Summit Hotel Properties Inc (INN) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Summit Hotel Properties, Inc. Q2 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, Ms. Elisabeth Eisleben. Ma'am, please begin.

Thank you, Liz, 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.

Please 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 known, as described in our 2014 Form 10-K and other SEC filings.

Forward-looking statements that we make today are effective only as of today, August 4, 2015, and we undertake no duty to update them later. You can find copies of our SEC filings and earnings release, which contains reconciliations to non-GAAP financial measures, referenced on this call on our website at 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 second-quarter 2015 earnings conference call. The second quarter was another strong quarter for Summit and we are thrilled with the record performance and continued growth of our portfolio.

For the second quarter we reported adjusted FFO of $29.7 million, which is a 21.4% increase over the second quarter of 2014. Our AFFO per share increased 21% from the second quarter of 2014 to $0.34 per diluted share, our highest amount per share in history.

Our same-store RevPAR growth for the second quarter was remarkably strong at 8.7% compared to the second quarter of 2014. RevPAR growth was driven primarily by strength in average daily rate which was up 7.3%.

Our growth in the quarter was again very broad-based with 43 of our 93 properties and 17 of our 39 markets posting double-digit RevPAR growth. Two of our strongest markets in the quarter were New Orleans and Salt Lake City.

New Orleans posted 20.3% RevPAR growth due to a very strong May with a citywide convention. And we were also successful in the softer months with strong transient demand.

Salt Lake City continues to shine posting RevPAR growth of 18.8% with success coming from the capital invested in 2014 and shifting the business to higher rated corporate and transient guests.

Our operational team continues to execute and drive growth throughout the portfolio. Our same-store portfolio continues to outperform and has now exceeded the Smith Travel Research overall US and upscale average for 13 consecutive quarters. This truly validates our mantra of being best-in-class in operations and shows the value enhancement capabilities of our team.

On a pro forma basis we also had a strong quarter posting RevPAR growth of 7.6%. Our RevPAR growth was driven by a 6.5% increase in average daily rate and increased occupancy of 1% to 80.9%. The pro forma portfolio lagged the same-store portfolio primarily due to the softness in our two Houston hotels.

Moving on to acquisitions. During the quarter we closed on three acquisitions for an aggregate purchase price of $98 million or approximately $211,000 per room. Subsequent to quarter end we acquired two Residence Inn by Marriott properties for $56.8 million or approximately $235,000 per room.

These acquisitions are all institutional quality and the last four had an average trailing 12 RevPAR of $128.65. We are very pleased with the addition of these great hotels to our portfolio of premium select service assets.

To be able to add acquisitions of this quality in geographic locations which exhibit strong growth profiles, multiple demand generators and have the strong operational model of premium select service is a key differentiator of our Company.

During the quarter we also announced the pending sale of 26 hotels for $351.4 million to ARC Hospitality. The sales are scheduled to close in three tranches with the first closing anticipated late in the third quarter.

The due diligence period ended and we have received $35.2 million in earnest money. We have essentially match funded the first tranch with the last five acquisitions and are ahead of our plans to have the transaction fully match funded.

During the second quarter we spent approximately $10 million on capital improvements to the portfolio. We are renovating the rooms at the Hampton Inn & Suites here in Austin and creating some flare in the public space by blending the historic culture of the South with the uniqueness of the Austin music scene.

In our Hampton Inn & Suites in Ventura, California we're implementing the Forever Young initiative which has a more modern and upscale vibe. It has been received positively by today's business and leisure traveler and we expect great results from that investment.

Lastly, we took advantage of a window after the May convention center -- after the May convention to upgrade the bathrooms at the Courtyard by Marriott at the convention center in the New Orleans market to further enhance the guest experience. And what that I will turn the call over to our CFO, Greg Dowell.

Thanks, Dan, good morning everyone. In the second quarter of 2015 we were pleased not only with our operating performance, but with the continued strength of the overall US lodging industry.

On a pro forma basis our hotel EBITDA in the second quarter of 2015 increased to $47 million, which was an increase of 10.4% over the same period in 2014, expanding second-quarter pro forma hotel EBITDA margins by 39 basis points to 37.8%.

Margin expansion this quarter was held back by increased franchise taxes, additional incentive management fees and increased property taxes. Half of our franchise fees were a catch-up related to prior periods which would have improved the margin expansion for the quarter by an additional 10 basis points.

We remain confident that our portfolio will continue to expand margins at or above the high end of our previously stated range of 50 to 100 basis points of margin expansion for the full year. For the second quarter of 2015 our adjusted EBITDA grew to $41.7 million, an increase of $6.1 million or 17% over the same quarter in the prior year.

