Summit Hotel Properties, Inc. Reports Third Quarter Results

Summit Hotel Properties, Inc. (NYSE: INN) announced results of operations for its third quarter ended September 30, 2011. The company is a publicly traded real estate investment trust (REIT) specializing in acquiring and owning premium-branded upscale and upper-midscale hotels and currently owns 70 properties in 19 states.

“We continue to work closely with our hotel management company to recover as quickly as possible from the unforeseen disruptions at the 11 rebranded hotels”

Third Quarter and Recent Highlights

• FFO: Achieved $0.23 per share of FFO, in-line with estimates.
• RevPAR: Improved revenue per available room (RevPAR) by 6.0 percent for the same store portfolio, compared to the same 2010 period. The same store portfolio excludes the five hotels that were acquired since the company’s February 2011 IPO and the 11 former Choice Hotel-branded properties that recently were rebranded.
• Acquisitions: Acquired the 90-room Courtyard by Marriott, El Paso, Texas for $142,000 per key with a post-renovation NTM capitalization rate in the range of 8 to 9 percent. This is the fifth acquisition since the company’s February 2011 IPO.
• Dividends: Declared a third quarter dividend of $0.1125 per common share.
• Equity: Issued 2 million shares of 9.25% Series A Cumulative Redeemable Preferred Stock, following the close of third quarter, at $25 per share, with net proceeds of $48.0 million.
• Strategically restructured permanent debt: Refinanced $12.6 million of debt that matured during the third quarter of 2011, modified $32.9 million of debt which reduced the interest rate, and obtained a commitment to refinance $67.5 million of existing debt maturing in 2012 and 2013, subject to customary due diligence and documentation.

“Our third quarter results demonstrate our ability to adapt quickly to unforeseen events,” said Dan Hansen, Summit’s president and chief executive officer. “We are confident that we have resolved the challenges of the transition in the management of 65 of our properties and the unexpected re-branding of 11 hotels. With nearly $50 million from our recent preferred stock offering, we have the capital and flexibility to continue executing our strategy of making accretive acquisitions at attractive prices.”

Financial Results

For the 2011 third quarter, the company’s full portfolio of 70 hotels had $42.3 million in revenues, a 12.5 percent increase compared to $37.6 million for the company’s privately held predecessor during the same 2010 period. RevPAR for the third quarter rose 3.8 percent, led by a 2.2 percent increase in average daily rate (ADR) to $90.94 and a 1.5 percent increase in occupancy to 70.1 percent. Income from hotel operations was $13.5 million, an increase of 8.9 percent compared to $12.4 million for the same 2010 quarter. Hotel operating margins were 31.9 percent for the 2011 third quarter, a contraction of 120 basis points when compared to 33.1 percent for the same period 2010. Hotel operating margins for the quarter, on an adjusted basis, expanded by 110 basis points when adjustments for additional hotel management or franchisor costs (including hotel and revenue management fees, as well as compensation and other expenses, accounting and information technology expenses and royalty fees imposed by certain franchisors as a requirement of consent to the IPO) of $0.9 million were applied to income from hotel operations in third quarter 2010.

During the quarter the company incurred $0.2 million of one-time expenses related to rebranding its former Choice hotels, which included but were not limited to guest room supplies, logoed items and linens. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $11.9 million. Funds from operations (FFO) was $8.4 million, or $0.23 per fully diluted common share. Adjusted funds from operations (AFFO) for the period was $8.6 million, or $0.23 per fully diluted common share. Reconciliation of these non-GAAP financial measures appears at the end of this release.

Operating Performance

The company segregates its hotel operating results for its 70 currently owned hotels into the following components:

• Same-store Hotels – Fifty-four hotels with an aggregate of 5,537 rooms operated for longer than one year under its current franchise. These hotels exclude the 11 rebranded hotels and the five hotels acquired during the 2011 second and third quarters.
• Rebranded Hotels – On March 23, 2011, Choice Hotels terminated franchise agreements for the company’s 11 Choice-branded-hotels. The company currently is in arbitration with Choice to settle outstanding claims regarding steps taken by Choice. The completion of the rebranding process will result in an increase of one property. The two-building, 111-room property located in Twin Falls, Idaho was converted to an AmericInn & Suites on April 15, 2011. The property’s two buildings will become separately branded hotels, a 58-room Fairfield Inn & Suites by Marriott and a 52-room AmericInn & Suites, after a renovation/conversion scheduled for completion in the second quarter of 2012.
• Recently Acquired Hotels – the five hotels acquired during the second and third quarters of 2011.

