Summit Hotel Properties, Inc. quarterly report, Q3 FY2022

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Summit Hotel Properties, Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022. Unless stated otherwise, dollar amounts are in millions. Summit is a self-managed hotel REIT; its portfolio at quarter-end comprised 102 hotels and 15,323 guestrooms across 24 states.

Business context and operating performance

Results reflected recovery in travel demand, especially leisure, some improvement in corporate and group travel, and a much larger portfolio following the 2022 NewcrestImage and Brickell acquisitions. The NewcrestImage transaction added 27 hotels and two parking structures for an aggregate purchase price of $822.0 million. Summit reported a 51% controlling interest in 39 GIC joint-venture hotels and a 90% interest in two Brickell hotels.

  • Q3 total portfolio: Revenue was $178.3 million, up 61.0% year over year. Occupancy was 71.7%, ADR was $158.39, and RevPAR was $113.59, increases of 4.4%, 11.1%, and 16.1%, respectively.
  • Q3 same-store portfolio: Revenue was $134.9 million, up 25.0%; occupancy was 73.7%, ADR was $164.46, and RevPAR was $121.21. Same-store RevPAR increased 24.1%.
  • Nine-month total portfolio: Revenue was $503.4 million, up 97.4%. Occupancy was 70.1%, ADR was $158.28, and RevPAR was $110.99, increases of 14.2%, 27.4%, and 45.5%, respectively.
  • Nine-month same-store portfolio: Revenue was $381.4 million, up 52.0%; same-store RevPAR increased 51.7%.

Financial results, cash flow and liquidity

  • Q3: Operating income was $17.2 million versus $5.0 million a year earlier. Net loss was $1.0 million; net loss attributable to common stockholders was $0.5 million, with reported basic and diluted loss per share rounding to $0.00.
  • Nine months: Operating income was $61.0 million versus an operating loss of $31.8 million in 2021. Net income was $13.3 million versus a net loss of $57.7 million; common-stockholder net loss was $5.0 million, or $0.05 per share.
  • Non-GAAP measures: Q3 AFFO applicable to common shares and units was $30.9 million ($0.25 per share/unit), compared with $20.5 million ($0.19) in 2021. Nine-month AFFO was $83.6 million ($0.69), compared with $22.0 million ($0.21). Adjusted EBITDAre was $47.2 million for Q3 and $134.7 million for nine months. These are company-defined supplemental measures, not substitutes for GAAP results.
  • Cash flow, nine months: Operating cash flow was $135.7 million versus $50.3 million. Investing used $257.4 million, principally for acquisitions and hotel improvements, partly offset by $73.8 million of net disposition proceeds. Financing provided $116.0 million. Cash, cash equivalents and restricted cash ended at $91.2 million; unrestricted cash was $72.6 million.
  • Debt and interest: Gross debt was $1.481 billion at September 30, up from $1.081 billion at year-end 2021; debt net of issuance costs was $1.468 billion. Weighted-average interest rate after derivatives was 4.54%, versus 3.35% at year-end. After swaps, 53% of debt was fixed-rate and 47% variable-rate. Interest expense was $17.6 million in Q3 and $46.2 million for nine months.
  • Liquidity: The company’s $400 million revolver was undrawn at quarter-end, subject to facility terms. Management said it expected available liquidity and operating cash flow to fund operations for at least 12 months. The filing reported $2.9 million of scheduled principal amortization and $31.8 million of debt maturities over the following 12 months. The company and GIC joint venture reported compliance with loan covenants.

Material changes and unusual items

  • The acquisitions substantially increased revenue, assets, depreciation, management fees, operating expenses and debt; total-company growth therefore includes portfolio expansion as well as improved hotel trading.
  • Q3 included a $20.5 million gain on the GIC joint venture’s sale of a San Francisco-area hotel. The nine-month comparison also benefited from the absence of a $4.4 million impairment recorded in 2021.
  • In August, Summit defeased three CMBS loans totaling $54.9 million, releasing nine hotels from collateral and returning $20.1 million of restricted reserves; the transaction also generated costs. It eliminated approximately $1.3 million of future interest payments.
  • Higher floating rates and acquisition-related borrowing increased interest expense. The reported fair value of interest-rate swaps rose substantially, producing other comprehensive income; this is not equivalent to operating cash flow.
  • Q3 operating costs reflected higher labor and contract-labor costs, and food-and-beverage expense grew faster than related revenue. Nine-month corporate G&A included $1.3 million of additional stock compensation related to the former COO’s retirement and award modifications.

Outlook, risks and contingencies

Management expected the recovery to continue through the remainder of 2022, led by leisure demand, while noting that corporate and group travel remained below historical levels and recovered more slowly. It anticipated approximately $25 million of portfolio capital expenditures during the remainder of 2022, funded through operating cash flow, revolver borrowings or other available capital. The filing provides no formal earnings or RevPAR guidance.

  • Management identified continued leisure strength, business-travel recovery, easing pandemic concerns, geopolitical stability, moderating inflation and labor-market normalization as important to operating performance.
  • Risks include inflation and wage pressure, rising interest rates, refinancing and maturity risk, recession or weaker travel demand, acquisition integration and renovation costs, and joint-venture and capital-market risks.
  • After quarter-end, a lender’s counsel alleged defaults under a subsidiary’s MetaBank loan, principally involving non-monetary covenants, and asserted default interest was accruing. The borrower disputes that a default occurred and is evaluating the allegations with counsel.
  • The company reported no pending legal actions believed to have a material effect on financial position or results. It recorded a valuation allowance against substantially all deferred tax assets.
  • Subsequent to quarter-end, the board declared common and preferred distributions payable November 30, 2022. Summit also completed a 90% interest acquisition in an 11-unit glamping property on October 26, for $4.5 million cash plus contingent consideration of up to $1.8 million, and acquired an interest in adjacent land.

Most important facts for investors to verify

  1. Separate organic same-store improvement from revenue and EBITDA growth attributable to the expanded portfolio.
  2. Assess variable-rate exposure, the 2023 debt maturities, refinancing options, and the effect of further rate increases despite swaps.
  3. Track the disputed MetaBank loan allegations and any resulting default, interest or covenant consequences.
  4. Review acquisition performance, integration and required capital spending, including the NewcrestImage and Brickell properties.
  5. Reconcile GAAP losses attributable to common stockholders with AFFO and Adjusted EBITDAre, and assess the sustainability of distributions and liquidity.