Q4 2020 Summit Hotel Properties Inc Earnings Call
Okay.
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Ladies and gentlemen, thank you for standing by and welcome to the Summit Hotel properties fourth quarter and full year 2020 earnings conference call.
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I'd like to hand, the conference your speaker today, Adam of Bell Senior Vice President of Finance and capital market. Please go ahead Sir.
Thank you Victor and good morning.
I'm joined today by Summit Hotel properties, President and Chief Executive Officer, John Standard.
Please note that many of our comments today are considered forward looking statements as defined by the federal Securities laws.
These statements are subject to risks and uncertainties, both known and unknown as described in our SEC filings.
Forward looking statements that we make today are effective only as of today February 'twenty, four 'twenty and 'twenty, one 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 S. H P REIT dotcom.
Please welcome Summit Hotel properties, President and Chief Executive Officer, John Standard.
Thanks, Adam and thank you all for joining yesterday for our fourth quarter and full year 2020 earnings Conference call. As you are all well aware 2020 was the historically challenging year for our industry of air travel and business and consumer spending deteriorated significantly primarily as a result of measures taken to slow the spread of the COVID-19.
And virus, which led to a previously unimaginable over 35 per cent decline and the industry wide demand.
Despite the unusually difficult operating environment. We are pleased to have made tremendous progress on several key initiatives during the year that we believe uniquely and favorably positioned summit for growth.
Today, I'll provide a recap of our fourth quarter and full year financial results along with the few of our more notable accomplishments and update on current operating trends and our outlook for the business and our company going forward.
Revpar and our pro forma portfolio declined 63, 7% and the fourth quarter essentially on top of the $63 five per cent decline and the third quarter as the.
The seasonally slower fourth quarter provided slightly easier year over year comparisons that mostly offset marginally lower nominal revpar.
Our fourth quarter Revpar declined compared favorably to the Revpar declines and top 25, and urban markets of 69 per cent and 76% respectively.
For the second consecutive quarter, our portfolio was profitable at the hotel level and has been profitable on accumulative basis since may and with an average revpar of approximately $40.
Demonstrating the clear benefits of our efficient and flexible operating model.
Our asset and revenue management teams continue to do a remarkable job operating and a low demand environment as our pro forma portfolio achieved a revpar index of nearly 138% during the fourth quarter, which represents a market share gain of nearly 22 percentage points compared to the fourth quarter of 2019.
For the full year on a pro forma portfolio of finished with the Revpar index of 134%, which represents an increase of more than 19 percentage points.
During the fourth quarter, the well documented trend of weekend occupancy and Revpar outperformance continued and the leisure travel remains the primary source of demand throughout our portfolio.
Weekend occupancy was 52% during the fourth quarter, which led to revpar levels that were 40% higher than weekdays.
With the demand profile at our hotels virtually unchanged from recent quarters occupancy trends across various location types and chain scales remained fairly consistent and the fourth quarter.
Hotels and markets, we classify as drive to outperformed hotels and fly to markets by nearly 20 percentage points and hotels located outside of CBD locations fared better than our hotel in downtown locations Biosimilar margin.
And our extended stay hotels posted fourth quarter occupancy of approximately 60%, achieving a 74% revpar premium compared to our non extended stay hotels.
Urban hotels continue to lag the industry recovery, though occupancy and our urban and CBD portfolio has generally stabilized our 42 non urban hotels achieved nearly 55 per cent occupancy during the fourth quarter and ran over 60% on weekends.
And our hotel and resort suburban airport and other locations also performed relatively better during the fourth quarter, each posting occupancies of more than 50 per cent.
For the full year 2020, we reported pro forma revpar of $52, which represents the decline of 59, 2% year over year.
This decline and also compares favorably to the declines in top 25, and urban markets of <unk> 62 per cent and 68% respectively.
While these revenue declines translated into material erosion and the profitability of our hotels. We were pleased the still report positive adjusted EBITDA at the corporate level for the full year, partially driven by our team's ability to quickly adapt the operating model of our hotels.
