Summit Hotel Properties, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; balance-sheet figures are as of June 30, 2016. The company owned 80 upscale and upper-midscale hotels with 10,716 guestrooms in 23 states, compared with 93 hotels in the prior-year portfolio. It operates as a REIT and uses third-party managers and hotel brands.
Financial and operating results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $127.2 million | $120.7 million | $245.3 million | $228.3 million |
| Operating income | $25.6 million | $24.5 million | $46.3 million | $43.1 million |
| Net income | $22.0 million | $16.3 million | $70.7 million | $26.9 million |
| Net income attributable to common stockholders | $17.7 million | $12.1 million | $62.1 million | $18.4 million |
| Diluted EPS | $0.20 | $0.14 | $0.71 | $0.21 |
| FFO per common share/unit | $0.37 | $0.32 | $0.67 | $0.57 |
Revenue rose 5.4% in Q2 and 7.4% for the first half. Same-store RevPAR increased 6.5% in Q2 and 5.5% for the first half, reflecting higher occupancy and average daily rates (ADR). Q2 same-store occupancy was 82.6% versus 80.4%, and ADR was $142.22 versus $137.11. First-half same-store occupancy was 80.0% versus 77.6%, and ADR was $141.25 versus $137.87.
Same-store hotel operating expenses declined as a share of revenue: 60.9% versus 62.6% in Q2 and 61.5% versus 63.1% for the first half. Company-wide hotel operating expenses nevertheless increased 2.0% in Q2 and 4.4% for the first half, partly reflecting acquired hotels.
First-half earnings included a $39.5 million net gain on asset disposals; Q2 included a $2.7 million disposal gain. The gain materially boosted GAAP net income and first-half EBITDA, so those results do not solely represent recurring hotel operations. FFO, which excludes property-sale gains, increased 18.1% in Q2 and 17.7% for the first half.
Cash flow, debt and liquidity
- First-half operating cash flow was $69.5 million, up from $55.1 million. Investing cash use was $13.3 million versus $120.8 million, mainly reflecting greater disposition proceeds; financing cash use was $9.1 million versus $64.1 million of cash provided in 2015.
- Cash and cash equivalents were $76.4 million, with an additional $25.4 million in restricted cash. First-half cash increased $47.1 million.
- Debt at June 30 was $628.6 million before $6.2 million of unamortized issuance costs; balance-sheet debt, net of those costs, was $622.4 million. Debt comprised $338.6 million of mortgage loans and $290.0 million of term loans; the $300 million revolver was undrawn, with $300 million available under the $450 million facility.
- Weighted-average borrowing rate, after derivatives, was 3.84%. About 60.5% of debt was fixed-rate and 39.5% variable-rate. Management estimated a 1 percentage-point rate increase would reduce annual cash flow by about $2.5 million, assuming variable debt did not increase.
- The company reported compliance with credit-facility covenants and believed available liquidity would meet requirements for at least 12 months. It stated an intention generally to keep indebtedness to EBITDA at no more than six times.
- First-half capital expenditures were $18.2 million; expected remaining-2016 hotel renovations were $24 million to $30 million. Dividends paid in the first half totaled $30.3 million.
Material changes, outlook and risks
- The company acquired two hotels for a combined $109.0 million and completed multiple dispositions. Disposition proceeds and acquisitions were also used in Section 1031 exchanges to defer taxable gains.
- In February, it sold six hotels to an ARCH affiliate for $108.3 million, including $20 million of seller financing. The related loan carried 13% interest initially, with extension rates of 14% and 15%; ARCH was current on scheduled payments at the reporting date. The loan balance was recorded net of deferred gain.
- A reinstated agreement contemplated sale of up to ten hotels to a new ARCH purchaser for an original aggregate $89.1 million, with closing scheduled by December 30, 2016. Two hotels were sold to other buyers by June 30, reducing the contemplated sale price. A $7.5 million earnest-money deposit supported the agreement; the company was also marketing remaining properties.
- Management expected U.S. lodging-industry growth to continue at a slower pace in 2016. Cited industry projections were 3.5% RevPAR growth for upscale hotels and 4.5% for upper-midscale hotels. No company-specific annual earnings or revenue guidance was provided.
- Key risks include economic and travel-demand weakness, slower occupancy/ADR/RevPAR growth, new hotel supply, operating and renovation cost increases, interest-rate exposure, refinancing and capital-market access, and failure to complete planned acquisitions, sales or 1031 exchanges. Management noted that actual renovation costs and results may differ from estimates.
- Subsequent events: the company repaid a $17.0 million mortgage on August 1, 2016; a $61.4 million hotel acquisition was under contract and expected to close in August. On August 2 it established an at-the-market program allowing up to $125 million of common and Series D preferred shares to be sold; issuance is optional and could dilute common shareholders or add preferred-dividend obligations.
- The company reported no known litigation expected to have a material adverse effect, no material changes to the previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- How much of reported earnings growth reflects hotel operations versus the $39.5 million first-half disposal gain; compare GAAP results with FFO and same-store performance.
- Whether the ARCH-related sales close on the stated terms, the final proceeds after property substitutions, and the collectability and repayment terms of the seller-financed loan.
- Actual renovation spending, the expected acquisition closing and funding, and any share issuance under the $125 million ATM program.
- Debt maturities, covenant headroom, variable-rate exposure and availability of refinancing or other capital if market conditions weaken.
- Whether occupancy, ADR, RevPAR and same-store expense improvements continue, given management’s expectation of slower industry growth.