Business Overview and History: Summit Hotel Properties, Inc. (INN) is a self-managed real estate investment trust (REIT) that focuses on owning premium-branded lodging properties with efficient operating models primarily in the upscale segment of the lodging industry. The company’s portfolio consists of 96 lodging properties with a total of 14,260 guestrooms located in 24 states across the United States.
Summit Hotel Properties was founded in 2010 and completed its initial public offering in February 2011. The company’s strategy is to own lodging properties in markets with multiple demand generators such as corporate offices and headquarters, retail centers, airports, state capitols, convention centers, and leisure attractions. Over the years, Summit has steadily grown its portfolio, making strategic acquisitions and dispositions to maintain a high-quality, well-positioned collection of properties.
Summit Hotel Properties was organized in June 2010 as a self-managed lodging property investment company. The company owns its properties in fee simple, except for 7 that are subject to ground leases or subleases. Summit’s lodging properties primarily operate under premium franchise brands owned by Marriott, Hilton, Hyatt, and IHG. The company also owns one glamping property under the Onera brand and an independent Nordic Lodge property. All of Summit’s lodging properties are leased to the company’s taxable REIT subsidiaries and operated by third-party management companies.
As of September 30, 2024, the company owns 100% of the equity interests in 54 of the 96 lodging properties, while owning a 51% controlling interest in 39 properties through a joint venture with GIC, a private limited company incorporated in Singapore. Additionally, the company owns a 90% equity interest in two separate joint ventures, the Brickell Joint Venture and the Onera Joint Venture, which own two and one lodging properties, respectively.
Over its history, Summit has faced some challenges. In 2020, the company recorded a net loss of $143.3 million amid the COVID-19 pandemic and related disruptions to the travel industry. However, the company has since worked to strengthen its balance sheet, executing $150 million in asset sales over the past 18 months to reduce leverage and improve the quality of its portfolio. These efforts have helped Summit navigate industry headwinds and position the company for future growth.
Financials: For the nine months ended September 30, 2024, Summit Hotel Properties reported revenue of $558.85 million, a slight increase from the $558.69 million reported in the same period of the previous year. The company’s net income for the nine-month period was $37.98 million, compared to $6.85 million in the prior year period. Summit’s adjusted funds from operations (AFFO), a key metric for REITs, increased by 9.3% year-over-year to $93.98 million for the nine months ended September 30, 2024.
In the most recent quarter (Q3 2024), Summit reported revenue of $176,807,000, a 2.8% decrease compared to Q3 2023. This decline was primarily driven by a decrease in room and food & beverage revenues due to the sale of four lodging properties during 2024. However, the company saw a 2.7% increase in RevPAR for its total portfolio, led by a 1.2% increase in ADR. Net income for Q3 2024 was $352,000, while operating cash flow (OCF) reached $55,663,000 and free cash flow (FCF) was $95,583,000.
Liquidity: The company’s balance sheet remains strong, with total liquidity of over $400 million as of September 30, 2024. Summit’s net debt to EBITDA ratio has improved by a full turn over the past year, reflecting the success of the company’s capital recycling program. Additionally, the company’s interest rate exposure is well-managed, with 77% of its pro rata share of debt having fixed interest rates after considering interest rate swaps.
As of September 30, 2024, Summit had a debt-to-equity ratio of 1.47 and cash on hand of $51,700,000. The company has a $400 million revolving credit facility, of which $200 million was outstanding. Summit’s current ratio and quick ratio both stood at 26.67, indicating strong short-term liquidity.
The company operates through two main business segments: the Operating Partnership and the Joint Venture Debt. The Operating Partnership segment includes a $600 million senior credit facility, comprising a $400 million revolver and a $200 million term loan facility. The Joint Venture Debt segment includes the GIC Joint Venture’s credit facility and a $396.04 million term loan with Bank of America, N.A.
At September 30, 2024, Summit had total debt of $1.35 billion, with 67% of the debt having fixed interest rates and 33% having variable interest rates. The weighted-average interest rate, after giving effect to the company’s interest rate derivatives, was 5.25%.
Operational Performance and Outlook: Summit Hotel Properties’ third-quarter 2024 results highlight the company’s ability to navigate a challenging industry environment. The company’s same-store RevPAR (revenue per available room) increased by 0.2% in the quarter, driven by a 1.2% increase in average daily rate (ADR) that was partially offset by a 1% decline in occupancy. This performance was impacted by the disruption caused by Hurricanes Francine and Helene, which the company estimates reduced RevPAR growth by 20 basis points and EBITDA by approximately $300,000 in the quarter.
Despite these headwinds, the company’s urban and suburban hotels continued to demonstrate strong performance, with RevPAR growth of 1.3% and 3.9%, respectively, in the third quarter. This was driven by robust group demand and improving business transient trends, which have helped offset the normalization of leisure demand. Summit’s management team has also been effective in managing expenses, with pro forma operating expenses increasing only 3% year-over-year in the third quarter.
Looking ahead, the company’s outlook for the remainder of 2024 and into 2025 remains cautiously optimistic. Industry expectations broadly reflect moderate top-line growth driven by continued strength in group demand and positive trends in business transient, coupled with a more subdued outlook for leisure travel. Summit believes there is potential for better leisure trends as comparisons to 2024 ease and a weaker U.S. dollar could start to facilitate the normalization of inbound/outbound international travel.
Additionally, the company expects the expense environment to be more favorable in 2025, as wage pressures have broadly moderated. Summit has also been active in its capital recycling program, having sold 10 hotels over the past 18 months for $150 million in gross proceeds. This has reduced the company’s near-term capital requirements, enhanced the quality and growth profile of its portfolio, and increased its capacity for external growth.
For full-year 2024, Summit has provided updated guidance, including: – RevPAR growth range of 1% to 2% – Adjusted EBITDA range of $188 million to $194 million – Adjusted FFO range of $0.92 per share to $0.98 per share – Pro rata interest expense of approximately $55 million – Series E and Series F preferred dividends of $15.9 million – Series E preferred distributions of $2.6 million – Pro rata capital expenditures of $75 million to $85 million
This guidance represents a slight revision from the company’s initial 2024 guidance, with the Adjusted EBITDA range now accounting for the impact of $100 million in asset sales completed since the beginning of the year. The company is maintaining its Adjusted FFO midpoint guidance of $0.95 per share while narrowing the range.
Risks and Conclusion: While Summit Hotel Properties has demonstrated resilience in the face of industry challenges, the company is not without risks. The lodging industry remains susceptible to macroeconomic conditions, changes in consumer behavior, and industry-specific factors such as supply growth and labor costs. Additionally, the company’s joint venture structures and debt levels could expose it to certain risks.
However, Summit’s strategic focus on premium-branded, upscale properties, efficient operating models, and disciplined capital allocation have positioned the company well to navigate the current environment and capitalize on future growth opportunities. The company’s strong balance sheet, prudent risk management, and experienced management team provide a solid foundation for long-term value creation for shareholders.
Overall, Summit Hotel Properties’ consistent operational performance, balanced approach to capital allocation, and promising industry outlook make it a compelling investment opportunity in the real estate sector. The company’s ability to adapt to changing market conditions, as evidenced by its recent asset sales and updated guidance, demonstrates its agility and commitment to optimizing shareholder value in a dynamic industry environment.
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