Summit Hotel Properties, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Summit completed its IPO and formation transactions on February 14, 2011; therefore, 2011 results combine post-IPO company operations with the predecessor’s results before that date. Comparisons with 2010 are not fully like-for-like.
Business context
Summit is a hotel investment company focused on select-service hotels, primarily in the upscale and upper-midscale segments. At year-end it owned 70 hotels with 7,095 rooms across 19 states. The company operates through Summit Hotel OP, LP and leases nearly all hotels to taxable REIT subsidiaries, which use third-party managers. Interstate and its affiliate managed 69 hotels as of February 27, 2012.
Financial and operating results
| Metric | 2011 | Comparable period / note |
|---|---|---|
| Total revenue | $148.9 million | $135.6 million in 2010; up 9.8% |
| Hotel operating expenses | $106.8 million | $95.9 million in 2010; up 11.3% |
| Income from operations | $5.5 million | $5.6 million in 2010 |
| Net loss | $10.4 million | $20.9 million in 2010 |
| Net loss attributable to common stockholders | $9.6 million | Includes $0.4 million in preferred dividends; reported loss per share was $0.12 |
| Cash from operating activities | $24.1 million | $10.4 million in 2010 |
| Cash used in investing activities | $83.5 million | Included $50.0 million for hotel and land acquisitions and $33.5 million for property and equipment |
| Cash from financing activities | $61.9 million | Included equity proceeds, debt repayments and distributions |
| Total assets | $554.0 million | $493.0 million at year-end 2010 |
| Mortgages and notes payable | $217.1 million | $420.4 million at year-end 2010 |
Same-store revenue rose 2.4%; occupancy was 64.0% versus 63.7%, ADR was $89.38 versus $87.59, and RevPAR increased 2.6% to $57.23. For the total portfolio at year-end, occupancy was 64.5%, ADR was $90.03 and RevPAR was $58.02. Reported full-year 2011 portfolio measures include acquired hotels only for the periods Summit owned them.
Cash and cash equivalents were $10.5 million at year-end, plus $1.5 million of restricted cash. The $125 million secured revolving facility had approximately $62.9 million available to borrow as of February 27, 2012, subject to borrowing-base limits and covenants. At year-end, 56.5% of debt was fixed-rate and 43.5% variable-rate; management estimated a 1-percentage-point increase in variable rates would reduce annual cash flow by about $413,000. A 1% common distribution payout ratio or operating margin is not separately stated in the filing.
Changes, outlook and material items
- Revenue growth reflected five hotel acquisitions during 2011 and improving hotel fundamentals. Same-store RevPAR improved, but operating expenses grew faster than revenue and income from operations edged lower.
- Interest expense fell to $17.9 million from $26.4 million, primarily after IPO proceeds were used to repay debt. The IPO and concurrent private placement raised approximately $240.8 million net; a preferred-stock offering raised approximately $47.9 million net and was used to reduce revolving-credit borrowings.
- The Choice franchise agreements for 11 hotels were terminated in 2011. During the transition, loss of access to national reservation systems contributed to lower occupancy; those hotels’ RevPAR fell 18.1% year over year to $41.95. Six hotels moved to lesser-known brands with less marketing and loyalty-program support.
- Management cited third-party 2012 RevPAR growth estimates of 7.4% for upscale, 5.8% for upper-midscale and 4.5% for midscale hotels. It was guardedly optimistic about recovery, but warned that a stalled recovery could impair results. The filing gives no company-specific earnings or RevPAR guidance.
- Management expected liquidity to cover requirements for at least 12 months, while noting refinancing and capital-market access were not assured. Approximately $28.5 million of debt was due before the end of 2013 as of year-end. Subsequent to year-end, Summit refinanced about $76.6 million of debt; the ING refinancing carries a 6.10% rate and lender call dates.
- Summit budgeted approximately $20.7 million of 2012 hotel capital improvements, largely for brand-required plans. It had spent $28.9 million on capital improvements since the IPO through year-end 2011.
- Choice litigation remained unresolved: the parties’ arbitration hearings occurred in December 2011 and January 2012, with a decision expected in late March or April 2012. Choice asserted counterclaims including approximately $3.9 million in actual damages, $2 million in punitive damages and $120,000 for trademark infringement; the company denied the claims and could not estimate a loss range.
- Other notable risks include hotel-industry cyclicality, concentration in Interstate as manager, variable-rate debt and refinancing needs, REIT qualification and distribution requirements, franchise obligations, and environmental exposures identified at properties in Bloomington, Minnesota and San Antonio, Texas. The company reported effective disclosure controls and internal control over financial reporting.
Investor facts to verify
- Reconcile the combined 2011 results with post-IPO results and predecessor reporting periods before drawing year-over-year conclusions.
- Track Choice arbitration outcomes, hotel performance after rebranding, and completion of the Fort Worth franchise conversion.
- Confirm refinancing of remaining near-term maturities, facility availability and compliance with debt covenants.
- Assess whether operating cash flow can fund distributions, debt service and planned renovations without additional borrowing or equity issuance.
- Monitor REIT qualification and the environmental matters disclosed for the Minnesota and Texas properties.