Summit Hotel Properties, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 6, 2014. The company is a REIT focused on upscale and upper-midscale hotels. At quarter-end, its portfolio included 90 hotels and 11,367 guestrooms across 22 states.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $105.5 million | $79.1 million | $195.1 million | $138.8 million |
| Income from operations | $16.2 million | $10.9 million | $25.5 million | $16.5 million |
| Net income | $9.2 million | $6.7 million | $12.5 million | $8.6 million |
| Net income attributable to common stockholders | $4.8 million | $2.6 million | $4.1 million | $2.1 million |
| Basic and diluted EPS | $0.06 | $0.04 | $0.05 | $0.03 |
| Operating cash flow | Not provided for the quarter | $48.8 million | $34.9 million |
- Q2 revenue rose 33.4%; first-half revenue rose 40.5%. Acquisitions contributed substantially: same-store revenue growth was 8.9% for Q2 and 8.6% for the first half.
- For the 66-hotel same-store portfolio, Q2 occupancy was 78.9% versus 77.0%, ADR was $111.91 versus $105.27, and RevPAR increased 8.9% to $88.28. First-half same-store RevPAR increased 8.6% to $84.22.
- Same-store hotel operating expenses were 65.1% of revenue in Q2 versus 65.3%; for the first half, 66.0% versus 66.1%. The filing does not provide a company-wide operating margin measure.
- FFO, a non-GAAP measure, was $22.5 million for Q2 versus $16.0 million and $37.1 million for the first half versus $26.7 million. EBITDA was $32.6 million for Q2 versus $25.1 million and $57.8 million for the first half versus $43.0 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $41.7 million and restricted cash was $54.6 million. Total assets were $1.43 billion; total liabilities were $624.8 million.
- Debt was $579.9 million, up from $435.6 million at December 31, 2013. The weighted-average borrowing rate, after derivatives, was 4.62%, down from 5.03%. Fixed-rate debt was $472.0 million (81.4%); variable-rate debt was $107.9 million (18.6%).
- The $300 million senior unsecured credit facility had $156.0 million borrowed, $13.8 million in letters of credit, and $130.2 million available at June 30. Management expected cash, operations and available borrowing sources to meet liquidity needs for at least 12 months.
- Investing cash outflow was $126.4 million, primarily reflecting hotel acquisitions and property improvements; financing cash inflow was $72.6 million. Cash declined by $5.0 million during the first half.
Changes, outlook and notable matters
- The company acquired four hotels in the first half for an aggregate purchase price of $125.7 million, versus 16 hotels for $412.2 million in the comparable 2013 period. Acquisitions and associated debt increased revenue, depreciation and interest expense, limiting direct period-to-period comparability.
- Management cited improving economic and hotel-industry fundamentals and expected meaningful RevPAR gains, while noting that a stalled recovery could hurt performance. No quantified earnings or RevPAR guidance was provided.
- Management expected $14 million to $20 million of hotel renovations in the remainder of 2014; $22.8 million had been spent in the first half. A potential $37.7 million Minneapolis hotel acquisition remained subject to construction, franchise and occupancy conditions.
- The company requested release of approximately $20 million of restricted cash, expected in Q3 subject to lender approval; there was no assurance it would be released.
- Interest-rate sensitivity: a 1 percentage-point increase in rates was estimated to reduce annual cash flow by approximately $1.1 million, assuming variable-rate debt did not increase.
- The CFO resigned effective May 27, 2014. His severance included a $348,289 payment, up to 12 months of COBRA premiums and accelerated equity vesting.
- The company reported a material weakness in internal controls involving reconciliation of hotel-level balance sheets to property-manager information and unreconciled intercompany accounts. Remediation work continued; management said the interim financial statements fairly presented the company’s results. Disclosure controls were assessed as effective.
- Management reported no litigation believed likely to have a material adverse effect and no material changes to previously disclosed risk factors. The company early-adopted revised discontinued-operations guidance; most future hotel sales may no longer be reported as discontinued operations.
Important facts for investors to verify
- Whether the material weakness is fully remediated and whether hotel-level and intercompany reconciliations remain timely and reliable.
- How much of revenue and earnings growth reflects same-store performance versus acquired hotels, and the acquired hotels’ ongoing contribution after financing and renovation costs.
- Debt maturities, covenant headroom, floating-rate exposure and continued access to the unsecured credit facility.
- Whether lenders released the requested restricted cash and whether the Minneapolis acquisition closed on its stated conditions.
- Renovation spending against the remaining-2014 estimate, and the effect of property dispositions and the updated discontinued-operations presentation on future comparisons.