Summit Hotel Properties, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet figures are as of March 31, 2014. Dollar amounts below are in millions unless stated otherwise. Summit is a REIT focused on upscale and upper-midscale U.S. hotels. Its portfolio comprised 90 hotels and 11,353 rooms across 22 states.
Financial performance and operating metrics
- Revenue: $89.5, up 49.9% from $59.7. The increase reflected $25.5 of revenue from acquired hotels and $4.3 of same-store growth.
- Same-store performance: For 66 hotels, revenue rose 8.1%; occupancy increased to 72.8% from 70.3%, average daily rate (ADR) rose to $110.01 from $105.22, and revenue per available room (RevPAR) increased 8.4% to $80.12.
- Operating results: Operating income was $9.3, versus $5.6; operating margin was approximately 10.4%, versus 9.3%. Hotel operating expenses were $59.9, or 66.9% of revenue, compared with $39.8, or 66.6%.
- Net income and common-stockholder result: Net income was $3.3, versus $1.9. After preferred dividends, the statement of operations reports a $0.7 net loss attributable to common stockholders; reported basic and diluted loss per share was $0.01.
- Cash flow: Operating activities provided $22.3, compared with $11.1. Investing activities used $106.8, including $90.0 for hotel acquisitions and $19.0 for property improvements. Financing activities provided $74.3. Cash and cash equivalents ended at $36.6, down from $46.7 at year-end; restricted cash was $52.2.
- Debt and liquidity: Debt totaled $567.4, up from $435.6 at December 31, 2013. The weighted-average interest rate after derivatives was 4.61%, compared with 5.03%. At quarter-end, the $300.0 credit facility had $166.0 borrowed, $13.9 in standby letters of credit, and $120.1 available. Management said resources were expected to meet liquidity needs for at least 12 months.
- Balance sheet: Total assets were $1,428.9 and total liabilities were $613.0. Total equity was $815.9.
Material changes and notable items
- The company acquired four hotels for $125.7 in Q1, compared with nine hotels acquired for $226.9 in Q1 2013. The 2014 purchases included two San Francisco-area properties and hotels in Houston and Goleta, California. Acquisition-related debt assumed was $43.2.
- Two Fort Smith, Arkansas hotels were sold in January 2014 for $3.1; a third Fort Smith hotel was classified as held for sale. Discontinued operations contributed $0.4 of income, compared with $0.4 in Q1 2013. The company early-adopted revised discontinued-operations guidance.
- Same-store operating expenses increased 8.3%, approximately in line with the 8.1% revenue increase. Management attributed improved same-store results to economic and lodging-industry conditions and renovations at 17 hotels in 2013.
- Interest expense rose to $6.4 from $4.1, primarily reflecting borrowing to finance acquired hotels. Depreciation and amortization also increased, mainly because of acquisitions.
- At quarter-end, 83.6% of debt was fixed-rate after giving effect to swaps. Management estimated a 1 percentage-point increase in rates would reduce annual cash flow by approximately $0.9, assuming variable-rate debt did not increase.
Outlook, risks, and contingencies
- No specific full-year revenue or earnings guidance was provided. Management expressed a positive view of economic conditions and expected continued RevPAR gains, while noting that a stalled recovery or changing lodging supply could impair results.
- The company expected to spend $20–$28 million on hotel renovations during the remainder of 2014. It had a conditional $37.7 million purchase agreement for a Hampton Inn & Suites in Minneapolis; completion was not assured. A $13.1 million letter of credit supported that agreement.
- Key disclosed risks include leverage and refinancing, interest-rate increases, changes in hotel demand and operating metrics, economic weakness, competition, acquisition and renovation execution, capital availability, and maintaining REIT qualification. Management reported no litigation it believed would materially affect the company.
- Management disclosed a material weakness in internal control over financial reporting involving the lack of controls to reconcile hotel-level balance sheets with consolidated amounts. Remediation was underway, with outside accounting assistance; management nevertheless concluded the reported financial statements fairly presented the periods shown.
- Subsequent to quarter-end, the company closed a $25 million mortgage loan on May 6, 2014 and used its net proceeds to reduce the credit facility. The board also declared quarterly dividends payable May 30, 2014.
Important facts for investors to verify
- Reconcile the filing’s common-stockholder loss figures: the statement of operations reports a $0.689 million loss, while the EPS note reports a $0.704 million loss attributable to common stockholders.
- Review the material weakness, remediation progress, and whether hotel-level account reconciliations and related controls are operating effectively.
- Assess debt growth, upcoming maturities, borrowing availability and covenants, and sensitivity to higher interest rates.
- Evaluate whether acquired hotels and planned renovations deliver expected operating improvements, and whether the conditional Minneapolis acquisition closes.
- Consider the quality and sustainability of same-store RevPAR growth, as well as the effects of portfolio changes and discontinued operations on year-over-year comparisons.