Q3 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Summit Hotel properties Q3, 2019 conference call.
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I would now like to have a conference, which today speaker, Adam Waddell Senior Vice President Finance a capital markets. Please go ahead Sir.
Thank you Valerie and good morning, I'm joined today by Summit Hotel properties, Chairman, President and Chief Executive Officer, Dan Hansen, and Executive Vice President and Chief Financial Officer, John Scanner.
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 2018 Form 10-K and other as easy filings.
Forward looking statements that we make today, our effective only as of today November six 2019, 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 dot and teach P. read dotcom.
Welcome Summit Hotel properties, Chairman, President and Chief Executive Officer, Dan Hansen.
Thanks, Adam and thank you all for joining us today for a third quarter 2019 earnings conference call.
We're pleased with the continued relative outperformance of our portfolio compared to the broader industry the upscale segment.
Our relevant comparative sets in what continues to be a challenging operating environment.
I'd like to specifically acknowledge our entire operations team, who have been relentless in controlling operating expenses and leading initiatives to create value.
For the third quarter, we reported pro forma revpar growth of 0.2%, which was driven by a 1% increasing occupancy partially offset by a 0.8% decrease in right.
Our third quarter results were affected by both hurricane Barry and Dorian, which reduced pro forma revpar growth by 50 basis points.
And disruption from renovation activity during the quarter further reduce pro forma revpar growth by 40 basis points.
Adjusting for these disruptions pro forma Revpar growth was one person, which compares favorably to third quarter results for the total U.S. top 25 markets and the upscale chain scale.
Reported revpar changes of positive, 0.7% negative, 0.4% and negative 0.5% respectively.
We once again gained market share among our competitive sets in the third quarter with an average Revpar index of 113.7, which represents a market share gain of 149 basis points compared to the third quarter of 2018.
The share gain consistent both.
Occupancy and rate share gains relative to our portfolio is respected competitive sets.
Our same store portfolio posted a revpar decline of 0.1% in the corner driven by a 0.9% increase in occupancy and a 1% decrease in right.
Excluding hurricane related and renovation disruption same store revpar increased 1%.
Our strongest performing markets during the corner, where Phoenix, Louisville, Indianapolis and Boulder.
Our for Phoenix hotels posted a combined revpar increase of 26.7% in the quarter driven by our courtyard and Springhill suites, and North Scottsdale, which received comprehensive renovations during the third quarter of 2018.
In addition, our in house revenue strategy team worked to develop new pricing strategies at all for hotels to better manage the off peak summer months, which helped contribute to a combined share gain of 16.3% in the corner.
Adjusting for the displacement third quarter of 2018 or to North Scottsdale hotels. The four hotels posted an average revpar gain of 6.1% compared to the overall Phoenix market, which grew only a little over 2%.
In Louisville, our two hotels posted combined revpar growth of 21.5% turned the corner as we were once again able to shift segmentation towards higher rated group in retail business. Following the reopening of the convention center and the resulting 20% increase in citywide room nights.
This shift in segmentation contributed to an 11.9% increase in rain during the quarter, which outpaced the competitive sets combined growth of 4%.
Revpar growth at our hotels once again outpaced the overall, the we though market the downtown Submarket and the competitive sets gaining nearly 960 basis points of market share on average.
In Indianapolis, a strong convention center counter drove a 15% increase in citywide room nights during the quarter and our two hotels posted average revpar growth of 10.6%, which outpaced the overall Indianapolis market by 470 basis points and represents an average market share gain of 320 basis points versus our respective competitive sets.
Our hotels were also successful in growing group business during the quarter with group night room demand up 18.6% in the segment compared to the third quarter of 2018.
We continue to add a positive view the Indianapolis market as citywide convention base is up over 9% for 2020.
In Boulder, our Marriott Hotel continues its strong ramp following the hotels comprehensive renovation, which was completed in the second quarter of 2018.
The hotel posted a 10% revpar gain during the third quarter, which outpaced the Boulder submarket by nearly 600 basis points and its competitive set by nearly 400 basis points in the corner.
The hotel was able to drive significant rate increases as occupancy reach nearly 90% in the quarter and 8.8% increase in rates significantly exceeded the competitive sets 0.6% decline.
