Summit Hotel Properties Inc (INN) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2015 Summit Hotel Properties, Inc., earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to hand the presentation over to Mr. Adam Wudel, Vice President of Finance. Mr. Wudel, you may begin your conference.

Thank you, Chelsea, 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 risks and uncertainties, both known and unknown, 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, November 3, 2015, and we undertake no duty to update them later. You can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures contained on this call, on our website at www.shpreit.com.

Please welcome Summit Hotel Properties' President and Chief Executive Officer, Dan Hansen.

Thanks, Adam, and thank you all for joining us today for our third-quarter 2015 earnings conference call. We are very pleased with the strong bottom-line results that our portfolio delivered and remain encouraged by the fundamentals we see heading into the end of the year.

For the third quarter, we reported adjusted FFO of $32 million, which is a 24.6% increase over the third quarter of 2014. Our AFFO per share increased 24.4% from the third quarter of 2014 to $0.37 per diluted unit. On a pro forma basis we posted RevPAR growth of 4.9% for the quarter, which was in line with our outlook and, as a reminder, was on top of 15.1% growth in the comparable period last year.

Our RevPAR growth was driven by a 5.1% increase in average daily rates and an occupancy decline of 0.2% to 79.7%. When excluding our two Hilton Garden Inn hotels in Houston, Texas, and the three hotels that experienced guestroom displacement, pro forma RevPAR growth for the quarter was 5.9%. Our hotels in the Houston market continued to be challenged, having posted a RevPAR decline of 8.3% for the quarter, as compared to the broader Houston MSA posting RevPAR decline of 3.7%.

Having said that, our Houston hotels outperformed their respective competitive sets by approximately 30 basis points in the quarter, which is a credit to our talented asset management team and their partnership with our third-party management company.

I would like to provide a bit of color on the hotels that had guestrooms out of service during the quarter. We are nearing completion of the repairs related to a hailstorm that affected our Hyatt House in Denver, which equated to approximately $300,000 of displaced room revenue in the quarter. In addition, the Hampton Inn & Suites in downtown Austin had the bathrooms renovated in the guestrooms and the Hyatt Place in downtown Minneapolis had the planned exterior work completed that resulted in approximately $400,000 of additional displacement.

A bright spot for Summit was the San Francisco market, which continued to be strong, having delivered 8.5% RevPAR growth in the third quarter, which compares favorably to the broader San Francisco MSA of 5.5% reported by Smith Travel Research.

Our hotel in the Fisherman's Wharf submarket experienced more modest performance posting RevPAR growth of 3.5% in the quarter. And our two hotels located near the corporate office park and the San Francisco International Airport performed exceptionally well, with 14.4% RevPAR growth in the quarter.

Moving on to acquisitions, during the quarter we closed on two acquisitions for an aggregate purchase price of $56.8 million, or approximately $235,000 per guest room. Subsequent to quarter end, we acquired the Hyatt House in Miami and the Courtyard by Marriott in the Atlanta suburb of Decatur for $83 million, or approximately $248,000 per guestroom.

We're thrilled with the initial strength in RevPAR growth of our recent acquisitions. The last six hotels we have acquired, beginning with our Hampton Inn in the Boston suburb of Norwood and ending with the Courtyard by Marriott in the Atlanta suburb of Decatur, delivered 8.2% RevPAR growth in the quarter on a pro forma basis. Leading the way for this group of the newly-acquired hotels at a stellar 17.6% RevPAR growth for the quarter was our Hotel Indigo in Asheville, North Carolina, that we acquired on June 30.

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 continues to be a key differentiator of our company and a validation of our strategy we have employed throughout the cycle.

We completed the sale of the first tranche of hotels in our capital recycling initiative to affiliates of American Realty Capital Hospitality Trust on October 15, which consisted of 10 hotels, for a combined price of $150.1 million. The sale of the remaining 16 hotels is scheduled to close in two separate tranches totaling $197.3 million with expected sale dates of December 2015 and the first quarter of 2016. Since the transaction to sell 26 hotels was announced in June of this year, we have completed $198.8 million of acquisitions and have an additional $109 million under contract. We have match-funded the first tranche and are on pace to have the transaction fully match-funded. Completing this first phase of the transformation to higher RevPAR assets in markets with strong growth profiles is a milestone that demonstrates our team's thoughtful view on capital allocation and the subsequent value creation.

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

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

On a pro forma basis, our hotel EBITDA in the third quarter 2015 increased to $47.1 million, which was an increase of 5.5% over the same period in 2014. Third-quarter pro forma hotel EBITDA margins contracted by 38 basis points to 37.4% as a result of pressure from property taxes and some timing issues around incentive management fees. On a pro forma basis, the third-quarter margins were held back 92 basis points due to a $1 million, or 23%, increase in property taxes and 43 basis points due to a $0.7 million, or 17%, increase in third-party management fees.

