Summit Hotel Properties, Inc. (NYSE:INN) Q3 2023 Earnings Call Transcript
Summit Hotel Properties, Inc. (NYSE:INN) Q3 2023 Earnings Call Transcript November 2, 2023
Operator: Good day and thank you for standing by. Welcome to the Summit Hotel Properties Q3 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I’d 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.
Jon 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 one quarter 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 non-core 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.
Trey 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 room night 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 non-operational 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 will open the call to your questions.
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