Same-store Hotels

Total revenue of $42.3 million in the third quarter was largely a result of the $34.0 million of revenue generated by the company’s same-store hotels. For the 2011 third quarter, same-store hotel revenue rose $1.9 million over third quarter 2010. RevPAR of $65.72 was up 6.0 percent over the same 2010 period. Third quarter 2011 RevPAR consisted of 71.7 percent occupancy, up 4.4 percent, and ADR of $91.62, up 1.5 percent over third quarter 2010. Same-store income from hotel operations was $11.2 million, up 4.7 percent over third quarter 2010. Hotel operating margins were 32.9 percent, contracting 30 basis points, compared to the same period in 2010. Hotel operating margins for the quarter, on an adjusted basis, expanded by 200 basis points when $0.8 million of additional hotel management or franchisor costs (including hotel and revenue management fees, as well as compensation and other expenses, accounting and information technology expenses and royalty fees imposed by certain franchisors as a requirement of consent to the IPO) were applied to income from hotel operations during third quarter 2010.

Rebranded Hotels

The company continued the conversion/rebranding process of the 11 former Choice hotels. Third quarter 2011 revenues from the 11 rebranded hotels were $4.3 million, compared to $5.5 million in third quarter 2010. RevPAR was $45.80, down 21.4 percent, compared to the same 2010 period. RevPAR consisted of occupancy of 58.6 percent, down 17.6 percent, and ADR of $78.11, a decrease of 4.7 percent in comparison to third quarter 2010. Income from hotel operations was $0.9 million for the quarter resulting in hotel operating margins of 21.0 percent as compared to $1.8 million and 32.2 percent, respectively, in the comparable quarter of 2010. Hotel operating margins for the quarter, on an adjusted basis, contracted by 910 basis points when $0.1 million of additional hotel management or franchisor costs (including hotel and revenue management fees, as well as compensation and other expenses, accounting and information technology expenses and royalty fees imposed by certain franchisors as a requirement of consent to the IPO) were applied to income from hotel operations in the third quarter of 2010. During the quarter the company incurred one-time expenses such as guest room supplies, logoed items and linens in the amount of $0.2 million to convert the former Choice hotels to other brands. The company estimates that the disruption of the Choice rebranding affected 2011 third quarter FFO by approximately $1,030,000 or $0.03 per fully diluted common share.

Acquired Hotels

The results from the five hotels acquired during the second and third quarters of 2011 are as follows: For the third quarter, revenue was $4.0 million on RevPAR of $76.74. RevPAR reflected 74.7 percent occupancy and ADR of $102.79. Income from hotel operations was $1.4 million, equating to 34.9 percent hotel operating margins.

“We continue to work closely with our hotel management company to recover as quickly as possible from the unforeseen disruptions at the 11 rebranded hotels,” Hansen said. “The effects of the transition of hotel management that negatively affected hotel margins and earnings during the second quarter continued to affect the third quarter but at a significantly reduced rate,” he said. “We expect this to diminish in the fourth quarter. We’re encouraged that occupancy has remained stable as room rate increases. Our management companies are pushing rate as aggressively as they can in this difficult economic environment. Margins remain a primary focus, and we expect to see improvement as we continue our transition from a private to a public company.”

Nine-Month Summary

For the 2011 nine-month period, the company generated a 9.1 percent increase in revenues to $114.3 million, compared to $104.8 million earned by the company’s predecessor during the same 2010 nine-month period. Income from hotel operations was $34.9 million for the period.

The Hotel Operating Data section below contains additional information regarding the company’s operating performance.

Balance Sheet

The company had total outstanding debt of $257.6 million as of September 30, 2011. The weighted average interest rate was 5.10 percent for the 2011 third quarter. Of the total debt, $50.2 million was outstanding borrowings under the company’s $125 million senior secured revolving credit facility.