By the time lodging demand trough and April of last year. The hotel level of full time equivalents had been reduced by approximately 85 per cent leading to a 47 per cent reduction and hotel operating expenses and 2020, which were down over 4% on a per occupied room basis, Despite historically low occupancy levels.
On an aggregate basis hotel level of operating and fixed expenses were approximately $140 million lower than 2020 and of nine 2019, and our hotel EBITDA retention. It was an impressive 46% from April through year end and despite over a 70% decline and revpar during the same period.
Hotel level of operating retention also benefited from our ability to thoughtfully modify of services and amenities across the portfolio throughout the year.
Despite recent improvements and some stabilization and occupancy we continue to operator of hotels utilizing a very lean staffing model as we had on average less than 14 Ftes per hotel during the fourth quarter, approximately 40% of normalized pre pandemic staffing levels.
And in an effort to preserve liquidity, we delayed most nonessential capital expenditures and suspended common dividend distributions in 2020, which combine preserved approximately $30 million and the fourth quarter and $120 million on an annualized basis.
Today, we have more than $400 million of liquidity and a manageable and monthly cash burn rate that average just under $7 million per month and the fourth quarter.
This represented a slight increase from the third quarter as a result of the lower nominal revpar levels, but represents nearly a 40% improvement from the second quarter and the continuation of of generally declining trend.
Forecasting our business continues to be very difficult and part driven by an extremely short booking window that became common early and the crisis and has persisted through the first couple of months of 2021 for.
For example, approximately 55% of our transient occupied room nights and the fourth quarter were booked within 72 hours, a day and nearly 70% booked and the week for the week.
Despite the short term nature of demand January operating results were stable generally in line with December and we are expecting the beginning of a gradual pick up starting in February.
Our performance over Presidents' day weekend was particularly encouraging as we had our best weekend and best single night since the start of the pandemic on that Saturday with the portfolio wide revpar of nearly $90.
The near term and pickup and demand and February has been robust partially aided by the Super Bowl Presidents' day weekend, and some pick up from the winter storms in Texas and.
And February is now pacing toward being our best month post pandemic in line with October of last year.
And as importantly pace for March is up significantly from where February stood a month ago.
We believe this all bodes well for strong leisure demand as we get into the spring and summer months, assuming a reasonable timeline and trajectory for the continued recovery and demand. We believe we can be cash flow positive at the corporate level and the latter part of the second quarter.
Shifting to the balance sheet and January we successfully completed the convertible notes offering that generated gross proceeds of $287 5 million at a one 5% coupon that mature in February of 2026.
The notes have a base conversion premium of 37, 5% and as part of the transaction we entered into a capped call transactions that increase the effective conversion premium to 75% or $15 and 26 per share.
Net proceeds from the transaction totaled $258 $7 million, which were used to reduce our outstanding revolver balance to zero and partially pay down our $225 million term loan maturing in November of 2022, two of balance of $127 million.
Earlier this month, we successfully amended our senior unsecured credit facility to extend the covenant waiver period through March 31, 2022 with modified Covenant testing through December 31, 2023.
In addition to extending our covenant waiver period, our amendment increases liquidity by providing access to the full availability of our $400 million revolver, which currently has an outstanding balance of $10 million.
We also have the ability to utilize a $150 million of current liquidity to fund new investments and have an unlimited the ability to fund acquisitions with equity issuances.
We currently have more than $400 million of total liquidity, which includes approximately $23 $5 million of unrestricted cash on hand.
Today, our weighted average interest rate is approximately three 2% we have no debt maturities until November of 2022, and ample liquidity to repay all maturing debt through 2023.
While the current operating environment for our business continues to be challenging we remain decidedly bullish on the outlook for our industry generally and the future of summit specifically.
And all indications point to considerable pent up demand for travel, particularly leisure travel and as the continued vaccine rollout leads to lower Covid case counts and related hospitalizations globally, we believe of more normal travel environment will take hold.
We are blessed with a tremendous portfolio and an experienced and capable team can.
Combined with our strong liquidity profile and the flexibility of our balance sheet. We believe we are uniquely positioned to pursue value creation opportunities.