It is important to note that the timing in which incentive management fees have been earned has varied from the prior year and 11 of our 12 hotels managed by affiliates of Hyatt are in their last year of a management fee ramp, which accounted for approximately $0.2 million of the $0.7 million increase. A key take away regarding margins is that we remain confident in achieving the high end of our previously stated 50 to 100 basis point range of margin expansion for the year.

For the third quarter of 2015, our adjusted EBITDA grew to $43.7 million, an increase of $7 million, or 19.1%, over the same quarter in the prior year.

Moving on to our balance sheet, we continued to utilize our strong balance sheet to facilitate improvements to the portfolio and maintain a healthy liquidity position. At September 30, 2015, we had total outstanding debt of $770 million with a weighted average interest rate of 3.97%. We ended the quarter with a net debt to trailing 12-month adjusted EBITDA of 5 times, which is near the high end of our stated range. This short-term increase in leverage is the result of us executing on our capital recycling strategy, which includes acquiring assets before selling to minimize earnings disruption to our shareholders.

As of October 28, we have reduced total net debt to trailing 12-month adjusted EBITDA by over a half turn to 4.4 times and had total outstanding debt of approximately $689.8 million with a weighted average interest rate of 3.94%. In addition, in the month of October we retired $40.7 million of the $90 million of 2016 debt maturities outstanding at September 30, 2015, through advances on our senior unsecured credit facility and without any prepayment penalties. As of October 28, we had $145 million available to borrow under our facility.

Turning to our outlook 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 nine months and the transactions we have completed since our last guidance update. For the full year 2015, we increased our AFFO guidance to $1.20 to $1.22 per share for the fourth quarter 2015. We are providing guidance for AFFO of $0.22 to $0.24 per share. Metrics supporting our guidance are provided in our release.

For the full year 2015 we are tightening our pro forma RevPAR growth projections to a range of 6.75% to 7.25% and maintaining the midpoint of 7%. Our same-store RevPAR growth outlook for the quarter is 4% to 6% and we are increasing the full-year same-store RevPAR growth outlook by 75 basis point at the midpoint to 7.5% to 8%.

Finally, we have increased the amount of capital investment for the full year 2015 to a range of $41 million to $44 million as a result of the recent acquisition activity. As a reminder, our guidance assumes no additional acquisitions, dispositions, or capital markets activities in the fourth quarter of 2015.

And with that I will turn the call back to Dan.

Thanks, Greg. 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 continued identify the right brands in key locations with outsized growth drivers and the operational upside that is possible with the higher margin operating model of premium select service.

With that we will open the call to your questions.

(Operator Instructions) Gaurav Mehta, Cantor Fitzgerald.

Good morning, thanks for taking my question. Going back to your asset recycling activities, I know that you provide 470 basis points EBITDA margin premium for the hotels that you acquired in October, but I was wondering if you have that number for all the hotels that you've acquired since you announced the sales activity in June.

We don't. I don't think we've telegraphed that at this point yet. I think there will be a lot better clarity once all three tranches are closed and we will have better clarity and be able to put that out in a more fulsome format.

Okay. Going back to your margins for 3Q you said 23% uptick in property taxes, could you share with us which -- in which markets did you see pressure on the property taxes side?

Yes, I think probably the greatest increase we saw was New Orleans and some of the California properties.

Gaurav, this is Dan. I think the one thing we want to make sure people don't forget is just the sheer number of acquisitions we have done over the last couple years relative to our size puts us in a position where logically there would be more property tax reassessments from the purchase of those assets. But it is something that weighed again this quarter.

Okay, thank you. That's all I had.

Shaun Kelley, Bank of America.

Good morning, Dan. Good morning, everyone. I was just wondering if you guys could give us a little bit more color on what you're seeing in the transaction activity market right now on the private side. Maybe any color on cap rates or just general activity levels, since things have sort of been a little bit rocky out there in the public markets for the group over the last three to six months.

Thanks, Shaun; this is Dan. I think I'm not sure we've got a view on the broader cap rate for the transaction market. Most of our work was done early as we started the capital recycling initiative. We haven't seen, as we are still very active out there discussing opportunities, that there is any backup in cap rates, but that has been pretty consistent for quite some time in the spaces that we are looking.

We are not chasing assets in the downtown core urban gateway cities. Most of our acquisitions are in urban markets are outside of probably the top seven or eight markets. I wouldn't say from our view that we've seen any change in cap rates, because you have also seen many of the private companies be much less aggressive. So I think, while you would expect there to be some better optics around transactions, there just haven't been enough I think to be meaningful to make an assessment from our seat.

