Summit Hotel Properties, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; unaudited. Amounts are in U.S. dollars unless noted. Summit is a hotel REIT focused on premium-branded select-service properties. At quarter-end it owned 95 hotels with 12,175 guestrooms in 24 states.
Financial performance
- Revenue: Q3 revenue was $125.1 million, up 14.5% from $109.3 million. Nine-month revenue was $353.4 million, up 16.1% from $304.3 million.
- Profit and EPS: Q3 net income was $13.6 million, versus $3.7 million; net income attributable to common stockholders was $9.4 million, versus a $0.4 million loss. Basic and diluted EPS were $0.11, versus a loss of $0.01. For nine months, net income was $40.5 million versus $16.2 million, common-stockholder income was $27.8 million versus $3.7 million, and EPS was $0.32 versus $0.04.
- Operating margin: GAAP operating income was $21.9 million in Q3 versus $10.6 million, and $65.1 million for nine months versus $36.9 million. Operating income as a share of revenue was approximately 17.5% versus 9.7% for Q3 and 18.4% versus 12.1% for nine months.
- Hotel metrics: Same-store Q3 RevPAR rose 4.6% to $100.21, on occupancy of 79.6% and ADR of $125.93. For nine months, same-store RevPAR increased 8.7% to $100.03, on occupancy of 78.3% and ADR of $127.80. Same-store operating expenses were 63.8% of revenue in Q3, up from 63.0%; for nine months they improved to 63.5% from 64.3%.
- Non-GAAP measures: FFO applicable to common shares and units was $26.9 million ($0.31 per share/unit) in Q3 and $77.7 million ($0.89) for nine months, increases of 10.7% and 26.5%. EBITDA was $37.5 million in Q3 and $110.9 million for nine months, up 36.8% and 30.1%. The filing cautions these company-defined measures are not substitutes for GAAP results and may not be comparable across companies.
- Cash flow: Nine-month operating cash flow was $96.4 million, versus $79.0 million. Investing used $200.6 million versus $193.6 million; financing provided $97.6 million versus $102.6 million. Cash declined $6.6 million to $32.0 million; restricted cash was $28.9 million.
- Balance sheet and debt: Total assets were $1.610 billion and total debt was $770.0 million at September 30, compared with $1.459 billion and $626.5 million at year-end 2014. Equity was $784.8 million. Weighted-average debt cost, after derivatives, was 3.97%, versus 4.35% at year-end. The company had $115 million available under its $300 million unsecured credit facility and reported covenant compliance.
Changes and significant transactions
- Revenue growth reflected higher same-store performance and acquired hotels; management attributed improvement to acquisitions of higher-quality assets, revenue and asset management, industry fundamentals, and renovations. Nine-month same-store revenue rose 8.8%.
- The company acquired five hotels for an aggregate purchase price of $154.8 million in the first nine months of 2015, compared with six hotels costing $214.7 million in the comparable 2014 period. Hotel-property acquisition costs were expensed as incurred.
- At September 30, 26 hotels were classified as held for sale under agreements to sell to ARCH for approximately $347.4 million. The first closing—10 hotels for $150.1 million—occurred October 15 and was expected to produce a roughly $65 million gain in Q4 2015. The remaining closings were expected by year-end 2015 and Q1 2016, subject to customary conditions.
- After quarter-end, the company acquired two hotels for $39 million and $44 million, using ARCH-sale proceeds and revolving-credit borrowings through 1031 exchange arrangements. It also reported repayment of $62.1 million of mortgage debt after quarter-end.
Outlook, risks, and unusual items
- Management expressed a positive near-term outlook but expected RevPAR growth to decelerate somewhat in Q4 2015 and fiscal 2016 as occupancy stabilizes. It cited increased hotel construction and possible slower economic growth as risks. The filing provides no company-specific earnings or RevPAR guidance.
- Management expected $6.6 million to $9.6 million of additional hotel renovations and other non-recurring capital expenditures during the remainder of 2015. It stated that available operating cash, working capital, revolver capacity, and other funding sources were expected to meet liquidity needs for at least 12 months, while noting financing availability and terms could be affected by leverage, collateral values, lender restrictions, and market conditions.
- Debt was 62.9% fixed-rate and 37.1% variable-rate after derivatives. A 1 percentage-point increase in rates, assuming variable debt stayed constant, was estimated to reduce annual cash flow by approximately $2.9 million. The company generally intended to keep debt to EBITDA at no more than 6:1.
- The ARCH sale and related 1031 exchanges carry closing and execution risks. The filing also describes $2.7 million of seller-financed notes in default; foreclosure proceedings were underway, and management believed collateral value was sufficient to recover the carrying value.
- Q3 included $1.1 million of impairment charges on land parcels and $3.1 million of cash and equity-based costs related to the executive chairman’s departure. Separately, the filing reports $1.1 million of additional stock-compensation expense associated with award modifications.
- A new ERP system significantly affected, or could reasonably be expected to affect, financial-reporting controls; the company said new controls were being validated. Management concluded disclosure controls were effective. No material litigation or material changes to previously disclosed risk factors were reported.
Investor verification checklist
- Confirm completion and proceeds of the remaining ARCH sale closings, the expected gain, and execution of the associated 1031 exchanges.
- Review the effect of the post-quarter hotel acquisitions and $62.1 million of mortgage repayments on debt, liquidity, and borrowing-base capacity.
- Track same-store RevPAR and expense trends against management’s expectation of slower growth, as well as renovation spending.
- Monitor variable-rate exposure, debt maturities, covenant headroom, and access to the $115 million of quarter-end revolver availability.
- Assess recovery of the defaulted seller-financing notes and the continued validation of controls following the ERP implementation.