Q3 2023 Summit Hotel Properties Inc Earnings Call
Participants
Adam Wudel; Senior VP of Finance & Capital Markets; Summit Hotel Properties, Inc.
Jonathan P. Stanner; President, CEO & Director; Summit Hotel Properties, Inc.
William H. Conkling; Executive VP & CFO; Summit Hotel Properties, Inc.
Austin Todd Wurschmidt; VP; KeyBanc Capital Markets Inc., Research Division
Chris Jon Woronka; Research Analyst; Deutsche Bank AG, Research Division
Michael Joseph Bellisario; Director and Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
William Andrew Crow; Analyst; Raymond James & Associates, Inc., Research Division
Presentation
Operator
Good day, and thank you for standing by. Welcome to the Summit Hotel Properties Q3 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, it will be a question-and-session. (Operator Instructions). Please be advised that today's conference is being recorded.
I now like to hand the conference over to your speaker today, Adam Wudel, Senior Vice President of Finance, Capital Market and Treasurer. Please go ahead.
Adam Wudel
Thank you, Victor, and good morning. I am joined today by Summit Hotel Properties President and Chief Executive Officer, Jon Stanner, and Executive Vice President and Chief Financial Officer, Trey Conkling. 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, November 2, 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.shpreit.com.
Please welcome Summit Hotel Properties President and CEO, Jon Stanner.
Jonathan P. Stanner
Thanks, Adam, and thank you all for joining us today for our third quarter 2023 earnings conference call. We were pleased with our third quarter results as pro forma RevPAR increased 2.4% compared to the third quarter of last year, driving a 2.6% increase in hotel EBITDA and essentially unchanged operating margins. Accelerating urban and midweek demand, led by improving business transient and strong group trends as well as continued outperformance within the NCI portfolio served as our primary growth catalyst in the quarter.
Urban and midweek demand trends in September and October were particularly strong, which resulted in September RevPAR growth of 3.6% and October is expected to finish generally in line with September, a reacceleration from July and August, more modest growth levels. RevPAR trends during those peak summer months were pressured by difficult year-over-year comparisons as leisure demand normalized and outbound travel to Europe search.
It is important to note that leisure demand remains strong in a historical context, illustrated by RevPAR in the retail segment of our portfolio, which is a reasonable proxy for the leisure transient customer still trending well above 2019 levels. The outlook for leisure demand broadly remains positive with more normalized comparisons coming next year. Group demand was especially strong during the third quarter, driving occupancy approximately 250 basis points higher than the third quarter of last year and a 12% increase in non-rooms revenue.
The evolution of hybrid and remote work environment has created increased demand for smaller groups with shorter-term stays and tighter booking windows, for which our portfolio is particularly well suited. Overall, pro forma total revenue for the portfolio increased 3.3% in the third quarter. Business travel typically accelerates post Labor Day, and we were encouraged with the clear upward trends in weekday performance, particularly Tuesday and Wednesday nights as indicators of growth in business transient and group demand. Since Labor Day weekend, Tuesday and Wednesday, absolute occupancy has reached 84%, driving nearly 10% year-over-year RevPAR growth on those days of the week.
Encouragingly, the operating expense environment continues to normalize and our team did a fantastic job during the quarter, controlling costs as operating expenses decelerated noticeably from earlier in the year on a per occupied room basis, driven in part by an approximately 20% reduction in contract labor year-over-year. Cost per occupied grow in our pro forma portfolio increased just 1% in the third quarter, a deceleration from the over 8% growth we experienced in the first half of the year, and we expect continued moderation in expense growth through the remainder of the year.
We continue to make important capital investments at our hotels to enhance our ability to drive RevPAR growth and gain market share. Recent renovation activity, combined with our boots-on-the-ground approach to asset and revenue management resulted in our third quarter RevPAR index increasing to 114%, a 230-basis point improvement from the third quarter of last year and a sequential 100 basis point improvement from the second quarter of this year.
