Summit Hotel Properties Inc (INN) 2016 Q2 法說會逐字稿

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

I would now like to turn the conference over to Adam Wudel, Vice President of Finance. Sir, you may begin.

Thank you and good morning, everyone. 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 2015 Form 10-K and other SEC filings.

Forward-looking statements that we make today are effective only as of today, August 3, 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 second-quarter 2016 earnings conference call. We are thrilled with the results that our diverse portfolio of premium select-service hotels delivered in the second quarter of 2016.

For the quarter we reported adjusted FFO of $36.5 million, which is a 23% increase over the second quarter of 2015. Our adjusted FFO per share increased 22.5% from the second quarter 2015 to $0.42 per share.

On a pro forma basis, we posted RevPAR growth of 6.4% in the second quarter, which was above the midpoint of our outlook and, as a reminder, was on top of 7.6% growth in the second quarter of 2015. Our RevPAR growth was driven by a 2.4% increase in occupancy to 83% and an average daily rate increase of 4% to $145, both of which partially offset RevPAR by a total of 19 basis points due to renovation displacement.

Our same-store RevPAR growth for the quarter was 6.5% compared to the second quarter 2015. RevPAR was driven by a combination of increases in occupancy, which was up 2.7%, and a 3.7% increase in average daily rates.

The strength and quality of our portfolio continues to be evident as we again surpassed the Smith Travel Research Overall US and Upscale RevPAR growth rates by large margins. Not only has our same-store portfolio now exceeded the Smith Travel Upscale RevPAR growth rate for 16 of the last 17 quarters, but it has done so by an average margin of nearly 300 basis points, which is truly a testament to our best-in-class revenue and asset management teams.

As discussed last quarter, we expect our RevPAR growth to shift more heavily to rate growth as the year progresses from what was 40% rate driven in the first quarter, now 60% rate driven in the second quarter. The strength in our second-quarter RevPAR growth was again very broad-based, which is what we would expect from the geographic diversification of a high-quality portfolio like ours.

Four of the strongest markets in the country during the second quarter were Dallas at 12.1%; Los Angeles at 11.1%; Nashville at 10.6%; and Phoenix at 9% RevPAR growth. Combined, the Dallas, Nashville, and Phoenix markets make up 17% of our portfolio EBITDA as of June 30, and we were able to outperform the robust RevPAR growth of each market.

Our Nashville hotels posted 17.7% RevPAR growth, which surpassed the overall MSA by 710 basis points. Our Dallas hotels posted 15% RevPAR growth, which beat the overall MSA by 290 basis points, and our Phoenix hotels posted RevPAR growth of 13.7%, which exceeded the overall MSA by 470 basis points.

Moving on, in the second quarter we were able to sell three hotels at attractive valuations that generated gross proceeds of $25 million. The first of the three was the 128-guestroom Holiday Inn Express & Suites in Las Colinas, Texas, which was sold in May of 2016 for $10.5 million at a trailing 7.7% capitalization rate and was not part of the 26-hotel transaction with ARC.

The two additional hotels sold during the quarter were the 136-guestroom Aloft in Jacksonville and the 119-guestroom Holiday Inn Express in Vernon Hills, Illinois, which sold for an aggregate sales price of $14.5 million and a trailing 6.1% capitalization rate. These two hotels were part of the 26 hotel transaction with ARC.

Subsequent to quarter end, we also sold the 122-guestroom Hyatt Place in Las Colinas, Texas, for a total sales price of $14 million and a trailing capitalization rate of 7% in a transaction that was not part of the ARC deal. These dispositions, along with the hotel we have under contract and the hotels we have recently acquired, continue to demonstrate our ability to strategically recycle capital and create value for our shareholders.

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

Thanks, Dan, and good morning, everyone. We were very pleased with our second-quarter 2016 results. On a pro forma basis, our hotel EBITDA in the second quarter grew to $50.1 million, which was an increase of 10.7% over the same period in 2015. Pro forma hotel EBITDA margin expanded by 156 basis points to 39.9% compared to 38.3% in the same period of 2015. For the second quarter, our adjusted EBITDA grew to $47.4 million, an increase of $5.7 million, or 13.6%, over the same period in 2015.

