Q3 2021 Summit Hotel Properties Inc Earnings Call
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Good day, and what I think is a semi hotel properties kids right South of 21 earnings call.
As a reminder, this call is being recorded.
I'm not trying to call over Adam Waddell Senior Vice President of Finance capital markets and Treasurer.
Thank you Michelle.
I am joined today by someone hotel properties, President and Chief Executive Officer, John Scanner, and Executive Vice President and Chief Financial Officer trade conflicts.
Please know that many of our comments today are considered forward looking statements as defined by federal security block.
These statements are subject to risks and uncertainties, both known and unknown as described filing.
[noise] filings.
Forward looking statements that we make today are effective only as of today November 4th 2021, and we undertake no duty to update them later.
You can find copies of our SEC filings and earnings release, which contain reconciliation and non-GAAP financial measures referenced on this call on our website at Www Dot <unk> Dot com.
<unk> welcome somebody hotel properties, President and Chief Executive Officer, John Standard.
[noise], Thanks, Adam and thank you all for joining us today for our third quarter of 2021 earnings Conference call.
In conjunction with our earnings release last evening, we announced the signing of a definitive agreement for a transformational acquisition of 27 hotels to parking structures and various economic incentives from Newcrest sandwich for a total consideration of $822 million.
I'll provide more transaction highlights and other details following our prepared remarks for our third quarter financial results.
But we were incredibly excited to have the opportunity to acquire these 27, well located hotels concentrated in high growth markets.
Overall, we are extremely pleased with the continued acceleration of are improving operating trends in the third quarter, which exceeded our initial expectations and resulted in more than a 25% increase in revpar from the second quarter.
Occupancy average daily rate and overall profitability all reach new highs since the onset of the pandemic and we more than tripled our positive corporate cash flow compared to last quarter.
Demand growth accelerated broadly during the quarter as we sold nearly 7% more room guidance in the third quarter than we did in the second quarter.
Peeking during a historically strong summer travel season in July when occupancy in the portfolio was about 72%.
Although August demand pulled back modestly is expected we saw reacceleration in the back half of September when occupancy averaged nearly 70% during the last two weeks of the quarter.
While leisure demand continues to be the primary driver of our operating results. We remain encouraged by improving corporate transient demand trends.
Negotiated room revenue increased approximately 28% in the third quarter over the second quarter and while that is admittedly off of a very small base. We're also encouraged by some of the anecdotal signs, suggesting a more robust return of corporate travel is forthcoming.
We reported third Carter pro forma revpar of $98, which was more than double R. Revpar in the third quarter of last year.
And was 24% lower than what was achieved in the third quarter of 2019, a significant improvement from the first half of the year when revpar with nearly 43% lower in the second quarter and 59% lower in the first quarter than the comparable 2019 periods.
Importantly, the recovery of average rates accelerated meaningfully during the quarter is ADR across our portfolio increased 19% compared to the second quarter and weekday ADR growth outpaced weekend growth by nearly 200 basis points.
Average rates in our urban portfolio increased 24% from the second quarter and weekday urban ADR through 27% from the second quarter, which encouragingly reflects some level of right accretive re mixing of our business with corporate travel.
We can't occupancy was impressive 80% during the third quarter and averaged 82% in July and September because the recovery continues to clearly be led by exceptionally strong leisure demand.
However, midweek occupancy also continues to steadily improve climbing to 64% during the third quarter, a full five percentage points higher than the second quarter.
And the gap between weekday and weekend occupancy continues to narrow.
Trade will provide some additional color on our operating results later in the call.
During the third quarter, we completed the previously announced acquisition of the newly built 110 Guestroom residents in steamboat springs for $33 million.
The extended stay hotels, the newest hotel in steamboat one of only six other hotels that have opened in the market since the year 2000, and the first Mary apprehended extended stay products from the market.
Since acquisition the hotel has performed exceptionally well generating occupancy and revpar of nearly 87% and $161 respectively.
And hotel EBITDA margin of 49% from the third quarter.
