Summit Hotel Properties Inc (INN) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter and fiscal year 2011 Summit Hotel Properties Inc. earnings conference call. My name is Tahitia and I will be your operator for today.

At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Dan Boyum. Please proceed.

Thank you, Tahitia. Good morning, everyone, and welcome to Summit Hotel Properties fourth-quarter and full-year 2011 earnings conference call. Today I am joined by Dan Hansen, our President and Chief Executive Officer, as well as Stuart Becker, our Executive Vice President and Chief Financial Officer.

If anyone has not received a copy of yesterday's press release, please visit our website at www.shpreit.com or call me at 605-782-2015. I will take care of that for you.

Before we begin I would remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. They may not be updated in the future. These statements are subject to risk and uncertainties described in our securities filings.

Also, as we discuss certain non-GAAP financial measures may be helpful to review the reconciliation to GAAP in our earnings press release. To begin our discussion of our fourth-quarter and full-year results, please welcome President and Chief Executive Officer, Dan Hansen.

Thanks, Dan. 2011 is firmly in our rearview mirror and we are focused squarely on 2012. We are committed to our disciplined, proven strategy -- growth in our existing portfolio as lodging fundamentals continue to improve and grow through accretive acquisitions as we continue to find great properties in great markets at great yields.

Our growth through acquisition is perfectly illustrated by our announcement yesterday. In addition to our earnings release, we also announced the closing of two more acquisitions. Since the beginning of the year we have closed on acquisition numbers six, seven, and eight.

In the first year since our IPO we have acquired nearly 1,000 rooms and deployed over $100 million of capital at an average cap rate in the range of 8% to 10%. Three Hilton Garden Inns, two Courtyards by Marriott, and one each Holiday Inn, Homewood Suites, and Staybridge Suites. Six of the eight properties are in top 50 markets so top brands, top markets at great yields -- that is what we do.

A year ago at our IPO we set out to talk about our portfolio in three main categories -- our seasoned portfolio, properties we have owned through a complete cycle; our unseasoned, properties that were built or underwent a brand change at or after the last peak of the cycle; and acquisitions.

Our same-store portfolio, our original 54 hotels which excludes the 11 rebranded properties, delivered RevPAR growth in the fourth quarter of 3.6%. But that number doesn't tell the complete story. If you take the hotels we had under renovation out of that group, the RevPAR would have been 6.2%. These hotels are now positioned as among the newest and best properties in their markets as we head into the historically superior second and third quarters.

In addition, our 15 unseasoned hotels, excluding the four rebranded properties, delivered RevPAR growth of 9.8%. The remaining properties in this same-store 54 portfolio are still operating at very high levels of RevPAR penetration, but the rate in some of those markets has lagged and that lag means there is still embedded growth in the portfolio.

The effect of rebranding of the 11 hotels has diminished and we are confident they will continue to do so going forward. In fact, three of the former Cambria properties have delivered tremendous RevPAR growth.

For the fourth quarter we had RevPAR growth of 36% at the Bloomington, Minnesota, Springhill Suites and over 11% at the Boise, Idaho, Holiday Inn. So far this year the Bloomington Springhill is up over 22% in RevPAR and the Boise Holiday Inn is up over 23%. The newly converted Baton Rouge, Louisiana, Doubletree is up over 34%.

We estimated the effect on FFO from the rebranding to be $0.04 in the second quarter, $0.03 in the third quarter, and now an additional $0.03 in the fourth quarter. Rebranding at all but one of the 11 properties is complete and we expect to see that property completed in the second quarter of this year.

The arbitration issue with Choice is reaching its conclusion and we expect the results from the arbitrators in April.

We have continued our focus on improving and streamlining the management of our properties, working with our three property managers to drive top-line growth to the bottom line. We continue to see improvement in this area as evidenced by the 326 basis point expansion in our pro forma hotel operating margin. We agreed with the assessment that margins have improved from the trough but still have significant opportunity for growth.