Moving on to our balance sheet. Our balance sheet continues to be in great shape, and we have continued to strengthen it by reducing leverage, staggering our debt maturities and improving our cost of financing. At June 30, 2016, we had total outstanding debt of $628.6 million with a weighted average interest rate of 3.84% and a zero balance on our revolving credit facility. We ended the second quarter with net debt to trailing 12-month adjusted EBITDA of 3.3 times.

During the quarter, we successfully completed a $75 million offering of 6.45% Series D preferred stock and contributed the proceeds to our operating partnership to reduce the outstanding balance of our revolving credit facility and for other general corporate purposes, which may include the $50 million redemption of our 9.25% Series A preferred stock in October of 2016. Until the proceeds are fully deployed, we expect our leverage to be at or slightly below our stated range of 3.5 to 4.5 times.

Subsequent to quarter end, we repaid one CMBS loan in the amount of $17 million that had an interest rate of 6.22% and a maturity date of November 1, 2016. There is no prepayment penalty associated with the early repayment, and we expect to add the hotel to our unencumbered asset pool in the third quarter. As a result of the loan repayment, there are no remaining scheduled debt maturities in 2016, over 60% of our portfolio EBITDA is unencumbered, and only 2.4% of our total debt is scheduled to mature through 2018.

Turning to our outlook, in our release you will see that we provided our outlook for the third quarter and for the full year of 2016. For the third quarter 2016 we are introducing pro forma and same-store RevPAR growth guidance of 1% to 3%. Included in our third-quarter RevPAR growth guidance is renovation disruption of $800,000, which is expected to adversely affect our RevPAR growth by 75 basis points.

Our third-quarter adjusted FFO guidance is $27.9 million to $29.7 million, or $0.32 to $0.34 per share.

For the full-year 2016, we are tempering our RevPAR growth outlook to a range of 3% to 4.5% for both our pro forma and same-store portfolios as a result of softening corporate demand in the second half of 2016 and the limited visibility that continues across the industry. We are maintaining the midpoint of our adjusted FFO outlook to a range of $115.2 million to $118.7 million, or $1.32 to $1.36 per share. We have incorporated capital improvements of $42 million to $48 million, which includes both renovation and recurring capital expenditures.

Our adjusted FFO guidance incorporates the recent $75 million issuance of our Series D preferred stock, the anticipated $50 million redemption of our Series A preferred stock in October of 2016, the extended sale date of the eight remaining ARCH hotels from July 1 out to October 1 for an aggregate sales price of $77.2 million, and the acquisition of a $61.4 million hotel expected to close in August 2016.

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

Thanks, Greg. In summary, we are very pleased with the consistent results in our portfolio and remain encouraged about 2016 as the continued guest preference of premium select-service hotels, limited supply growth in our submarkets, and broad geographic diversification continues to show the benefits of our differentiated investment strategy.

With that we will open the call to your questions.

(Operator Instructions) Jordan Sadler, KeyBanc Capital.

Good morning, guys; it is actually Austin Wurschmidt here. I was just wondering if you could provide a little bit of additional detail on the RevPAR reduction in the second half of the year. I understand some of the softness in the corporate side that you talked about, but maybe speak a little bit more broadly on specific geographies as well as what you are seeing in the leisure segment.

Sure, Austin; this is Dan. I think clearly July was a soft month for the industry. As you know, the third quarter is always weighted more heavily on the backend, specifically September. So with the slow start and limited visibility we really felt like a tempered outlook is warranted.

If we look out in the quarter some of the things that are headwinds obviously are Houston. Not that that is a big part of our portfolio, but we expect that continued and even more recent decline in energy to continue to create challenges in that market. And then in New Orleans declines in the convention pace for July and August we think is headwind. September is pacing up a little bit at this point, but again, with the limited visibility, it is just real hard to forecast that far out.

