What could flip Summit Hotel Properties from a net seller to a net buyer

Summit Hotel Properties has stuck to its asset disposition strategy as economic conditions have been less than favorable.

But now, the winds might be blowing in the other direction to allow the Austin, Texas-based real estate investment trust to make more acquisitions pencil.

At the end of October, Summit sold the 101-guestroom Four Points by Sheraton San Francisco Airport for $17.7 million. Summit has sold 10 hotels for a combined $150 million over the past 18 months.

President and CEO Jonathan Stanner said Summit's asset disposition strategy is to sell the REIT's lower-performing hotels. Even some of the hotels Summit has acquired via its joint venture with Singaporean wealth fund GIC Real Estate are part of its portfolio review process, he added. Summit and GIC acquired 27 hotels from NewcrestImage in 2022 for $822 million and acquired two hotels for a combined $42.7 million with GIC in 2023.

"We identified I'll call it a handful of assets that were not going to be long-term holds," Stanner said. "For us, very often the trigger point for those sales was when we got to a point where we needed to put material capital into the assets. I think that thesis is still very much in place that you shouldn't be surprised for us to continue to sell some of the lower-[revenue per available room], lower-margin assets in the joint-venture portfolio that will ultimately need capital over the next 12 to 24 months."

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Of the 10 hotels Summit has sold over the past 18 months, four properties have been Hyatt Place hotels. Stanner was asked if the REIT is looking at exiting the brand completely. Currently, Summit has 13 Hyatt Place hotels in its portfolio, which totals 95 hotels and 14,154 rooms in 24 states.

"The common thread there has been these have been lower-RevPAR, lower-margin hotels that needed significant capital, and we had a hard time kind of making that math pencil," he said. "There's no kind of strategic initiative internally to say we're going to sell all our Hyatt Places. In fact, we renovated a fair number of them. I think broadly speaking, we're happy with the remaining Hyatt Places that we have. We'll always continue to be opportunistic around selling assets, and that really isn't a brand-driven discussion."

Could Summit flip back to being a net acquirer of hotels? The economic conditions are certainly improving to make more hotel transactions happen, Stanner said.

"While the transaction market hasn't maybe thawed completely, we do think we're beginning to see the signs of a market that's more conducive to transactions," he said. "The capital markets have improved dramatically, and I do think that seller expectations, broadly speaking, have adjusted for the condition where rates are today and some of the fundamental uncertainty that we've seen in the business, even in the last 60 to 90 days."

As for the types of hotels that could be acquisition targets, there are positive performance trends in midweek group business which could make hotels in urban markets look attractive.

"The outlook is potentially better in kind of the near to medium term in some of these urban markets where we're seeing better growth on Tuesday and Wednesday night," he said. "It's really being helped by the strength of group business and kind of this grind higher in business-transient demand as we've described. We do think that those trends will continue to play out in the near to medium term, and that creates some interesting opportunities in some of those markets."

In recent months, labor strikes have disrupted hotels in various parts of the U.S. as unions renegotiate contract terms with hotel companies at some of the country's biggest full-service hotels. Summit, meanwhile, has only a few hotels in its portfolio with a union presence, Stanner said.

"We only have two union assets in the portfolio today, but we do operate hotels that have exposure in those markets, and so it's a priority of ours to make sure that we're maintaining the right employee relationships and that we're maintaining the right competitive wages," he said. "I will say, 65% [or] two-thirds of our portfolio is in the Sun Belt, where there's generally less of a union presence.

"Despite some of the headlines that we've seen and some of the disruption we've seen around the union activity in the industry over the course of the last quarter or so, we've generally remained pretty insulated for from some of that activity. And it's something that we're just very, very mindful of, continuing to make sure that we have the right programs in place to manage that."

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For full-year 2024, Summit executives anticipate pro-forma revenue per available room growth between 1% and 2%, which is a 0.25% revision downward at the midpoint from its last outlook update. The REIT's adjusted earnings before interest, taxes, depreciation and amortization for real estate is forecast to land between $188 million and $194 million.

Stanner highlighted five of Summit's markets that were slow to recover at the beginning of the year which the company anticipates will have better growth profiles for full-year 2024 and beyond: San Jose, California; New Orleans; Louisville, Kentucky; Baltimore; and Minneapolis.

For example, Summit's New Orleans hotels should rebound in fourth quarter and have an excellent start to 2025, Stanner said.

"New Orleans had a Taylor Swift concert in October. So we'll have a huge fourth quarter there. There they host the Super Bowl next year, which will be a big lift to that market. And just broadly speaking, the convention center calendar is better in '25 in New Orleans than it was in '24."

Summit's hotels in San Jose are benefiting from better midweek demand.

"You're starting to see the return of some of the tech-driven midweek business transient demand," Stanner said. "So we're largely full again on Tuesday, Wednesday nights in that market, which is driving better year-over-year growth that really has started to take hold in the second half of this year. And we expect those trends to continue into next year."

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In the third quarter, Summit Hotel Properties reported same-store RevPAR increased 0.2% year over year to $120.28. Occupancy fell 0.9% to 73.8% and average daily rate increased 1.2% to $163.06.

Summit's adjusted EBITDA for real estate grew 4.5% in the quarter to $150.1 million with net income of $24.5 million.

The company reported $176.8 million in total revenues in the quarter, compared to $181.8 million during the same quarter the prior year.

As of press time, Summit's stock was trading at $6.05 per share, down 9.9% year to date. The NYSE Composite was up 15.2% for the same period.

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