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#Thank you, Kevin, and good morning.
I am joined today by Summit Hotel Properties' Chairman, President and Chief Executive Officer, Dan <UNK>; Executive Vice President and Chief Financial Officer, Greg <UNK>; and Executive Vice President and Chief Investment Officer, <UNK> <UNK>.
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 2017 Form 10-K and other SEC filings.
Forward-looking statements that we make today are effective only as of today, February 22, 2018, and we undertake no duty to update them later.
You can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call, on our website at www.shpreit.com.
Please welcome Summit Hotel Properties' Chairman, President and Chief Executive Officer, Dan <UNK>.
Thanks, <UNK>, and thank you all for joining us today for our fourth quarter and full year 2017 earnings conference call.
As you know, 2017 was an extremely active year for us, as we completed nearly $600 million of high-quality acquisitions, sold 12 hotels for $120 million, raised $320 million of prominent preferred equity, and closed on nearly $275 million of debt financing transactions.
Overall, we're very pleased by the stronger-than-expected performance of our portfolio this past quarter that drove both top and bottom-line results above the high end of our guidance range.
We continue to believe that our portfolio of high-quality hotels in great locations with efficient operating models will garner an outsized share of the industry's demand growth and are encouraged by the operating trends that drove our financial results in the fourth quarter.
We remain optimistic that tax reform, strong demand and continuing economic improvement will benefit our portfolio of hotels with great locations and efficient operating models.
On a pro forma basis, we reported fourth quarter RevPAR growth of 5.5%, which was driven by a 4.9% increase in occupancy to 76.3%, 0.6% increase in average daily rate.
Our pro forma portfolio outperformed both the total U.S. lodging industry and the Upscale chain scale, and most importantly, continued to gain market share among its competitive sets in the fourth quarter with a RevPAR index of 115.6, which represents a 3.3% market share gain, while occupancy gains in the quarter were partially driven by hotels located near recent natural disaster affected areas.
Excluding these markets, RevPAR would have still increased a healthy 3.6%.
For the fourth quarter of 2017, we reported adjusted FFO of $31.5 million, an increase of 17.9% as compared to the same period of 2016.
And our AFFO of $0.30 per diluted share exceeded our guidance range of $0.26 to $0.29 per share.
For the full year, pro forma RevPAR increased 1.3%, which exceeded our guidance range of 0.25% to 0.75%.
The RevPAR gain was driven by a 1.4% increase in occupancy and partially offset by a 0.2% decline in average daily rate.
Our revenue management strategies continue to be effective as we once again increased our RevPAR index versus our competitive set by 1.6% for the overall portfolio.
For the full year, we reported adjusted FFO of $134.1 million, which represents an 8.4% increase, as compared to 2016.
And our adjusted FFO of $1.34 per share exceeded the high end of our guidance range of $1.29 to $1.32 per share.
A few of our better performing markets in 2017 included Portland, where RevPAR increased 6.6% as our 2 hotels continue to benefit from recent renovations and a still favorable supply and demand dynamic.
Our 2 Indianapolis hotels delivered outsized RevPAR growth of 8.9%, following recent renovations and the successful implementation of new group strategies.
This compares favorably to the comp.
set RevPAR growth of 4.2% and the Indianapolis market RevPAR growth of 3.3%.
Our 2 Houston hotels posted combined RevPAR growth of 7.5% for the year in large part due to the Super Bowl in the first quarter and demand related to Hurricane Harvey in the third and fourth quarters.
Our recently acquired Homewood Suites Tucson and Courtyard by Marriott at Yale University delivered RevPAR gains of 13.1% and 10.1%, respectively, highlighting our ability to find acquisition opportunities in higher growth markets.
In general, our acquisition portfolio outperformed as RevPAR grew 4.0%, compared to a 0.2% increase in our same-store portfolio.
In 2017, we acquired 14 hotels, totaling nearly 2,500 guestrooms for an aggregate purchase price of $586 million, which are all well positioned for future growth that we expect to lead the portfolio through 2018.
We continue to differentiate ourselves with capital recycling during 2017, as we completed the sale of 12 hotels for an aggregate sale proceeds of $120.2 million.
To date, all net sale proceeds from dispositions have been redeployed into high-quality, premium-branded hotels that we believe are well positioned to create long-term shareholder value.
Turning to capital expenditures.
During 2017, we invested $37.2 million into our portfolio on items ranging from common space improvements to complete guestroom renovations, including furniture, soft goods, fitness areas and bars.
Notably, the Marriott Boulder is currently undergoing a $6.7 million comprehensive guestroom renovation that includes the conversion of underutilized meeting space into 8 additional guestrooms.