One housekeeping note on the timing of the filing of our 10-K typically we file our 10-K.
Simultaneously with the release of our earnings press release, however, given the unusually severe winter weather, we experienced in Texas last week, which led to widespread power outages and we are delaying the filing until this Friday February 26th are on.
And our partners are and the process of completing their audit of certain financial control procedures and performing audit related administrative matters, which are required prior to issuing the final opinion.
We expect to receive an unqualified opinion on the financial statements provided and our earnings release, which will be the same as those included in our form 10-K.
Before I open it up the questions. Let me take a brief moment to talk about our recent leadership transition.
Many of you have had the opportunity to get to know and work closely with Dan over the years and are well aware of his passion for and dedication to this business.
And his transition to his new role as our executive Chairman. He leaves a lasting legacy of the success underpinned by a tremendous track record and unwavering commitment to transparency and integrity.
To me he has been a role model of mentor and and inspiration.
And while he remains an important part of our organization I'd like to publicly thank him for all of his contributions to this industry our company and meet personally.
And he certainly leaves of large pair of shoes to fill.
We're currently conducting and nationwide search for our next CFO and hope to have an announcement coming over the next several weeks the rest of our team remains engaged motivated and extremely excited about the bright future. We have in front of us at summit.
And with that we'll open the call to your questions.
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Our first question comes from the line of Neil Malkin from capital One Securities you may begin.
Good morning, everyone, John Congratulations and look forward to hearing your voice the tell us what happened in the quarter.
Good morning, Neil Thank you.
Sure Yes.
And can you just talk about.
San Francisco, maybe just kind of and.
In general.
Our capital allocation, so and your San Francisco portfolio is it not really sort of the sort of CBD heavy portfolio, but I'm.
And just kind of given and I wanted to get your thoughts on how you see San Francisco and market like that and you have exposure to.
And and how you kind of view those market and this cycle.
You know and as it pertains to capital allocation.
You know just given what we've seen in terms of the lot of company at the leaving and the sort of.
Coastal urban markets for a panoply of reasons and I know you use the you say your market agnostic, but love to get how you're thinking about that as we kind of you are and the early stages of recovery.
Sure Yeah look I think to your point you know San Francisco has been a market. That's obviously the high profile market for our industry that has had some significant challenges.
And we're fortunate that we only have one hotel closed and our portfolio of 72 assets and that hotel happens to be and downtown San Francisco and and Fisherman's Wharf and I think everyone has agreed that the path to recovery there is potentially a little bit longer we are fortunate that more of our exposure in that city is down closer to the airport.
And and the Oyster point sub market, which is really fueled by a lot of biotech and life science type business that we think comes back faster and in a more robust way maybe than some of the stuff downtown or at least sooner.
And I wouldn't certainly write off the per.
Permanently the return of demand the gateway cities and since the San Francisco is included into that part of the struggle. The San Francisco is going to have particularly as there's a real distinct lack of international travel today and so I think ultimately that comes back I do think.
Cuz of those factors, we would certainly underwrite differently today than we would've previously and a market like San Francisco, but again I also don't think of it I think it would be premature to say that demand and never comes back into those markets I think for US specifically, we were fortunate that were in the Fisherman's wharf Submarket, because we do think that the more leisure oriented sub market generally.
And likely one that will allow per will come back sooner than some of the other submarkets downtown.
Yes.
I appreciate that and then.
And it would be great to get some any insight into kind of conversations you've had with GIC, obviously your JV partner.
<unk> bin.
The pretty pretty non active.
But I know that you guys are all of you know when your hallmark.
Very creative and strategic capital Allocator and.
Obviously, the Yankees of long term vehicles. So so wondering if you're you know kind of what you guys are thinking about maybe near term or I guess, maybe and the second half of this year.
You know priority of there in terms of putting some capital to work and taking advantage of the the way you guys are uniquely positioned.
Yes, sure. We do have you know very very frequent conversations with GIC they've been a tremendous partner of ours really since the inception of the venture.
