Summit Hotel Properties, Inc. (INN) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Summit Hotel Properties Incorporated Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, the conference call is being recorded. I would now like to turn the conference over to your host Mr. Adam Wudel, Vice President of Finance.

Thank you, Emily, and good morning. I'm joined today by Summit Hotel Properties President and Chief Executive Officer, Dan Hansen; and Executive Vice President and Chief Financial Officer, Greg Dowell. 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 2015 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today May 4, 2016, 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 in www.shpreit.com. Please welcome Summit Hotel Properties' President and Chief Executive Officer, Dan Hansen.

Thanks, Adam. And thank you all for joining us today for our first quarter 2016 earnings conference call. We are extremely pleased with the results that our diverse portfolio of premium select-service hotels delivered in the first quarter of 2016. For the quarter, we reported adjusted FFO of $28.3 million, which is 21.7% increase over the first quarter, 2015. Our AFFO per share increased 21.2% from the first quarter 2015 to $0.32 per share. On a pro forma basis we posted RevPAR growth of 3.8% in the first quarter, which was near the midpoint of our outlook and as a reminder was on top of 11.9% growth in the first quarter of 2015. Our RevPAR growth was driven by 2.3% increase in occupancy to 77.6% and an average daily rate increase of 1.5% to $141. Both of which were partially offset by a total of 39 basis points due to renovation displacement. Our same store RevPAR growth for the quarter was 4.5% compared to the first quarter, 2015. RevPAR was driven by combination of increases in occupancy, which was up 3.3% and a 1.2% increase in average daily rate. The strength and quality of our portfolio continues to be evident as we again surpassed the Smith Travel Research overall US and upscale RevPAR growth rate by large margins. Our RevPAR growth was driven 60% by occupancy as compared to the Smith Travel Research upscale average, which was flat. The primary factors behind our occupancy growth was the Super Bowl in San Francisco and the continued ramp from hotels under renovation in the first quarter of 2015. Looking ahead, we still expect the majority of our full year 2016 RevPAR growth to be rate driven. The strength in our first quarter RevPAR growth was again very broad-based, which is what we'd expect from the geographic diversification of a portfolio like ours. Three of our top five performing markets in the first quarter were on the West Coast those being San Francisco, Portland and Ventura, California which is the Los Angeles, MSA. Our three hotels in the San Francisco market delivered 19.4% RevPAR growth, outpacing the MSA average by 370 basis points. Even more impressive, these hotels were able to capture more than 500 basis points of additional market share in the quarter as compared to their competitive set, which is a testament to our best in class revenue and asset management team. Moving on in the first quarter, we closed out the second 1031 with the sale of tranche three and purchased two hotels, with the total of 386 rooms for an aggregate purchase price of $109 million or approximately $282,000 per room. The 226 room Courtyard by Marriott in Nashville, hotel is located in the vibrant midtown neighborhood near many of the area's finest restaurants and entertainment venues as well as Vanderbilt University, the Ryman Auditorium and Bridgestone Arena. In addition, the hotel benefits from proximity to Music City Center, historic Second Avenue, County Music Hall of Fame, Nissan Stadium, Nashville Convention Center and the Centennial Sportsplex which are all located less than a mile away. The 160 room Residence Inn by Marriott Atlanta is in the heart of the diverse midtown neighborhood and conveniently located near the High Museum of Art, Alliance Theatre, Atlantic Station, Center Stage and the Fox Theatre. These institutional quality hotels with strong and diverse demand generators are excellent compliments to our existing portfolio and as a pair generated RevPAR of $128 and hotel EBITDA margins of 45.1% in 2015. The two acquisitions have a RevPAR premium of 36% and hotel EBITDA margin premium of more than 700 basis points as compared to the six hotels sold during the quarter. Our capital recycling initiative continues in the first quarter of 2016 by completing the sale of those six hotels to affiliates of American Realty Capital Hospitality Trust on February 11 for a combined price of approximately $108.3 million. In addition, we were able to resurrect the purchase and sale agreement on tranche two, which consists of 10 hotels. Under this agreement, the remaining 10 hotels are scheduled to be sold by the end of 2016. Simultaneous with the sale of the six hotels, we entered into a $27.5 million with ARC Hospitality with $20 million being applied to the purchase of the six hotels and the remaining $7.5 million being applied to the new earnest money deposit on the remaining 10 assets scheduled to be sold in 2016. The transaction to sell 26 hotels was announced in June of 2015. We had fully redeployed the disposition proceeds received so far into $307.8 million of acquisitions that have a RevPAR premium of more than 60% compared to the hotels we've sold and have under contract to sell. Completing the first two phases of the transformation to higher RevPAR assets in markets with strong growth profiles, there's a milestone that demonstrates our team's thoughtful view and capital allocation and the subsequent value creation. With that, I'll turn the call over to our CFO. Greg Dowell.

