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Edited Transcript of INN earnings conference call or presentation 27-Feb-19 2:00pm GMT

Q4 2018 Summit Hotel Properties Inc Earnings Call

Sioux Falls Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Summit Hotel Properties Inc earnings conference call or presentation Wednesday, February 27, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam Wudel

Summit Hotel Properties, Inc. - SVP of Finance & Capital Markets

* Daniel P. Hansen

Summit Hotel Properties, Inc. - Chairman, President & CEO

* Jonathan P. Stanner

Summit Hotel Properties, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* Michael Joseph Bellisario

Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Summit Hotel Properties Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions)

As a reminder, this call is being recorded.

It is now my pleasure to introduce Senior Vice President of Finance and Capital Markets, Mr. Adam Wudel. Please go ahead, sir.

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Adam Wudel, Summit Hotel Properties, Inc. - SVP of Finance & Capital Markets [2]

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Thank you, Andrew, and good morning. I am joined today by Summit Hotel Properties' Chairman, President and Chief Executive Officer, Dan Hansen and Executive Vice President and Chief Financial Officer, Jon Stanner.

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 2018 Form 10-K and other SEC filings.

Forward-looking statements that we make today are effective only as of today, February 27, 2019, 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.shpreit.com.

Please welcome Summit Hotel Properties Chairman, President and Chief Executive Officer, Dan Hansen.

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [3]

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Thanks, Adam. And thank you, all, for joining us today for our fourth quarter and full year 2018 earnings conference call.

We are pleased with our results for the fourth quarter, which came in at the high-end of our expectations despite the challenging year-over-year comparison from higher-than-normal occupancy created by the natural disasterrelated demand in the fourth quarter of 2017.

On a pro forma basis, we reported a fourth quarter RevPAR decline of 1.3%, which was near the high end of our guidance range of negative 3.0% to negative 1.0%.

For the fourth quarter of 2018, we reported adjusted FFO of $31.3 million or $0.30 per diluted share, which exceeded the high end of our guidance range of $0.26 to $0.29 per share.

For the full year, pro forma RevPAR increased 0.8%, which exceeded our guidance range of 0.25% to 0.75%.

The RevPAR gain was driven by a 1.3% increase in average daily rate and partially offset by a 0.5% decline in occupancy.

Our pro forma portfolio, once again, gained market share among its competitive set in 2018 with an average RevPAR index of 113.2, which represents a market share gain of 40 basis points, despite significant renovations at several of our largest hotels.

When excluding hotels under renovation, our pro forma portfolio posted an average index of 116.2 in 2018, resulting in a market share gain of 210 basis points.

For the full year, we reported adjusted FFO of $141.0 million, which represents a 5.1% increase as compared to 2017, and our adjusted FFO of $1.35 per share exceeded the high end of our guidance range of $1.31 to $1.34 per share.

As expected, Atlanta was one of our stronger markets in 2018, as RevPAR increased 19.0% for the full year and 10.0% in the fourth quarter, driven primarily by the continued ramp-up of the downtown AC Hotel by Marriott, which has been extremely well received by guests and is ramping quicker than we had forecasted.

Our Courtyard hotel in the same downtown submarket grew RevPAR over 7.0% in 2018, as both hotels significantly outperformed the broader Atlanta market growth of 2.6%.

RevPAR at our Residence in Midtown increased 8.5% in the fourth quarter, dramatically exceeding a 5.5% decline in the competitive set, as several recent revenue management initiatives are beginning to gain traction and positively influence our ability to gain market share.

As we mentioned on last quarter's call, the recently opened Hyatt House Orlando achieved a fair market share in its first month after being opened. The hotel achieved 128% RevPAR index in the fourth quarter, and has increased market share each month since opening.

We had a tremendous year in our other South Florida hotels as well. The hotels located in Miami, Tampa and our Orlando Hyatt Place posted a combined RevPAR growth of 4.8% for the year, which compares favorably to the competitive set average increase of 1.4% and results in an average market share gain of 340 basis points.

Our six Minneapolis hotels posted combined RevPAR growth of 10.7% for the year, largely driven by the city hosting Super Bowl 53 in the first quarter but also as a result of a strong convention calendar that aided better group demand throughout 2018. In general, the market was strong throughout the year as the new supply that negatively influenced the market in 2017 continues to get absorbed. Our hotels were outperformers, gaining 250 basis points of market share relative to their respective competitive sets and outperforming the broader Minneapolis market by nearly 4.0% on a combined basis.

The recently acquired Residence InnCleveland Downtown delivered RevPAR growth of 9.1% for the year compared to the Cleveland market increase of 6.8%, benefiting from limited new supply and strong demand from conventions and special events.

