Summit Hotel Properties, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The combined filing covers Summit Hotel Properties, Inc. and its operating partnership; their consolidated assets and liabilities are the same. Unless noted, amounts below are consolidated.
Business context
Summit is a self-advised hotel REIT focused primarily on premium-branded select-service hotels. At quarter-end, it owned 73 hotels with 7,533 rooms in 20 states. The interim financial statements are unaudited, and management cautions that results may not indicate full-year performance because of seasonal and other factors.
Financial performance and liquidity
| Metric | Q3 2012 | Comparable period / balance |
|---|---|---|
| Revenue | $51.2 million | Up 26.7% from $40.4 million in Q3 2011 |
| Income from operations | $5.9 million | $3.0 million in Q3 2011 |
| Net income | $1.6 million | $41,000 in Q3 2011; common-stock EPS was $0.01 versus $0.00 |
| Same-store hotel metrics | Occupancy 73.9%; ADR $95.87; RevPAR $70.85 | RevPAR up 12.9% year over year; occupancy up 6.0% and ADR up 6.5% |
| Net income (loss), nine months | $(1.5) million | $(7.2) million for the comparable combined 2011 period; 2012 common-stock EPS was $(0.13) |
| Operating cash flow, nine months | $24.6 million | $19.9 million in 2011 |
| Investing cash flow, nine months | $(68.1) million | Primarily acquisitions and capital spending, partly offset by disposition proceeds |
| Financing cash flow, nine months | $43.2 million | Debt proceeds and repayments, distributions, and other financing items |
For the nine months, revenue was $138.4 million, up 26.2% from the comparable combined 2011 period. Same-store RevPAR increased 10.4%. The nine-month comparison combines Summit’s results with predecessor results before the February 2011 IPO and is not a simple like-for-like company comparison.
At September 30, total assets were $633.1 million, mortgages and notes payable were $312.3 million, and total liabilities were $331.8 million. Debt rose from $217.1 million at December 31, 2011. Cash and cash equivalents were $10.3 million, with $4.3 million of restricted cash. Equity was $301.4 million.
Debt comprised $204.9 million fixed-rate and $107.4 million variable-rate borrowings; the fixed-rate category includes hedged debt. The company reported approximately $40.8 million available under its $125 million secured revolver at quarter-end, after borrowings and standby letters of credit. As of November 6, the facility had been increased to $150 million, with $43.0 million reported available. Contractual obligations totaled $421.0 million, including estimated interest and operating leases.
Material changes and unusual items
- Q3 revenue growth reflected $4.7 million of same-store revenue gains and $6.1 million from acquired hotels. Management cited improving hotel fundamentals, renovations at nine hotels, and improved results following rebranding and upgrades.
- Same-store hotel operating expenses declined to 66.2% of revenue in Q3 from 69.4% a year earlier; for the first nine months, the ratio fell to 67.7% from 70.0%. Higher revenue also drove variable expenses.
- The company acquired seven hotels in the first nine months of 2012 for an aggregate net purchase price of approximately $65.9 million, including assumed debt. It sold three Twin Falls hotels for $16.5 million and a Missoula hotel for $1.9 million. A $2.1 million impairment was recorded in discontinued operations for properties sold or being sold. Nine-month discontinued operations reported a $2.1 million loss.
- Interest expense was $11.7 million for the first nine months. Management said interest costs may rise as acquisitions add debt. The company refinanced or extended several loans; approximately $20.1 million of debt was due to mature before December 31, 2013, according to the liquidity discussion.
- The company recorded a $522,564 derivative liability at quarter-end. It estimated that $228,000 of accumulated derivative losses would be reclassified as additional interest expense over the next 12 months.
- In October, Summit raised approximately $107 million net through a common-stock offering and used proceeds toward purchases of eight Hyatt hotels for $87.4 million and a Hilton Garden Inn for $7.2 million. Those acquisitions brought the portfolio to 82 hotels and 8,674 rooms, according to the filing’s overview. The company also agreed to provide a $20 million first mortgage loan toward a proposed Minneapolis hotel conversion and purchase.
Outlook, risks and contingencies
- No specific earnings or operating guidance was provided. Management said available working capital, operating cash flow, revolver borrowings, and other funding sources should meet ongoing short-term liquidity requirements for at least the next 12 months, but cautioned that financing may not be available on acceptable terms or at all.
- Management anticipates continued hotel acquisitions and expects interest expense to rise as the portfolio and financing needs grow. It also reported approximately $14.6 million spent on renovations and other non-recurring capital expenditures at same-store hotels in the first nine months, against an anticipated $23.0 million for 2012.
- Key risks include debt refinancing and covenant capacity, interest-rate increases, economic and travel demand conditions, hotel occupancy and room rates, acquisition execution and stabilization, capital-market access, competition, and maintaining REIT qualification. A 100-basis-point increase in variable-rate indices was estimated to reduce annual cash flow by approximately $0.7 million, before the subsequent October hedge.
- The company generally intends to distribute at least 100% of REIT taxable income to avoid tax on undistributed income and must meet REIT distribution requirements. It stated that debt covenants may restrict distributions in some circumstances.
- Management reported no litigation it believed would materially adversely affect the company. A Choice Hotels arbitration resulted in a $298,090 award to Summit, received April 30, 2012. The company also had an outstanding agreement to purchase a 178-room Residence Inn in Salt Lake City for $20.0 million, subject to approvals and other closing conditions.
Important facts for investors to verify
- Confirm debt maturities, refinancing progress, revolver borrowing-base availability, and compliance with financial covenants.
- Track whether post-quarter acquisitions, renovation spending, and the proposed Salt Lake City and Minneapolis transactions close on expected terms and deliver anticipated operating results.
- Review same-store occupancy, ADR, RevPAR, and operating-cost trends separately from growth due to acquisitions and dispositions.
- Assess the effect of additional debt, interest-rate exposure, and derivative accounting on future cash flow and interest expense.
- Verify the basis for reported common-stock earnings per share and the allocation of income to preferred interests and noncontrolling unit holders; the filing presents multiple attribution measures.