These four markets out performance highlights the benefits and value from having an in house team of professionals to oversee and execute renovations and the subsequent outperformance and repositioning made possible with comprehensive renovations and creative pricing strategies.
We are proud of our portfolios relative outperformance is year to date revpar growth of 1.7% in our pro forma portfolio compares quite favorably to industry growth of 1% upscale growth of negative, 0.5% and essentially flat growth in our competitive sets.
The great work by our asset management team continues to translate into better operating margins as year to date operating expenses have increased by only 1.4% on a per occupied room basis, which has kept you keep margins nearly even despite tepid topline growth.
Capital recycling continues to support our external growth as we closed on the acquisition of five hotels and the land parcel in partnership with GE I see for a total purchase price of $276.9 million during the quarter and subsequent to quarter end.
Earlier this quarter, we also announced the pending sale of our two hotels in Birmingham, Alabama for a combined sales price of $21.8 million, which we expect to close in the fourth quarter.
Finally during the third quarter, we invested $14.1 million into our portfolio and items ranging from common space improvements and meeting room, and fitness center renovations to complete guestroom renovations, including comprehensive renovations at our Hampton Inn, <unk> suites hotels in Austin, Texas, and Tampa, Florida, and our courtyard by Marriott in Fort Worth Texas.
Year to date, we've invested $46.7 million into our high quality hotels, resulting in an average affected age of 3.4 years, demonstrating our commitment to provide the most updated offering and the best in class guest experience with that I'll turn the call over to our CFO John Stan.
Thanks, Dan Good morning, everyone for the quarter, our pro forma hotel EBITDA was $48.3 million a 3.4% decrease from the same period in 2018 and hotel EBITDA margins contracted by 130 basis points to 36%.
Excluding the effect of property tax increases, which rose nearly 10% during the quarter hotel EBITDA margins contracted by 75 basis points.
Operating expenses continue to be willing manish quarter to date and year to date operating expenses, increasing just 0.7% and 1.4% on a per occupied room basis, respectively.
During the third quarter, our adjusted EBITDA, Ari decreased 8.8% of $45.2 million and adjusted FFO per share decreased 10.1% to 31 cents per share both primarily driven by year to date disposition activity.
During the third quarter, we close on the previously announced acquisition of the Hampton Inn, <unk> suites, and an adjacent land parcel and silverthorne, Colorado, which kicked off our joint venture with GE I see.
Additionally, subsequent to quarter and re close on the acquisition of four hotels in California in Oregon and partnership, but you guys see for a total purchase price of $249 billion.
The combined purchase price of the five hotels acquired year to date equates to an average estimated cap rate of 8.4% on the underwritten net operating income for the full year 2019.
These recently acquired hotels have a combined 2019 revpar of $162, which is approximately 30% higher than our existing portfolio and average hotel EBITDA margin of nearly 50%, which is approximately 1300 basis points higher than our portfolio.
These statistics are all property level figures and do not include any fee income we will earn as the joint ventures general partner and asset manager.
As Dan mentioned, we also announced the pending sale of our two hotels in Birmingham, Alabama for $21.8 million.
The combined purchase price equates to a 6.9% cap rate on the trailing 12 months net operating income or a 5.6% cap rates, including estimated capital expenditures for Pip related items.
Including the sale our year to date disposition activity totals nearly $170 million and translates to an average cap rate of 7.7% or 6.8%, including estimated pip related costs on the hotels combined trailing 12 month net operating income.
The 10 hotel sold year to date or currently under contract. So have a trailing revpar of $102 and hotel EBITDA margin of 33%.
Both of which are well below our portfolio average.
These transaction service further validation of our ability to thoughtfully recycle and reallocate capital in a manner that we believe will create long term value for shareholders.
Our balance sheet continues to be well positioned with approximately $350 million of current liquidity no maturities until the end of 2022 and an average remaining term of more than four years.
As of September Thirtyth, we had total outstanding debt of $849 million with a weighted average interest rate of 4%.
On a pro rata basis, our current net debt to trailing adjusted EBITDA Ari is approximately 4.7 times.
Today more than 86% of our hotel EBITDA is unencumbered as we continue to assemble a highly flexible balance sheet.