Got it, that's helpful. Then one just more on the current fundamental environment, but, Dan, we've heard a number of companies comment throughout this quarter that, at least in October, they saw a little bit less corporate business than they thought they might be seeing at this point time. They all worded it slightly different, but they were basically saying that the month was coming in a little lighter on the corporate side.

Can you just remind us of just your mix across corporate, leisure, transient? I know you don't get much, if any, relative group. But A), can you just remind us of those mixes and then B), any color on whether or not you saw any softness in October?

This is Dan. Our mix is -- between business and leisure is probably 65% that is some sort of business traveler. We don't have a lot of group or government business. In our portfolio the majority of it being transient.

We haven't seen a drop off. We are very well diversified in a lot of different markets across the country, so I think we would be a good barometer, and still think the fundamentals for that, both business and leisure transient guests, are strong.

Great, thank you very much.

Wes Golladay, RBC Capital Markets.

Good morning, guys. Can we stick with that last line of questioning? I'm just wondering if you've been more aggressive in the fourth quarter on revenue management. Are you staying the same or you've seen the headwinds that your peers are facing and maybe dialing it back a little bit trying to get a little bit more longer lead time business on the books if you can as you look to build business the first quarter and second quarter of next year? Has your revenue management changed at all?

You know, it hasn't. I think to say that we've become more aggressive would imply that we were ever less aggressive, which really isn't the case. We've got a great team of revenue managers and asset managers in-house that are fully engaged day in and day out. So I think for us it just continues to be business as usual, uncovering every opportunity that we can and having courage. I think one of the challenges that you see in this environment is -- in pricing is having courage. It's a lot easier to have courage when you are sold out every night. When you're not, I think trying to find that optimum balance of the mix between business and leisure and local negotiated rate and transient is truly an art, and I firmly believe we are best in class and that focus remains intact.

Okay. Then on the expense side you mentioned a little bit of a timing issue for taxes and incentive management fees. Do you have your expectations for year-over-year growth for those line items, and do you see any of that spilling over into next year?

Wes, this is Greg. On property taxes, on a year-to-date basis we are up about 13.5%. Our forecast is saying by the time we get to the end of the year that will be about 14%, so we think that kind of a straight movement into Q4. But when you look the management fees, that's where we see more of a timing issue.

For the first nine months we are up about 12%, but we think that will be about 8% by the time we get done with the year. So much of the choppiness has to do with the timing of the incentive management fees.

Okay. You mentioned a burn off of, call it, maybe teaser rates for some of these brand fees or initial management fees. Do you see that continuing into next year or is that just something that was more of a 2015 issue?

Wes, this is Dan. That was just a stabilization of a group of assets that we bought, so that is -- will complete its ramp this year.

Okay. Then just on the capital deployment, you have I guess the other two tranches to deploy, $197 million. Would you look to deploy all of that capital or would you save some -- keep some dry powder? How much do you have to deploy?

I know you guys have the preferred next to retire, so would you keep some of that available to retire that piece of equity?

Wes, this is Dan; great question. We did, as this transaction was structured in a 1031 exchange, need to redeploy a minimum of $250 million, which we will have done.

Beyond that we do have options. As you pointed out, we've got a Series A preferred that matures in October of next year. So, yes, we want to make sure we do maintain optionality, and we look at every opportunity, whether it be an acquisition or the extinguishment of debt, as a way to create value. So to the extent that one has greater opportunity than the other, we are certainly open to the different options available to us.

I wouldn't say that we are -- have any bias other than to create the most value we can with the proceeds.

Okay, thanks a lot.

Ryan Meliker, Canaccord Genuity.

Good morning, guys. Thanks for the color on margins in the third quarter. I just wanted to follow-up with regards to full year and I guess 4Q margin assumptions.

Are there any tailwinds that you are expecting that are going to drive stronger margin growth in the fourth quarter? Because obviously you are building in some much stronger margins in the fourth quarter than you saw in the third quarter or even year-to-date. Are some of those incentive management fees? Were those timing issues where they are not going to show up in 4Q and they did last year where you have a tailwind? Just some color on that would be helpful.

I guess the only item that kind of stands out there is those incentive management fees. And, yes, since we are sitting at a 12% increase and we think we are going to wind up at an 8%, yes, we're expecting a little bit of lift in Q4 as it relates to those. The timing of those fees kind of hit heavy in Q4 last year; they're hitting a little heavier Q3 of this year.

You know those are all calculated on an asset-by-asset basis so it's kind of -- that choppiness comes based upon which assets are performing and at what time. And then also I think in the script we mentioned the ramp up in the Hyatt fees will start flattening out.

