5 Portfolio Lessons to Be Learned from the Summit Hotel Sale

Posted by Kris Lindahl on Wednesday, May 15th, 2019 at 12:42pm.

The Summit Hotel Sale and What Investors and the Public Have LearnedSummit Hotel Properties recently sold off six hotels for $135 million, resulting in a net gain of $36.6 million. One of their properties was the SpringHill Suites by Marriott, located at the Mall of America. The numbers for this sale are impressive, with an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiple of 12.8 and close to 7% capitalization rate.

However, there's a lot more to this story than just the group's net gain from the sale. In fact, Summit Hotel Properties has seen some dips in their stock price that are worth taking note of. Whether an investor holds one property in Hennepin County, Minneapolis or several across the US, there are a few lessons to be learned from this sale that can be applied to larger portfolio management.

For informational purposes only. Always consult with a certified tax expert before proceeding with any real estate transaction.

How REITs Work

A Real Estate Investment Trust (REIT) applies the principles of a mutual fund to property. Instead of buying a property outright, investors give their money to this special kind of trust. The REIT will spread the money around to a variety of properties, and investors will receive dividends based on the rental values of the properties (without having to personally manage the properties). When the time comes to sell those properties, investors share in the profits.

When it comes to managing a portfolio, investors have to ask themselves about the types of properties they want to invest in and who they want to manage those companies. Summit Hotel Property has always had a recycling strategy, investing in high-growth hotels after selling off lower performers. If an investor believes the REIT is mistakenly investing in hotels when they should be investing in Airbnb properties or if they feel the REIT is mismanaging the funds in some way, then they may want to think twice before building their portfolio with the wrong REIT.

The Nature of Property Management

Summit Hotel Group invests in mid- to upscale lodging properties with solid reputations. The ultimate goal is to manage the property, streamline operations, and maximize their investors' returns. The group's full portfolio currently consists of 69 hotels totaling 10,714 guestrooms across 24 states, including Minnesota. Because the Summit Hotel Group chooses brands with solid reputations (e.g., Marriott, Hampton, Hyatt, etc.), the company is more likely to collect rent on time, every time.

In turn, the properties are more likely to attract more guests because they're well maintained by a management group that cares about the state of the facility and its ground. The company's priorities while they owned the hotels are likely what contributed to the solid cap rate. When it comes to managing a real estate portfolio, property management plays a big role in how well the property fares in the long term.

The Writing on the Wall

Real estate investors need to look between the lines when it comes to property sales, which means asking why certain decisions are made. Summit Hotel Group ultimately sold these properties to reduce an outstanding balance from their credit facility. After paying out their investors and settling with the agency, they'll have $395 million available to borrow. Summit released financial results in 2018 showing that their price per diluted share had slipped $.11 from 2017 to 2018.

The net income attributable to their stockholders also decreased to $71 million, which may have been what prompted the sale. If an investor's portfolio contains a REIT, they should keep up with yearly updates from the trust to assess how the stock is faring in the general market.

Honesty Matters

Summit Hotel Group has been forthcoming with its investors, posting its press releases, financial updates, and reports on its website. The payout to their investors is not the highest, but this may not necessarily be a bad sign. The leadership has made property improvements a top priority, which is a smart move in the increasingly competitive lodging sector. Some experts believe that the company's integrity is a strong mark in the company's favor, especially if investors are playing the long game.

Lodging Is a Difficult Market

The lodging and hotel sector has had a wild ride in the past few years, especially as more people opt for marketplaces like Airbnb. Everything from the economy to the weather can affect how many people stay in a hotel during any given year - travelers are expecting things from hotels they have never expected before. This doesn't mean that hotels reflect poorly on a portfolio though. In fact, more people are turning to upscale hotels, like those that Summit Hotel Group purchases. But investors should be ready for some degree of unpredictability if they choose to make lodging a part of their overall holdings.

This sale has a few principles that anyone can use to manage their portfolio—whether they invest in a REIT or not. By and large, investments in the twin cities are a long-term game. Even if Summit has been struggling when it comes to their share price, their end strategy fits in with changing consumer expectations. As long as investors can reasonably ensure their properties are wisely managed, they're more likely to turn a profit.

For informational purposes only. Always consult with a certified tax expert before proceeding with any real estate transaction.

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