During the third quarter the company allocated $10.0 million toward capital investments. Cash and cash equivalents as of September 30, 2011 was $17.1 million. Shortly after the end of the third quarter, the company completed a preferred stock offering raising approximately $48.0 million after underwriting discounts and offering-related expenses. Net proceeds of the offering were used to reduce the outstanding balance on the company’s senior secured revolving credit facility. As of November 10, 2011 the company had $84.1 million available on its senior secured revolving credit facility. “The equity infusion from the preferred offering and cash on hand gives us considerable flexibility in our acquisition program,” said Stuart Becker, chief financial officer. “Our market for acquisitions remains quite robust. We have identified a substantial number and continue to see an influx of new opportunities.”

Capital Expenditures

The company continued its strategy of upgrading hotels with capital renovations to capture additional RevPAR as the industry outlook improves. During the third quarter, the company capitalized $10.0 million in improvements and completed renovations on two hotels. Renovation on one additional hotel was completed subsequent to the quarter end and work continues on six properties. The completion of work on these six hotels is anticipated by first quarter 2012. Additionally, brand conversion is now complete on ten of the former Choice hotels and completion of the remaining two is anticipated by second quarter 2012.

Debt Refinancing

On November 10, 2011, the company obtained a commitment from ING Investment Management, LLC (ING) to consolidate the company’s four outstanding loans with ING into a single 7-year term loan with a principal balance of $67.5 million, amortized over 20 years and bearing an annual interest rate of 6.1 percent. This loan is collateralized by first mortgages on 16 hotel properties containing an aggregate of 1,639 guestrooms. Terms of the refinancing have been agreed to by both parties and funding is expected to occur no later than March 23, 2012. Closing is subject to customary third party reports and finalizing documentation.

On September 30, 2011, the company refinanced its Bank of the Cascades loan of approximately $12.6 million with a new maturity date of September 30, 2021 and a fixed interest rate of 4.66 percent through September 29, 2016 and a fixed interest rate thereafter based on the then-current Federal Home Loan Bank of Seattle Intermediate/Long-Term Advances 5-year Fixed Rate plus 3.00%.

On August 12, 2011, the company modified approximately $30.3 million of loans with General Electric Capital Corp (GECC). These loans now bear an interest rate equal to 90-day LIBOR plus 3.50 percent.

The results of these changes will result in an average maturity of the company’s term mortgage debt of 5.3 years.

Dividends

On November 8, 2011, the company's Board of Directors declared a quarterly dividend of $0.1125 per share to common shareholders of record as of November 18, 2011, payable on November 30, 2011. The company’s 9.25% Series A Preferred Stock dividend will commence with the 2011 fourth quarter, payable on November 30, 2011 and will be in the amount of $0.20556 per share.

Outlook and Guidance

“The industry continues to recover, led by occupancy improvement,” Hansen said. “Room rates are strengthening in most of our markets. Our management company has successfully completed the transition process, and we are seeing benefits from economies of scale and marketing strength. The fourth quarter to date is in-line with our expectations. However, we are cautiously optimistic because of the fragile economy and continued high unemployment.”

“We continue to see excellent acquisition opportunities and our recent capital transactions will allow us to continue our strategy of acquiring premium select-service hotels at attractive prices. Because of the immediate negative effect to earnings as a result of dividend payments on the company’s recently completed preferred offering, we are adjusting our FFO estimate for the full-year 2011 from $0.72 - $0.77 to $0.71 - $0.74 per fully diluted share. This estimate anticipates that RevPAR for our 70 currently owned hotels will improve in the fourth quarter by 5 - 7 percent over the same period in 2010.”

The company does not undertake to update its forecasts due to any developments in the company’s business. Achievement of the anticipated results is subject to the risks disclosed in the company’s filings with the SEC. The company’s full year 2011 RevPAR reflects the ownership of 65 hotels since January 1, 2011 and the ownership of five hotels acquired between April and July 2011 from the respective dates of acquisition. In addition, the company’s guidance reflects management’s view of current market conditions, which is subject to change. It excludes potential future acquisitions and dispositions, which could result in a change in the company’s guidance.

