Q2 2021 Summit Hotel Properties Inc Earnings Call
Thank you for standing by the copper costs I think of momentarily again. Thank you the standing by your conference call should be getting all the time of the thank you.
[music].
Thank you for standing by and welcome to the Summit Hotel properties second quarter 2021earnings conference call at this time, all participants on a listen only mode.
Of the speaker's presentation there'll be a question and answer session. The asked the question at that time. Please press Star then 1 on you touched on the telephone.
Has your mom today's conference call is being recorded.
I would now like turn the conference of the host Mr. Adam Waddell Senior Vice President of Finance capital markets and Treasurer. Please go ahead.
Thank you Valerie and good morning.
I am joined today by Summit Hotel properties, President and Chief Executive Officer, John Scanner, and Executive Vice President and Chief Financial Officer trade conflict.
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 August 4.2021, 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 that's HP REIT dotcom.
Please welcome Summit Hotel properties, President and Chief Executive Officer, John Stanton.
Thanks, Adam and thank you all for joining us today for our second quarter 2021 earnings Conference call.
Overall, we are extremely pleased with the acceleration of our operating trends in the second quarter, which significantly exceeded our initial expectations and represented of nearly 50% increase in revpar from the first quarter.
Occupancy average daily rate and overall profitability of all reached new highs since the onset of the pandemic and importantly, we achieved positive corporate cash flow for the quarter.
Demand improved sequentially each month during the quarter and we sold 30% more room nights in the second quarter than we did in the first quarter.
While leisure demand continues to be the primary driver of our operating results. We are also encouraged by improving corporate transient demand trends that are having a positive effect on our hotels located in urban locations and our midweek performance in particular.
Demand at our urban hotels grew out of considerably faster paced on the overall portfolio during the second quarter, increasing 43% over the first quarter.
For the second quarter, we reported pro forma revpar of $78, which was over 3 times higher than our second quarter Revpar last year and of 49% increase over last quarter.
Like demand Revpar improved sequentially each month of the quarter and our preliminary results for the July show further revpar acceleration to just over $100 of.
A robust 15% improvement over June and our first full month of Revpar above $100 since the pandemic started.
Revpar for the second quarter was 43% lower than what was achieved in the second quarter of 2019 of significant improvement from the first quarter. When Revpar was nearly 60% lower than the comparable 2019 period.
This gap narrowed considerably in July with Revpar of only 21% below July 2019 levels, which we expect will be sufficient to drive corporate cash flow positive on a year to date basis.
Importantly, the recovery of average rates accelerated meaningfully during the quarter as ADR across our portfolio of increased 15% compared to the first quarter as both weekend and weekday ADR grew double digits.
Average rates on our urban portfolio increased 23% from the first quarter, which encouragingly reflect some level of rate of accretive remixing of our business with corporate travel.
Weekend occupancy was an impressive 79% during the second quarter and was over 80 per cent and both May and June.
Midweek occupancy also continues to steadily improve and the GAAP between weekday and weekend occupancy continues to narrow.
Midweek occupancy in July was 57% a full 10 percentage points higher than it was just 60 days ago.
As you would expect we are closely monitoring the developments of the spread of the Delta variant of COVID-19, and has positioned the company very well if we begin to see any reversal and the strong reopening momentum we've experienced over the past few months.
To date, we have not seen any negative response to the variance in our July operating numbers and our pace for future months remains decidedly positive.
August paces up slightly to what we had on the books for July at this time last month, but with rates of nearly 5% higher.
September paces up 6% over August and October paces over 25 per cent highest in September.
While we would not preclude some plateauing of results in the back half of August and into September when we get into a nationally slower leisure demand period, we remain optimistic that some of that leisure business will be replaced by pent up corporate demand and the post labor day period, particularly as we get into October and passed the Jewish holiday season.
Trey will provide some additional color on our operating results later in the call.
During the second quarter, we completed the contribution of 6 wholly owned hotels totaling 846, guestrooms into our joint venture with GIC per $172 million.
The transaction generated approximately $84 million of cash proceeds, which increased our investment capacity reduced corporate leverage and enhance our overall liquidity.
