Summit Hotel Properties, Inc. (NYSE:INN) Q4 2023 Earnings Call Transcript
Summit Hotel Properties, Inc. (NYSE:INN) Q4 2023 Earnings Call Transcript February 29, 2024
Summit Hotel Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Summit Hotel Properties Q4 2023 and Full Year Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Wudel, Senior Vice President of Finance, Capital Markets and Treasurer. Please go ahead.
Adam Wudel: Thank you, Dede, 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, February 29, 2024, 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.
Jon Stanner: Thanks, Adam, and thank you all for joining us today for our fourth quarter and full year 2023 earnings conference call. 2023 proved to be another highly successful year for Summit, culminating with strong fourth quarter results. For the full year, RevPAR increased 6.6%, which outpaced the broader industry by 170 basis points, and resulted in hotel EBITDA and adjusted EBITDAre growth of approximately 6% and 5%, respectively. We continue to enhance the overall quality of our portfolio through strategic acquisitions while disposing of non-core assets with meaningful near term capital investment needs, and we have methodically refinanced approximately $1 billion in bank debt over the past 10 months, further improving the balance sheet and our ability to execute on important strategic initiatives.
Today, Trey and I will discuss our 2023 financial results, our outlook for 2024, and how our recent capital allocation and balance sheet activities position Summit for growth moving forward. Fundamentals continue to improve across our portfolio in 2023 as RevPAR across all segments experienced positive growth despite the normalization of leisure travel witnessed throughout the year, most notably in the summer months. Robust demand in group and negotiated business drove 12% and 7% RevPAR growth in those segments, respectively as travel to urban markets continued to accelerate. Full-year pro forma RevPAR growth of 6.6% was comprised of roughly equal increases in occupancy and average rate. While average daily rates in the portfolio are more than 5% ahead of 2019, occupancy continues to trail prior peak levels, creating meaningful opportunity for continued growth, particularly given our exposure to urban markets that have been slower to recover.
RevPAR growth in our portfolio is increasingly driven by midweek demand as weekday RevPAR for the full year increased over 9% compared to 2022, a trend that's accelerated throughout the year and helped partially offset the normalization of leisure demand that has driven weekend RevPARs to all-time highs. More specifically, RevPAR on Tuesdays and Wednesdays increased by 11% year-over-year, again, primarily driven by the strength in the Group and Negotiated segments. The stable operating trends we experienced throughout the fourth quarter have continued in early 2024 with preliminary January RevPAR increasing approximately 5% year-over-year. We expect February to finish relatively flat to 2023, in part driven by the challenging Super Bowl comparison in Phoenix last year, where we own five hotels.
Non-rooms revenue increased 15% in 2023 driven primarily by a 20% increase in Food & Beverage revenue. Midweek occupancy gains driven in part by robust group demand facilitated healthy, banquet and catering revenue growth and higher in house outlet utilization. Other non-rooms revenue increased as a result of successful parking contract renegotiations, increased resort fee capture and various other opportunistic strategies that were deployed. Growth in the NewcrestImage portfolio which we have now owned for approximately two years continues to be a key driver of our results as full year 2023 RevPAR increased a robust 13%, driving a 15% increase in hotel EBITDA. Group and Negotiated demand were again the primary drivers of our top line growth which generated RevPAR increases of 25% and 17%, respectively, in those segments for the year.
As we have highlighted on prior calls, our ability to deploy cluster sales strategies alongside the benefit of participating in our first traditional corporate RFP process drove the NCI portfolio's RevPAR index to 112% in 2023. This represents a 530 basis point improvement from 2022 driven by index gains in the second half of the year that approached 700 basis points. The performance of the NCI portfolio further validates our conviction in this transformational transaction and highlights our ability to appropriately identify and underwrite opportunities as well as develop and implement effective business plans for high-quality, well-located hotels. These assets have clearly been a bright spot in our portfolio and we remain encouraged by the demand trends in these markets and are optimistic in our ability to gain additional market share and improved profitability, positioning the portfolio to deliver continued outsized growth in 2024 and beyond.
