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Summit Hotel Properties Inc (INN) Q4 2018 Earnings Conference Call Transcript

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Summit Hotel Properties Inc  (NYSE: INN)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Summit Hotel Properties Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instructions will be given at that time. (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.

Adam Wudel -- Senior Vice President of Finance and Capital Markets

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 27th, 2019, and we undertake no duty to update them later.

You can find copies of our SEC filings and earnings release, which contains 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.

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

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 disaster related 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% to negative 1%. 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 sets 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 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% for the full year and 10% 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 it's ramping quicker than we had forecasted.

Our Courtyard hotel in the same downtown submarket grew RevPAR over 7% in 2018, as both hotels significantly outperform the broader Atlanta market growth of 2.6%. RevPAR at our residents 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 the strong convention counter 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% on a combined basis.

The recently acquired Residence Inn Cleveland 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 eight hotels for aggregate sale proceeds of $106.8 million, which represents a 7.7% cap rate on trailing 12-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 million and it is an expected year one yield of over 8% 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 sales price of $11.6 million equates to a 7.4% cap rate on trailing 12-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 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 displaced 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 headwinds to reverse in 2019. Over the last five 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 prove to our commitment to maintaining a high quality portfolio, our guests want to stay.

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

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

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. Margin 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 9.2% increase in property taxes, driven by 2017 acquisition activity, and 10 basis points of displacement from the renovation activity, Dan just described.

Adjusted EBITDA -- our 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% 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 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 12-month adjusted EBITDA of 4.7 times, 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 31st, we repaid four mortgage loans without penalty with an outstanding balance of $107 million and a 5.2% interest rate that were set to mature in 2019, further reducing our overall borrowing costs and extending our weighted average length of maturity to nearly five 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 and 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 56% at the midpoint of our 2018 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 relative 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, and 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% to 3% 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 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.

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

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.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Chris Woronka with Deutsche Bank. Your line is now open.

Chris Woronka -- Deutsche Bank -- Analyst

Hey, good morning, guys. Want to ask Dan, as you guys kind of scrub the -- 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?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Yes, I think that while building cost have -- haven't been rising as fast, they have in the past, the lumber clearly has been down significantly, but the actual cost to construct hotels has not gone 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.

Chris Woronka -- Deutsche Bank -- Analyst

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

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

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'd expect to be more of a net seller this year, but as we kind of telegraphed and demonstrated in 2018 and 2019, 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 relate 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.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, great. And just a quick one for probably for Jon. Thanks, appreciate the introduction of EBITDA guidance. Should we assume that margins are still probably running negative this year that made in lower points of the RevPAR range?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

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.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, very good, thanks guys.

Operator

Thank you. And our next question comes from the line of Wes Golladay with RBC Capital Markets. Your line is now open.

Wes Golladay -- RBC Capital Markets -- Analyst

Hey, good morning, guys. Looking at your portfolio, you have the average age of 3.5 years. Is there any more non-core assets left?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Wes, this is Dan. This really not, I think, the Charleston assets were probably the two, in more specifically didn't look like the others. They are great assets for a great number of years. We don't look at it as much about non-core, as we do 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 of that way, but I wouldn't look at anything in our portfolio at this point as non-core.

Wes Golladay -- RBC Capital Markets -- Analyst

Okay, thanks. And then received 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?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

I think the majority of it is either related to storm comps, everything is much more market-specific, as the lines between (Technical Difficulty) 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.

Wes Golladay -- RBC Capital Markets -- Analyst

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?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

I think the usual suspects clearly San Francisco, we've done a lot of renovation work there. So, with a 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 have in the Super Bowl, they've got up strong convention calendar and then there is a few of our hotels that are coming online from renovations like a 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 out.

Wes Golladay -- RBC Capital Markets -- Analyst

Okay, thanks a lot.

Operator

Thank you. And our next question comes from the line of Michael Bellisario with Baird. Your line is now open.

Michael Bellisario -- Robert W. Baird & Co -- Analyst

Good morning, guys.

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Good morning.

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning.

Michael Bellisario -- Robert W. Baird & Co -- Analyst

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 is -- what's different today and what gives you more confidence that 2019 should be better than 2018 for your portfolio?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

That's a good question, Mike. I think as we look today, there are some things that are a 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 a -- at this point while it's still early in the year, have a great confidence in the range.

Michael Bellisario -- Robert W. Baird & Co -- Analyst

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?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Yeah, I mean, buyers come in all shapes and sizes and it's transaction at some level is fairly unique. It does appear there is -- 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 much more desirable.

Michael Bellisario -- Robert W. Baird & Co -- Analyst

That's all from me. Thank you.

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Thanks, Mike.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is now open.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Yeah. Hi, good morning guys. 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 US upscale hotels in 2018. And I know you mentioned market mix and renovations being some of the disruptive factors in 2018. But may be 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?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Hey, Austin, it's Jon. Look, I think we really hit on, and I do think we've got a favorable market mix as you mentioned on, two of our top five markets from exposure perspective, our Atlanta and San Francisco, which are both expected to be very strong markets. Renovation was a headwind in 2018, we think that it will 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, 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 ranges is at.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

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 of 2019?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, 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 operate 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 100 basis points is the right kind of margin range for us at this point. Obviously hope we do better as we go throughout the year, but again, I think it's a very similar operating environment this years as we had in 2018 from an expense perspective.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

I appreciate. And would you care to or be willing to provide your RevPAR trends year-to-date?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Now, we typically don't do that. I would say that as we see the market 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.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Okay. Thanks for taking my questions.

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Austin.

Operator

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

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

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 innovative 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.

Operator

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.

Duration: 26 minutes

Call participants:

Adam Wudel -- Senior Vice President of Finance and Capital Markets

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Chris Woronka -- Deutsche Bank -- Analyst

Wes Golladay -- RBC Capital Markets -- Analyst

Michael Bellisario -- Robert W. Baird & Co -- Analyst

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

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