Summit Hotel Properties, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Dollar amounts are in U.S. dollars.
Business context
Summit is a self-managed hotel investment company and REIT focused primarily on premium-branded, select-service hotels. At year-end, it owned 72 hotels with 11,288 guestrooms across 23 states; five hotels were held through a consolidated joint venture in which Summit owned 51% and GIC 49%. All hotels operated under major franchise brands and were managed by third parties.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $549.3 million | $567.3 million |
| Operating income | $119.4 million | $125.2 million |
| Net income | $82.3 million | $91.1 million |
| Net income attributable to common stockholders | $67.8 million | $71.0 million |
| Basic and diluted EPS | $0.65 | $0.68 |
| Cash from operating activities | $148.5 million | $161.7 million |
| Capital expenditures | $59.3 million | $66.6 million |
| Dividends per common share | $0.72 | $0.72 |
Revenue declined 3.2%; operating income declined 4.6%, with operating margin at approximately 21.7% versus 22.1%. Common-stockholder net income fell 4.5%. The company recorded $45.4 million of net gains on asset sales in 2019, compared with $41.5 million in 2018; these gains materially contributed to reported operating income.
Same-store performance across 65 hotels improved: occupancy was 78.3% (up 45 basis points), ADR was $158.57 (up 0.5%), and RevPAR was $124.21 (up 1.1%). For the total portfolio, RevPAR rose 3.8% to $124.35, reflecting acquisitions and sales as well as same-store performance.
FFO applicable to common shares and units was $122.5 million, or $1.17 per share/unit, versus $131.3 million, or $1.26, in 2018. AFFO was $130.4 million, or $1.25 per share/unit, down from $141.0 million, or $1.35. Adjusted EBITDAre was $185.3 million, down 5.7% from $196.5 million. These are non-GAAP measures and should be read with GAAP results.
Debt, liquidity and capital
- Year-end gross debt was $1.023 billion; balance-sheet debt net of issuance costs was $1.016 billion, compared with $965.0 million gross debt at the end of 2018.
- Net debt to Adjusted EBITDAre was 5.3x; management’s stated general limit is 6.5x. Summit reported compliance with debt covenants.
- The $600 million unsecured facility had $275 million drawn and $315 million available at year-end. The joint venture had $140 million drawn on its $200 million credit facility.
- Cash and cash equivalents were $42.2 million and restricted cash was $27.6 million. Scheduled 2020 debt principal payments were approximately $3.7 million.
- After swaps, 53.7% of debt was fixed-rate and 46.3% variable-rate. Management estimated a 1 percentage-point rate increase would reduce annual cash flow by about $4.7 million.
- Cash from operations covered reported annual common dividends, but REIT distribution requirements and recurring property investment remain important cash demands.
Material changes and unusual items
- Summit acquired five hotels for a stated purchase price of $274.5 million in 2019, including four purchased through the GIC joint venture, and sold ten hotels for gross proceeds of $168.4 million. The sales generated a reported net gain of $45.6 million.
- Operating cash flow decreased $13.2 million. Investing cash outflow increased to $182.2 million, chiefly reflecting acquisitions; financing cash flow was positive $31.0 million, including $68.7 million of joint-venture partner contributions.
- Impairment charges were $2.5 million, including a charge on one hotel and two land parcels. A land parcel was under contract for sale, with closing expected in 2020.
- Interest-rate swaps with $400 million aggregate notional were in a $16.2 million liability position at year-end. The decline in swap value contributed to a $14.6 million other comprehensive loss.
- Adoption of the new lease standard in 2019 resulted in recognition of $23.6 million of incremental right-of-use assets and lease liabilities at adoption.
Outlook, commentary and risks
Management cited slower industry growth and expected continued RevPAR deceleration. An industry forecast referenced in the filing projected a 0.3% decline in U.S. Upscale-segment RevPAR for 2020. Summit estimated 2020 capital expenditures of $50–$70 million on a consolidated basis ($45–$65 million pro rata). Management said available operating cash, working capital, credit facilities and other funding sources were expected to cover liquidity needs for at least the next 12 months. The filing provides no company-specific quantified 2020 revenue or earnings guidance.
Key risks include economic weakness or reduced business and leisure travel, hotel supply and alternative-accommodation competition, relatively fixed operating costs, labor-cost inflation, dependence on third-party managers and franchise brands, capital-intensive renovations, leverage and refinancing needs, variable interest rates and the transition away from LIBOR. The filing specifically identified Coronavirus outbreaks as a potential threat to travel demand and results; the scale of any impact was not predictable at the filing date. Summit also discussed REIT qualification and distribution requirements, environmental and regulatory exposure, and joint-venture decision-making risks. It reported no pending litigation believed to have a material adverse effect. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Subsequent to year-end, Summit repriced its $225 million 2018 Term Loan on February 18, 2020, reducing the applicable margin by 40 basis points; management estimated annual interest savings of approximately $0.9 million. The board declared quarterly common and preferred dividends on January 31, 2020.
Important facts for investors to verify
- Review the full-year and same-store trends separately from acquisition and disposition effects, especially the contribution of asset-sale gains to GAAP operating income.
- Confirm debt availability, covenant headroom, maturities and refinancing capacity, and assess the 5.3x leverage ratio alongside planned capital spending.
- Track hotel demand, RevPAR, labor costs and any travel disruption, including effects from infectious disease outbreaks.
- Assess whether the $50–$70 million consolidated 2020 capital plan and the $0.72 annual common dividend remain supported by operating cash flow and liquidity.
- Review the valuation assumptions behind the $2.5 million impairment charge, acquired hotel asset allocations, and the joint venture’s debt and performance.