Our portfolio's market share is at or approaching the highest level ever achieved outside of the pandemic years. The NCI portfolio once again produced particularly strong results in the third quarter as RevPAR increased 12% and hotel EBITDA increased 27% compared to the same period last year. Group a negotiated RevPAR within the NCI portfolio increased 24% and 23%, respectively. And midweek RevPAR increased 16% in the quarter, further highlighting the strength we see in business transient and overall weekday demand.
RevPAR index in the NCI portfolio also achieved a new post-acquisition high of 116%, increasing nearly 700 basis points from the third quarter of last year and further testament to the great work our team has done deploying cluster sales strategies and other operating initiatives across the 27 hotels. Our outlook for the NCI portfolio remains extremely positive, and we expect to continue to generate outsized RevPAR and EBITDA growth in the near term as these markets benefit from the favorable trends we identified during our underwriting process, driven primarily by the strength of the NCI portfolio, much of our recent EBITDA growth can be attributed to our successful acquisition activity coming out of the pandemic.
Since July of 2021, we've acquired 34 hotels for a total of approximately $1 billion. Collectively, these recent acquisitions generated third quarter RevPAR and EBITDA growth of 9% and 19%, respectively, and year-to-date RevPAR and EBITDA growth of 14% and 21%, respectively. Nearly all of these assets are relatively new developments with minimal near-term capital requirements. Our Texas markets, which in total represent more than 1/4 of our total room count, continue to be the strongest performers in our portfolio as RevPAR grew 12% in the third quarter, highlighted by Dallas and Houston, which generated RevPAR growth of 16% and 14%, respectively. In addition, several of our legacy hotels, particularly in urban markets, delivered outsized growth during the quarter.
Our best-performing legacy markets included Indianapolis, Boulder and Austin as well as encouragingly, certain markets that have been slower to recover, such as Kansas City, Minneapolis and Baltimore. Combined, these markets generated approximately 19% RevPAR growth in the quarter. We believe the next leg of our recovery will be more equally driven by our legacy hotels, which have a significant urban orientation and the majority of our exposure in markets that are earlier in their recovery cycle. We continue to successfully execute on capital recycling opportunities to increase the overall quality of the portfolio and its growth profile, minimize noncore capital expenditures and enhance our liquidity and balance sheet profile.
In September, we signed an agreement to sell our 123 guestroom Hyatt Place in Owings Mills, Maryland, for $8.25 million. The sale price equates to a 4.6% capitalization rate on the hotel's trailing 12-month net operating income at quarter end and a 2.9% capitalization rate inclusive of near-term deferred CapEx. The buyers earn us money is nonrefundable, and we currently expect the transaction to close prior to the end of the year. Since May of 2022, we've disposed of 6 hotels, inclusive of the pending sale of the Hyatt place. Sellings mills totaling $111 million and deferred approximately $33 million of near-term capital requirements.
The collective sale price for these hotels resulted in a blended capitalization rate on the trailing 12-month net operating income of less than 2%. -- although the transaction environment remains generally challenged, we continue to evaluate additional potential asset sales that we believe are similarly value accretive. Finally, Trey will provide the specifics of our changes in full year guidance, but I want to highlight we are increasing the midpoint of our EBITDA and AFFO guidance ranges while leaving the midpoint of our full year RevPAR guidance range unchanged, given strong third quarter results and our confidence in the forward outlook.
With that, I'll turn the call over to our CFO, Trey Conkling.
William H. Conkling
Thanks, Jon, and good afternoon, everyone. Looking across our various location types, the company's urban and suburban hotels were relative outperformers with third quarter RevPAR growth of 3.2% and 4.1%, respectively, driven primarily by the continued improvement in weekday demand. The urban portfolio continues to be driven by strong midweek demand, particularly the business transient customer, resulting in midweek RevPAR growth of approximately 7% in the third quarter and approximately 9% in the 4 weeks post Labor Day, respectively.
