Summit Hotel Properties Inc (INN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Summit Hotel Properties Inc earnings conference call. My name is Pam and I'll 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 Mr. Dan Boyum. Please proceed.

Thanks, Pam. Good morning everyone, and welcome to Summit Hotel Properties first quarter 2012 earnings conference call. Today I'm 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 want to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under Federal Securities law. They may not be updated in the future. These statements are subject to risks and uncertainties described in our Securities filings. Also, as we discuss certain non-GAAP financial measures, it may be helpful to review the reconciliation to GAAP in our earnings press release.

To begin our discussion on our first quarter 2012 results, please welcome President and Chief Executive Officer, Dan Hansen.

Thanks, Dan.

Our performance in the first-quarter of 2012 clearly demonstrates the power of our portfolio, and the strength of our strategy. We fully expect that to continue throughout 2012. Having the rebranding process and transition issues largely behind us gives us a clear runway for superior execution.

Demand continues to increase, rate continues to improve in many of our markets, and supply growth continues to be muted. We see the rate growth that started in luxury and upper upscale last year starting to permeate through many of our markets. We are already beginning to see the benefits of this in our converted and renovated hotels.

All of this supports are optimism for 2012. There continues to be strength in both Business and Leisure segments and our third-party management companies continue to improve, meet, and/or exceed our expectations. Craig Aniszewski, our Chief Operating Officer, and our whole asset management team are working tirelessly to ensure we continue to build momentum in our rate growth and in our margin expansion.

Our strategy to improve the mix of occupancy and rate is progressing nicely. Pro forma RevPAR growth of 6.1% for the first quarter of 2012 was solid. And, when we adjust for the effective renovations our pro forma RevPAR growth would have been 8.3%. We have wrapped up the majority of the property improvements we undertook in the third and fourth quarters of 2011 and the first quarter of '12. And, we are now poised to take advantage of the historically superior second and third quarters. We are well into this period with a portfolio of properties that offer our guests the newest and cleanest hotels. We believe that newer and cleaner wins and we are expecting some significant wins this year.

Three more acquisitions closed in the first quarter of 2012. The Courtyard by Marriott in downtown Atlanta, and two Hilton Garden Inns in Birmingham, Alabama. These are great examples of our acquisition strategy. Top brands in top markets at great cap rates. Our pipeline of these opportunities continues to be robust. Our proven, disciplined strategy, our conservative capital structure, and our capacity for growth all point to continued success. You will see continued activity from us on the acquisition front. We also have several dispositions of properties as well as raw land parcels that we expect to close on in the second quarter.

We have expanded our guidance to include a range of adjusted FFO for the second quarter and for the full year. It's important to note that this range is based on current hotels owned, and, assumes no additional hotels acquired or sold for the remainder of 2012. Our dividend is one of the highest in our space and is well covered. When you combine that with the embedded growth and accretive acquisitions, we see our company as an exceptional total return opportunity for investors.

For further discussion on our performance and details on our balance sheet and financials for the first quarter of 2012, please welcome our Executive Vice President and Chief Financial Officer, Stu Becker.

Thanks, Dan. Good morning everybody.

At the outset, I want to clarify how we are communicating our operating numbers. Our RevPAR and hotel EBITDA results include all the hotels we owned as of March 31, 2012, exclusive of the three hotels now classified as held for sale. The hotels included in discontinued operations are the AmericInn, the Holiday Inn Express, and the Hampton Inn all in Twin Falls, Idaho. These three hotels are currently under sale agreement as part of our disposition strategy.

The first quarter was a great start to 2012. We generated a 24% increase in revenue. That revenue growth was largely the result of two factors, the acquisition of eight hotels since our IPO in February of 2011, and solid, same-store RevPAR growth. Pro forma RevPAR for our total portfolio grew by 6.1%. Excluding the results of the six hotels undergoing renovations during the quarter, our total RevPAR growth was a very solid 8.3%. For the quarter, pro forma occupancy grew at a rate of 6.6% to 64.8%.

ADR, on the other hand, was relatively flat. We believe the economic recovery is taking hold and that the US market is in the early stages of a substantial -- a sustained RevPAR growth cycle. Based on our expectations of substantially muted hotel supply, we anticipated ADR growth in our portfolio to be more meaningful over the next several quarters.