Moving on to our balance sheet. We continue to maintain a strong balance sheet and liquidity position. At June 30, 2015 we had total outstanding debt of $721 million with a weighted average interest rate of 4.04%. We ended the quarter with net debt to trailing 12-month adjusted EBITDA of 4.8 times, which is well within our acceptable range.

At this time our target is still four times for the end of 2016 through the execution of the ARCH transaction as well as the amortization of debt and smart capital allocation.

Subsequent to quarter end we closed on two acquisitions for $56.8 million that were funded by advances on our credit facility. When factoring in the closing of these acquisitions we have total outstanding debt of approximately $761.6 million with a weighted average interest rate of 3.9%.

Turning to our guidance for 2015. In our release you will see that we again increased guidance for the full year 2015 to incorporate our strong results from the first six months and four acquisitions we have completed subsequent to our last guidance update.

For the full year 2015 we increased our AFFO guidance to $1.16 to $1.20 per share. For the third quarter 2015 we are providing guidance for AFFO of $0.33 to $0.35 per share. This guidance assumes an annual G&A forecast of $21.5 million that includes the effect of the transition of our former Chairman of which $1.9 million will be an add back to AFFO due to its nonrecurring nature.

Metrics supporting our guidance are provided in our release. For the full year 2015 we are maintaining our pro forma and same-store RevPAR growth projections of 6% to 8%.

We have increased the amount of capital investment for the full year 2015 to a range of $37 million to $43 million based on the outsized returns we have generated from previous capital investment projects. Of this increase approximately $2 million will be reimbursed from insurance proceeds resulting from a hail storm claim.

As a reminder, our guidance assumes no additional acquisitions, dispositions or capital markets activities in the third quarter or full year 2015. With that I will turn the call back over to Dan.

Thanks, Greg. Before I turn it back to the operator for questions, I did want to take just a minute to thank our founder, Kerry Boekelheide, for all his contribution to Summit.

As you know, Kerry decided to step down from his position as Executive Chairman to return to his roots in hotel development and he does leave behind a legacy of strong work ethic, high moral standards and a singular focus on working to create value for shareholders.

In summary, we are absolutely thrilled with the performance of our portfolio and the continued successful execution by our team. We see a window of opportunity today to create value for shareholders through thoughtful capital allocation in premium select service hotels which today's guests love.

We continue to identify the right brands in key locations with outsized growth drivers and the operational upside that is possible with the higher margin operational model of premium select service. And with that we will open the call to your questions.

(Operator Instructions). Bill Crow, Raymond James.

Just a couple of clarifications here. The inclusion of the positive impact from actual and pending acquisitions, but we understand the decision to exclude the expected impact from the sale.

Does that in any way indicate that the -- there is increasing risk to the sale closing, the timing of it, the magnitude of it, anything else that has you deciding not to include that in the guidance?

Bill, this is Dan. The only gating item for the ARC transaction really is fully negotiating the PIP. We did build some flexibility into the closing to the extent it doesn't affect our 1031.

It is a little unique to have the negotiating part of the PIP for the seller to be involved and to be working with the buyer and the brands. But we feel it is important to work as partners really to maintain the value of the capital that was invested in this portfolio.

The discussions are going exceptionally well with really only one brand, which we are not going to name, not being quite as flexible yet at this point. But -- we don't see any issues of getting to the finish line, but there are three parties involved, between us, ARC and the brand.

So unless one of the parties doesn't truly act in good faith we should have no problem getting to the finish line. The timing of which is just still flexible. So I hope that helps.

Okay. And then one of the items that hurt margins was the increase in incentive management fees. Do you have a -- can you give us the number of hotels, percentage of hotels that are paying incentive management fees? Help us think about the ramp to IMF as we go through this year and next year.

I think about 35 basis points is the expected incentive management fee I think would be a good way to look at it.

And does that increase next year or just maintains on a higher revenue base? The growth?

I would expect it to maintain on a higher revenue base.

Okay and then finally, just clarify for us -- our understanding is that Kerry has departed in order to spend more time developing hotels which ultimately could or could not compete against you. So I am just curious about the decision to pay severance in that case and why it is appropriate to do so?

This is Dan again. Kerry was an Executive Chairman, so he did have an employment contract. It is something that he started essentially part-time with the blessing of the Board with certain covenants on his ability to do that.

And this was -- timing felt right to make that a full-time opportunity for Kerry on his terms. So, based on the terms of his contract, which as I said he was an employee, that is where really the severance comes from.

So, despite the fact that he is initiating the move it is under the contract?

It's a mutually negotiated severance agreement; it wasn't a violation of any contract. This was a very comfortable departure and, as I said, the timing just felt right for Kerry. And again, it was more of a result of a severance package, not any contract.