The project is expected to be completed by the second quarter of 2018.
We also began a comprehensive guestroom renovation at our Holiday Inn Express & Suites in Fisherman's Wharf.
The project is expected to be completed in mid-2018 and will position the hotel well in anticipation of the reopening of the Moscone Convention Center.
Over the last 6 years, we've invested well over $200 million into our portfolio, and 83 hotels that we own today have an average effective age of approximately 3 years, further proof of our commitment to maintaining a high-quality portfolio where guests want to stay.
With that, I'll turn the call over to our CFO, Greg <UNK>.
Thanks, Dan, and good morning, everyone.
For the full year 2017, on a pro forma basis, we reported hotel EBITDA of $211.7 million and hotel EBITDA margin contraction of 136 basis points to 37.3% from 38.7% in the prior year.
The margin contraction was primarily as a result of elevated property taxes and the occupancy-driven RevPAR growth that drove variable expenses higher.
But excluding the 16% increase in property taxes, pro forma hotel EBITDA margin contracted by 59 basis points to 38.1%.
Our adjusted EBITDA grew to $180.1 million, an increase of 8.2% over the same period in 2016.
For the fourth quarter 2017, our pro forma hotel EBITDA increased to $48.8 million, an increase of 4% over the same period of 2016.
Pro forma hotel EBITDA margin contracted by 65 basis points to 35.8% from the same period in 2016.
Again, excluding the 22% increase in property taxes, pro forma hotel EBITDA margin expanded as expected by 39 basis points to 36.8% as compared to 2016.
Moving on to our balance sheet.
Our balance sheet continues to be well positioned with no maturities through 2018 and liquidity of more than $300 million as of year-end.
Throughout 2017, we continued to strengthen our balance sheet by laddering our debt maturities and reducing our cost of debt financing.
At December 31, 2017, we had total outstanding debt of $873.1 million with a weighted average interest rate of 3.89%.
We ended 2017 with net debt to pro forma trailing 12-month adjusted EBITDA of 4.1x, which continues to be well within our stated range of 3.5 to 4.5x.
Today, more than 65% of our portfolio EBITDA is unencumbered, which is proof of the progress we continue to make in assembling a highly flexible balance sheet.
Earlier this month, we announced a 5.9% increase in our common dividend to an annualized $0.72 per share, which is now yielding 5.1% and results in a prudent AFFO payout ratio of approximately 52% at the midpoint of our 2018 outlook.
Commensurate with our increased cash flow, this is the fourth dividend increase we have announced in the last 8 quarters and demonstrates the consistency and strength of our cash flow generated by our well-diversified portfolio of high-quality hotels.
With that, I will turn the call over to our Chief Investment Officer, and soon to be Chief Financial Officer, <UNK> <UNK>, to discuss the capital markets activity and guidance for 2018.
<UNK>.
Thanks, Greg.
As Dan previously mentioned, we were very active in the capital markets throughout 2017, raising nearly $320 million of common and preferred equity and nearly $275 million of debt capital.
Prior to the recent increases in interest rates, we were able to execute on a couple of timely transactions in a more favorable rate environment, which both lowered our overall borrowing costs, and gave us increased exposure to fixed rate capital, including issuing a $160 million of preferred equity at a 6.25% coupon, which is an all-time low for the lodging industry.
In conjunction with this issuance, we redeemed our $75 million, 7.875% Series B Preferred and recently announced the redemption of our $85 million, 7.125% Series C Preferred scheduled for March.
These transactions reduced our annual dividend, preferred dividend payments by nearly $2.0 million, resulting in perpetual accretion of approximately $0.02 per share.
We also executed $200 million of forward-starting interest rate swaps to lock in LIBOR at less than 2.0% for the next 5 years.
Including these swaps, our total debt is now approximately 70% fixed and well positioned to withstand further increases in interest rates.
Just yesterday, we announced the closing of a new 7-year, $225 million unsecured term loan that matures in 2025.
This is the largest ever unsecured 7-year bank term loan for a lodging REIT.
And with the support of our bank group, we were able to improve the pricing to a range of 180 to 255 basis points plus LIBOR depending on our leverage ratio.
Proceeds were used to replace our existing 7-year, $140 million unsecured term loan that was scheduled to mature in 2022.
The new term loan includes a 90-day delayed draw feature at no additional costs and allows for additional lender commitments of up to an aggregate of $375 million.
We drew an initial advance of $140 million on the facility to fund the repayment of the previous loan and intend to draw the remaining $85 million of commitment in March to fund the redemption of the Series C preferred.
