Summit Hotel Properties, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Summit is a hotel REIT that owns and operates select-service hotels through its operating partnership. At quarter-end, it reported 73 hotels and 7,469 guestrooms across 20 states. Summit completed its IPO in February 2011, so the prior-year comparison combines post-IPO results with predecessor results and is not fully like-for-like.
Key financial metrics
| Metric | Q1 2012 | Prior-year comparison |
|---|---|---|
| Revenue | $40.0 million | $32.4 million combined; up 23.6% |
| Income from operations | $1.4 million | $0.9 million combined |
| Net loss | $2.8 million; $0.11 loss per common share | $7.8 million combined |
| Operating cash flow | $2.9 million | $1.8 million |
| Cash and cash equivalents | $10.9 million | $10.5 million at December 31, 2011 |
| Debt | $277.1 million | $217.1 million at December 31, 2011 |
Quarter-end total assets were $604.1 million and total liabilities were $293.0 million. Cash used in investing was $36.9 million, including $29.7 million of net hotel and land acquisitions and $6.8 million of other property and equipment purchases. Financing provided $34.3 million net. Hotel operating expenses were $28.0 million; depreciation and amortization was $8.2 million. Operating income was approximately 3.5% of revenue.
Same-store results for 62 hotels improved: revenue rose 5.8%, occupancy increased to 64.2% from 60.8%, and RevPAR rose 4.8% to $59.03. Same-store ADR declined 0.7% to $92.01. Management attributed operating improvement to better hotel fundamentals and revenue growth; same-store hotel operating expenses fell to 70.5% of revenue from 72.7%.
Material changes and unusual items
- Three hotels in Twin Falls, Idaho were classified as held for sale under a $16.5 million sale agreement, expected to close May 16, 2012. A $932,000 impairment contributed to discontinued-operations losses of $1.0 million.
- Summit acquired three hotels in Q1 for approximately $48.6 million in aggregate purchase prices: an Atlanta Courtyard and two Birmingham Hilton Garden Inns. Debt increased from year-end, reflecting acquisitions and financing activity.
- Debt was approximately 57% fixed-rate and 43% variable-rate. Summit refinanced four loans into a $67.5 million, 6.10% loan with a 2032 stated maturity, subject to lender call dates. It also refinanced a $7.0 million loan and added acquisition-related term debt.
- On April 4, an arbitration panel found Choice Hotels had improperly terminated 11 franchise agreements and awarded Summit $298,090; the award settled the claims. No material adverse litigation was identified.
- After quarter-end, 3,265,894 partnership units were redeemed one-for-one for common shares. On May 4, Summit entered into interest-rate hedges covering approximately $29.5 million of variable-rate debt.
Liquidity, outlook, and risks
At March 31, the $125 million revolving facility had approximately $43.4 million drawn and $50.5 million available under borrowing-base limits. As of May 10, reported availability was $44.5 million. Management said available cash, operating cash flow, and the revolver should meet short-term needs for at least 12 months, while warning that refinancing may not be available on acceptable terms. Approximately $28.3 million of debt was expected to mature before year-end 2013; management had refinanced $76.5 million since January 1, 2012.
Management anticipated 2012 renovation and non-recurring capital spending of $23.0 million at same-store hotels and $6.0 million at acquired hotels; $7.9 million and $0.5 million, respectively, had been spent during the quarter. No earnings or operating-performance forecast was provided. The company cited guarded optimism about the economy and hotel demand, and did not expect a significant near-term increase in new hotel supply.
Key risks include leverage and refinancing access, variable interest rates, hotel demand and operating metrics, acquisition and disposition execution, capital availability, and maintaining REIT qualification. A 100-basis-point increase in variable-rate indices was estimated to reduce annual cash flow by approximately $0.5 million, considering existing rate floors and hedges. The company generally intends to distribute at least 100% of REIT taxable income; REIT qualification requires annual distributions of at least 90% of taxable income as defined for tax purposes.
Investor facts to verify
- Confirm the Twin Falls sale’s closing, proceeds, and final impairment or disposal effects.
- Review the revolver borrowing base, covenants, remaining availability, and maturities, including the near-term balloon payments.
- Track acquisition integration, renovation spending, and same-store occupancy, ADR, RevPAR, and expense trends.
- Assess exposure to variable rates and the effectiveness and coverage of the post-quarter hedges.
- Monitor REIT distribution requirements, unit redemptions and resulting share dilution, and the final accounting allocations for the Atlanta acquisition.