Summit Hotel Properties Inc (INN) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 Summit Hotel Properties, Inc. earnings conference call. My name is Jemma, and I'm your operator for today. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Ms. Elisabeth Eisleben. Please proceed, ma'am.

Thank you, Jemma, and good afternoon. I am joined today by Summit Hotel Properties' President and Chief Executive Officer, Dan Hansen. Dan has prepared comments related to our first-quarter 2014 release and filing. And following these comments, we will have an opportunity to address any related questions you may have.

As a reminder, this conference call is the property of Summit Hotel Properties. Any redistribution, retransmission, or rebroadcast of this call in any form, without the express written consent of Summit, is prohibited.

Please also note 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 2013 Form 10-K and other SEC filings.

These risks and uncertainties could cause the results to differ materially from those expressed or implied by our comments. Forward-looking statements that we make today are effective only as of today, May 12, 2014, and we take no duty to update them later. Our earnings release contains reconciliations to non-GAAP financial measures 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, Elisabeth, and thank you all for joining us today for our first quarter 2014 earnings conference call. On the call today, I'll update you on operating and portfolio results, and provide more detail on our financial performance for the quarter; discuss our balance sheet; liquidity; and then finish up with a review of our outlook for the second quarter and the remainder of 2014.

Unfortunately, our CFO, Stu Becker, will not be joining us today, as he is recovering from back surgery. We do wish Stu a speedy recovery.

Let me begin by saying we are very pleased with the performance of our portfolio in the quarter, which finished at the high end of our guidance. Our same-store RevPAR growth for the quarter was 8.4% compared to the first quarter of 2013. This was an acceleration from the 6.1% increase we reported for the fourth-quarter 2013. RevPAR was driven by a combination of increases in average daily rate, which was up 4.6%; and a 256 basis point increase in occupancy to 72.8%, compared to 70.3% in the first quarter of 2013.

Our strongest markets in this quarter were Baton Rouge and the Phoenix/Scottsdale market, which posted 16.1% and 15.9% RevPAR growth, respectively. Both of these markets are benefiting from the renovations completed last year, and we anticipate strong RevPAR growth to continue. Our West Coast hotels were strong contributors as well, posting 7.6% RevPAR growth, despite the Holiday Inn Express in San Francisco being under renovation during the quarter.

Our same-store RevPAR growth exceeded the Smith Travel upscale average by 200 basis points in the first quarter. Our continued success and posting strong RevPAR shows the strength and quality of our portfolio and the capital improvements we've made over the last two years. This gives us great confidence in our portfolio's ability to continue to deliver strong results over the remainder of the cycle.

On a pro forma basis, including hotels acquired in the first quarter, we reported RevPAR growth of 7.5%. RevPAR was driven by a 4% increase in average daily rate, and increased occupancy of 233 basis points. Our average occupancy in the first quarter was 72.1% compared to 69.7% in the first-quarter 2013.

Growth in our EBITDA was driven by strong RevPAR growth, which was partially offset by higher operating expenses, property taxes, and fees. For example, quarter over quarter, our same-store property taxes were up 8.7%. In addition, our five New Orleans hotels experienced a RevPAR decline of 6.6% as a result of the Super Bowl that benefited the market in the prior year. Also, our results were affected by the 11 hotels that were under renovation in the first quarter. Combined, we estimate that these factors, and increased energy costs due to the harsh winter, resulted in a 200 basis point drag on our pro forma hotel EBITDA margins.

Moving on to acquisitions. As we previously announced, we acquired four hotels in the first quarter, comprising 591 guestrooms for a total purchase price of approximately $126 million, or $213,000 per room. We continued our expansion into the high-growth, West Coast markets, with three of these acquisitions. While we continue to see a steady pipeline of potential acquisitions, we remain extremely selective, and targeting only the right hotels that fit our long-term growth objectives. We have several potential acquisitions in various stages of due diligence, and remain focused on the highest-quality, premium, select service assets that will provide strong in-place yields and create long-term value.

Turning to our renovation programs, in the first quarter of 2014 we invested $16.8 million in 11 properties. Our largest renovation completed in the first quarter was at the Holiday Inn Express & Suites located in San Francisco. The property was updated with a completely redesigned lobby and common area, as well as an expanded and upgraded business center to accommodate our business travelers. All guest rooms were updated with new furniture, carpeting, 42-inch flat screen TVs, wall coverings, as well as new bathroom vanities and lighting. We also upgraded the fitness center, including state-of-the-art equipment.

In addition, we renovated five Hyatt Places from our portfolio that we purchased directly from Hyatt back in 2012, and expect strong results that we have seen from our other Hyatt renovations.

