Summit Hotel Properties, Inc. annual report, FY2016

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Summit Hotel Properties, Inc. — FY 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. Summit is a self-managed hotel REIT focused primarily on premium-branded select-service hotels. At year-end, it owned 81 hotels with 10,957 guestrooms in 23 states. The filing also reports fourth-quarter results; amounts below are in U.S. dollars.

Financial and operating performance

  • Revenue: $473.9 million, up 2.3% from $463.5 million in 2015. Same-store revenue rose 3.3% across 70 hotels.
  • Hotel operating metrics: Same-store occupancy increased 60 basis points to 77.7%; ADR rose 2.6% to $138.75; and RevPAR increased 3.3% to $107.83. For the total portfolio, RevPAR was $110.41.
  • Profit: GAAP net income was $108.3 million, down from $125.3 million; net income attributable to common stockholders was $87.4 million versus $107.8 million. Diluted EPS was $1.00 versus $1.24. Results included a $49.9 million gain on asset disposals. FFO, a non-GAAP measure, increased 2.1% to $110.7 million ($1.26 per diluted common share/unit); EBITDA, also non-GAAP, declined 5.5% to $207.3 million.
  • Fourth quarter: Revenue was $110.3 million and net income was $10.4 million, or $0.04 per share. In Q4 2015, net income was $84.8 million, or $0.93 basic EPS, reflecting unusually large asset-sale gains; the periods are not directly comparable.
  • Margins and costs: Same-store hotel operating expenses were 63.1% of revenue, improving from 64.1%; same-store hotel operating margin therefore increased to 36.9% from 35.9%. Total hotel operating expenses were essentially flat at $295.7 million. Depreciation and amortization increased 13.0% to $72.4 million.
  • Cash flow and investment: Cash from operations was $137.9 million, compared with $132.2 million. Investing used $154.4 million, including $244.7 million for hotel acquisitions and $42.4 million for hotel improvements; asset-sale proceeds were $145.3 million. Financing provided $21.9 million, including $161.3 million net proceeds from equity offerings and $66.7 million of dividends paid. Cash and cash equivalents ended the year at $34.7 million; restricted cash was an additional $24.9 million.
  • Debt and liquidity: Gross debt was $657.6 million ($652.4 million net of issuance costs), down from $677.1 million gross at year-end 2015. Debt/EBITDA was 3.2x, compared with management’s stated general ceiling of 6.0x. The $450 million unsecured credit facility had $200 million drawn and $250 million available at year-end, subject to borrowing-base and covenant limits. The company reported compliance with debt covenants.
  • Interest-rate exposure: After hedging, 54.7% of debt was fixed-rate and 45.3% variable-rate. Management estimated that a 1 percentage-point rate increase would reduce annual cash flow by approximately $3.0 million, assuming variable-rate debt remained unchanged.
  • Distributions and equity: Common dividends declared totaled $0.55 per share for 2016, versus $0.47 in 2015. The company issued $89.1 million of common stock and $72.3 million of Series D preferred stock net proceeds, and redeemed all Series A preferred shares for $50.7 million.

Material changes versus 2015

  • Same-store RevPAR growth slowed to 3.3% from 8.2% in 2015. Management attributed growth to economic conditions, revenue and asset management, industry fundamentals, and renovations.
  • Total revenue growth reflected same-store gains and newly acquired hotels, partly offset by revenue lost from disposed properties. The total portfolio comprised 81 hotels at year-end versus 87 in 2015.
  • Operating income increased to $82.5 million from $80.0 million, but GAAP net income and EBITDA declined. Lower asset-sale gains and the absence of the $9.1 million ARCH forfeited deposit recognized in 2015 affected the comparisons.
  • During 2016, Summit acquired four hotels for a combined $244.2 million and sold ten hotels for gross proceeds of $147.3 million. It completed the $450 million unsecured facility, replacing the former $300 million facility, and extended key credit-facility maturities.

Outlook, risks, contingencies, and unusual items

  • Outlook: Management expected U.S. lodging growth to continue at a slower pace in 2017. It cited an industry forecast of 1.2% Upscale RevPAR growth for 2017, compared with 2.1% in 2016. Planned 2017 capital expenditures were estimated at $35–$45 million. Management believed available operating cash, working capital, credit-facility borrowings, and other sources would meet liquidity needs for at least 12 months.
  • ARCH transactions: Eight hotels with 741 guestrooms remained under a sale agreement for $77.2 million. In January 2017, closing dates were extended: most sales were scheduled by April 27, 2017, while the El Paso hotel was scheduled for October 24, 2017, subject to conditions. Completion was not assured. Summit had also extended and modified its $27.5 million ARCH loan and entered into a $3.0 million contingent second loan; verify collection, repayment, and sale outcomes.
  • Tax and asset-sale items: Summit used 1031 exchanges to defer taxable gains. Approximately $74.0 million of gains were deferred in connection with the ARCH sale transactions, and $5.1 million and $7.5 million were deferred in other exchanges. Failure to complete qualifying exchanges could result in tax liabilities. The 2016 asset sales generated $49.9 million in net gains.
  • Key risks: Hotel demand, occupancy, ADR and RevPAR are sensitive to economic conditions, travel spending, competition, new hotel supply, and seasonality. Other material exposures include debt refinancing and interest rates, reliance on external capital, renovation costs, franchise requirements, REIT qualification and distribution requirements, and third-party hotel management. Interstate or affiliates managed 40 of 81 hotels, creating manager concentration risk.
  • Contingencies and controls: The company reported ordinary-course litigation and a contractual-obligation dispute for which it accrued an expected settlement amount; it stated no pending action was expected to materially harm results. The independent auditor issued unqualified opinions on the financial statements and internal controls; management reported effective controls and no material control changes.

Important facts for investors to verify

  • Whether the ARCH hotel sales closed on the amended terms and whether the associated loans and deferred gains were collected or recognized as expected.
  • Whether same-store RevPAR and hotel operating margins held up as industry growth slowed and new supply increased.
  • Debt maturities, available borrowing capacity, covenant headroom, and sensitivity to higher rates; confirm the distinction between gross debt and debt net of issuance costs.
  • Funding and returns on the planned $35–$45 million of 2017 capital expenditures, and the cash available after debt service and preferred and common distributions.
  • Whether reported GAAP earnings, FFO, and EBITDA comparisons are understood in light of asset-sale gains, the prior-year ARCH deposit, and acquisition/disposition activity.
  • Whether REIT qualification, required distributions, and 1031 exchange treatment remain supportable under actual tax and transaction outcomes.