Summit Hotel Properties Inc (INN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the First Quarter 2013 Summit Hotel Properties Inc. Earnings Conference Call. My name is Tahesha and I will be your operator for today. At this time, all participants are in a 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 you host for today, Mr. Dan Boyum, Vice President, Investor Relations. Please proceed.

Thank you, Tahesha and good morning. I'm joined today by Summit Hotel Properties' President and Chief Executive Officer, Dan Hansen and Executive Vice President and Chief Financial Officer, Stuart Becker. Dan and Stuart have prepared comments related to our first quarter 2013 release and filing, following these comments, you will have the opportunity to address any related questions you may have.

I remind everyone that many of our comments today are considered forward-looking statements as defined by Federal Securities laws. These statements are subject to numerous risks and uncertainties, both known and unknown, as described in our 10-K for 2012 and our other SEC filings. These risks and uncertainties could cause results to differ materially from those expressed or implied by our comments. Forward-looking statements that we may make today are effective only as of today, May 7th, 2013. We undertake no duty to update them later.

Our earnings release contains reconciliations to non-GAAP financial measures that are referenced during this call. If you do not have a copy of our release, you may view and print it from our Website, shpreit.com. Please welcome Summit Hotel Properties' President and Chief Executive Officer, Dan Hansen.

Thanks, Dan. We had another solid quarter and set the stage for another strong year. We achieved 7.7% pro forma RevPAR growth, adjusted FFO of $0.18 per share and adjusted EBITDA of $18.9 million, which makes five consecutive quarters that we have exceeded consensus estimates. As we look back at the first quarter, there are some similarities to the fourth quarter. They are both seasonally softer quarters than the second and third and we had a lot of activity.

In both quarters, we bought hotels, sold hotels, renovated hotels and raised capital. Through these seasonally soft quarters and all of that activity, we still beat our consensus estimates. This should give investors confidence in our ability to execute our strategy and our ability to absorb acquisitions without missing a beat.

We closed on five assets in the New Orleans market in the first quarter and look for this dynamic market to be a great performer for our portfolio. 2013 is a softer year in the New Orleans market as compared to the banner year in 2012. The group and convention market there is anchored around first and fourth quarters which is actually a benefit for our portfolio.

We knew of the weakness in the second and third quarters when we bought the assets and expect to use this soft -- this year's softness to complete the room renovations at the Courtyard near the convention center and the Courtyard in Metairie. The 2014 calendar is shaping up nicely and we expect terrific performance with the convention center hotels, the Courtyard in the French Quarter and our more business transient properties in the suburb of Metairie.

We also closed on a 120 room Hilton Garden Inn in Greenville, South Carolina recently. It's approximately three years old, requires minimal capital expenditures, has multiple demand generators and a strong outlook for growth. Also, as you have read by now, we have just entered into an agreement to consider purchase of four hotels that were built, seasoned and are managed by White Lodging. We have been monitoring these hotels for some time and see tremendous potential in these markets.

In fact, Indianapolis is a specific market that Marriott identified on their earnings call as having done a fabulous job investing in their infrastructure and as a result, is seeing a great volume of business.

The acquisition pipeline is as strong as it's ever been for us. We have explained many times before the ways we source deals and we continue to do so and maintain a full pipeline. We are on various stages of underwriting and have a mix of one-offs and small portfolios. Our size and scale is such that we can be patient and we have adequate capacity to continue to selectively acquire these one-off hotels or small portfolios.

Our capital recycling program continued in the first quarter and we see additional value in the sale of land and hotels that are less strategic going forward. We sold two hotels in the first quarter, as well as a parcel of land. We also sold two additional properties last week in the Boise market and have identified several more in our portfolio that we would consider selling. Our ability to find strategic buyers for these hotels is based on our strong relationships in the industry.

We have now generated $50 million of proceeds from the sale of assets we no longer consider strategic and have reinvested those proceeds into accretive assets. The private model works well for many of these hotels and there are several buyers that are well capitalized that have interest.