To discuss the details on our balance sheet and financials, please welcome our Executive Vice President and Chief Financial Officer Stu Becker.

Thank you, Dan. Fourth-quarter revenue was $34.6 million, an increase of $3.8 million, which amounts to an improvement of 12.3% over the same period last year. The increased revenue was a result of two positive factors -- occupancy and rate increases at our hotels -- and the acquisition of five hotels during the year. The revenue increase was muted somewhat by loss revenue at our now rebranded former Choice hotels.

Going forward in 2012, we will present our portfolio in two categories same-store and acquisitions, but for fourth quarter 2011 we believe a more meaningful picture of RevPAR excludes the 11 rebranded properties. We have discussed and identify these properties in the past as our same-store 54. This group of hotels produced a RevPAR increase of 3.6% for the fourth quarter.

A further breakdown of that same-store 54 shows that the 15 unseasoned properties had RevPAR growth of 9.8% and of the remaining 39 seasoned properties, five of those hotels were under major renovation. RevPAR growth of 39 seasoned hotels, as a group, was only 36 basis points. However, when excluding the hotels under renovation, RevPAR growth on the remaining 34 hotels was 6.2% for the quarter.

We are encouraged by our overall results, especially the consistent outsized growth the unseasoned properties are showing. These hotels represent the newest properties in our portfolio and are the most similar to the five properties acquired in 2011, the three properties acquired since the first of the year, and the future acquisitions we are pursuing.

Hotel EBITDA totaled $7.2 million for the quarter, an increase of 12.5% over last year. Hotel margins were 21.3%, an expansion of 20 basis points in the quarter as compared to same period last year. This seemingly low margin expansion is caused largely by our transition from private company to public company that we have discussed in previous quarters.

As you may recall, as a private company we owned and operated our hotels at cost. As a public company, management, accounting, and related expenses are outsourced to third parties. Additionally, at the execution of our IPO, two franchisors amended franchise agreements with our company which increased ongoing royalty fees.

Adjusting for these expenses, our hotel operating margins would have expanded by 326 basis points when comparing current to prior-year operating performance. Additionally, due to the pro forma margin expansion in the quarter, Interstate earned back the $565,000 fee reduction we implemented second quarter 2011. We believe this is a clear indication to us that Interstate has things well in hand and we are pleased with that fourth-quarter performance.

The impact of converting from a private to public company is no longer meaningful beginning second quarter 2012. We are confident we will see much better margin expansion.

AFFO for the quarter came in at $4.2 million, or $0.11 per fully diluted share. Worth noting, AFFO includes over $700,000 in legal costs during the quarter associated with the Choice arbitration. This nonrecurring expense negatively affected AFFO by nearly $0.02 per fully diluted share in the quarter.

For 2011, our company had $148.9 million in revenues, a 9.7% increase from 2010. The revenue increase was significantly offset by the revenue falloff at our former Choice Hotel. Income from hotel operations for 2011 was $41.2 million, an increase of 6.1% compared to 2010.

Hotel operating margins were 28.3% for 2011. Our operating margins expanded by 160 basis points when adjustments for additional public company costs of $2.8 million were applied to income for hotel operations for 2010 on a pro forma basis.

As a result of the rebranding of certain hotels during the past year, the Company incurred $300,000 of one-time expenses which included guest supplies, logoed items, and linens, and $300,000 of increased franchise fees as a result of the franchisor negotiations related to the IPO. During the year, we incurred approximately $1 million in legal costs associated with the Choice arbitration.

Our normalized earnings before interest and taxes, which adjusts for expenses related to our predecessor company, was $36.5 million. We estimate the effect of the termination of 11 hotels to have been a reduction in FFO of approximately $0.10 per fully diluted common share for 2011. Normalized AFFO for the period was $26.4 million, or $0.71 per fully diluted share.

