When evaluating REITs such as Summit Hotel Properties, net income or net loss is less relevant than Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO).
These metrics provide a clearer picture of a REIT’s financial health by excluding non-cash expenses like depreciation and amortization, which do not necessarily reflect a decrease in the fair value of the underlying assets.
Financial Performance Analysis
Starting with a net profit of $2.8 million, after deducting preferred dividends and distributions to non-controlling interests, the net loss attributable to common shareholders was approximately $2.4 million. However, the FFO, which adds back depreciation and amortization, stood at $25.5 million for the first quarter.
The AFFO, which includes additional adjustments, totaled just under $30 million. Notably, the AFFO does not account for capital expenditures, which amounted to over $18 million in Q1, aligning with the full-year guidance of $65-85 million.
After adjusting for these capital expenditures, the AFFO was approximately $12 million.
Preferred Dividend Coverage
The AFFO calculation already considers the impact of preferred dividend payments. The AFFO, adjusted for capital expenditures but before preferred dividends, was about $16 million, indicating a payout ratio of roughly 25%.
Given the seasonality in the REIT’s operations, the full-year guidance anticipates AFFO between $111-123 million. Using the midpoint of $117 million and expected capex of $75 million, the adjusted AFFO would be around $42 million, even after accounting for $16 million in preferred dividends, demonstrating strong coverage.
Asset Valuation and Leverage
As of the end of Q1, the book value of Summit Hotel Properties’ assets was $2.72 billion, excluding assets held for sale, with $63 million in cash. This results in a net debt of $1.39 billion, or $1.31 billion, after considering $84 million from hotel sales.
The Loan-to-Value (LTV) ratio is approximately 48.2% based on book value. However, considering $821 million in accumulated depreciation, the pro forma LTV ratio using acquisition values of $3.22 billion is just over 40%, which is acceptable.
Equity and Asset Coverage
Summit Hotel Properties’ total equity value attributable to shareholders was approximately $908 million at the end of Q1. With 10.4 million preferred shares outstanding, totaling $260 million in preferred equity, there is over $640 million in common equity junior to the preferred shares.
Using acquisition costs for valuation, the common equity cushion would be even larger, providing substantial protection for preferred shareholders.
Preferred Shares Analysis
Summit Hotel Properties has two publicly traded preferred shares: Series E (NYSE: INN.PR.E) and Series F (NYSE: INN.PR.F). The Series E shares offer a dividend of $1.5625 per share annually, payable quarterly, and can be called at any time.
The Series F shares offer a dividend of $1.46875 per share annually, also payable quarterly, but can only be called from August 2026 onwards.
Yield Comparison
As of the last close, the Series E shares yielded 7.46% at a price of $21.06, while the Series F shares yielded 7.44% at a price of $19.73. Both series of preferred shares have similar rights, so investors should choose based on yield.
Despite the potential for the Series E to be called earlier, the low cost of preferred equity (6.25% per year) suggests they are unlikely to be called soon.
A 7.4% preferred dividend yield is not the highest in the sector, but Summit Hotel Properties’ preferred shares offer good value. The solid asset coverage and acceptable leverage ratios provide a strong safety net for preferred shareholders.
Common and Preferred Shares
The common shares could be interesting despite low earnings results (with post-capex AFFO per share expected to be $0.35-0.40). The current book value per share is about $6, and applying the fair value of the assets could add several dollars to the pro forma book value.
Summit Hotel Properties’ preferred shares, with their strong dividend yields and solid coverage, represent a good investment opportunity.
The company’s focus on maintaining asset value through capital expenditures and its acceptable leverage ratios provide additional security for preferred shareholders.
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