As we've said pretty consistently and we're very fortunate to have this unique vehicle for growth as we look at what we hope is the beginning of of a fairly robust.
Recovery here as.
As you know G I see as the long term vehicle and in many ways. They are built for these type of environments, where there is some level of of dislocation and.
And market pricing. So we would like to take advantage of that you know I think the first order of business for US is some of what we achieved or even earlier this year between doing the convertible deal and and amending for the second time of our bank facility. So we know of.
A very positive liquidity position and we've got real flexibility and our balance sheet to pursue deals and it has been quiet from a transaction perspective, you know over the course of the last six months or so we do think that's going to change and we've started to see the thigh and to some degree of both the credit markets and the transaction markets and so I think we're very pleased that we've given ourselves we'd built the.
And the liquidity and you'd be able to pursue those and and GIC as very likely a big part of the equation for us and that pursuit.
And just sorry, just in terms of that do you expect that in 2021 acquisitions, you make will be exclusively within that venture.
I wouldn't say, it's necessarily exclusively and the venture I do think that is our preferred method for growth at this time for all of the reasons debt that we've talked about it lowers the the capital requirement from our perspective, it creates the fee stream and and promote opportunity that should enhance returns and so I wouldn't say it has to be and the vehicle, but I do think that is our preferred vehicle and grow.
At this time.
Alright, Thank you everyone. Thank.
Thank you Dan.
Thank you our net.
Question on comes from the line of Austin <unk>.
Smith from Keybanc you may begin.
Great. Thank you and good morning, everybody.
John You had mentioned and expectation of being cash flow positive I think he said by the latter half of <unk> can you just remind us what revpar level gets you to the corporate level breakeven on either before or after Capex, and then with expenses, presumably increasing along with the ramp and demand and occupancy and how should we think about that relationship between revenue.
Par growth.
Growth and expense growth beyond that breakeven level.
Sure, Yes, I think what we've kind of said and and this has been consistent is that somewhere between kind of of $60 $70. Revpar is where we think we need to get to be breakeven at the cash flow level and that does include kind of the ongoing maintenance level of Capex capex that we've been spending which is which has been somewhere between a million and a million and a half dollars on on them.
Monthly basis, So I don't think our view has changed there as we said we're getting closer to that level, we're getting to that level on exceeding that level on the weekends and so our hope is if this trajectory continues and against some of the the commentary we made in the prepared remarks, we've seen some great pickup in February our pace and the March looks really good we do.
The level of of optimism that we will get there at some point and the second quarter.
Our belief on and you look I think one of the things of the team did a great job of last year was managing expenses and so when we talk about 70% ish revpar declines over the last eight or nine months of the year and and our retention rate and.
And the kind of of the mid 40% I think that's really positive I would think we look at it probably more so on on a relative basis to 19, I think in and around those levels will continue to persist as you mentioned, we are going to start to bring some level of expenses back that potentially influence that number to some degree of occupancy comes back, but today, where we sit today and where.
Still running these operations and incredibly lean and we're only going to bring back services and amenities and additional staffing to the extent of the demand is there to support it.
Got it and then in that comment you know referencing the meaningful pick up in pace and March can you put a little more detail around the nature of that pick up and bookings any.
Anything regionally to call out or otherwise just any additional details on that comment would be helpful. Sure. Yes. Our March pace today sits a little over 30% ahead of where February is we don't talk a lot about pace because as we mentioned also on the prepared remarks, you know our booking window is really small, but sure it but I do.
Think of that it is a very positive sign, particularly because we had Super Bowl and Presidents' day weekend, and and February and so I think what Youre seeing is again more of a continuation of of this recovery and leisure demand.
Dominantly and it's in some of the markets that you would expect some of the markets that performed better last year and markets like Tucson, and Tampa and Phoenix and Silverthorne, We've had a really good quarter. So I would say, it's more of a continuation of some of the trends that we saw on the fourth quarter is whats for the most part of driving that pace, but it is I think encourage line.
Really broad based.
Got it and then if I can just one more very helpful.
Comment there but.