Our strategy to improve and upgrade our properties to present the newest and freshest hotels in our markets continued throughout the fourth quarter. During the period we capitalized $11.4 million in improvements. As always, we gauge the return of our invested dollars, whether in acquisitions or property improvements, on the return we can expect on that investment. We are confident these improvements will bring significant top-line growth and improving margins will bring more of that growth to the bottom line.

Last year we provided specific FFO guidance for the year. This decision to provide guidance was due to the disruption caused by the Choice rebranding. Going forward we are not planning to offer this direct guidance to FFO. We will, however, share some insight which you should find useful in modeling your forecasts.

First of all, we estimate our RevPAR growth to be in the 5% to 7% range for the year and we anticipate being at the high end of that range. Over the course of 2012 we expect to invest approximately $18 million for renovations to existing properties. Regarding interest costs, based on the restructuring we have been able to secure on some of our term debt we anticipate interest expense, including the recent refinancing of the ING loans and the recent assumption of debt as part of the acquisition of the Atlanta Courtyard, to be in the range of $12.25 million to $12.75 million for 2012.

Thank you, Stu, and thank you to all who took the time to join us today. As always, we welcome your questions so let's open the lines.

(Operator Instructions) David Loeb, Baird.

Good morning. I have a few, naturally. Stu, the 5% to 7% RevPAR that you anticipate, is that total portfolio or is that the 54 same-store assets?

Total portfolio.

Okay, that helps. And on the legal expenses, would you expect that there was a similar number in the first quarter? I know the arbitration proceeding dragged into the first quarter.

Correct. We think there will be some impact, but it will be not near as impactful as what we saw in fourth quarter.

Does that mean $500,000, $300,000?

South of I think that $300,000 number. I think maybe $150,000 is maybe a more meaningful number.

Okay, that does help a lot. And to look back in the rearview mirror for a minute or two, the TRS tax expense, can you just talk a little bit about why that arises? I remember before TRS's it highly structured leases, but was this something that was actually impossible to accrue or to forecast earlier in the year? Was it because of full-year results of individual properties that you had the big tax benefit?

Yes to, I guess, all of those points. First of all, the benefit is largely driven by the fact that we had the Choice interruption, so 11 hotels came completely out of service, rebranded, and put back in. So the anticipation of what kind of revenue generated by those was probably mismatched with actually what the lease cost was going to be, so that in part has impact.

Additionally, we did quite a bit of renovation work during the year, particularly in this fourth quarter. So both of those would allow -- what you start out with the three-year lease arrangement would be significantly probably different in that first year. In addition to that, we kind of straight lined those lease expenses one month per -- so 1/12 of a year on any month.

And so with that impact the fourth quarter is typically our slowest month. When you straight-line your lease costs and you have variability in your performance in any month that also kind of has a large impact in the fourth quarter.

Okay. So full year next year should we expect tax -- or this year, 2012, should we expect tax expense?

We would expect to probably have no tax expense in 2012. We will have the NOLs and we will use that to offset any tax obligation.

Okay. So the TRS -- this tax line will likely be zero, not a big benefit but not a big expense either, is that fair?

Yes, I think that is fair.

Okay, that actually helps a lot. On the operations, Dan, this is probably more for you. Were the Interstate results so good that you paid that incentive? Am I reading that right? Is that what you said?

That is correct. We spent some time with Interstate during the course of the year and outlined where we wanted to see improvement and some of the issues around transition. Their confidence in performing for the remainder of the year specifically in the fourth quarter was solid and they delivered.

So we look at that as a positive. Obviously it's an impact and it's a nonrecurring issue. They don't get an additional incentive for continuing to do that. But it was really a credit to not only interstate but our asset management team to get out there and focus on the issues at hand and feel very pleased with that.

Okay, I will circle back and ask others and let other people -- thanks.

Will Marks, JMP Securities.

Thank you. Good morning. You had mentioned, talked about how margins have a lot of room for improvement. Is there any way to look at the current portfolio and get a sense of peak EBITDA or peak margins?

