Buy On The Dip; There's Room At The INN

Canaccord Genuity analyst Ryan Meliker initiated coverage on select-service lodging REIT Summit Hotel Properties, Inc.

with a Buy rating and $16 target price on July 13, 2015. On August 4, after the Summit conference call discussing 2Q15 results, Meliker published a research note reiterating both the Buy rating and $16 PT. The primary thrust of the note was that "misunderstood guidance" has created a buying opportunity for investors. Notably, Summit reported Q2 results that beat consensus on RevPAR growth, EBITDA and FFO. In addition, Summit management increased FFO guidance a nickel to $1.16 - $1.20 per share vs a consensus average of $1.15 per share.

Despite the Q2 earnings beat and guidance raise, the stock traded off ~5.6 percent during Tuesday's trading session, "…materially underperforming peers and the market," according to Meliker.

During the past 52-weeks, Summit shares have traded in a range of $9.86 - $14.61 per share; with INN down another 1.3 percent at the close of Wednesday's session.

Back in June, $1.1 billion cap Summit announced that it was selling 26 hotels for $351 million to American Realty Capital Hospitality (ARCH). The sale was structured in three tranches, with staggered closing dates. Canaccord estimated proceeds to INN of $125 million in 3Q15 and 4Q15, with the final $100 million received during 1Q16.

Summit will be tasked with recycling capital from the ARCH installment sale as funds come in between September 2015 to January 2016. Some of the confusion appears to be over Summit's FFO estimates moving forward being tied to assumptions regarding how quickly Summit will be able to close on hotels to replace the income stream lost by the sale. Canaccord believes that "…the 4Q15 and 1Q16 disposition to be offset by acquisitions in the same dollar amount," and noted that "the match funding acquisitions associated with the dispositions scheduled to occur in Q3 have already been executed." Canaccord has increased its FY 2015 RevPAR estimate for Summit, as well as its margin growth assumptions and now forecasts "…2015E EBITDA and recurring FFO of $150M and $1.17, respectively. 2016E EBITDA moves to $169M, while recurring FFO per share is unchanged at $1.33."

Meliker noted, "Same-store RevPAR was up 8.7% in the quarter [2Q15] and is up a staggering 10.6% YTD." On one hand, "Management indicated that trends across the portfolio are unchanged and they are just as positive about the forward quarters now as a few months ago." However, Meliker noted caution in Summit's 3Q15 guidance, "…same-store RevPAR growth of just 4 to 6 percent," which combined with 4Q15 guidance, essentially assumes no growth. He believes "…the Summit RevPAR growth outlook which often drives sentiment towards the stock is extremely conservative and offers material upside."

The Canaccord $16 target price represents a potential ~25.8 percent upside in INN shares, based upon the recent close of $12.72 per share. INN shares are currently paying an annual distribution of $0.47, which adds an additional 3.7 percent in dividends over the next 12 months. The Canaccord year-end 2015 Summit target price of $16 is based upon a multiple of 12.9x 2016E EBITDA; which also equates to a 5 percent portfolio premium based upon Canaccord's 2016 NAV estimate, utilizing a 7.5 percent cap rate.

Meliker believes that "…positive trends across INN's markets and properties will drive INN's RevPAR growth to outpace peers again in 3Q and 4Q. This dynamic should lead the stock higher through the remainder of the year."