Our disposition strategy is based upon full underwriting and factors in market supply and demand, demand generators, age of the asset, link to the franchise term, number of rooms, contribution to EBITDA and the quality of that EBITDA. We invested $7.4 million in the first quarter and performed renovation work on 10 hotels. We are still seeing outsized RevPAR growth in these hotels and investment in certain hotels is a continuation of our strategic plan.

There's no doubt in my mind that we have much more than best in class asset management. I view our team as a premier asset management team in the lodging space. Most of our team has been together for over a decade. We have bought, built, renovated and managed over 200 hotels across the country. We have a deep bench; strong brand and industry contacts and valuable resources that help us tackle multiple projects with great success.

What differentiates us from many of our peers is our corporate revenue management team and our in-house team of construction and renovation experts. These teams are responsible for generating millions of dollars of profits through additional revenue or elimination of unnecessary purchasing and project management (inaudible). We are truly a hands on team.

Our largest concentrations of EBITDA are in New Orleans, Denver, Dallas/Fort Worth, Minneapolis and Atlanta and see our more significant clusters continuing to build momentum. Supply continues to be muted and we see no meaningful supply affecting our markets or our ability to perform.

I'll now turn it over to Stu Becker, our CFO, for further details on our first quarter results and our outlook for the year.

Thanks, Dan. Good morning, everybody. As Dan has described, we were very active during the quarter. Our activity is reflected in our revenue growth. Our Q1 2013 revenue was approximately $63 million, an increase of 69% as compared to the same quarter in 2012. Our revenue growth was driven by both solid same store performance and continued growth through acquisitions. Our adjusted FFO of $11.8 million for the quarter amounted to an $0.18 per share which exceeded consensus estimates.

For the quarter, pro forma RevPAR growth was 7.7%. Nominal RevPAR for the quarter was $77.44. Our pro forma RevPAR consisted of 70.7% occupancy, which was up 175 points over Q1 2012 and $109.57 ADR, which amounts to a 5% increase quarter over quarter. We were particularly pleased with the 5% ADR growth. As we have discussed in the past with relatively muted hotel supply in most of our markets, we are excited about the possibilities for future rate growth.

As we discussed in our outlook for first quarter, we had renovation work at 10 of our hotels during the quarter. Adjusting pro forma RevPAR for displaced rooms, we had a very solid nine% pro form RevPAR growth for the quarter, as compared to the same period in 2012. We continue to be pleased with improvements made with the renovation capital deployed. We believe that our solid RevPAR growth over the last quarters -- or several quarters is driven in part by the renovations we have completed.

On a same store basis, Q1 RevPAR growth was 6.6% as compared to same period in 2012. Nominal RevPAR was $66.67, which consisted of 67.7% occupancy, which was an increase of 155 basis points for -- over Q1 2012, $98.45 ADR that was an increase of 4.1% when compared to Q1 2012. A large portion of the renovation disruption previously discussed was a result of renovations on our same store hotels. Adjusting same store RevPAR growth for rooms displaced results in 8.6% growth first quarter as compared to Q1 of last year.

Pro forma hotel EBITDA for Q1 2013 was $24.7 million, which on a margin basis amounted to 34.1% of revenues. As compared to first quarter 2012, pro forma hotel EBITDA margins expanded by 190 basis points. Considering renovation disruption and the fact that we brought nine additional hotels online during the quarter, we are pleased with the margin expansion.

Adjusted EBITDA for first quarter 2013 totaled $18.9 million, a solid increase of 79% year over year. Our G&A expense, in nominal dollars, increased by $1.3 million as compared to first quarter 2012. Generally speaking, the G&A expense increase was largely due to staffing and general corporate expenses required to support our revenue growth. However, relative to revenue generated, we expect G&A margins to compress as we move forward.