Based on our positive outlook, we are providing guidance for RevPAR growth for the second quarter in the range of 6% to 8%, and increasing our full-year guidance for RevPAR growth to 6.8%, as well, an increase from our previous guidance of 5% to 7%. Pro forma hotel EBITDA grew by 10.3% during the quarter. Excluding hotels under renovation, we estimate pro forma hotel EBITDA would have grown 13.9% during the quarter.

During the first quarter, pro forma hotel EBITDA margins expanded by 60 basis points. Exclusive of hotels under renovation, we estimate margins to have expanded by 180 basis points to 31.1% for the quarter. Although the expansions was positive, margin improvement was driven largely by occupancy growth. We fully expect future margin expansion to be driven by a blend of rate and occupancy growth.

Our company generated adjusted EBITDA of $10.6 million for the quarter. EBITDA was adjusted for equity-based compensation, hotel property acquisition costs, and loss on impairment of assets, specifically relating to the hotels held for sale in the Twin Falls market. In excess of 100% of the impairment was related to Twin Falls AmericInn and its pending sale. During the quarter, our Company spent $137,000 in nonrecurring legal costs related to the Choice arbitration. Listeners should note the one-time legal costs were not included in our adjusted EBITDA or AFFO calculations. The arbitration has since been settled. The settlement will result in a positive effect of approximately $450,000 to our earnings in second quarter 2012.

Regarding our balance sheet. At the quarter ended March 31, we had cash and cash equivalents of $10.9 million and capacity of $93.9 million with usage of $43.4 million on our line of credit. Additionally, we continue to have eight unencumbered hotels. We remain active in deploying capital for renovations having completed renovations on six additional hotels and deploying $8.4 million during the quarter. The renovations are consistent with our strategy of deploying capital early in the recovery of hotel cycle. Regarding future renovations, you can expect us to do fewer renovations over the next two quarters.

Generally speaking, Q2 and Q3 are our strongest operating quarters. Thus, we typically deploy less capital during our peak season in an effort to avoid rooms out of service. In Q2 we plan to invest $3 million to $5 million for renovation work focusing largely on four hotels. Three hotels that we acquired in the past, we plan to spend approximately $900,000 on the Hilton Garden Inn in Atlanta, approximately $600,000 on the Courtyard by Marriott in El Paso, Texas, and approximately $700,000 at the Homewood Suites in the Jackson, Mississippi market.

The final property to be rebranded regarding the Choice interruption will become a Fairfield Inn and Suites by Marriott in Ft. Worth, Texas. We estimate an additional $1.5 million to complete the project. We expect to complete it in the second quarter.

We expect RevPAR disruption of no more than 50 to 100 basis points as a result of renovations during the quarter. Considering the rebranding of 11 hotels and major renovation on 10 hotels over the last two quarters, we believe our company is poised to take advantage of RevPAR growth throughout the anticipated cyclical recovery in the hotel industry.

Thanks, Stu. And, thanks to all of you who took the time to join us today. As always, we welcome your questions, so let's open the lines.

Certainly. (Operator Instructions)

Tim Wengerd, Deutsche Bank.

Hi, good morning, guys. I'm wondering how hotels are performing in Q2 that were renovated in 1Q and in 4Q?

Tim, I would say that overall, we have obviously seen improvement as we go through the stabilization phase. We do the renovations and then we work into what we consider a 12 to 18 months stabilization phase. So, we are seeing positive improvement on that.

We've never given -- we haven't given specific optics on it. But, we considered to those to be improving. And, we would expect over the next couple of quarters to probably outperform the same-store balance of our portfolio.

And then, in a hypothetical scenario, where equity issuance doesn't make sense and absent any more capital recycling, what pace of acquisitions would you expect over the next -- for the remainder of the year?

I think we could feasibly continue to do one a month depending upon the size. Our average acquisition to date has been around, maybe, $10 million. So, $10 million to $15 million is, per acquisition, is a pretty good run rate. We have, as we've outlined before, several different ways to gain runway with our current facility. Either through the issuance of OP shares, recycling of capital, and capacity on our credit line. We don't feel an immediate need to raise equity.

Okay, this is helpful. And then, after the three hotels sales and the Nashville acquisitions, how many unencumbered hotels will you have? And, where well that put you at with respect to capacity?

We currently have eight unencumbered that we have chosen not to put on our line of credit yet. We could expand our credit facility by using some of those assets. On the acquisition -- or on the sale of disposition, it subsequently would have an impact on that line of credit.