We made significant progress on our capital recycling program in 2018, as we completed the sale of 8 hotels for aggregate sale proceeds of $106.8 million, which represents a 7.7% cap rate on trailing twelve-month NOI including estimated CapEx.

Net proceeds from dispositions were partially redeployed into the acquisition of the 150-room Residence Inn Boston Watertown for $71.0 million and it has an expected year 1 yield of over 8.0% on our cost basis.

This further validates our ability to recycle capital into high-quality, well-located hotels that provide stronger growth profiles and generate superior, risk-adjusted returns.

In addition, yesterday, we announced that on February 12th, we completed the sale of our Holiday Inn Express and Country Inn & Suites in Charleston, West Virginia. The combined sale price of $11.6 million equates to a 7.4% cap rate on trailing-twelve months NOI as of December 31st, including estimated capEx requirements for brand-mandated PIP items.

The two hotels had an average RevPAR of $80, which was 34% lower than our pro forma portfolio RevPAR and Hotel EBITDA margin of 33.3%, which was 370 basis points lower than the portfolio average for the same period.

During 2018, we invested $66.6 million into our portfolio, including comprehensive renovations at our Holiday Inn Express & Suites, Fisherman's Wharf and our Marriott in Boulder as well as several change of ownership PIPS related to 2017 acquisitions.

This was a particularly active year for us with capital expenditures, partially driven by an acceleration of our project timeline in San Francisco to ensure completion ahead of the Moscone Center reopening. These projects in total displace roughly $3.5 million of revenue throughout the year, which lowered our reported RevPAR growth by approximately 70 basis points.

Based on our capital plans going forward, we expect this headwind to reverse in 2019. Over the last 5 years, we have invested over $200 million into our portfolio, and the 75 hotels that we own today have an average effective age of approximately 3.5 years, further proof to our commitment to maintaining a high-quality portfolio where guests want to stay.

With that, I'll turn the call over to our CFO, Jon Stanner.

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Jonathan P. Stanner, Summit Hotel Properties, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Dan, and good morning, everyone. For the full year 2018, we reported pro forma hotel EBITDA of $205.9 million and margin contraction of 81 basis points to 37% in our pro forma portfolio. Larger contraction was primarily the result of: rising labor costs, which drove operating expenses on a per occupied room night basis up 2.9% for the year, a 9.3% increase in property taxes driven by 2017 acquisition activity, and 10 basis points of displacement from the renovation activity Dan just described.

Adjusted EBITDAre was $196.5 million, the highest in the company's history, which represented an increase of 9.1% from 2017.

In the fourth quarter, our pro forma hotel EBITDA decreased just under 1.0% to $47.1 million compared to the fourth quarter of 2017. As a result, pro forma hotel EBITDA margin contracted by 61 basis points to 35.5%. Our balance sheet continues to improve and is well positioned with no significant maturities until November of 2022 and current liquidity of more than $300.0 million.

At year-end, we had total outstanding debt of $965 million with a weighted-average interest rate of 4.27%. We ended 2018 with net debt-to-pro forma trailing twelve-month adjusted EBITDA of 4.7x, which has been slightly reduced by our recently closed asset sales.

Today, more than 80% of our portfolio EBITDA is unencumbered, as we continue to make great progress assembling a highly-flexible, low-cost balance sheet. We were very active in the capital markets in 2018 as we raised $825 million of debt capital to replace existing term and mortgage loans. That includes the previously announced $600 million unsecured credit facility comprised of a $200 million term loan and a $400 million revolver that we closed in December.

The new facility increased our borrowing capacity by $150 million, reduced interest expense, extended maturity dates and broadened our bank group. On December 31, we repaid four mortgage loans without penalty with an outstanding balance of $107 million and a 5.2% interest rate that we're set to mature in 2019, further reducing our overall borrowing costs and extending our weighted average length of maturity to nearly 5 years.

In addition, we executed two interest rate swaps, totaling $200 million that became effective prior to year-end. As a result, approximately 60% of our total debt is fixed-rate today. On February 1st, we declared a quarterly common dividend for the fourth quarter of 2018 of $0.18 per share or annualized $0.72 per share.

The annualized dividend results in an attractive dividend yield of 6.2% based on the closing stock price as of February 25th and a manageable AFFO payout ratio of approximately of 56% at the midpoint of our 2019 outlook.

Before getting into the details of our 2019 guidance, you will see in our press release that we will be providing annual earnings guidance only going forward, which we believe better aligns with how we think about our business and creating long-term value for shareholders.

