Summit Hotel Properties Inc (INN) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Summit Hotel Properties Q4 and full-year 2015 earnings call.

(Operator Instructions)

As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. Adam Wudel, Vice President of Finance. Please go ahead.

Thank you, Catherine, and good morning. I'm joined today by Summit Hotel Properties President and Chief Executive Officer Dan Hansen and Executive Vice President and Chief Financial Officer 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 2015 Form 10-K and other SEC filings.

Forward-looking statements that we make today are effective only as of today, February 25, 2016, 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 referenced 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 fourth-quarter and full-year 2015 earnings conference call. We are very pleased with the strong top and bottom-line results that our portfolio delivered in 2015 and take great pride in the progress we've made in our capital recycling initiatives.

For the full-year 2015, we reported adjusted FFO of $108.6 million which is a 28.8% increase over 2014. Our AFFO per share increased 28% from 2014 to $1.25 per share.

On a pro forma basis, we posted RevPAR growth of 7.3% for the year which was at the high end of our outlook and as a reminder was on top of 10.9% growth in 2014. Our RevPAR growth was driven by a 5.7% increase in average daily rate and an occupancy increase of 1.4% to 77.4%.

For the fourth quarter of 2015 we reported AFFO of $23.7 million, 35% above the fourth quarter of 2014. Our AFFO of $0.27 per share represents 34.2% growth compared to the same period in 2014.

On a pro forma basis we reported RevPAR growth of 5.5% for the quarter which was driven by a 2.6% increase in average daily rate and increased occupancy of 2.9% to 74%. Our same-store RevPAR growth for the quarter was 6.6% compared to the fourth quarter of 2014. RevPAR was driven by a combination of increases in average daily rate which was up 2.9% and a 3.6% increase in occupancy.

The year 2015 capped off four consecutive years of us exceeding the Smith Travel Research upscale RevPAR growth rate, and we've done so by an average of nearly 200 basis points. The strength in RevPAR growth across our portfolio was again very broad-based.

I'd like to take a moment to touch on two of our largest outperformers. Our strongest market in 2015 was the Phoenix MSA where we own four hotels that contribute approximately 4.6% to our total portfolio EBITDA. Combined these four hotels posted 17.2% RevPAR growth in 2015 compared to the market at 12.8% and were led by our two Hyatt Place hotels in Phoenix and Oldtown Scottsdale.

Super Bowl XLIX was an obvious driver of performance but our team's focus on additional high rated transient finance throughout the year was also a strong factor in our hotels outperforming the market by 440 basis points.

Another bright spot for Summit was the San Francisco market which continued to be strong, having delivered 15% RevPAR growth in 2015 on the heels of 13.1% RevPAR growth in 2014. This compares very favorably to the broader San Francisco MSA's growth of 7.5% reported by Smith Travel Research. All three hotels outperformed the market in 2015.

Our hotel in the Fisherman's Warf submarket posted RevPAR growth of 11.5% in the quarter and our two hotels located near the corporate office Park and the San Francisco International Airport performed exceptionally well with 19.1% RevPAR growth in 2015. The outperformance in that submarket was led by our DoubleTree by Hilton at the airport which continues to benefit from the brand conversion and renovation completed in 2015.

Moving on to acquisitions, in 2015 we purchased seven hotels with 1,042 guestrooms for an aggregate purchase price of $237.8 million or approximately $228,000 per room. These institutional quality hotels as a group, excluding the newly built Minneapolis Hampton Inn & Suites, generated RevPAR of nearly $140, margins of 41.4% and they compete successfully with the boutique, soft branded and traditional full-service hotels. Their success demonstrates that the quality and experience in many of today's premium select service hotels rivals that of many hotels in the upper upscale segment.

Our capital recycling initiative continued in the fourth quarter of 2015 by completing the sale of the first tranche of hotels to affiliates of American Realty Capital Hospitality Trust on October 15 which consisted of 10 hotels for a combined price of approximately $150.1 million. Prior to the close of the sale of the 10 hotels in tranche two to ARC Hospitality, the purchase agreement was terminated and we retained the $9.1 million earnest money deposit. However, on February 11, 2016 we were able to resurrect the purchase and sale agreement on tranche two and we completed the sale of the third tranche of hotels to affiliates of ARC Hospitality which consisted of six hotels for a combined purchase price of $108.3 million. The remaining 10 hotels are scheduled to be sold by the end of 2016.

