The hospitality industry has been among the hardest hit by the pandemic. Governments have restricted travel, which forced many hotels to close their doors early last year. While most have reopened, occupancy remains low since many people are staying home until they feel safer.
That's put significant pressure on hotel real estate investment trusts (REITs) like Summit Hotel Properties (NYSE: INN). Its stock price is down more than 20% since the beginning of last year, suggesting that it's facing some serious headwinds. Here's a look at whether it can recover from the challenges brought on by the global pandemic.
A brutal year
Last year was a historically abysmal year for the hotel industry and Summit Hotel Properties. The REIT's same-store RevPAR plunged 59.3% for the year to $51.09. Meanwhile, hotel EBITDA and adjusted EBITDAre plummeted by 87.1% and 92.2%, respectively. Finally, its adjusted funds from operations (FFO) came in at a negative $38.6 million, or $0.37 per share, well below the $130.4 million, or $1.25 per share, FFO it produced in 2019.
That forced the company to take several actions to stay afloat, including closing or integrating hotels, postponing non-essential capital projects, suspending its dividend, reducing staff, and working with lenders to improve its liquidity and financial flexibility. Those moves helped reduce its cash burn so that it didn't take on too much debt to navigate last year's challenges.
The slow burn
Summit Properties has reopened most of its hotels as demand has begun recovering. That improvement has helped boost occupancy and RevPAR at most hotels. Because of that, the company's hotel portfolio has operated above its $30 to $40 RevPAR breakeven levels since the third quarter.
However, it's not yet back in the black on a corporate level, as it needs RevPAR in the $60 to $70 range to start generating positive cash flow. As a result, it's still burning through cash at a rate of about $6.8 million per month. On a more positive note, it does have enough liquidity to last 60 months at that cash burn rate.
Signs of optimism
Occupancy and RevPAR have steadily improved in 2021. Summit produced an average of $65 in RevPAR in March, which was its best month since the pandemic started more than a year ago. That has it right on the cusp of returning to profitability at the corporate level.
The upward trends in occupancy and RevPAR appear poised to continue throughout 2021 as vaccines roll out, giving more people the confidence to travel. Summit Properties is in a strong position to benefit from this recovery since it concentrates on owning upscale hotels in top markets with several demand drivers, including vacation-related travel.
Meanwhile, the company recently completed a second amendment to its revolving and term- loan credit facilities, giving it full access to its $400 million line of credit. It also completed a $287.5 million convertible debt offering. These moves "have greatly enhanced our liquidity," according to CEO Johnathan Stanner, giving the company the flexibility to weather the current storm and "opportunistically pursue a broad range of capital alternatives and growth opportunities as our business continues to recover." The REIT has the firepower to take advantage of the current downturn and acquire hotels from distressed sellers, which would enhance its recovery prospects.
The worst seems to be over
While Summit Hotel Properties is continuing to burn cash, it has ample liquidity. Meanwhile, it appears to be turning the corner on profitability, which should continue throughout the year as hotel demand continues to recover due to the increase in vaccinations. Because of that, it seems as if the company's troubles are fading fast.