Thanks for that. Then was the 75 basis point impact: is that to the third quarter? Was that originally planned in your guidance, and what is the impact on the full-year RevPAR growth numbers?

Yes, that is factored in our guidance.

So it was in the original guidance plan?

Yes.

Okay. And then just lastly, I guess given some of the challenges and lack of visibility, how are you thinking about additional capital recycling given it must be a little bit more difficult to underwrite in the current environment?

Really it is opportunistic. We don't have a specific goal; it is on a case-by-case basis. Very active in the market, as we always are, looking for what we would call hidden gems that have strong going in yields with value creation opportunities on top of that. But the recycling of capital, being able to buy at cap rates better than what we sell, we think is a great way to continue to create value in this environment.

Can you provide any additional detail on the pending acquisition, either expected cap rate, brand, geography, etc.?

We are not able to disclose the full details at this point under the confidentiality of the purchase and sale agreement, so I think you should just assume similar going in yield to the last 40 or 50 deals we have done and be assured there are value creation drivers on top of that. We would expect to provide full details post-closing by the end of the month.

Okay. Thanks for taking the questions.

David Loeb, Baird.

Just to follow-up on the new acquisition, Dan -- and good morning, by the way. Are your plans to use that as part of a 1031 for some of the dispositions that you are working on?

David, thanks; it is Dan. That is a great question. That is our intent.

And can you give us an update on the disposition activity? Just like a little more detail about when you think you might sell those remaining eight assets and how?

Sure. As you all probably know, ARC does have until the end of the year to buy the assets, but we do have the contractual right to sell them prior to that date. We have sold two and the remaining eight are -- one is under contract and seven are under letter of intent. We do have $7.5 million of nonrefundable earnest money from ARC.

So we really don't have an immediate need to sell the hotels, and we think there is a natural floor built in with the contract that we have. But we have run a full process. We are estimating October 1, assuming due diligence proceeds smoothly, but that is really an estimate for the remaining hotels.

But there is a number of different scenarios in how we would allocate those proceeds, if some were to sell before October 1 or after. But that would be the most likely scenario at this point.

Okay, thank you for that. Is ARC current on all of its obligations?

They are. They have been a very good partner and very transparent and have fulfilled all their obligations on time for us.

So the loan is current and everything is fine?

That is correct. They have been current on their payments and on the amortization that they have committed.

Okay. Couple more quickly, sorry. You talked about in the last quarter the strength in Dallas, Los Angeles, and Nashville. How about looking forward? Which markets do you think will be particularly strong? I guess I left out Phoenix.

Q3 we still see some strength in Dallas, Nashville, too. Denver partially on, some rooms coming online that were out of inventory; but also Minneapolis. Minneapolis has got some strong transient group demand that we think will be a contributor for the third quarter as well.

Last one, I promise. You have had amazing margin results. Clearly, your asset management efforts are proving successful. Is there more? Is there more that you can do? Is there low-hanging fruit or is it going to get harder from here to achieve the same kind of margin results?

Thanks, David; this is Greg. Craig and the operations team have done a fantastic job on margin expansion and cost containment. What we said early in the year was that we expected 25 to 75 basis points, and now that we're halfway through the year with 130 basis points of expansion, it's obvious -- we're trending above that.

In the back-half of the year we're anticipating an additional 40 basis points of expansion, so as you get toward the back end of the year we see some lingering headwinds. But we still see continued growth and trending above the previously-stated range.

Ryan Meliker, Canaccord.

Thanks. David took most of my questions, so kudos to him I guess. But one thing I just wanted to touch on was you guys obviously have the deal with AR Capital for the remaining eight hotels. You have been marketing some of the other hotels.

Are you seeing any interest for either the entire portfolio or subsets of the portfolio right now to anybody else? Or is it most likely that you are going to be moving forward with AR Capital? And then if you are seeing any interest, are we seeing any portfolio premium valuations like we had a couple years ago, or is that still gone?