One way, I guess, to look at -- from a margin perspective, remember as a private company we had a different mix of margins but let's just start with peak. We will take what -- full cycle assets from the last peak, those are assets that we had owned through a full cycle, so we are going to narrow it down to a group of about 46 assets. But in 2007, 2008 our peak margins would have been just south of 40% on a hotel EBITDA basis.

Now that is a private company and there is -- the way we set our company up we used to basically operate at cost and then split profits between our investors and management. And so as a public company you have got a heavier load on hotel margins, specifically as we described in our earnings release, so let's just say maybe peak margins are more like 37.5% once you adjust for those loads.

So that is one way to look at it. So if you look at that relative to where we sit today, that is where we come to the conclusion that we have got significant growth opportunity in those margins.

Okay, thank you for that. Second question, in terms of just cap rates for your properties or however you look at acquisitions, EBITDA multiples, where do those stand today versus average? And maybe you can give some figures and we can see where some of the properties you are buying our trading.

I am sorry, Will. Where do we see cap rates on acquisitions that we are looking at?

Yes, thank you.

Yes, they are all over the board. The ones that we are focused on are -- we see a lot of opportunities in initial cap rates in the 8% to 10% range, top 50 markets. That has been relatively consistent, actually a little bit better than we anticipated at IPO.

Last fall when the sky was falling I think that pricing got a little bit better and the slow recovery actually helps us fill our pipeline and continue to find great hotels in that 8% to 10% cap rate range.

Did that 8% to 10% range change much in, let's say, 2005 to 2007?

Yes, I think 2007 when leverage was high, you could get a higher leverage those cap rates were -- you could make the math work at lower cap rates. But today at kind of that 50% to 60% leveraged rate we think that for the foreseeable future we have great runway.

Okay, that is all for me. Thank you.

Dan Donlan, Janney Capital Markets.

Thank you and good morning. Just wanted to talk a little bit about the acquisitions you made, what excited you about them. And more specifically, can you talk about when you say in your release a post renovation, next 12 month cap rate of 8.5% to 9.5%, what is that?

Is that like once you finish the improvements that starting from then you expect that cap rate? Or just trying to properly model these acquisitions on a going-forward basis.

I guess the first question is why Birmingham and not Boston. We found great values there. We knew the assets, we knew the owner. They weren't marketed for sale. They were on a list of assets that we thought gave us a lot of upside. Multiple demand generators, top 50 market, a great brand.

Nothing drew us to Birmingham other than the opportunity. As stated before, top 50 markets with best brands with great cap rates are attractive and these came up, I wouldn't say quickly, but moved to the top of the list because it's run by a great management team, HP Hotels, in a very vibrant market with a lot of demand generators. So I mean I wish there was more of a story behind it, but as you know what we do is pretty simple.

As far as the next 12 month cap rate range, I guess your question is how do you model that. Is that an exact year one cap rate?

Right, yes, exactly.

Yes, that is where we see the Hotel performing in the first year not starting just after the renovation.

Okay, that is helpful. And then any -- how is the sales process moving for some of the ex-Choice assets? Are you going to be starting that come this spring? What is the update there?

Great question, Dan. The recycling of capital is one of the strategies that we think adds some great opportunity for us. The smaller assets in smaller markets, as you could probably expect, are not easy to sell. We have several assets that we have been approached to potentially sell. We have not actively marketed anything.

The certainty of close with smaller assets is challenging. Some of our smaller assets are on sites with other hotels that have to be divided, so that takes some time. But I wouldn't say that we are actively marketing because we don't have anything listed for sale. But it is part of our strategy and it shouldn't be a surprise over the next couple of quarters if we announce potential sales or stuff under contract.

The certainty of close is challenging and that is why until we have something concrete with purchase agreements signed and a pretty clear runway that we would list them as discontinued operations or along those lines.

