Summit Hotel Properties, Inc. (NYSE:INN) Q1 2024 Earnings Call Transcript May 2, 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: Welcome to the Summit Hotel Properties’ 2024 First Quarter Earnings Conference Call. I will now be passing the line to Adam Wudel, Senior Vice President of Finance, Capital Markets and Treasurer.
Adam Wudel: Thank you, Howard, 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, May 2, 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 first quarter 2024 earnings conference call. We were extremely pleased with our first quarter operating performance and financial results as adjusted EBITDAre increased 10% and adjusted FFO increased 14% compared to the first quarter of last year. Pro forma RevPAR increased 1.5% year-over-year and meaningfully outperformed the total US lodging industry and upscale chain scale by 130 basis points and 140 basis points, respectively. Our asset management team and operating partners did a terrific job managing expenses during the quarter, resulting in hotel EBITDA growth of 6% and margin expansion of over 80 basis points compared to the first quarter of last year.
And yesterday, we announced the closing of three additional asset sales, an increase in our common dividend and a revised 2024 guidance range that reflects our strong first quarter results and a constructive outlook for the remainder of the year. On today’s call, Trey and I will provide more details on our first quarter results and recent capital allocation activity, as well as highlight our longer term view on the industry outlook and Summit’s relative positioning. Fundamentals continued to improve across the company’s portfolio in the first quarter as our RevPAR growth was driven by a 3% increase in occupancy, predominantly concentrated in urban and suburban markets, which was partially offset by a 1.4% decrease in average rate versus the prior year, which was predominantly concentrated in outperforming leisure-oriented markets.
Our RevPAR growth continues to be driven by weekday and urban demand, which increased approximately 4% and 3%, respectively, in the first quarter. More specifically, total portfolio RevPAR on Mondays, Tuesdays and Wednesdays increased by 5% year-over-year and a robust 7% when isolating those days of the week to the company’s urban portfolio, further evidence of strong group business and the continuing recovery of corporate transient demand. As we discussed on our last call, we believe our portfolio is well positioned for relative outperformance given our exposure to several urban markets that have been slower to recover. Five of those markets in particular, the San Francisco Bay Area, New Orleans, Baltimore, Minneapolis and Louisville, represented 19 of our owned hotels in the first quarter that collectively finished 2023 approximately $25 million below 2019 hotel EBITDA levels.
On RevPAR that was less than 80% recovered. In the first quarter, these 19 hotels produced RevPAR growth of 12% and hotel EBITDA growth of 44%, highlighted by 22% RevPAR growth in Baltimore and 16% RevPAR growth in both New Orleans and Minneapolis. Encouragingly, we are beginning to see the recovery of technology-related business travel in our Silicon Valley asset, which grew RevPAR by over 40% during the quarter and nearly 30% after adjusting for renovation tail winds created last year. Downtown San Francisco remains the lone pocket of weakness among this portfolio, though RevPAR at our DoubleTree in the life science oriented Oyster Point submarket grew 7% in the quarter. Excluding our three San Francisco assets, RevPAR increased 17% in the remaining 16 hotels and EBITDA increased nearly 60% year-over-year in the first quarter.
Second quarter pace for these lagging markets remains strong. It should continue to facilitate outsized growth in RevPAR and hotel EBITDA for the company. The relative strength of our first quarter is further highlighted by significant market share gains across our portfolio. RevPAR index in the first quarter for the pro forma portfolio was 115%, an increase of 335 basis points, which was driven by occupancy share gains. Our portfolio’s market share is approaching the highest levels ever achieved outside of the pandemic era, and on a trailing twelve month basis, we’ve seen our biggest gains come from resort, airport and urban locations and from within the NCI portfolio. As we look to the second quarter, preliminary April RevPAR growth is expected to actualize around 4% and benefited from continued midweek strength, the Easter shift and strong demand related to the solar eclipse in Dallas, Fort Worth, Austin, Indianapolis and Cleveland.
While booking pace for our portfolio remains short-term in nature, RevPAR pace for May is encouraging and suggests that underlying demand trends remain stable heading into the peak summer travel months. From a capital allocation standpoint, we continue to improve the overall quality of our portfolio and health of our balance sheet, including the disposition of three additional hotels subsequent to quarter end. In April, we closed on the sale of two wholly-owned hotels, the Courtyard and Spring Hill suites at the New Orleans Convention center, totaling 410 guest rooms for a gross sales price of $73 million. The sales price represents a 6.7% capitalization rate on the estimated 2024 NOI, including foregone near-term capital expenditure requirements.
