Summit Hotel Properties, Inc. — Q1 2017 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. The company is a REIT focused primarily on premium-branded select-service hotels. At quarter-end, it owned 82 hotels with 11,095 guestrooms in 23 states. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Q1 2016 / December 31, 2016 |
|---|---|---|
| Total revenue | $118.0 | $118.1 |
| Operating income | $18.6 | $20.7 |
| Net income | $33.2 | $48.7 |
| Net income attributable to common stockholders | $28.9; $0.31 per diluted share | $44.3; $0.51 per diluted share |
| FFO attributable to common shares and units | $28.2; $0.30 per share/unit | $25.9; $0.30 per share/unit |
| Cash provided by operating activities | $30.6 | $24.5 |
| Cash and cash equivalents | $68.0 | $34.7 |
| Debt, net of issuance costs | $714.3 | $652.4 |
| Total assets | $1,796.1 | $1,718.5 |
Hotel operating expenses were $75.2 million, or approximately 63.7% of revenue, versus $74.1 million, or 62.8%. Same-store hotel operating expenses rose to 63.8% of same-store revenue from 62.3%, indicating margin pressure. Same-store RevPAR increased 0.2%; occupancy fell 49 basis points while average daily rate rose 0.8%. For the total portfolio, RevPAR increased 3.9%, with occupancy up 38 basis points and ADR up 3.4%. Management noted that Q1 2016 had one extra day due to leap year.
Cash used in investing activities was $38.4 million, including $60.5 million for hotel acquisitions, $8.3 million of property improvements and $5.1 million for development; proceeds included $22.5 million from collection of a real estate loan and $14.9 million from dispositions. Financing activities provided $41.1 million, including $100.0 million of debt proceeds and $38.7 million of principal repayments. Dividends paid were $19.4 million.
Gross debt was $718.9 million: $270.0 million under the senior unsecured credit facility, $140.0 million of unsecured term loans and $308.9 million of mortgage debt. The company had $180.0 million available under its $450 million facility at quarter-end and was in compliance with covenants. After hedging, 48.9% of debt was fixed-rate and 51.1% variable-rate; management estimated a 1 percentage-point increase in rates would add about $3.7 million to annual interest cost. Restricted cash was $27.1 million and is subject to use restrictions.
Material changes and unusual items
- GAAP net income and EPS declined substantially, principally because the gain on disposal of assets was $19.5 million versus $36.8 million in Q1 2016. The 2017 gain included $15.0 million of deferred gain recognized when ARCH repaid its loan and a $4.8 million gain on the sale of an Atlanta hotel. The prior-year gain largely reflected the sale of six hotels.
- Despite lower GAAP net income, FFO rose 9.0% to $28.2 million, primarily reflecting higher interest income, including $1.2 million of ARCH payment-in-kind interest, and lower income tax expense. FFO per share/unit remained $0.30.
- Two hotels were acquired for a combined purchase price of $60.2 million. Common shares outstanding increased to 93.8 million from 86.4 million at March 31, 2016.
- Debt increased from year-end, while cash also increased due to the Atlanta hotel sale and ARCH loan repayment. The company said approximately $40 million of proceeds reduced its credit-facility borrowings during April.
Outlook, risks and contingencies
Management expects U.S. lodging growth to continue at a slower pace in 2017 and cites an industry forecast of 1.2% RevPAR growth for upscale hotels. It expects room-night demand growth to decelerate from 2016 levels, while stating that near-term new supply in its markets is not expected to materially harm results. The company gave no specific earnings or FFO guidance.
Management expects liquidity from operations, working capital, borrowing availability and other sources to meet needs for at least 12 months. It forecast $25–$35 million of remaining 2017 renovations and capital expenditures and approximately $30 million in total costs for its Orlando hotel development; $5.1 million had been incurred by quarter-end. It reported $7.6 million of mortgage debt maturing within 12 months plus $7.7 million of scheduled principal amortization.
Subsequent to quarter-end, the company sold seven hotels to an ARCH affiliate for $66.8 million, reporting an approximately $16.0 million net gain; proceeds were placed with a qualified intermediary for planned 1031 exchanges. The El Paso hotel was under contract to an unrelated buyer, with a closing expected in Q2 2017; the filing cautions that dispositions may not close as expected. The board declared a $0.17-per-share common dividend payable May 31, 2017.
Key risks include hotel demand and RevPAR changes, economic and geopolitical conditions, competition and new supply, variable interest rates and refinancing, access to capital, renovation costs, acquisition and disposition execution, REIT qualification and successful completion of tax-deferred exchanges. The company reported ordinary-course litigation, including a contractual settlement matter for which it accrued its expected liability; it did not believe pending actions would materially affect financial condition or results. No material changes to the prior Form 10-K risk factors were reported.
Most important facts for investors to verify
- Whether same-store operating margins stabilize after hotel expenses outpaced revenue growth in Q1.
- Completion and use of proceeds from the seven-hotel ARCH sale, and the expected third-party sale of the El Paso property.
- Debt levels, facility availability, upcoming maturities and exposure to variable rates; confirm the April credit-facility paydown.
- Execution, total cost and funding of planned renovations and the Orlando development.
- How much reported earnings depend on property-sale gains and other non-recurring items; compare GAAP results with FFO and operating trends.