Summit Hotel Properties, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Summit is a REIT focused primarily on premium-branded select-service hotels. At quarter-end, it owned 70 hotels with 10,803 rooms in 24 states.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $133.7 million | $142.3 million | $415.6 million | $434.8 million |
| Operating income | $19.2 million | $47.0 million | $101.4 million | $110.2 million |
| Net income | $11.6 million | $38.0 million | $73.6 million | $85.4 million |
| Net income attributable to common stockholders | $7.8 million | $34.2 million | $62.2 million | $68.9 million |
| Diluted EPS | $0.07 | $0.33 | $0.60 | $0.66 |
| Operating cash flow | Not reported by quarter | Not reported by quarter | $119.6 million | $129.0 million |
| Adjusted EBITDAre | $45.2 million | $49.6 million | $144.3 million | $151.5 million |
| AFFO per common share/unit | $0.31 | $0.35 | $0.99 | $1.05 |
For Q3, total-portfolio occupancy was 80.1%, ADR was $155.13 and RevPAR was $124.27. Same-store RevPAR was down 0.1% year over year; for the first nine months, same-store RevPAR increased 1.4%. Nine-month total-portfolio RevPAR increased 4.0%, reflecting both same-store improvement and portfolio changes.
At September 30, cash and cash equivalents were $48.1 million, with another $27.8 million restricted. Gross debt was $848.7 million ($843.5 million net of issuance costs), down from $965.0 million gross at December 31, 2018. The weighted-average borrowing rate, after derivatives, was 4.03%; 65% of debt was effectively fixed-rate. Lease liabilities were $18.6 million. Total assets were $2.15 billion and total equity was $1.20 billion.
Changes and significant items
- Q3 revenue declined 6.1% and nine-month revenue declined 4.4%. Management attributed the total-portfolio declines principally to hotels sold, partly offset by acquired properties and, for the nine-month period, same-store revenue growth.
- Q3 GAAP net income and operating income fell substantially versus 2018, when Q3 included a $25.2 million gain on hotel sales. Nine-month 2019 included $40.8 million of net gains on hotel dispositions and a $1.7 million impairment charge; nine-month 2018 included $42.6 million of disposition gains.
- Adjusted EBITDAre declined 8.8% in Q3 and 4.7% for the first nine months. AFFO per share/unit declined to $0.31 for Q3 and $0.99 for nine months. Management cited dispositions and lower same-store operating income as key factors, with acquired higher-RevPAR hotels partly offsetting the effect.
- In April, the company sold six hotels for net proceeds of $133.0 million and a $36.6 million gain; in February, it sold two hotels for $11.6 million and a $4.2 million gain. Net proceeds from the April sale were used to reduce credit-facility borrowings. It acquired an 88-room hotel in Silverthorne, Colorado, for $25.5 million in August.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $23.6 million of incremental right-of-use assets and lease liabilities at adoption; prior periods were not restated.
Liquidity, outlook and risks
- Management said available cash, operating cash flow, working capital, credit-facility capacity and other funding sources were expected to meet ongoing liquidity needs for at least 12 months. At quarter-end, the $600 million unsecured credit facility had $240 million drawn and $350 million available, as reported by the company; it was in compliance with financial covenants. Scheduled debt principal amortization over the next 12 months was $3.7 million, with no debt maturities in that period.
- Capital expenditures were $46.7 million for the first nine months. Management estimated full-year 2019 capital expenditures of $57.5 million to $62.5 million. Its stated general leverage objective was debt to EBITDA of no more than 6.5x.
- Management described U.S. lodging growth as slowing and cited an industry forecast for 0.4% RevPAR decline in the Upscale segment for 2019. No company-specific earnings or RevPAR guidance is provided in the filing.
- After quarter-end, a joint venture with GIC acquired four hotels for $249.0 million on October 8. The joint venture also entered a $200 million credit facility; by October 24, its affiliate had borrowed $140 million. The company separately reported $295 million drawn on its unsecured credit facility at October 24.
- Two Birmingham hotels were under contract for an expected fourth-quarter sale at an aggregate $21.8 million, with an estimated gain of approximately $4.8 million; completion was not assured. The board declared common dividends of $0.18 per share, payable November 29, 2019.
- Key risks include hotel demand and RevPAR weakness, competition and new supply, labor and other cost inflation, interest-rate exposure and refinancing access, lending and acquisition risks, and potential disruptions from cybersecurity incidents or natural disasters. The filing noted LIBOR transition uncertainty; a 1% rate increase was estimated to reduce annual cash flow by approximately $3.0 million after swaps. Management reported no material change to previously disclosed risk factors and no pending litigation it believed would materially affect results.
Important facts for investors to verify
- Underlying hotel trends: same-store occupancy, ADR, RevPAR, and expense growth, especially labor and franchise costs.
- How much of reported earnings and cash generation depends on property-sale gains, and whether disposition proceeds continue to reduce debt.
- Debt availability, covenant headroom, leverage, floating-rate exposure, and refinancing terms; distinguish parent-company debt from joint-venture borrowing.
- Execution and returns on the GIC joint venture’s acquisitions, its financing, and the planned Birmingham dispositions.
- Capital spending needs, dividend coverage, and the assumptions behind management’s liquidity and full-year capital expenditure outlook.