Expense pressures broadly began to moderate in 2023, particularly in the second half of the year as the operating environment continues to normalize. Operating expenses increased by only 2% per occupied room in the fourth quarter despite revenue growth that was driven primarily by occupancy gains. Operating expenses per occupied room in the second half of 2023 were approximately 2% lower than the first half of the year, and year-over-year, operating expense growth decelerated from 8.5% in the first half of the year to a mere 1.4% in the second half of the year on a per occupied room basis. We anticipate continued stabilization in the labor environment in 2024 and believe there is further opportunity for improved productivity and flow through with reduced reliance on contract labor and lower turnover, which remain well above 2019 levels.
Capital allocation remains a key strategic priority and 2023 was another successful year from a capital recycling standpoint as we improved the overall quality of our portfolio through several strategic transactions. In 2023, we closed on the sale of five hotels in the suburbs of Chicago, Minneapolis and Baltimore, and subsequent to year-end, through our joint venture with GIC, we sold our Hyatt Place in Plano, Texas. In aggregate, these six non-core hotels were sold for gross proceeds of $46.6 million at a blended cap rate of 4.3% based on the trailing 12-month net operating income at the time of sale. When adjusted for the approximately $31 million of foregone CapEx, the blended cap rate was 2.6%. These hotels generated a weighted average trailing twelve-month RevPAR of $73 at the time of sale, a 40% discount to our pro forma portfolio.
Our non-core dispositions were supplemented by two strategic acquisitions in our joint venture with GIC. In the second quarter, we acquired the 120-guest room Residence Inn Scottsdale North and the 47-guest room Nordic Lodge in downtown Steamboat Springs for a total of $42.7 million. Collectively, these two hotels generated an average 2023 RevPAR of $137, a 14% premium to the pro forma portfolio and nearly double the blended RevPAR of the six sold hotels. These hotels require minimal near term capital expenditures, but offer future high ROI capital investment opportunities and complement our existing exposure in their respective markets, allowing our operations team to create or enhance sales clusters and complex various staffing positions to generate outsized RevPAR growth and return profiles.
On a combined basis, we expect these hotels to generate a yield on cost of over 9% in 2024 as benefits from our asset management initiatives begin to materialize. Before I turn the call over to Trey, let me provide a quick overview of our 2024 outlook. Our full-year RevPAR growth range of 2% to 4% reflects a stable demand outlook and assumes the broad continuation of operating trends we experienced in the second half of 2023. Specifically, we expect continued strength in midweek demand, particularly in urban markets, which constitutes 50% of our portfolio exposure. We also expect to benefit from strong Group demand, which accounts for approximately 15% of our room night mix, driven by a combination of small, self-contained events, which in many cases are a function of a more prevalent hybrid work environment, compression from citywide events and general overflow from full-service hotels.
Our RevPAR outlook also reflects the continued normalization of leisure demand, which faces difficult year-over-year comparisons, particularly in the first half of the year, but remains quite strong in a historical context. Finally, we believe our portfolio is positioned to outperform the broader industry again, in part given our exposure to several urban markets that have been slower to recover, including the San Francisco Bay Area, New Orleans, Minneapolis, Baltimore, and Louisville, where combined, hotel EBITDA at our 19 hotels in these markets remains approximately $25 million below 2019 level. Broader macroeconomic risks always exist in our business and as is our custom, we are providing guidance that assumes a continuation of today's stable economic conditions.
While we expect the moderation of expense growth we experienced in the second half of 2023 to continue in 2024, our hotel EBITDA guidance range assumes 4% to 5% annual operating expense growth as a portion of our RevPAR mix is driven by occupancy gains and certain expenses in our business continue to grow at above inflationary levels. This results in positive year-over-year hotel EBITDA growth and modest EBITDA margin contraction at the midpoint of our RevPAR growth range. Lastly, based on our current view of the transaction market, we expect to be a net seller of assets in the first half of the year. However, we do believe the transaction environment will improve throughout the year, and given the progress we've made on the balance sheet, we believe we will be positioned to take advantage of acquisition opportunities as they arise.