Great, that's helpful. Then the second question I had for you guys was can you give us some color -- I know it's a little early, but maybe some color on what you are looking at from a renovation perspective for 2016? Are you expecting any quarters where you are going to see a material increase in renovations year over year or any material increase in disruption associated with those renovations?

This is Dan. We're in the budgeting process right now so I think, in general, we would always expect to have renovation a little heavier in fourth quarter and then first quarter. Second and third quarter are typically the least affected by renovation and I wouldn't see next year as any different.

Right. So that's not an increase in first quarter versus the prior year. It's more just that's when you do it so you're not really looking at any changes from a renovation standpoint or a disruption standpoint; is that correct?

That's correct.

Great. Thanks, Dan. That's it for me. Nice quarter.

Austin Wurschmidt, KeyBanc Capital Markets.

Good morning. Thanks for taking the question. As you look across the recent acquisitions you made I was curious if you guys are seeing better opportunities to drive occupancy or ADR, and how exactly across those properties do operating margin stack up versus the balance of your portfolio.

Thanks, Austin; it's Dan. Clearly, the hotels we are buying have stronger margins. I think if you look at just the peer metrics we do have, in the portfolio of newly acquired assets, a higher occupancy. So on a go-forward basis I think there's -- despite where we are in the cycle, which is an environment where the majority of the gains in RevPAR should be based on rates, the assets we are buying exhibit that simply because they do run a higher occupancy, but also have the higher rate opportunity. And that's really a function of our asset management and revenue management team finding ways to either fix the mix or implement pricing strategies to get outsized returns.

Given that you think that there is really good rate opportunity on that portfolio, that you could continue to drive outsized margin growth in the new acquisitions versus your legacy assets?

An interesting thing happens when you sell hotels that you've managed for a long time; I would be --. I'd have to say that new assets with our management team breed new opportunities and every time we find a new hotel we look at ways to shift and modify both mix and operational efficiency. So, yes, I think that's one of the benefits of the recycling of capital in buying new properties is simply new opportunities to add value based on a proven model of achieving outsized performance.

Thanks for the detail. Then just last one. I was just curious how the 8.2% growth compared to your guys' underwriting.

As a whole, it was right on track. I think it's always challenging to implement all the efficiencies and opportunities you want. I think that's a process that our asset management and revenue management team goes through over the first couple years. You can't change the functioning of a hotel at the snap of fingers. It is truly an art that has to be implemented over time, but so far everything is meeting our expectations.

Great, thanks for the detail.

(Operator Instructions) Bill Crow, Raymond James.

Good morning, guys. Two quick questions, Dan, if I could. First of all, in your discussions with ARC H, any indication of how the equity raise is going and confidence from you in the December tranche sale?

There's risk in any transaction, but we are very confident in the way we structured it and the partnership with the team at ARC Hospitality has been terrific. They have been incredibly transparent and a good group to work with, so we still remain highly confident in the closings in December and first part of next year.

That's helpful, thanks. Second, as you look into the early part of next year, there is a Super Bowl in San Francisco. Could you talk about your assets there, what you are seeing? It may be early. I'm not sure if you're part of the NFL block or not, but any indication of the lift you might get there.

One of our hotels is part of the NFL block. It's probably a little bit earlier. We pride ourselves on -- because of the type of operator we have, being as flexible as possible in trying to work towards that last room availability at the highest rate. So I think we've got as good of an opportunity as anybody in the market to take advantage of the compression there.

I think there's been plenty said about Airbnb and I think it has yet to be determined how much effect that will have on the actual compression. But as you may have heard in our comments, that doesn't specifically affect all markets. I think each submarket acts little bit different than the overall market and I think strong asset management teams can exploit those opportunities and outperform over time.

Lodging REITs have that operational component that a lot of other property REITs don't have, because their leases are, by and large, daily. So quite frankly, operations matter. I'm proud of the team and the assets we've purchased and we would expect to always perform at the highest level.

Great. Then, Greg, maybe you can help with this one. Just remind us when the Series A and Series B can be repurchased.

Series A is October of 2016 and Series B is September? December, December of 2017.

All right. Great, thank you. That's it for me.

I'm not showing any further questions at this time. I would now like to hand the call back to Mr. Dan Hansen, President and CEO of Summit Hotel Properties Inc., for any closing remarks.

Thank you all for joining us today. We remain encouraged by the continuation of the industry fundamentals and the limited supply growth that we continue to see gives us confidence in our outlook. Our renovated properties and operational expertise continue to deliver strong results and we're looking forward to the balance of the year.

I wish you all the best. Have a terrific day and we look forward to talking again next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.