Thanks, Ryan. This is Dan. I will try to address that in reverse order.

I don't see a portfolio premium like we saw in the past, but I do think pricing is consistent with where we started. NOI has improved, but maybe cap rates have backed up a half a turn or so, so nominal dollars. We would expect the sale to still be in line with what we originally put it under contract for.

We did run a full process on seven of the assets and had quite a bit of interest, surprisingly, in all seven, but also quite a bit of interest in subsets of the portfolio. As a reminder, of the seven, three of them are in Memphis and four are in Jackson, Mississippi, so there is some natural alignment to some of the portfolios. But the party that we are negotiating with currently is interested in all seven, and we do have one outside that is under contract.

So I think the shift really in the industry has been away from the usual suspects on the portfolio buyers towards smaller, more owner-operators with private equity backing. So I would say the financial buyer has gone away in a large degree and it is more of an operational buyer or a local owner operator that I think is the most likely candidate for asset sales for us.

Okay. So it sounds like there is still at least a reasonable likelihood that these assets will be sold, but not necessarily be sold to AR Capital; is that fair?

That is fair. We are optimistic that we will be able to complete this last phase of the capital recycling. It is not exactly how we expected to be here or get there, but we have made great progress and still see this coming to fruition by the end of the year.

And then just real quickly, as a follow-up to Austin's question with regards to guidance, it sounds to me like you guys had a little bit of a challenging July. How much of that was, do you think, the July 4th calendar shift versus just underlying trends that are softer? And are you, I guess, forecasting those underlying soft trends or the actual July softness through the remainder of the quarter? I guess help us understand that difference.

That is a great question. Ryan, you are killing me with these three part questions. I try to get each part of it, but I think, clearly, some of the softness in the first week in July was the demand at the last week of June kind of pulled some of that demand into the prior quarter. And we are guiding now I think more in line with what we've seen the last nine to 12 months.

We are not underwriting or forecasting with the thought that there is an acceleration in economic activity. With limited visibility, I just don't think that is prudent.

I think that the slight softening in demand and really the lack of pricing go hand in hand. Technology, social media, lack of cancellation policies, poor management company pricing integrity, supply and brand proliferation, those have all contributed to pricing issues, but we have all been dealing with that throughout this cycle. I think when you combine all those with a little softening in demand it is exacerbated and that is really, in our view, what has brought this to the forefront.

The notion that all of a sudden companies are being more thoughtful about their business travel I think is a bit flawed. I think all the way back since the downturn companies have tried to be more thoughtful about business travel, and I think it is just more prevalent today as we get later in the cycle.

That is good color. Thanks, Dan. That is it for me. No more two-part questions.

Bill Crow, Raymond James.

Good morning, guys. Believe it or not I actually have a question or two after the last 10 or 12.

Dan, just to clarify, it is your portfolio softness that you were basing your revisions to guidance upon, right? It is weaker results in July and thus far into -- well, we're only a couple days into August. It is not broader industry concerns, right? You are actually seeing it on the ground?

Yes, Bill, that is correct. I think that is a great point. We guided what some thought was aggressive last quarter and it wasn't based on what our peers were seeing out in the marketplace. It was based upon what we were seeing for our portfolio.

We didn't see -- at that point, the business transient had not exhibited the slowdown. Even if you take the softness of the first week of July out of there, to guide aggressively, as I said earlier, after a soft month and knowing that the back half -- meaning September -- is a big contributor, just feels a little bit aggressive. So we felt like tempering that made sense. But it is, based on what we are seeing in our portfolio.

And, Dan, did you give July RevPAR growth? If not, or if you did, could you repeat it, please?

We don't provide quarter-by-quarter RevPAR guidance, but I know July in Upscale was off I think 12% the first week; up 1.3% the second week, if I have that correctly; and up 1.9% the third week. So with a broad, diverse portfolio I think that is a good benchmark to look at for companies like ours.

