Summit Hotel Properties Inc (INN) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Summit Hotel Properties Q1 2015 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference call, Director of Investor Relations Elisabeth Eisleben. You may now begin.

Thank you, Marcus, and good morning. I am joined today by Summit Hotel Properties' President and Chief Executive Officer Dan Hansen and Executive Vice President and Chief Financial Officer Greg Dowell. Dan and Greg have prepared comments related to our first-quarter 2015 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 expressed 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 2014 Form 10-K and 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 make today are effective only as of today, May 5, 2015, and we undertake 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, www.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 2015 earnings conference call. Let me begin by expressing how thrilled we are with the performance and growth of our portfolio in the first quarter of 2015, exceeding the high end of our guidance.

For the first quarter, we reported adjusted FFO of $23.2 million, which is a 39.6% increase over the first quarter of 2014. Our AFFO per share increased 42.1% from the first quarter of 2014 to $0.27 per diluted share, exceeding the $0.22 to $0.24 per share guidance range we provided for the quarter.

Our same-store RevPAR growth for the first quarter was remarkably strong at 13.3% compared to the first quarter of 2014. RevPAR growth was driven primarily by strengthened average daily rate, which was up 9.5%.

Our same-store portfolio continues to outperform and has now exceeded the Smith Travel Research overall US and upscale average for 12 consecutive quarters. This is a credit to our operational team that is truly best-in-class and continues to execute on our strategic objectives and drive growth throughout our portfolio.

On a pro forma basis, we recorded very strong RevPAR growth of 11.9%. Our RevPAR growth was driven by an 8.8% increase in average daily rates and increased occupancy of 2.8% to 74.3%.

Our growth in the quarter was again very broad-based. 46 of our 90 properties and 20 of our 38 markets posted double-digit RevPAR growth. San Francisco was again one of our strongest markets, posting 40% RevPAR growth for the first quarter, aided by an easier comparison in the comparable period from renovation disruption. Excluding the San Francisco Holiday Inn Express that was the beneficiary of that comparison, our remaining San Francisco hotels posted RevPAR growth of 28.7% for the first quarter of 2015.

Our hotels in Minneapolis and Phoenix-Scottsdale markets were also fantastic performers, posting approximately 35% and 33% RevPAR growth, respectively, benefiting from continued stabilization from our Hyatt Place in downtown Minneapolis and the Super Bowl in Phoenix.

Moving on to acquisitions, subsequent to quarter end we closed on the newly-constructed 211 guestroom Hampton Inn & Suites in Minneapolis, Minnesota, for a purchase price of $39 million or $185,000 per key. Situated in the heart of downtown Minneapolis near the art and business districts, our hotel is connected to the city's iconic climate-controlled Skyway, placing us minutes from the convention center, Hennepin Avenue, and Nicolett Mall. It is less than three blocks away from the Minneapolis Metro Blue Line, which provides easy connectivity into the Minneapolis International Airport and the Mall of America.

In addition, we are located within walking distance of Target Field, which is home to the Minnesota Twins, and the Target Center, which is home to the Minnesota Timberwolves and hosts other headline entertainment and events. We are thrilled with the completion of this new hotel and see it as a strong addition to our portfolio of premium select service assets.

During the first quarter, we spent approximately $16.1 million on capital improvements to our portfolio and added five guest rooms. In addition to the Fairfield Inn & Suites that we highlighted in our release, we also completed the renovation at our Hilton Garden Inn, located in the Galleria area of Houston, Texas, for approximately $1.9 million. And also continued the renovation on the rebranded Doubletree in San Francisco and we expect to complete that renovation in the third quarter.

With that, I will turn the call over to our CFO, Greg Dowell.

Thanks, Dan, and good morning, everyone. In the first quarter of 2015 we were very pleased with the continued strength of our portfolio and the overall lodging industry.

On a pro forma basis our hotel EBITDA in the first quarter of 2015 increased to $38.4 million, which was an increase of 18.9% over the same period in 2014, expanding our first-quarter pro forma hotels EBITDA margins by a robust 216 basis points to 35.7%. For the first quarter of 2015 our adjusted EBITDA grew to $34.5 million, an increase of $7.3 million, or 26.9%, over the same quarter in the prior year. These results were largely driven by exceptional RevPAR growth, which was driven primarily by strong growth in our average daily rate.