The summit team really spent the last cycle turning over the portfolio.
<unk> the market and even sub market and makeup of your hotels and so just coming out of the pandemic and Theres a lot of discussions around the evolving travel trends and.
And what this next cycle of holds and I you know I think neill touched on it a little bit but how does this go into your thinking about the future makeup of the portfolio and and sort of a transaction that you'll pursue.
Yeah look I think the first thing I would say is that we really love the portfolio that we on today.
As we sit here and look at how the recovery unfolds and the trajectory and the markets and wish it unfolds I think we feel really good about the 72 hotels that we own today.
We have always been big believers and evolution and and.
I don't think that we necessarily believe we need to transform the business like the business was transformed over the first of kind of nine years and as a public company, but we do think we'll continue to try to be forward thinking and thoughtful around how we evolve the business and.
And I think one of the things that we've done well historically as the company has found creative ways to grow the business through transactions, even in markets and times, where it's otherwise been difficult to do.
Some of the historical transactions. We've done we think have been very forward thinking in terms of how guests guests trends are going to evolve and and I think we'll continue to make that a priority.
Great. Thanks for the time.
Okay.
Our next question will come from the line of Danny Assad from Bank of America, you may begin.
Hey, good morning, John.
My question to use on right so how much of the 35%.
The rate decline that we saw on the fourth quarter, how much of that is the mix shift of corporate versus leisure and then to tie that out to what the brands of set about holding corporate negotiated rate steady versus last year and the year before.
How should we think about.
And again that mix shift how would that affect the timing of a.
The rate recovery of the cycle.
Yeah look it's a great question I mean, I think how rates change over the course of the year of something we spent a lot of time line.
And to look backwards to start for your question and I do think there was it was a mix of both change and mix and just overall rate degradation. It last year that drove rates lower.
We are we've talked about how optimistic and bullish we are on the recovery I think the one thing that we're watching very closely as rate integrity. We do see some positive signs as we look out into the summer months, particularly on some of the more popular leisure travel periods, where we've seen good rates hold even relative to where they were in 2019.
And as you alluded to I think positively most of these corporate negotiated rates have held flat from 2020 of which were essentially held flat from 2019.
That is a good thing most of them or many of them are going to have some level of dynamic pricing associated with them, which creates some level of risk if there isn't the amount of compression in the market. So I think we're optimistic about rate I do think that is probably the one place that we hold out some level of uncertainty and we need to see a level of.
The compression and other types of business billed back into these markets before we get corporate rates back up in and around where they were pre crisis.
Got it thank you.
Yeah.
And our next question will come from the line of Chris.
This will ranke from Deutsche Bank, you may begin.
Oh, Hey, Hey, John and.
Let me add my congratulations on on getting into the the <unk>.
Top seat there.
Glad to have you there.
And so.
The question was yeah, Yeah, you bet. The question was on and we've heard a lot of your more full service oriented peers.
Talk about how they have to reshape the operating model and it seems like a lot of full service hotels, especially those in suburban airport markets might look and feel a lot more of like select service hotels going forward.
Do you kind of look at that and are there any concerns there that of a full service hotel becomes more competitive and if it has to kind of play of different rate level going forward.
Yeah look I think we've always felt one of the advantages that we have has been the efficient nature of our operating model and and how efficiently. We can operate these hotels and so when you hear things like full service hotel is trying to operate more like select service hotels.
And some ways, we take that as a compliment.
And the type of hotels and the way that we operate our hotels.
Is it the better way to create value and a better path to profitability and so look I think ultimately if they're converting their operating model to look more like operating model I think location quality of products are going to win out and we feel really good about the locations we own and we are of young portfolio of the average age of our portfolio is on.
Four years most of the portfolio has been renovated and so I think we'll continue to compete very very well with that type of product.
Okay fair enough and.
And then.
It's probably of conversation for another day of later on but you'll you'll you'll have a CFO and place and.
Understanding that it will later be a board decision, but as.
The pertains to the dividend.
And you guys will probably be and are positioned to potentially restart.
Something meaningful sooner than some of your peers.
