Summit Hotel: Collect 8.4% Yield On The Preferred Stock (NYSE:INN)

REITs have made a comeback in current weeks, as fears round a ‘greater for longer’ rate of interest surroundings have subsided. It pays, nonetheless, to stay cautious, because the restoration should be too early to inform. Maybe that’s why greater danger segments like accommodations and workplace properties stay priced effectively under the place they had been only a 12 months in the past.

This brings me to Summit Resort Properties (NYSE:INN), which I final coated right here in December of 2020, in what looks as if a totally totally different time. Again then, Summit was climbing out of the depths of the pandemic and rates of interest had been traditionally low.

Hindsight is 20/20, and it seems that exuberance was overrated as greater rates of interest have pressured the inventory, with it now buying and selling 30.5% under the place it was since my final piece. On this article, I revisit the inventory and focus on whether or not if it’s a purchase or maintain presently, so let’s get began!

Why INN?

Summit Resort Properties is a self-managed REIT that owns premium-branded lodging properties with environment friendly working fashions. It has a presence in 43 markets consisting of 101 resort belongings, 57 of that are wholly owned with the remaining being owned as a part of joint ventures. As proven under, the bulk (86%) of INN’s properties are within the Prime 50 markets within the U.S.

INN is targeted on select-service, upscale accommodations with environment friendly working fashions, with Marriot, Hyatt, and Hilton branded accommodations comprising 95% of its room depend. This interprets to higher margins than business common. That is mirrored by INN’s TTM Resort EBITDA margin of 36%, sitting above the 34% amongst choose service friends and 30% for all friends.

This has enabled INN to rapidly climb out of the depths of the early pandemic, throughout which journey basically got here to a halt. As proven under, INN noticed encouraging RevPAR (income per obtainable room) within the pre-pandemic timeframe, and has since made a robust restoration, with efficiency sitting forward of the STR Upscale chain benchmark over the whole timeframe.

In the meantime, INN continued to provide secure and rising top-line developments, with identical retailer RevPAR rising by 2.4% YoY to $117.85 and identical retailer occupancy rising by 230 foundation factors YoY to 73.7% through the third quarter, signaling sturdy demand from shopper and enterprise journey. Encouragingly, top-line development is being transformed to backside line profitability for INN’s accommodations, regardless of wage inflation, as identical retailer Resort EBITDA grew by 2.8% YoY to $61.4 million throughout Q3.

It’s value noting, nonetheless, that INN’s restoration has slowed, in comparison with identical retailer RevPAR development of seven.7% YoY for the primary 9 months of the 12 months. I’m not too involved across the slowdown, nonetheless, as this was resulting from a tricky similar to 2022, when revenge travel was solidly taking maintain. As well as, a robust U.S. greenback has made abroad journey extra engaging, the place the U.S. greenback strengthened, significantly in opposition to the Japanese Yen for instance, as proven under.

Wanting forward, INN ought to profit from evolution of labor, during which workers are more and more in hybrid mode in comparison with pre-pandemic. This implies interval visits to their firm’s regional headquarters, with smaller teams and shorter stays, for which INN is effectively suited.

Plus, whereas INN’s price of fairness and debt are at present unattractive resulting from a low share value and better curiosity prices, portfolio recycling is a means for INN to generate inside development. That is mirrored by a signed settlement to promote a Hyatt Place in Maryland for $8.25 million at an attractively low 4.6% cap fee, and the proceeds of which may be deployed to greater yielding properties. Since Could of 2022, INN has disposed of 6 accommodations totaling $111 million, inclusive of the above-mentioned Hyatt Place.

Importantly, INN is modestly leveraged with a web debt to enterprise worth of 51%, a set cost protection ratio of two.5x, and no materials debt maturities till 2025, as proven under.

Dangers to INN embody the truth that Motels are extra susceptible to an financial recession in comparison with different REIT asset lessons corresponding to web lease, industrial, and neighborhood buying facilities. As such, a possible exhausting touchdown within the economic system might reverse among the high and backside line beneficial properties that INN has seen over the previous 12 months.

As well as, greater rates of interest pose a headwind, as INN does have significant debt maturities beginning in 2025, as proven above. Nonetheless, whereas Resort REITs are among the many most economically susceptible asset lessons, they’re additionally resilient with regards to inflation resulting from their means to reset charges virtually instantaneously. As such, room fee development resulting from inflation might offset among the affect from greater rates of interest, ought to inflation stay elevated.

In the meantime, INN at present pays a 3.8% dividend yield, which is well-covered by a 27% payout ratio, based mostly on INN’s ahead FFO/share of $0.89. This leaves INN with loads of retained capital to both pay down debt or to pursue accretive development. I additionally see worth in INN on the present value of $6.39 with a low ahead P/FFO of simply 7.2, sitting effectively underneath its regular P/FFO of 11.7. As such, it seems that the market has already priced in loads of dangers into the inventory.

Conservative revenue buyers ought to think about Summit’s Most well-liked Sequence E Inventory (NYSE:INN.PR.E), which at present yields a excessive 8.4%. On the present value of $18.70, it trades at a cloth 25% low cost to the $25 Par Worth. This most popular concern can be cumulative, which signifies that missed funds have to be made up as long as INN is solvent. Whereas INN.PR.E at present trades publish its name date of 11/13/2022, I don’t see it being redeemed anytime quickly, contemplating that it has a face yield of 6.25% and was issued in November of 2017, at a time when rates of interest had been a lot decrease.

Investor Takeaway

INN is a well-positioned resort REIT with a robust deal with select-service, upscale properties in high markets. With excessive margins and spectacular efficiency lately, INN has confirmed its resilience and potential for development. Moreover, INN’s strategic portfolio recycling strategy permits for inside development alternatives and continued stability.

In the meantime, the frequent inventory trades effectively under its regular valuation whereas providing a well-covered near-4% dividend yield, leaving loads of retained capital to bolster the steadiness sheet and/or pursue development alternatives. Extra conservative revenue buyers might need to take into account the Most well-liked Sequence E inventory, which carries an 8.4% dividend yield and trades at a 25% low cost to par worth.