One are we plan to increase our G&A spend in is in our construction and renovation division. More of these functions will be handled in-house. Overall, we believe this approach will provide better returns to our investors.

Approximately $100,000 of the increased G&A for Q1 are one time costs related to the transition of our corporate office from Sioux Falls, South Dakota to Austin, Texas. Our plan remains to complete consolidation of operations by the end of Q3, 2013.

Regarding balance sheet and liquidity, as noted, we have been relatively active in both the equity and debt markets, while acquiring and selectively selling hotels. The activity has allowed us to continue our strategy of acquisition growth, while maintaining the liquidity on our balance sheet. During the first quarter 2013, we raised $148.2 million in net proceeds from a common equity offering and $82 million in net proceeds from a preferred equity offering.

A portion of the equity was deployed in the nine hotels we acquired which required proceeds of $232 million. We generated proceeds by disposing of two hotels and a parcel of land, which resulted in net proceeds of $10 million during the quarter.

Regarding the debt markets, we placed or assumed $90 million of term mortgage debt with an average interest rate of 4.4% on placed debt while retiring $22.8 million of maturing term debt. As of March 31st, 2013, the average interest rate on our debt was 5.35%, recent financings were at interest rates that helped further compress our overall debt funding costs.

After all of the activity, as of March 31st, 2013, our funded debt to EBITDA was 3.9 times and we had $113 million of capacity and $5 million outstanding on our $150 million secured revolving credit facility.

During second quarter, we plan to increase our availability upwards to $150 million on our secured revolving line of credit by applying additional collateral. As of today, our debt to total market cap was approximately 28% and we have 20 unencumbered hotels.

During the first quarter 2013, we performed renovation work and deployed $7.4 million on eight of our same store hotels and two of our recently acquired hotels. Later in the year and on a go forward basis, we anticipate a larger portion of renovations will be performed on acquired hotels and the pace of renovation work on same store hotels will moderate. We have been aggressive in our renovations over the past two years and we continue to see positive effect of our ability to grow RevPAR.

Our outlook for the remainder of 2013 is positive, even as the macroeconomic concerns continue to weigh on the US economy ability to sustain or accelerate growth. Potential stagnating GDP growth and/or continued employment concerns could dampen our otherwise positive outlook.

Regarding our company's -- company specifically, we are providing updated outlook on RevPAR, adjusted FFO and capital spend as follows. Our outlook for both same store and pro forma RevPAR growth is 5% at the low end and seven% at the high end for both second quarter and full year 2013. Our full year RevPAR guidance is unchanged.

Regarding adjusted FFO, on a fully diluted per share basis, we are providing a second quarter outlook of 24 cents at the low end and 26 cents at the high end. Full year adjusted FFO outlook is unchanged at 84 cents to 90 cents per fully diluted share.

As Dan and I have noted in our previous remarks, our company has been very focused on executing our strategy of both raising and deploying capital into quality hotels while disposing of less strategic property. The ultimate result from successful execution of our strategy should be providing our investors with both expanded earnings per share growth and consistent dividends. Maximizing total returns to our investors is our highest priority.

Regarding renovation spend, for the second quarter of 2013, we anticipate deploying between $11 and $13 million in renovations on nine hotels. A larger portion of this spend in the quarter is for deposits on renovations. Actual physical construction is primarily planned for later in the year. Therefore, minimal RevPAR destruction is anticipated in the second quarter.

Thanks, Stu. Premium brands, portfolio composition and execution of strategy together create value. Summit is uniquely positioned to grow shareholder value and we are extremely proud of our track record. With that, let's open the lines for questions.

Thank you. (Operator Instructions). Your first question comes from the line of David Loeb from Baird. Please proceed.

(inaudible) dispositions on the acquisition front, I wonder if you could just talk a little bit about competition that you're seeing. Are you seeing private equity significantly these days? And can you talk a little bit more about the White Lodging transaction and that relationship (inaudible) management contracts, things like that?