On November 1st we declared a quarterly common dividend for the third quarter of 2019 of 18 cents per share or annualized 72 cents per share.
The annualized dividend results in a prudent AFFO payout ratio of approximately 58% at the midpoint of our 2019 outlook.
Consistent with our prior practice, we updated our full year guidance in the press release yesterday to include the acquisition of four hotels and the pending disposition of our two Hilton Garden Inn hotels in Birmingham, which is expected to close in the fourth quarter.
Our revised full year 2019 guidance for adjusted FFO is $1.23 to $1.26 per share and adjusted EBITDA of $183.3 million $286.4 million, which reflects the midpoint of both ranges being increase to account for a recent transaction activity.
We revised our full year estimate for pro forma and same store Revpar rose 2.5% to 1%.
The reduction of the midpoint of our pro forma Revpar growth range is primarily driven by the inclusion of the for West Coast assets. We recently purchased as if they were own for the full year and the exclusion of the two Birmingham assets that are currently held for sale.
Which combined lowered full year revpar growth by approximately 40 basis points.
Full year pro forma Revpar growth was further reduced by 10 basis points as the result of the Hurricane disruption Dan mentioned earlier.
Same store Revpar growth guidance was lowered by 25 basis points at the midpoint of our range.
Finally, we adjusted our full year outlook for capital improvements to 57.5 million to $62.5 million for 2019.
No additional acquisitions dispositions equity raises or debt transactions beyond those previously mentioned are assumed in the full year 2019 Guy.
With that I will turn the call back over to Dan.
Thanks, John in summary, we are pleased with our third quarter performance and our continued ability to identify and execute on opportunities that we believe position our portfolio for future outperformance and with that we'll open the call to your questions.
Thank you to ask a question you know we did press star one on your telephone.
You mean, we turn to the Q by pressing the pound key please standby, while we compile acuity roster.
Our first question comes from Austin Wurschmidt of Keybanc capital market. Your line is open.
Hi, Good morning dinner, John I guess, I'm curious, how we should be thinking about the balance between grown the joint venture and and managing your leverage levels moving forward kind of within that level or that targeted range you've outlined historically.
Sure Ausnet sedan.
I think you should look at it as.
That range of kind of three NAFTA for an AFE times.
The real guidepost that we've been very focused on for quite some time, obviously, our capital constraints are more limited and geographies.
We'd expect to fund at this point, our component of any growth through recycling of capital as we've done in the past.
So how would you rank the attractiveness of the funding sources when you look at selling assets, and then common and or preferred equity.
Our bias is very strong list, we're selling assets right now weve shown an ability to sell assets at very attractive rates and we still think theres a market for that so I think thats, where our focus would be at this point.
Appreciate that and then just next question I guess I was hoping to get a little bit additional detail around the economics of the new mezzanine loan that you closed on this quarter.
Remind us again, what your target thresholds are for them as book and then could you provide some latest thoughts on either you know the remaining three.
Loans outstanding whether you think those ultimately get prepaid or you take out the borrowers.
Through an acquisition.
Yes, Hey, Osten, it's it's John I.
I think as we've said in the past we like this is kind of an ancillary piece of the business I think where we are today and as you pointed out we now have four different loans outstanding three of which are fully funded feels like a round.
The right balance for US out we do have some period of time over the course of of next year with which we would look to potentially exercise.
Those options I think as we've said kind of over and over we're early in this to do it for hotels that we ultimately like to own.
And we'll kind of make those evaluations at the time the options come due over the course of the next year.
And then what was the size of the new loan and the yield that you expect to achieve on that.
Yes. The total loan commitment is just under $29 million, we have just under $7 million of that funded at year end and it carries a 9% coupon.
Great. Thank you.
Thank you. Our next question comes from Wes Golladay of RBC capital markets. Your line is open.
Good morning, guys stick with that mezzanine.
Debt that you have out there is it all with different developers.
Hi, Wesson span, it's with two separate developers.
Okay, and then go into your acquisitions can you give us your view on what the growth profile is for the assets over the next two or three years, which you can do from investing in the assets. Obviously this year is a little sluggish on the growth relative to what your soul, but what do you see the inflection coming.