Okay, that is helpful. Then the Residence Inn in Kansas City, is that still out there? Are you still looking to purchase that asset?

We are still looking to purchase that asset. One of the things that has allowed us a lot greater runway is many of the assets that we find have debt that we can assume. Lenders very much like us as a borrower as opposed to the existing borrower; great balance sheet, great cash flow. So we have been able to assume debt that originally we weren't sure was available.

And that assumption of the debt just takes time. And so that is still in the pipeline and you could -- that is one that you can expect to see an update on here fairly shortly.

Okay. And then kind of going back to David's question on the RevPAR growth, that is for the 70 hotels but I would imagine that the five hotels that you have acquired probably have higher nominal RevPARs than the prior portfolio did. So do you have any idea of -- is that a true statement?

And then secondly, from a margin standpoint, the five assets that you acquired are their margins kind of above where the full portfolio ended the year? In which case we would have to bring up our growth rate on margins a little bit higher because of these assets not being in the prior statements or portfolio.

Yes. Two good questions. On the RevPAR you are kind of alluding to, Dan, it's a little bit choppy because we do have the Choice rebranded assets coming on and we expect those to be substantial RevPAR growth compared to the rest of the portfolio, simply because of the stress of this last year. We do expect -- we are, in fact, the nominal RevPAR of those five acquisitions. Those are at higher nominal RevPAR rates, and as you see -- I think we have provided that hotel operating data.

If you look at the margins of those particular hotels, they actually operated at higher hotel margins than the portfolio as a whole. So I think you are accurate in both of those assessments.

Now trying to telegraph a RevPAR assumption, we have put that whole together and say we think a 5% to 7% range is a reasonable range. But inside of that there is quite a bit of choppiness, that is the Choice interruption. Those unseasoned hotels we think are still coming on, particularly with rate, and will probably outperform those new hotels, those five new hotels. We think those have some upside at the higher end of that range. And then we have got our seasoned portfolio that we are bringing up.

So it's made up of four components and that is why we try to at least put it into a basket and give you some reasonable look at our expectations at a high level.

Okay. Thank you, Stu.

I will just add quickly, Dan, our expectations for 2012, we have got an extremely high level of confidence. We are ahead of our targets for the year with -- our EBITDA targets for the year. And if you think about the fourth quarter, I have always operated under the assumption that it's never the wrong time to make the right decision. We decided early on that we were going to renovate and put our capital into our best hotels that gave us the best upside.

Now that cuts both ways. You take your best hotels offline and that is a bigger impact than anybody would hope to have. But you also need to understand that when you renovate a hotel, like for example, Scottsdale. When Scottsdale was under renovation if you go to the website to book a room there is a big banner that says hotel under renovation.

So you don't just lose part of your guests because rooms are out of service, you miss opportunity for existing guests that may say, well, I will just come back after it's renovated. I may pass this time. So there is a larger impact than would appear to be on the surface.

Good news is that sets us up fully renovated with the best property in the space. So while there was impact in the fourth quarter and that was largely that, and the Choice disruption was largely the impact that we had with our NOI, that puts us in a great spot because it's all done for our peak months, our peak quarters that are coming up.

Okay. And those five assets, were they all in the seasoned hotel bucket?

Yes, all five were in the seasoned bucket and there were also two hotels in the renovation or the 11 unbranded hotels. We converted a hotel in Charleston, West Virginia, from Comfort Suites to a Holiday Inn Express. That was a full renovation. We spent over $1 million just on that, so that had a large impact.

And then the Baton Rouge Cambria which we converted to the Doubletree, which was off to such a great start, was also offline. So two big -- two impacts from the 11 rebranded hotels in addition to the five. Then you layer on some Choice legal costs and the Interstate fee and you can quickly see where the shortfall came. All for, we believe, the right reasons.

Okay. Thank you, Dan.

Tim Wengerd, Deutsche Bank.

