Summit Hotel Properties, Inc. annual report, FY2012

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Summit Hotel Properties, Inc. — FY 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone Q4 filing. The company is a lodging REIT focused on premium-branded select-service hotels; at year-end it owned 84 hotels with 9,019 rooms in 21 states.

Financial and operating performance

  • Revenue: FY revenue was $189.5 million, up 32.9% from the combined 2011 comparison. Same-store revenue increased 11.6% to $147.8 million.
  • Hotel metrics: Same-store occupancy rose to 69.1% from 64.6%; ADR increased to $93.51 from $89.66; and RevPAR increased 11.7% to $64.63. The total portfolio’s RevPAR rose 13.6% to $66.65.
  • Profitability: Operating income was $10.8 million; net loss was $2.3 million. Net loss attributable to common stockholders was $5.7 million, or $0.17 per share, including preferred dividends. Q4 revenue was $51.4 million; common-stockholder loss was $2.0 million, or $0.03 per share.
  • Operating costs: Same-store hotel operating expenses were 69.3% of revenue, improving from 72.5% in 2011. Annual depreciation and amortization was $34.3 million and interest expense was $15.6 million.
  • Cash flow: Operating cash flow was $34.7 million; investing cash outflow was $233.0 million, primarily reflecting acquisitions and property investment; financing cash inflow was $201.7 million. Year-end cash and cash equivalents were $14.0 million.
  • Balance sheet and debt: Total assets were $810.8 million, debt $312.6 million, total liabilities $337.3 million and equity $473.5 million. Debt was secured by mortgages on 68 hotels. At year-end, $229.6 million was fixed-rate and $83.0 million variable-rate; weighted-average borrowing rate was 5.15%.
  • Liquidity: Under the $150 million secured revolving facility, $52.8 million was available at year-end after borrowing-base limits and letters of credit. Debt maturities in 2013 totaled $36.1 million. Management stated available resources should cover short-term needs for at least 12 months.
  • Distributions and capital: Common distributions were $0.45 per share for 2012. The company raised $106.4 million net from a common-stock offering and $72.5 million net from Series B preferred stock in 2012.

Changes versus the prior comparable period

  • Revenue growth reflected both improving hotel performance and portfolio expansion: 19 hotels were acquired in 2012, compared with five in 2011. Same-store RevPAR growth was 11.7%, versus 3.5% in 2011.
  • Hotel operating expenses increased 27.1% across the total portfolio, less than the 32.9% revenue increase. Same-store expense growth was 6.7%.
  • Debt rose from $217.1 million to $312.6 million, while total assets increased from $554.0 million to $810.8 million, principally alongside acquisition activity and related financing.
  • Comparisons require care: 2011 includes both post-IPO company results and predecessor results for the period before the February 2011 IPO and reorganization.

Outlook, risks and unusual items

  • Management expected continued hotel-market improvement but cautioned that a stalled recovery could weaken results. Industry estimates cited in the filing projected 2013 RevPAR growth of 5.8% for upscale and 5.1% for upper-midscale hotels; these are industry forecasts, not company guidance.
  • Management estimated 2013 renovation and other non-recurring capital expenditures of $38 million to $48 million for hotels then owned, with additional spending possible on future acquisitions.
  • After year-end, the company completed a $148.1 million net common-stock offering, repaid $22.8 million of term loans and closed a $29.4 million fixed-rate loan. It also completed hotel acquisitions and entered into agreements for additional purchases, including a proposed $135 million New Orleans portfolio acquisition subject to closing conditions.
  • 2012 included $2.3 million of hotel impairment charges in discontinued operations and $0.7 million of impairment on development land. Hotel dispositions generated a reported $3.0 million gain in discontinued operations.
  • A 2011 dispute with Choice Hotels was resolved by arbitration in 2012: the panel found Choice had improperly terminated 11 franchises and awarded Summit $0.3 million. The company reported that it had rebranded the affected hotels.
  • Key risks include leverage and refinancing, variable-rate exposure, reliance on external capital, hotel-market cyclicality, acquisition and renovation execution, franchise and management-company dependence, REIT qualification, and environmental or accessibility compliance. Interstate or its affiliate managed 64 hotels at year-end.

Important facts for investors to verify

  • Whether same-store occupancy, ADR and RevPAR gains persisted, and how acquired hotels performed after integration.
  • The company’s actual leverage relative to its stated target of no more than six times EBITDA; the filing does not provide a clear value for this ratio in the summarized data.
  • How the $36.1 million of 2013 maturities and planned capital spending were funded, and whether refinancing and facility availability met management’s expectations.
  • Whether announced or pending acquisitions closed on stated terms, and their subsequent operating contribution and renovation requirements.
  • Whether distributions remain supported by operating cash flow after preferred dividends, debt service and recurring hotel capital needs.
  • The scope and effect of the acquired hotels excluded from management’s year-end internal-control assessment; those hotels contributed $24.9 million of 2012 revenue.