Thanks, Dan and good morning, everyone. We were very pleased with our first quarter 2016 results. On a pro forma basis, our hotel EBITDA in the first quarter 2016 increased to $43.8 million which was an increase of 10.3% over the same period in 2015. Pro forma hotel EBITDA margins expanded by 112 basis points to 37.5% in the quarter. For the first quarter, our adjusted EBITDA grew to $40.9 million, an increase of $6.4 million or 18.6% over the same period in 2015. Moving onto our balance sheet, our balance sheet is arguably in the strongest position it's ever been and we will continue to strengthen it by reducing leverage, staggering our debt maturities and improving our cost to financing. At March 31, 2016 we had total outstanding debt of $704.1 million with a weighted average interest rate of 3.76%. We ended the first quarter with net debt to trailing 12-month adjusted EBITDA of 4.2 times. Our reduction in leverage is primarily the result of continued EBITDA growth and the sale of 16 hotels to affiliates of ARC Hospitality. In January 2016, we closed on a new $450 million unsecured credit facility, which replaces our former $300 million facility. As a result of the successful completion of this credit facility, our pricing grid was improved by approximately 30 basis points. As of April 21st, we had total net debt to trailing 12-month adjusted EBITDA of 4.1 times and had total outstanding debt of $693.3 million with a weighted average interest rate of 3.78%. Subsequent quarter end, we repaid CMBS loans and the amount of $5 million and expect to repay another in the amount of $13.4 million this week using our unsecured revolving line of credit. As a result, more than 60% of our portfolio EBITDA will be unencumbered with less than 5% of our total debt maturing through 2018. With the continued outperformance of our portfolio and consistent cash flow stream provided by our premium select-service hotels, we are excited to have increased the common dividend for the first quarter of 2016. On April 29, we declared a cash dividend of $0.1175 [ph] per common share which is an increase of 12.8% over the prior quarter. Turning to our outlook, in our release you will see that we provided our second quarter outlook and increased our guidance for the full year 2016. For the second quarter 2016, we are introducing pro forma and same-store RevPAR growth guidance of 5.5% to 7.5% and 5% to 7% respectively. Our second quarter adjusted FFO guidance is $34 million to $35.8 million or $0.39 to $0.41 per share. For the full year 2016, we are increasing our RevPAR growth outlook to a range of 4% to 5.5% for both our pro forma and same-store portfolios. We are also increasing our adjusted FFO outlook to a range of $114.4 million to $119.6 million or a $1.31 to a $1.37 per share, which is an increase of $0.9 million or $0.01 per share at the midpoint. We have incorporated capital improvements of $40 million to $50 million which includes both renovation and recurring capital expenditures. Our adjusted FFO guidance continues to assume mid-year sale of 10 hotels totaling $89.1 million. No additional acquisition, dispositions or equity ranges other than those mentioned are assumed in the second quarter or full year 2016. With that, I'll turn the call back over to Dan.

Thanks, Greg. In summary, we're very pleased with the consistent results in our portfolio and remain encouraged about 2016, as the benefits of premium select-service hotels; limited supply growth in our submarkets and broad geographic diversification continues to show the benefits of our differentiated investment strategy and with that, we'll open the call to your questions.

[Operator Instructions] your first question comes from Shaun Kelley from Bank of America. Your line is open.

Good morning, guys. Dan, one of the follow-up on just the very last point there I think, you're talking a little bit about the lack of supply growth in some of your submarkets and was just curious, do you kind of have a sense of directionally where some of like what the weighted average supply growth is across your portfolio at the moment because we see some very mix numbers, but in general we see a lot higher growth in a lot of the urban areas, so I'm just curious what you think that number might be?

We haven't triangulated around a specific numbers market-by-market. We watch them in a very close; as you know it takes two and sometimes three years to build hotels even in markets outside of the gateway cities. So we're very aware of what's coming. I'd estimate it would be 2% or less in - as a portfolio, some of the markets have zero, some probably have little bit more but very manageable in our markets.

That's helpful and just my second question, this one's a little bit different topic. A couple of the brands that you guys have some exposure to have launched some of these direct booking campaigns and I'm curious to hear, we did see some of those brands broadly underperform in the first quarter and I'm curious to hear if, you think that had any impact. I mean obviously your overall portfolio did very well, so it doesn't seem like there is much, but when you look across some of those brands, do you think campaign initiative had any impact on performance and anything that you guys felt?