Good morning. A quick follow-up on guidance. So just to be clear, the 5% to 7% RevPAR guidance that is versus the $58.02 number that was reported for 2011?

Correct.

Okay. And then can you talk a little bit about what is a reasonable expectation for hotel closings for the remainder of 2012? And then what do you think the total -- what is your total capacity?

We think there is a couple different ways to look at that and we talked a little bit about our ability to assume debt associated with acquisitions. So if we have got, call it, $55 million that we feel comfortable drawing on our line and we assume debt along with that, that gets us five, six months out if we continue to do on the pace of one a month. Shorter if we speed that up.

So no immediate needs to do anything. We are still finding a lot of value in the one-off deals where most people just won't do the due diligence to dig down to.

Okay, thanks. And then just across your portfolio are there any particular clusters or markets that jump out as a real outperformers or underperformers? There is a lot going on with Choice and sort of individual situations, but are there any particular markets that jump out?

It's a pretty mixed bag, Tim. We have got some great performing markets. We have got high expectations in Scottsdale with two great renovated properties. As you would expect, the lack of snow in Flagstaff early on in the year would hamper those two assets but now that there is snow we expect some resurgence there. Portland has been strong for us.

Simply the lack of supply in virtually all the markets is where we see the greatest opportunity. As rate comes back outside the top markets, I think there are some great opportunities in most of the clusters that we have. I would say Memphis has been a challenge for us as a market, but for the most part, even within clusters that we have, depending upon which markets you are in, there are more opportunities for growth than weakness.

El Paso is a market that is incredibly strong for us but there was some new supply that came into El Paso recently, one hotel, which is really just a short-term disruption. So acquiring the additional asset there that we did gives us much greater pricing power and flexibility. So even in markets where there is some short-term disruption we still see some great growth potential.

So that is -- apologize, Tim, that is a pretty vague answer. But a lot of markets and a lot of clusters and some really great opportunities and some we are still waiting to see rate come back.

In the Atlanta area where you made some acquisitions how -- the acquisitions that you did last year, how are those performing relative to your expectations then?

They are performing in line with expectations. The Holiday Inn has struggled just a little bit more than we expected but we are in that at a price that really accounts for that. So if you look at our -- the hotels that we have acquired as a group, they are all performing in line with our expectation, which again is one of the key parts of our growth strategy.

Great, thank you.

(Operator Instructions) Wes Golladay, RBC Capital Markets.

Good morning, guys. Can you give us some color on how the first quarter is progressing?

We feel great about the first quarter. As I said earlier, we are hitting our EBITDA target. RevPAR, we have some pretty tough comparisons. We had great RevPAR growth in January/February last year, but having great success out there in the market as we get some of our newer, our renovated properties online and more of the stabilization of the converted Choice properties.

Wes, think about it, we really are more tilted towards second and third quarter. Those are our really strong quarters the way our portfolio tends to perform. Also, when you think about the Choice interruption that occurred last year in March into April and May. So for all those reasons that Dan described we are bullish on the next couple, three quarters.

Okay. Now turning to the renovations, would we expect the $18 million to be deployed more in the first and the fourth quarter?

We really focus on that particular asset and the market that it's in, but as a general statement I think that is fair.

Okay.

If we could do all the renovations between November and January we would prefer to, but it's not always in the best interest of the property. So we try to balance that out with potential downturns or lows in the -- lulls in the market.

Okay, fair enough. Now turning to the acquisitions, how would you compare your pipeline now versus, say, third and fourth quarter? Is it improving at all or better deal quality?

I would say better quality. The sheer size and scale of it has been consistent, but we have had an opportunity to move some stuff up higher on the list quicker, higher quality assets with greater upside. So I would say that the size is consistent but the quality continues to improve.

Okay, thank you, guys.

David Loeb, Baird.

Hello, again. Two if you don't mind. One, clearly the performance of Interstate has improved, but you have also made an effort I think to acquire hotels and leave management in place.

