Summit Hotel Properties, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 4, 2015. Unaudited consolidated results. The company is a REIT focused on upscale and upper-midscale hotels; it owned 90 hotels with 11,468 rooms in 21 states at quarter-end.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $107.6 million | $89.5 million |
| Operating income | $18.6 million | $9.7 million |
| Net income | $10.6 million | $3.3 million |
| Net income attributable to common stockholders | $6.4 million | Loss of $0.7 million |
| Basic and diluted EPS | $0.07 | Loss of $0.01 |
| FFO, a non-GAAP measure | $22.6 million; $0.26 per share/unit | $14.6 million; $0.17 per share/unit |
| EBITDA, a non-GAAP measure | $33.4 million | $25.2 million |
| Cash provided by operating activities | $20.4 million | $21.3 million |
Revenue increased 20.2%; management attributed the increase mainly to improved hotel performance and properties acquired in 2014. Same-store revenue rose 13.3%, with occupancy increasing to 74.3% from 71.8%, ADR to $128.54 from $117.36, and RevPAR to $95.52 from $84.32. Same-store hotel operating expenses rose 8.4%, slower than revenue; expenses declined to 64.2% of same-store revenue from 67.1%. Operating margin was approximately 17.3%, versus 10.8% a year earlier.
Interest expense was $7.2 million, up from $6.7 million, primarily reflecting higher average debt. Income tax expense was $0.5 million versus $0.1 million. Preferred dividends were $4.1 million in both periods.
Balance sheet, debt and liquidity
- At March 31, 2015, total assets were $1.454 billion, total liabilities $673.4 million, and total equity $780.9 million.
- Debt was $628.8 million, up from $626.5 million at year-end 2014. The weighted-average interest rate, after derivatives, was 4.33%. Debt was 73.6% fixed-rate and 26.4% variable-rate after hedging.
- Cash and cash equivalents were $28.5 million, down from $38.6 million at year-end; restricted cash was $34.2 million. The existing $300 million credit facility had $81.2 million available at quarter-end, after $205.0 million borrowed and $13.8 million of standby letters of credit.
- Operating cash flow was $20.4 million. Investing used $17.9 million, including $16.1 million of hotel improvements; financing used $12.6 million, including $14.4 million of dividends. Cash declined $10.0 million during the quarter.
- Management stated that available sources were expected to meet ongoing liquidity needs for at least 12 months. The company was in compliance with debt covenants at quarter-end.
Changes, outlook and risks
- No hotels were acquired in Q1 2015. Six hotels acquired in 2014 contributed to the year-over-year revenue increase; the same-store comparison covered 84 hotels.
- Management cited stronger economic conditions, revenue and asset-management initiatives, industry fundamentals, and renovations as drivers of same-store gains. It expected positive U.S. lodging-industry trends to continue in 2015, while noting that rising hotel construction could increase supply. This was industry commentary, not specific company earnings guidance.
- Management expected $15.9 million to $21.9 million of hotel renovations and other non-recurring capital expenditures for the rest of 2015. It also reported $3.5 million of mortgage debt maturing in 2015 and $11.8 million of scheduled principal payments for the remainder of the year.
- After quarter-end, the company completed a $39.0 million purchase of a 211-room Minneapolis Hampton Inn & Suites, funded with its revolver. It also obtained a $125 million unsecured term loan, drew it in full, and exercised a $15 million accordion increase; proceeds were used to repay revolver borrowings. By April 24, the company reported $199.2 million available under the revolver.
- Key risks include leverage and refinancing, interest-rate increases, hotel demand and operating metrics, competition and new supply, renovation costs, access to capital, and maintaining REIT status. A 1 percentage-point increase in rates, assuming no change in variable-rate debt, was estimated to reduce annual cash flow by about $1.7 million.
- The company reported no litigation it believed would materially affect its financial condition or results, and no material change to previously disclosed risk factors. Disclosure controls were considered effective.
Investor verification points
- Check how much of the revenue and earnings growth reflects same-store performance versus acquired hotels, and whether RevPAR gains persist.
- Review debt maturities, covenant headroom, the terms and use of the post-quarter unsecured loan, and actual revolver availability.
- Compare planned renovation spending and scheduled debt payments with operating cash flow, dividends, and liquidity.
- Assess exposure to variable rates and the value and effectiveness of interest-rate hedges.
- Review the company’s definitions and reconciliations of FFO and EBITDA; these non-GAAP measures are not substitutes for cash flow or net income.