Simultaneous with the sale of the hotels we entered into a $27.5 million loan with ARC Hospitality with $20 million being applied to the purchase of the third tranche of the assets and the remaining $7.5 million being applied to the new earnest money deposit on the remaining 10 assets scheduled to be sold in 2016. Since the transaction to sell 26 hotels was announced in June 2015 we have fully redeployed the disposition proceeds received so far into $307.8 million of acquisitions that have a RevPAR premium of more than 60% compared to the hotels we've sold and have under contract to sell. Completing the first two phases 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 2015 we were very pleased with our fourth-quarter and full-year 2015 results.

On a pro forma basis our hotel EBITDA in 2015 increased to $167.2 million which was an increase of 10.8% over the same period in 2014. Pro forma hotel EBITDA margins expanded by 70 basis points to 36.2%. On a pro forma basis the 2015 margins were held back 75 basis points due to a $3.5 million or 18.2% increase in property taxes as compared to 2014.

A large portion of this increase was due to an unanticipated multiyear special property tax assessment of $743,000 received on the Holiday Inn Express at Fisherman's Wharf in San Francisco. For 2015 our adjusted EBITDA grew to $153.6 million, an increase of $25.6 million or 20% over the prior year.

Moving on to our balance sheet, during 2015 we continued to strengthen our balance sheet by reducing our leverage, staggering our debt maturities and improving our cost of financing. During the year we retired seven loans totaling $79.4 million with no prepayment penalties. At December 31, 2015 we had total outstanding debt of $677.1 million with a weighted average interest rate of 3.9% which is 45 basis points less than the 4.35% at year-end 2014.

We ended the year with net debt to trailing 12-month adjusted EBITDA of 4.2 times, down from five times at the end of the third quarter. Our reduction in leverage is primarily the result of the sale of the first tranche of 10 hotels to ARC Hospitality.

In January 2016 we closed on a new $450 million unsecured credit facility which replaced our former $300 million facility. As a result of the successful completion of this credit facility our pricing grid was improved by approximately 30 basis points.

We now have less than 10% of our total debt maturing through 2018. As of February 19, we had total net debt to trailing 12-month adjusted EBITDA of 4.3 times and had total outstanding debt of $689.8 million with a weighted average interest rate of 3.8%.

Turning to guidance for 2016, in our release you'll see that we provided guidance for full-year 2016 AFFO of $112.6 million to $119.6 million, or $1.29 to $1.37 per share. For the first quarter of 2016, we provided AFFO guidance of $0.30 to $0.32 per share. Metrics supporting our guidance are provided in our release.

For the full-year 2016 we assume pro forma and same-store RevPAR growth of 3.5% to 5.5%. We have incorporated capital improvements of $40 million to $50 million which includes both renovation and recurring capital expenditures.

Our guidance assumes a midyear sale of 10 hotels totaling $89.1 million. No additional acquisitions, dispositions, equity raises or debt transactions are assumed in the first-quarter or full-year 2016.

With that I will turn the call back over to Dan.

Thanks, Greg. In summary, we're thrilled with the performance of our portfolio and the continued successful execution by our team. I often thank the asset management team for their relentless focus and commitment to creating value and 2015 was a great example of the success of their efforts.

Today I wanted to also thank very publicly the rest of our team as they are truly unsung heroes. The work that goes on behind the scenes in our accounting, finance and throughout the office is truly remarkable and allows us to deliver our message. Each and every employee should be proud of the success we have shown.

And with that we will open the call to your questions.

(Operator Instructions) Chris Woronka, Deutsche Bank.

Hey, good morning guys. Dan, I wanted to ask you with all the headlines we've read about in the news and everything, if you take a 30-, 60-, 90-day lookback what do you think has changed on the private side of the market?

And I'm really kind of comparing that to what's happened in the public markets. Do you think the disconnect has gotten wider, smaller or stayed the same?

This is Dan. Thanks for the question, Chris. It really is one of the themes out there where are public and private values and where do they shake out?

It's a little bit hard I think to place a specific number. I think the portfolio buyer is clearly on the sidelines as you'd expect as CMBS has become more challenging.

In our space the individual hotel owners and smaller value add buyers are still plentiful and aggressive. So I mean I think in general I would expect pricing over the last probably 90 days, maybe a little longer, to maybe have moved 50 to 100 basis points on a cap rate basis.