Next, I will provide further detail on our financial and operating results for the first-quarter 2014, followed by an update on the balance sheet and liquidity position. I will conclude with our outlook for the second quarter and balance of 2014.

For the first quarter of 2014, we reported adjusted FFO of $0.19 per diluted share, which was at the high end of the $0.17 to $0.19 per share guidance range we provided for the quarter. This reflects a 5.6% increase over the first quarter of 2013. The increase in our adjusted FFO was due to higher hotel property income driven by continued growth in our portfolio and solid net RevPAR increases, partially offset by higher G&A, increased interest expense, property taxes, and a higher share count after our equity offering late in the third quarter of 2013.

Pro forma hotel EBITDA for the first quarter was approximately $30 million, a 6% increase compared to the first-quarter 2013. On a same-store basis, our EBITDA margin for the quarter was 32.9%, which was up slightly from 32.8% we achieved in the same quarter of 2013. We continue to maintain a strong balance sheet and liquidity position, with ample capacity and access to a variety of additional sources of capital to execute on our strategic growth objectives.

At March 31, 2014, we had total outstanding debt of approximately $567.4 million, with a weighted average interest rate of 4.61%, and a weighted average term to maturity of more than five years. At quarter-end, we had $91 million outstanding on our $225 million unsecured revolving credit facility. Including available capacity on our line, and cash and cash equivalents on our balance sheet, we have approximately $150 million of available liquidity to fund our investment growth objectives. At the end of the first quarter, our net debt to trailing 12-month adjusted EBITDA was 5.2 times.

For the full-year 2014, we increased our RevPAR growth target for our same-store and pro forma portfolios by 50 basis points on both the high and low end, to 4.5% to 6.5%, and 5.5% to 7.5%, respectively. This change was based on our portfolio results in the first quarter, which were above the high end of our RevPAR guidance previously provided. We are maintaining our full-year adjusted FFO guidance range of $0.84 to $0.92 per share, and providing adjusted FFO guidance for the second-quarter 2014 of $0.24 to $0.26 per share. As a reminder, our guidance assumes no additional acquisitions in 2014, and no additional capital raises.

In summary, 2014 is off to a great start for Summit. We continue to execute and deliver on the plans that we communicated earlier this year. Our top priority remains on the organic growth of our existing portfolio through operational efficiencies, targeted renovation, and upgrade programs, to further capture the embedded growth.

We are thrilled with our freshly renovated hotels, and look forward to the positive contribution these properties will add to our results as we move through the balance of the year. With our leading brands and an asset management team that is committed to extracting maximum value from our hotels, coupled with our strong balance sheet and sufficient capital to support our growth strategies, Summit is poised to continue to deliver additional value for shareholders.

With that, we'll open the call to your questions. Operator?

(Operator Instructions). Ryan Meliker, MLV & Co.

Good morning, Dan. I don't have too much going on here. But one thing I assume you can provide some color on was -- obviously, the quarter had great RevPAR; margins were, a little bit, probably disappointing to us. I'm imagining it to you guys, although as you pointed out in your press release, New Orleans and the renovations had some pretty material impacts there. But for the full year, you've increased RevPAR guidance, but have basically maintained FFO guidance.

Can you give us some color on that margins are coming in lighter than you had expected a quarter ago, despite the fact that RevPAR is coming in more robust? Just give us some color on what you're seeing.

Thanks, Ryan, for the question. I think at this point, it's just a little early for us to commit to bumping up the guidance. We did have some issues in the first quarter that many others have talked about; weather costs. We had the disruption that we telegraphed. Feel real good about the year; feel very comfortable with our guidance; just a little bit earlier for us to be aggressive about changing our outlook.

All right, but then -- were 1Q numbers a little bit lower than you were expecting on the margin front? Or was that in line with your expectations?

I think they were a little bit lower, to the extent we had some increased energy costs, a few little things. When you -- we had some Hilton Hotels that came out of renovation. And we had double bonus -- or bonus points that added a little bit of extra cost as those ramped up. So there were some little things that affected our margins. But we knew, early in the year, that the first quarter was going to be a challenging quarter on the margin side. And I think we talked, on the first-quarter call in the Q&A, with guidance kind of 25 to 75 basis points for the year. At this point, feel comfortable with that number.

Okay, that's good. And then just real quickly on the acquisition environment out there. Any changes from a couple of months ago when we last spoke? Obviously it seems like the lending markets are loosening every day. Are you seeing more competition for the assets you're chasing? Less? Any changes at all?

No, still, for the one-off in transactions, we're not seeing a lot of competition. Obviously, there's a lot of movement on the portfolio side. There's some transactions that I think are all but done that just haven't quite been announced yet. But all those are at the portfolio level at several hundred million dollars or greater.

All right. That's it for me. I'll jump back in queue with anything else. Thanks, Dan.