David, this is Dan. Can you repeat the first part of your question? You broke in a little bit late.

Oh, well, I said good morning and then I asked about competition for assets. Are you seeing private equity players active? Or have they stepped back a bit? And can you talk a little bit about White Lodging? That transaction, the relationship, the kind of management contracts you're taking with those.

Sure. Good morning, David. Private equity, we talked about on the last call as being more visible in many of the markets that we're looking at. Since that call, we really haven't seen them as much. I don't think they've gone away. I think they are still viable buyers for you know portfolios. You know we would more likely see them in the larger portfolio transactions or maybe some of the deeper turn value creating opportunities. But we really haven't seen them much over the last quarter.

White Lodging is a company that's obviously very well respected. They build terrific assets. They've got a strong management company. We've known them for a lot of years. We've spent a lot of time with them more recently understanding their philosophy, their management and revenue management processes and we feel very strongly they'll perform in the clustered markets they manage or potentially manage for us.

They do have a strong history of managing for multiple owners in markets and have done so with integrity and professionalism. The length of their management contract is essentially the length of the term of the franchise, I believe it's 20 year with a couple of extensions.

That's not as much of a concern for us in CBD markets of institutional quality assets, like these. I think the buyer or potential buyer in the future of an asset like that is less likely to be an owner/operator. So a longer term management contract with a company like that we think is actually a positive in those kind of markets. Outside of those markets, most of our contracts are you know three year or renewable type contracts in more of the suburban markets that we have.

Does that answer your question?

Yes. And the fee structure, is that similar to your other management contracts?

Very similar. Yes.

Okay. On the acquisition pipeline, is your focus more on those kinds of CBD locations and therefore, more like eight caps? Or do you see a lot of a mix of smaller markets, suburban higher cap rate in that pipeline?

You know it's still a pretty mixed pipeline. We haven't changed our philosophy on what we look at or how we underwrite. You know we still have one-off transactions in more of the suburban beltway locations around the top 50 markets. But when we find great opportunities that are CBD higher barrier to entry in that eight to 10 cap range.

You know those are certainly right in our sweetspot as well. So I think in the grand scheme of things, the larger more institutional CBD assets are probably you know 8 to 8.5 caps and outside of the CBD or probably 8.5 to 9 cap. But our pipeline is really a blend of all of those.

Great. And finally, on the dispositions, you'd been very active, that's great to see the capital recycling. Can you talk a little bit about the characteristics of the buyers of those assets? What are they looking for? And how do your assets fit in with what they're looking to buy?

Well, I think they're similar to the structure of our company, you know maybe 10 years ago. They've got a base of hotels, operational expertise, most of the time they're local, understand the market very well. They may have one or two properties in the market or region already. So they look at it as synergistic. Many of these hotels need renovations.

You know some of them are in the process of getting short on the franchise term and may need to be re-flagged. So you know they look at it as more of a turnaround, a value creating opportunity and for us, it is a good partnership to have. There can be much more efficient in some of these smaller tertiary markets than what we could be.

Great. Thanks. That's exactly what I was looking for.

Thanks, David.

Your next question comes from the line of Jordan Sadler from KeyBanc Capital Markets. Please proceed.

Hey, good morning, guys. It's Austin Wurschmidt here with Jordan. Just wanted to touch on guidance for a second. So are you seeing anything different than you did at the outset of the year that's making you a bit more cautious than you were either on the demand side or the supply side?

You know it appears there could be some conservatism baked in given you know 1Q RevPAR came in above the high end of the range that you had set or is there -- you know can you just talk a little bit about that?

Sure. Stu and I will share the question. This is Dan. I think as we look out for the second quarter and the balance of the year, it's we have better clarity and conviction than we had in the first quarter. We are just starting to see some of the effects of the sequester. We don't have a lot of government business, but you know that slowdown in government travel is just not good or supportive for anybody. We're very well diversified.