Group demand was also a significant catalyst for the urban and suburban portfolios, with third quarter group RevPAR increasing approximately 5% collectively. Group RevPAR within the urban portfolio specifically, is currently approximately 80% of 2019 levels, implying ample opportunity for continued growth moving forward. Today, Summit's urban and suburban hotels account for approximately 75% of our overall portfolio. The moderation in leisure demand was felt most acutely in our resort and small-town metro assets. where third quarter RevPAR was essentially flat to prior year, but a strong 108% recapture rate to 2019 levels.
We anticipate these hotels will continue to perform at levels well above 2019 results. Today, the resort and small-town metro segments account for approximately 15% of Summit's total portfolio. Overall, weekday demand growth was robust throughout the quarter, posting year-over-year RevPAR increases in all segments. Most notably, the retail and group segments, which make up nearly half of our current room night mix generated weekday RevPAR growth of 3.1% and 7.2%, respectively.
The retail segment, which captures various types of demand, including leisure and some business transient, remained the largest weekday Roomlia contributor and continued to post positive weekly ADR growth. Pro forma hotel EBITDA for the third quarter was $62.3 million, a 2.6% increase from the third quarter of last year. Hotel EBITDA margin for the pro forma portfolio contracted by only 25 basis points versus the third quarter of 2022 to 34.3% despite primarily occupancy-driven RevPAR growth. On a same-store basis, hotel EBITDA margin was 35.4%, with margin contraction of only 12 basis points.
The most notable headwind to EBITDA margin is the more than 40% increase in insurance premiums, which created a 65-basis point headwind to hotel EBITDA margin and was partially offset by several favorable property tax appeals. The timing of these property tax appeals represents a headwind in the fourth quarter of 2023 as we receive the benefit from our property tax appeals in the fourth quarter of 2022. Our margin performance in the quarter points to a more stabilized operating environment and labor base as well as strong operational oversight and cost containment at the asset level.
The company's FTE count per hotel stands approximately 20% below 2019 levels. And the company's utilization of contract labor declined by approximately 20% on a nominal basis year-over-year and 5% sequentially from the second quarter. In addition, hourly wages have stabilized since the beginning of 2023. We believe that moderating labor expense pressures and our efficient operating model will continue to benefit the company moving forward. Adjusted EBITDA for the quarter was $46.3 million, a 1.9% decrease compared to the third quarter of 2022.
Although pro forma hotel EBITDA increased 2.6% year-over-year -- 2.6% year-over-year, the modest decline in adjusted EBITDA was attributable to net transaction activity as we have been a net seller over the past 12 months as well as the relative contribution of our wholly owned portfolio and joint venture portfolios, in particular, the NCI portfolio, which saw meaningful outperformance during the quarter. Adjusted for net transaction activity over the last year, adjusted EBITDA was unchanged compared to the third quarter of 2022. We expect to see continued strength in our joint venture assets, particularly the NCI portfolio through the balance of the year.
Third quarter adjusted FFO was $26.5 million or $0.22 per diluted share compared to $30.9 million or $0.25 per diluted share in the third quarter of 2022. From a capital expenditure standpoint, in the third quarter, we invested approximately $20 million in our portfolio on a consolidated basis and approximately $16.6 million on a pro rata basis. For the year, capital expenditures on a pro rata basis now total approximately $52 million. The vast majority of this capital continues to be invested in guest-facing projects and includes comprehensive ongoing renovations at our Staybridge Suites Cherry Creek, Courtyard New Haven, Connecticut, SpringHill Suites Dallas Downtown, Embassy Suites Tucson and Hyatt Place Denver Tech Center.
We continue to ensure the quality and relative age of our portfolio positions the company to drive market share and improve operational results. And we expect the ongoing transformational renovations across our portfolio to drive outsized future growth. Turning to the balance sheet. Our current overall liquidity position remains robust at over $400 million. From an interest rate risk management perspective, our balance sheet is well positioned, including an average pro rata interest rate of 4.8%, and approximately 74% of our pro rata share of debt is fixed when accounting for the effect of interest rate swaps. When including the company's fixed coupon preferred securities, which carry a blended coupon of less than 6%, the balance sheet is approximately 80% fixed at a blended rate of just over 5%. Specific to the wholly owned portfolio, our hedging activity over the last year effectively fixes approximately 90% of wholly-owned indebtedness. In total, the company's $600 million swap portfolio fixes SOFR at an average rate of less than 3% and has an average duration of approximately 3 years.