Thanks, Ryan.

David Loeb, Baird.

A couple of questions for you, and I'll be quick, I promise. The expenses related to improvements in internal controls, I see you've taken that out of adjusted funds from operations, which seems reasonable. Can you give us an idea about how much is left of that to be expensed, either in the second quarter or through the balance of the year?

Sure, David. I think if you look at whether we do -- as some outside resources come in, or as we slowly absorb those functions with new hires, maybe $150,000 to $200,000 a quarter would be the added cost, but nothing like we had for reconciliation in the first quarter.

Okay. And then for the balance of the renovation capital that you're going to be deploying as the year goes on, what kind of disruption do you expect from that deployment?

I think probably 60%, maybe 65% -- almost two-thirds of that was in the first quarter, so we've got relatively little disruption in the second and third quarter. And as you know, we do some renovation work in the fourth quarter, so we'd see a little bit of disruption in the fourth quarter.

Okay. Those were all of my questions. Please do give Stu our best.

Will do. Thanks, David.

Jordan Sadler, KeyBanc Capital Markets.

It's Austin Wurschmidt here with Jordan. Just really wanted to touch on acquisitions a little bit more. You discussed being extremely selective on acquisitions. And was wondering just where you're seeing the best opportunities, and are there any markets that you'd like to add exposure to?

Yes. Thanks, Austin, for the question. I think that we've always been somewhat market agnostic. All things being equal, we would like to be in the best markets with the highest barrier to entry, but those also have to meet our underwriting criteria. So I wouldn't say that you shouldn't expect us in any one market over the other. We're still focused on top 50 markets with multiple demand generators, but no specific focus on any one market.

And then just thinking about plans to fund that, how comfortable are you today with leverage toward the higher end of your range at 5.2 times? What are your thoughts on funding future opportunities?

I think there's maybe room for selectively two or three more acquisitions. Obviously it depends upon the size and the cost. I think anything beyond that, we'd expect to probably offset with some dispositions, but nothing other than the one hotel held in for sale that we have targeted at this point.

So, would you consider teeing those up and balancing acquisitions, going forward, with additional dispositions? Is that what you're saying?

Yes. I want to be careful there, but that's essentially what I'm saying. We have already disposed of the hotels we believe are nonstrategic for us, for the cycle. Should we get offers that we believe we can reallocate that capital to -- better markets at better yields, and long-term growth -- we'd be inclined to do so. But I don't want to leave anybody with the impression that we've got a bunch more hotels for sale. We feel very good about our portfolio.

Thanks, Dan, for the color there. And then just one last clarification. Any update on the internal control issue? Is there anything new to report there?

No, we have been working side-by-side with our auditors, and have a plan in place that we're executing on. So feel very good about our ability to deliver the tie out of the balance sheets from the individual hotels to our corporate balance sheet.

Great. That's all I have for today. Thanks.

Thanks, Austin.

Wes Golladay, RBC Capital Markets.

Hey, everyone. Looking at the balance sheet, it looks like you guys are carrying a bit of a line balance here, but you have adequate leverage to low leverage. Would you look to term that out with more mortgages at this time?

No, we feel pretty good about where it stands right now. I don't think we have any immediate plans to make any changes with the balance sheet.

Okay. But when you take on these additional acquisitions, I'm sure they go on the line first. And then you have -- should we assume more mortgages coming up this year?

Yes, to the extent we acquire hotels, and either assume debt or have the ability to put a piece of paper, with today's competitive interest rates -- definitely, we'd be inclined to do so.

Okay. And then you had mentioned that the -- I think it was five of the Hyatt hotels were under renovation this quarter. If you can correct me if I'm wrong, but I believe those had much lower margins than your existing portfolio when you acquired those hotels. How much runway do you have with those Hyatt Hotels, on the EBITDA -- on growing the margins there?

Yes, I think we've got several hundred basis points of margin improvement potential as a portfolio. Now, each hotel is kind of unique in its own market. But, yes, we feel very good about our partnership with Hyatt; the capital we've committed, the markets they are in, and the continued success of the brand.

Okay. And then looking at your markets right now, do you see supply creeping into any of the markets? Or do you -- in aggregate, will it be below the, call it, the 2% historic average of supply of through probably 2015 or 2016? Do you have any concerns on that?

No, we really don't. I think at the margin, there's a hotel or two that comes into markets where we have hotels, but we do have 90 hotels in top markets across the country. So a little bit of supply here or there shouldn't affect us materially. I think the supply issue that continues to come up is one that needs to be balanced with; also the reality that demand is increasing; and demand is increasing in upscale hotels greater than it is in any other chain scale. So, while there is greater supply, there's also greater demand. So I think that speaks to the quality of the new, premium, select service hotels.