Perfect, great. Thanks, Dan. Appreciate it.

David Loeb, Baird.

Hey, Dan, can I just follow up on Kerry a little bit? I am sure you are going to miss his wisdom and guidance on the Board. But just part of Bill's question was about the kind of stuff he is going to be doing.

My understanding from the agreement that the Board had with him prior to this was that he wasn't really anywhere near the kind of markets or properties or I guess type of investments that you guys were looking at. And part of that was because you had restricted is ability to compete pretty directly.

Can you just talk a little bit more about whether what he is going to do might compete or might be a source of future acquisitions for you, things like that?

Yes, we don't see Kerry's new business venture as competition at all. Kerry is a very large shareholder; this Company is near and dear to his heart. So there is certainly -- I have 100% confidence that there is no intent to do anything that is in any way detrimental to the Company.

As you know specifically, and many others may know, Kerry has a long history of hotel development for the last 30 years. And to the extent he wants to grow the Company, we are very supportive and don't see that as any risk at all to our ability to execute on our strategy.

That helps, thanks. And just to go back to the ARCH transaction and the acquisitions that you are looking at. It looks like your strategy is to: one, replace the lost EBITDA from those dispositions with new acquisitions; two, to do that a little bit in advance; and three, to do that at pretty attractive rates.

I am impressed with the forward cap rates on the stuff you are buying. Do you see the market out there for more assets that have that kind of 8% to 8.5%, 2016 cash flow profile?

You know, we do. And it is a unique window in the market, we think, where higher-quality institutional assets have fewer bidders. And the pricing for the one-offs and small portfolios are such that we can essentially match fund and continue to grow our portfolio with higher-quality assets.

So, our pipeline is strong and, as I said in my prepared comments, we fully expect to be able to match fund the sale with new acquisitions consistent with what you have seen us announce so far.

So I took that comment as being you would essentially redeploy the capital in a pretty close time proximity. But can you also talk about whether you would be replacing the earnings? In other words, will there be some -- still be some dilution either in the first or the second year following the disposition, the slices of the disposition?

We would expect the first year post closing to be at or above the levels of the portfolio that we are selling.

Great, thank you.

Ryan Meliker, Canaccord Genuity.

I just had a couple of questions. First with regards to the guidance increase, it sounds like it is primarily driven by the acquisition of these hotels in advance of the disposition of the ARCH portfolio that is still yet to come. Is that the primary driver of the $0.05 increase at the midpoint on FFO?

Yes, I think we brought the penny beat from the quarter through and along with what we telegraphed EBITA contribution for the balance of the year that was really the move from guidance to the higher level.

all right, that is what I thought, that is helpful. And then the second question I had was with regards to as we look out on the RevPAR metrics to 4Q, we have heard from a lot of other companies that 3Q is going to be softer than 4Q driven by some calendar disparities.

But it looks like your implied guidance for 4Q is much lower than 3Q. Are you really seeing -- obviously you don't have that much visibility into 4Q, but are you expecting a material deceleration into 3Q and then again into 4Q?

No, I think it's as we have talked about each quarter, it is more of a visibility issue than a confidence in the market as a whole. Let's be honest, we are six years into a cycle. To expect RevPAR to be accelerating is -- well, I'll just say we never expected RevPAR to continue at a double-digit pace forever.

So we are reaffirming our full year guidance for both pro forma and same store. Our Q3 RevPAR guidance of 4% to 6% is truly healthy for us. And remember, it is also coming off of 15% RevPAR growth in Q3 of 2014.

So, we can generate terrific returns with mid-single-digit RevPAR and the operating model of premium select services is really built to perform in markets like this. So, I wouldn't read anything into the guidance beyond what we see immediately in front of us.

So it sounds like from a RevPAR perspective you are more comfortable at the high end of the range than low end of the range?

Yes, I think the opportunity to outperform with the fundamentals remaining strong would put us strongly between the midpoint and high end.

Okay, that is helpful. And then the last question I had was you guys filed an ATM last night, just some color behind what made you guys decide to do that?

Yes, this is Greg. You know, we don't have any immediate plans to use the ATM, but we look at it as a tool to match fund acquisitions. It is the least costly way to raise capital and we think if thoughtfully used it is a valuable tool. But as I said, there are no immediate plans to use the ATM.

And this is Dan, I would just add we have had one in place for quite some time and haven't used it and it was just time to upgrade it and keep it current.

That makes sense, you won't hear me argue with any of that. Great quarter and hopefully we will see those double-digit RevPAR growth levels continue throughout the rest of the year. Thanks.