We also have a fair number of hotels that are just coming online that we feel very confident we've underwritten you know the downside into, but probably have been conservative on measuring the upside. And with the renovations that we've done to date, we've seen great performance post renovation, but as noted in our comments, we had 10 hotels in -- having some form of renovation work.

So when you take all of that -- those factors in, being conservative just seems to be prudent for us. We're not any less positive on the outlook, but it is still a little bit early in the year and we're -- want to make sure that we give accurate and prudent guidance.

I'd be hard pressed -- that's a well summary by Dan. I would just note that first quarter is one of our soft quarters and so we're always a little cautious coming out of the first quarter. But we do feel very positive about the balance of the year.

And then -- and then -- no, thank you. That's helpful. And then could you just remind us what you're assuming in terms of hotel EBITDA on margin growth for the year?

So we've provided -- for margin growth, we really provided at the start of the year on the hotels that were in place at that time, if you recall, there were 84 hotels that we had at the end of the year. And we had provided a footnote in our guidance in the -- at the start of the year that we anticipated 100 to 175 basis points of margin expansion for those hotels. Now obviously the mix changes since then; we've sold some hotels and bought some more hotels, but I think that's a good baseline to start from.

Thank you. That's definitely helpful and that's all I have.

Your next question comes from the line of Ryan Meliker from MLV & Company. Please proceed.

Hey, good morning, guys.

Morning, Ryan.

Morning, Ryan.

So I just have -- I'm hoping you can -- and forgive me if I -- you know if I'm not clear in this question. But I'm trying to I guess reconcile your guidance this quarter versus your guidance last quarter and you're sources and uses table that you provided. It looks like you've got -- and correct me if I'm wrong, you've added an incremental seven hotels in the footnote for the guidance this year and pulled out six.

But you don't have proceeds from all six hotels planned for sale in the sources and uses. Can you tell me -- you know are you -- are there going to be any proceeds from those sales? Is there a reason why you included them in guidance, but didn't include them in the sources and uses table? Any color on that I think would be helpful.

Yes. I think on the sources and uses we provided sort of a look out for the next couple of years and a couple of those disposition hotels, two of those would close in the fourth quarter so they don't make that sources/uses table only because that was just not included in that two quarter window that we provided in the sources and uses.

Okay.

And I think that -- (inaudible) for dollar amount, probably $9 million of additional source would be available in the fourth quarter if gave you guide all the way through.

But your guidance doesn't assume that those hotels -- you own those hotels throughout the remainder of the year, correct?

Correct.

Okay. So if those properties don't close until 4Q as you're expecting in the sources and uses, then you'd be likely to exceed your absolute FFO level, correct?

If -- say that again; if we didn't close in the fourth quarter?

If you didn't close on those hotels until the fourth quarter, if the guidance assumes that those hotels are being pulled out of FFO today and they don't close until the fourth quarter, then you'd beat the FFO or the FFO range would probably be slightly higher, correct?

Well, the guidance is built in the assumption that we do sell them some time in the fourth quarter, but the FFO is built in as defer them.

Okay. So in the fourth quarter is what the guidance assumes.

Correct. That is correct.

Okay. That is was one of the things I was wondering. So then the next question I have is it looks like you guys have the 92 current hotels in your current guidance and a quarter ago it was 93. You've -- it looks like you're recycling a lot of capital and of those 92 hotels, you know you've got those three that you're not -- you're expecting to have up until the fourth quarter.

Yet, your FFO range has only -- you know it actually widened and the low end was lowered. And I'm not talking about in (inaudible); I'm talking absolute FFO. I think it was 57.5 at the low end before, now it's 57.3 and at the high end, you went from $61 million to $61.4 million.

Can you give us color on you know why the range is widening as we're a quarter later? Especially given that it seems like you're going to own more hotels throughout the majority of the year than you were a quarter ago.