Moving on to our balance sheet, we continue to maintain a strong balance sheet and liquidity position. At March 31, 2015, we had total outstanding debt of $628.8 million with a weighted average interest rate of 4.33%. We ended the quarter with net debt to trailing 12-month adjusted EBITDA of 4.4 times, which is well inside of our acceptable range.

Subsequent to quarter end we closed on a $125 million seven-year unsecured term loan. The term loan has an accordion option which provides the Company with the ability to increase the term loan commitments to $200 million subject to certain conditions.

On April 21, 2015, we exercised $15 million of the $75 million accordion feature, which increased the aggregate seven-year unsecured term loan commitment to $140 million. Proceeds from both the term loan and accordion were used to repay borrowings under our $225 million senior unsecured revolving credit facility. When factoring in the closing of the term loan and accordion, we have total outstanding debt of approximately $663 million with a weighted average interest rate of 4.22% and a weighted average maturity of five years.

We currently have approximately $70 million in trailing 12-month unencumbered hotel EBITDA, which represents approximately 46% of our total portfolio on a pro forma basis. Including available capacity on our line and cash and cash equivalents on our balance sheet, we have capacity of over $200 million to fund our strategic objectives.

Turning to guidance for 2015. In our release you will see that we increased guidance for the full year 2015 to incorporate our strong first-quarter results as well as the acquisition of the Minneapolis Hampton Inn & Suites. For the full year 2015 we increased our AFFO guidance to $95.6 million to $100.8 million, or $1.10 to $1.16 per share. For the second quarter 2015 we provided guidance for AFFO of $0.32 to $0.34 per share. Metrics supporting our guidance were provided in our release.

For the full year 2015, we also increased our pro forma and same-store RevPAR growth projections on both the high and low end from 5.5% to 7.5% up to 6% to 8%. We have also incorporated capital improvements of $32 million to $38 million for the full year 2015, which includes both renovations and recurring capital expenditures. As reminder, our guidance assumes no additional acquisitions, dispositions, or capital markets activity in the second quarter or full-year 2015.

With that, I'll turn the call back over to Dan.

Thanks, Greg. In summary, we are absolutely thrilled with the performance of our portfolio and the continued successful execution by our team. As always, we continue to seek opportunities for growth and to look for additional ways to create value for shareholders.

With that, let's open the call to your questions.

(Operator Instructions) Jordan Sadler, KeyBanc.

It's Austin Wurschmidt here with Jordan. I was just curious where you saw growth exceeded your guys' expectations in the first quarter. You were pretty materially above the guidance you provided earlier this year so just curious where you exceeded your expectations.

Thanks, Austin and Jordan. Minneapolis was strong, even if you took out the Hyatt Place, which was continuing to stabilize. That market was up 27% for us, exceeding the market. We got great properties that we have invested in and that was a great addition.

Phoenix, even absent the Super Bowl, had a very strong March, over 20%. So those are two key markets I think that, in addition to the obvious really, outperformed for us. And then, as I said in my comments, San Francisco has been very strong despite having some rooms out for renovation.

So I don't know that there is anything that stuck out as a big surprise, but just very broad-based across the portfolio. We are in that part of the cycle where select services historically outperformed it and we're seeing the benefits of that now.

Would you say that it's a function of better traffic or demand I guess in some of these markets, or are folks just a little bit more willing to accept a little bit higher rate than you may have expected?

You know, occupancy has been strong, that's for sure. We have been very pleased of our team's ability to add occupancy on the shoulder nights and on the weekends. But, yes, the leader segment has been price takers to a great extent. So I think that higher occupancy has allowed us to be very aggressive in pushing rates. And when you combine that with a little extra occupancy coming off of some renovation, that has allowed us to be successful really across the board.

That's helpful. Then just one last one for me. If you strip out I guess some of the benefits that you mentioned from both Phoenix and some of the renovation properties with the easier comps, have you seen any deceleration subsequent to quarter end in your same-store growth?

No, I think a key point would be that we took the full beat all the way through for the year, so I don't think you could say that we think there's a slowdown. We essentially had the same guidance with Q1 actuals factored in. We don't have a lot of visibility beyond the current quarter.

We've talked about that on the prior calls. So I would say similar to last year we see more opportunities and think there's more upside potential should the underlying fundamentals remain strong. But, no, we don't see a deceleration in growth potential throughout the year.

Would you say you feel like you are trending more towards the high side I guess of the operating margin guidance, the 50 to 100 basis points you gave last quarter?