While New Orleans is one of the lagging markets we have identified as augmenting our growth profile, post asset sales, we still have ample exposure with six hotels in the market and believe our remaining assets are better located and have less near-term capital needs. We also sold one non-core hotel in the GIC venture, the 119 guest room Hilton Garden Inn College station, for $11 million at an all in cap rate of less than 8% on estimated 2024 NOI. In total, over the last twelve months, we have sold nine hotels for a combined $131 million at a blended capitalization rate of approximately 5%, inclusive of approximately $44 million of foregone capital needs, based on the estimated trailing twelve month NOI at the time of each sale. The combined RevPAR for these hotels was approximately $87, which is nearly a 30% discount to the pro forma portfolio.
Our disposition efforts have facilitated nearly a full term reduction in our net debt-to-EBITDA ratio, enhanced the quality and growth profile of our portfolio, and significantly reduced near-term CapEx requirements. Last night, we announced that our Board of Directors approved a $0.02 per share increase in the common dividend on a quarterly basis to $0.08 per share or $0.32 per share on an annualized basis, which represents a 33% increase. The dividend increase is consistent with our strategy of prioritizing returning capital to shareholders and reflects our constructive outlook for our business and the stability of those cash flows. Our approach to our dividend reinstatement and subsequent growth has been to set payouts at levels that allow for consistent and meaningful increases over time while maintaining a conservative payout ratio to absorb any unforeseen deterioration in demand.
With this most recent increase, our dividend yield is approximately 5% based on the current share price and our AFFO payout ratio increases to a modest 34% at the midpoint of our AFFO guidance range, which remains well below historical levels. Finally, before I turn the call over to Trey, let me highlight a few observations about our industry and some its relative positioning that give us optimism for the future. While the recovery in travel demand post pandemic has been uneven by both segment and market, we are beginning to see a more meaningful recovery in many of those segments and markets which have lagged and which Summit has outsized exposure to, namely urban markets and those with a heavier reliance on business travel. We are also starting to benefit from a gradually easing labor environment, which we believe will facilitate margin changes more in line with historical norms, as utilization of contract labor declines and turnover abates.
Combined with post-pandemic enhancements to the core select service operating model and an already superior margin profile, we believe the conditions for better relative future profitability growth exist. As has been well documented, supply growth in our industry is poised to remain subdued for an extended period of time, given elevated construction costs and tight development financing conditions. And finally, while macroeconomic growth is slowing in conjunction with tightening monetary policy, a deeper dive into recent trends suggest demand for services broadly and travel more specifically remains robust and enduring. Taken together, this all provides for a positive setup for longer term hotel level EBITDA growth. With that, I’ll turn the call over to our CFO, Trey Conkling.
Trey Conkling: Thanks, Jon, and good morning everyone. The first quarter of 2024 represented a continuation of 2023 trends, as growth within our portfolio was once again driven by the company’s urban and suburban hotels, which each produced RevPAR increases of approximately 2.5% in the first quarter. Strength in our urban and suburban portfolios was driven by several of our key Sunbelt markets such as Dallas Fort Worth, Orlando, Charlotte and Houston, all of which continued to generate RevPAR growth meaningfully above the industry average. As Jon mentioned, several of our lagging markets, such as the San Francisco Bay Area, Baltimore, Minneapolis, Louisville, and New Orleans, also experienced strong first quarters, with RevPAR increasing 12% in aggregate.
We expect continued outperformance in these lagging markets for the balance of the year. In addition to the urban and suburban portfolios, our airport hotels were amongst our strongest performers as first quarter RevPAR increased over 5% for this portfolio. From a national perspective, TSA statistics indicate air travel increased 6% in the first quarter of the year, and recent commentary from Delta, American and other major carriers point towards accelerating corporate transient demand and a strong summer travel season. From a Summit perspective, airport hotel performance was driven by our five Grapevine hotels, where RevPAR increased 6.5% in the first quarter, benefiting from double-digit year-over-year passenger growth at Dallas Fort Worth International Airport.
In addition, our Courtyard and Residence Inn Metairie generated a first quarter RevPAR increase of 36% as a result of the recently completed renovation at the Courtyard and 5% year-over-year passenger growth at New Orleans Louis Armstrong International Airport. Although our resort portfolio declined modestly year-over-year in the first quarter, including a challenging Super Bowl comparison for our Phoenix hotels and several disruptive renovations, we are pleased with the continued strength in our resort markets where average rates and RevPAR remained 14% and 8% above pre pandemic levels, respectively. We continue to invest in several of our resort hotels such as the Embassy Suites, Tucson; Hotel Indigo, Asheville; and Courtyard Fort, Lauderdale Beach, given the constructive long-term outlook for leisure demand.