In September, we successfully completed the refinancing of our $200 million GIC joint venture credit facility, which consists of a $125 million revolving credit line and a $75 million term loan. The fully extended maturity date of the credit facility is September 2028. And as a result, our average length to maturity increased to more than 3 years. So far this year, we have successfully refinanced $800 million of debt, which includes both the primary credit facility for the company and the GIC joint venture credit facility in what continues to be a challenging debt capital markets backdrop. We are thrilled that both executions maintain interest rate pricing with effectively the same terms as the prior facilities, and they continue to ensure the company has sufficient flexibility and liquidity to execute on our strategic initiatives.
For the balance sheet as a whole, with the exception of a $15 million property level loan due in December 2024, we have no other maturities until February 2025. On October 26, our Board of Directors declared a quarterly common dividend of $0.06 per share or an annualized dividend of $0.24 per share, which represents a dividend yield of approximately 4%. We -- the dividend continues to represent a prudent AFFO 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 Jon previously referenced, included in our press release last evening, we provided updated ranges on full year guidance for 2023 operational metrics as well as certain nonoperational items. This outlook does not include any additional transaction or capital markets activity. Based on the company's third quarter operating results as well as our future outlook, we are revising full year guidance across certain key metrics. Our full year RevPAR growth range has been narrowed to 6.25% to 7.75%, which implies no change to the midpoint relative to our previously stated full year RevPAR guidance.
This translates to an adjusted EBITDA range of $186.5 million to $191.6 million, an increase of over $1 million at the midpoint of our prior range and an adjusted FFO range of $0.89 to $0.93 per share, which also reflects an increase to the midpoint of the range. We expect full year pro rata interest expense, excluding the amortization of deferred financing costs to be approximately $55 million to $60 million. Series A and Series F preferred dividends to be $15.9 million, Series E preferred distributions to be $2.6 million and a revised pro rata capital expenditures range of $65 million to $75 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 may earn during the year. And with that, we'll open the call to your questions.
Question and Answer Session
Operator
(Operator Instructions). One moment for our first question. Our first question from the line of Austin Wurschmidt from KeyBanc Capital Markets.
Austin Todd Wurschmidt
Great. And I just wanted to start out just talking a little bit about the leisure segment. Jon, you mentioned it's been a little bit of a drag due to some of the comps and normalization. I'm just curious as you look out whether you expect that segment to reaccelerate next year or kind of perform even in line with overall industry forecast? Just trying to get some color around how you think things play out within leisure demand.
Jonathan P. Stanner
Yes. As -- thanks for the question. I think, generally, we think that leisure demand remains strong. And as we alluded to in my prepared remarks, but I think when you look at it in historical context outside of the year-over-year comparisons to last year, I think leisure demand generally still looks very, very good. I think we can expect leisure to remain strong. I think that the comp comparisons as we go into next year, get much more normalized.
So we -- I think we'll look back in several years and look at the rates that we were able to charge in 2022 as a bit of an outlier. And we saw that as we looked at our rates specifically in the third quarter in July and August, in particular. Those comparisons were very difficult. As we turn the calendar into 2024, we'll have much more normalized comparisons. And I think, again, absent anything dramatic happening in America, we think leisure demand remains stable.
Austin Todd Wurschmidt
Helpful. And then just as it relates to the transaction market, I mean, are you seeing any kind of positive changes there or greater depth in the buyer pool? And how big is the pool of assets that you're evaluating for sale today?