Yes, we communicated kind of a 50 to 100 basis points range. We do, as we said, in the past have some lingering headwinds from property taxes, which is a result of the assessment on the high-quality assets we acquired. We will see some incentive management fees this year also as a result of outperformance. But after posting the 200+ basis points of margin expansion, we do feel there's a stronger likelihood for our portfolio to expand margins to the high end of that 50 to 100 basis points range.

Great. Thanks for the time today.

Bill Crow, Raymond James.

Good morning, guys. Dan, can you just walk us --? I guess the same question stated a little differently than we just heard. Just walk us down from the strength in the first quarter, which admittedly is a slower quarter relative to the rest of the year, to get down to a 6% to 8% RevPAR growth.

And I get that you don't have much visibility, so maybe it is just conservatism, but I think that's what the last question was getting at, what is the slowdown that could impede? Maybe it's tough comps, maybe it's renovation. Whatever it would be that would take you from the strong outperformance in 1Q to a lower number average for the year.

I think we could back into it another way with the comps from last year. Both Q3 and Q4 were kind of double-digit RevPAR quarters for us, so to have what we would telegraph for the year on top of that is still a very strong performance.

I think that would be part of it; optically having lower RevPAR growth for the year as a result of having significantly higher RevPAR growth for the second and third quarter -- third and fourth quarter last year as well. I think that is an important factor as well.

Okay, that's helpful. You have talked before about a two-year goal on margin increase. I think it was 250 basis points over a couple of years. Does that remain intact and are you -- especially after this first quarter?

Yes, I think that's still a good target for us. It is a little early to say how that comes in, if it's linear or if it's chunkier early or chunkier later. Pure rate-driven RevPAR would obviously translate into a higher margin expansion. So we do think there's added opportunity over the next couple years, but I think that's still a good target for us.

Great. Then finally for me, if you could just give us some comments on the acquisition environment, your appetite. Are some of the folks that are set to list, have they come out of the market, providing maybe a little more opportunity for you? Just what are you seeing there? Thanks.

Thanks, Bill. We do have a better pipeline than we had last quarter for sure. We have been fairly proactive in sourcing deals and made progress in a few off-market deals and, quite frankly, a few marketed deals that were potentially overlooked by others. So we do see opportunities in the low 8 cap range on a forward basis for a high-quality asset, which is still within that range that we've been targeting all the way back since IPO.

We don't have any assets that -- under contract with money that's nonrefundable at this time, but we will always continue to look for the superior one-off transactions and packages of two or three. Still very active in underwriting, but planned on being focused on two or three key opportunities. Still have a bias to using the sale or disposition of hotels to fund our growth strategy, but I think we have been very pleased at the ability to continually find acquisition opportunities that not only meet our underwriting criteria but that offer great growth profile going forward.

Great, thank you.

Wes Golladay, RBC Capital Markets.

Good morning, everyone. Once again a very nice quarter.

Sticking with that last question, you mentioned you would have a bias towards disposition to fund acquisitions and actively underwriting stuff. Are you actively looking to sell assets right now? And if not, how soon could you sell an asset if you found an acquisition?

We've never actively looked at capital recycling. We did sell 24 assets over the last couple years that we didn't feel would measure up, but the remaining assets we have are -- the secondary assets are high quality. They are renovated. So if we were to get a compelling offer, that is definitely something that we've talked about in the past that we would consider.

I think there are opportunities out there from many of the usual suspects that place a high value on some of these assets and they are great quality. But unless we are able to transact with something that we feel benefits our shareholders and have opportunities to redeploy the capital, we are very content with the assets. So I think as we look forward, we wouldn't be actively marketing, but obviously receptive to offers on some of those assets.

Does that answer your question?

What -- and you could close on that in a relatively short period time if you --?

We've got -- after closing the Minneapolis Hampton Inn & Suites, we still have what we would consider $180 million of capacity that would leave us at kind of the high end of that 4.5 to 5.5 times range. But that would be kind of a temporary measure while we sold some assets to offset the acquisitions.

Okay. Then looking at your outlook for the balance of the year, I know there is limited visibility into your type of hotels, but how do you see your company on a relative basis outperforming the upscale segment? And what is really driving that?

Is it the footprint having less New York? Is it a renovation tailwind or is it the product offering with the premium select service? How do you chalk that up for I guess 12 straight quarters of outperformance?

I think you identified in your question many of the key areas that are driving our outperformance. We view ourselves as an active manager, so to speak, so we would always expect to outperform over time and 12 quarters is a remarkable, consistent track record.