Turning to guidance.
For 2018, in our release you will see that we provided full year 2018 guidance for adjusted FFO of $1.33 to $1.45 per share, a pro forma RevPAR change of 0% to 3% and same-store RevPAR change of negative 1.0% to positive 2.0%.
For the first quarter, we provided AFFO guidance of $0.28 to $0.31 per share.
Pro forma RevPAR growth of 0.0% to 2.0% and same-store RevPAR growth of negative 2.0% to 0.0%.
We've incorporated capital improvements of $45 million to $65 million, which includes both renovation and recurring capital expenditures.
Much of the increased capital spend is related to recently acquired hotels as well as some carryover projects from 2017.
This capital expenditure activity is forecasted to result in a RevPAR displacement of approximately 80 basis points in the first quarter and 50 basis points for the full year 2018.
Our guidance also assumes the redemption of the 7.125% Series C Preferred Stock for approximately $85 million in the first quarterand the opening of 168-room Hyatt House Orlando Universal Studios hotel in the third quarter.
No additional acquisitions, dispositions, equity raises or debt transactions beyond those previously mentioned are assumed in the first quarter or full year 2018 guidance.
With that, I will turn the call back over to Dan.
Thanks, <UNK>.
In summary, we were quite pleased with our fourth quarter results, as our well-diversified portfolio produced solid results in the second half of 2017, despite the challenging operating environment.
We continue to be optimistic about the outlook for 2018 and for the future of Summit.
And with that, we'll open the call to your questions.
This is Dan.
Clearly our strongest markets for the last quarter were our natural disaster affected areas: Fort Myers, Miami, Tampa.
Fort Myers itself was up 42%, Miami was up almost 30%.
So I think if you look at our fourth quarter numbers, ex the hurricanes, we were still up 3.6%.
So I think you can derive some strength in those markets but also some portfolio-wide strengths as well.
Yes, it's <UNK>, I'll take that one.
We've been pretty consistent in saying that we need about 2.0% RevPAR growth to break-even on margins.
I would characterize, given some of the cost pressures we're seeing whether it's salaries and wages or property taxes or whatever else.
We probably think that's the mostly rate-driven RevPAR growth this year.
Obviously, the midpoint of our pro forma guidance range is 1.5%.
So I think at that level, you can expect us to be kind of break-even from a margin perspective or just slightly below.
It's <UNK>, I'll jump in.
I think we look at our supply growth.
I think, we expect supply growth for the industry about 2.0% this year.
If you look at, clearly, that's a little bit more concentrated in the major markets.
If you look at the top 25 markets, we expect it to be about 50 basis points above that.
I would say that our portfolio is generally in line with the top 25 markets.
And our portfolio, in particular, is heavily skewed by Nashville, which is expecting larger supply growth this year.
If you exclude Nashville from our numbers, we are actually 20 basis points or so below the national average and what we would expect supply to grow this year.
I do think it's a fair characterization to say that there is more ---+ there is more supply growth in the select-service change.
And I would also say there, there is far more demand growth in those chain scales as well.
So we do think that's an offset there.
So clearly 4Q came in well ahead of your expectations from a RevPAR growth perspective, but was driven predominantly by occupancy.
So just curious what do you think it will take for pricing power to return.
And have you seen it all any early signs in 2018 of pricing power improving.
<UNK>, this is Dan.
I think there are markets and submarkets that we've seen our ability to hold an increased price, but it's very much market-specific.
I think we're very hopeful that the tax cuts and the economic backdrop are going to result in increased travel and as supply moderates and gets absorbed in these markets, we do expect that we'll have opportunities to grow rate.
But it has been a stubborn thing for sure.
But we are very optimistic that we'll start to see some strengths more broad-based and a lot of the occupancy gains, as you noted, were the result of the natural disasters.
And I don't think that is our expectation for 2018.
And then kind of getting back to a lot of the work you did last year on the portfolio, acquiring nearly $600 million.
I think it's been closer to $750 million over the last 2 years, which kind of gives you a fresh palate for you and the team to identify those value-creation opportunities going forward and continue to outperform kind of the overall Upscale chain scale.
But the 0.0% to 3.0% RevPAR growth for 2018 is below the 2-plus percent growth projected for upscale hotel.
So what gives you the pause there for this year.
That's a great question, <UNK>.
I think, when we buy a hotel, performance is never linear.
There is a time to get in and change the things you need to change, whether it is a strategy or maybe a ---+ shift in staffing.
There are a lot of factors that we use to drive value.
Renovation could be a year off or 18 months off.
So sometimes there are performance that isn't, as I said, linear.
