Summit Hotel Properties, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 26, 2021. The company is a lodging REIT focused on premium-branded, primarily select-service hotels. At year-end, its portfolio comprised 72 hotels and 11,288 guestrooms in 23 states.
Financial and operating performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $234.5 million | $549.3 million |
| Net income (loss) | $(149.2) million | $82.3 million |
| Common-stockholder earnings (loss) per share | $(1.52) | $0.65 |
| Operating cash flow | $(42.1) million | $148.5 million |
| Adjusted EBITDAre | $14.4 million | $185.3 million |
| FFO applicable to common shares and units | $(48.6) million | $122.5 million |
| Debt, gross | $1,101.5 million | $1,022.7 million |
| Total assets | $2,233.0 million | $2,355.7 million |
COVID-19 drove a 57.3% decline in total revenue and a 58.1% decline in portfolio RevPAR. For the total portfolio, occupancy fell to 43.3% from 78.5%; ADR decreased 24.0% to $120.36. Income from hotel operations declined to $27.8 million from $199.6 million. Hotel operating expenses fell less than revenue, while depreciation and interest expense increased year over year.
Fourth-quarter revenue was $48.2 million versus $133.8 million in the prior-year quarter. The company reported a fourth-quarter net loss of $44.7 million and loss per share of $0.45, compared with net income of $8.8 million and earnings per share of $0.05 in Q4 2019.
At December 31, cash and cash equivalents were $20.7 million and restricted cash was $18.2 million. Gross debt was approximately $1.10 billion; the filing reports $1.095 billion of debt net of issuance costs. Operating cash flow was negative, and cash, cash equivalents and restricted cash together declined by $30.9 million during 2020. The company reported no debt defaults and stated it was in compliance with applicable financial covenants at year-end.
Changes, response and outlook
- The pandemic caused a sharp reduction in travel demand. Six hotels temporarily suspended operations in March 2020; at December 31, one hotel remained closed and guests at two others were directed to sister properties.
- The company cut hotel staffing and services, furloughed or eliminated corporate positions, postponed non-essential capital projects, and suspended common-stock and operating-partnership-unit dividends beginning in Q1. Common dividends for 2020 were $0.18 per share; preferred dividends continued to be paid.
- Credit amendments provided covenant waivers through March 31, 2022 for the senior facility and term loans, with specified covenant adjustments thereafter through 2023. The company also amended its joint-venture facility. These changes brought restrictions, collateral pledges and liquidity conditions; lender approval or thresholds may constrain transactions.
- In January 2021, the company issued $287.5 million of 1.50% convertible senior notes due 2026, receiving approximately $279.8 million net before capped-call costs. Proceeds funded capped calls and repayments of revolving and term-loan borrowings. As of February 15, 2021, it reported $24.6 million of unrestricted cash and $380.0 million of undrawn availability on its revolver.
- Management expects 2021 results to remain adversely affected, while anticipating gradual recovery over multiple years; timing and pace are uncertain. It said cash, operating recovery and credit availability were expected to fund operations for at least twelve months. Planned 2021 capital expenditures were estimated at $20–$30 million, assuming reasonable lodging-demand recovery.
- Management changes effective January 15, 2021 made former CFO Jon Stanner CEO and Daniel Hansen Executive Chairman. The company was searching for a new CFO.
Risks and unusual items
- Continued pandemic effects, travel restrictions, slow demand recovery and fixed hotel costs could further pressure revenue, cash flow and asset values.
- Leverage was significantly above the company’s historical target of net debt to Adjusted EBITDAre of no more than 6.5x, reflecting the collapse in earnings. Refinancing, covenant compliance after waiver periods, variable rates and LIBOR transition are material risks.
- The company recorded a $4.8 million provision for credit losses, including an allowance related to development loans and seller financing, and $1.8 million of impairment/write-off charges related to purchase options. It also recorded a $15.2 million valuation allowance against deferred tax assets of certain taxable REIT subsidiaries.
- Interest-rate swaps with $400 million aggregate notional value were in a $30.9 million liability position at year-end. Management estimated that a 1 percentage-point rate increase or decrease would change annual cash flows by approximately $5.6 million in the opposite direction.
- Other risks include reliance on third-party hotel managers and franchise brands, with Aimbridge or affiliates managing 33 properties; hotel renovation needs; ground leases; and maintaining REIT qualification. The company reported no pending litigation it believed would materially affect its financial position or results.
Investor facts to verify
- Whether lodging demand, occupancy and RevPAR recover as management expects, and the resulting effect on operating cash flow and earnings.
- Actual unrestricted liquidity, revolver availability, borrowing restrictions and debt repayment progress after the January 2021 notes offering.
- The company’s ability to meet covenants as waivers expire, refinance maturities beginning in November 2022, and manage elevated leverage.
- Recovery and collectability of mezzanine and seller-financing loans, including loans with deferred interest or recorded credit-loss allowances.
- Effects of suspended common dividends, continued preferred distributions, and potential dilution from convertible notes; confirm terms and capped-call protection.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2020.