss estimates, purchase-option valuations and hotel-property carrying values require further adjustments.
- Actual 2020 capital spending and whether management’s 12-month liquidity expectation remains supportable.