But each hotel, whether you're buying or selling, has a story. Assets that are unencumbered by management typically will have a greater value than those that are encumbered with management. Hotels in markets with stronger growth profiles would be valued different than a hotel in a gateway city that has a lot of supply.

So I think there's a lot of moving parts. But I think it would be safe to say there's been some movements in the maybe 50 to 100 basis point range as it relates to cap rates.

Okay, that's fair. And with your -- I guess congratulations on getting the revised deal done here with the ARC.

Does, just broadly speaking does the experience you've had here make you less likely to do portfolio deals with anybody in the future given, or I should say in kind of the next several months given the dislocation in the market? Or do you think it's kind of a one-off, more of a one-off situation and you're still willing to be a net seller if you can confident that deals can get done?

Another great question. I think because of some of the changes in the CMBS markets I'd be a little bit more hesitant to do a portfolio sale. I think as I said the one-off local owner operators are still very plentiful.

I don't rely as much on the higher leverage CMBS that market, so I think that's more likely where our bias would be. But as a reminder ARC does still have the 10 assets under contract, so they do still have an ability to close. But I think as I said in relation to your prior question I think the portfolio buyers are on the sidelines in our view.

Okay, and just finally for me, obviously with the public equity markets the values where they are but you guys have done a really nice job of building out the portfolio or I guess upgrading the portfolio. Given where we are in the cycle and again the public value, is it possible you guys still look to acquire this year or do you think the things that you got done last month are kind of it for this cycle?

I think we're always opportunistically looking for ways to create value. I think we are obviously later in the cycle but I wouldn't say that we would be hesitant to buy a hotel that provided a good value creation opportunity. I think our bias for capital for doing such has been through the recycling which we've demonstrated.

So I wouldn't say that we would be sitting on the sidelines at all. I think we take great pride in being able to find little incremental ways to create value and for a Company like us with our size all those little things we can do to create value add up into things that really move the needle.

So I wouldn't expect anybody to be surprised if there was an acquisition opportunity that provided a unique growth profile. But I think there's a lot of different ways we can add value beyond that.

Okay, very good. Thanks, Dan.

Shaun Kelley, Bank of America Merrill Lynch.

Hey, good morning guys. Dan, you mentioned a couple of times in your response to Chris' question about the CMBS market impacting portfolio buyers and kind of looking back at the situation with ARCH, any color you can provide on is it primarily the debt markets that makes the portfolio sale harder to do or is it also something you have to consider as it relates to fundraising for some of these nontraded or nontraditional funding sources?

Shaun, this is Dan, I think the way we would see it is each buyer has a unique set of circumstances. ARC Hospitality capacity was at the time much dependent upon their ability to raise equity which obviously changed. Some of the other private equity buyers raised money in completely different ways.

So I would say that is more unique to ARC than anything else. I think the notion that private equity is out of the game for good is probably a little far-fetched. But I think they are trying to as everybody is trying to find where the real value opportunities are and the less equity they have to put in historically has allowed them to drive outsize returns.

So as the CMBS market has become locked up so to speak we think that will for many of the private equity buyers that aren't of the nontraded REIT category are going to continue to sit on the sidelines. Some maybe more than others but I think there are some key differences between the nontraded REITs and the other private equity portfolio buyers.

That's really helpful. And my second question is we're hearing from a lot of the full-service guys about supply in the urban areas but you guys have a really different dynamic and I'm curious can you guys give us any sense of just what you're seeing on kind of supply on either a ground-up or market basis as it relates to your portfolio and where you think we are on the construction environment for more of these types of assets in your types of markets?

Yes, that's a good question, Shaun. Some of the markets that we have exposure in that have some outsized supply are a market like Houston or Austin or Nashville.

A lot of the supply coming on is as people should note is of this high-quality premium institutional select service. That competes very well with a lot of the soft brands, the boutiques and the full-service hotels. I think supply, new supply should affect us less than the traditional big-box hotels but make no mistake there is new supply coming.

These are good projects by developers that are by and large very well capitalized. So I wouldn't say that all the new supply in a market like Nashville is going to not have an effect on RevPAR but there are a lot of demand generators from leisure to corporate. And I think as we've shown that people are voting with their feet in a lot of instances and staying at premium select service hotels.

So we think our portfolio while in some of the markets that there is a lot of new supply should compete very well. And we feel that makes us much less vulnerable to drops in occupancy or things of that nature. So we feel good about the portfolio not just in terms of markets we're in but our ability to manage through the new supply.