Jonathan P. Stanner
Yes. I think the transaction market has remained relatively unchanged. It's still pretty challenged. Rates are still higher. The buyer pool is still smaller than it was several years ago. We still continue to believe that the assets that we have sold and including the asset that we announced the pending sale of an Owens mills this quarter, that's still the most liquid part of the transaction market in our view, where you've got smaller check sizes of less requirements on debt capital markets. That's where we think the best execution can come. As we alluded to, we'll continue to opportunistically look for disposition candidates. We like the ability to sell lower cap rate assets that have larger deferred capital needs as a good way to redeploy those capital into other opportunities.
Austin Todd Wurschmidt
Is there a specific set of properties? Or could you kind of gauge what pool fits that criteria that you had just mentioned kind of smaller assets, upcoming CapEx needs and so forth.
Jonathan P. Stanner
Yes. I think you can look at, again, assets that look like the assets that we've sold this year. They're generally smaller. They require some CapEx. I think the common theme in all the assets that we've identified for sale has been kind of meaningful capital needs that we just don't feel like the return on capital is there. We think we can redeploy that capital into something that has a better return profile than the renovation of those assets. So, we haven't disclosed specific assets or the specific quantity of assets. But as you've seen again earlier this year, that's where our focus has been on the disposition side.
Operator
And one moment for our next question. Our next question will come from the line of Michael Bellisario from Baird.
Michael Joseph Bellisario
Jon, maybe a similar question to the last one, but maybe I'll ask it a different way. Just maybe how many hotels or how many dollars do you think you need to sell before maybe you can be back in acquisition mode or growth mode where the balance sheet isn't really a limiting factor? And do you think that could -- that inflection could occur in 2024? Do you think it will take a little bit longer?
Jonathan P. Stanner
Yes. Well, as I said, Austin, I'm hesitant to put a number or a number of hotels on it. I think we've said that on a net basis, we look opportunistically to dispose of some assets. That hasn't changed. We think that there are more in the portfolio where we can find opportunities to sell and redeploy that capital into better uses.
We would like to bring leverage down. We've made some progress on that. We like to continue to make more progress on that. We would like to get back to the point where we can be an opportunistic acquirer of assets as well as you alluded to. I do think that the potential for that exists as we get into next year. Again, I'm hesitant to put specific parameters around the number of assets of the magnitude of assets that would require. I think we want to make sure we maintain flexibility and continue to be opportunistic around how we think about deploying and redeploying that capital.
Michael Joseph Bellisario
Got it. Fair enough. And then it presumably we would see 2 or 3 or some number of dispositions likely before we would see an acquisition, so sort of net seller before any redeployment would come, correct?
Jonathan P. Stanner
Yes. Look, we've been a net seller of assets order in the last 12 months. I think we've acknowledged that we'd like to get our net debt-to-EBITDA ratios back down to our target ranges. Again, I want to be careful around commitments around timing, but that hasn't changed. We do plan to manage the balance sheet back down into our targeted leverage range...
Michael Joseph Bellisario
Got it. Fair enough. And then just next question for me. I just want to dig into the NCI portfolio. Maybe just the RevPAR growth in the quarter, how much was rate, how much was occupancy? Are you picking up business demand? Are you picking up leadership and really just kind of trying to understand the drivers of the growth and the recapture that you saw in that portfolio?
Jonathan P. Stanner
Yes. Look, obviously, it was a terrific quarter for MCI portfolio. It's been a terrific year for the NCI portfolio, and our EBITDA, and that portfolio is up over 25% year-over-year. And it's a little bit different asset by market, Mike. We see, for example, in the Dallas markets, we're getting great PC contribution. We're getting good strong contribution from group in those markets. Other area leisure oriented. So it's a little bit of mix. In terms of the mix of rate and occupancy, the majority of the increase has come from occupancy in the quarter, there has been -- we are positive in rates. We have some rate lift.
But as we expect and as we underwrote the ramp-up of these assets, we thought there was tremendous opportunity from a lift perspective, that's all starting to materialize. The team has done a really, really nice job putting in cluster sales strategies, other operating initiatives to drive these results. We've hit our all-time high from a RevPAR index within the portfolio, the highest the portfolio has ever achieved. And so it's been fairly broad-based. And again, I'd say the specifics are really market dependent, but we've seen it in all segments. We've seen it in the leisure segment. We've seen it in BT and we've seen it in some of the smaller group business in certain markets.