Okay.

Still eight unencumbered.

Okay, still eight. All right. And then, if you could talk a little bit more about the Idaho sale. How did it happened, why exit that particular market, and what is the buyers motivation for buying them?

We identified a buyer through a direct dialogue with a broker. This is a more sophisticated buyer than would typically be looking at a smaller transaction. He is actually a regional investor. He is very familiar with the market. Twin Falls, Idaho is a great market.

We've had great success there for a lot of years. The third hotel that our company owned was actually built there in the early '90s. But, it's a market that is smaller, and we believe has less opportunity for growth. So, as we identified a buyer we decided to exit the entire market. And, focus our efforts on really the sweet spot that we have discussed many times, which is top 50 markets with Marriott, Hilton, Hyatt, and ISG.

Thanks.

David Loeb, Baird.

Good morning. I just have a few, just my usual multi-part questions. Dan, just to expand on the disposition question, what other markets are you targeting?

Do you think you might be able to do the same kind of multi- asset deal to exit clusters in smaller markets? Or do you expect that subsequent dispositions are more likely to be one-off kinds of sales?

I think you should expect the dispositions to be more one offs than complete clusters. Most of the buyers are looking at one, maybe two assets. I wouldn't have an expectation that we would be exiting markets as a whole. The markets that we would look to potentially sell assets in would be some of the smaller more tertiary markets outside the top 100. Not all of them. Some of them still exhibit very strong growth characteristics. But, some of them we feel there is a better use of our capital.

If you think about our strategy, it's -- we look at it as use of our capital whether it is for an acquisition or renovation. And, if we see a market that has less upside than others that has potential capital requirement over the next several years, that's a market we would consider selling. And, redeploying that money in markets that have, what we believe, greater upside. Maybe a little bit long answer but that's really a pretty broad answer on how we look at the markets.

No, that's actually really helpful. As you look at acquisition opportunities versus dispositions, is there a cap rate arbitrage? Or is it about a push in the going in yield and you're really looking more for long-term value accretion and growth relative to redeploying those proceeds?

That's a great question, David. It's about a push on cap rate. I don't really see a lot of arbitrage there. Where the opportunity lies is, as I said before, we avoid putting additional capital into markets with less market growth, less rate growth.

We believe we could sell two or three assets in a market and replace that with one asset with higher RevPAR, higher margins, with a higher growth profile. I wouldn't say there's a cap rate arbitrage but really a growth profile arbitrage. The cap rate is -- we are selling in that $9 million to $10 million range and buying in that $9 million to $10 million range.

Great, okay. In terms of acquisition financing, have you looked at -- or has there been interest among potential sellers in taking OP units? Have you looked at using shares as one way to fund this? And, what is the appetite for that among the sellers?

We still have a few sellers in our pipeline that are considering OP units for part of the purchase price. It's a way for us to bridge a gap in value. We are not too excited about issuing OP units at a lower price. But, to bridge a gap with a good growth profile and in some instances it makes some sense.

Okay. And, finally, I noticed in the 10-Q that about one-third of the current OP unit holders converted. Is it your impression that they converted to shares because they want to sell or rather just to take tax losses and hold onto the shares as opposed to the units?

Our impression was, and our expectation was, about one-third of them would convert. The last group of investors are really the only ones that didn't have a gain. Most of our longer-term investors had a gain.

We believe most of it is tax event driven. But, having the shares in liquid form for most individuals, absent the tax benefit -- the tax issues makes a lot of sense. It was not a surprise to us.

Okay, great. That's all I had for now. Thanks.

Thanks David.

(Operator Instructions)

Dennis Forst, KeyBanc.

Good morning all. I just wanted to touch base one more time on the Idaho sales. You said that you do have a buyer and they are under contract to be sold?

Correct.

Any timing on that Dan or Stu?

We hope it closes here today.

Okay, that soon, that would be great.

We don't typically like to have acquisitions closing around an earnings call when we are trying to get numbers out. This is, as we stated before, these transactions do not have a high level of certainty around close and there's a lot of moving parts. So, it unfortunately pushed up against the call. But, we will get the confirmation out and have some dialogue after the closing takes place.

Okay then, I will just wait for a press release on some of the details about that. As far as acquisitions, do you have anything on the front burner that you can talk about? Any timing that you want to share with us today?

