Summit Hotel Properties, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The filing combines Summit Hotel Properties, Inc. and its operating partnership; figures below are consolidated and in U.S. dollars. Summit is a REIT focused mainly on branded select-service hotels. At quarter-end it owned 92 properties with 10,913 guestrooms across 24 states; 10 properties were classified as held for sale.
Financial and operating performance
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Total revenue | $82.2 million | $43.1 million | $221.0 million | $116.6 million |
| Operating income | $9.9 million | $4.3 million | $26.2 million | $8.7 million |
| Net income (loss) | $(0.6) million | $1.6 million | $8.0 million | $(1.5) million |
| Net income (loss) attributable to common shareholders | $(4.8) million | $0.4 million | $(2.7) million | $(3.7) million |
| Basic and diluted EPS | $(0.07) | $0.01 | $(0.04) | $(0.13) |
| Cash provided by operating activities | — | $46.2 million | $24.6 million | |
| Cash and cash equivalents at period-end | — | $45.5 million | $10.3 million |
Revenue growth largely reflected portfolio expansion: 16 hotels were acquired in the first nine months, versus seven in the comparable 2012 period. Same-store results also improved. For 47 same-store hotels, Q3 revenue rose 6.4%, occupancy was 75.9% versus 75.4%, average daily rate (ADR) rose 5.5% to $104.61, and revenue per available room (RevPAR) rose 6.2% to $79.38. For the first nine months, same-store revenue rose 6.9%, occupancy increased to 73.8% from 72.4%, ADR rose 5.3% to $102.74, and RevPAR rose 7.2% to $75.80. Management attributed these gains to improving lodging fundamentals and renovations.
Same-store hotel operating expenses were 66.3% of revenue in Q3, versus 66.4%; for the first nine months they were 66.7%, versus 67.4%. Reported results include substantial acquisition, disposition, and discontinued-operations effects, so total-portfolio growth is not a like-for-like comparison.
At September 30, total assets were $1.280 billion, debt was $400.3 million, and total liabilities were $442.3 million. Debt was secured by mortgages on 77 hotels; 15 hotels were unencumbered. After swaps, 99.5% of debt was fixed-rate, with a weighted-average borrowing rate of 5.27%. The $150 million secured revolver had no borrowings, $0.7 million in letters of credit, and $149.3 million available. Restricted cash was $35.4 million.
Material changes and unusual items
- Hotel property investment, net, increased to $1.082 billion from $734.4 million at December 31, 2012. The company spent $388.5 million on acquisitions and had $422.0 million of net cash used in investing activities.
- Financing cash flow was $407.3 million, including $389.4 million of net equity proceeds. The company completed two common-stock offerings totaling $300.2 million net and a Series C preferred-stock offering yielding $81.7 million net. Common shares outstanding rose to 83.45 million from 46.16 million at year-end 2012.
- Q3 included a $1.4 million impairment charge on land. The first nine months included $8.7 million of impairments, largely associated with hotels sold or held for sale. Discontinued operations produced losses of $1.7 million in Q3 and $4.3 million for the first nine months; the Q3 discontinued-operations result included a $5.8 million impairment charge.
- Preferred dividends were $10.4 million for the first nine months. Although consolidated nine-month net income was positive, common shareholders had a reported net loss and negative EPS.
Outlook, liquidity, and risks
- Management stated it expected available operating cash flow, working capital, credit-facility borrowings, and other funding sources to meet ongoing liquidity needs for at least 12 months. This is management’s assessment, not earnings guidance.
- The company anticipated $15–$19 million of hotel renovations in the remainder of 2013; $28.5 million had been spent on renovations in the first nine months.
- On October 10, 2013, the company replaced its secured revolver with a $300 million unsecured facility: a $225 million revolving line and a $75 million term loan. At November 1, it reported $13.0 million drawn and $235.0 million available, subject to borrowing limits, unencumbered-asset requirements, and covenants. Management expected to fully draw the term loan in Q4; a swap was intended to fix its rate at 4.145% from January 2014.
- Two hotels were acquired in October for a combined $30.9 million. Two properties classified as held for sale were sold after quarter-end. Other pending hotel acquisitions and a planned Minneapolis hotel conversion remained subject to conditions; completion was not assured.
- Management was guardedly optimistic about lodging demand and expected RevPAR gains, while noting that a stalled economic recovery could weaken results. Risks include travel and hotel-demand declines, competition, higher interest rates and operating costs, refinancing and capital-access constraints, acquisition execution, and continued REIT qualification. The filing specifically identified federal budget impasses, sequestration, and air-traffic disruptions as potential threats to travel and distributions.
- The company reported no litigation it believed would materially affect its financial condition or results. Disclosure controls were considered effective, and no material change in internal control was reported.
Investor verification priorities
- Separate organic same-store trends from the effects of acquisitions, dispositions, and hotels reclassified to discontinued operations; confirm the precise portfolio basis used in comparisons.
- Assess common-shareholder earnings after preferred dividends, impairment charges, and discontinued operations, rather than relying on consolidated net income alone.
- Review the new unsecured facility’s borrowing-base limits, covenant headroom, unencumbered-hotel requirements, and subsequent use of proceeds.
- Confirm funding and completion of renovation plans and pending acquisitions, and monitor post-quarter acquisitions and asset-sale proceeds.
- Evaluate the ability to sustain distributions alongside REIT distribution requirements, equity issuance, debt service, and substantial capital needs.