Summit Hotel Properties, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 2, 2017. Amounts are U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Business context
Summit is a self-managed REIT focused primarily on premium-branded, select-service hotels. At June 30, 2017, it owned 81 hotels with 11,608 guestrooms in 24 states. The interim statements are unaudited, and management cautions that results may not indicate full-year performance.
Financial and operating performance
- Q2 revenue: $129.1 million, up 1.5% from $127.2 million. Operating income was $24.5 million versus $25.6 million, and operating margin was approximately 19.0% versus 20.2%.
- Q2 earnings: Net income was $34.1 million versus $22.0 million; net income attributable to common stockholders was $29.8 million versus $17.7 million. Diluted EPS was $0.30 versus $0.20. The increase in reported earnings chiefly reflects a $16.4 million net gain on asset disposals, versus $2.7 million a year earlier.
- Q2 hotel trends: Same-store revenue fell 3.4%; same-store RevPAR declined 3.5%, as ADR decreased 2.5% and occupancy fell 84 basis points. Total-portfolio RevPAR rose 2.0%, primarily reflecting acquired hotels.
- First-half revenue and earnings: Revenue was $247.0 million, up 0.7%. Net income was $67.3 million versus $70.7 million; common-stockholder net income was $58.7 million versus $62.1 million, and diluted EPS was $0.61 versus $0.71. Disposition gains were $35.8 million versus $39.5 million.
- First-half same-store trends: Revenue declined 2.0% and RevPAR declined 1.5%; ADR was down 0.8% and occupancy decreased 52 basis points. Total-portfolio RevPAR increased 3.0%, largely due to acquisitions.
- FFO: First-half FFO applicable to common shares and units rose 4.8% to $61.4 million, but FFO per share/unit declined to $0.64 from $0.67. Q2 FFO was $33.2 million versus $32.7 million, while per-share/unit FFO was $0.33 versus $0.37. FFO is a non-GAAP measure.
- Cash flow: First-half operating cash flow was $69.2 million, compared with $69.5 million. Investing used $277.3 million, chiefly for $367.1 million of hotel acquisitions, partly offset by disposition proceeds. Financing provided $203.2 million, including $163.8 million net common-stock offering proceeds. Cash and cash equivalents ended at $29.8 million; restricted cash was $25.6 million.
- Debt and liquidity: Gross debt was $739.4 million ($735.2 million net of issuance costs), up from $657.6 million gross at year-end 2016. The weighted-average borrowing rate was 3.71%. Of gross debt, $397.2 million was variable-rate and $342.2 million fixed-rate after hedging. The $450 million credit facility had $150 million available at quarter-end; the company reported covenant compliance. Scheduled principal payments for the next 12 months were $8.1 million.
- Equity and dividends: The May common-stock offering issued 10.35 million shares at $16.50 per share and raised $163.8 million net. Shares outstanding increased to 104.2 million from 93.5 million at year-end. A new at-the-market program permits up to $200 million of additional common-stock sales. Quarterly preferred dividends were $4.2 million.
Material changes, outlook and risks
- The company acquired nine hotels during the first half for an aggregate purchase price of $364.5 million and sold eight hotels during Q2. Dispositions, acquisitions, and related gains materially affect comparisons with prior periods.
- Management reported that U.S. lodging RevPAR growth was slowing and cited an industry forecast of 0.8% growth for upscale hotels in 2017. It expected demand growth to moderate; increased supply or weaker demand could reduce RevPAR. No company-specific earnings or RevPAR guidance was provided.
- Management expected $20–$30 million of capital expenditures during the remainder of 2017 and approximately $30 million in total development costs for an Orlando hotel; $9.9 million had been incurred by June 30. It believed available liquidity would cover requirements for at least 12 months, while noting financing access and terms are not assured.
- Management cited rising labor costs and property-tax reassessments as operating pressures. A 1 percentage-point rise in interest rates was estimated to increase annual interest cost by approximately $4 million, assuming variable debt remained at the June 30 level. The company generally intends to keep indebtedness to EBITDA at no more than 6.0x; the filing does not state the actual ratio.
- Other risks include refinancing and leverage, hotel supply and demand, travel conditions, acquisition and renovation execution, REIT qualification, and completing tax-deferred 1031 exchanges. The filing reports a contractual-obligation litigation matter with an accrual recorded, but no pending legal action believed likely to materially harm financial condition or results.
- Subsequent to quarter-end, the company acquired an Atlanta hotel for $57.5 million, sold three Fort Worth hotels for $27.8 million, and collected a $10.1 million real-estate loan. The board declared a $0.17-per-share common dividend payable August 31, 2017.
Most important facts for investors to verify
- Whether same-store RevPAR weakness persists and how acquisitions alter total-portfolio comparisons.
- How much reported earnings and EBITDA depend on property-sale gains; assess recurring performance using GAAP results alongside FFO and other measures.
- Debt maturities, variable-rate exposure, credit-facility availability, covenant headroom, and actual leverage relative to the stated 6.0x target.
- Capital needs and returns from acquisitions, renovations, and the Orlando development, as well as any future equity issuance and dilution.
- Progress on the stated 2017 outlook, REIT and 1031-exchange tax assumptions, and resolution of the accrued contractual litigation obligation.