We do have about seven acquisitions in various stages of LOI, that at the right time and the right price we could move on fairly quickly. We do have the two announced acquisitions in Nashville we expect to close this quarter. And, as that time gets closer, we will be able to better quantify numbers. So, nothing that I think would surprise anybody.

We always try to keep a pipeline of 20 properties or so that we have done some initial due diligence on that we feel meet all our criteria. And then, we try to keep five to six, seven that we can close on if the pricing is right and if the timing is right and it make sense. You should expect us to continue on the acquisition front as I stated in my opening comments. But, we will do it at a measured pace where it make sense.

Okay, terrific. All my other questions were asked. Thanks a lot.

Thanks, Dennis.

(Operator Instructions)

Wes Golladay, RBC Capital Markets.

Yes, good morning, guys. For the quarter, what was the mix of leisure and business travel? And, how was this mix trending over the past year?

We're still running about a 70% business/leisure travel mix. That's been trending up for some time. If you remember, at the bottom of the cycle we were about 50/50. At the peak of the last cycle we were about 80% business traveler. That business traveler is a blend of the local negotiated rate and the transient business traveler.

In different markets we focus on the, as we talked about, improving the mix with those two groups. There's obviously less price sensitivity around the transient business traveler than the local negotiated rate. But, that -- you should expect that mix to be slowly increasing to that peak level over the next several quarters.

Okay. And, you mentioned the potential to sell some land. Can you give a dollar amount of what you're marketing or is everything for sale at the moment?

I would say 50% of our land parcels are for sale. I wouldn't say we are actively marketing those. We haven't, truthfully, actively marketed any of our hotels for sale. It's been -- we have been approached by some individuals, and we have targeted some markets. But, I would say it would be just a $2 million, $3 million would be a conservative estimate.

Okay, and, going to your acquisition pipeline. How much of that is, of your pipeline, is portfolio deals versus individual one-off assets? And, I guess maybe break it down top 25 markets versus top 50. Where -- what markets are the acquisitions coming from?

I would say all of the acquisitions are in the top 50. Probably most of them in that 10 to 40 type market. Most of the acquisitions that we have are either one-off or maybe twosy, three -- small groups.

There are several portfolios, larger, that we are aware of, we have looked at, nothing that we have under contract or are aggressively going after. As we've talked about with analysts and investors, a measured pace with consistent acquisitions right in line with our stated goals is our model.

Okay, and for these acquisitions, are you guys still the sole buyer and it's just more of a timing issue?

Yes, there is really no competition. I think the thing that, I wouldn't say holds us up, but keeps us at a more measured pace is just the continued opportunities that we see. Pricing tends to get better at times. We want to make sure that we close and have not missed out on any great opportunities. I consider it my job to know about acquisitions in the market. And, across the board. And, to make sure that we use our capital to the best of our ability, to be the most accretive puts us in a pretty enviable position where we don't have any other bidders for assets. And, we can do these at a more measured pace. We don't want to move too fast and miss out on opportunities that tend to come up.

Okay, thanks a lot guys, for taking the questions.

Thanks, Wes.

Daniel Donlan, Janney Capital Market.

Thank you, and good morning. Stu, just wanted to walk through the recent negotiation -- the refinancing of the Scottsdale assets. Was just curious what the LTV's were used there? Maybe debt yield?

And, the interest rate of 6%. It seemed a little bit higher than some of your other recent transactions. Just curious what has happened in April versus February and March where you guys were able to procure loans at 5.5% and 4.9%?

I think you've hit it a little bit there, Dan. Just the timing of that one was probably -- we've seen some better rate pricing as the quarter has worn on. I think you are effective there. I think from a debt yield, south of 12% was probably where that was put in place at. We did get some cash out on that transaction.

We were able to use that to pay down our line. There were some motivation there. And, it's a -- we think it's a decent piece of paper. But, as I said, there is a -- probably the last couple of months we have seen rates even gravitate farther lower.

Okay, all right, thank you.

David Loeb, Baird.

Hi, just wanted to go back to the acquisition RevPAR. I am just trying to tease out the acquisition hotels, the 8 acquisitions from the 70. On page 11 you give us the RevPAR growth for the 70 and then for the 62. So, can you -- we can do the math to figure out how much it impacted. But, can you give us the RevPAR growth in the first quarter for those eight acquired hotels?

I have to dig that number out for you.

Okay, we can certainly get it off-line. But, it was -- it added 130 basis points so it must of been substantial growth for those acquired.