On an annualized basis. This equate between 9% net operating income yield in less than three months of ownership. Despite the hotel having been open for less than one year.
During the third quarter, we invested approximately $4.2 million in our portfolio on items, primarily related to plan maintenance capital.
As we previously mentioned given our conviction around the long term improvement in demand trends, we plan to commend several renovations of the fourth quarter of this year and early next year to minimize disruption from these projects.
We expect to spend between 15 and $20 million in capital expenditures for the year on a consolidated basis in between 14 and $19 million on a pro rata basis.
With that I'll turn the call over to our CFO trade cocklin, Thanks, Sean and good morning, everyone. During the third quarter, a resort and other non urban hotels continued to show robust sequential improvement with Revpar growth of 12% relative to the second quarter of this year at a nominal revpar value exceeding $100.
This subset of the portfolio illustrates summit's diversification in broad exposure to the overall lodging recovery as ADR increased 13% to $135 relative to the second quarter unstable occupancy of 74%.
Transitioning to our urban hotels, we were encouraged by the progress in this subset of the portfolio, which for the first time since the onset of the pandemic experienced meaningful outsized growth relative to our other location types.
<unk> at our urban hotels increased 43% from the second quarter of 2021 to approximately $94, primarily on the strength of rate, which increased 24%.
As an additional point of reference in third quarter of 2020 or urban portfolio posted a revpar of $37 further evidence of the strong rebound experience year over year.
Key factors driving growth in the urban portfolio include increased business activity professional and college sports attendance and group demand.
As a final point on our urban portfolio. We believe business travel is now in the early stages of its recovery as an urban midweek occupancy increased 10 percentage points from the second quarter to 50 for 7% and ADR increased more than $30 to $144 or a 27% increase.
For the quarter.
This translates to a revpar growth rate of 54% versus second quarter for the urban portfolio.
To provide a little more insight into the company's overall third quarter portfolio segmentation growth in demand was driven primarily by the increases in group business and negotiated business segment. As previously mentioned full week group Revpar for the company's total portfolio increased by 76% relative to second quarter 12.
21, while weekday group Revpar increased by 100% during the same timeframe.
Similarly, full week negotiated revpar increased by 28% relative to second quarter, while weekday negotiated revpar increased by 32%.
Increases in negotiated Revpar were driven primarily by travel from small and medium sized business strategy and accounts.
Although booking windows remained short term in nature and forecasting continues to be a challenge we've experienced a decline in the percentage of room nights booked near to or on the night of stay.
For example, transient room nights booked within 24 hours a day declined from 23% of total bookings in the second quarter to 21% of bookings in the third quarter, but importantly nights booked more than 30 days out increased by 19% during that same period.
While the overall booking window remained shorten relative to Prepandemic standards. Its expansion represents a definitive trend started earlier in the year and has strengthened throughout the third quarter.
From a cash flow perspective continued growth in demand combined with thoughtful expense management enabled summit to generate positive corporate cash flow of $18.5 million in Q3.
Which was more than triple to corporate cash flow of Q2 2021.
Pro forma hotel EBITDA was $38.8 million in the third quarter exceeding the previous two quarters combined by approximately $5 billion.
Operating cost per occupied room declined nearly 10% compared to 2019, which drove third quarter gross operating profit margin and hotel EBITDA margin to an impressive 47% 35% respectively.
We continue to operate our hotels utilizing a very lean staffing model, which consists of approximately 19 fte's on average or slightly more than 55% of prepandemic staffing levels.
Hiring hourly staff, particularly in the housing Department housekeeping Department has been an ongoing issue across the industry. The.
Despite these challenges and increasing occupancy levels are asset management team has done a great job controlling operating expenses, leading to hotel EBITDA retention of 54% when compared to the third quarter of 2019.
Finally, turning to the balance sheet, our overall liquidity physician continued to strengthen during the quarter as the business made substantial progress generating positive cash flow. Additionally, we access the capital markets in August taking advantage of a favourable preferred equity market with the issuance of $100 million or five and seven eighths.