Operator
And one moment for our next question. Our next question will come from the line of Chris Woronka from Deutsche Bank.
Chris Jon Woronka
So, I think you mentioned in the prepared comments that your contract labor is down pretty meaningfully, I guess, 20% or something. That's great to hear. Is it possible that--I mean where do those folks come from? Are they from within the industry that you're replacing them with? Are they already in the industry and they're just kind of willing to take today's rate that the wage that they weren't willing to take a year ago? Or are there more folks coming into the worker pool?
Jonathan P. Stanner
Yes, we are seeing some expansion of the labor pool. I would say it's still tight. I would also say, again, it's really a credit to the team and the management companies that we work for. This has been an initiative since the beginning of the year. It is still a difficult labor market out there. So, to see a 20% year-over-year reduction in contract labor is very, very encouraging. It's still elevated. If I look at that percentage of our total labor relative to '19, you will still see the contract labor is higher than it was pre-pandemic. So, we're making progress. We're hopeful that we can continue to make incremental progress. But I do think it's broadly a function of while the labor markets are still tight, they have loosened to some extent through the course of the year. And so, we've seen a better influx of labor coming into our hotels.
Chris Jon Woronka
Okay. And then question for you on insurance. That's been a topic for a lot of your full-service peers. Of course, they're maybe a little bit more resort oriented and which has been where obviously a lot of the claims have come in. What does it look like for you guys? I mean I think everybody is up, but is it -- how much of a headwind is it this year? Or what do you expect for next year?
Jonathan P. Stanner
It was a material headwind for us. Our renewal date is February 1. Yes, I think as we said on prior calls, our insurance renewal was up around 40% year-over-year. The vast majority of that, as you would expect, was driven by higher property insurance renewal. Most of that -- we've absorbed most of that we're not quite on the calendar year end, but we're close -- it's too early to really guide towards what we think next year is going to look like we're just getting started going through that process. If I had to handicap it, I would say what will be less than the increase that we saw this year, but likely higher than inflationary expense growth next year.
Chris Jon Woronka
Okay. And then just last one for me is I think Hilton and Hyatt have both in recent quarters, announced some new extended stay products, and you guys own a little bit of the existing brands. Should we think about -- how do we think about you essentially -- again, it's not even in the ground yet, but are you willing to do more with those -- with both extended stay brands and with those two guys?
Jonathan P. Stanner
Yes. Look, I think all 3, Marriott Hilton and Hyatt have all announced new in and around mid-scale extended stay opportunities. We followed it very closely. We're good partners with all 3 of those brands. As you know, we're not natural developers. We don't do a lot of development activity. We do it kind of selectively throughout the portfolio, where there are some clear synergies and adjacencies to existing projects. But it's certainly something that we'll watch very closely.
We like the idea that the brands are embracing this kind of lighter labor type of operating models. Again, it's a natural extension for the types of assets that we own. And I think we're all well aware of how well Extended Stay has performed really since the pandemic. So, I do think there are interesting opportunities we'll certainly watch it. Again, we're not necessarily natural merchant builders or developers of these projects. But I do think it's interesting and something that we'll pay attention to.
Chris Jon Woronka
Okay. Very helpful.
Operator
One moment for our next question -- and our next question comes from the line of William Crow from Raymond James.
William Andrew Crow
A couple of questions for me. You talked about normalized comparisons heading into 2021. I guess against the backdrop of really strong margin performance quarter. I'm curious about what your thoughts are for expense growth next year when you put together the labor and the insurance and all the other factors.
Jonathan P. Stanner
Yes. Look, the first thing I would say is it's -- we're early, we're still going through the budget process right now. So, to say that we've got perfect sight lines into that at this time of the year would be a little premature. I do think as I just alluded to, I do think you'll see above inflationary growth in insurance costs again next year. I would just remind everybody that's roughly 5% of our total cost base. So thankfully, it's not the biggest driver of our overall cost. We have seen the biggest driver of overall cost, as you would expect, is on the labor side. we have seen wages moderate significantly this year.
