Summit Hotel Properties, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; financial statements are unaudited. Summit is a self-managed REIT focused primarily on premium-branded select-service hotels. Its portfolio comprised 80 hotels and 11,978 rooms in 26 states at quarter-end.
Financial performance
- Q2 revenue: $152.2 million, up 18.0% from $129.1 million. Operating income was $27.4 million versus $24.5 million; net income was $37.7 million versus $34.1 million. Net income attributable to common stockholders was $33.9 million, or $0.33 basic and $0.32 diluted per share, versus $29.8 million, or $0.30 per share.
- Six-month revenue: $292.4 million, up 18.4%. Operating income was $46.0 million versus $43.1 million; net income was $47.4 million versus $67.3 million. Common-stockholder net income was $34.7 million, or $0.33 per share, versus $58.7 million, or $0.61 per share.
- Operating trends: Q2 same-store RevPAR increased 0.9% as ADR rose 2.0% and occupancy declined 90 basis points to 82.7%. For the six months, same-store RevPAR increased 0.5%, with ADR up 1.5% and occupancy down 79 basis points to 79.0%. Same-store revenue increased 1.2% in Q2 and 0.8% for the six months.
- Margins and supplemental measures: GAAP operating margin was approximately 18.0% in Q2 versus 19.0% a year earlier. Q2 FFO was $41.7 million ($0.40 per diluted share/unit) and AFFO was $41.4 million ($0.40), compared with $33.2 million ($0.33) and $35.8 million ($0.36), respectively. Six-month FFO was $67.9 million ($0.65) and AFFO was $73.6 million ($0.71), versus $61.4 million ($0.64) and $66.0 million ($0.68). FFO and AFFO are non-GAAP measures.
- Cash flow and liquidity: Six-month operating cash flow was $84.4 million, compared with $70.1 million. Investing used $15.0 million and financing used $54.1 million. Cash, cash equivalents and restricted cash totaled $81.4 million at period-end, including $48.9 million of cash and equivalents and $32.5 million of restricted cash.
- Debt: Gross debt was $955.8 million ($950.5 million net of issuance costs), up from $873.1 million gross at year-end 2017. The weighted-average interest rate, after derivatives, was 4.20%. Debt was 58% fixed-rate and 42% variable-rate after hedging; a 1 percentage-point rate increase was estimated to raise annual interest expense by about $2.8 million.
Material changes and unusual items
- Reported revenue growth primarily reflects 2017 hotel acquisitions. No hotel properties were acquired in the first half of 2018; four hotels were sold in June for aggregate proceeds of $43.9 million and a net gain of $17.4 million. The company also provided $3.6 million of seller financing. Three additional hotels were sold after quarter-end for $46.5 million.
- Six-month 2018 common-stockholder earnings included a $3.3 million premium on the redemption of all Series C preferred shares, redeemed for $85.3 million in March. The prior-year comparison included $15.0 million of deferred gain recognized on repayment of a loan, contributing to lower 2018 six-month GAAP net income.
- Other income included a $2.0 million recovery from settlement of a prior-period industrial-disaster claim. Six-month depreciation and amortization rose to $50.2 million from $38.5 million, primarily reflecting acquired properties. Management cited higher labor costs and expects those costs to continue rising in some markets.
- The company completed and opened a 168-room Hyatt House near Orlando Universal Resort in June; total construction cost was $32.7 million, excluding previously acquired land.
Outlook, liquidity, and risks
- Management expressed a positive view of national economic conditions, leisure demand and improving business-travel indicators, while noting decelerating industry RevPAR growth, moderating demand growth and rising room supply. The filing cites an industry forecast of 1.9% U.S. Upscale RevPAR growth for 2018; it does not provide company-specific full-year earnings guidance.
- Management expects $25–$35 million of hotel capital expenditures during the remainder of 2018, in addition to $30.6 million spent in the first half. It stated that available cash, operating cash flow and borrowing capacity should meet liquidity needs for at least 12 months.
- Debt principal amortization of $7.0 million and maturities of $106.2 million were due in the next 12 months. Management believed it could meet these obligations, but noted refinancing and credit availability are not assured. The company reported compliance with credit-facility covenants at June 30.
- Key disclosed risks include leverage and refinancing, interest-rate increases, hotel demand and supply conditions, rising operating and renovation costs, completion of contracted property sales, borrower defaults on loans or seller financing, REIT qualification, and economic, natural-disaster, insurance and cybersecurity risks. The filing reported no material change to the prior 10-K risk factors and no pending litigation believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether same-store RevPAR and occupancy trends improve, and how much reported growth continues to depend on acquisitions and portfolio changes.
- The timing and funding of near-term debt maturities, refinancing terms, covenant headroom and sensitivity to interest rates.
- Actual remaining-2018 capital spending, hotel renovation needs and returns from the newly opened Orlando property.
- Closing and proceeds from contracted sales, and the credit quality and repayment terms of seller-financed and mezzanine loans, including the associated hotel purchase options.
- The impact of preferred-stock obligations, dividends and future property-sale gains on cash available to common stockholders.