Q2 2023 Summit Hotel Properties Inc Earnings Call
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Good day and thank you for standing by welcome to the Summit Hotel properties Q2 2000.
Good day and thank you for standing by welcome to the Summit Hotel properties Q2, 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone you will then.
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I'd now like to hand, the conference over to your Speaker today, Adam <unk> SVP of finance capital markets and Treasurer. Please go ahead.
Thank you Tania 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, Trey correctly.
Please note that many of our comments today are considered forward looking statements as defined by federal Securities laws.
These statements are subject to risks and uncertainties, both known and unknown as described in our SEC filings.
Forward looking statements that we make today are effective only as of today August 3rd 2023, 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 SHP Reed dotcom.
Please welcome Summit Hotel properties, President and Chief Executive Officer, John Scanner.
Thanks, Adam and thank you all for joining us today for our second quarter 2023 earnings Conference call.
During today's call, we will discuss recent industry trends and the continued improvement in many of our key operating metrics, which are increasingly being driven by non leisure demand segments urban markets and the new crest image portfolio.
We will also provide an update on our recent transactions and balance sheet activity as well as review our revised guidance range, which we provided in our earnings release yesterday afternoon.
Industry wide demand trends normalized in the second quarter as easy Omnicom variant driven comparisons in the first quarter were replaced with more difficult comparisons to last year's second quarter, when robust pricing elastic and predominantly domestically concentrated leisure demand drove tremendous top and bottom line growth.
Despite the more difficult comparisons key operating metrics in our portfolio continued to improve in the second quarter as pro forma Revpar increased three 5% compared to the second quarter of last year and once again reached a new nominal revpar high at the onset of the pandemic.
Revpar growth in the quarter was driven by a relatively balanced mix of occupancy and average rate growth was mostly concentrated midweek and continuing to recover urban and suburban markets Revpar.
Revpar growth for our urban and suburban portfolios, which collectively comprise approximately 75% of our revenue base increased 6% and 5% respectively year over year during the second quarter.
Non leisure demand segments, particularly business transient and group demand are increasingly driving the recovery in our business negotiated segment Revpar grew 4% during the quarter, while group Revpar increased a robust 7% driven by a 5% increase in average daily rates.
While industry demand and Revpar growth slowed in the second quarter, our team continued to drive impressive market share growth.
Revpar index and our pro forma portfolio finished the quarter at 113% nearly 300 basis point improvement from the second quarter of last year.
Excluding hotels that were under renovation in the second quarter of either this year or last our Revpar index increased over 4% year over year.
As I mentioned in the introduction second quarter results and the NCI portfolio were particularly strong as revpar increased nearly 15% and hotel EBITDA increased over 20% driven by a 225 basis point increase in margins compared to compared to the same period of 2022.
Group and negotiated Revpar increased 37% and 11% respectively from last year and midweek Revpar grew 15% during the quarter.
Revpar index in the NCI portfolio also achieved a new post acquisition high of 110%, increasing nearly 750 basis points from the second quarter of last year, a testament to the great work. Our team has done in implementing and executing strategic cluster sales strategies across many of these markets.
Within the NCI portfolio, the Texas markets were the strongest performers during the quarter highlighted by Houston, and Dallas, which generated second quarter revpar growth of 49% and 16%, respectively, driven by accelerating corporate travel and strong group and special event demand.
Additionally, Oklahoma city saw meaningful improvement throughout the second quarter growing revpar by 17% versus last year.
Our outlook for the NCI portfolio remains extremely positive and we expect it to continue to generate outsized revpar and EBITDA growth throughout 2023.
As our operational initiatives drive better performance and the newer hotels continue to ramp towards stabilization.
Many of our hotels in downtown urban markets outside of the inside Mci portfolio also continued to recover and performed particularly well during the quarter.
Second quarter, adjusted <unk> was $33 $2 million or <unk> 27 per diluted share compared to $32 6 million or 27 per diluted share in the second quarter of 2022.
When including the Companys fixed coupon preferred securities the balance sheet is approximately 80% fixed at a blended rate of just over 5%.
In June we successfully completed the refinancing of our $600 million senior unsecured credit facility, which consists of a $400 million senior unsecured revolving credit facility and a $200 million senior unsecured term loan.
The fully extended maturity date of the credit facility is June 2028, and as a result, our average life to maturity increased to more than three years.
For the balance sheet as a whole we have no debt maturities until the fourth quarter of 2024, when accounting for all available extension options.
On July 27th our board of Directors declared a quarterly common dividend of <unk> <unk> per share or an annualized dividend of <unk> 24 per share, which represents a dividend yield of approximately 4%.
The dividend continues to represent a prudent <unk> payout ratio, leaving room for increases over time, assuming no material changes to the current operating environment.
The company continues to prioritize striking an appropriate balance between returning capital to shareholders, reducing corporate leverage and maintaining liquidity for future growth opportunities.