Great. Finally for me, again you have talked quite often about how this cycle's supply growth has not, thus far, impacted your markets. At least not materially. Is that starting to change? Are you seeing the green shoots of new construction out there? And how closely do we have to monitor that with Summit and its portfolio?

That is a good question. I think Smith Travel is expecting 1.9% growth for the industry in 2016 and maybe a little over 2% for 2017. So at this point it doesn't appear that supply will be the cycle killer.

And I think a large portion of that supply -- granted it's in the Upscale segment, but if you assess it a little bit more thoughtfully, a large amount of that is in New York and other urban markets. And I think that supply is absorbed and, unfortunately, I think it is at the expense of some of the older and more tired full-service assets.

But I think the construction financing has tightened and construction costs continue to rise, so we would expect some of the pipeline continues to get delayed or dropped.

For us, we've just got good visibility into supply in our markets. You just can't build a hotel overnight. Somewhere between 2.5 to 4 years is what it is going to take for a hotel to come to fruition.

And most of our markets are insulated. We have got a fair amount of the brand represented there. One new hotel is in a market or a submarket that we are in we don't believe is going to affect our ability to achieve our numbers.

So apologize if that is a long answer. But it is something we watch very closely, but at this point still don't see a material effect on our portfolio in the near term.

That is perfect. Thank you for your time, Dan.

Shaun Kelley, Bank of America.

Good morning. Probably just one that I have left at this point. Dan, I was wondering if you could just sort of comment on size of deals that you think are able to get done right now. I think you mentioned a little bit around the portfolio as it related to you guys.

But just broader in the transaction markets, sort of what price points are the sweet spots for buyers and I think, as we had talked last time we sat down, there was sort of a level at which it was harder -- a size at which it was harder to get deals done. Is that still the case or any signs that that might actually be improving with capital markets?

Thanks, Shaun. Good question. I think what we are seeing now is still a pretty wide buying pool for the $20 million and smaller assets. We sold some at really strong cap rates to those more regional owner operators. The $25 million to $50 million or $60 million assets, more of the institutional quality assets, are a little bit more of a narrow buying pool, and that is where we are finding the most value-creating opportunities.

I haven't seen much change in buyers at the table. There is still a disparity between buyers and sellers, so not -- everybody talks about that narrowing over time. I'm not sure that ever narrows as much as everybody hopes, but we are finding ways to try to narrow that gap. Part of that is there's just very limited buyers in that $25 million to $50 million or $60 million pool. So we are one of the few out there.

As I said, if we can continue to sell assets at a cap rate that is attractive and buy at better cap rates with creative growth profiles that is -- we are strongly encouraged to do so.

Seems simple enough. Thank you very much.

Wes Golladay, RBC Capital Markets.

Good morning, guys. Looking at the guidance you mentioned a soft start to the quarter, the very difficult first week, but then after that we are doing about 2% in the Upscale segment and you typically outperform that segment, so it looks like you would be doing at least decent in July. So are you seeing anything on the forward bookings that is more concerning or is it just the rough start you had in the first week that is really the main driver of the tempered guidance?

I think it is more of a soft start that gives us more of a tempered outlook. Again, September we think at this point looks to be a solid month for us, but with the limited visibility in the industry, and more specifically in select-service, we thought it was more prudent to have a conservative outlook.

Okay. For context, what is your typical amount of business you have on the books for, call it, the next month at this point?

I don't know that we have a specific number. It varies from week to week and quarter to quarter. Typically, our outlook and our forecast is really more of a two- to three-week outlook than -- and it would be a blend of obviously more corporate and leisure transient.

I think the booking window continues to be short and technology has created an environment where people feel much more comfortable booking much closer to the date of their actual trip. So I don't know that I have a more fulsome answer than that.

That is good context. Now, looking at the ARC transaction, do you expect to be similar pricing for the assets you were trying to resell or could you beat it or take slightly less just to get certainty of close? How should we look at that?

