Summit Hotel Properties, Inc. (NYSE: INN-PE) is a self-managed real estate investment trust (REIT) that focuses on owning premium-branded, select-service hotels in the United States. The company's portfolio consists of 99 lodging properties with a total of 14,785 guestrooms located across 24 states. Summit's hotels primarily operate under well-known franchise brands such as Marriott, Hilton, Hyatt, and IHG.

Business Overview

Summit Hotel Properties was founded in 2010 and completed its initial public offering in 2011. The company's strategy is to own lodging properties with efficient operating models that generate strong margins and investment returns. Summit's hotels are typically located in markets with multiple demand generators, such as corporate offices, retail centers, airports, state capitols, convention centers, and leisure attractions.

To qualify as a REIT, Summit leases all of its hotels to taxable REIT subsidiaries, which then engage third-party management companies to operate the properties. This structure allows the company to focus on its core competencies of acquiring, renovating, and asset managing its portfolio.

As of March 31, 2024, Summit owned 100% of 56 of its 99 hotels, with the remaining 43 properties owned through joint ventures. The company's joint venture partners include GIC, a sovereign wealth fund from Singapore, as well as other institutional investors. Summit serves as the general partner and asset manager for these joint ventures, earning fees and potential incentive distributions.

Financials

Summit Hotel Properties has demonstrated resilience in its financial performance, navigating the challenges of the COVID-19 pandemic and emerging as a stronger, more diversified company. For the full year 2023, the company reported annual revenue of $736.1 million, net income of -$9.5 million, operating cash flow of $153.6 million, and free cash flow of $64.1 million.

In the first quarter of 2024, Summit continued its strong operational momentum, reporting a 3.2% increase in total revenues to $188.1 million compared to the same period in 2023. This growth was driven by a 4.9% increase in RevPAR (revenue per available room), reflecting improved occupancy and average daily rates across the portfolio.

Segmentation and Geographic Diversification

Summit's portfolio is well-diversified across various demand segments and geographic markets. In the first quarter of 2024, the company's urban and suburban hotels were the standout performers, generating RevPAR growth of approximately 2.5% each. This strength was driven by key Sunbelt markets such as Dallas-Fort Worth, Orlando, Charlotte, and Houston, which continued to outpace the industry average.

Additionally, Summit's airport hotels were among the strongest performers, with first-quarter RevPAR increasing over 5%. This was supported by a 6% increase in air travel during the quarter and accelerating corporate transient demand, as evidenced by commentary from major airlines.

While the company's resort portfolio experienced a modest decline in the first quarter, average rates and RevPAR in these markets remained 14% and 8% above pre-pandemic levels, respectively. Summit continues to invest in select resort properties, such as the Embassy Suites Tucson, Hotel Indigo Asheville, and Courtyard Fort Lauderdale Beach, given the constructive long-term outlook for leisure demand.

Operational Efficiency and Cost Management

Summit's asset management team and operating partners have demonstrated exceptional expense control, helping to drive margin expansion despite the inflationary environment. In the first quarter of 2024, the company's total expenses increased by only 2.4% year-over-year, while cost per occupied room declined by 1.6%.

The improvement in the operating expense environment was largely driven by moderating wage growth, reduced utilization of contract labor, and lower employee turnover. Wages increased by 2.5% in the first quarter, more in line with historical norms, while contract labor declined by 11% on a nominal basis and 14% on a per-occupied-room basis compared to the prior-year period.

As a result of these cost management initiatives, Summit's hotel EBITDA (earnings before interest, taxes, depreciation, and amortization) margin expanded by nearly 90 basis points for the same-store portfolio and over 80 basis points for the pro forma portfolio in the first quarter of 2024.

Capital Allocation and Balance Sheet

Summit has been proactive in improving the quality of its portfolio and strengthening its balance sheet through strategic asset sales. Over the past 12 months, the company has sold nine hotels for a combined $131 million at a blended capitalization rate of approximately 5%, including $44 million in foregone capital expenditures.

The net proceeds from these dispositions were used to repay outstanding debt, reducing Summit's net debt-to-EBITDA ratio by nearly a full turn over the past year. As of March 31, 2024, the company's balance sheet was well-positioned, with an average pro rata interest rate of 4.7% and approximately 77% of its pro rata debt fixed after considering interest rate swaps.

In April 2024, Summit further enhanced its financial flexibility by closing on the sale of two hotels in New Orleans for $73 million and the sale of a hotel in College Station, Texas, for $11 million. The proceeds from these transactions were used to repay the remaining $55 million balance on the company's corporate credit facility and reduce the balance of the GIC joint venture term loan.

Outlook

Summit Hotel Properties has provided a positive outlook for the remainder of 2024. The company is reiterating its full-year guidance for RevPAR growth of 2% to 4% and adjusted EBITDA in the range of $188 million to $200 million, despite the impact of the recent asset sales.

The company's confidence in its outlook is underpinned by the continued strength in its urban and suburban markets, as well as the anticipated recovery in its lagging markets, such as the San Francisco Bay Area, Baltimore, Minneapolis, and New Orleans. Summit expects these markets to generate several hundred basis points of incremental RevPAR growth above the overall portfolio for the full year.

Furthermore, the company's balance sheet flexibility and disciplined capital allocation strategy position Summit well to navigate any potential macroeconomic headwinds. With no significant debt maturities until 2026 and a fully extended average length to maturity of nearly 3.5 years, the REIT is well-equipped to execute on its growth objectives.

Risks and Challenges

While Summit Hotel Properties has demonstrated resilience, the company is not without risks. The lodging industry remains susceptible to macroeconomic conditions, changes in consumer travel patterns, and potential disruptions from events or pandemics. Additionally, the company's reliance on third-party management companies and the competitive nature of the select-service hotel segment present ongoing operational challenges.

Summit's geographic concentration in certain markets, such as the San Francisco Bay Area and New Orleans, also exposes the company to regional economic and market-specific risks. The company's ability to successfully execute its capital recycling strategy and maintain a healthy balance sheet will be crucial in navigating these challenges.

Conclusion

Summit Hotel Properties has demonstrated its resilience and adaptability in the face of industry headwinds. The company's diversified portfolio, operational efficiency, and strategic capital allocation have positioned it for continued growth and value creation. With a positive outlook for the remainder of 2024 and a strengthened balance sheet, Summit is well-poised to capitalize on opportunities in the lodging sector and deliver attractive returns for its shareholders.