Shaun, it's a good question. At this point, I don't see any direct correlation from the brand initiatives. I think it's a positive for the industry. We think, it's incrementally will be help us at the owner level, but I think it's still too early to draw anything from that initiative to our direct performance.

Thank you very much.

Thank you, Shaun.

Your next question comes from Austin Wurschmidt from KeyBanc Capital Mark. Your line is open.

Good morning, guys. Dan, I was wondering if you could just give us an update on ARCH portfolio and the interest level, you've seen from potential buyers of those 10 hotels.

Sure, Austin. Thanks for the question. We have had quite a bit of interest in the portfolio. It is under contract, so we don't have to sell it, what we did decide to do is take the seven of the hotels and bring them out to market, to better manage the process and be efficient. So well there is a quite a bit of demand for one off and smaller portfolios and we expect to have more to announce here in the coming quarters.

Great and then can you just give us a sense of what type of premium you might require in order to transact on an individual hotel?

I don't know that we look at it as a premium; we have at some level a built-in floor for pricing and remember these weren't hotels that we had to sell. So in the absence of getting as greater value as we have with the current contract, we'll be much more less likely to sell.

That makes sense, thanks and then just you've talked about potentially using the proceeds from the sale to repay debt later this year, but your leverage really is in the low fours today, towards the low end of the range you've talked about. So I'm just curious what's your appetite is to take that lower or if it's dependent upon the opportunity you see in the acquisition market.

Austin, I think the 3.5 times to 4.5 times is the range that we feel comfortable in, a year ago it was four to five, this year we think 3.5 to 4.5 times is appropriate. I think that range will be what will guide our activities, so at this point; I don't know that we have a view on deployment other than making sure that whatever we do with our capital creates value for shareholders.

Great, thank you.

Thanks, Austin.

Your next question comes from Ryan Meliker from Canaccord Genuity. Your line is open.

Good morning, guys. Just a follow-up to Austin, the tranche two that's under contract with ARCH that you're assuming the asset is closed in the second half of the year in your guidance, correct?

That's correct.

Okay, just wanted to confirm that. And then, one other thing I was wondering if you can give us some color on whether it's on the sale side or by the buy side. Have you seen any changes to cap rates for assets that you've been targeting obviously the debt markets have been a little more volatile. I know portfolio deals are harder to come by today but what about on single asset transactions, any movement?

I think single assets have probably backed up maybe 50 to 75 basis points over the last year. A lot of that's offset by increased net operating income, so I think values have been pretty constant, there haven't been enough portfolio sales to really have a strong benchmark or basis in our view, but I think it's fair to say that the cap rates have been backed up 50 to 75 basis points.

So that mean, as you look to redeploy capital from asset sales. You'll be looking at closer to 8.5 caps going forward.

I think that's fair, that's always been our goal is that kind of forward mid-8 either going in or very quickly after acquisition through you know operational improvement. So I think that's still an area that we feel comfortable in.

Okay, that's helpful and then just lastly, you commented a little bit on this earlier, but you guys obviously put a pretty solid numbers in the quarter. We've heard a lot of commentary from different companies over the course of earning season regarding business transient trends. Are you seeing any material slowdown regarding business transient travellers to your properties?

Ryan, it's a great question, we're not seeing it at any level that would give us concern, certainly there is a hotel or a sub-market that maybe experiencing softening due to one demand generator, but broadly based you know we still see the business in leisure transient guest as stable and not affecting our portfolio.

That's really helpful. Do you think maybe, I'm just speculating here curious what your take is? Are we seeing maybe a trade down from some of the higher end properties into some of your premium select-service properties which is eliminating the impact that your properties are seeing or you're not even seeing that in your markets?

Well, Ryan that's a really good question, I think historically the trade down concept has been, a concept that is been very well understood and followed, but today with the quality of premium upscale select-service. I think it's not as much of a trade down as it's a really value proposition. I think, our guest are drawn to the quality, the location and the experience in many of the premium upscale hotels and that's driving it more so then categorical mandate from the business that they cut cost.

Okay, that's good color. Thanks, Dan.

Thanks, Ryan.

Your next question comes from Wes Golladay from RBC Capital Markets. Your line is open.

Good morning, guys. You mentioned the occupancy gains in the first quarter partially due to renovation comps, how much more that is left going forward [indiscernible] by the second half of the year and then on the revenue management side, are you getting defensive at all, we've heard some people adopt their Heads and Beds strategy, so how you actively managing the revenue management?

