Summit Hotel Properties, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unless noted otherwise, financial amounts below are in millions of dollars. Summit is a REIT focused on premium-branded select-service hotels; at quarter-end it owned 93 hotels with 11,933 guestrooms across 23 states.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $120.7 | $105.5 | $228.3 | $195.1 |
| Operating income | $24.5 | $16.6 | $43.1 | $26.2 |
| Net income | $16.3 | $9.2 | $26.9 | $12.5 |
| Net income attributable to common stockholders | $12.1 | $4.8 | $18.4 | $4.1 |
| Diluted EPS | $0.14 | $0.06 | $0.21 | $0.05 |
| FFO per common share/unit | $0.32 | $0.26 | $0.58 | $0.43 |
| EBITDA | $40.0 | $32.6 | $73.4 | $57.8 |
Q2 revenue rose 14.4%; same-store revenue increased 9.0%, with occupancy of 80.9%, ADR of $128.90 and RevPAR of $104.25, up 8.7% year over year. For the first half, same-store revenue increased 11.0% and RevPAR rose 10.9%. Management attributed growth to better hotel demand, revenue and asset management, industry fundamentals, and renovations. Same-store operating expenses declined as a share of revenue: 62.5% versus 63.1% in Q2 and 63.3% versus 64.9% for the first half.
First-half operating cash flow was $55.1, investing cash outflow was $120.8, and financing cash inflow was $64.1; cash and cash equivalents ended at $37.0, down $1.6 from year-end. The company paid $28.8 in dividends during the half. At June 30, assets were $1,551.1, total equity was $784.6, and debt was $721.0, up from $626.5 at December 31, 2014. The weighted average borrowing rate, after derivatives, was 4.04%, versus 4.35% at year-end. Of debt, $460.2 was fixed-rate and $260.8 variable-rate after hedges.
Changes, financing and liquidity
- Q2 and first-half FFO increased 25.2% and 36.9%, respectively; EBITDA increased 22.6% and 26.9%. Revenue growth reflected both higher same-store performance and acquired hotels. Higher average debt increased first-half interest expense.
- During April, Summit entered into a $125 million unsecured term loan and exercised a $15 million accordion option; the $140 million proceeds were used to reduce revolver borrowings. At June 30, $160 million was drawn on the $300 million senior unsecured facility, leaving $140 million available. The company reported compliance with debt covenants.
- Management said available operating cash, working capital, revolver capacity and other sources should meet ongoing liquidity needs for at least 12 months, while noting that financing availability and terms are not assured. Scheduled principal payments through the remainder of 2015 were $9.1 million; estimated remaining-2015 hotel renovation and capital spending was $11–$17 million.
- Interest-rate sensitivity: assuming variable debt remains unchanged, a 1 percentage-point rate increase would reduce annual cash flow by approximately $2.6 million.
Outlook, risks and unusual items
- The filing provides no company-specific earnings or FFO guidance. Management expressed a positive view of the U.S. lodging outlook; it cited an external forecast of 2015 RevPAR growth of 6.6% for Upscale and 7.2% for Upper-midscale hotels, while cautioning that economic weakness or increased hotel supply could hinder results.
- On June 8, Summit agreed to sell 26 hotels with 2,793 guestrooms to affiliates of ARCH for approximately $351.4 million, with closings planned in September 2015, October 2015 and January 2016, subject to customary conditions. The company intended to use 1031 exchanges to defer a substantial portion of expected taxable gains. Completion, exchange execution and replacement of properties in credit-facility borrowing bases are material dependencies.
- At June 30, $2.7 million of seller-financed notes tied to two previously sold hotels was in payment default. Summit began foreclosure proceedings and said it expected collateral to cover the carrying amount.
- After quarter-end, Executive Chairman Kerry W. Boekelheide resigned effective July 30, 2015; the company expected an approximately $3.1 million Q3 charge related to severance and accelerated equity vesting. Also after quarter-end, Summit entered into a new at-the-market offering agreement allowing up to $125 million of common-stock sales; issuance is optional and could dilute shareholders.
- Other risks include leverage and refinancing, interest rates, hotel occupancy and pricing, operating and renovation costs, competition, economic and travel conditions, REIT qualification, and acquisition/disposition execution. The company reported no material litigation known to it and no material changes to the risk factors in its 2014 Form 10-K.
Most important facts for investors to verify
- Whether all ARCH sale closings occur on schedule and the 1031 exchanges and borrowing-base substitutions are completed as planned.
- Debt maturity and covenant capacity, including the impact of higher borrowing costs and the increase in variable-rate debt.
- Whether same-store RevPAR growth and expense leverage continue as hotel supply and economic conditions evolve.
- Cash needs for renovations, dividends and acquisitions, and whether the company uses the $125 million ATM program.
- Recovery of the defaulted $2.7 million notes and the actual Q3 cost of the chairman’s departure.
FFO and EBITDA are non-GAAP measures; the filing cautions that they are not substitutes for GAAP results or liquidity measures and may not be comparable across companies.