Part of that is fueled by, as you pointed out, investing capital in the renovation of those assets. Part of it is making sure we're in the right markets and then part of it is just the strength of the brands and our operational team's ability to extract maximum value and every last dollar from the market. So I wouldn't say there is a secret sauce or a black box, other than it's a lot of hard work and we've got a lot of experience through up-and-down cycles executing.

Okay, but I guess would you feel comfortable outperforming the upscale segment for the balance of the year?

I think that's always our expectation and something we feel comfortable with.

Okay. Then a last one from me. Looking at the Hyatt Place, has that stabilized yet or is that still waiting for next year in Minneapolis? What are your expectations for the Hampton Inn stabilization period and EBITDA contribution this year?

The Hyatt Place probably has another year before it's fully stabilized. We've been very pleased with the progress that we've made there. The Hampton, on the other hand, the strength of the brand has allowed it, we think, to probably stabilize fully by the end of 2016. Probably add maybe close to $0.01 this year in AFFO and obviously more in 2016.

Okay, thanks a lot for taking the questions.

Michael Bellisario, RW Baird.

Morning, guys. A few questions for you. One follow-up from a few of the earlier questions on margins. Have you guys noticed any amenity creep from the brands and is that negatively impacting your margin outlook at all?

Nothing that we would highlight. There's always a new breakfast somewhere and new pillowcases or something at -- a lobby something at another brand, but nothing that we would point out that would be material at this point.

Got it. Any major difference between your managed and franchised properties, the outlook for margin growth between the two?

I don't think so. I think the managed properties, many, as you all know, started at a much lower margin basis, so I think there is still as much opportunity in the managed as well as the third-party managed.

Got it, okay. Then one more on the acquisition environment, maybe asked a little differently than the previous questions. How are you guys evaluating potential deals today and those deals' potential returns versus your cost of capital? Does math pencil any better today versus 90 or 120 days ago?

Based on where our stock is trading, I would say that they would potentially be more accretive based on moment in time, but we don't make our investment decisions based on where our stock is trading at moment in time. We've said consistently over the last four years, and even longer, that an 8% to 10% going in yield was very important to us and that operational and value upside on top of that gets us to kind of that double-digit unlevered return and into the teens. So that has been a core underwriting tenet for decades.

Okay. And then in your underwriting model, whether it's five years, seven years, are you modeling any slow down or any recession in the out-years just yet?

Yes, we would look beyond. We've got good visibility beyond -- for, like, the next two years based on trends and the potential new supply. I think supply has started to pick up, as expected, but we see it being easily absorbed in our markets and having little effect on our results.

At this point it looks like about 1.3% supply for 2015 and I think it's unlikely we see 2% until at least 2017 or maybe even 2018. The brand companies have some new brands, but they are still -- most of the areas where there's very limited brand availability and also construction prices are up nearly 25% in the last 12 months; the developers are starting to be very selective. So I think there's some potential headwinds as well.

I also point out that all the new supply we are seeing has been in the pipeline for a couple years, so we do know what's coming. We've got very good visibility of that supply for the next couple years so there won't be anything that we are unprepared for. So does that clarify your question?

It does, thanks. That's all for me.

(Operator Instructions) Shaun Kelley, Bank of America.

Good morning. I think you alluded to this in an earlier question, but I just wanted to follow-up as it relates to longer-term margin. I'm curious, with your experience in limited service at this point in the cycle, what is the kind of theoretical margin potential of where you could go over a longer-term horizon and maybe play this out for a little bit longer.

But as you look back in that cycle, performance cycle peaks, how high would a portfolio like yours today get to? At a theoretical level, not a target that we will hold you to.

I think there's definitely potential to creep up to 40%. It's really a function of the length of the cycle. I think if you tell me the length of the cycle I can back into where we think supply and costs are going to rise to. But I think, theoretically, for a portfolio like ours we can get to the 40% depending upon the length of the cycle.

Thanks for that. Then my second question would be you were mentioning just a moment ago about the supply, but we have seen the upscale supply numbers start to creep up faster than that kind of 1.2% or 1.3% for the industry. So are you seeing that in your markets or are you seeing above 1.3% as you look at your blended markets? Are you kind of able to choose locations and places where you've got barriers that you're not seeing numbers that would be meaningfully above the industry average?

