Summit Hotel Properties, Inc. quarterly report, Q1 FY2016

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Summit Hotel Properties, Inc. — Q1 2016 10-Q

Reporting period: Three months ended March 31, 2016. Summit owned 83 upscale and upper-midscale hotels with 11,099 guestrooms across 23 states. Comparative figures are for Q1 2015 unless otherwise noted.

Financial performance

  • Revenue: $118.1 million, up 9.7%. Room revenue was $110.6 million; other hotel revenue was $7.5 million.
  • Hotel operating expenses: $74.1 million, up 7.0%. Same-store hotel expenses were 62.5% of same-store revenue, versus 64.0% a year earlier.
  • Operating income: $20.7 million, versus $18.6 million. Depreciation and amortization was $18.1 million, up from $15.3 million.
  • Net income: $48.7 million, versus $10.6 million. The increase chiefly reflects a $36.8 million gain recognized on hotel dispositions. Net income attributable to common stockholders was $44.3 million, or $0.51 per diluted share, versus $6.4 million, or $0.07.
  • FFO: $25.9 million, or $0.30 per diluted share/common unit, up 17.1% from $22.1 million, or $0.25. EBITDA was $75.9 million versus $33.4 million; the comparison is heavily affected by the disposition gain.
  • Same-store operating metrics: Across 74 hotels, revenue rose 5.6%; occupancy was 76.9% versus 74.5%, ADR was $138.75 versus $137.14, and RevPAR increased 4.5% to $106.76. Total-portfolio RevPAR increased 9.0% to $107.18.
  • Cash flow: Operating cash flow was $24.5 million, compared with $20.4 million. Investing used $29.9 million, including $109.2 million of hotel acquisitions and $27.5 million funded as a real estate loan, partly offset by $107.5 million of disposition proceeds. Financing provided $10.0 million. Cash increased $4.6 million to $34.0 million.
  • Balance sheet and liquidity: Total assets were $1.64 billion and total equity was $890.8 million. Debt outstanding was $704.1 million before issuance costs ($697.3 million net on the balance sheet). Cash was $34.0 million; restricted cash was $24.8 million. The $450 million unsecured facility had $205.0 million drawn and $245.0 million available; the company reported covenant compliance.

Material changes and transactions

  • On January 15, the company replaced its former $300 million unsecured credit facility with a $450 million facility: a $300 million revolver and $150 million term loan. The revolver matures in 2020, with a conditional one-year extension; the term loan matures in 2021.
  • In January, Summit acquired a Nashville Courtyard and an Atlanta Residence Inn for a combined purchase price of $109.0 million.
  • On February 11, Summit sold six hotels to ARCH for $108.3 million and provided ARCH $27.5 million of seller financing. The company recognized $36.8 million of the $56.8 million sale gain and deferred $20.0 million pending loan repayment. The loan bears 13% initially, with monthly cash interest at 9% and the balance accruing as PIK interest; ARCH was current on monthly interest at filing.
  • The parties reinstated an agreement for ARCH to purchase ten additional hotels for $89.1 million, with closing scheduled by December 30, 2016. Summit retained the right to market the hotels to other buyers; two were under contract with unrelated purchasers. A $7.5 million deposit supports the agreement, subject to its terms.
  • Gross debt rose from $677.1 million at year-end to $704.1 million. The weighted-average interest rate, including the swap, was 3.76%, versus 3.90% at year-end. A 1 percentage-point rise in rates on the reported variable-rate debt was estimated to reduce annual cash flow by about $3.0 million.

Outlook, risks and contingencies

  • Management expected RevPAR gains in 2016 but anticipated industry growth to decelerate from 2015. It cited economic volatility and increasing hotel construction as risks, while expecting new supply not to materially impair its markets.
  • Management believed available cash, operating cash flow, working capital, and borrowing capacity would meet liquidity needs for at least 12 months. It expected $30–$40 million of hotel renovations and other non-recurring capital spending for the rest of 2016.
  • At March 31, $35.5 million of mortgage debt matured during the remainder of 2016, with a further $6.0 million of scheduled principal payments. Summit said it expected to address these with operating cash flow or facility borrowings, but noted borrowing remains subject to covenants and availability. It subsequently repaid a $5.0 million mortgage loan.
  • Key risks include leverage and refinancing, interest-rate exposure, borrower default on seller financing, completion of planned hotel sales and like-kind exchanges, renovation costs, lodging demand and supply, and maintaining REIT status. The filing reported no material litigation known to management and no material change to previously disclosed risk factors.
  • Summit reported disclosure controls were effective and no defaults on senior securities. Its quarterly results may not indicate full-year performance.

Investor verification priorities

  • Assess recurring operating performance separately from the $36.8 million disposition gain; review FFO and same-store RevPAR alongside GAAP earnings.
  • Verify ARCH’s loan payments, amortization, collateral protections, and ability to repay or refinance the $27.5 million seller-financed balance.
  • Track the reinstated hotel sale, the two third-party contracts, and whether remaining disposition proceeds and any 1031 exchanges are completed as planned.
  • Monitor 2016 mortgage maturities, covenant headroom, variable-rate exposure, and the stated $30–$40 million renovation spending range.
  • Review preferred dividends, cash distributions, and restricted-cash availability when assessing liquidity; restricted cash is subject to release conditions.