Summit Hotel Properties, Inc. — Form 10-Q Summary
Business context and reporting period
For the quarter and six months ended June 30, 2012. Summit owned 73 hotels with 7,489 guestrooms in 20 states at quarter-end, focused mainly on branded select-service hotels. Summit Hotel Properties, Inc. (the REIT) consolidates Summit Hotel OP, LP; the two registrants report the same consolidated assets and liabilities. The REIT owned approximately 81.8% of OP’s common units at June 30.
Financial and operating performance
| Metric | Q2 2012 | Comparable period | Six months 2012 | Comparable period |
|---|---|---|---|---|
| Revenue | $47.3 million | $37.0 million, Q2 2011 | $87.2 million | $69.2 million, combined 2011 periods |
| Income from operations | $4.5 million | $3.7 million | $6.0 million | $4.6 million |
| Net income (loss) | $(0.4) million | $0.6 million | $(3.2) million | $(7.2) million |
| Net loss attributable to common shareholders | $(1.2) million; $(0.04) per share | $0.4 million; $0.02 per share | $(4.1) million; $(0.14) per share | $(0.7) million; $(0.03) per share |
Q2 revenue increased 27.8%; same-store revenue rose 12.8%, with occupancy up 6.9%, average daily rate up 5.6% and RevPAR up 12.9%. For the first half, same-store revenue increased 9.5%, occupancy 6.3%, ADR 2.6% and RevPAR 9.1%. Same-store hotel operating expenses declined as a share of revenue: to 66.8% in Q2 from 68.2%, and to 68.5% for the half from 70.3%. These operating metrics exclude three hotels sold and one classified as held for sale. The six-month comparison combines post-IPO company results with predecessor results, so it is not a simple like-for-like comparison.
Q2’s operating improvement did not translate into positive net income: interest expense rose about $1.3 million year over year, and discontinued operations recorded a $1.0 million loss, including impairment. Q2 included a $298,090 arbitration award from Choice Hotels and reversal of approximately $131,000 in related expense accruals. The first-half net loss improved from the combined 2011 loss, with lower interest expense partly offset by acquisition, depreciation and other costs.
- Cash flow, six months: Operating cash flow was $13.1 million, versus $11.3 million in the comparable 2011 period. Investing cash outflow was $47.2 million, including $50.5 million for land and hotel acquisitions, partly offset by $16.8 million of disposition proceeds. Financing cash inflow was $35.2 million. Cash increased by $1.1 million to $11.6 million.
- Balance sheet at June 30: Total assets were $621.5 million; total liabilities were $316.1 million; and total equity was $305.4 million. Mortgages and notes payable were $298.4 million, up from $217.1 million at year-end 2011. Restricted cash was $3.1 million. The filing does not provide a conventional current ratio.
- Debt and liquidity: Debt comprised $206.1 million fixed-rate and $92.3 million variable-rate, including hedged debt as fixed for this presentation. The $125 million revolving facility had $54.4 million outstanding and approximately $32.7 million available at June 30, subject to borrowing-base limits and covenants. At August 7, reported availability was $43.8 million after adding collateral. Management said available sources were expected to meet short-term requirements for at least 12 months.
- Margins and distributions: Q2 operating income was about 9.5% of revenue and net loss about 0.8% of revenue. The REIT paid $8.8 million in distributions and dividends in the first half, including $2.3 million in preferred dividends.
Material changes, outlook and risks
- Six hotels were acquired in the first half for approximately $83.9 million in gross allocated assets, with $33.1 million of debt assumed; the company also completed refinancings and extended or modified several loans. The revolving credit facility amendment lowered pricing and certain covenant requirements, extended maturity to May 2015, and increased borrowing capacity based on collateral and other limits.
- Three Twin Falls hotels were sold on May 16 for $16.5 million; proceeds were used in part to repay approximately $5.6 million of term debt and reduce revolver borrowings by $9.0 million. The company recorded a $932,000 impairment in Q1 for those assets. A Missoula hotel was classified as held for sale and impaired by approximately $1.2 million; management expected its sale to close in Q3 2012.
- Management cited improving hotel fundamentals and limited near-term new hotel supply, while noting continuing macroeconomic uncertainty. No specific earnings or operating-metric guidance was provided. The company anticipated approximately $20.0 million of 2012 renovations and other non-recurring capital expenditures at same-store hotels and $5.1 million at acquired hotels; $10.6 million and $1.2 million, respectively, had been spent by midyear.
- Risks include refinancing and access to capital, leverage and covenant compliance, interest-rate movements, hotel demand and operating costs, acquisition integration, REIT qualification, and the effectiveness and counterparty exposure of hedges. A 100-basis-point rise in variable-rate indices was estimated to reduce annual cash flow by about $0.6 million, assuming debt levels and hedging remained unchanged. Approximately $20.3 million of debt was reported as maturing before December 31, 2013.
- Subsequent events: Summit acquired a 96-room Arlington, Texas Residence Inn on July 2 for about $15.5 million; 745,130 OP units were redeemed for common shares the same day. The Choice Hotels arbitration was resolved in the company’s favor, with the award received April 30. The company reported no litigation it believed would materially adversely affect it, and no material off-balance-sheet arrangements.
Investor verification priorities
- Verify hotel-level same-store trends and the effects of acquisitions, dispositions and the Missoula sale on reported revenue and earnings.
- Review debt maturities, variable-rate exposure, revolver availability, borrowing-base restrictions and compliance with financial covenants.
- Assess the funding plan for planned renovations, acquisitions and REIT distributions, including reliance on refinancing or additional capital.
- Check the realized proceeds and final accounting for hotel and land dispositions, impairment charges, and the post-quarter acquisition and unit redemption.
- Confirm the sustainability of operating gains and whether earnings can cover preferred dividends and common distributions.