INN - Summit Hotel Properties: (Slowly) Climbing To The Summit

2023-03-16 07:20:39 ET

Summary

• Summit Hotel Properties reported its FY 2022 earnings, reporting an operating profit for the first time since the pandemic.
• The company is still recovering from the effects of the pandemic, and demand is picking up.
• Dividends have resumed, with a forward dividend yield of 2.35%.

Introduction

Summit Hotel Properties ( INN ) is a company which I wrote about once previously . However, in the few years since my article, I noticed that there hasn't been much coverage on the company - just 3 articles in 2022 and none in 2021. One possibility I can think of is that hotel REITs have fallen out of favour with investors as a result of the pandemic. After all, the hospitality sector was one of the most affected sectors from the pandemic. With the release of the company's Q4 2022 and FY 2022 results late last month , I figure now would be a good time for me to take a look at the company to determine if I should open a position in the company.

Business Model

Summit Hotel Properties is a hospitality REIT. Similar to Apple Hospitality REIT (NYSE: APLE ), which I wrote about recently , the company is focused on the select-service segment. These hotels offer limited services and amenities, instead focusing on the rooms itself, which in turn means the hotels have a higher operating margin.

As of 2022, the company's portfolio comprises 103 hotels, with over 15,000 rooms between them. Spread across the country, thereby ensuring geographical diversification, these hotels are mostly operated under prominent brands such as Marriott, Hilton, Hyatt and IHG.

FY 2022 Earnings & FY 2023 Outlook

The company reported a net loss of $0.16/share for FY 2022 , the third year running since the start of the pandemic that the company has reported a loss. While the company still has some way to go before it turns a profit, the company has improved on its performance compared to the prior years, recording a loss of $1.52/share and $0.80/share for the FY 2020 and FY 2021 respectively.

The trajectory of the company's earnings show that it is slowly inching towards profitability. In fact, the company reported an operating profit for the FY 2022. The bulk of its net loss came from its distributions for the company's preferred dividends, without which the company would have just about broken even.

In terms of adjusted FFO/share, a metric to watch when it comes to equity REITS, the company reported $0.94/share for FY 2022, compared to just $0.35/share the prior year. All this shows that demand in the hospitality industry started to pick up during the FY 2022, and this is expected to continue for 2023, with revenue from the company's hotels for the FY 2022 actually surpassing its pre-COVID figures. Going forward, the company expects its adjusted FFO/share to be between $0.92/share and $1.05/share, albeit without accounting for any acquisitions or disposals. Given that one of the company's key's strategies is to grow via acquisitions, my only takeaway from this outlook would be that the company expects demand for FY 2023 to match, if not exceed, that of FY 2022.

For what it's worth, the pre-COVID figures were between $1.25/share to $1.35/share.

Balance Sheet

The company has a strong balance sheet with sufficient liquidity. The company has close to $500 million in liquidity, allowing it to deploy this cash towards the acquisition of hotels whenever it spots a good opportunity.

This cash on hand is also sufficient when it comes to its debt profile - only a small portion of the company's debt is due by the end of Q4 2024, with the rest of the debt due in 2025 and after. This provides the company with enough runway to work with.

Dividend

Similar to most hospitality REITs, the company halted its dividends during the pandemic, and only resumed its dividends recently. The company announced a quarterly dividend of $0.04/share for the third consecutive quarter, giving it a forward dividend yield of around 2.35% (assuming a share price of approximately $6.80).

While this is a far cry from the pre-pandemic quarterly dividend of $0.18/share - right now the projected yearly dividends won't even cover the previous quarterly dividend - I believe it is possible the company might increase its dividends in the near future. Apart from using the historical dividend as a benchmark, my belief is supported by the fact that the company's projected AFFO/share for FY 2023 is also able to comfortable cover any increase its dividends.

Conclusion

Prior to the pandemic, the company's share price was hovering around $11, with an annual dividend of around $0.72/share - about a 6.5% yield. I don't believe we are likely to see these figures anytime soon, especially as the company has yet to recover from the effects of the pandemic.

However, the key thing is that the company is recovering, albeit slowly. At its current price, and with demand in the hospitality industry expected to continue increasing in the near future, I would view INN stock as a buy, both for the potential capital gains as well as the expected dividend growth.

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