Investment Thesis

Summit Hotel Properties (INN) saw a modest growth in its revenue per available room in Q2 2019. The REIT’s recent joint venture announcement with Singapore’s sovereign wealth fund will allow it to become opportunistic to acquire good quality properties in the future. It also has several initiatives to grow its revenue. The company offers a 6.7%-yielding dividend with a sustainable payout ratio. However, the U.S. economy appears to be heading for a slowdown. Therefore, it may be challenging to grow its business in this challenging environment. We think investors may want to wait on the sideline.

Data by YCharts

Recent Developments: Q2 2019 Highlights

Summit Hotel delivered an inline Q2 2019. Due to its disposition of 8 properties year-to-date, the company saw its total revenue declined to $142.9 million from $152.2 million in Q2 2018. Similarly, its adjusted funds from operations declined to $0.37 per share from $0.40 per share. Fortunately, the company continued to see growth in its RevPAR. As can be seen from the table, its RevPAR increased by 1.2% year over year.

Source: Q2 2019 Press Release

Earnings and Growth Analysis

Joint venture with GIC will allow Summit to grow its portfolio quickly

In Summit Hotel’s Q2 2019 earnings release, the company announced that it has entered into the joint venture with GIC, Singapore’s sovereign wealth fund, to acquire assets. Summit Hotel will control a 51% interest in the joint venture with GIC contributing to the remaining 49% interest. We like this announcement as it will allow the company to gain a source of long-term capital to acquire quality properties. GIC’s deep pocket means that Summit Hotel can be opportunistic to acquire quality properties at good prices. In addition, the company will be able to earn fees for providing services to the JV and incentive fees. The access to long-term capital also will allow Summit Hotel to pursue growth through development as well. The joint venture’s initial investment will be its recently announced acquisition of the 88-guestroom Hampton Inn & Suites in Silverthorne, Colorado.

Solid balance sheet

Summit Hotel has a solid balance sheet. The REIT’s total debt is $834.9 million at the end of Q2 2019. Its net debt to EBITDA ratio of about 4.3x is an improvement from Q2 2018’s 4.7x. The company’s EBITDA interest coverage ratio of 5.2x is also solid.

Source: Investor Presentation

The company also has a good debt maturity schedule with no debt maturing before 2022. Therefore, the company will not need to worry about refinancing its debts in the next two years. We believe the company’s solid balance sheet will help fund any acquisitions and development projects.

Source: Investor Presentation

The U.S. economy appears to be heading for a slowdown

While Summit Hotel may have a quality portfolio with growth drivers such as its JV with GIC, the economy in the U.S. appears to be weakening. As can be seen from the chart below, business confidence in the U.S. has declined considerably and is now below 100. This deceleration is not a good news for the hotel industry as businesses may wish to preserve cash and cut travel expenses during the time of uncertainty. Therefore, we think the macro environment will become increasingly challenging for Summit Hotel to grow its RevPAR.

U.S. Business Confidence (Source: Moody’s Analytics)

Risks and Challenges

Like any other hotel operators, Summit Hotel faces these risks:

Hotel industry is highly-cyclical

Hotel industry is cyclical and the prosperity depends on the strength of the economy. In a recession, we will likely see a decline in RevPAR and occupancy rate.

Supply risk

Barrier to entry is low for hotels in major markets as cities encourage new hotel supply to promote tourism and increase taxable income. It is also not difficult to build new hotels. Therefore, a lengthy period of economic prosperity can trigger new constructions. This may eventually result in oversupply.

Wage expense

Unemployment rate of 3.7% is one of the lowest we have seen in the past 5 decades. This low unemployment rate has the potential to significantly increase Summit Hotel’s wage expenses as it may become increasingly challenging to find quality workers.

Valuation

Summit Hotel expects to generate AFFO of $1.20 ~ $1.28 per share. Using the midpoint of its guidance, its price to 2019 AFFO ratio is about 8.7x. This is comparable to Host Hotels & Resorts’ (HST) 8.8x but below Pebblebrook Hotel’s (PEB) 9.9x. However, its P/AFFO ratio is higher than Park Hotels & Resorts’ (PK) 7.8x.

A 6.7%-yielding dividend

Summit Hotel currently pays a quarterly dividend of $0.18 per share or $0.72 per share annually. This is equivalent to a dividend yield of about 6.7%. The company has frequently increased its dividend. As can be seen from the chart below, its dividend yield of 6.7% is towards the high end of its yield range in the past 5 years.

Chart

Data by YCharts

Summit Hotel’s dividend is sustainable with a payout ratio of 58%. As can be seen from the chart below, its dividend payout ratio of 58% and therefore the REIT’s dividend will likely be safe even in an economic downturn.

Source: Investor Presentation

Investor Takeaway

Summit Hotel operates in a highly-cyclical hotel industry. Since we are likely heading for an economic slowdown in the second half of 2019, we think investors should apply a higher margin of safety and remain on the sideline until better visibility is seen.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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2019-08-31