We remain committed to providing great transparency and have introduced adjusted EBITDAre guidance as an additional relevant metric to judge the performance of our business. As we have always done, we will continue to have an intense focus on daily, weekly and monthly results. And we believe, our transition to annual guidance will alleviate some of the undue focus on short-term results.

As you would expect, we plan to update our annual earnings guidance on a quarterly basis. Our 2019 guidance includes 75 hotels in our pro forma portfolio following the sale of the two hotels in Charleston, West Virginia. In our release, you will see that we provided full year 2019 guidance for adjusted FFO of $1.22 to $1.34 per share, pro forma and same-store RevPAR growth of 0.0 to 3.0% and adjusted EBITDAre guidance of $186.7 million to $199 million.

We've incorporated capital improvements of $40 million to $60 million, which includes both renovation and recurring capital expenditures. This capital expenditure activity is forecasted to result in a RevPAR displacement of approximately 50 basis points for the full year 2019.

No additional acquisitions, dispositions, equity raises or debt transactions, beyond those previously mentioned, are assumed in the full year 2019 guidance.

With that, I will turn the call back over to Dan.

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [5]

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Thanks, Jon. In summary, we continue to be optimistic about the outlook for 2019 and for the future of Summit. And with that, we'll open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Chris Woronka with Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [2]

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Wanted to ask, Dan, as you guys kind of scrub your markets and the pipeline in those markets, do you get the sense that thing -- anything that's kind of on the board in terms of competitive supply? Are you seeing any kind of projects getting delayed or deferred or canceled?

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [3]

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Yes, I think while building costs haven't been rising as fast they have in the past, they -- lumber clearly has been down significantly, but the actual cost to construct hotels is not going down. So just that number in itself, at some level, changes a lot of the underwriting, so we do see delays in restructuring of deals. And I think, we're starting to see that pipeline slowing for the foreseeable future.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [4]

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Okay, great. And then just on your acquisition pipeline, can you give us maybe an update on what the volume of that looks like, and if pricing expeditions have moved much at all?

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [5]

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This is Dan. Pricing expectations really haven't moved much for us. It's very competitive. We're still active in the market. I think we expect to be more of a net seller this year. But as we kind of telegraphed and demonstrated in '18 and '19 that favorable transaction environment and pricing kind of leads us down that path to be a net seller. We do see opportunities from time to time. And I think, we'd expect dispositions really to reduce our leverage over time. That'd be really a priority for sales proceeds. But to the extent that we have capacity, as always, we'd certainly entertain ways to create long-term value through some acquisitions, but as far as the environment, we really haven't seen much change in pricing, it's been pretty stable.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [6]

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Okay, great. Just quick one for -- probably for Jon. Appreciate the introduction of EBITDA guidance. Should we assume that margins are still probably running negative this year at the mid and lower points of the RevPAR range?

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Jonathan P. Stanner, Summit Hotel Properties, Inc. - Executive VP, CFO & Treasurer [7]

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Yes. I think that's fair. I think we probably bracket flat to down 100 basis points, depending on where we fall within our RevPAR guidance range.

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Operator [8]

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And our next question comes from the line of Wes Golladay with RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [9]

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Looking at your portfolio, you have the average age of 3.5 years. Is there any more noncore assets left?

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [10]

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Wes, this is Dan. There's really not. I think, the Charleston assets were probably the two that more specifically didn't look like the others. They were great assets for a great number of years. We don't look at it as much but noncore as we do, I think, the opportunity. If we see an opportunity to sell something at pricing that we see is fully valued and we can redeploy that either to reduce leverage or to look at other opportunities at greater returns, we look at it more that way. But I wouldn't look at anything in our portfolio at this point as noncore.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [11]

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Okay. And then we see some questions regarding the underperformance of the upscale segment the last few quarters versus upper upscale. How much of this, do you think, is the function of the difficult storm comps versus actual maybe some structural issues?

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [12]

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I think the majority of it is either related to storm comps. Everything is much more market-specific, as the lines between full service and select-service and upper upscale and upscale have blurred. So I look at it as more of a market-specific or event-specific softness.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [13]

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Okay. Now a last one. When you look at your markets this year, what are going to be -- what will be some of your stronger markets and weaker markets?

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [14]

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I think the usual suspects. Clearly, San Francisco, we've done a lot of renovation work there. So with the strong convention calendar at the Moscone Center, I think San Francisco should be a good market for us. Atlanta should continue to be a good market. In addition to having the Super Bowl, they have got a strong convention calendar. And then there is a few of our hotels that are coming online from renovations like Boulder -Marriott, and then the Hyatt House in Orlando continues to ramp and be strong. So I think those are the, kind of, the key ones that would jump up.