Series that perpetual preferred paper.
Post proceeds from this opportunistic offering we're used to accretively refinance or $75 million, 645% series, the preferred stock and to reduce the outstanding balance on our November 2022 term loan to its current balance of $62 million.
This stub term loan remains the company's only 2022 maturity and we continue to maintain ample liquidity to repay all maturing debt through 2024, when considering available extension options.
With that I will turn the call back over to John to discuss the acquisition of the new crest image portfolio.
Thanks, Greg we're thrilled to announce the acquisition of a 27 hotel portfolio from new crest him ish, which is comprised of approximately 3700 guestrooms located across 10 high growth Sunbelt markets, and Texas, Oklahoma City in New Orleans.
These hotels are highly complimentary to our existing portfolio with premium brand affiliations.
Excellent locations in strong markets and comprise a relatively new portfolio with approximately 70% of the guest rooms opening since 2015 and more than a third of the guest rooms built in the last three years.
The hotel portfolio allocated value of 776 $5 million.
Equates to approximately $209000 per key which reflects a significant discount to replacement cost and results in a stabilize NOI yield of 80, 85%, including underwritten capital expenditures.
Our increased exposure to sunbelt markets, which will be approximately 60% of our pro forma room count positions that combined hotel portfolio to benefit from the favorable migration patterns Lieber dynamics corporate relocation activity returned to office trends in general Pro business climate in these markets.
In addition to the hotel portfolio, we will be acquiring two parking structures totaling approximately a thousand parking spaces that serve two triplex hotel clusters, one in downtown Dallas and the other in the emerging mixed use development of Frisco station.
Thriving north Dallas suburb.
The transaction also includes an allocation to several financial incentives that will be assumed upon closing of the transaction.
Our joint venture with GIC will acquire the assets for a total consideration of $822 million and we will finance the investment with a new 410 million dollar credit facility.
We expect the transaction to be immediately accretive to earnings and leverage neutral to our balance sheet.
J C is 49% equity interest will be a cash contribution totaling approximately $208 million and 51% controlling interest will come from a combination of common and preferred opie units.
We will issue 15.9 million shares of common O P units valued at $160 million based on our common stocks 10, Davy Wap as of Tuesday's closing price equal to $10.09 per share.
Pro forma for the issuance newcrest images ownership will be approximately 13% of our total shares outstanding.
The preferred opie units totaling $50 million will be issued a standard 25 dollar par value and pan annual coupon equal to 5.25%.
As part of the transaction Newcrest image will have the right to a 0.1 representative to the company's board of directors.
The transaction would increase our combined room count by over 30% and our total enterprise value by approximately 20%.
Acting as the general partner on behalf of the joint venture we will continue to earn fees for asset management services and expect our stabilized fee stream earned through the joint venture will cover approximately 17% of are in place cash corporate G&A.
The utilization of common and preferred Opie units for our 51% equity interest will preserve nearly all of our liquidity a $450 million, leaving us ample runway to pursue additional growth opportunities.
While closing remains subject to customary closing conditions and a formal due diligence period, we anticipate closing to occur later this quarter early in the first quarter of 2022.
In closing I'd like to take just a minute to publicly thank our dedicated team here at summit, our partners that GIC, and especially <unk> hotel and the team at new crest image for their tireless work getting a very important transaction for our company to this point.
We are incredibly excited about the future of our business and believe this transaction combined with the continued recovery of watching fundamentals positions is particularly well to create long term value for our shareholders.
And with that we'll open the call to your questions.
Thank you.
Again, ladies and gentlemen, as a reminder to ask a question you will need some fresh start followed by the number one on your telephone keypad.
Again, that's star one to answer your question.
First question, we have Austin were Smith, we'd keep X.
Thanks, and good morning, everybody. So I was wondering John if you could just give some additional details around the accretion numbers from from the transactions with newcrest image or or maybe even going in yield and then what did you assume upon stabilization as far as hotel EBITDA relative to Prepandemic.
