Summit Hotel Properties, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company owns primarily premium-branded, select-service hotels; at quarter-end it operated 79 hotels with 11,590 rooms across 24 states. Amounts below are in millions except per-share data and hotel operating metrics.
Financial and operating results
| Metric | Q3 2017 | Q3 2016 | First nine months 2017 | First nine months 2016 |
|---|---|---|---|---|
| Revenue | $136.6 | $118.3 | $383.6 | $363.6 |
| Operating income | $22.4 | $21.4 | $65.5 | $67.7 |
| Net income | $22.4 | $27.2 | $89.7 | $97.9 |
| Net income attributable to common stockholders | $18.2 | $22.1 | $76.8 | $84.1 |
| Diluted EPS | $0.17 | $0.25 | $0.78 | $0.96 |
| FFO per diluted share/common unit (non-GAAP) | $0.33 | $0.34 | $0.96 | $1.02 |
| EBITDA (non-GAAP) | $53.6 | $50.5 | $173.8 | $173.3 |
- Q3 revenue rose 15.4%, largely from acquisitions; same-store revenue increased 0.5%. Same-store RevPAR rose 0.6%, as occupancy improved but ADR fell 1.4%.
- For the first nine months, revenue rose 5.5%, while same-store revenue declined 1.2% and same-store RevPAR fell 0.8%. Management attributed weakness in certain markets to convention-center closures and calendars and added hotel supply.
- Q3 net income declined despite higher revenue, in part reflecting lower gains on asset disposals and higher depreciation and interest expense. Nine-month net income and diluted EPS also declined. Common shares outstanding increased substantially after a May offering.
- FFO increased 13.0% in Q3 and 7.6% year to date, according to management, helped in part by lower preferred dividends following the Series A preferred-stock redemption. EBITDA was nearly flat year to date.
- Hotel operating expenses were $86.1 million in Q3 and $240.8 million year to date. Same-store hotel operating expenses grew faster than same-store revenue in both periods, raising expense as a share of same-store revenue.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $114.2 million, versus $112.4 million a year earlier. Investing cash use was $314.3 million, primarily reflecting $424.7 million of hotel acquisitions, development spending and property improvements, partly offset by disposition proceeds and loan collections. Financing provided $217.8 million.
- Cash and cash equivalents were $52.5 million at September 30, 2017; restricted cash was an additional $28.9 million and is subject to use restrictions.
- Gross debt was $777.5 million ($772.3 million net of issuance costs), up from $657.6 million gross at year-end 2016. The weighted-average borrowing rate, after derivatives, was 3.78%. Debt included $322.5 million of mortgage debt and unsecured borrowings.
- The company reported $260 million available under its $450 million senior unsecured credit facility at quarter-end and compliance with its debt covenants. It stated that available sources should meet ongoing liquidity needs for at least 12 months. Scheduled debt principal payments over the next 12 months were $8.2 million.
- Variable-rate debt was 53% of debt after existing hedges; management estimated a 1 percentage-point rate increase would raise annual interest expense by about $4.1 million, assuming no change in variable-rate debt. Two $100 million swaps entered into after quarter-end are intended to reduce that exposure beginning in January 2018.
Portfolio changes, outlook and risks
- The company acquired ten hotels for stated purchase prices totaling $422.0 million during the first nine months and sold twelve hotels. Disposition gains were $43.5 million in reported results; gains and deferred gains materially affected comparisons. The ARCH loan was repaid in March, and $15.0 million of previously deferred gain was recognized in 2017.
- Management described U.S. lodging-industry growth as positive but muted, noting decelerating room-night demand and industry forecasts of 0.4% 2017 RevPAR growth for Upscale hotels. It warned that increased supply or weaker demand could further pressure RevPAR. No company-specific earnings or RevPAR guidance was provided.
- Management expected $15–$20 million of additional capital expenditures in the remainder of 2017 and approximately $30 million total cost for an Orlando hotel development; $16 million had been incurred by quarter-end. It also cited modest ongoing wage pressure in some markets.
- Hurricanes Harvey and Irma caused minor property damage and limited closures; the company said the effects were not material at quarter-end and repair costs were below insurance deductibles.
- Risks highlighted include leverage and refinancing, interest-rate increases, hotel demand and supply trends, acquisition and renovation execution, REIT qualification and tax treatment of 1031 exchanges, natural disasters, and insurance coverage. The company disclosed litigation over a contractual obligation related to a 2012 hotel purchase and said it had accrued its expected settlement liability; it did not expect pending legal actions to materially affect results.
- On October 30, 2017, the board declared a $0.17 per-share common dividend and preferred dividends, payable November 30 to holders of record November 16.
Important facts for investors to verify
- Whether same-store operating trends and margins improve, given year-to-date declines in same-store revenue and RevPAR and rising expense ratios.
- How much reported earnings and cash generation depend on property-sale gains, deferred gains, acquisitions and non-GAAP adjustments; compare FFO and EBITDA with GAAP results.
- Debt maturities, covenant headroom, remaining borrowing availability and the effect of variable rates, including the timing and impact of the new swaps.
- Acquisition returns, disposition proceeds, planned renovation spending and the cost, schedule and financing of the Orlando development.
- The accrued litigation settlement amount is not clearly stated in the filing text; verify the amount and any material developments, as well as the availability of restricted cash and funding for dividends.