Summit Hotel Properties, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter ended September 30, 2011. The filing combines Summit Hotel Properties, Inc. and its operating partnership. The company completed its IPO and formation transactions on February 14, 2011; therefore, year-to-date 2011 results combine post-transaction company results with predecessor results and are not fully comparable with 2010.
Business context and operating performance
Summit owns premium-branded select-service hotels. At quarter-end, its portfolio comprised 70 hotels and approximately 7,100 rooms in 19 states, versus 65 hotels before five 2011 acquisitions.
- Q3 revenue was $42.3 million, up 12.6% from $37.6 million. Same-store revenue increased 1.9%.
- Same-store occupancy was 69.7% (up 0.6 percentage points), ADR was $89.89 (up 1.0%), and RevPAR was $62.68 (up 2.0%). The five acquired hotels contributed $4.0 million of Q3 revenue while owned.
- Q3 operating income was $3.5 million, down from $5.6 million. Net income was $41,000, compared with a $1.3 million net loss in Q3 2010; reported earnings per share were $0.00.
- Q3 EBITDA, a company-defined non-GAAP measure, was $11.9 million versus $12.4 million, down 3.8%. Higher depreciation, acquisition-related costs and post-IPO corporate expenses weighed on operating income despite revenue growth.
Financial position, cash flow and material changes
- For the combined nine months ended September 30, revenue was $114.3 million, up 9.1% from $104.8 million. Net loss was $7.2 million versus $6.9 million; EBITDA was $30.4 million versus $33.2 million, down 8.4%. The year-to-date comparison includes predecessor operations before February 14, 2011.
- Nine-month cash from operations was $20.6 million, investing cash outflow was $70.9 million, and financing cash inflow was $59.5 million. Cash and cash equivalents ended at $17.1 million.
- At September 30, assets were $553.2 million, liabilities $273.9 million, and mortgages and notes payable $257.6 million. Debt comprised $123.7 million fixed-rate and $133.9 million variable-rate borrowings. A 100-basis-point increase in variable-rate indices was estimated to reduce annual cash flow by approximately $0.8 million.
- IPO and concurrent private-placement proceeds were $240.8 million net. The company used a substantial portion to repay debt; year-end-to-quarter-end debt fell from $420.4 million at December 31, 2010. A $125 million secured revolving facility had $50.2 million outstanding at September 30.
- After quarter-end, a $48.0 million net preferred-stock offering was used to pay down the revolver. As of November 7, the company reported $6.2 million outstanding on the revolver and approximately $84.1 million available under it.
Outlook, risks and unusual items
- Management said working capital, operating cash flow and available borrowing sources were expected to meet short-term liquidity needs for at least 12 months, while cautioning that financing may not be available on acceptable terms.
- Approximately $26.0 million of capital improvements were planned through September 30, 2012, including $21.9 million required by franchisors. The filing gives no company earnings or RevPAR guidance. Management cited third-party forecasts for lodging-sector RevPAR growth, but noted economic weakness and possible recession could undermine recovery.
- Approximately $106.1 million of debt matured or was callable before December 2013. ING had called a loan and extended its due date to April 1, 2012; a proposed consolidation of four ING loans into a $67.5 million, seven-year loan at 6.10% remained subject to final documentation and closing. Refinancing was not assured.
- Choice terminated 11 hotel franchise agreements. For those hotels, Q3 occupancy fell to 58.6% from 71.1% and RevPAR declined 21.4% to $45.80. Some replacement brands offered weaker marketing and loyalty support. Summit’s arbitration against Choice and Choice’s counterclaims were pending; a hearing was scheduled for December 2011.
- Summit intended to qualify as a REIT beginning with its short 2011 tax year. Qualification depends on meeting tax and distribution requirements; failure could result in corporate taxation. Management also identified hotel demand, interest rates, refinancing, franchise and manager relationships, and capital availability as material risks.
Important facts for investors to verify
- Progress and final terms of the proposed ING refinancing, including the extended maturity and any required paydown.
- Actual revolver availability, borrowing-base and covenant compliance, and subsequent debt balances after the preferred offering.
- Performance and renovation costs at former Choice hotels, and the outcome of the Choice arbitration.
- Whether planned capital expenditures and acquisitions are funded without weakening liquidity or distributions.
- REIT qualification and distribution capacity, alongside the effect of preferred-stock dividends and debt service on cash available to common holders.