Really helpful. My last question would be sort of on the same vein. But you mentioned in your prepared remarks for the seven hotels that you had sort of redeployed capital for RevPAR was I think you said 140, margins at 41.4%.

So my question is any sense in some of those types of market tracks since you underwrote those recently? How big of a gap do you have to some of the full-service operators in those same markets?

I think we see this theme pretty clearly that the premium select service taking share. But how big of a kind of ceiling do you guys have to move up, to move that RevPAR number up underneath maybe in some of the things that you've underwritten recently? Just even ballpark what are your thoughts on that?

Well, I think because of the dynamics of the model and our team's ability to manage rate and occupancy there shouldn't be any limit to our ability to raise rates to the level of the full-service peers and in some instances maybe even higher. They have a need to fill in many circumstances a big group block that has to be done at a negotiated rate.

So with a smaller amount of rooms we can manage a little bit more aggressively for that last room availability. So I don't think with the quality of the rooms and the experience there really is anything that would limit our hotels from pricing at the same level or in some instances even higher than the upper upscale competitors.

That's helpful. Thank you very much.

David Loeb, Baird.

Good morning, Dan and Greg. I wonder if you could just give a little bit of color on how you viewed ARCH as a credit risk and what kind of credit enhancement there might be on that or other benefits you get from making those loans?

Thanks, David. This is Dan. You know ARC Hospitality I think is maybe gets a little bit overshadowed by some of the problems they've had in other entities. John and James and Ed have been great partners for us.

They've been very transparent and we think they are incredibly focused on creating great value through the process there. We structured this note to help get tranche three over completed which helps pay down our revolver and allow us to continue to further our capital recycling program and in view of the structure is very much in line with the credit risk involved.

So we at this point have great confidence that the team at ARC Hospitality is going to fulfill their obligations. If we didn't we wouldn't have done that. I think we structured it in such a way to give us the greatest amount of confidence and flexibility but feel really good about the loan.

I think it is clearly the best solution for our shareholders. It does create a little bit of confusion and there's a lot of moving parts around that. But those moving parts were implemented to mitigate the challenges surrounding the repayment and we feel it's structured very well.

Okay. If you are successful in closing tranche two or if you do succeed in selling some of the assets individually prior to that, what's your thought on use of proceeds that you would get from those sales?

That's another great question, David. We do have a lot of options. We have estimated July 1 as a closing date.

That's not a hard date, it's just an estimate. We could sell two assets are five assets or all 10 slightly before or after. So we needed to pick a date to try to be clear about expectations.

But we could pay down the revolver. We've got some property level debt, $36 million or so, that matures this year.

We could look at a unique acquisition opportunity that's accretive long term or we could certainly implement a stock buyback program. So I think the proceeds -- we have a lot of optionality with the proceeds.

Okay, and one more you kind of set me up for that I was thinking of it anyway. The July 1 estimate is just a line in the sand for your guidance and it seems like it's a conservative estimate just given the fact that if you hold those hotels longer it's positive for earnings. Just given that timing and given kind of the rest of your guidance, what's the outlook for property level operating margins in 2016?

David, this is Greg. You're right as far as the date. We kind of wanted to put our best guess out there because we do have the ability to sell individual assets.

So we wanted to telegraph as best we could where we think that might go. But then as you start to think about margins with so many moving pieces we didn't give the margins in the guidance but I think you would see about 25 to 75 basis points of expansion over the year. And that would probably be more kind of toward the back end of the year is kind of where we would see the majority of that expansion.

As we mentioned in our remarks, we do continue to see some headwinds as it relates to property taxes. In 2016 we're forecasting an 11% increase in property taxes and that's following a 17% increase in 2015. But with that said also I think it's important to point out that some of these property taxes we pay and we go ahead and expense because that's the appropriate thing to do but we continue to protest them.

So you'll get a tax bill and you will pay it under protest and so you know where that exactly winds up is hard to say. But for forecasting purposes we're assuming an 11% increase. But even with that we see that kind of 25% to 75% expansion.

That's very helpful, Greg. Thank you.

Bill Crow, Raymond James.

Good morning guys. A couple of questions. Dan, you didn't mention the redemption of the preferred in your potential use of proceeds.

Can you talk about that a little bit? I think it comes to toward the end of the year at 9%-plus and is that built into your guidance for the year?

