Summit Hotel Properties, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Summit is a REIT focused primarily on premium-branded select-service hotels. At quarter-end it owned 75 hotels with 11,529 rooms across 25 states.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $139.0 million | $140.2 million |
| Operating income | $22.8 million | $18.5 million |
| Net income | $12.9 million | $9.7 million |
| Net income attributable to common stockholders | $9.2 million | $0.9 million |
| Diluted EPS | $0.09 | $0.01 |
| Operating cash flow | $30.2 million | $37.7 million |
| Cash, cash equivalents and restricted cash, quarter-end | $70.9 million | $74.9 million |
Operating income margin was approximately 16.4%, versus 13.2% a year earlier. Results included a $4.2 million gain on hotel sales in Q1 2019. Interest expense rose to $10.9 million from $9.3 million. The filing does not provide a single company-wide GAAP “operating margin” definition; the percentages above are calculated as operating income divided by revenue.
Hotel metrics: Total-portfolio occupancy was 76.4% (up 12 basis points), ADR was $160.80 (up 4.3%), and RevPAR was $122.81 (up 4.4%). Same-store revenue increased 2.8%, same-store RevPAR increased 2.6%, and same-store expenses rose 2.2%.
REIT measures: FFO applicable to common shares and units was $30.5 million, or $0.29 per share/unit, compared with $26.0 million, or $0.25. AFFO was $32.3 million, or $0.31 per share/unit, essentially unchanged from $32.1 million, or $0.31. Adjusted EBITDAre was $46.7 million, approximately flat year over year. These are non-GAAP measures and should not be treated as substitutes for GAAP results or cash available for distribution.
Balance sheet, debt and liquidity
- At March 31, total debt principal was $967.7 million ($961.8 million net of debt issuance costs), versus $965.0 million principal at December 31, 2018. Total liabilities were $1.05 billion and total assets were $2.23 billion.
- Weighted-average borrowing rate after derivatives was 4.26%. After swaps, 58% of debt was fixed-rate and 42% variable-rate. A 1 percentage-point increase in interest rates was estimated to reduce annual cash flow by approximately $4.1 million.
- The $600 million unsecured credit facility had $325 million drawn and $275 million available at quarter-end. The company reported compliance with its financial covenants and no debt maturities in the next 12 months; scheduled principal amortization over that period was $4.2 million.
- Management said available operating cash flow, working capital, borrowing capacity and other funding sources should meet liquidity needs for at least 12 months. Cash from operations declined $7.5 million year over year, primarily from working-capital timing and lower adjusted net income. Investing cash use was $10.3 million, including $17.2 million of hotel improvements; financing cash use was $21.5 million, including $22.7 million of dividends paid.
Changes, outlook and notable items
- Reported revenue fell 0.9%, while same-store revenue rose 2.8%. Dispositions reduced revenue, partly offset by same-store growth and contribution from 2018 hotel additions. The portfolio had 75 hotels at quarter-end versus 83 in the prior-year total-portfolio comparison.
- Common-stockholder earnings improved substantially from Q1 2018, which included a $3.3 million premium on redemption of preferred stock. Lower preferred dividends also benefited the comparison. FFO increased, while AFFO and Adjusted EBITDAre were broadly stable.
- On February 12, the company sold two hotels for $11.6 million and recognized a $4.2 million gain. On April 17, it sold six hotels for $133.0 million net of buyer credit; an approximately $36.6 million gain was expected to be recorded in Q2. The six properties were included in assets held for sale at March 31.
- Subsequent to quarter-end, the company repaid mortgage loans of $10.6 million and $21.9 million, with $1.0 million of debt transaction costs reported for Q2. The board declared a common dividend of $0.18 per share, payable May 31, 2019.
- Management cited an industry forecast of 1.5% U.S. Upscale RevPAR growth for 2019 and noted that lodging growth had decelerated. It identified softer demand, increased hotel supply, higher labor and renovation costs, financing availability and interest rates among relevant risks. No specific company-wide revenue or earnings guidance was provided. Estimated remaining-2019 capital expenditures were $22.8 million to $42.8 million.
- Adoption of the new lease accounting standard on January 1, 2019 added $23.6 million of right-of-use assets and related lease liabilities. At March 31, reported lease liabilities were $19.3 million. The company also had $29.6 million funded in three mezzanine construction loans.
- Interest-rate swaps declined $5.6 million in fair value during the quarter, principally reflecting changes in the forward yield curve. The company is monitoring the planned transition from LIBOR after 2021 because material contracts are LIBOR-indexed.
- The filing reported no pending legal action believed to have a material effect, no defaults upon senior securities, and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective.
Key facts for investors to verify
- Whether same-store revenue and RevPAR growth can persist amid slower lodging-industry growth and potential supply or demand changes.
- Completion and financial effects of the six-hotel sale, including the expected Q2 gain and subsequent mortgage repayments.
- Debt levels, facility availability, covenant compliance and exposure to variable rates, including the stated $4.1 million annual cash-flow sensitivity.
- Execution and funding of the projected $22.8 million to $42.8 million of remaining-2019 capital expenditures while maintaining liquidity and distributions.
- Progress on LIBOR transition for the company’s debt and derivative contracts, and performance and collection of its real estate loans.