Are you referenced in the new acquisitions, Yeah. You bought you bought the the four assets abroad diner growth profile, but I'd imagine you're going to have some sort of playbook, where you can invest and bring the growth up and maybe your view on supply and those markets.
Yeah, I think there they're all asset that we feel that very well located.
We as we've said before I feel very good about the brands and driving value. These particular assets, we think would benefit from a significant amount of capital.
We call that $23 million of renovation capital over the next couple of years for those properties. So we do think theres some considerable upside post renovation.
They're very well.
Addition, in their market and with very strong brands that we think we'll we'll continue to lead the market specifically post renovation.
Okay, and then about last one for me you. When you look to next year, how do you view supply in your markets relative to this year.
Yeah, Hey, what John I think we look at it fairly consistent with what we're seeing this year, we've talked about kind of industry supply growth in and around 2% our portfolio and kind of our top 10 meaningful markets, probably 40 to 55 basis points north of that more in line with what we're seeing.
And kind of top 25 in urban markets and our expectation at this time is for next year to shake out generally in line with what we've seen this year.
Got it thank you.
Thank you. Our next question comes from Neil Malkin of capital Once security Your line is open.
Hey, guys good morning.
Just a question on the Birmingham assets, you have teed up that cap rate.
Physician cap rate looks really good really low I'm just how how are you a.
Well do achieve those I mean are you signed those into like a 10 31 market is it just like rich doctors using.
80% ltvs of floating rate debt.
Like how are you on.
Sourcing those to get such.
Attractive.
Relations on inferior assets relative to your.
Go forward portfolio.
Neil It's Dan look I wouldn't look at these as inferior assets I think these have been good assets for us they performed well.
We have a relationship with owners all over the country Big and small.
This particular owner, it's very well respected and great operator, who has a strong presence in Birmingham, so from a cost and expense standpoint, he can probably do things that we just can't being.
Public company with third party manager, so what that cap rate represents to us is probably significantly different to him.
So I wouldn't look at it as buyer that is either unqualified or not paying attention I think it's just a different profile of a local owner operator that can find value in ways that we can't because of our structure.
Yes that is our job is to find the right buyer to maximize value but.
It's not any way.
Should not be lifted in any way as a reflection the buyer everybody has a different focus and value proposition.
I understood. Thank you for that.
Clarity.
And then other one for me could you just maybe highlight the your key.
Demand drivers or customer bases in terms of the leisure transient business transient kind of how those segments have trended in terms of.
Demand or or the health of that since July any any notable takeaways you've seen in terms of.
Degradation or stability any notable insight that would give you a clues or be a harbinger for things to come potentially.
Yes, John I think kind of as a continuation from what we saw in the first half of the year. Yeah. We've seen group pulled up on a relative basis better.
I think when we look at and even some of the kind of the corporate negotiated it again on a relative basis has held up better where we've seen more of the weakness is on the transient side and more particularly on the leisure side, Yeah, I think in the third quarter weekday revpar outperformed weekend revpar by about 250 basis points.
Sure I just wonder if leisure for example was was weaker because.
You had a tough holiday.
Jewish holiday comp and.
Leisure has been so is outperformed for quite some time I didn't know if there was something in particular or anything that you stuck out to you that you're hearing from your property managers that would you maybe think rethink how you revenue manage.
Yeah, I think that there's.
Theres definitely some of that in there you know kind of parsing out the separate effects of its is very difficult, but I do think that the holiday shift was a piece of it at home and again, it's been a little bit of a continuation with what we've seen throughout the year I think your point on it has been a relative outperformer in previous periods is also driving a piece of it.
Thanks.
Thank you. Our next question comes from Chris Walker of Deutsche Bank. Your line is open.
Hey, good morning, guys.
Wanted to kind of revisit that the revpar assumption for the four acquisitions is that.
Ill try to do the math quickly I mean is that one is that was that the revpar I guess call. It underperformance relative to the rest of the portfolio is that one or two of those hotels or is it kind of uniform across the four.
Hey, Chris It's John It is I would say all for our you know the expectations for them to perform as a group rail relatively lower than the portfolio I would say that weakness is concentrated in Portland, and I think there's a market that's been well understood that has been weak consistent with our expectations going into the deal.
On the way that we underwrote the acquisitions at the time that we purchased them.
Okay, and then can you maybe share with us I mean, even if at a high level just.
Given the some of the.
Management fees are going to be earning on this JV, how does that kind of improved overall returns on how you underwrite. These these JV deals.
Yeah look we haven't Chris we havent disclosed the exact fee stream and what all comprises the fee stream. What we have said publicly is that we do believe that they're meaningful we've done that mostly kind of out of respect for our partner.
I think what you'll see as we progress through the JV in particularly as we get into next year those fees will run through other income on the income statement.
They will be more meaningful of ability to articulate in a little bit more detail what comprises those fees as we go forward.
Okay.
Great and then just wanted to ask on the Brown to come on the brand side. It seems like as we've been hearing from other reads in the brand companies. There is theres been a little bit of back and forth on market share and I know you guys are obviously in the into select service part of the market, but do you think there have been any shifts there maybe because of the Bon voyage.
Program kind of kind of gaining traction or something else is there anything notable that's important for you guys.
Chris It's Dan I wouldn't say theres anything notable or surprising for us we've we've been big believers in the value of loyalty for a long time, which is one of the key drivers, we believe and the strength of our portfolio.
How that shifts over the next three or four or five years with continued proliferation of brands and.
The upscale brands competing as well if not better than boutique and the upper upscale I think will kind of prove itself out.
But I don't think I've seen a anything that would.
Give us any pause and continuing our belief in the strength of the brands.
During their loyalty programs I do believe both Hilton and Marriott and Hyatt NRG continue to post numbers of growth.
There are a lot of different ways to to ER segment that but we do think that it's at spirit, a big positive not just for our portfolio, but for the industry.
Okay, Great and just I don't have the math in front of me, but you guys as you see more and more of the Hilton true.
Operator has opened up maybe maybe in some of your markets do you think there kind of staying within that that swim lanes, because I know historically, what we saw overtime was Hampton Inn grew from what's true is today to compete with.
Really almost full service hotels.
I'm, just curious as to whether you're you're seeing true in any of your markets and whether it's having a positive or negative impact on on any of your properties.
Chris This is Dan again, it I wouldn't say that we've seen any effect in our markets, it's still a relatively new brand.
It is creative and unique I don't know that you have a.
A true segment anywhere in the lodging space as you have had traditionally I think people are looking for.
New and clean and renovated rooms in great locations, where they want to stay and spend time so.
I do think that even the mid scale or upper Midscale brands like true will be a competitor.
And I think that.
I will be something that we'll be focused on.
What are our properties many of them are custom many of them location wise drive higher revpars and those barriers.
With construction costs and renovation costs are likely to keep some of those brands from continuing to steepen there.
So long answer, but we haven't seen a lot from those brands, but there definitely part of the reservation and loyalty programs.
It should continue to gain traction in markets that are accommodative to those guests.
Okay very good thanks, guys.
Thank you. Our next question comes from Michael Bella Sorry.
Sorry at Baird. Your line is open.
Good morning, everyone.
Morning.
First just kind of housekeeping item on the Revpar change.
The week Revpar for those hotels in 2019.
What's the tail there how should we think about any potential impact on your pro from our portfolio into 2020, they're going to be.
Headwind again and then.
What sort of magnitude should we be thinking about.
Mike in terms of what we think the portfolio will do in 20.
Not necessarily what those four hotels will do specifically, but the impact on overall revpar growth for the plus or minus 74 hotels or whatever you have in your your pro forma pro forma side, just given that it's a change in mix and on a backward looking basis as a negative impact I would presume at least in the near term.
Going forward, it's also a bit of a negative impact is that correct.
Yeah, Yeah, I think look I think as we what we have discloses that it's about a 40 basis point headwind for the full year of 19, Yeah. As you know we're kind of in the middle of going through budgets for next year. So for us to quantify anything I think we'd be premature, but I do think it's fair to assume that.
We would we would we would expect those.
Those acquisitions to be a tailwind next year.
Got it and then maybe just on on those four transactions are on the forward tells that one portfolio transaction.