Good question, Bill. We did not assume a redemption of the series preferred, the A preferred in our guidance. It is a great option and really high on our list but a little too early to commit at this time.

Okay. Now that you're in the financing business have you thought at all about the loan to own business?

I think Hersha did it rather successfully with new construction mezz financing. As you're seeing some of the challenges for new development lending out there, is there an opportunity for Summit to get in there and participate or that's not something you want to look at?

It's a great question you know since we've done a little bit of this recently. We're always looking at unique opportunities to create value and using the note receivable opportunity we think is a creative way to complete transactions, really to maximize value.

We don't look at it as really part of a business strategy, more of a tactical tool we can use in certain circumstances. So I think we'll always evaluate the risks associated with these opportunities to ensure they provide good risk-adjusted returns. But we look at more of a tool than any sort of business strategy.

All right. And then finally for me, are you seeing any tangible evidence that the brands are having success in lowering the commission rates to the OTA?

Yes, a little bit. I think they are obviously been very focused on challenging the status quo and taking and regaining control of a lot of the pricing mechanisms. So we continue to expect them to negotiate on our behalf and theirs to create a more profitable environments for us.

Is there any sensitivity you could give us? If the brands lowered the commission rate 100 basis points what would that translate into for you guys? Have you done that analysis?

You know, we haven't. We could do some math off-line and provide that and some additional commentary but we haven't done that math. It's one of those things that's really fun to think about and exciting to think about but until it actually happens it's real hard to figure out what the cost savings would be.

Is there an offset to that? Are there additional fees that may creep up? We have had this continuing increase in fees from franchise fees.

And so there could be an offset towards in addition to any gains you'd make. So I think there's a holistic way to look at it and probably involve some complicated math that probably can't do here right on the call.

Okay, understood. Thanks, guys. I appreciate it.

Ryan Meliker, Canaccord.

Hey, good morning guys. First of all, congrats on a great quarter.

First question I had was related to your RevPAR performance. I guess as we look at 4Q in 2015 and really even 2014 you guys have obviously outperformed on the RevPAR growth front. It shows it's very clear as you guys highlighted in your release relative to Smith Travel Research's segment and US overall performance.

I'm just wondering if you can give us any color or even underlying metrics surrounding whether that out-performance is market driven, that you're just in markets that are outperforming the US averages, or whether it's that you're gaining share and your RevPAR index is increasing? And if so I'm wondering how much more that RevPAR index can really grow on a relative basis? Thanks.

Thanks, Ryan. That's a great question. It is one of the things that we're very proud of is that our out-performance in many of our markets was on top of strong market performance.

In the prepared comments you know we referenced both San Francisco and also Phoenix. Those are two markets that have been very strong and our properties outperformed even the strength there.

And that was right brands, right markets, good relationships with our third-party managers and just a relentless asset management team. So I think every market will be a little bit different but those two markets specifically can show that good management teams can drive performance outside of just individual market performance.

So then as we look at your guidance for 3.5% to 5.5% RevPAR growth for 2016, is any of that assumed increased RevPAR penetration or is that all based on kind of market level performance?

No, there's definitely some RevPAR penetration and property and MSA specific factors in there. For example, Houston is forecast to be down 7.1% for 2016 and we're not forecasting a decline of that much with our two hotels. So those are some things that we factor in when we're putting our forecast and our guidance together, not just market but on a property by property basis.

All right. That's helpful. And then I don't know if maybe this is for you, Greg.

It looked like in your guidance you've got same-store RevPAR growth of 3.5% to 5.5% for the year at $106 to $108 actual absolute dollar range and then if I look back at your full-year 2015 same-store 74 hotel RevPAR it was $98.77 in your release. I'm just wondering how that $98.77 at 3.5% to 5.5% gets to $106 to $108.

Is it a different pool? It looks like they are both 74 hotels. I'm just trying to understand or reconcile those two numbers.

Yes, it's different pools of hotels. What we're generally always giving is that RevPAR increase on a pro forma basis. And when you take a look at the change in the portfolio as we're buying higher RevPAR hotels, that has a large impact on it as well.

Sure. And then just real quickly, I guess a little bit of a maintenance question, obviously the pro forma portfolio changes from 87 hotels for the year to 83 hotels for the guidance. Any chance you guys can give us what the 2015 absolute RevPAR dollar was for the 83 hotels in the guidance?

