On one hand, the deep dive in Summit Hotel's stock price suggests that investors who buy today could earn a hefty return as shares recover from their COVID-19 sell-off. That helps boost the probability that the company could generate market-beating total returns going forward.
Another factor in Summit's favor is its business model of operating upscale and upper-upscale hotels. That's because these properties grow their RevPAR and margins at a faster pace than other hotel types. Meanwhile, Summit has outperformed the industry growth rate over the years by focusing on upgrading its hotel portfolio through the sale of properties with lower metrics and the acquisition of those with better ones. The company has also invested in development and renovation projects that generate high returns and more profitable hotels. This focus on owning increasingly lucrative hotels should grow Summit's FFO and ability to pay dividends during normal market conditions.
Unfortunately, the company's strategy hasn't paid off in recent years. Because of hotel sales and a weaker hospitality market, Summit's FFO declined from $1.35 a share in 2018 to $1.25 per share last year. Meanwhile, FFO was on track to decline again this year (its initial guidance was $1.15 to $1.27 per share) even before the impact of COVID-19.
Summit must reverse that declining FFO trend if it wants to generate market-beating total returns in the future. That's because the key to long-term outperformance is consistently above-average earnings growth, as well as steady dividend increases. With Summit's FFO sinking for several years -- and its dividend currently suspended -- it doesn't have a great track record.