Summit Hotel Properties, Inc and Summit Hotel Properties, LLC (Predecessor)
Hotel Operating Data
Schedule of Property Level Results
(unaudited)
			For the three months ended						For the nine months ended
			September 30,						September 30,
			2011			2010			2011			2010
Room Sales			41,482,931			36,935,600			112,022,768			102,874,263
Other Hotel Operating Income			846,774			664,897			2,302,943			1,938,680
Total Operating Revenue			42,329,705			37,600,497			114,325,711			104,812,943
Room Expenses			12,289,038			10,628,993			33,893,188			30,677,033
Direct Expenses			5,544,425			4,781,468			15,354,602			13,068,150
Property Taxes			1,768,576			1,828,947			5,470,647			5,522,590
Insurance			456,521			348,405			1,273,348			1,179,813
Management Expenses			1,347,824			789,155			3,293,803			2,400,136
Other Expenses			7,437,470			6,787,967			20,119,559			18,635,392
Total Hotel Operating Expenses			28,843,854			25,164,935			79,405,147			71,483,114
Income from Hotel Operations			13,485,851			12,435,562			34,920,564			33,329,829
Occupancy			70.11%			69.06%			66.53%			65.64%
Average Daily Rate			90.94			88.99			90.44			87.88
Room Revenue Par			63.76			61.45			60.17			57.68
Summit Hotel Properties, Inc and Summit Hotel Properties, LLC (Predecessor)
Same-Store Hotels (54 Hotels)
Schedule of Property Level Results
(unaudited)
			For the three months ended						For the nine months ended
			September 30,						September 30,
			2011			2010			2011			2010
Room Sales			33,469,863			31,593,395			94,320,783			88,484,437
Other Hotel Operating Income			531,840			535,633			1,648,868			1,548,362
Total Operating Revenue			34,001,703			32,129,028			95,969,651			90,032,799
Room Expenses			9,495,381			8,992,667			27,327,598			25,912,158
Direct Expenses			4,292,470			4,061,309			12,450,323			11,038,746
Property Taxes			1,346,979			1,528,637			4,369,193			4,567,066
Insurance			350,029			297,580			1,030,004			1,008,036
Management Expenses			1,089,581			675,011			2,724,682			2,064,501
Other Expenses			6,247,511			5,898,910			17,572,267			16,272,288
Total Hotel Operating Expenses			22,821,951			21,454,114			65,474,068			60,862,794
Income from Hotel Operations			11,179,751			10,674,913			30,495,583			29,170,004
Occupancy			71.73%			68.69%			68.12%			65.32%
Average Daily Rate			91.62			90.30			91.61			89.62
Room Revenue Par			65.72			62.02			62.40			58.54
Same-Store Seasoned (39 Hotels)
Occupancy			69.63%			68.75%			67.02%			66.51%
Average Daily Rate			88.99			89.07			90.56			89.20
Room Revenue Par			61.97			61.23			60.69			59.33
Same-Store Unseasoned (15 Hotels)
Occupancy			75.82%			68.57%			70.26%			62.99%
Average Daily Rate			96.34			92.69			93.58			90.48
Room Revenue Par			73.04			63.56			65.75			56.99
Summit Hotel Properties, Inc and Summit Hotel Properties, LLC (Predecessor)
Rebranded Hotels (11 Hotels)
Schedule of Property Level Results
(unaudited)
			For the three months ended						For the nine months ended
			September 30,						September 30,
			2011			2010			2011			2010
Room Sales			4,196,624			5,342,205			11,784,864			14,389,825
Other Hotel Operating Income			102,121			129,265			348,956			390,320
Total Operating Revenue			4,305,745			5,471,470			12,133,820			14,780,145
Room Expenses			1,652,783			1,636,326			4,766,589			4,764,875
Direct Expenses			750,949			720,159			2,168,703			2,029,404
Property Taxes			292,881			300,310			914,989			955,525
Insurance			58,233			50,825			179,149			171,776
Management Expenses			132,997			114,145			373,075			335,635
Other Expenses			514,979			889,057			1,501,200			2,363,104
Total Hotel Operating Expenses			3,402,822			3,710,821			9,903,705			10,620,320
Income from Hotel Operations			902,923			1,760,649			2,230,115			4,159,825
Occupancy			58.63%			71.11%			55.43%			67.43%
Average Daily Rate			78.11			81.99			78.19			78.48
Room Revenue Par			45.80			58.30			43.34			52.92
Summit Hotel Properties, Inc and Summit Hotel Properties, LLC (Predecessor)
Acquisitions (5 Hotels)
Schedule of Property Level Results
(unaudited)
			For the three months ended						For the nine months ended
			September 30,						September 30,
			2011			2010			2011			2010
Room Sales			3,816,445			0			5,917,121			0
Other Hotel Operating Income			205,813			0			305,118			0
Total Operating Revenue			4,022,258			0			6,222,239			0
Room Expenses			1,140,874			0			1,799,001			0
Direct Expenses			501,006			0			735,575			0
Property Taxes			128,717			0			186,465			0
Insurance			48,259			0			64,195			0
Management Expenses			125,246			0			196,046			0
Other Expenses			674,980			0			1,046,092			0
Total Hotel Operating Expenses			2,619,081			0			4,027,374			0
Income from Hotel Operations			1,403,177			0			2,194,866			0
Occupancy			74.65%			.0%			74.35%			.0%
Average Daily Rate			102.79			0.00			101.49			0.00
Room Revenue Par			76.74			0.00			75.46			0.00

