Summit Hotel Properties, Inc. annual report, FY2017

Summit Hotel Properties, Inc. — 2017 Form 10-K Summary

Business context and reporting period

For the fiscal year ended December 31, 2017; the filing also reports quarterly results, including the fourth quarter. Summit is a self-managed REIT focused primarily on premium-branded select-service hotels. At year-end, it owned 83 hotels with 12,242 rooms across 26 states; approximately 99.5% of rooms operated under major franchise brands. Hotels are managed by third parties.

Financial and operating performance

Metric	2017	2016
Total revenue	$515.4 million	$473.9 million
Operating income	$83.9 million	$82.5 million
Net income	$99.5 million	$108.3 million
Net income attributable to common stockholders	$79.2 million	$87.4 million
Diluted EPS	$0.79	$1.00
FFO per common share/unit	$1.21	$1.26
EBITDA	$216.7 million	$207.3 million
Cash from operating activities	$146.9 million	$137.9 million
Capital expenditures	$37.2 million	$42.4 million

Fourth-quarter revenue was $131.7 million and net income was $9.8 million; diluted EPS was $0.02.
Same-store revenue declined 0.1%. Same-store occupancy rose 80 basis points to 78.9%, while ADR fell 0.7% to $144.09; same-store RevPAR increased 0.2% to $113.65. Total-portfolio RevPAR rose 4.9% to $115.80, benefiting from acquisitions and dispositions.
Total hotel operating expenses were $325.6 million, or approximately 63.2% of revenue. Operating income was approximately 16.3% of revenue. Net income included material gains on asset sales; it is not a direct measure of hotel operating performance.
Gross debt was $873.1 million at year-end; reported debt net of issuance costs was $868.2 million. Total assets were $2.21 billion and total equity was $1.28 billion. Net debt to EBITDA was 3.9x, against management’s general target of no more than 6.5x.
Cash and cash equivalents were $36.5 million; restricted cash was $29.5 million. The $450 million unsecured credit facility had $285 million available at year-end. Scheduled debt principal payments due in 2018 were approximately $8.2 million. Management said available resources were expected to meet ongoing liquidity needs for at least 12 months.
At year-end, 44.2% of debt was fixed-rate and 55.8% variable-rate after the existing swap. Two additional $100 million swaps became effective in January 2018; management estimated that, after all swaps, a 1 percentage-point rate increase would reduce annual cash flow by about $2.9 million.

Material changes versus the prior period

Revenue grew 8.7%, primarily because of acquisitions. Summit acquired 14 hotels for a stated purchase price of $586.0 million and sold 12 hotels for gross proceeds of $120.2 million during 2017.
Same-store revenue was nearly flat, reflecting weaker performance in certain markets, partly offset by asset management and renovations. Management reported slower industry RevPAR growth in 2017, including slower business-travel growth.
EBITDA increased 4.5% and operating cash flow increased $9.0 million. FFO per share/unit decreased from $1.26 to $1.21, while diluted EPS fell from $1.00 to $0.79.
Net income declined despite higher revenue and EBITDA, in part because net gains on asset disposals were lower than in 2016. Depreciation and amortization rose 18.7%, largely due to acquired hotels.
Investing cash outflow increased to $515.5 million, primarily because of hotel acquisitions and development spending. Financing cash inflow rose to $370.4 million, supported by common and preferred stock offerings and borrowing activity.
Common dividends declared increased to $0.67 per share from $0.55. The company issued 10.35 million common shares for net proceeds of $163.8 million and 6.4 million Series E preferred shares for net proceeds of $154.7 million; it redeemed all Series B preferred shares for approximately $75.2 million.

Outlook, commentary, risks, and unusual items

Management cited a third-party forecast of 2.3% U.S. RevPAR growth for Upscale hotels in 2018, but warned that higher supply or weaker demand could further constrain growth. No company-specific revenue or earnings guidance was provided.
Management expected 2018 hotel capital expenditures of $45 million to $65 million. An Orlando hotel under development was expected to cost about $30 million in total; $21 million had been incurred, with opening anticipated shortly after completion around mid-2018.
After year-end, the company entered a $225 million unsecured term loan due in 2025, drew $140 million to replace its 2015 Term Loan, and retained an accordion feature subject to conditions. It also announced redemption of all Series C preferred shares on March 20, 2018.
The Tax Cuts and Jobs Act resulted in a $0.6 million fourth-quarter, non-cash tax expense from remeasurement of deferred tax assets; the amount was provisional and other tax effects were still under evaluation.
Key risks include hotel demand and supply cycles, rising wages and property taxes, interest-rate and refinancing exposure, reliance on external capital, franchise and renovation requirements, competition from other hotels and alternative accommodation providers, and dependence on third-party managers. Interstate or an affiliate managed 37 of the 83 hotels.
The company reported no pending legal action it believed would materially affect its financial position or results. The notes disclose ordinary-course litigation over a contractual obligation from a 2012 hotel purchase; the expected settlement liability had been accrued.
The CFO planned to retire effective March 31, 2018. Management and the auditor reported effective disclosure controls and internal control over financial reporting; the financial statements received an unqualified audit opinion.

Important facts for investors to verify

Whether same-store RevPAR and revenue recover, and whether the acquired hotels deliver expected performance as the portfolio continues to change.
How the $45 million to $65 million renovation budget and Orlando development affect cash flow, leverage, and returns.
Debt maturities, covenant headroom, available credit capacity, refinancing terms, and actual sensitivity after the new swaps.
Cash available for common and preferred distributions after debt service, capital spending, and the Series C redemption.
Final tax effects of the TCJA and the company’s ability to maintain REIT qualification and complete future tax-deferred exchanges.
The filing presents both gross debt of $873.1 million and balance-sheet debt net of issuance costs of $868.2 million; confirm the relevant debt basis when comparing leverage measures.