Subsequent to quarter end of portion of the net cash proceeds from the asset contribution were reinvested into the acquisition of the newly built 110 Guestroom resident of 10 steamboat Springs for $33 million, which further scale of our joint venture with GIC.
The extended stay hotel is expected to benefit from favorable market demand trends and is the perfect complement to our existing portfolio of well located high quality hotels with the efficient operating models.
As the newest hotel on Steamboat Springs, 1 of only 6 other hotels that have opened in that market since the year 2000.
And the first Marriott branded extended stay product in the market. The hotel has been able to achieve of 30% revpar premium compared to its competitive set in the first 6 months of operation.
And just over 3 weeks of our ownership. The hotel has been 1 of our best performers running over 93% of occupancy with revpar of over $180.
Our 2021 forecast for the hotel is already ahead of our underwriting reflecting just how quickly the fundamental operating backdrop has improved.
Our joint venture now holds 12 assets with a total investment of nearly $500 million and affirms the commitment from both parties to find unique and opportunistic investments to continue to grow the partnership.
During the second quarter, we invested approximately $2.9 million on our portfolio on items, primarily related to planned maintenance capital.
As we mentioned last quarter, given our conviction around the long term improvement in demand trends, we plan to accelerate several renovations into the second half of 2021, which will take advantage of the still lower than historical occupancies to minimize disruption from those projects.
We expect to spend between $30 million to $40 million and capital expenditures for the year on a consolidated basis.
Between 25 and $35 million on a pro rata basis.
With that I'd like to publicly welcome and turn the call over to our new CFO Trey Conklin.
Thanks, Sean and good morning, everyone.
During the second quarter, our resort hotels continued to lead the recovery with the occupancy levels that exceeded 83% and of <unk>.
First of all of nearly a $110 resort occupancy remained strong across the quarter with each month of achieving 80% or better driven by continued growth in leisure demand and overall robust summer travel for July 'twenty, 'twenty, 1 preliminary occupancy ADR and revpar of our comparable resort portfolio.
Which excludes the residence in steamboat exceeded second quarter 2019 levels.
Moving on to our 42 non urban hotels, the subset of the portfolio achieved better than 75% occupancy and an $89 revpar during the second quarter with June metrics, improving substantially to 78% of occupancy at $99 Revpar on the strength of weekend demand consistent with.
Our resort portfolio.
The preliminary July numbers for our non urban portfolio demonstrated steady improvement with a 79% occupancy at $108 Revpar representing month over month growth of approximately 9% compared to June.
Finally, while urban hotels continue to lag the broader sector recovery are of 30 urban assets for the also benefited from strong summer travel where second quarter Revpar, increasing sequentially 75 per cent compared to the first quarter.
This was driven by strong weekend travel with the occupancies averaging over 70%.
The outlook for our 30 urban hotels continues to improve and that's preliminary July revpar is anticipated to exceed $94 representing month over month growth of 23% compared to June.
Although booking windows remained very short term in nature and forecasting continues to be of challenge. We've experienced the decline in the percentage of room nights booked near to or on the night of stay for example, transient room nights booked within 3 days of stay declined from 46% in April to 39% in June.
And nights booked in the week 4 of the week declined from 60% to 53% over that same time period.
This represents the very short booking window relative to pre pandemic standards. We view this as another encouraging trend, reflecting an improving environment.
For the cash flow perspective, the continued growth in demand combined with thoughtful expense management enabled summit to generate positive corporate cash flow for the second quarter.
Pro forma hotel EBITDA was $25.3 million for the second quarter, which is more of the 3 times higher than the hotel EBITDA, we reported in the first quarter of 2021.
Operating cost per occupied room declined over 20 per cent compared to 2019, which drove second quarter gross operating profit margin on hotel EBITDA margin to an impressive 45% and 29% respectively.
We continue to operate our hotels utilizing a very lean staffing model.
Consists of approximately 17, ftes on average or less than 50% of pre pandemic staffing levels rehire.
The rehiring hourly staff, particularly on the housekeeping Department has been in the ongoing issue across the industry. Despite these challenges and of primarily occupancy driven topline growth our asset management team has done a great job controlling operating expenses, leading to strong hotel EBITDA of retention of 46% when compared to the second quarter of 2019.