Wes Golladay, RBC Capital Markets.

Excellent quarter. Can you tell us or give us more visibility on New Orleans in the second half of the year, how you see that progressing in 3Q and 4Q?

I think the calendar feels solid to us and I wouldn't expect huge volatility. 2016 looks to be okay, 2017 may be a little bit stronger. But I don't think any one of our markets, whether it is New Orleans or Indianapolis, really has a huge effect on our ability to hit our numbers.

But I think conceptually we see the convention market as a whole being much more positive in 2016. But I wouldn't look at New Orleans as anything other than a positive contributor to our Company.

Okay. And then looking at the increase in the capital improvements, how much of this is due to new projects or other things such as rising construction costs? And will there be incremental disruption that is already baked in the guidance?

Maybe a little bit of disruption, nothing that is not baked into guidance. Mostly it is an increase in scope. As we talked about in our prepared comments, that we have had great success by being smart about where to invest capital and Craig and our operational team are magicians at some level of being able to create value and rate growth.

So we decided to increase the scope on a couple and then also we did have a hail storm in Denver that added about $2 million to that budget. The majority of that will be recouped from insurance, but nevertheless it is an expenditure in the year.

Okay, thanks for taking the questions.

(Operator Instructions). Austin Wurschmidt, KeyBanc Capital Markets.

Just had a question related to the acquisition pipeline and just sort of how you would characterize I guess the geographic footprint of what you are seeing. Are there any regions that the pipeline is more heavily weighted in?

No, I would say it is fairly broad-based.

Seeing I guess the acquisitions that have closed so far have been very East Coast weighted, so could we see some additional purchases on the West Coast I guess as you look to back fill the hotel EBITDA?

Austin, we have said pretty consistently that we are market agnostic, we are purely return generated underwriting. We do focus more exclusively on top 50 markets and markets that exhibit some of the similar characteristics.

Your question is similar to the question we got -- about a year and a half ago when we bought assets in San Francisco and California that was our focus there driven by the desire to be there. And the answer is no.

It truly is a bottom up underwriting focus where we tend to be more market agnostic. So not to be flip or avoid the question, but it shouldn't surprise anybody for us to be on the East Coast or West Coast or dead center in middle America.

Fair enough. Given I guess the ability to source deals at higher going in yields, I guess would you consider selling some additional assets or is there any part of the portfolio that you look to kind of opportunistically capitalize on the opportunities that you are seeing on the acquisition side?

That is actually a really great question, I am glad you asked it. We do have some work to do to get the first sale closed with ARC. Beyond that we don't have anything identified sale and -- identified for sale.

And quite frankly, the portfolio that we are selling to ARC again wasn't a portfolio we had gone out and marketed or identified for sale. We think our portfolio as it sits today is very high quality, has a great growth profile.

But having said all that, if there is an opportunity to capture some value and redeploy into projects that can create outsized growth we are always open to those opportunities.

Thanks. And then just the last one kind of going back to Ryan's question earlier a little bit. When you look at the deceleration in the back half of the year, I guess I am curious -- do you think that that is a function of you guys have squeezed out a lot of the upside in the existing portfolio and some of the assets that you are selling?

And do you think that that streak of outperforming the overall industry could continue? So I guess is it more broader based slowdown or do you think it is more portfolio specific?

Well I mean everybody's portfolio is different and unique. Ours is unique for a couple reasons. One, it's larger than most. We have a higher number of properties in a greater number of markets. So to be able to outperform with a broad based portfolio I think is truly remarkable and a credit to Craig and his team.

If we look through towards the back half of the year we do have double-digit RevPAR comparisons in both the third and fourth quarter. So I don't want that to get lost either. You never quite get credit for difficult comps and you never quite get all full credit when you have easy comp either.

So I think it is more indicative of the choppiness as our properties went through renovation and the industry has recovered. I don't see it as a material change in underlying business fundamentals. And I think 2016 looks very positive.

And as I said at Ryan's question, this is the part of the cycle that a portfolio like ours and properties like ours really shine. We can generate terrific returns with these mid- to later-cycle mid-single-digit RevPAR returns. We've got a great operating model, great operational leverage and we are excited about the back half of the year and 2016 as well.

Great, thanks for the time today.

I am showing no further questions on the phone lines at this time. I'd like to turn the call back to Dan Hansen for closing remarks.

Thanks, everybody, for joining us today. I think it is clear from our comments we are very encouraged by the continuation of strong industry fundamentals. The limited supply growth gives us great confidence in our outlook.

Our renovated properties and operational expertise continue to deliver strong results. We are looking forward to the balance of the year and talking to you again next quarter. Have a terrific day, everybody.

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