So we got to guide, we use the best information we have, which truthfully is 6 weeks at this point and maybe a 2-week forecast.
So there still are a lot of moving parts.
We also have some shorter-term effects of some weather, we had some softness in New Orleans and some rate erosion in San Francisco, which are 2 of our bigger markets.
So in San Francisco, specifically, we have a renovation underway, which is also a challenge to quantify.
So we do feel good about the guide and it feels like, we've adequately bracketed the risk and the opportunity, we don't want that to imply our enthusiasm is dampered in any way about the great hotels we bought in the markets.
We think they'll compete very well.
And as the economy recovers and there is growth available in rate, we expect to garner our fair share as we have in the past.
And a part of that, I think strength will come as you've seen, we've continued to gain market share in our submarkets in a competitive sense.
That's fair.
Would you be willing to offer some detail as to how the portfolio is trended into the kind of mid- to late-February time frame because it seems as though the industry data, you noted some of the markets with challenges, but clearly many is a top 5 market for you, and a lot of strength there from the Super Bowl, any detail you could offer at this point.
Sure, maybe a little bit.
In general, clearly, Minneapolis was a winner for the ---+ for January, and some of the broader-based markets, I think are ---+ you would expect to be in line with national averages, but other than commenting on some softness, weather-related in some of our markets and some of the disruption from renovations tend to not focus on any one hotel.
So I wouldn't say that weather in New Orleans is in any way indicative of how the portfolio would perform for the year.
But if we look back over the last couple of years, we've seen weather, on almost every conference call from almost every lodging REIT have some factor on it.
And with the great number of storms last year, fires, I think it's an added risk that adds to the volatility of not just monthly, but quarterly earnings.
So I don't know that I would say that there is anything specific other than a couple of things in some of our larger markets that we outlined.
And then how does that 80 basis points of displacement you expect in the first quarter compare versus any displacement you have last year.
I think we've very little displacement last year.
For the full year, we quoted 50 basis points.
I think we had 20 last year.
So I think it nets to be around 30 and 40 basis points.
I believe it's similar in the first quarter and then we'd bought 80 this quarter, and we quote 10 to 20 in the first quarter last year.
As you think about value-creation and the leverage you can pull this year, kind of what's the biggest driver for you.
And how are you thinking about that and kind of how does that play out over the next 9, 12, 18 months for you guys.
Mike, there is ---+ unfortunately, the bigger drivers are a little harder to find.
I think some of the capital recycling we've done in the past will be difficult to replicate in scale.
But I think, at the margin, we've been very good at that, probably better and more active than anybody else in the space.
So I think there is ---+ the drivers are plentiful, but all small operationally.
Whether it's our revenue management team or asset management team being in the market helping to identify shifts in occupancy and making sure our hotels become ---+ remain competitive.
I think some of the capital investment projects that we've done over the past and some of the new projects we've done, renovating bars and fitness centers continue to drive behavior, which is a little bit harder to quantify.
So I think this is a year where a lot of the little things that we have been very proud of as a very operationally focused REIT expect to drive performance.
Got it.
And then just in terms of capital recycling.
How would you characterize the acquisition pipeline.
And then, the potential for more asset sales to reduce leverage a little bit closer to the midpoint of your target.
Yes, this is <UNK>.
I think that as we've talked about, we'll continue to look for assets.
It is a challenging acquisition market, particularly as the debt markets have recovered, the CMBS market in particular.
Sellers are out and able to finance 75% LTV, tight financing that creates a little bit of a shadow competitor.
I wouldn't say that the acquisition market is that much more difficult than it was last year, and we were quite successful last year in acquiring properties.
So I think we'll continue to try to find kind of the diamonds in the rough and assets that we think fit the profile that are potentially a little bit broken and give us an opportunity to create value and buy and fix it.
I do think you can expect us ---+ it is a good market to sell as well.
So that to the extent that, that creates more competition buying assets, it does accrue to our benefit as a seller.
And I think you can expect us to ---+ any external growth to be funded largely through our capital recycling program this year.
Got it.
And then last one from me, just on the guidance.
What are the scenarios kind of top-down, when you think about the 0.0% to 3.0% RevPAR range that need to play out to get to that low end at flat or the high end at 3.0%.
I think ---+ this is Dan.
I think it's just a function of demand from the corporate sector.
I think the corporate travel has been slow.
I think with tax reform, there has been a higher level of confidence with CEOs across the board and the expectation is that, corporate travel picks up and the leisure travel has been fickle, but active and that has shown up in occupancy across the board.