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Lastly, turning to the balance sheet and liquidity. We currently have over $430 million of pro rata total liquidity, which includes nearly $42 million of unrestricted cash on hand.
Today, our weighted average interest rate is approximately 3.4% we have no debt maturities until November of 2022, and we maintain ample of the current liquidity to repay all maturing debt through 2023.
With that I will turn the call back over to John.
Thanks strength in closing, we continue to gain enthusiasm on the recovery of our business and the outlook for summit in particular, we remain confident in our business model and optimistic on the overall recovery in general and with that we'll open the call to your questions.
Thank you again, ladies and gentlemen, like the asked the question. Please press Star then 1 on you touched on the telephone 1 woman part of first question on.
Your first question comes from Neil Malkin of capital Y on your line is open.
Yeah.
Hey, gentlemen, good morning.
Okay.
First question you called it out in your press release and in your prepared remarks about mid week.
On getting noticeably stronger contributing to your.
On the performance can you just maybe talk a little bit more about that but more specifically in terms of.
Market.
Is it regional private.
The business travelers.
I guess are you seeing the demand come from larger.
I guess, you can call the mainstay of corporate negotiated accounts or how.
How does that look.
Yeah sure. Thanks for the question Yeah, it's a little bit of both of you know I would say the strongest markets midweek have continued to be the leisure oriented markets markets like Fort Lauderdale in Tucson, and Tampa Orlando the markets, we've talked a lot about driving overall strength and certainly some of that is just continued better than longer stays on the leisure side.
We are starting to see it and we mentioned in the prepared remarks as well you know youre starting to see it midweek and some of our more urban properties and probably is encouragingly as anything youre starting to see better rates come in midweek and rewind even over the last 2 or 3 earnings calls I think what we've been monitoring is is how rate continues to evolve.
Typically what happens is as occupancy comes first and rate come second I think we're very encouraged by what we're seeing on the rate side. We're certainly starting to see some level of of negotiated corporate type of business come back in I think in the second quarter of appropriate corporate negotiated rates were up $12 over the first quarter. So you are starting to see some of that.
Not your bigger larger national accounts to the same extent they were of pre pandemic youre seeing as we've talked about previously more region of more local more drive to type of corporate business. Nonetheless, the remixing of that business is positive and I think the outlook for that continues to get better and better.
Yeah.
Right that maybe sticking with the same theme I think 1 of the issues for the sectors.
Lagging performance.
Is sort of the uncertainty with regard to business.
Travel and the the groups or the recovery pace, obviously, not really of group portfolio.
Portfolio, but.
Can you just talk about what you what your property managers are telling you or what.
What do you guys expect for like the post labor day and in the fourth quarter in terms of.
The the.
The business the business the transient side I guess you could if you could talk about it at the relative to 2019 the level I think that'd be helpful. On assessing how you see the the cadence sort of playing out at least near term.
Yes look we I think bigger picture and longer term, we expect corporate transient to come back and look a lot like it was pre pandemic the.
Timing of that is the question, it's and it's more of a question of when non yes in our minds I think we've kind of as an industry evolves to believe that post labor day youre going to start to see that come back more meaningfully I do think that the trajectory of that recovery is going to be.
More gradual than what we saw on the leisure side, but again, we do expect that business to come back and to come back in a meaningful way.
Havent seen look market sentiment has certainly changed as of given what we've seen with what's the delta there and we haven't seen net effect consumer behavior yet.
Our July results continue to be very strong even through the last weekend and week of July or August pace has held in nicely rates on the books for every month over the next 3 months continued to increase on our pace looks quite positive on we're certainly monitoring it very closely as we said in the prepared remarks, we wouldnt preclude for there.
Being some plateauing as of of results as we get into the back half of this month and into the into the.
Post Labor day period, what I would say again I think encouragingly, what we've seen from of pace perspective is where we've seen the best pace of increases in the back half of August in particular have been in some of our urban markets that have been slower to recover in the markets like downtown Cleveland or downtown Pittsburgh, or Boulder, where we see some benefit of REIT.
Turn to school so again.
