Summit Hotel Properties, Inc. — Q3 2014 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2014. Summit is a self-managed hotel REIT focused on upscale and upper-midscale U.S. hotels. At quarter-end it owned 91 hotels with 11,589 guestrooms across 21 states. It acquired six hotels during the first nine months of 2014; the comparable 2013 period included 16 acquisitions.
Financial performance and position
- Q3 revenue: $109.3 million, up 33.0% from $82.2 million. Operating income was $14.8 million versus $10.1 million; net income was $8.3 million versus a $0.6 million loss. Net income attributable to common stockholders was $4.1 million, or $0.05 per diluted share, compared with a $4.8 million loss, or $0.07 per share.
- Nine-month revenue: $304.3 million, up 37.7% from $221.0 million. Operating income was $40.3 million versus $26.5 million; net income was $20.8 million versus $8.0 million. Net income attributable to common stockholders was $8.2 million, or $0.10 per diluted share, compared with a $2.7 million loss, or $0.04 per share.
- Hotel operating trends: Same-store Q3 revenue rose 11.3%; occupancy was 78.9% versus 75.7%, average daily rate (ADR) was $113.71 versus $106.54, and revenue per available room (RevPAR) increased 11.3% to $89.67. For the first nine months, same-store revenue rose 9.5%; occupancy was 76.9% versus 74.3%, ADR was $111.94 versus $105.68, and RevPAR increased 9.5% to $86.06. Same-store hotel operating expenses declined as a share of revenue, to 64.0% from 66.2% in Q3 and to 65.3% from 66.1% for the nine months.
- Margins and non-GAAP measures: GAAP operating margin was approximately 13.5% in Q3 versus 12.3%, and 13.2% for the nine months versus 12.0%. FFO was $24.3 million ($0.28 per diluted common unit) in Q3 and $61.4 million ($0.71) for the nine months; EBITDA was $32.0 million and $89.8 million, respectively. The company cautions that FFO and EBITDA are non-GAAP measures and may not be comparable with other companies’ definitions.
- Cash flow: Nine-month operating cash flow was $79.0 million, up from $46.2 million. Investing used $193.6 million, versus $422.0 million, largely reflecting lower acquisition spending. Financing provided $102.6 million, versus $407.3 million; 2013 included substantial equity-offering proceeds. Cash and cash equivalents ended the period at $34.8 million, down from $46.7 million at year-end 2013.
- Debt and liquidity: Debt was $624.3 million, up from $435.6 million at year-end 2013. The weighted-average borrowing rate, after derivatives, was 4.40%, compared with 5.03%. Debt included $421.3 million of mortgage loans and $203.0 million drawn on the $300 million senior unsecured facility. The company reported $83.2 million available under the facility after outstanding letters of credit. Restricted cash was $35.3 million; the filing says release is subject to usage requirements and is not assured. Total assets were $1.47 billion and total equity was $799.4 million.
Material changes versus the prior comparable period
- Revenue growth reflected both hotel acquisitions and stronger same-store operations: acquired hotels contributed $20.5 million of the Q3 increase and $67.1 million of the nine-month increase; same-store revenue increased $6.6 million and $16.2 million, respectively.
- Higher depreciation and interest expense accompanied the larger acquired portfolio and debt used to finance acquisitions. Corporate general and administrative expense also rose, including higher equity compensation, bonus accruals, professional fees, and executive-transition costs.
- Impairment losses recognized in continuing operations were $3.6 million in Q3 and $4.3 million for the first nine months, primarily associated with the Country Inn & Suites and adjacent land in San Antonio and land in Spokane. A further $0.4 million impairment was reported in discontinued operations for the nine-month period.
- Debt increased materially while the company continued to invest in acquisitions and property improvements. Common shares outstanding also increased modestly during 2014; unlike 2013, the first nine months of 2014 had no public equity-offering proceeds.
Outlook, risks, contingencies, and unusual items
- Management described U.S. lodging fundamentals as positive through the first nine months of 2014 and expected the trend to continue into 2015, citing improving economic conditions and room-night demand. It also noted that new hotel supply was increasing and expected to accelerate in 2015, while stating it did not then expect near-term adverse effects in its markets. No quantified earnings or revenue guidance was provided.
- Management expected cash from operations, working capital, available revolver borrowings, and other funding sources to meet ongoing liquidity needs for at least 12 months. It anticipated $7.0–$10.0 million of additional hotel renovations in the remainder of 2014; $30.1 million had been spent on renovations in the first nine months.
- Interest-rate exposure is principally to 30-day LIBOR. After swaps, 75.2% of debt was fixed-rate and 24.8% variable-rate. Management estimated a 1 percentage-point rate increase would reduce annual cash flow by approximately $1.5 million, assuming no change in variable-rate debt balances.
- A purchase agreement for a downtown Minneapolis Hampton Inn & Suites was contingent on completion of construction, franchise approval, and a certificate of occupancy. The $38.7 million purchase was not assured; a $13.1 million standby letter of credit supported the agreement. Subsequent to quarter-end, the company sold the San Antonio hotel and adjacent land for $7.9 million and used the proceeds to pay down the revolver.
- The company early adopted the revised discontinued-operations guidance. It expects most future hotel sales not to be classified as discontinued operations, which may affect comparability of reported results.
- The CFO role changed during the period: the former CFO resigned in May, an interim CFO served, and a new CFO took office October 1. The company continued remediation of a previously identified material weakness in internal controls involving hotel-level balance-sheet and intercompany account reconciliations. Management said disclosure controls were effective and that the reported financial statements fairly presented results, while remediation work continued.
- Other principal risks cited include leverage and refinancing, economic and travel-industry conditions, occupancy/ADR/RevPAR declines, higher interest and operating costs, renovation-cost overruns, competition, capital availability, acquisition and disposition execution, REIT qualification, and environmental or natural-disaster risks. The filing reported no litigation believed to have a material effect and no material change to previously disclosed risk factors.
Most important facts for investors to verify
- How much of reported growth is attributable to acquisitions versus continued same-store RevPAR and expense performance.
- Debt maturity and refinancing exposure, covenant headroom, variable-rate sensitivity, and the actual availability of revolver capacity and restricted cash.
- Whether projected renovation spending and remaining acquisition-related costs stay within estimates, and whether the Minneapolis hotel purchase closes on its stated conditions.
- Progress in remediating the material weakness in hotel-level and intercompany reconciliations, and any subsequent changes in internal-control conclusions.
- Effects of impairments, property dispositions, and the revised discontinued-operations presentation on period-to-period comparisons and reported earnings.