Hotels are costly to own, operate, and maintain. Because of that, many of the well-known hotel brands are opting not to hold the physical real estate. Instead, they're selling it to third parties like real estate investment trusts (REITs) that own and maintain the properties. That arrangement frees up their capital while enabling them to earn higher-margin management fees.
One REIT focused on owning hotels is Summit Hotel Properties (NYSE: INN). Here's a closer look at the company.
Summit Hotel Properties profile
Summit Hotel Properties is a hospitality REIT. As of mid-2021, Summit owned 73 primarily upscale hotels -- 61 wholly owned -- with 11,398 guest rooms in 34 metro areas across 23 states. The company's top 10 markets are:
- New Orleans: 7.3% (of its portfolio by guest rooms)
- Atlanta: 6.6%
- San Francisco: 6.5%
- Portland, Oregon: 5.7%
- Minneapolis: 5.4%
- Baltimore: 5.0%
- Phoenix: 4.9%
- Denver: 4.5%
- Chicago: 4.3%
- Orlando, Florida: 4.1%
Summit concentrates not only on exploring "markets that matter," which it defines as having favorable supply and demand dynamics and several demand drivers, but also on owning premium-branded hotels with efficient operating models. Summit has relationships with the following premium franchisors:
- Marriott International: 51.6% (of its hotels and guest rooms)
- Hilton Worldwide: 22.3%
- Hyatt Hotel: 21%
- Intercontinental Hotel Group (IHG): 5.1%
Summit believes in the value of brand loyalty. These premium brands consistently provide exceptional service. These relationships also give it access to enrolled loyalty members -- who account for more than half of Summit's room nights -- helping reduce guest acquisition costs.
Another aspect of Summit's strategy is investing in value-add opportunities. Summit will purchase underperforming hotels in strong locations and undertake property renovations, brand conversions, and management changes to boost the property's results.
The company will often convert full-service restaurants to high-quality, efficient menus with a bar. It will also eliminate underutilized and costly amenities, such as business centers, and create modern, guest-focused offerings like workout centers. These types of renovations yield high returns and make its hotels operate more efficiently.
Summit Hotel Properties news
The pandemic had a significant impact on Summit Hotel Properties in 2020. Government-mandated shutdowns and travel restrictions, along with a general reduction in travel (especially for business), caused occupancy at Summit's hotels to plummet 45.1% year over year to an average of 43.3% for the year.
As a result, RevPAR plunged 59.2% to $52.16. Hotel EBITDA (earnings before interest, taxes, depreciation, and amortization) cratered 87.1% to $27.8 million, while its adjusted funds from operations (AFFO) was negative $38.6 million.
Summit Hotel Properties took several actions to help mitigate the impact of the pandemic on its financial results. It enacted comprehensive cost-reduction initiatives, postponed all nonessential capital-improvement projects, suspended its dividend, and worked with its lenders in modifying its revolving and term loan facilities to increase its financial flexibility. These moves helped limit its cash burn, enabling it to return to profitability at the hotel level by year-end.
Hotel demand improved throughout the early part of 2021. Occupancy reached 65.9% by the second quarter, while RevPAR was up to $77.88 per room. As a result, Summit Hotels was generating positive cash flow at the corporate level.
The company also took advantage of its improved financial profile in 2021 to acquire the newly built Residence Inn by Marriott Steamboat Springs as part of its joint venture with GIC, Singapore's sovereign wealth fund. The partners spent $33 million on the 110-guest-room hotel. Summit also contributed a portfolio of six hotels with 846 guest rooms to that joint venture in 2021. Summit received $84.3 million in cash, which it used to improve its balance sheet.
Summit Hotel Properties stock price
Summit's strategy hasn't paid dividends in recent years: