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Could Summit Hotel Properties be a Millionaire Maker REIT?

Jun 24, 2020 by Matthew DiLallo

While get-rich-quick schemes might seem exciting, slow and steady is a proven wealth-creation strategy. For example, an investor can turn $1,000 into a $1 million payday by parking it in an S&P 500 index fund and holding it for decades (75 years to be exact, assuming the market maintains its historical annualized rate of return of around 10%). Boost the initial investment or return profile, and the time horizon can shorten considerably. Thus, any stock that generates outsized total returns could be a millionaire-maker stock if an investor holds on for the long haul.

With that math in mind, here's a look at whether hotel REIT Summit Hotel Properties (NYSE: INN) has the potential to turn a small up-front investment into a $1 million future windfall.

A look at Summit Hotel's wealth-creation track record

Summit Hotel has done an abysmal job creating shareholder value since its initial public offering in 2011. The hotel REIT sold those shares to the public at $9.75 apiece. Today, the stock trades at about 30% below that level at $6.50 apiece. On a more positive note, the company's initial investors have collected lots of dividends over the years, which pushed the total return into positive territory at around a 5% gain. Unfortunately, that has badly trailed the S&P 500, which has generated a nearly 190% total return during that time frame.

Summit Hotel Properties has shown brief glimpses of outperformance in the past. For example, by the summer of 2017, it had generated a more than 160% total return, which was well ahead of the S&P 500's roughly 110% total return. However, it has all been downhill from there. The stock has tumbled 45% this year alone due to the impact the COVID-19 outbreak has had on the hospitality industry. On top of that, it suspended its dividend.

What Summit Hotel Properties needs to do to mint millionaires

On one hand, the deep dive in Summit Hotel's stock price suggests that investors who buy today could earn a hefty return as shares recover from their COVID-19 sell-off. That helps boost the probability that the company could generate market-beating total returns going forward.

Another factor in Summit's favor is its business model of operating upscale and upper-upscale hotels. That's because these properties grow their RevPAR and margins at a faster pace than other hotel types. Meanwhile, Summit has outperformed the industry growth rate over the years by focusing on upgrading its hotel portfolio through the sale of properties with lower metrics and the acquisition of those with better ones. The company has also invested in development and renovation projects that generate high returns and more profitable hotels. This focus on owning increasingly lucrative hotels should grow Summit's FFO and ability to pay dividends during normal market conditions.

Unfortunately, the company's strategy hasn't paid off in recent years. Because of hotel sales and a weaker hospitality market, Summit's FFO declined from $1.35 a share in 2018 to $1.25 per share last year. Meanwhile, FFO was on track to decline again this year (its initial guidance was $1.15 to $1.27 per share) even before the impact of COVID-19.

Summit must reverse that declining FFO trend if it wants to generate market-beating total returns in the future. That's because the key to long-term outperformance is consistently above-average earnings growth, as well as steady dividend increases. With Summit's FFO sinking for several years -- and its dividend currently suspended -- it doesn't have a great track record.

The odds aren't in Summit Hotel's favor

Summit Hotel hasn't created much value for investors during its first decade as a public company. While there are signs that it could produce market-beating gains in the future, it doesn't have a consistent track record of generating outsized returns. Because of that, I wouldn't bet on it being a millionaire-maker stock.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.