Yes, I would say that from an absolute or for those mid-range, we really looked at -- you know as looked at it as just unchanged. We still remain confident in those numbers on a -- we didn't really do the adjustment for the absolute dollars. The other thing is remember, Ryan, in the second -- as we finished up the first quarter and the second quarter, we did the preferred transaction. We raised common obviously in January and we also raised preferred in March and there is -- you know until we get that capital to deploy, there is somewhat of a drag to performance on that drag on preferred.

And so, as we get that capital put back online end of second -- or end of the second quarter, we'll pick back up on that, but so to have a -- our guidance for full year unchanged considering the drag that happened in the quarter, we're really offsetting that drag with additional hotels coming online later.

So I think the net net is unchanged, but it really is a period of time in which we had a drag on earnings as we were not fully deploying that preferred.

Okay. That's helpful. And then can you give us any color on you know cap rates or EBITDA multiples for the acquisitions and dispositions that you've announced? Or -- and -- you know maybe they've finalized yet or not both those.

Ryan, this is Dan. Cap rates for acquisitions you know are you know still in that 8 to 10 cap rate range. You know that as you would expect in Indianapolis and Louisville, those potential acquisitions would be at the lower end of the range. An asset like the Hilton Garden Inn in Greenville is probably more the midpoint of that range. That's really consistent of what we're seeing out there. On the disposition of assets, it's a little bit more difficult to compare apples to apples.

Some of the acquisitions are losing franchise -- or some of the dispositions rather are losing franchises, they need capital invested in them. What we do see is a very high level of confidence that the proceeds from the sale of those dispositions, we're redeploying into more accretive uses.

So I would say on balance, a push at worst, but we see it as very positive, if that helps.

No, that does help. And then can you guys give any color on expected proceeds from those sales that are expected to close in 4Q that you've identified?

A dollar amount, you're asking for, Ryan?

Yes.

This is Stu. Yes, we think it's probably in that $9 million range.

Nine million? Great. Okay. And then just one last one and then I'll hand it over to anybody else. How does the pipeline look? You know obviously you guys have been really aggressive in making a lot of acquisitions recently and growing your portfolio and you know I certainly think a lot of them have been very attractive and accretive to your stock price. But any color on you know whether that can continue and for how long?

You know we're still a lot of opportunities, hasn't slowed down at all for us. But we do source them from a variety of sources. So it -- at some level, it kind of feeds on itself, the more successful you are, the more deals that are brought to you. So you know I can't say that how long it will go on. We still see very little new supply in the markets. If you just look at the most recent Smith Travel research that we looked at, there's about 30,000 rooms that opened in the previous 12 months on kind of a rolling 12 month rate. Choice and Windham combined had a conversions into their brands at twice that amount, nearly 60,000 rooms in the last 12 months.

So it's kind of tough to compare those two metrics apples to apples, but it does validate our thesis of minimal net new supply in upscale and upper mid scale and it really shows that this -- we think the opportunity will be longer than shorter.

All right. Thanks a lot. I appreciate all of the color, guys.

Thanks, Ryan.

Thanks, Ryan.

Your next question comes from the line of Wes Golladay from RBC Capital Markets. Please proceed.

Quick question for you, Dan. Is your pipeline actually bigger today than it was at the beginning of the year? And how many deals do you see and underwrite a quarter?

I would say it's pretty much the same size. I think on a nominal dollar amount maybe it's a little larger. Again, related to last comment, it kind of feeds on itself and they come in a bit chunky from time to time. But on balance, we think it's continuing to be strong and meaningful. And what was the second part of your question again, Wes?

Yes, I was just trying -- yes, I was just trying to see how many deals you guys underwrite. It seems like you guys are seeing a lot of deal flow and I didn't know if you guys had the -- a rough estimate of a dollar amount you guys underwrite a quarter.