Yes, Ryan, I think we can pull that up for you.

Great, thanks. And that's it for me.

Austin Wurschmidt, KeyBanc Capital.

Hi, good morning. There's been a lot of discussion on today's call on the disruption in the credit markets and the impact in the transaction market. And I know you guys aren't developers but I was just curious if you could give us any color on how the credit market disruption is having an impact on development deals?

Austin, it's Dan. I think it's a great question. I don't know that we've got clear data that would give any specifics but as most of the developers that we talk to and are very close with aren't really relying on the CMBS markets.

They are doing construction loans that in many cases convert to permanent. They are very well-capitalized. So most of the developers that we've been in contact with they still are able to find good pieces of debt.

They are very well-capitalized but the cost, construction costs have put them in a position where many of the projects are starting to get a little thin on the profit side. So the barriers to entry, the time it takes and the availability of capital will always still be drivers. But I don't know that the CMBS market in our view has had much of an effect on the developers at least as far as people that we've been in discussion with.

Thanks for the detail. Then just jumping around a bit, just circling back to Bill's question, could you give us any detail as what percent of your bookings are booked through the OTAs?

It's right around 9%, 10%.

Thanks, that's helpful. Then just lastly for me, you guys have kind of talked a lot about occupancy continuing to stabilize, we're kind of in that mid to high 70% range. Good occupancy growth in the fourth quarter again, so just kind of looking out what's the opportunity for you to continue to drive occupancy whether it's the shoulder nights or more on the business transient side?

The fourth quarter is our lowest occupancy quarter so gains there are a little bit more achievable. But as you pointed out we've been very pleased with our team's ability to add occupancy on shoulder nights and weekends.

We've had some success building a base with some leisure groups but do consider our portfolio to be for all intents and purposes nearly fully occupied. There's always some potential pickup as renovated hotels come back online. But I would expect 80% or better of our RevPAR growth to be through rate at this point.

Great, thanks for taking the questions.

Wes Golladay, RBC Capital Markets.

Good morning guys. We talked a lot about the CMBS tightening up right now. Are you seeing many deals fall apart and get re-traded with you a logical buyer?

West, it's Dan, it's a great question. We haven't actually been as active in the transaction market for obvious reasons. We've been -- we had a good, solid pipeline that we were planning to execute through the sale of hotels.

But I would say that we would expect some of those things to come our way. I think it's only logical to think that as financing alternatives become a little bit more challenging that owners that have to sell will have to take a price adjustment. Those owners that don't have to sell may just postpone.

So we keep pretty close tabs on the portfolios and one-off transactions in the market and definitely keep an eye on that. But as of yet, we haven't seen any deals that have just purely fallen apart because of the CMBS market.

Okay and now looking at your last two acquisitions, were these more core acquisitions you had to 1031 the money or do you have operational upside at these assets?

We also have operational upside. I think everything we look at those under a high level of evaluation and scrutiny. There's always little things at the margin that we think our operational team can improve upon, whether it be the mix of guests and taking a little bit more group business, restructuring local negotiated rates.

So that's sort of internal evaluation and modification goes on for the first couple of years. So a little bit of a long answer but yes, we think there's operational upside in those two assets for sure.

Okay and then lastly going to that ARC note, you mentioned you've structured it with optimal flexibility. What are some of the things you did with that note?

We do have not only a current pay but a PIK associated with it that must be current for any sort of extension. There's some amortization in the first year. I think there's an ability for us to look at using that as a potential vehicle to sell it down the road.

I don't want to create too much about the future. We think it's a good note. We think it structured right.

We think it's we're very confident in ARC's commitment to continue to fulfill their obligations. But we feel good about not just the yield associated with it but the mechanism surrounding it.

Okay, thanks a lot.

Thank you. I am showing no further questions at this time. I would like to turn the call back to Dan Hansen for any closing remarks.

Hey, Ryan, real quick before Dan gives his closing remarks, that 2015 absolute RevPAR on the same-store 83 was $106. $106. Dan?

Thanks, Greg. Thanks everybody for joining us today. We do continue to see opportunities to create value for shareholders through what we continue to see as thoughtful capital allocation in premium select service hotels which today's guests love.

Our renovated properties and operational expertise continue to deliver these strong results. And we're looking forward to 2016 and beyond. I hope you all have a terrific day and we look forward to talking to you again next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.

You may all disconnect. Everyone have a great day.