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Operator [15]

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Our next question comes from the line of Michael Bellisario with Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [16]

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Dan, how should we think about the 0 to 3% guidance range for 2019? The same as last year, but results came in toward the low end. So maybe what's different today? And what gives you more confidence that '19 should be better than '18 for your portfolio?

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [17]

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That's a good question, Mike. I think as we look today, there are some things that are little different than last year. We're not faced with as much renovation disruption, which I think is helpful. And every year as we continue to cycle through some of these renovations, and they start to come back online and our revenue and asset management team get to work, setting strategy. I think that creates much more opportunity to kind of move the needle and manage the business. So I think, certainly, we've got -- at this point, while it's still early in the year, have a great confidence in the range.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [18]

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Got it. And then just back to Chris' question on the transaction market. One of your peers talks about seeing a portfolio premium, kind of, come back into the market. Do you agree with that? And do you think one-off and two-off transactions for you on the disposition side are still best execution today?

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [19]

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Yes. I mean buyers come in all shapes and sizes, and each transaction, at some level, is fairly unique. It does appear there's -- at this point, there's more of a market for a one-off or a large portfolio, but that's really just this moment in time, and that could easily change. So, I think we could see some smaller portfolios with the same aggressive pricing too. The reality, I think, is that the strong demand for these type of assets is kind of validation that they do have a better operating model and are much more desirable.

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Operator [20]

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(Operator Instructions) Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [21]

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Just a question on the guidance as well. You're predicting RevPAR growth to be consistent with the overall projections for the upscale segment despite the underperformance you had versus U.S. upscale hotels in 2018, and I know you mentioned market mix and renovations being some of the disruptive factors in 2018, but maybe similar, what gives you the confidence that you're going to achieve similar growth? Is there something specific you see in your markets this year?

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Jonathan P. Stanner, Summit Hotel Properties, Inc. - Executive VP, CFO & Treasurer [22]

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Yes, Austin it's Jon. Look, I think, we really hit on it. I do think we've got a favorable market mix as you mentioned, two of our top five markets from exposure perspective are Atlanta and San Francisco, which are both expected to be very strong markets. Renovation was a headwind in 2018. We think that'll flip to be a slight tailwind for us in 2019. And, as Dan said, I think we still, kind of, continue to see some of the benefits of what we've acquired over the last couple of years, whether it's the build-out of the Hyatt House in Orlando that continues to ramp, the continued ramp of the AC in Atlanta, some of the other stuff that we bought in 2017 and 2018. I think, those all -- those benefits continue to accrue in 2019, and we feel good about where the range is at.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [23]

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Appreciate that. And then switching to expenses. Despite the fact that RevPAR growth was negative in the fourth quarter, you really had one of your best quarters on expense containment for the full year. And you're forecasting better RevPAR growth for the full year in 2019, yet expect a similar type decline in expenses. So curious what the moving pieces are there between what you achieved in the fourth quarter and what your outlook is for the full year in '19?

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Jonathan P. Stanner, Summit Hotel Properties, Inc. - Executive VP, CFO & Treasurer [24]

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Yes, we did have a good fourth quarter. I think flow-through and retention was strong in the fourth quarter. I think the margin guidance reflects somewhat of a continuation of the same operating environment that we operated in for most of 2018. Labor markets are still tight, labor costs are going up. We do expect to still see some increases in property taxes, certainly not to the magnitude that we saw in 2019. But our expectation is property taxes increase in kind of mid-single-digit range.

So I think flat to down a 100 basis points is the right kind of margin range for us at this point. Obviously, hope we do better as we go through out the year. But again, I think it's a very a similar operating environment this year as we had in 2018 from an expense perspective.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [25]

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Okay, appreciate it. And then would you care to or be willing to provide your RevPAR trends year-to-date?

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [26]

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No, we typically don't do that. I would say that as we see the markets so far this year, it does feel stable. We haven't seen volatility at this point that would give us any concern about guidance or outlook. But we do feel good about what we've seen so far.

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Operator [27]

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And I'm showing no further questions at this time. So with that, I'll turn the call back over to Chairman, President and CEO, Mr. Dan Hansen for closing remarks.

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Daniel P. Hansen, Summit Hotel Properties, Inc. - Chairman, President & CEO [28]

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Thank you, all, for joining us today. We continue to see opportunities to create value for shareholders through our thoughtful capital allocation in the premium hotels, which today's guest love. Our renovated properties and operational expertise continue to deliver strong results, and we're looking forward to 2019 and beyond. Hope you have a terrific day and look forward to talking again next quarter.

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Operator [29]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.