Hotel EBITDA.
Yes, good morning, Austin per sheet. The question as we said in the press release, we do expect this to be immediately accretive to earnings.
The hotel operating statistics that we put forth war.
Between 85%.
Of of stabilized NOI yield that does include about $40 million of underwritten capital expenditures that does not include any benefit that we will get from a fee stream earned through the joint venture, which would add another 30 basis.
30 basis points or so to our overall yields.
Got it.
Then so with Newcrest image now willing to take a L. P units it seemed to imply that deferred taxes, maybe weren't important consideration for them, but with them now being your largest shareholder how should we think about their holding period when when the lockup expires.
The shares will be subject to a six month lockup period.
I think that the relationship the partnership with Newcrest is expected to be a longer term one I can't speak directly for what their intentions are for the stock, but I think conceptually as we've talked about putting this deal together, particularly with their representation on the board. The expectation is for it to lead to a longer term relationship and hopefully they can they can help us continue to grow that.
Business.
And then just one last one for me with the joint venture now over $1.3 billion of investment what what sort of the runway beyond this in in terms of continuing to scale up with GIC.
Yes.
Today, it's about a quarter on a on a pro rata basis about a quarter of our total total asset value I think we're very comfortable with where that fits I think it does give us additional room to continue to grow the debenture, we will be cognizant to make sure that we don't get to a point, where we have an inverted ownership structure, where we own more into the joint venture then we.
Do outright again I still think we have one runway to grow through that venture, but I also think we will be more open dhoni acquiring assets outright on a go forward basis as well.
Okay. Thank you.
Thanks Awesome.
Thank you.
Next question, we have my phone Bill before you with marriage.
Thanks, Good morning, everyone.
Good morning.
Yeah, I just want to go back to the kind of underwriting assumptions. You made can you just talk about whether it's high level or specifics.
<unk> of EBITDA that you guys expect from his portfolio kind of twofold, given the markets that you require in that are probably better performing markets over the near term, but also the fact that a bunch of hotels or new or.
At least one as soon to open what the ramp up of burning and EBITDA looks like from this portfolio versus your your existing portfolio today.
Yeah, I think it's a good thing to emphasize may I mean, I think when we look at making kind of apples to apples comparison since 2019 metric, it's highly difficult because as you pointed out not only are there are a fair number of new assets about a third of the guest rooms of open within the last three years one asset in particular, the canopy in New Orleans is not yet.
And.
Some of the what we expect to be the higher revpar assets likely to hire EBITDA. Her key assets are part of the newer portfolio. So we do expect this to have a different growth profile of different trajectory of higher growth profile than the existing portfolio, specifically because of that as you kind of alluded to.
Got it and then just maybe big picture, how do you how did you get comfortable with.
The outside Texas exposure and then also the handful of smaller Texas markets that you'll not have representation in that I think most people outside of Texas are probably not familiar with.
That's probably fair.
Look at Texas, We think the dynamics, what's happening down here a lot of these are in our backyard. We're based here we can see the growth that's happening in Texas. The migration down here from a from a people perspective in the corporate relocation activity. The job growth is all very real in many ways Dallas is kind of the epicentre of that growth.
And so I think again to concentration, particularly in some of these markets is something that we think in the near term is very good from a growth perspective.
I will say, while there is a lot of concentration in Texas about 70% of the portfolio is located in Texas, It's a very big state and the properties are located in fairly distinct.
Markets Amarillo is actually closer to Denver than it is to Austin or Houston again. These are these are there and a lot of different markets that have different supply and demand dynamics and we think ultimately we get we get comfortable with that because of it's just a different growth profile down here. Then we think in a lot of these other other market the Sunday.
In particular has I think better and different growth prospects. Some of the smaller markets are actually kind of sneaky. Good little markets. We didn't know a lot about the amaryllis of the world. The <unk> of the World Tyler, Texas is of the world as we got into the due diligence I think we got more and more comfortable with these are while they're smaller markets. They are actually.