And we think the supply -- I think Marriott talked about it on their call -- 65% of Marriott's supply is outside of the top 25 markets. And if you throw in New York and a few of the other gateway cities, most of the supplies are in markets that we're not. So we still feel very good, and think that that amount of new supply is much lower than the headline numbers would indicate.

All right. Thanks for the color on that.

Thanks, Wes.

(Operator Instructions). Bill Crow, Raymond James & Associates.

Good morning, Dan. Are there any initiatives out there by the brands that we should look at as amenity creep? Or anything creative going on that the brands are starting to push, as you attend the brand -- the national meetings, and you meet with the brand owners? What's out there that's new and different, now that we've gotten the TV thing behind us?

Yes, that's a great question. It seems every year we sit back and have the thought that there's not much more they could ask you to do. But as the gap between full service and select service guest experience continues to narrow, I think it was apparent that the lobbies were a big initiative from the brands over the last few years. And I think the Millennial guest is something that has really woken up many of the brands. And I think things that create better experiences and unique experiences for the Millennial guests are things that you would expect to see now. What those cost, and what those exactly are, I think remains to be seen.

What we do know is that they don't like to walk into a hotel and see a sea of sameness -- like a business traveler, like myself, would like to see. That consistency is not as attractive to them. So bandwidth matters; experience matters; location matters; and newer and cleaner usually wins.

So maybe as we think about it, it's not so much as what things are going to cost, but what new things are, and how you can deliver on that experience. And I think to spend the extra money for a real quality renovation pays off significantly over the balance of the cycle.

So, long answer -- and I don't know that I specifically answered if there's any specific things -- but most of the things, I think, would be around the experience for the Millennial.

As you think about the lobby reno -- which, you're right, everybody is talking about that -- are you on top of that? Are you (technical difficulty) curve? In other words, how much more do you have to do to catch up to the new brand standards?

Yes. I think this year we should be through with the majority of our renovations from not only our same-store, but our acquired hotels, so that CapEx should drop off considerably next year. And we have, as we've talked about over the last year, accelerated some renovations. We spent a little bit more than the PIP would have required in a hotel like the Holiday Inn Express in San Francisco. The flow and guest experience there matters considerably. And so we feel like we're ahead of the curve in accomplishing those initiatives.

Okay. That's it for me. Thanks, Dan.

Alright. Thanks, Bill.

Jordan Sadler, KeyBanc Capital Markets.

Hey, Dan. Just a follow-up on the RevPAR growth. Wanted to understand the drivers a little bit better. I know you mentioned Baton Rouge and Phoenix/Scottsdale in some of the big numbers. But what outside of those -- which I feel where maybe a little bit more expected -- were a surprise to the upside? Which markets were real strong for you?

Well, I think that's a great question. I think the West Coast would have stronger had not Holiday Inn Express been under renovation, but it was fairly broad-based across the board. I will be honest with you. As we've talked about, we've been investing in these properties for the last couple of years. And as these properties have come online, and we've continued to work with our sales teams and our revenue management teams, it's been very broad-based. So the outsized -- I think we're largely on those two markets, but it is fairly broad-based across the portfolio. Which, as we said, really gives us confidence over the balance of the cycle that the money we spent was well spent, and we've got a great runway ahead of us.

And with some of the -- so the upside in the overall 8.4% that we saw -- I know occupancy was up a lot. Was that a function of Baton Rouge and Phoenix, as well? Or was that also broad-based, the occupancy gain?

Not to continue to use the broad-based answer, but one of the things we've done is we have acquired hotels. Craig, our Chief Operating Officer, and his team have really dug in and worked at fixing the mix of business from business and leisure, and they've been able to find some opportunities to add some occupancy, maybe on some soft periods, over weekends. And so I think part of that is just fixing the mix across a lot of our acquired hotels. So I wouldn't say it's just driven by rooms being out of service. I think part of it is the asset management process, or revenue management process, of extracting maximum value throughout the week.

Okay. And do you continue to see upside there, to occupancy? I know that, relative to historical standards, you're pretty full.

Yes, I think once you start to get into the low- to mid-70s, you start to hit -- you get closer to peak occupancy. To get much higher than that, you need to have pretty strong leisure demand on weekends. So I think the biggest gains in occupancy have been had. And I think the majority of the gains we'd expect, going forward, will be from rate.

Thank you.

Thank you. I would now like to turn the call over to Mr. Dan Hansen for closing remarks.

Thanks, everybody, for dialing in today. As we've said many times before, we're extremely proud of all the work we've done over the last couple of years, and especially over the last several quarters, to drive increased value within our portfolio. We're really looking forward to a great 2014, and discussing our results with you again next quarter. Have a great day.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.