As John previously referenced in our press release last evening, we provided updated ranges of our full year guidance for 2023 operational metrics as well as certain non operational items.
This outlook reflects the previously highlighted demand normalization and does not include any additional transaction or capital markets activity.
Based on the company's second quarter operating results as well as our future outlook, we are revising our full year guidance ranges across certain key metrics.
Our full year Revpar growth range has been revised to 6% to 8%.
This revpar guidance range translates to an adjusted EBITDA range of $183 million to $193 million.
On an adjusted <unk> range of 86.
To <unk> 94 per share.
Included in this revised range is the full year impact of second quarter transaction activity, which we estimate to account for a reduction to full year, adjusted EBITDA and <unk> of $2 million and $1 6 billion respectively.
Our revised full year Revpar guidance implies revpar growth of one 5% to five 5% in the second half of 2023.
Assuming the midpoint of the aforementioned second half Revpar growth range Hotel EBITDA margin will contract approximately 150 basis points.
150 basis points versus the second half of 2022.
We expect full year pro rata interest expense, excluding the amortization of deferred financing costs to be approximately $55 million to $60 million series E and series F preferred dividends to be $15 $9 million series Z preferred distributions to be $2 6 million.
And pro rata capital expenditures to range from $60 million to $80 million.
As previously mentioned given the increased size of the GIC joint venture the fee income payable to summit now covers nearly 15% of annual cash corporate G&A expense, excluding any promote distributions summit they earned during the year.
With that we'll open the call to your questions.
Certainly.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for your first question.
And our first question will come from Austin, where Schmidt of Keybanc capital markets. Your line is open.
Great. Thanks, and good morning, guys within the Revpar guidance change how does the 150 basis point decrease breakout between ADR and occupancy.
Versus the prior expectation and then is the gap between your Revpar growth decrease versus the decrease in adjusted EBITDA a function of performance across the wholly owned portfolio versus assets and your GIC joint venture that are kind of outperforming.
Hey, good morning, Osten, It's John I would say the reduction of 150 basis point reductions fairly evenly split between <unk> and ADR and yes, you alluded to the two it correctly that the reduction in the midpoint of the adjusted EBITDA range, which as a percentage is a little higher than the reduction in our Revpar range is driven.
The relative strength of the GIC portfolio, particularly at the NCI portfolio, which as we said in the prepared remarks was up 15% of second quarter, which is offset by softer performance in the wholly owned portfolio.
Got it and then as far as the July performance I think you said it was roughly in line with June which was in the mid 2% range can you just share some detail around forward pace or what gets you comfortable with re acceleration to get to the mid 3% back half implied in the Revpar guidance.
Yes.
Correct.
July finished right around two 5% essentially in line with June some of that was affected by a slow start to the month around the fourth of July holiday. So the back half of July performed much better than the front half of July .
Our pace for August is up 9% today, our pace for September is up about 3% to 13% so.
The numbers that we have on the books for this month and next still look very positive and when we look at the pickup that we really saw in the second quarter as a more normalized level of pick up it gives us some comfort that that kind of mid three 5% range, which is the midpoint of our back half of the year range is a reasonable range.
Thanks.
One moment for our next question.
And our next question will come from Michael Bellisario of Baird. Your line is open.
Thanks, Good morning, everyone.
Just first question just wanted to follow up on guidance in terms of that.
<unk> second half outlook, maybe how much of the reduction is really just on the top line.
More decremental flow through to the bottom line versus any incremental express.
Spence pressures that you might be seeing in the business.
Yes, it's predominantly topline driven Mike our assumption for the back half of the year is to be in a much more stabilized expense environment than we were in the first half of the year and we started to see that trend happen even in the second quarter in our expenses in the second quarter grew about 6% on a per occupied room base.
They were up less than 3% in June and so you can start to see that.
The normalization of the expense environment in the third quarter, our FTE count was up about 11% in total over the second quarter, but up 7% in June and our FTE count is essentially flat at the end of the second quarter versus where it was at the end of the third quarter of last year. So there still are some well known headwinds.
We're still operating in a tight labor environment as we mentioned in our prepared remarks insurance costs are up significantly our insurance costs were up about 40% year over year. Some of that is baked in and we've got some difficult property tax comparisons to the fourth quarter of last year, where we had some significant rebates. So that's driving it.
<unk> of the margin contraction that we're forecasting for the balance of the year, which is down about 150 basis points at the midpoint and EBITDA are up on the operating expenses, our GOP margins at the midpoint of our range are roughly flat in the second half of the year, that's essentially consistent with where we thought we would actually.
<unk> adjusted for the lower revenue assumptions, so long answer to say most of the most of the decrease is driven by <unk>.
Pressure on the top line.
Got it thanks for that and then second question just on capital allocation, maybe at the stock price. When do you buyback may be start to make sense if at all.
Do you balance that potential use of capital with a focus on reducing overall leverage and other potential uses of capital you might have for the business. Thanks.