Very good smaller markets with some of our best acquisitions over the course of the last three or four years have been in smaller markets Silverthorn, Colorado is a good example, Tucson, Arizona is a good example, these may not be top 50 top 25 markets, but they are very good strong markets with good regional local demand generators.
Got it and then last one for me you guys still have about the same amount of liquidity and I assume you structure. The deal intentionally for that purpose would you expect to remain acquisitive at least over the near term or should we expect a cause for the time being while you digest dispute transaction.
Well. This is obviously going to keep us very busy getting the first of all getting the deal closed and then getting the 27 assets.
Integrated into the portfolio I think again one of the good things about the portfolio is while there are 2007 assets. They are fairly concentrated again, there's a number of clusters of two or three assets together. So I think from an efficiency of managing those assets. It is.
Going to fit into into the model fairly well you are right to point out that I think that the work that train Adam did to structure. The deal in a way that utilizes essentially none of our $450 million liquidity was intentional we did want to make sure that we continue to have capacity to grow the business. We will look to continue to do that an opportunistic basis.
Got it thank you all for me.
Thanks Bye.
Thank you next we have new Neil Martin we'd comfortable one.
Oh, thank God.
Congratulations on the transaction just maybe a little housekeeping one does that 18, the half cap rate.
Stabilize does that include.
Some of the central occupancy margin in EBITDA for room upside.
On that one page in your presentation, there's a difference between sort of your average portfolio and and.
New crust.
Does that <unk> are you guys, assuming that or is that going to be like gravy to that.
Yeah. It does not Neil I mean, we've kind of underwritten a baseline on a typical standard basis. We do think we will hopefully be able to find not only some expense synergies, but also some revenue synergies, particularly where we have assets, where there are significant clusters that isn't that isn't baked into the eight and the hate night percent that we quoted.
Okay, great. Other one is on.
Ah labor.
You talked about I think but 19 at these 55% pre COVID-19 I'm just wondering if obviously everything is very fluid if you.
Sort of retooled or Rejiggered, how you think about what a steady state.
Head count looks like your hotels, just given that we're pretty far into COVID-19 pretty foreign in this new operating environment you have a lot of experience running at these levels.
I I just.
Do you may be believe that you can actually run it like lower levels on you know when demand comes back that then you did three to six months ago, just given how how hard it's been to get people back you know on site.
Yeah look I think we will run lower than we did pre COVID-19 I think the average FTE count of our hotels is was roughly 35 ftes per hotel pre COVID-19, we're a little bit back back halfway past that point.
So I think we'll run lower than what we did historically I think we will continue to add fte's from where we sit today you alluded to the fact that some of this is driven by the difficulties that we have in finding labor day, and I think that we're still the brands are still kind of in the early phases of getting brand standards re rolled out and so my.
<unk> is that that FTE count will continue to go up but I do think it will stabilize at something lower than where we were pre COVID-19.
Okay, Great and then if I could maybe John can you just say.
As candidly as possible.
What the the the large portfolio, obviously very all sunbelt oriented kind of says.
From a strategic standpoint about.
Coastal markets or your coastal.
Markets.
Cycle over the next three to five years.
I think everyone's really moving to the Sun belt and sort of recycling out at the coast and just curious to get.
How you think that's going to play out.
Yeah, well I wouldn't have first of all we're happy to invest in the Sun belt I think that what's happening the dynamics that are happening in these markets have been well documented I think it's there's a clear path to above average growth down here and kind of any metric that day do you want a site because of again some of the positive dynamics that are happening.
I wouldn't take that to mean that we've completely given up on coastal market, we try to be opportunistic acquires a capital allocators, regardless of the market we've talked a lot over the years about being market ignostic. When it comes to allocating capital at a very fundamental basis, we tried to underwrite high quality assets.
At risk adjusted returns that exceed are weighted average cost of capital. We think we found a really compelling opportunity to do that I think if you look at our basis in this portfolio at a little over $200000, a key and compare that to some of the other kind of high quality.
