Summit Hotel Properties, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company is a REIT focused primarily on premium-branded select-service hotels. At quarter-end it owned 69 hotels with 10,715 guestrooms in 24 states. Unless stated otherwise, financial amounts below are in millions.
Financial performance and operating metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $142.9 | $152.2 | $281.9 | $292.4 |
| Net income | $49.1 | $37.7 | $62.0 | $47.4 |
| Net income attributable to common stockholders | $45.2 | $33.9 | $54.4 | $34.7 |
| Diluted EPS | $0.43 | $0.32 | $0.52 | $0.33 |
| FFO per common share/unit | $0.34 | $0.40 | $0.63 | $0.65 |
| AFFO per common share/unit | $0.37 | $0.40 | $0.68 | $0.71 |
| Adjusted EBITDAre | $52.4 | $55.2 | $99.1 | $101.9 |
Hotel performance: Same-store revenue rose 1.2% in Q2 and 2.3% for the first half. Same-store RevPAR increased 1.1% in Q2 and 2.1% year to date, as ADR gains offset slightly lower Q2 same-store occupancy (down 13 basis points). Total-portfolio RevPAR increased 5.6% in Q2 and 4.9% for the first half; management attributed this partly to portfolio changes, including sales of lower-RevPAR hotels and 2018 additions with higher RevPAR.
Cash flow and liquidity: First-half operating cash flow was $75.3, down from $84.4 a year earlier. Investing activities provided $106.4, mainly reflecting $144.0 of net disposition proceeds; financing activities used $178.4, including debt repayments and dividends. Cash and cash equivalents were $48.8 at June 30; restricted cash was another $27.1. The company reported $375.0 available to borrow under its $400.0 million revolver and said it expected available resources to meet liquidity needs for at least 12 months.
Debt: Gross debt was $834.5 ($829.0 net of issuance costs), down from $965.0 gross at year-end 2018. The weighted-average interest rate, after derivatives, was 4.21%. Swaps left 66% of debt fixed-rate and 34% variable-rate; management estimated a 1 percentage-point rate increase would reduce annual cash flow by approximately $2.8. The company was in compliance with debt covenants and had $3.5 of scheduled principal amortization and no debt maturities in the next 12 months.
Material changes and unusual items
- Total revenue fell 6.1% in Q2 and 3.6% in the first half, primarily reflecting hotel dispositions; same-store revenue increased in both periods.
- Reported earnings benefited substantially from gains on hotel sales: $35.5 in Q2 2019 versus $17.3 in Q2 2018, and $39.7 for the first half versus $17.3. Accordingly, net income rose while FFO, AFFO and Adjusted EBITDAre declined year over year.
- The company sold eight hotels in the first half for aggregate proceeds described as $146.6, recognizing gains of approximately $40.8. Net proceeds were used to reduce revolving-credit borrowings. It recorded a $1.7 impairment on the Hyatt Place in Hoffman Estates, Illinois.
- Adoption of the new lease standard on January 1, 2019 resulted in $23.6 of incremental right-of-use assets and lease liabilities at adoption. At June 30, right-of-use assets were $29.3 and lease liabilities were $18.9.
- Derivative fair-value movements reduced first-half other comprehensive income by $14.8; all four interest-rate swaps were liabilities at quarter-end.
Outlook, commentary and risks
Management described the national lodging outlook as stable but expected modest 2019 RevPAR growth, citing an industry forecast of 1.0% for Upscale hotels. It identified weaker economic or travel demand, increased hotel supply, labor and other operating-cost inflation, interest rates, financing availability, and acquisition, disposition and renovation execution as risks. The company estimated 2019 capital expenditures of $50–$60, compared with $32.6 funded in the first half. It generally intended to keep indebtedness-to-EBITDA at no more than 6.5x.
Subsequent to quarter-end, the company announced a joint venture with GIC: Summit expects to invest 51% of the equity and GIC 49%, with an anticipated overall leverage target of 50%. On July 29, the board declared a $0.18 per-share common dividend and preferred dividends payable August 30, 2019. The filing reported no pending litigation believed to have a material effect and no material changes to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Underlying hotel trends: same-store RevPAR and expense growth, and how sales and portfolio composition affect reported results.
- How much reported earnings depend on asset-disposition gains versus recurring operating performance; review FFO, AFFO and Adjusted EBITDAre alongside GAAP results.
- Debt reduction, revolver availability, covenant headroom, refinancing needs and exposure to variable rates and the LIBOR transition.
- Whether planned capital spending and the GIC joint venture proceed on expected terms, and their effects on liquidity, leverage and returns.
- Hotel operating risks, including demand, new supply, labor costs, renovation costs and potential further impairment.