Summit Hotel Properties, Inc. — 2018 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The company is a REIT focused primarily on premium-branded, select-service hotels. At quarter-end it owned 77 hotels with 11,659 rooms across 26 states. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $142.3 | $136.6 | $434.8 | $383.6 |
| Operating income | $22.2 | $22.4 | $68.1 | $65.5 |
| Net income | $38.0 | $22.4 | $85.4 | $89.7 |
| Net income attributable to common stockholders | $34.2 | $18.2 | $68.9 | $76.8 |
| Diluted EPS | $0.33 | $0.17 | $0.66 | $0.78 |
| FFO per common share/unit | $0.33 | $0.33 | $0.98 | $0.96 |
| AFFO per common share/unit | $0.35 | $0.35 | $1.05 | $1.04 |
Q3 revenue rose 4.2%, while operating income declined slightly; reported operating margin was approximately 15.6%, versus 16.4% a year earlier. For nine months, revenue rose 13.3% but reported operating margin declined to approximately 15.7% from 17.1%. Growth in total revenue largely reflected acquisitions, not same-store growth. Q3 net income benefited from $24.8 million of asset-disposal gains; nine-month gains were $42.1 million. Nine-month common earnings also included a $3.3 million premium paid to redeem Series C preferred shares.
Hotel operating trends: Same-store Q3 revenue was nearly flat (+0.2%); same-store RevPAR fell 0.3%, as occupancy declined 209 basis points while ADR rose 2.3%. For nine months, same-store revenue increased 0.5% and RevPAR increased 0.2%; occupancy fell 120 basis points and ADR rose 1.7%. Companywide RevPAR increased 2.0% in Q3 and 3.6% for nine months, with acquisitions and dispositions affecting comparisons.
Cash flow and investment: Nine-month operating cash flow was $129.0 million, compared with $116.6 million. Investing used $44.4 million, versus $312.5 million, reflecting substantially lower acquisition spending. Financing used $58.5 million, compared with $217.8 million provided in 2017; 2018 included the $85.0 million preferred-stock redemption, while 2017 included $163.6 million of common-stock offering proceeds. Cash, cash equivalents and restricted cash totaled $92.1 million at September 30, including $60.5 million unrestricted cash and $31.6 million restricted cash.
Debt, liquidity and capital
- Gross debt was $974.0 million at September 30 ($969.1 million net of issuance costs), up from $873.1 million gross at year-end 2017. The weighted average interest rate after derivatives was 4.31%, versus 3.89%.
- After currently effective swaps, 64% of debt was fixed-rate and 36% variable-rate, compared with 44% and 56% at year-end 2017. A 1 percentage-point increase in rates was estimated to add about $3.0 million in annual interest expense, assuming variable debt did not increase.
- The $300 million revolving facility had $65 million drawn and $235 million available at quarter-end. Management reported compliance with debt covenants. At October 22, total borrowings under the unsecured credit facility were $195 million, including $45 million on the revolver.
- Debt principal amortization due in the next 12 months was $6.2 million, with $106.3 million of maturities. The filing says management expects to meet liquidity needs for at least 12 months, but refinancing and credit-facility availability are not assured.
- Management stated an intention generally to keep indebtedness-to-EBITDA at or below 6.5x; the filing does not provide a current ratio in the supplied text.
- Nine-month capital expenditures were $49.5 million; management estimated a further $10–$15 million for the remainder of 2018. The company also fully funded $29.6 million of mezzanine construction loans, bearing 8% stated interest.
Material developments, outlook and risks
- The company acquired a 150-room Residence Inn in Boston Watertown for $71.0 million and completed a 168-room Hyatt House development in Orlando, which began operating in June.
- Eight hotels were sold during the first nine months. Proceeds from three July sales were used in a Section 1031 exchange, deferring $22.2 million of taxable gains. The company also provided $3.6 million in seller financing on two sales.
- Management cited an industry forecast of 2.4% U.S. upscale-hotel RevPAR growth for 2018 and maintained a positive view of national macroeconomic conditions. It also noted moderated industry demand growth and increasing room starts, with labor costs expected to keep rising in some markets. The filing provides no company-specific full-year earnings or RevPAR guidance.
- Other income for the first nine months included a $2.0 million recovery under a settlement related to a prior-period industrial disaster affecting coastal properties, as well as increased interest income from real-estate loans.
- Principal risks include leverage and refinancing, rising interest rates and operating costs, hotel supply and demand, travel conditions, acquisition and disposition execution, insurance and natural disasters, cybersecurity, and maintaining REIT status. Management reported no pending litigation it believed would materially affect results and no material change to previously disclosed risk factors.
- Disclosure controls were judged effective; no material change in internal control over financial reporting was reported. The board declared a $0.18-per-share common dividend after quarter-end, payable November 30, 2018.
Important facts for investors to verify
- Separate underlying same-store performance from acquisition, disposition and one-time gain effects; reported GAAP earnings rose in Q3 but declined for the nine-month period.
- Track occupancy, ADR, RevPAR and operating-cost trends, especially labor and sales-and-marketing costs.
- Review the $106.3 million of near-term debt maturities, available revolver capacity, covenant headroom and refinancing terms.
- Assess cash available for capital needs and dividends separately from restricted cash and non-GAAP FFO/AFFO.
- Monitor execution and returns on the Boston acquisition, Orlando development, mezzanine loans and hotel-sale proceeds, including the tax consequences of 1031 exchanges.