Can you maybe give us a little bit of background on how that came about how it was sourced and then what you're seeing more broadly in the pipeline today in terms of pricing quantity.
Yeah that this was unlike the other the acquisition. This was a broker deal. This was part of a larger portfolio that was for sale, we looked at a much larger portfolio and kind of weren't interested in the larger portfolio and really focused on these four assets we felt like.
These four assets kind of fit the profile of what we were looking for and fit the profile of how we wanted to grow the JV with GE I see so they checked a lot of boxes for us I think we felt fortunate that we were able to kind of carve them out of the larger portfolio.
Beyond that I think we continue to.
See opportunities out there it's more difficult I would say that's transaction market has remained fairly stable again, despite the fact that fundamentals remain fairly tepid.
Thank you. Our next question comes from Bill Crow Raymond James Your line is open.
Good morning.
Are you seeing anything on that on the leading edge that we can't see that might indicate you're getting any relief from the labor cost front, maybe maybe lower turnover or anything like that any markets in particular that might be.
Might be helping you a little bit instead of hurting you.
Bill, It's Dan I wouldn't I wouldn't say that theres anything on the leading edge I think it's just a market by market very boots on the ground.
Commitment to try to find good employees at fair wages.
And minimize the contract labor and the turnover that that comes along with that.
We've made quite a bit better progress through the portfolio getting our contract labor less than 10% of the payroll.
But I think to to offset that is a very strong focus on the whole expense side, which we've been implementing up of an expense forecasting process over the last year. This helped us keep expenses and control. So I don't know that I would say theres a.
Definite solution that we've uncovered out there other than a market by market approach to really trying to find the right implies that I think the markets with greater supply are going to continue to be the more challenging ones.
But I think we've had some success stabilizing that so far this year.
And what are the trends on property taxes do you anticipate to be a.
The increases are going to be as great. In the next 12 months as they have been over the last 12 months.
Yeah, Hey, Bill as John .
Think we're looking at kind of.
At single digit increase in property taxes. This year, it's been kind of right in line with our expectations going into the year.
Absent the recent transaction activity I would have expected it to be on a fairly similar trajectory similar trajectory in 2020, clearly there is going to be some prop 13 considerations for the assets that we just bought in California next year, which potentially could put some pressure on on property taxes for 20.
Dan the full service guys have of.
Leaned heavily on fees.
Sustain their EBITDA this year.
It's not something that you're able to do is easily.
You just talked about the opportunity to.
Comment or increase in place fees.
There's a bill is there's a few opportunities out there that that we're exploring.
I think that are offering model is a little bit different in unique and.
To provide legitimately provide those charge those extra fees that would be an offering made and our operating model is such that it's very much of rooms based focus so and that's what we like we like the efficient operating model.
That drives the higher margin so to the extent there are few properties and true resort markets that we can add a fee to certainly we would consider that but I wouldn't expect it to be a huge driver for us because of our operating.
I apologize I have one more question here for you and that that is it does feel like Marriott and Hilton separated themselves on the sheer size of the platform the number brands.
And the loyalty programs membership and I'm just wondering on the margin does that does that change your preference for brands when you're looking at acquisitions all else equal.
Yes, if all else equal clearly the strongest loyalty program is the one that is probably the easiest to underwrite. Unfortunately, all is never equal. So I think we have continually tried to be somewhat agnostic.
And I understand that certain brands may have a less contribution either in.
LT or even public perception of value.
But to take down under consideration and pricing so still driving after the same.
Returns and if we can get better return because of certain dynamics, whether it's the need for capital or repositioning.
We would just be folks on one brand versus another for that reason.
Thanks, I appreciate the time.
Thanks, Doug.
Thank you.
No for the question at this time of let's turn the conference back over to Dan Hansen for any closing remarks.
Well. Thank you all for joining us today, our goal of creating long term shareholder value through opportunistic capital investment and relentless asset management remains unchanged and our portfolio has in the best shape, we've we've ever had very well positioned for the future.
On behalf of the entire summit team, we wish you joyous holiday season, and look forward to talking to all of you individually if you'd like to have any direct conversations to answer any questions have a great day.
Ladies and gentlemen concludes today's conference call. Thank you for participating you may now disconnect.
Yes.