Yeah, well look it certainly something that is always a consideration. We certainly believe the stock is undervalued relative to the intrinsic value of the portfolio I think you alluded to it correctly, yes, we do want to make sure we balance that with managing our corporate leverage I think we have a.
Our ROE bias towards asset sales in the near future to try to manage manage leverage lower and gives us some optionality on the capital allocation front.
Got it and then just one follow up there for you.
Year end and midpoint of guidance or does that put net leverage based on your numbers.
And the numbers today, it probably puts us in the high fives I think based on the guidance where before it was probably in the mid fives. So we've probably moved about $3 four of a turn.
From a leverage perspective.
I'd say, Mike is that we.
We probably did a fair amount of activity over the last 12 months as you know, including the refinancing of the credit facility and so while that leveraged a set a little bit higher. The fact that we don't have any near term refinancing risk until the end of 2004. It gives us some comfort in the ability to kind of navigate what is obviously a volatile market right now out there in the <unk>.
Capital markets.
Thanks, that's all for me.
Thanks, Mike.
One moment our next question.
And that will come from Bill Crow of Raymond James Your line is open.
Great. Thanks, good morning.
Jonathan We all talk about markets like San Francisco, and San Jose, which you mentioned the Portland, maybe Seattle is.
Suffering some sort of long term if not permanent impairment over the last few years.
In that same boat and if it is or.
How are you thinking about your positioning there.
Minneapolis has been really challenged market on a variety of fronts and we did sell earlier this year two of our Minneapolis assets. We have two assets remaining theyre both downtown they are both good assets. It's unfortunately been a very very challenged market. It's a combination of never really.
Recovering from.
A lot of the riots around the George Floyd incident.
There's very very little BT in the market and so we've tried to head to reorient around more leisure base demand in that market.
I hate to say never.
But it is we do think it's a longer road back for Minneapolis.
Our hope is that you'll start to see a little bit of traction there.
As a commonality in many of those markets that you mentioned it that there is real kind of life safety concerns in some of those markets.
Getting those addressed first and foremost I think is the first step back but.
I think we hold out hope that Minneapolis can recover to something closer to what it was pre pandemic. We do think that it's a longer road back there an.
Our capital allocation decisions reflect that.
Shifting a little further south.
The performance in North, Texas in particular has been really strong here this quarter.
But it's also a market, which has a lot of new supply coming on it I'm just wondering how youre thinking about next year with the tough comps in new supply whether that turns into more of a headwind the tailwind we're enjoying now.
Yes look we're really bullish on the.
The Dallas DFW market Houston has been a tremendous market for us.
The one thing we always point out when you look at overall supply statistics in the DFW Metroplex, you have to be mindful of how large of a geographic area that really encompasses and so when we look at our exposure in DFW, we really look at it in pockets of Submarkets, We've got downtown exposure we're in Frisco.
Great Fine we're in Arlington and were in Fort worth and there are different supply demand dynamics in each of those submarkets and by and large they really operate independently of each other I do think that we've seen tremendous growth. Obviously this year in that market I don't think we're all the way through the benefits of the great work. The team has done to put.
<unk> put in place cluster sales operations and start to really realize the benefit of having multiple hotels in multiple brands with which we can cross sell so we're mindful of supply certainly in those markets, but I think by and large we still feel very very good about the outlook for that business, even as we go into next year or that portion of the portfolio even as we.
<unk> and next year.
Alright.
One final one for me just the transaction environment out there.
You are obviously busy over the last six months or so.
We're kind of bias towards you, reducing your leverage levels as opposed to reinvest EBITDA Im wondering what youre seeing out there.
From.
The acquisition disposition point of view.
Yes, sure, it's still a pretty slow transaction environment Bill I mean, we've been.
<unk> been a little bit active certainly less active than we've been historically, we've tried to be really strategic around which assets. The two assets that we've acquired where.
Assets that were adjacent to its existing on assets. They had really compelling current yield profiles and I think really attractive upside to both of those assets I think as you alluded to we do have a bias towards selling assets in part to manage leverage lower overtime, we still view the most liquid part of the transaction market is.
Kind of this lower revpar.
Lower per key, but probably lower yield type of asset that we think we can find local owner operators that can partner with local lenders to come up with financing the financing markets are still choppy I do think they are improving we're seeing financing is getting done in the market at spreads that have certainly compressed from where they were 345 months.
Ago. So there there are some encouraging signs on the financing side, but it's still a fairly.
Slow transaction environment, and so we're trying to be thoughtful and opportunistic kind of where we can find opportunities to sell assets.
Alright, that's it from me thanks.
No.
Again, ladies and gentlemen, if you would like to ask a question. Please press star one one from your touch tone telephone.
And our next question will be coming from Dani Zhang of Bank of America. Your line is open Danny.
Yes.
Hi, good morning, everybody.
Hey, guys.
My question is whats the expense leverage point going forward, so like how much revpar growth would we need to hold margins in the back half of this year.