It's difficult for us to assess today when it exactly the cadence of the sequencing of that business comes back, but we do overall, we are optimistic in all of the numbers that we have on the book supports that things are still continuing to improve.
Thanks.
Okay.
Last 1 real quick maybe for Craig.
Radical or bigger picture question.
I think before you touched on your <unk>.
Interest in or doing some study on alternative.
<unk> and potential.
No allocation, there or looking at that for the augment growth.
Can you maybe just talk about what that kind of looks like what.
What youre doing there and how how.
Realistic something like that.
As for summit.
Yeah, Hey, Danielle, it's John I'll start and Tracon can jump in at the end of it. If you like look I would say that as we've talked about a lot of what we've always focused on is how we believe customers' preferences evolve and change and that Hasnt changed and so we certainly want to make sure that we're cognizant of of how those preferences.
<unk> is continuing to evolve we do study a fair number of business, we love our current business. We don't have any immediate plans, but it's certainly something that we continue to evaluate.
Okay. Thank you.
Thanks, Dan.
Thank you.
Our next question comes from Austin <unk> worth it.
Keybanc Your line is open.
Great. Thanks, guys.
Just curious John if some of the lift in ADR that you've seen and achieved month to month. If this is just reflecting kind of increasing demand broadly or is it really these urban markets that have driven ADR.
Heretofore.
Are you seeing any less price sensitivity on the on the leisure side as well.
Yes, certainly we are I mean, again I would say it's market by market and on the leisure side and this has been kind of well documented across the industry and strong markets. There is a fair amount of pricing elasticity. I mean have you been able to push prices dramatically in markets that are compressed with leisure travel.
The the better growth has been mid week and in urban markets now on fairness. The bar was much lower the baseline was much lower so we are growing off of a much lower base, but I think again as we look out over kind of the cadence of the recovery and the types of business that we need to see come back that midweek in that urban business in the in those urban locations in particular.
All areas, where I think we have the most opportunity and we are starting to see that.
As we talked about some of that is as a result of leisure, but we do believe and we've seen some level of kind of remixing of the business into sort of more corporate demand come in and improve midweek rates in particular.
Yeah. So so if the recovery of kind of continues to take hold you know and it's a little bit of a seamless transition coming.
Coming out of the summer and into kind of back to corporate travel what do you think that means for upside the ADR as you move into the fourth quarter or just that spread between midweek and weekend type rates.
Looking out a little bit further.
Yes look I think it continues to narrow the.
The GAAP.
Certainly peaked out probably early in the second quarter of late in the first quarter, we have seen that gap narrow later in the second quarter and into the into the end of July on my expectation is that changes for a couple of reasons..1 again, we're getting in just 2 of naturally slower leisure demand period, and so well I still think leisure will be strong.
We're getting to a point, where you know.
Kids are going back to school offices are going back to in person I think theres going to be a little less of the type of travel that has been the strength of the industry of across the summer. We do think we're going to start to see a pickup of corporate travel as we get in the later the latter parts of the third quarter and into the fourth quarter. So I'm not sure how I would quantify on.
Time, the difference, but I do think again generally youre going to see kind of that GAAP between midweek and weekend performance begin to narrow part of that is going to be driven by just stronger results out of our urban properties.
Got it and then just 1 last 1 what sort of the mix today of your best guess of the mix between leisure versus.
BT business.
It's probably still 75% leisure Austin rough rough numbers and.
And I would say on a normal environment, it's closer to 50.50.
That's helpful. Great. Thanks, John.
Okay.
Thank you. Our next question comes from Daniel thought of Bank of America. Your line is open.
Good morning, John and good morning, Trey.
You guys in your prepared remarks touched on the topic of staffing. So just in the context of you know.
How you've made tweaks to the operations of your hotels, how should we think about.
FTE counts realm.
Relative to pre Covid levels once we of returning to a more normalized environment.
Yes, Dan I'll start and can trade jump in I think.
Historically, we ran on average of about 35 ftes across the portfolio, we're running half or just slightly less than half of that level of today part of that is just the challenges that all of us being able to find labor.
No I think thats been again, well documented across the industry and part of that is we are adapting the operating models as to what is still a unique environment and still lower than normal Occupancies I do think we'll continue to add ftes back I don't think 17 is the right stabilized number I do think there are opportunities for 35 again. This is an average.