Thanks for five questions in one, Shaun. Appreciate that. I think that definitely the majority of new supply is upscale. There's no question about that. And I think there is -- the deeper issue is that that has become such a popular and desirable place for guests to stay that it has basically been very demand driven. That's where guests want to stay.

So I think that is getting absorbed a lot by today's traveler that doesn't want to stay in a full-service hotel that may be of an older vintage or may have less capital. So I think that's one reason that a lot of that supply is getting absorbed.

For us, the majority of our markets, all the existing brands are already there so there's very limited brand availability, absent kind of the new brands that have been recently introduced. And those take a while to get stabilize. So the big number of supply that people continue to hone in on is a lot driven by New York and Nashville and Austin and some of the bigger markets that are kind of headline markets, and we've got very limited exposure to those type of markets.

I think that kind of mid-1% range for our portfolio is probably fair, but nothing in that number is something that we are not aware of. As I said in the prior comment, we can see that supply coming two years out, so it's not like something just opens up overnight. We feel very comfortable absorbing that new supply and don't believe it will affect our numbers.

Thanks for that, I think it's very clear. I guess my last question would be -- and again I think you alluded to this a little bit. We've heard a little bit about construction costs moving up for developers actually, even in some of the secondary and tertiary markets. Could you just give a little bit more color there on if you are seeing that and what kind of inflation rates developers might be seeing right now?

We were a development company; that is how our company started, so we have got great visibility and relationships with developers that have been building hotels across the country for decades. So I think we've got pretty good sanity check, so to speak, to what's going on in the marketplace.

What happens when costs go up, underwriting becomes tighter. And when -- in most markets in the premium select service, you're looking at a 75% occupied type of market. It's not like Manhattan, where it's a 90% market. There's real stabilization that can take two and three years in some markets, so underwriting starts to get tough.

And when those construction numbers take off, two things happen. There's really a flight to the higher barrier to entry, higher RevPAR markets, and a lot of projects just get put on hold. We haven't seen projects put on hold yet. We continue to see developers find opportunities to put brands where they are not today and we don't think that's unhealthy in many of these markets.

Many of these markets would very much benefit from new, clean and fresh, premium select service hotels. And outside of those secondary markets into some of the top 50 markets, we'd expect to be buyers of some of those new premium assets over the next -- this cycle and the following.

Thank you very much.

Wes Golladay, RBC Capital Markets.

One more quick one on the construction costs. Do you have a replacement cost for a typical Beltway hotel outside of the top 10 markets?

I think there's such a wide variance today in what that average price would be. I haven't seen the updated numbers from any of the brands, but I would suspect probably well over $125,000 a key without land in just your average market, not counting higher value land and higher barrier to entry. So I think that's a real good baseline of maybe where to start.

Okay, thanks for taking the follow-up.

Chris Woronka, Deutsche Bank.

Good morning. Dan, wanted to ask you with the changes that might occur at Starwood, whatever they might be, does it make you guys more or less likely to maybe look at some of their assets, which obviously a lot of REITs don't own many of them. I know it's a tough question because we don't know what might happen, but maybe some of the gives and takes in your mind, what would need to happen for you guys to potentially look to do more with them?

Chris, that's actually a pretty good question. I think it goes back to where our focus is. We are predominantly Marriott, Hilton, Hyatt, and IHG brands in our portfolio. They've got the greatest amount of distribution of premium select service and they've also made the strongest, in our view, commitment to the space.

I think Starwood's Aloft brand in particular resonates very well with this Millennial traveler and in the right markets is a great brand. So it would be purely opportunistic; if there was a Starwood brand in a market that we felt was a strong benefit and a strong performer, we would be definitely interested. We did buy the Four Points in San Francisco last year, which was our second Starwood property. So not a bias against a Starwood, more a question of, in our view, their commitment to growing their brands in that space and just the pure math of their distribution and footprint.

Okay, very good. Thanks, Dan.

We have no further questions in queue at this time. I would now like to turn the call back over to the speakers for closing comments.

Thank you all for joining us today. Really just wanted to wrap up with a similar comment that we have used in the past, just that we've got extreme confidence in the portfolio. We continue to see strong fundamentals, limited supply growth, and our operational expertise with our team. Very pleased they continued to deliver with strong results.

Thanks again for taking the time. Have a terrific day and we will talk to you next quarter.

Ladies and gentlemen, thank you for attending today's conference. This does conclude today's program. You may now disconnect. Everyone, have a fabulous day.