I think our wages are up about 2% year-to-date versus where they were last year. That's been very encouraging. It's what helped drive what was really, really strong margin performance in the quarter. When you look at essentially flat operating margins on plus or minus 2.5% RevPAR growth and less than 1% expense growth per occupied room, you're seeing really, really strong control. So, I do think wages generally have stabilized. I think the expense growth outlook for 2024 is much better and much cleaner than it was when we looked at '23.
And again, you saw that in the transition from the second quarter to the third quarter, where we had significant expense growth in the second quarter because we had difficult expense comps from the second quarter of last year. Those operating models now have largely normalized. We will have a more normalized comparison as we look into next year. And again, we feel better that we're going to have expense growth that's going to look much more like kind of inflationary type of growth next year versus kind of the unique comparisons we had this year.
William Andrew Crow
Jon, that's helpful. Does that mean that kind of 2.5% RevPAR growth next year should generate those same sorts of flat margins?
Jonathan P. Stanner
Yes. Look, again, I don't want to get out kind of over our skis on where we think the year is going to translate. I would say that 2.5% RevPAR growth historically has been where we felt we could break even from a margin perspective, and that played out in the third quarter. I do think some of that was our ability to eliminate some contract labor. And I think some of that going forward is going to be what mix is generating that RevPAR par growth, the mix of rate and occupancy. We did it this quarter on essentially 0% ADR growth. It was actually slightly negative. We did it on all occupancy growth. My expectation is that we probably need a little bit more than that next year to break even on margins. But it's really premature to get too far into that conversation given where we are in the budget process.
William Andrew Crow
Sure. Two other quick ones from me. You talked about wanting to get potentially back into the acquisition side to face anything you're looking at from the glamping side? Or are the yield possibility in the future growth from traditional hotels just too attractive at this point?
Jonathan P. Stanner
No, the -- look, the yield on the glamping opportunities are still interesting. I think that we've announced that we have a development underway at our Fredericksburg asset, and then we do have a mezzanine loan that's outstanding that's part of the glamping opportunities. Beyond that, we've been focused on kind of the capital allocation priorities that we've talked about before. But the business continues to perform very well. The yield profile of the business is still very compelling.
William Andrew Crow
Finally, for me, the NCI portfolio continues to deliver terrific results. But it's also sitting in the kind of in the pathway of what's going to be the highest supply growth in the country. in the Dallas-Fort Worth metro books. I'm just wondering if you're now going to be kind of fretting over some of the supply deliveries? Or if you feel good that those particular assets are maybe a little bit more out of the way of that path of growth?
Jonathan P. Stanner
Yes. Look, I think the one thing that I constantly remind everyone of, when we talk about DFW is just how large and broad that market really is. And so, there are so many different pockets of the DFW market. And again, it is one of the higher supply growth markets in the country. It's obviously a really, really compelling supply growth environment broadly for the industry. I think when you break down and you look at what's going on in downtown Dallas versus -- great vine versus Frisco versus Fort Worth.
We don't -- we're not all that concerned about supply growth affecting next year in the portfolio. The comparisons get much harder. We've obviously had enormous revenue growth and EBITDA growth in that market this year. So, to think we can continue at the same growth rate next year is unrealistic. But we do feel really good that the outlook for that market, in particular from a demand perspective is extremely strong and are not particularly concerned with the broader supply numbers that are heading the DFW market. Our submarkets or specific micro locations in that market feel more insulated.
Operator
I'm not showing any further questions in the queue.
I would now like to turn the conference back to Jon Stanner, President and CEO, for closing remarks.
Jonathan P. Stanner
Well, thank you all for joining us today for the third quarter call. We look forward to speaking with many of you and seeing many of you in LA for NAREIT later this month. Thank you all.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.
