Summit Hotel Properties, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; quarterly figures below include the unaudited fourth quarter. Amounts are in U.S. dollars.
Business context
Summit is a self-managed hotel investment company and REIT focused primarily on premium-branded, select-service hotels. At year-end, it owned 77 hotels with 11,659 guestrooms in 26 states; 99.5% of rooms operated under premium franchise brands. Hotels are leased to the company’s taxable REIT subsidiaries and managed by independent third parties.
Financial and operating performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $567.3 million | $515.4 million | +10.1% |
| Operating income | $125.2 million | $127.1 million | Down $1.9 million |
| Net income | $91.1 million | $99.5 million | Down 8.4% |
| Net income attributable to common stockholders | $71.0 million | $79.2 million | Down 10.4% |
| Diluted EPS | $0.68 | $0.79 | Down $0.11 |
| FFO per common share/unit | $1.26 | $1.21 | Up $0.05 |
| AFFO per common share/unit | $1.35 | $1.34 | Up $0.01 |
| Adjusted EBITDAre | $196.5 million | $180.1 million | Up 9.1% |
| Operating cash flow | $161.7 million | $147.7 million | Up $14.0 million |
Revenue growth primarily reflected acquisitions and development: acquired hotels contributed $78.4 million in incremental revenue, while same-store revenue rose just $1.0 million. Same-store RevPAR declined 0.2%, as occupancy fell 143 basis points to 77.7% while ADR increased 1.6% to $153.87. For the total portfolio, RevPAR increased 3.4% to $119.75, reflecting the acquired hotels and portfolio sales. Management cited rising labor costs as a principal expense pressure. The filing does not provide a clear headline GAAP operating-margin figure.
Fourth quarter: Revenue was $132.5 million versus $131.7 million in Q4 2017; net income was $5.8 million versus $9.8 million, and diluted EPS was $0.02 in both periods. The filing’s quarterly table does not explain the year-over-year Q4 earnings change.
Debt, liquidity and capital allocation
- Gross debt outstanding was $965.0 million at year-end; the balance-sheet carrying amount, net of issuance costs, was $958.7 million. Net debt to EBITDA was 4.1x, against the company’s stated general limit of 6.5x.
- Cash and cash equivalents were $44.1 million, with an additional $28.5 million of restricted cash. The $600 million unsecured credit facility had $315 million drawn and $285 million available at year-end. The company reported compliance with debt covenants and said available sources were expected to meet liquidity needs for at least 12 months.
- Debt included $200.0 million of mortgage debt and $765.0 million of unsecured credit-facility and term-loan borrowings. Weighted average borrowing cost after swaps was 4.27%. After hedging, 59% of debt was fixed-rate and 41% variable-rate; a 1 percentage-point rate increase was estimated to reduce annual cash flow by approximately $4.0 million.
- Operating cash flow was $161.7 million; investing activities used $63.1 million and financing activities used $92.0 million. Capital expenditures were $66.6 million. The common dividend was $0.72 per share for 2018, compared with $0.67 in 2017.
- The company redeemed all Series C preferred shares for $85.3 million, including accrued dividends. It acquired one hotel for $71.0 million, completed a 168-room Orlando hotel development, and sold hotels and land for $107.3 million gross proceeds.
Outlook, risks and unusual items
- Management expected portfolio RevPAR growth in 2019. It cited an industry forecast of 1.5% RevPAR growth for U.S. Upscale hotels, while noting that industry RevPAR growth had slowed in 2018 and could weaken further with increased supply or reduced demand. No company-specific quantified earnings or RevPAR guidance is provided.
- Management estimated 2019 capital expenditures of $40–$60 million. Funding plans include operating cash flow, working capital, restricted-cash releases and borrowings, subject to availability.
- Key risks include hotel demand and economic cyclicality, labor and other fixed-cost inflation, new hotel and alternative-accommodation competition, reliance on third-party operators and franchise brands, renovation needs, refinancing and variable-rate interest exposure, and access to external capital. Interstate or its affiliate managed 33 of 77 hotels, creating operator concentration risk.
- 2018 included a $2.0 million net recovery from settlement of a prior-period industrial disaster, a $0.9 million income-tax benefit from amended state returns, a $1.1 million impairment of two land parcels, and $41.5 million of net gains on asset disposals. These items affect comparisons of reported earnings.
- The company reported no pending legal action believed likely to have a material adverse effect. Its auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much of reported revenue and Adjusted EBITDAre growth came from acquired assets versus same-store hotel performance, particularly given the slight decline in same-store RevPAR.
- The causes of the sharp year-over-year decline in Q4 net income and the extent to which disposal gains, settlement proceeds, taxes and other nonrecurring items affected annual and quarterly results.
- Debt maturities, covenant headroom, refinancing capacity and interest-rate sensitivity; confirm the effect of swaps and the availability of the unsecured facility under its borrowing-base and covenant limits.
- Whether the $40–$60 million 2019 capital plan is sufficient for renovations and brand-required improvements, and how labor-cost pressure may affect hotel margins.
- Future distributions relative to operating cash flow and REIT distribution requirements; the filing notes distributions remain subject to board discretion and may require external funding if cash is insufficient.