You know we do various depths of underwriting. You know we can do more of a desktop valuation analysis to see if it you know meets any of our criteria. You know I would say there is maybe 20 of those a month that we look at. We look at a lot of deals. We underwrite and basic underwriting on deals that are really outside of our sweetspot just to keep strong intelligence on the market and what we're likely to see. But I'd say you know we do pretty deep underwriting on you know six to 12 a month.

Oh, Okay. And do you have an estimated timeline for the Louisville and Indianapolis portfolio for closing, if you were to pursue that?

Yes. We're still completing you know some of the due diligence items, but we'd say in the next 60 days.

Okay. And would that likely go with CMBS financing? Looks like you guys alluded to $100 million of potential financing for that.

Yes, this is Stu. The CMBS market has stayed very solid and we like where the pricing is at. So I would anticipate that over the next -- yes, over the next two quarters that we'd end up putting probably CMBS' debt in place. We may have some bridge financing ahead of time to complete the close if the close comes sooner, but that is definitely where we'd probably be headed with that.

Okay. So probably the low to mid four% is where we can sort of model at this point.

I think that's a fair -- I think that's a fair number.

Okay. And lastly on the dispositions, you guys have been really active on selling the non-core assets. Do you guys have a dollar amount identified for what you'd like to sell maybe in the next two years?

No, it's really opportunistic. You know we -- again, we look at every asset for disposition as we do for an acquisition. You know we do -- you know full underwriting and see if it's accretive or dilutive and whether it's strategic long term. So you know we've got a number of assets that we would consider for sale, but nothing that we've drawn a hard line on or a goal or target.

Okay. Yes. Thanks for taking the questions and nice quarter, guys.

Thanks, Wes.

Thanks, Wes.

Your next question comes from the line of Bob LaFleur from Cantor. Please proceed.

Hey, good morning. A couple of sort of random ones here. One, can you talk a little bit about progress of the Minneapolis renovation? And related to that, the note on that, where does that sit on the balance sheet? And is it contributing any interesting (comment) to you?

This is Stu. Regarding interest income, we're capitalizing on the balance sheet so it doesn't hit your P&L during the year. And then the progress on it, it's -- you know it's going well. We think we're running on time and on budget at this point. We would anticipate that that would be closed end of third quarter, early in fourth quarter.

Okay. And the investment in hotel properties under development, that $10.38, is that where it sits on the balance sheet? Is that --

Yes.

(inaudible) Okay.

That is correct.

All right. And then just to follow up on Ryan's question, the FFO -- there's an FFO contribution from the assets held for sale that's incorporated into the guidance. Is that correct?

That is correct.

Okay. And then the last question is you did a -- just under 3.1 in SG&A in the quarter. Can you talk about how that plays out over the course of the year? Is that a good run rate? Or do you expect to see that accelerate a little bit? How should we think about that going forward?

Yes, I think that's a decent run rate. There should be a little bit of acceleration. We talked about it on our comments here. We're going to bring a little bit more of our development work that we have been sort of outsourcing that often times gets capitalized into projects, we're going to bring that in-house. So it has a little bit of impact to G&A, but we think that long term has served great benefits for us because we have more control there. So I think that's the way to look at it is a slight uptick, but not far off of that current run rate.

Okay. Thank you.

Your next question is a follow up question from the line of David Loeb from Baird. Please proceed.

I was wondering if you could just give a little more color on financing strategy going forward. Do you plan to leave a bit out on the line? Are you going to look to expand that? And then kind of in summary, what do you think your remaining debt capacity is at this point?

David, this is Stu. Regarding debt capacity, you know as we lay out that page 15 sources and uses, if we ran through that whole process, we think we'd have probably another $70 million plus available on our line of credit. And if you assumed you know using this mortgage debt at 50%, that provides you know $140 million of capacity for additional acquisitions.

Regarding just our strategy, you know we have quite a few unencumbered hotels and we always have the ability to accordian that up to $200 million, if we chose to go that route. I think we'll also look at over the next several quarters maybe with so many unencumbered hotels looking to maybe more of an unsecured structure to our revolver.