So I think, corporate confidence and corporate travel would be the biggest driver of our success as a company and as an industry.
Thanks, <UNK>, this is Dan.
I think our mix of guest is probably fairly balanced today between both corporate and leisure.
It's predominantly transient; we have a little bit of group, a little bit of government, a little bit of corporate negotiated rate.
But I think kind of, in general, a 50-50 mix is probably where we would say, we stand today.
As far as the Marriott and Starwood merger, I think it's been a popular topic, and I would have to say that Arne and his team have truly been delivering on their promise of using their size and scale to deliver cost savings.
And at this point, it's a little hard to quantify.
We're not seeing it immediately in the numbers, but we do feel strongly it will benefit us going forward and that partnership is very much appreciated.
Yes.
It's <UNK>.
I think our view of supply is that supply probably peaks late this year or early next year.
I think even as we're underwriting and acquiring assets last year, I think we're very cognizant of the markets that we're buying and what the supply, the demand-supply dynamics are in those specific markets.
So we'll continue.
I think, for us it means, we probably value location more than we ever have.
We spend more time making sure that we own assets in the right locations that are going to be relevant this year, next year and 5 years from now.
So I'm not sure that as we start to see the end of the supply pipeline or kind of light at the end of the tunnel from a supply pipeline perspective, it changes our view on how we think about acquisitions.
We've tried to be very forward-thinking all along in terms of what markets and what locations we want to own assets in.
<UNK>, this is Dan.
Just to add a couple of comments.
As it pertains to portfolios and any change in strategy, I think we've been very consistent that portfolios of great size and scale are difficult for us because of our intensive due diligence process.
So kind of the one-offs and small portfolios have always been where we've found the greatest value and the greatest opportunity to create outsized growth through operational improvements or capital investment.
I would say that the governor for us, as we've discussed is the range of 3.5 to 4.5x of net debt-to-EBITD<UNK>
So that in itself will help guide us and continue to keep us focused on that continued belief, and we're very important stewards of investor capital.
So we went through a period in ---+ where we didn't raise capital for 3 years.
So we also take pride in making sure that people understand acquisitions, whether it's an individual or small portfolio or very much ---+ that capital is very precious to us, and we want to make sure those are strong adds to the portfolio.
Thanks, Wes, this is Dan.
We've built in pretty some good flexibility in the schedule.
So at this point, we're still on target for opening middle of the year.
Labor has been challenging, but not something that we haven't been able to overcome.
But it does create one of the challenges that we've seen more broad-based in the market, which is construction is getting more and more challenging.
So I'm not sure that many of the projects that were started 2 and 3 years ago, underwrote the type of environment we are in today.
So I would say that it's less likely that that's going to be any greater focus for us.
We continue to be very opportunistic, 0 or 1 is probably more in the cards for us in the development side.
And we do think that there'll be opportunities over the next several years.
As the supply moderates, some of the new developments would definitely be good targets, and we would have a high level of interest.
Yes, this is <UNK>.
I think that it will still be a headwind, but much less significant than it was last year.
So I think you can assume that there will be a slight headwind, but it won't be near the impact that we saw in 2017.
Bill, it's <UNK>.
I would think not yet.
Obviously, the move in rates has still been a relatively recent phenomenon.
So I haven't seen a lot of trade.
Obviously, there was a big trade in another space yesterday.
But in terms of what we're looking at, I can't say that we've seen a significant move again.
It's been a fairly recent thing though.
Bill, it's Dan.
It's hard and getting harder.
I think the environment we're in is going to be a challenge, not just for Summit, but across the board.
And we've got strategies in place to try to retain employees, and I think it's going to be one of the challenges that we're faced with.
So I don't think it's going away, but I think if ---+ fortunately, we've only one Union hotel.
So we do have some good flexibility with our operating model and working hard to shift from some of the contract labor to actual employees of management companies and managing it to the best of our abilities, but it is going to be a challenge going forward.
Yes, I think if we factor in a land cost, we're still inside of $200,000 per key.
Thanks, everybody.
I wanted to take just a minute to publicly thank Greg <UNK> for his contributions at Summit.
I truly feel blessed that Greg joined our team with the mission to help make us a best-in-class company.
So from me and our Board, our entire team, the analysts and shareholders, thanks, Greg.
It's been truly a pleasure.
And thank you all for joining us today.
We do continue to see opportunities to create value for shareholders through ---+ we've always believed is very thoughtful capital allocation in hotels, which today's guests love.
Our innovative properties and operational expertise continue to deliver strong results, and we're looking forward to 2018 and beyond.
So have a terrific day, and we'll talk to you again next quarter.
