Summit Hotel Properties, Inc. — 2015 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2015, not a standalone fourth-quarter report. Summit is a self-managed hotel REIT focused on premium-branded select-service hotels. At year-end, its portfolio comprised 87 hotels, 11,420 guestrooms and 24 states; 97.3% of guestrooms operated under premium franchise brands.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $463.5 million | $403.5 million |
| Operating income | $80.0 million | $48.7 million |
| Net income | $125.3 million | $20.9 million |
| Net income attributable to common stockholders | $107.8 million | $4.3 million |
| Diluted earnings per share | $1.24 | $0.05 |
| FFO per common share/unit | $1.27 | $0.90 |
| EBITDA | $219.3 million | $113.0 million |
| Cash provided by operating activities | $132.2 million | $102.1 million |
| Capital expenditures | $43.2 million | $42.4 million |
Revenue rose 14.9%, reflecting same-store growth and acquisitions. Same-store revenue increased 8.3%; occupancy rose 160 basis points to 76.9%, ADR increased 6.0% to $128.48, and RevPAR grew 8.2% to $98.77. Same-store hotel operating expenses were 64.6% of revenue versus 65.2% in 2014, implying improved property-level operating margin.
Reported earnings included a $65.1 million net gain on asset disposals, primarily a $66.6 million gain on the October sale of ten hotels, and $9.1 million of forfeited ARCH earnest money recorded in other income. These items materially lifted net income and EBITDA; they are not equivalent to recurring hotel operating performance. FFO, which excludes property-sale gains, increased 41.2% to $110.5 million.
Cash used in investing activities was $131.1 million, including $236.5 million for hotel acquisitions, offset in part by $150.1 million in disposition proceeds. Financing activities used $10.4 million, including $57.6 million of dividends paid. Cash and cash equivalents were $29.3 million at year-end, alongside $23.1 million of restricted cash.
Balance sheet, debt and liquidity
- Total assets were $1.581 billion, total equity $856.9 million and debt $677.1 million at December 31, 2015. Debt was up from $626.5 million a year earlier.
- Debt comprised $367.1 million of mortgage debt, $170.0 million drawn on the former $300 million unsecured credit facility, and a $140.0 million unsecured term loan. Weighted-average borrowing rate was 3.90%. After swaps, 59.5% of debt was fixed-rate and 40.5% variable-rate; a 1 percentage-point rate increase was estimated to reduce annual cash flow by about $2.7 million, assuming no change in variable debt.
- Scheduled principal payments for 2016 were $44.2 million; $35.7 million of mortgage debt matured during 2016. Management said it expected available liquidity to meet obligations for at least 12 months, while noting refinancing and borrowing capacity were not assured.
- On January 15, 2016, the company replaced its prior facility with a $450 million unsecured credit facility: a $300 million revolver and $150 million term loan. At February 19, 2016, it reported $190 million drawn under that facility, $140 million drawn under the 2015 term loan, and $359.8 million of mortgage debt.
- Common distributions declared were $0.47 per share for 2015, paid at $0.1175 per quarter. The company also has cumulative preferred shares with stated annual dividend rates of 9.25%, 7.875% and 7.125%.
Material changes, outlook and unusual items
- Summit acquired seven hotels in 2015 for $237.8 million and sold ten hotels for gross proceeds of $150.1 million. Its capital-recycling strategy targets selling lower-growth or lower-margin assets and reinvesting in hotels with stronger expected returns.
- In February 2016, six additional hotels were sold to an ARCH affiliate for $108.3 million. A separate agreement to sell ten hotels for $89.1 million was reinstated, with closing scheduled by December 30, 2016 and a new $7.5 million non-refundable deposit, subject to limited exceptions.
- In connection with the February 2016 transaction, the Operating Partnership lent ARCH $27.5 million. The loan bears 13% interest initially, rising to 14% and 15% if extended; part of the interest accrues as payment-in-kind. Principal is due February 2017, subject to extension options. This creates counterparty and repayment risk.
- Reverse 1031 exchanges completed in connection with the February sales deferred approximately $74 million of taxable gains and reduced revolving-credit borrowings by $105 million. Two additional hotels were acquired in January 2016 for a combined $109 million, funded with credit-facility borrowings.
- Management expected U.S. lodging growth to continue in 2016 but decelerate from 2015 as occupancy stabilized. It cited projected 2016 RevPAR growth of 4.7% for Upscale and 5.4% for Upper-midscale hotels, and expected new supply to increase. Planned 2016 hotel renovations were estimated at $40–$50 million.
- Principal risks include economic and travel-demand weakness, hotel competition and new supply, rising operating costs and interest rates, capital needs, debt refinancing and covenants, and dependence on third-party managers and franchisors. Interstate or its affiliate managed 48 of the 87 hotels.
- The $9.1 million forfeited deposit raised a REIT qualification issue: if treated as nonqualifying income, the company said it would have failed the 95% gross-income test for 2015. Based on tax-adviser advice, management believed the payment should be disregarded for that test, but disclosed no assurance against an IRS challenge.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. The company reported no litigation it believed would materially affect its financial condition or results.
Important facts for investors to verify
- How much of 2015 earnings and EBITDA reflects recurring hotel operations versus the sale gain and forfeited ARCH deposit; compare with FFO and same-store metrics.
- Whether the remaining ARCH hotel sale closes by the stated deadline, and whether the $27.5 million loan is repaid on schedule, including accrued interest.
- Actual borrowing availability under the new facility after asset sales and acquisitions, covenant headroom, and the plan for 2016 debt maturities and amortization.
- Whether 2016 renovation spending stays within the $40–$50 million estimate and generates the expected operating returns.
- Whether RevPAR and operating margins hold up as lodging growth slows and new hotel supply increases, including at properties managed by Interstate.
- The tax treatment of the ARCH deposit and asset sales, and continued compliance with REIT requirements and distribution obligations.