Summit Hotel Properties, Inc. — Q1 2018 Form 10-Q
Business context and period. The company is a self-managed REIT focused primarily on premium-branded, select-service hotels. At March 31, 2018, its portfolio comprised 83 hotels and 12,242 guestrooms in 26 states. This unaudited report covers the three months ended March 31, 2018, compared with the same period in 2017.
Financial and operating results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $140.2 million | $118.0 million |
| Operating income | $18.5 million | $18.6 million |
| Net income | $9.7 million | $33.2 million |
| Net income attributable to common stockholders | $0.9 million; $0.01 diluted EPS | $28.9 million; $0.31 diluted EPS |
| Operating cash flow | $37.7 million | $30.9 million |
| FFO per common share/unit | $0.25 | $0.30 |
| AFFO per common share/unit | $0.31 | $0.32 |
| Adjusted EBITDAre | $46.7 million | $41.1 million |
Revenue increased 18.8%, while operating income was essentially flat. Total-portfolio RevPAR rose 5.6% to $117.60 and ADR rose 6.4% to $154.22; occupancy declined 57 basis points to 76.3%. For the 69-hotel same-store portfolio, revenue rose 0.3%, RevPAR was unchanged at $114.78, ADR increased 1.0%, and occupancy fell 76 basis points to 76.2%.
At March 31, cash and cash equivalents were $43.4 million and restricted cash was $31.5 million. Gross debt was $981.1 million and debt net of issuance costs was $975.3 million, compared with gross debt of $873.1 million at December 31, 2017. The weighted-average interest rate after derivatives was 4.13%. The company had $175 million available under its $450 million unsecured credit facility and reported compliance with its debt covenants.
Changes and unusual items
- Revenue growth mainly reflected 14 hotel acquisitions during 2017 and was partly offset by properties sold after year-end 2016. Same-store revenue growth was modest.
- Q1 2017 results included a $19.5 million gain on asset disposals, primarily the $15.0 million final recognition of deferred gain on repayment of the HIT loan and a $4.8 million hotel-sale gain. This materially elevated prior-year net income.
- In Q1 2018, the company redeemed all 3.4 million Series C preferred shares for $85.3 million, including accrued dividends. The redemption generated a $3.3 million premium charge and contributed to lower common-stockholder earnings.
- Interest expense increased to $9.3 million from $6.8 million. Depreciation and amortization increased to $25.2 million from $18.7 million, primarily reflecting 2017 acquisitions. Corporate general and administrative expense included $1.0 million of additional stock-based compensation related to the former CFO’s retirement.
- Financing cash flows included $270.0 million of debt issuance and $162.0 million of principal payments. Investing cash use was $22.8 million, including $13.0 million of hotel improvements and $4.5 million of development spending. Cash, cash equivalents and restricted cash increased $8.9 million.
Outlook, risks and contingencies
- Management expressed a positive outlook on national macroeconomic conditions, leisure demand and improving business-travel indicators, while noting that 2017 RevPAR growth had decelerated amid softer corporate demand and supply growth. It cited an industry forecast of 2.3% U.S. upscale RevPAR growth for 2018.
- The filing provides no specific company earnings or RevPAR guidance. Management expects $32 million to $52 million of hotel capital expenditures through the remainder of 2018 and approximately $32 million in total development cost for a 168-room Hyatt House in Orlando; $25.5 million had been incurred through March 31.
- Four hotels were under sale agreements totaling $43.3 million, with closings expected in Q2 2018. The company also reported a $23.3 million funded balance on three mezzanine construction loans, with commitments up to $29.6 million and stated interest of 8%.
- Management believed available liquidity would meet needs for at least 12 months. It disclosed $110.8 million of debt maturities and $8.2 million of scheduled principal amortization in the following 12 months. A 1 percentage-point increase in rates was estimated to increase annual interest cost by about $4.0 million, assuming variable-rate debt remained unchanged.
- Management generally intends to keep indebtedness to EBITDA at no more than 6.5x. Key risks include hotel demand and supply conditions, wage and operating-cost inflation, higher interest rates, refinancing and capital-market access, hotel sale execution, REIT qualification, and acquisition, development, insurance and natural-disaster risks.
- The company accrued its expected liability in litigation over a contractual obligation related to a 2012 hotel purchase; it said no pending legal action was expected to have a material adverse effect. No material risk-factor changes from the 2017 Form 10-K were reported.
Investor verification priorities
- Confirm the drivers and sustainability of same-store performance, particularly flat same-store RevPAR and declining occupancy.
- Reconcile GAAP earnings with FFO and AFFO, and assess the impact of the prior-year disposal gains and 2018 preferred-stock redemption.
- Review debt maturities, available borrowing capacity, covenant headroom, and the effect of interest-rate changes.
- Track completion and proceeds of the four hotel sales, planned capital spending, Orlando development costs, and mezzanine-loan exposures.
- Assess whether anticipated operating trends and liquidity remain consistent with management’s outlook; the filing cautions that quarterly results may not indicate full-year results.