Signet similar type of asset that have traded here over the past three or four months I think this stands up very well and again I think the growth profile here is going to be better than a growth profile, we might in the near term find another market I wouldn't say, we wouldn't go back and buy in coastal markets again, I think so long as we can underwrite risk adjusted returns that are rational.
That are above our cost of capital we would do so we'll probably underwrite a different trajectory of the recovery than we would in the Sun belt, but I wouldn't read into this that we no longer like the coast.
Okay.
Right corner.
Thank you I appreciate it.
Thank you.
Next we have Chris where I'm, calling in which a man.
Yeah, Hey, you guys good morning.
John you guys always talk kind of talked about the benefits of scale and this adds obviously significant scale to your platform.
Question is though disease does it also make you more likely to revisit.
The legacy portfolio and and maybe accelerate the any pruning that you still wanted to do.
Because it gives you the opportunity to kind of stay at a certain level.
Level of access <unk> EBITDA.
<unk>.
<unk>.
Thoughts on that on potential essentially recycling other gone core assets.
Yeah sure look at it is we've always felt like we have a platform in place here that could be leveraged to take on greater scale and I think there is a benefit from us having more assets, particularly in some of these better markets. We've never been an acquirer for for just the sake of scale and you can as you read the prison.
Nation that we put out as you listen to the prepared remarks, as you listen to even the commentary hearing Q&A.
Scale is a good at the benefit but it wasn't the driver of this transaction again the driver of the transaction was buying high quality real estate. It returns that we felt were very very compelling I wouldn't preclude us from being a seller of assets again, I think we always try to be an opportunity opportunistic allocator of capital.
There are a lot of assets in the portfolio today that we really view is non-core that we feel like we have to sell but if we can sell assets at at the right price, we're certainly open to that.
Okay.
But that's helpful and then.
I heard the last question about kind of how you view of coast and how does fits in with that but I might take that question a different way, which is are you also kind of make it a call.
The labor you talk a little bit about it but the fact that maybe believer situation of these markets is better.
Availability and potentially less pressure on and we just going forward I mean, how how much how important was that kind of in the configuration process.
Yeah I think these are.
Was a consideration and I do think the labor dynamics and some of these markets are better and I think that you'll look I think there's labor challenges everywhere, but I think that obviously and very much non union kind of pro business markets here. So.
I do think that that is another positive fact pattern as we look at the portfolio.
Okay, Great and then the last one is just.
We think about I'm thinking about supply thought service supply growth broadly for the for the whole country not not this specific new crust portfolio. What are you guys see in terms of.
It kind of was in process pre COVID-19 or or was being considered pre COVID-19 and then it starts to get closer to shovel in the ground now construction costs are.
A certain level of labor is harder to find her you see stuff in your markets pipelines third to start to drop or or get pushed out further.
Yes look I think that the stuff that was in the ground or coming out of the ground pre COVID-19 is going to get completed I think the new development pipeline has slowed significantly for all the reasons that you kind of alluded to construction costs are materially higher than they were finding labor as challenges the supply chain issue that we've all been dealing with have been.
Very well documented so you see it in the National numbers you see it in the chain scale numbers I think our expectation here that we're going to be in a window for for several years, where we're going to have below average supply growth for the industry and for our markets in particular.
Okay very good very helpful. Thanks, Thanks, Sean.
Thanks, Chris.
Thank you again, if you wish to ask a question you may do so by pressing star one on your telephone.
We have built grow with Raymond James.
Good morning, Bill Bill <unk>.
Yeah.
I think he just withdraw.
Question. So there are no more questions. Please continue presenters.
Okay, well. Thank you all for joining us today is clearly a very exciting time for our business and we're very appreciative and thrilled to have the opportunity to work with Newcrest image on this important transaction, we'll look forward to speaking with many of you next week at NAREIT Hope you all have a nice quarter. Thank you.
This concludes today's conference call. Thank you all for participating you may now disconnect.
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