The lower going forward and a lot of that is going to be based on how brand standards of evolves I think we're encouraged by the opportunity that cleaning on on Stayovers is kind of be something that is optional on not a brand standard. That's the most meaningful lot for us from a margin perspective, and I think we are reevaluating things like our breakfast offering and all of the other kind of service.
And amenities that were put in place pre pandemic that are being reevaluated food trucks and social hours on the airport shuttles a lot of these other.
A lot of these other amenities and services that are costly and labor intensive likely come back in a slightly different form, but I think overall generally help profitability at the hotel level.
Got it and.
We've heard that.
Some brands have already started moving in that direction.
As anybody like you know what I mean the.
The ultimate had been 1 that we've heard of.
Over over the last couple of weeks about that have you heard anyone else commit from the big brands to the concept of making it into like permanently.
On opt in as opposed to just something Thats a standard going forward.
Yes. The Hilton is our is the only 1 that has formally announced it we're certainly hopeful if not optimistic that others will follow.
Got it alright, thank you very much.
Okay. Thank you.
Our next question comes from Michael Bellisario of Baird. Your line is open.
Thanks, Good morning, everyone.
1 of them.
A couple of questions for you.
First John could you go back to the page numbers, maybe focus on September and I know, it's probably a small amount of bookings at this point, but.
I know you mentioned a couple of markets for us.
August excuse me, but what about certain markets pockets of strength that youre seeing for September of more of the business traveler.
Does the booking pace look weekday versus weekend of et cetera, any segment strong week.
Yes.
September later on the first of all excuse me Labor day is in September. So, we obviously have strong bookings over that weekend and all of the markets that are leisure oriented that you would expect.
For the rest of the September it's similar it's a similar dynamic than what we talked about later in August.
The markets that have 1 and in terms of their their improvement of pace. It's markets that have underperformed. So it is our more urban related markets as I said September paces up 6% today over where we sit for August.
There's a little early for us for.
For September you know things book and fairly narrowly but.
I would say room nights are up but probably more importantly rates are up double digits as we look at our pace in September. So the hope is that some of that is driven by more midweek and more more corporate demand.
Yes.
Got it so it sounds like it's still so early in labor day is having a big impact on that.
Alright, yes. There is some there is some small convention and group activity, we have on the books in markets like Atlanta. For example, in particular that are helping improve the space. So again I would say the what we see in September and again, it's early for September it's really early for October, but we are seeing it outside of your traditional leisure demand sources Labor day is clearly driven by.
Leisure, but beyond that the pace of improvement is driven by whether it's corporate small group of our small convention type activity.
Got it and then just switching gears a little bit on on the supply front, just maybe go back to the pre pandemic question on weighted average supply growth in your markets have you seen more projects. It started in your markets more projects get tabled with what's your latest outlook for your portfolio on the supply side.
Yeah look I still I still think that you know whats in the ground and under construction most of which is kind of get finished and completed I do think new starts are going to continue to slow.
We have a lot of dialogue with developers.
We're certainly looking at things I deal do you still think new construction is difficult to pass on a lot of markets and so on.
Our expectation is that we're going to have a couple of year period, where supply runs well below historical averages.
And then just last 1 for me on transactions can you maybe talk about portfolio of pricing versus 1 off deals and then your level of confidence.
And your ability to put the money to work on more deals over the near term.
Sure.
The pipeline today is more active than it's been at any time since the pandemic began.
Certainly more active than it was 30 days ago 60 days of about 90 days ago, So and the quality of assets that are on the market I think today are higher than what we've seen at anytime before I do think pricing has moved upward. The I don't think theres any question that as fundamentals have improved and rates continue to stay at level of the financing markets have become more constructive you've seen the asset prices.
<unk> continue continue to improve I do think we'll find some unique opportunities I think steamboat is a really good example of.
An asset that is kind of right down the middle of the fairway from a demand perspective, and a lack of new supply perspective, we were able to transact on that I think in a very very compelling valuation in and can underwrite of compelling stabilized yield on that type of assets and I think there'll be more out. There you know we're fortunate that we've got you know of $150 million of capacity on.