 

EBITDA

EBITDA represents net income or loss, excluding: (i) interest, (ii) income tax expense and (iii) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it provides investors with an indication of our ability to incur and service debt, to satisfy general operating expenses, to make capital expenditures and to fund other cash needs or reinvest cash into our business. We also believe it helps investors meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our asset base (primarily depreciation and amortization) from our operating results. Our management also uses EBITDA as one measure in determining the value of acquisitions and dispositions.

We caution investors that amounts presented in accordance with our definitions of EBITDA may not be comparable to similar measures disclosed by other companies, since not all companies calculate this non-GAAP measure in the same manner. EBITDA should not be considered as an alternative measure of our net income (loss) or operating performance. EBITDA may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. We further adjust EBITDA for certain additional items such as hotel transaction and pursuit costs and other non-recurring expenses. Although we believe that EBITDA and adjusted EBITDA can enhance your understanding of our financial condition and results of operations, these non-GAAP financial measures are not necessarily better indicators of any trend as compared to a comparable GAAP measure such as net income (loss). Attached we include a quantitative reconciliation of EBITDA and adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net income (loss).

About Summit Hotel Properties

Summit Hotel Properties, Inc. is a publicly traded real estate investment trust focused primarily on acquiring and owning premium-branded limited-service and select-service hotels in the upscale and upper midscale segments of the lodging industry. As of September 30, 2011, the company’s portfolio consisted of 70 hotels with a total of 7,100 guestrooms located in 19 states. 

Summit Hotel Properties, Inc. and Summit Hotel Properties, LLC (Predecessor)
Condensed Consolidated Balance Sheets (unaudited)
September 30, 2011 and December 31, 2010
								Summit Hotel
			Summit Hotel					Properties, LLC
			Properties, Inc.					(Predecessor)
			2011					2010
ASSETS
Cash and cash equivalents			$	17,118,080				$	7,977,418
Restricted cash				1,529,487					1,933,268
Trade receivables				5,478,840					2,665,076
Receivable due from affiliate				-					4,620,059
Prepaid expenses and other				2,233,465					1,738,645
Land held for development				20,294,973					20,294,973
Property and equipment, net				493,902,474					445,715,804
Deferred charges and other assets, net				9,032,280					4,051,295
Other assets				3,581,178					4,011,992
TOTAL ASSETS			$	553,170,777				$	493,008,530
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable			$	899,535				$	864,560
Related party accounts payable				-					771,066
Accrued expenses				15,408,319					11,092,131
Mortgages and notes payable				257,591,082					420,437,207
TOTAL LIABILITIES				273,898,936					433,164,964
COMMITMENTS AND CONTINGENCIES
EQUITY
Members' equity				-					61,468,029
Common stock, $.01 par value per share, 450,000,000 shares authorized, 27,278,000 issued and outstanding as of September 30, 2011				272,780					-
Additional paid-in capital				240,921,363					-
Accumulated deficit and distributions				(5,311,755	)				-
Total stockholders' equity				235,882,388					61,468,029
Noncontrolling interest				43,389,453					(1,624,463	)
TOTAL EQUITY				279,271,841					59,843,566
TOTAL LIABILITIES AND EQUITY			$	553,170,777				$	493,008,530