What's your high level view on how important that might be especially in light of what's going on with the rates interest rates and the and the market share.
We've always felt the dividends were an important part of the kind of the total here total shareholder return story of of the company and we never viewed them as.
As of nor we've used it is and and we're obviously and a very unique environment today I think positively.
From a from a REIT perspective, we're not going to have any near term need to reinstate the dividend. We'll do so opportunistically I think frankly, it's unlikely that that happened this year, but going forward as the business recovers. It is something that we will look very closely and as we do with all capital allocation decisions.
Okay.
Good Thanks, Tom.
Thanks, Chris.
And once again Thats star one for question and Starwood.
Our next question will come from the line of Michael Bellisario from Baird you may begin.
Good morning.
One of my head.
John just on the acquisition front, maybe when you're underwriting deals and and looking at certain properties today.
Can you help us understand of what metrics are you looking at today when evaluating deals and then also are you looking at anything differently today versus how you maybe would have looked at it on a pre pandemic basis.
Yes, it looks of the methodology is the same right I mean were typically solving for hold period Unlevered IRR.
And that Hasnt changed you know clearly the starting point from her on our underwriting perspective has changed.
And we like to and I think that's the primary method that we use to underwrite assets, we want to underwrite the returns that exceed our weighted average cost of capital.
And the starting point has changed I think the dynamics in certain markets have changed given what's happened with with Covid and we talked a little bit about the dynamics and urban and gateway markets and some of these other and.
Some secondary market sunbelt market, the likely have a more of quicker.
And recovery, but the overall process Hasnt changed again, we've been we've tried to be very prudent capital allocators and and solve for returns again that exceed our weighted average cost of capital.
Yeah.
Got it and then just on the Capex front and not sure. If you provided this but can you give us a sense of what you think you might spend in 2021 and then.
How do you share that you keep the market share gains that you've realized so far.
And the war make sure your outspend your comp set given that you and a better financial position and most other owners today.
Yes.
And we spent about $23 million and Capex in 2009 excuse me in 2000, 2011 of which was in the first quarter kind of projects that were already baked.
Pre pre COVID-19.
And we're at today, as we continue to spend maintenance and and emergency and necessary type capital and ensure that the properties.
Day in and proper physical condition I would say that our expectation is the spend somewhere between 15 and $25 million on a pro rata basis, this year and capital that's likely to be back half weighted when we've got a little bit better visibility into the business, but we have a number of projects as you alluded to that we'd like to keep on schedule and we're fortunate to have the.
Liquidity to do it and assuming we get.
Some reasonable pace of recovery, we'd like to continue to make sure that the portfolio of stays and good physical condition. So the overall level of spending will likely be fairly close to what we spent in 2020 again and it'll be more back half weighted than front half weighted.
From a market share perspective look as we said I think.
The team did a marvelous job of last year from a share perspective.
We ran 134% Revpar index for the year was up almost 20 percentage points.
As the nominal Revpar increase I'm not sure of that that level of outperformance is sustainable and I do know that the team has done and will continue to do a great job finding some of these unique pieces of business and that's if you really look at what drove the Revpar index performance. It was mostly and occupancy share gain and a lot of it had to do with.
Being able to find kind of a unique pockets of group business that others and our comp sets were unable to find so I'm not sure 135 as the new as the new bar for us, but I do feel very strongly that we'll continue to do it.
And it's good of job as anyone from a market share perspective, and continue to run high Revpar indices.
Got it and then just remind me 2019 market share was and the 100 and.
Teens, roughly right, yes, it was about $1 15.
Got it thank you.
And I'm not showing any further questions and the queue I'd like to turn the call back over to John standard.
President and CEO for any closing remarks.
Well. Thank you all for joining US today as you can tell we're extremely excited about the future of summit and proud of the many steps we've taken over the last 12 months and what has been a challenging environment to position us well going forward and we look forward to seeing you all hopefully in person and very soon and have a nice day.
Ladies and gentlemen, this concludes today's call. Thank you for participating you may now disconnect.
Okay.
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