Summit Hotel Properties, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company owns premium-branded select-service hotels and reported 80 hotels with 10,751 rooms across 23 states.
Financial results
Amounts below are in millions, except per-share data and operating metrics.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $118.3 | $125.1 | $363.6 | $353.4 |
| Operating income | $21.4 | $21.9 | $67.7 | $65.1 |
| Net income | $27.2 | $13.6 | $97.9 | $40.5 |
| Net income attributable to common stockholders | $22.1 | $9.4 | $84.1 | $27.8 |
| Diluted EPS | $0.25 | $0.11 | $0.96 | $0.32 |
| FFO per diluted common share/unit | $0.34 | $0.30 | $1.02 | $0.88 |
- Q3 operating margin was approximately 18.1%, versus 17.5% a year earlier; nine-month operating margin was approximately 18.6%, versus 18.4%.
- Q3 same-store revenue rose 1.4%; same-store occupancy declined 1.1% to 77.9%, while ADR rose 3.1% to $137.81 and RevPAR increased 1.6% to $107.33. For nine months, same-store revenue grew 4.4%, occupancy rose to 79.3%, ADR increased 2.7% to $140.32 and RevPAR rose 4.3% to $111.22.
- Nine-month operating cash flow was $112.4 million, investing cash flow was a use of $70.2 million, and financing cash flow was a use of $31.0 million. Cash and cash equivalents ended at $40.5 million; restricted cash was $25.6 million.
- September 30 debt was $624.6 million before issuance costs ($618.9 million carrying value), down from $677.1 million at year-end 2015. Weighted average borrowing cost, including the interest-rate hedge, was 3.67%. The $450 million unsecured credit facility had $165 million drawn and $285 million available; the company reported covenant compliance.
Changes and notable items
- Reported earnings included significant property-sale gains: $10.5 million in Q3 and $50.0 million in the first nine months. Nine-month net income and EBITDA therefore benefited materially from dispositions and should not be viewed as solely reflecting recurring hotel operations.
- Q3 total revenue fell 5.4%, mainly because of properties sold; same-store revenue increased. Nine-month revenue rose 2.9%, with same-store growth and acquisitions partly offset by dispositions. Same-store hotel operating expenses were 64.0% of revenue in Q3 (unchanged year over year) and 62.3% for nine months, improved from 63.3%.
- FFO increased 13.9% in Q3 and 16.4% for nine months. Management attributed the increases to revenue growth and lower corporate G&A, among other items. Reported EBITDA growth was also substantially affected by sale gains.
- The company acquired three hotels for a combined $170.4 million during the first nine months, including the $61.4 million Boulder Marriott. It sold multiple properties and used transactions in part for like-kind exchanges.
- The company issued Series D preferred stock in June, receiving $72.3 million net. After quarter-end, it redeemed all Series A preferred shares for $50.7 million on October 28. It also acquired a Chicago hotel for $73.8 million after quarter-end.
Outlook, risks and contingencies
- No company-specific earnings or operating guidance is provided. Management cited an industry forecast of 2.5% U.S. upscale RevPAR growth for 2016 and expected slower lodging-industry growth, with economic conditions and new supply as risks.
- Management expected $13–16 million of hotel renovations and other non-recurring capital expenditures for the remainder of 2016. It believed available cash, operating cash flow and financing sources would meet liquidity needs for at least 12 months.
- Management estimated that a 1 percentage-point increase in interest rates, with variable-rate debt unchanged, would reduce annual cash flow by about $2.6 million. Approximately 42.1% of debt was variable-rate at September 30.
- Key risks include hotel demand and RevPAR deterioration, financing and refinancing availability, higher interest and renovation costs, acquisition and disposition execution, borrower default, and maintaining REIT status. The planned ARCH hotel sale remained subject to completion; the filing describes seller financing and an ARCH loan with a 13% initial annual interest rate. The company said it was marketing remaining properties to other buyers.
- Management reported no pending litigation believed to have a material adverse effect, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Separate recurring hotel operating performance from gains on sales when assessing net income, EBITDA and period-to-period growth.
- Check completion, final proceeds and any remaining exposure associated with the ARCH sale agreements and seller-financed loan.
- Review the effect of the post-quarter Series A redemption, subsequent acquisition and October borrowing levels on liquidity and leverage.
- Monitor same-store occupancy and RevPAR trends, renovation spending, debt maturities and sensitivity to variable interest rates.