Correct. I would note that probably the best way to understand the group is in Atlanta, that was a much earlier stage hotel than some of the other hotels. If you recall that acquisition was in ramp-up stage. It probably has a little more go to it relative to maybe some of the other hotels. We have a mixed bag in there of those acquisitions.

Some of those were just good purchases and we would expect them to perform in line with the portfolio as a whole. Atlanta is one that sticks out a little bit. And, the acquisition we did off balance sheet from IHG, also the one in Denver also had some real good upside built into it. But, it is a mixed bag that overall performed better than our portfolio as a whole.

As we've talked about it, David, as we've made these acquisitions, we pro forma them out. But, it is to note that we have been really successful with those eight acquisitions. They have all tended to have, on just a nominal basis, better RevPAR. They tend to be in bigger markets with, we think, better upside and growth to it. So, they have all been impactful with then going forward relative to our whole portfolio.

Yes, pretty clearly. That's very helpful. And then, on the rebranding disruption, that looks like it is waning pretty dramatically with the last hotel scheduled to convert in the second quarter. Do you think there will be any net disruption in that portfolio of 11 in the second quarter?

Yes, certainly there's a significant impact of that rebranding, because the Fairfield Inn Suites in Texas, that is a complete redo. That one is substantial drag in the quarter relative to just getting that work done. But, overall, if you look at the group of seven, excuse me, this group of 11 Choice, as we converted those, we are now into second quarter. And, at March 25 is when we are kicked out of those brands with Choice and went into arbitration.

Second, third, and fourth quarter this year provides a pretty good comp relative to those same 11 hotels last year. Because, as you recall, we spent a good part of the quarter finding new brands, having to do some work, putting those in position, And so, as a bucket, we would expect some really strong performance from those 11 hotels for the next three quarters.

So, do you think relative to the $0.04, $0.03, $0.01 in second, third, and fourth quarter last year, does that go to flat to where they were or do think there is net upside as we get later in the year?

Yes, I would say as a whole we would say -- we consider that by the end of the second quarter we will have rebranded all 11 of those. We would think over the next 12 months that -- in nominal dollars we felt we lost about $3.5 million of EBITDA to that Choice disruption. And, we would think over the next 12 months we should earn that back, those nominal dollars back. And, convert that into RevPAR, that is double-digit 20% RevPAR growth in that portfolio over the next 12 months.

Great, okay. And then, finally, just on the disruption that came from Interstate. I realize those were tied together little bit because of the disruption in the system as a whole. Is there anything unusual other than the shift of fee expense out of second quarter into fourth quarter that clearly reverses? Is there anything else we should be thinking about in terms of operating efficiencies at these hotels?

Good question. I think that is important, David, you did point out to all listeners that we did have that fee -- we got a discount on fees in the second quarter as we were repositioned last year and were not having as much success. There is that adjustment in second quarter and then it comes back in the fourth quarter. That's important.

Otherwise we feel pretty good about the IHR and their performance. We have seen every quarter improvement. We think there is probably still additional improvement relative to as a private company. There is still some additional improvements we think from an operational standpoint. But, we would say that to our managers. That we have to get tighter and have some better performance. But, I don't think there's anything that jumps out at me relative to additional things, ways you should think about those companies relative to last year.

That's great, very helpful. Thank you.

Dennis Forst, KeyBanc.

Yes, I've got a simple yes or no question. The $40 million of revenue in the first quarter Stu, that was for 70 hotels? There was no income statement other than the discontinued for the three Twin Falls? Is that correct?

Correct.

Okay. So, we should be apples to apples in the second quarter, depending on the closing of the Nashville properties, we will be apples to apples for the same 70 properties in the second quarter?

I think that's a fair way to look at it.

Great, thanks.

With no further questions in queue I would like to turn the call back over to Mr. Dan Hansen for closing remarks.

Thanks to all who participated today on the call. We are confident in our discipline strategy and it's proving itself. And, it's going to continue to do so through 2012 and beyond. Solid increases in revenue, RevPAR, hotel EBITDA, and hotel EBITDA margin expansion in the first quarter bolsters our expectations for the remainder of the are.

We appreciate your time and consideration. And, as always, sincerely invite you to call Stu or me anytime to discuss questions or concerns you may have. We look forward to seeing many of you over the course of the next few months. And, joining you here again in August to discuss what we expect to be a great second quarter. Thanks, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.