Thanks, Wes. I'll answer those in reverse order. I think our revenue management team is focused on creating opportunities in each market every day. So I think it's fair to say that, our Heads and Beds strategy or focusing on occupancy in certain markets at certain times is certainly warranted, but it's not across the board strategy that we're employing it's a market-by-market hotel, by hotel initiative and as far as the mix, we do believe that now the first quarter was not indicative of the full year and that a more balance mix of rate and occupancy will be you'll see over the next several quarters and we still expect the majority of our RevPAR to be rate driven for the full year.

Okay, thanks and then looking at the margin expansion. It was quite strong at 112 basis points considering the occupancy led RevPAR growth anything special going there?

Yes, Wes we had said at the beginning of the year that we expected about 25 to 75 basis points of expansion for the year and for the quarter that's still very true. What we did see was we had a $700,000 property tax refund in New Orleans that kind of attributed about 50 basis points to this quarter. So we still had 62 basis points just kind of toward the higher end and we would expect, as we go through the year to still see about 25 to 75 basis points of expansion in the operations.

Okay, would it be fair to say you did not anticipate that refund in initial [indiscernible] and maybe have a little upward bias [ph] there.

Yes, that was not in the original guidance because we did not have final resolution yet to where we were going to be on that, so we set our original guidance without it and the 25 to 75 for the rest of the year, we still see for the full year without that $700,000 potential [ph].

Okay and then sticking with New Orleans and for my final question. That market obviously bounces around at your top market, is kind of how do you see that market playing out second quarter, third quarter, fourth quarter.

Wes, this is Dan. New Orleans is a tough market for sure. Each quarter is either a difficult journey [indiscernible] based on how the city wide events plan out. It's going to be a tough market for the year and a challenge for us, but with the property types that we have and the asset management and revenue management team that's focused day-to-day in there, it's going to be a challenge, but we'll find opportunities to create as much growth as we can.

Okay, thanks for taking the question.

Thanks, Wes.

Your next question comes from David Loeb from Baird. Your line is open.

Thank you. So Dan, can I come back to capital allocation for a minute. You talked about debt reduction and acquisitions, but what about buybacks how would they fit in, if you don't see interesting acquisition opportunities or instead of acquisitions?

David, that's a great question, I think that buybacks are definitely on the list of options for us. It's a little bit harder because of our size and liquidity to execute stock buyback that would be meaningful, but it's definitely an option that we have, I think we've demonstrated a bias towards finding unique and creative ways to create value, so but I wouldn't say that there's any way off the list.

Okay and with the Apple transaction for Apple 10, we're seeing the first kind of hence a consolidation within the hotel REIT's based. What do you think about that, do you think that's a trend that will continue and what's your view on your scale relative to kind of what you need or want?

I guess two questions, the notion that the consolidation in the space would have happen has been an ongoing topic, that has never really gotten traction for a lot of reasons, some obvious, some maybe not as obvious. I think there are definitely benefits to size and scale but I don't think there is any reason that size and scale can drive greater value just on pure size alone. We've been able to create great value at our size certainly being a little bit bigger would be a benefit, but we decided early on that we were going to win on quality and execution and that getting big just to get big, really wasn't in keeping with creating value.

Okay, great. Thanks.

Thanks, David.

Your next question comes from Bill Crow from Raymond James. Your line is open.

I'm sorry, guys. I tried to get out. I'm all set. Thanks.

Thanks, Bill.

Your next question comes from Blair Brantley from BB&T Capital. Your line is open.

Good morning, everyone. Just a quick question, could you give us some more color on some of the stress markets out there, that you had some exposure to and just kind of tell us, what you're seeing there?

Yes, I think, Blair this is Dan. I think, the two of that come to mind mostly for us are Houston continues to struggle storms didn't help, I think the perception out there is that Houston is still completely under water that's been a market that the most recent storms have gotten exacerbated a challenging market and then New Orleans, it's one of our larger markets and is a year that tends to be softer. So I think those two markets as a whole are our greatest challenges for the year and as I referenced earlier, we've got a great asset management, revenue management team that are always looking at unique and creative ways to minimize the effect of some of those events.

Great, thank you.

Thanks, Blair.

I'm showing no further questions at this time. I would now like to turn the conference back to President and CEO, Mr. Dan Hansen.

Thank you all for joining us today. Before I go, I did want to reiterate our guidance for the year, for our pro forma and RevPAR, our pro forma and same-store portfolios is 5% to 7% growth for both and I do appreciate the trust that you have in us and we'll continue to work hard for you. About being thoughtful in our capital allocation and continuing to find opportunities to create value in the premium upscale hotel market, which are the hotels that today's guest love. Have a terrific day and we look forward to talking to you again next quarter.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.