Under our existing facility, we've got a partner who is eager to grow with and so our hope is that we'll be able to find opportunities will always be disciplined around how we allocate that capital. It will continue to be a returns driven approach for us, but given the magnitude of of assets on the market again, we're hopeful to be able to find some opportunities here.
And then single asset versus portfolio of pricing.
Yeah, I don't know that we've seen.
Huge delineation between pricing of between single assets and portfolios I would say, it's more market driven and kind of demand driven so youre still seeing you know probably steeper type of discounts of pre COVID-19 pricing in core CBD urban markets than you are in and drive to leisure oriented markets as you would probably expect.
Got it thanks for all of the color.
Thanks, Mike.
Our next question comes from Bill Crow of Raymond James Your line is open.
Hey, John.
3 questions 1 topic labor.
Any change to the percentage of guests opting in for nightly housekeeping, we talked last quarter the debt.
Right and kind of doubled.
The low low base, but at the doubled over the last time, we talked on I'm wondering whether that number is still increasing.
Whether youre seeing on the difference in the opt in rate between leisure and business travelers.
Yeah.
And I don't know that I havent answer on leisure versus business something we'd have to come back to you on Bill I would see more generally the the opt in percentages and picking up as you would expect as kind of vaccinations have rolled out more meaningfully.
Probably 30% today and it was probably 10% to 20% in the first quarter. So we have seen that pickup rate continue to increase it is still relatively low again, it's probably 30% today.
Okay.
Second part of the Labor question.
It's about the availability of labor.
I know that the industry has talked to better post September.
Easing of of challenges, but.
In markets, where you've seen the.
The extended unemployment benefits and.
Has that made labor more available.
Yeah look I think youre seeing more applicants.
I do think the debt that has helped to some degree of I think labor is going to continue to be tightened its going to continue to be of challenge I do think some of the challenges that we've seen are transitory.
And we will continue to get better post labor day, but I think we're going to continue to see challenges on labor and we've continued to be creative in how we staff and get basic functions at the hotel done again, our hope is that you'll start to see some relief in that regard as we get past labor day and into the fall.
And then finally John on Labor.
How is the quality of the work force that Youre able to hire of these days I mean is it isn't what it used to be is it.
The turnover increased because they don't show up or can you kind of give us the general thought on how the quality of labor.
Look I think it's challenging today, though candidly I think we've seen even when we're able to to get new employees.
You can get a fair number of no shows you get a fair number of people that come to work for a few days and then don't come back for a few days and so there's no question that it has been challenging we're awfully fortunate that we've got a really good group of management companies that I think have great breadth and do a good job trying to staff hotels, but there is no question that is it.
It has been a challenge getting labor and getting good quality labor.
Alright, thank you.
Thank you. Our next question comes from the Neil Malkin of capital 1 of your line is open.
Hey, Thanks, guys just a quick quick follow up for me so.
John.
Could you just maybe talk about why you think summit has been an underperformer in 2021, and how you can get or what kind of main things you can do.
Do or levers you can pull to get the share price higher particularly given the.
Historically.
The stock is the word.
Very well when the external.
Engine is running.
Yes.
Clearly, we like to be able to grow the business externally we've done that today, we're 1 of a handful of lodging Reits, who have been able to grow it.
It's hard for me to comment on why the stock performs in a certain way I think what we're trying to do is be very thoughtful on how we and how we run the business. We're huge believers in the quality of the portfolio. We have the operating model that we have and the operating platform that we have and we do believe that over time, we'll be able to operate this business in a way that creates the trend.
Tremendous amount of value there is going to be periods of time, when the stock underperforms in over and outperforms.
And I think again the goal here is to run the business for the long term in the way that creates value.
Yeah.
Okay.
I get your thoughts.
Thanks Neil.
Thank you Sean.
<unk> no further questions at this time I turn the call back over to the President and CEO, John Tanner for any closing remarks.
Yes. Thank you very much and thank you all for joining us today for our second quarter earnings Conference call. We look forward to following up with you all post earnings and hope to see you all on person zone.
Thank you ladies and gentlemen of this does conclude today's conference. Thank you all for participating you may all disconnect have a great day.
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