I think we would look at it -- our expectation would be in the same range as where we have these under contract. There is a part where we would be open to taking a little bit less, depending upon where we are in the process, in the cycle or in the year. But we feel like their sold value is at or in excess at this point of where ARC had them under contract. So I think we are still very much in expectation that we will do as well or a little bit better.

And for your acquisitions, what cap rate are you targeting for an initial yield?

We are still going in 8%-plus yield. That has been something that has been very important to us to create the long-term value. Singing the same tune for five years now that the going-in yield is very important and eliminates a lot of the risk downstream where you may have RevPAR expectations that are below initial underwriting. And that is exactly what we are seeing today, but -- so nothing in our underwriting has changed.

Okay, thanks a lot.

(Operator Instructions) Chris Woronka, Deutsche Bank.

Good morning, guys. Dan, want to ask you on the dividend, and apologize if you already covered it, but I guess how do you look at that given the increased appetite for yield? I guess the 3.8% you are at, it's nothing to sneeze at, but it is probably a touch below the group. So it looks like you probably have the capacity to bump it up, just any thoughts there on direction?

Chris, this is Greg; it is a great question and something we take very seriously. We have always said that we look at it as far as total shareholder return an 'and' and not an 'or' kind of equation. We talk about it every quarter with our Board.

With the strong performance of our portfolio and the consistent cash flow stream, we are excited that we were able last quarter to announce the 13% increase. So as we look to the future the only guidance we have given, and it is still kind of how we look at it, we would anticipate having a 40% to 60% AFFO payout ratio and we are at the lower end of that. So I think that is kind of where we stand right now as it relates to dividend.

Okay, fair enough. Also want to ask about the -- some of the brand initiatives. I mean where do you sense they sit now as cycles moving on and we have seen some things that you guys have done and others on product refreshes. I won't use the amenity creep term. But where do you think the brands stand?

A second part, if I might is just on distribution costs. Are you guys kind of watching what is going on with the member discounts? Do you have -- as an owner incurring the distribution cost, do you have an opinion on where that is going?

Sure, Chris; this is Dan. On the brand initiatives, early on, even in pre-IPO, we fought a lot of those, but -- won some, lost some. But as we've looked back over the quality of the product and the upscale that we have today, many of these brand initiatives have really played out brilliantly.

They have created a product that today's guests love. It is a great alternative to a full-service hotel with, in many instances, even a better experience. We have been, over the last three or four years, very supportive of the majority of the brand initiatives.

We think a lot of the heavy lifting is done. The bathrooms have all been changed; the lobbies have all been changed. The F&B offerings in some of the higher-end, upscale hotels have done well, and they have been very supportive in making it more robust. So I wouldn't say that there wouldn't be any additional brand initiatives, but they've really set the bar very high and I think it has created a very viable asset class in the chain scale and we are pretty excited about it.

The next step, I think for us, is to stay ahead of the technology requirements. There are a lot of -- it is not just about bandwidth anymore. People are coming, as I am sure many of you on the call are, with multiple devices and they are all hooked up, so access points become more important.

To have a high-quality hotel that guests love, I think you have to be very thoughtful about where the capital is spent and where you get the return for that.

On the distribution side, with the new booking direct, I think there is some great long-term thoughts on how that will benefit the brands and eventually us as the owners; much more profitability. I think there is a little bit of leakage, so to speak, as some of the existing reward members are also getting those discounts that were -- but I think that washes out over time.

So we think it is a good first step, but I think it is a long-term initiative to direct more business away from the OTAs. And at this point, we think it is a positive.

Okay, very good. Thanks, guys.

I'm showing no further questions at this time. I would like to turn the call back over to Dan Hansen for closing remarks.

Thanks, everybody, for joining us today. We sincerely appreciate the trust you have in us, and we will continue to work hard for you by being thoughtful in our capital allocation and continuing to find opportunities to create value in premium upscale select-service hotels which today's guest love. Have a terrific day and we will talk to you again next quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.