Could you just talk kind of generally about your strategy for managers and whether you prefer multiple managers or continue to focus on Interstate, and what that means? Are they competing against each other for -- or competing with each other, I guess, for additional opportunities?

Sure. We have -- Interstate manages the lion's share of our portfolio but we do actively seek opportunities for other managers. We think there is -- having some tension out there amongst managers and shorter-term three-year contracts allows us to extract the very best performance and focus from our management groups.

I guess it's bragging a little bit. I don't know that anybody would be able to run as efficiently as we did as a private company, but as a public company there are a lot of great smaller management companies that maybe are a little bit more regional focused, a little more thin and hungry. We would certainly like opportunities to continue to grow and add them to our portfolio.

Now Interstate has been a great partner. They continue to get better, and as that multi-manager platform is something we are very focused on making sure we can deliver. So maybe too long of an answer, again, but it is part of our strategy and we continue to seek out opportunities outside of the management groups that we have today.

That is actually very helpful. Thank you. Then, finally, you have talked a bit about the acquisition environment, but can you just talk more about what you look for in the kinds of opportunities out there? Kind of more broadly do you see a lot of acquisition potential? Are you running into a lot of competitors?

On the competitor front we are really not seeing any. Our greatest competitor is the seller themselves. At some level if they don't have to sell they shouldn't, but if they have to sell we would prefer to be the buyer.

Our underwriting is solid and consistent and the number is the number. There is not a whole lot of negotiation that goes on. So with very few competitors out there we still do a lot of underwriting, we keep a shortlist of opportunities.

As far as what we look for, it's Marriott, Hilton, IHG, and Hyatt predominantly in the top 50 markets and selectively the next 100 and good brands. We are finding most value in hotels that need that full renovation. That is where a lot of value is created, where many of the owners either don't have the capital or don't want to spend it to make the hotel as new and we think there is a lot of upside there.

If we could find assets that are more consistent that had opened in 2008, 2009, 2010 that had some upside without the need for capital, those would be attractive too. But many of those are still stabilizing, so it's tough to get to a number that works. So I think it's a purely opportunistic, good cap rate focused, top brands in top markets.

We are still a bottoms-up underwriting company that provided it meets those criteria hits our screens and then we stack rank them based on best opportunity.

So as you look at, let's just say, the next eight are you looking at cap rates still in the kind of 8% to 9% range on a forward basis or is it better than that?

I would say in the top 50 markets you are still in that kind of 8% to 9% cap rate range. Maybe a little bit outside the top 50 you may get 9% to 10%, but that is not to say that we couldn't find a top 50 acquisition with a 10% cap. We just -- those opportunities are more -- have much less upside typically where they are great cash flow generators but maybe don't have as much terminal lift in value, where a more urban higher barrier to entry asset may have an 8% cap rate going in but maybe a greater terminal value.

So we don't specifically try to look at one versus the other other than to get to our unlevered 10%, 11% with most of that coming through the initial yield is really the most important thing for us.

That is great. Thank you very much.

(Operator Instructions) Dan Donlan, Janney Capital Markets.

Thank you. Just, Stu, going back to the -- or, Dan, going back to the RevPAR growth, just kind of curious if you could potentially give us maybe some quarterly thoughts on that. You know I would assume that the second quarter would probably see the -- potentially see the highest RevPAR growth given the Choice disruption started then and then maybe slightly moved down from there as you approach the third and the fourth quarter. Is that kind of a fair way to look at it with the first quarter maybe having the toughest comparisons, or can you give us any clarity there?

Dan, your assessment was very appropriate. I do think we have a tougher comp on a RevPAR basis first quarter. I think we showed numbers last year of 9% and 8% RevPAR growth in January and February. And then as you describe as you got into the disruption and then the easing off of that disruption that that would have a positive impact in a comparison of RevPAR growth s versus last year.