With that, I will turn the call over to our CFO, Trey Conkling.
Trey Conkling: Thanks, Jon, and good morning, everyone. Throughout 2023, RevPAR within our portfolio improved across all location types, most notably within our urban and suburban portfolios, which produced RevPAR growth of 9% and 8%, respectively for the full year. Growth in our urban and suburban portfolios was driven by several of our larger Sunbelt markets such as Houston, Dallas-Fort Worth and Atlanta, which comprise approximately 25% of our pro forma key count and generated RevPAR growth of 26%, 17% and 13%, respectively, for the full year. Despite this significant growth in 2023, nominal RevPAR in our urban and suburban portfolios remains low 2019 levels, leaving continued opportunity for outsized future growth. Today, our urban and suburban hotels comprise approximately 75% of our pro forma guest room count.
Turning to our resort and small town metro assets, full year 2023 RevPAR growth was approximately 3% as leisure demand remained steady but below the peak growth rates experienced in 2022, RevPAR performance in both of these location types continues to perform meaningfully above 2019 levels, a trend we expect to continue. Resort and small town metro assets account for 15% of our pro forma guest room count. Pro forma Hotel EBITDA for the full year 2023 was $260.5 million, an increase of 6% to 2022. This translated to full-year adjusted EBITDA of $190 million, an increase of 5% to 2022. Adjusted FFO for the full year 2023 was $112.8 million or $0.92 share. Moving to the fourth quarter, pro forma RevPAR increased 2.9% year-over-year, an acceleration from our third quarter RevPAR growth of 2.4%, driven by a 2.4% increase in occupancy and a 0.4% increase in average rate.
This resulted in fourth quarter market share improving year-over-year by more than 300 basis points to 116%. By comparison, for the full year, RevPAR index for our pro forma portfolio was 113%, an increase of nearly 200 basis points from the prior year. Similar to the full year, fourth quarter, pro forma RevPAR growth was driven by growth in our urban and suburban portfolios, which produced RevPAR increases of 5% and 4%, respectively. Key markets driving fourth quarter growth include Dallas, Atlanta, Boston and Oklahoma City, all of which significantly outpaced the pro forma portfolio. RevPAR growth for our resort and small town metro assets remained relatively flat to fourth quarter 2022. Furthermore, fourth quarter performance was largely driven by strong weekday RevPAR growth of approximately 6%.
Weekday growth in our portfolio resulted from better-than-expected demand in the Group segment, which generated fourth quarter RevPAR growth of 10% and in turn, allowed us to deploy strategies targeting the higher rated retail segment, for which RevPAR increased approximately 8% in the quarter. This continues a trend from the third quarter, where meaningful corporate and small group demand, particularly in our urban portfolio, have served as catalysts to portfolio RevPAR and non-room revenue growth. Our asset management team continues to deliver strong results in a challenging operating environment, particularly on the labor front. FTE's remained relatively stable in the fourth quarter and we continue to operate with FTE counts approximately 20% below 2019 levels on average.
Further evidence of an improving labor market is the continued decline in contract labor utilization. Contract labor expense in the fourth quarter declined 10% on a per occupied room basis from the prior year, and over 3% sequentially from third quarter 2023, and now represents the lowest absolute contract labor spend since the first quarter of 2022. That said, nominal contract labor does remain approximately 2 times that of 2019 levels, indicating there is additional progress to be made. Wage growth also moderated throughout 2023, with nominal wages in the fourth quarter essentially flat to the third quarter. All of this translated to a cost per occupied room increase of just 2% in the fourth quarter on a year-over-year basis, a trend we expect to continue into 2024.
