Summit Hotel Properties, Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. This is an annual filing; fourth-quarter figures are identified separately. The company is a self-managed hotel REIT focused on premium-branded select-service properties. At year-end it owned 88 hotels with 10,908 rooms across 22 states; 95.7% of rooms operated under major franchise brands.
Financial and operating performance
| Metric | FY 2013 | FY 2012 | Change / context |
|---|---|---|---|
| Total revenue | $299.0 million | $161.7 million | +84.9%; primarily acquisitions |
| Hotel operating expenses | $198.3 million | $110.4 million | +79.6% |
| Income from operations | $33.2 million | $7.3 million | Improved with portfolio growth and operating performance |
| Net income (loss) | $5.9 million | ($2.3 million) | Positive in 2013 |
| Net income (loss) per common share | ($0.12) | ($0.17) | Preferred dividends reduced income available to common shareholders |
| Operating cash flow | $72.4 million | $34.7 million | Higher year over year |
| Investing cash flow | ($467.4 million) | ($233.0 million) | Acquisitions and property investment |
| Financing cash flow | $427.7 million | $201.7 million | Equity issuances and debt financing funded growth |
| Debt at year-end | $435.6 million | $312.6 million | Includes $360.6 million mortgage debt and $75.0 million term loan |
| Cash and cash equivalents | $46.7 million | $14.0 million | Restricted cash was an additional $38.5 million |
Same-store results for 47 hotels improved: revenue rose 6.8% to $146.1 million, occupancy increased to 72.32% from 70.92%, ADR increased 4.9% to $102.03, and RevPAR grew 7.0% to $73.79. Same-store hotel operating expenses were 68.0% of revenue, versus 68.6% in 2012. The reported operating margin was approximately 11.1% of revenue; hotel operating expenses alone were approximately 66.3% of revenue.
Fourth-quarter 2013 revenue was $78.0 million, versus $45.1 million in Q4 2012. Q4 net loss was $2.1 million, compared with a $0.7 million loss; loss per common share was $0.07 versus $0.04. The filing says quarterly amounts were revised from prior filings due to discontinued-operations reclassifications.
Material changes and capital structure
- The company acquired 19 hotels in 2013 for an aggregate purchase price of $475.6 million and sold 15 hotels and five land parcels. Acquisition-driven growth explains most of the increase in total revenue.
- Common and preferred equity offerings generated approximately $381.8 million net proceeds during 2013. Common shares outstanding increased to 85.4 million from 46.2 million at year-end 2012.
- The company replaced its $150 million secured revolving facility with a $300 million unsecured facility, comprising a $225 million revolver and a $75 million term loan. At year-end, reported borrowing availability was $195.5 million, subject to borrowing-base limits and covenants.
- Debt was 82.3% fixed-rate and 17.7% variable-rate after hedging. A 1 percentage-point rate increase was estimated to reduce annual cash flow by less than $0.8 million, assuming variable debt did not increase.
- Quarterly common distributions remained $0.1125 per share ($0.45 annualized). Annual preferred dividends totaled $14.6 million in 2013.
Outlook, risks, contingencies and unusual items
- Management expected $35–$45 million of 2014 hotel renovations and capital improvements. It stated that working capital, operating cash flow, credit-facility borrowings and other financing sources should meet short-term liquidity needs for at least 12 months; this is management’s expectation, not a guarantee.
- The filing cites third-party industry forecasts of 2014 RevPAR growth of 6.1% for upscale and 5.1% for upper-midscale hotels. These are industry forecasts, not company-specific guidance. Management was guardedly optimistic but warned that a stalled recovery could weaken results.
- Debt maturities include $67.0 million in 2016 and $103.1 million in 2018; scheduled 2014 principal amortization was $9.2 million. Refinancing, interest-rate, leverage, covenant, acquisition-integration and hotel-demand risks remain material.
- Interstate or an affiliate managed 51 of 88 hotels, creating manager concentration risk. Franchise requirements, competition, operating-cost inflation, capital needs, natural disasters and REIT qualification are also risks.
- 2013 included $9.0 million of impairment charges (including $7.7 million in discontinued operations), $1.7 million of debt transaction costs and a $5.0 million valuation allowance against tax-loss assets. Tax expense primarily reflected uncertainty about using TRS net operating losses.
- Management identified a material weakness in internal control over financial reporting: hotel-level balances were not reconciled to consolidated balances. Reconciliations led to balance-sheet reclassifications and adjustments to 2013 operating statements. The financial-statement audit opinion was unqualified, but the auditor issued an adverse opinion on internal control effectiveness. Management said remediation was being implemented.
- The company reported no known litigation expected to have a material impact. A pending agreement to acquire a Minneapolis hotel for $37.7 million remained subject to construction, franchise and occupancy conditions.
Important facts for investors to verify
- Whether the material weakness has been remediated and whether subsequent filings report any further adjustments.
- How much of revenue and operating improvement reflects comparable-hotel performance versus acquired properties, and whether same-store trends persist.
- Available borrowing capacity after credit-facility covenants, letters of credit and borrowing-base requirements; also the company’s refinancing plans for 2016 and 2018 maturities.
- Actual renovation spending and returns, and whether distributions are supported by recurring operating cash flow rather than asset sales or additional borrowing.
- Acquisition execution, post-year-end financing and debt assumptions, and any changes in the pending Minneapolis project.
- Reconciliations of net income, common-shareholder losses and per-share figures, including the effect of preferred dividends and discontinued-operations reclassifications.