 

Summit Hotel Properties, Inc. and Summit Hotel Properties, LLC (Predecessor)
Condensed Consolidated Statements of Operations (unaudited)
For the three and nine months ended September 30, 2011 and 2010
						Summit Hotel
		Summit Hotel				Properties, LLC				Summit Hotel				Summit Hotel Properties, LLC
		Properties, Inc.				(Predecessor)				Properties, Inc.				(Predecessor)
										Period 2/14/11				Period 1/1/11
		Three Months				Three Months				through				through				Nine Months
		Ended 9/30/11				Ended 9/30/10				9/30/11				2/13/11				Ended 9/30/10
REVENUES
Room revenues		$	41,482,931			$	36,935,600			$	97,754,726			$	14,268,042			$	102,874,263
Other hotel operations revenues			846,774				664,897				1,972,692				330,251				1,938,680
Total Revenue			42,329,705				37,600,497				99,727,418				14,598,293				104,812,943
EXPENSES
Hotel operating expenses
Rooms			12,289,038				10,628,993				28,932,738				4,960,450				30,677,033
Other direct			5,544,425				4,781,468				12,696,842				2,657,760				13,068,150
Other indirect			10,766,957				9,596,484				24,880,526				4,686,274				27,277,580
Other			243,434				157,990				517,519				73,038				460,351
Total hotel operating expenses			28,843,854				25,164,935				67,027,625				12,377,522				71,483,114
Depreciation and amortization			8,391,915				6,805,779				18,640,738				3,429,216				20,327,601
Corporate general and administrative:
Salaries and other compensation			739,843				-				1,853,875				-				-
Other			625,609				-				2,127,420				-				-
Equity based compensation			51,201				-				353,685				-				-
Hotel property acquisition costs			181,892				73,836				181,892				-				130,355
Total Expenses			38,834,314				32,044,550				90,185,235				15,806,738				91,941,070
INCOME (LOSS) FROM OPERATIONS			3,495,391				5,555,947				9,542,183				(1,208,445	)			12,871,873
OTHER INCOME (EXPENSE)
Interest income			553				12,055				14,780				7,139				35,614
Interest expense			(3,456,335	)			(6,818,469	)			(9,975,104	)			(4,666,216	)			(19,519,570	)
Gain (loss) on disposal of assets			-				(334	)			(36,031	)			-				(39,723	)
Total Other Income (Expense)			(3,455,782	)			(6,806,748	)			(9,996,355	)			(4,659,077	)			(19,523,679	)
INCOME (LOSS) FROM CONTINUING OPERATIONS			39,609				(1,250,801	)			(454,172	)			(5,867,522	)			(6,651,806	)
INCOME TAX EXPENSE			1,813				(45,000	)			(514,666	)			(339,034	)			(273,185	)
NET INCOME (LOSS)			41,422				(1,295,801	)			(968,838	)			(6,206,556	)			(6,924,991	)
NET INCOME (LOSS) ALLOCATED TO NONCONTROLLING INTEREST			11,184				-				(261,586	)			-				-
NET INCOME (LOSS) ALLOCATED TO COMMON STOCKHOLDERS		$	30,238			$	(1,295,801	)		$	(707,252	)		$	(6,206,556	)		$	(6,924,991	)
Net income (loss) per share:
Basic and diluted		$	0.00							$	(0.03	)
Weighted-average common shares outstanding:
Basic and diluted			27,278,000								27,278,000

Logos, product and company names mentioned are the property of their respective owners.

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