The last piece that is a little bit -- you have to kind of factor in too is we saw quite a bit of growth first couple three quarters last year in our unseasoned portfolio. And that was -- we saw, like I said, for the year I think we grew 14%. That is not a pace we think we will maintain all of 2012.

We anticipate that there should be some additional growth in the RevPAR for those assets, but by the time you get to the second quarter a lot of that should start to normalize. So there is a little bit of a balance between the Choice impact and the unseasoned, but overall I think your assessment is accurate.

Okay, thank you. That is very helpful. Then just going back -- last question on the acquisitions. Dan, it seems like a lot of the properties you have bought most recently have had some type of renovation component in it.

Just kind of curious how you are thinking about buying slightly older properties that maybe need a pip versus going for something that has been built within the last two, three years. Is that kind of a discrepancy in that 8% to 10% cap rate range with the newer hotels being closer towards 8% and the older hotels being closer towards 10%? Is that fair?

Yes, that is fair. When you look at a newer hotel that would be more similar to one of our unseasoned hotels and to get to what we would consider an 8% to 10% cap rate range you would have to make some pretty aggressive assumptions on RevPAR growth. Until we get some confidence that the existing management team can deliver that it's really hard for us to get there on the math.

So you know, there are several properties that fall into that category that we are keeping a very close eye on and as they -- stuff that we looked at last year that had pretty aggressive 2011 and 2012 numbers. As those numbers are realized it gives us the confidence that we can assign a greater RevPAR growth to those properties and get that 8% to 10% cap for the next 12 months.

We take how we invest capital serious. I mean it would be real easy for us to say here is new property. It's going to grow at 12% as it seasons up and that is a 10% cap on forward numbers, but that is making some assumptions.

So we like to be conservative, as evidenced by our acquisitions so far. They meet our underwriting criteria. Maybe they are a little bit too conservative, but you know it's important to us to make sure that we can deliver on the capital that we have been entrusted with.

So if we could find newer hotels that didn't need to renovation that met our criteria we would love to do that, and we would do that in -- we would have a bias towards that. Less disruption. So it wouldn't be -- it shouldn't be a surprise to see something as an acquisition that doesn't need a lot of renovation, but at this point that is mostly where we have seen the value is the hotels that need the renovation because you can get better pricing.

Okay. Thank you very much.

Tim Wengerd, Deutsche Bank.

Hi, thanks for taking my follow-up. My question is does the quality of the pipeline improve if you are willing to sort of increase the number of hotels that you will purchase? For example, instead of doing a one-off hotel where you buy one, if you are willing to do something with five hotels does the quality of the pipeline improve? Are the cap rates better, etc.?

You know actually we have not found that. Actually we find that the quality actually falls apart a little bit. Anytime somebody wants to sell a portfolio they throw in a couple of laggards in there and you have to underwrite to that. So if you are going to buy five hotels there is probably at least one in there that you really don't want and so you end up -- and we would do the same. As we would bundle hotels we would try to get the very best value.

So where we have seen the greatest pricing power and the greatest quality is being able to go singularly after assets on a more targeted approach. Not to say that if we found a portfolio of two or three or four that met our criteria it wouldn't do that, but at this time we believe we can create our own portfolio.

We have got the capacity, the infrastructure, and the talent on a run rate to do one or two a month. And we can -- with the assumption of debt and postponing closing and timing due diligence, we could easily do what would appear to be a smaller portfolio by just managing our acquisition process.

Okay, thank you.

Ladies and gentlemen, we have no more questions in queue. I would now like to turn the conference over to Mr. Dan Hansen for closing remarks.

Once again, thanks to everybody who participated in today's call. We appreciate your time and consideration.

When it comes to investing we know you have a choice. We have demonstrated that we can make the right choice, whether it's in an acquisition, deployment of capital on a renovation. For us we will always continue to focus on the best brands and the best markets at the very best cap rates. That is simply what we do.

As always, Stu and I are available to speak with you one-on-one and encourage you to reach out and contact us directly. Thanks, everyone.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.