Pro forma Hotel EBITDA for the fourth quarter 2023 was $62.4 million, which is essentially in line with fourth quarter 2022. This translated to fourth quarter adjusted EBITDA of $46.4 million, an increase of approximately 1% to the prior-year period. Adjusted FFO for the fourth quarter was $26.9 million or %0.22 share. Turning to the balance sheet, to recap our recent capital markets activities, we successfully refinanced our $600 million senior unsecured credit facility in June and our $200 million senior credit facility for the GIC joint venture in September. Both of these refinancings maintain their previous interest rate pricing grids and have fully extended maturity dates of June and September 2028, respectively. Earlier this month, we completed a new $200 million senior unsecured term loan with a fully extended maturity date of February 2029, and an interest rate pricing ranging from 135 basis points to 235 basis points over the term SOFR.
Proceeds from the $200 million financing along with asset sale proceeds, cash on hand and our revolver were used to retire our $225 million term loan, scheduled to mature in February of 2025. We now have no significant maturities until 2026. The Company continues to be proactive in managing interest rate risk. In March 2023, we entered into two $100 million interest rate swaps, fixing one month term SOFR at 3.354% through January 2026 for floating rate debt within our GIC joint venture. In January of this year, we entered into an additional $100 million interest rate swap, fixing one month term SOFR at 3.765%, which is nearly 150 basis points below the current SOFR rate. This also is for floating rate debt within our GIC joint venture. The latest swap becomes effective in October of 2024 and expires in January of 2026.
Today, the net asset position of our swap portfolio is approximately $14 million. As a result of our interest rate management efforts, our balance sheet is well positioned with an average pro rata interest rate of 4.8% and approximately 75% of our pro rata share of debt is fixed after consideration of interest rate swaps at year-end 2023. When accounting for the Company's Series E, F and Z preferred equity within our capital structure, we are approximately 80% fixed. With no significant maturities until 2026, an average length to maturity of nearly four years and an overall liquidity position of approximately $400 million, we believe the Company is well positioned to achieve its growth objectives. From a capital expenditure standpoint, in the fourth quarter and for the full year 2023, we invested approximately $27 million and $90 million respectively in our portfolio on a consolidated basis and approximately $22 million and $73 million respectively on a pro rata basis.
In 2023, our design and construction team executed several transformational renovations including the Hilton Garden Inn Houston Energy Corridor, two Hyatt Places in Orlando, the Residence Inn downtown Portland, our Hilton Garden Inn San Jose Milpitas, the Spring Hill Suites downtown Dallas, the Embassy Suites Tucson, two Hyatt Places in South Denver, our Courtyard Metairie, New Orleans and finally our Staybridge Suites, Cherry Creek Denver. These newly renovated hotels, which comprise approximately 12% of our pro forma portfolio guest rooms, are now positioned for outsized growth and will continue to drive profitability, market share and ensure the quality and relative age of our portfolio. On January 25, 2024, our Board of Directors declared a quarterly common dividend of $0.06 per share, or an annualized $0.24 per share, which represents a dividend yield of approximately 4%.
The current dividend, which was increased by 50% throughout the year, continues to reflect a prudent AFFO payout ratio and balances ample room for continued increases over time while preserving liquidity for growth opportunities. Included in our press release last evening, we provided full-year guidance for key 2024 operational metrics in addition to certain non-operational items. This outlook does not include any additional acquisition, disposition or capital markets activity beyond what we have discussed today. For the full year, we anticipate RevPAR growth of 2% to 4%, which translates to an adjusted EBITDA range of $188 million to $200 million and an adjusted FFO range of $0.90 to $1 per share. At the midpoint of our RevPAR guidance range, we would expect hotel EBITDA margins to contract approximately 75 basis points year-over-year, which incorporates approximately 30 basis points of headwinds from higher property taxes.
We expect pro rata interest expense, excluding the amortization of deferred financing costs, to be $57 million, Series E and Series F preferred dividends to be $15.9 million, Series Z preferred distributions to be $2.6 million and pro rata capital expenditures to range from $65 million to $85 million. Finally, as previously mentioned, the increased size of the GIC joint venture results in fee income payable to Summit, covering approximately 15% of annual cash corporate G&A expense, excluding any promote distributions Summit may earn during the year. And with that, we will open the call to your questions.
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