And then lastly, I did make the comment obviously the debt markets are really solid and we do believe it's a good time to use the balance sheet a little bit and lock in some really -- what we consider you know nearly all time sort of low rates. And if you look at where we look at our run rate runway for the next couple of three years and possibility of raising ADRs and get some expansion in our portfolio, having some good solid term debt and get a nice margin expansion is a real positive aspect we think of the possibilities for the future.

And then finally maybe this is as much for Dan, as you look forward, you obviously have a very active pipeline, you've got the White Lodging transactions going as well. What's your thought about the next slice of capital? Is it likely to be common or preferred? And how do you look at that tradeoff today?

You know I guess Stu and I could probably share the question, but it's -- you know we've got no immediate need to come to the equity market. You know we have got a clear runway to use our balance sheet. You know we've got you know capacity to do one or two at time for the next several quarters. We do -- as we have talked about, we have some assets sales. We do still have some land parcels for sale. We've got added flexibility in our facility. So we do have options between a common equity preferred of the ATM, but nothing that is imminent.

Yes. And David, this is Stu. I agree -- I echo Dan's comments. Our goal is always to leave ourselves in a position where we have a solid balance sheet, we have liquidity and we have options so we can continue just to grow on our one-off strategy. But obviously the capital markets, if it makes some sense and we can find really -- the use of the proceeds in which capital would make some sense, we wouldn't be adverse to raising capital at some point.

Great. Thank you.

(Operator Instructions). Your next question comes from the line of Matthew Dodson from JWest LLC. Please proceed.

Can you just talk a little bit about your dividend strategy? And kind of how you think about potentially raising the dividend over time? And then the other question, you alluded to this earlier, but you talked about in your remodels, you've seen better than expected after -- through that process, yet you're currently you have 10. Is there a lot of risk you believe at all to the numbers that you've embedded with the remodels? Or renovations?

This is Stu. I'll take your dividend question first. Regarding dividends, I think there's always a balance in our organization. The balance being that we're finding really acquisitions that can be accretive to FFO and earnings for our investors. So the balance being trying to deploy capital where you can grow your earnings per share is a compelling argument. At the same time, you know dividends and wanting to make sure that our dividend is solid and is meaningful to our investors is always a balance too.

If you look at us in the hotel public space, we always are performing in the upper quartile as far as our dividend yield, so we feel that it's a compelling yield and at the same time, we're finding accretive acquisitions. So an opportunity to invest with a solid dividend yield and a potential for growth, we think that's pretty compelling.

On the -- this is Dan. On the renovation question, hopefully I have your question correct, but you were asking about the risk. We see that as a real positive outcome. Freshly renovated hotels generally perform better and through this last cycle of lodging, many hotels weren't renovated during the downturn. The capital was hard to come by, performance suffered, you know in 2009 and 2010. So our ability to renovate hotels in advance of many of our peers in the markets that we're in is actually giving us upside and really positive returns.

So we don't see it as a risk, we really see it as an opportunity and in markets we want to be real careful how we use that capital and make sure that we invest it in hotels that have that upside. Does that answer your question?

Yes, it does. Thank you.

Thank you.

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

Well, thank you, everyone, for dialing in today. I'd like to just close with a reminder that we've been doing this a long time; first as a private company and now as a public company. We have the skillset and equally as important, the bandwidth to manage the pace of acquisitions, dispositions and renovations. We have a commitment to creating shareholder value and have shown it by consistently doing what we say, alongside thoughtful capital raises, which are in the best interest of our shareholders. We've established a solid core portfolio providing long term growth. We've got a massive pipeline of acquisition opportunities to drive additional upside. And we are laser focused on becoming a dominant lodging company with a nationwide platform of premium select service assets. We appreciate your time and look forward to the next call.

Thank you, everybody.

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