From a segmentation perspective, group demand continues to serve as a key catalyst for the company as first quarter group RevPAR increased in 40 of our 43 markets. In addition, group RevPAR increased across all location types except for our resort portfolio. For the quarter, four weeks group RevPAR increased over 3% with weekday group RevPAR increasing approximately 4%. Other segments that demonstrated growth in the first quarter include negotiated discount and contract. The success of our revenue management strategies is perhaps best illustrated in the NCI portfolio where group and negotiated RevPAR increased by 19% and 15%, respectively, as the operating strategies of those hotels have been reconfigured to take advantage of today’s demand trends.
In the first quarter, non-rooms revenue in the pro forma portfolio increased 8%, driven largely by midweek occupancy gains as well as the shift in business mix towards group and corporate transient demand. While higher outlet utilization as well as banquet and catering demand resulted in a 3% year-over-year increase in food and beverage revenues, the ongoing benefit of favorable parking contract renegotiations and increased resort fee capture drove non F&B revenue growth of 14% for the quarter. Once again, the NewcrestImage portfolio was an outperformer, generating 6% RevPAR growth in the quarter. As previously mentioned, group and negotiated demand were the primary drivers of top line growth, further validation of our team’s successful application of strategic sales clusters.
As a result, the NCI portfolio’s market share increased 420 basis points compared to the first quarter of last year, driven primarily by gains in occupancy. The strength in top line performance within the NCI portfolio, coupled with slowing expense growth resulted in hotel EBITDA increasing approximately 12% and hotel EBITDA margin expansion of more than 130 basis points in the first quarter. The operating expense environment continues to moderate and our asset management team did a fantastic job during the first quarter controlling costs and managing the middle of the P&L. Total expenses increased 2.4% year-over-year. Combined with the increase in occupancy cost per occupied room declined 1.6 from the prior year period. From a labor expense perspective, we are experiencing moderating wage growth, reduced utilization of contract labor, and lower turnover.
Relative to first quarter 2023, wages increased 2.5%, which is increasingly in line with historical norms. Contract labor declined by 11% on a nominal basis and by 14% on a per occupied room basis versus the prior year, respectively. This represents the sixth consecutive quarter contract labor has declined on a per occupied room basis. Today, contract labor comprises 12% of our total labor spend, down from 18% at its peak in 2022, but still meaningfully above pre-pandemic levels, suggesting additional room for improvement moving forward. FTE count increased modestly during the quarter but continues to remain 15% to 20% below 2019 levels. A more constructive expense environment served as a key driver to improving hotel EBITDA margins, which expanded year-over-year by nearly 90 basis points for our same-store portfolio and over 80 basis points for our pro forma portfolio in the first quarter.
Pro forma hotel EBITDA for the first quarter was $68.6 million, a 6% increase from the first quarter of last year. Same-store hotel EBITDA flow through for the quarter was approximately 62%, despite RevPAR growth that was entirely occupancy driven. Notably, hotel EBITDA increased in each of the company’s wholly-owned GIC joint venture and other joint venture portfolios. Adjusted EBITDA for the quarter was $48.8 million, a 10% increase compared to the first quarter of 2023, and adjusted FFO was $30 million, or $0.24 per share, a 14% increase versus the same period last year. From a capital expenditure standpoint, in the first quarter, we invested approximately $18 million in our portfolio on a consolidated basis and approximately $15 million on a pro rata basis.
CapEx spend for the first quarter was driven by transformational renovations at our Hilton Garden Inn, Milpitas; Residence Inn, Hillsboro; Embassy Suites, Tucson; Courtyard, New Haven; and Hotel Indigo, Asheville. We continue to ensure the quality and relative age of our portfolio positions the company to drive profitability and market share. Turning to the balance sheet, the net proceeds from the New Orleans and College Station asset sales were used to repay the $55 million balance outstanding on the company’s corporate credit facility as of March 31 and to reduce the balance of the NCI term loan from $402 million at March $31 to $396 million today. As Jon mentioned, our net debt-to-EBITDA has declined by nearly one turn over the past year, driven by accretive non-core asset sales and continued growth in hotel EBITDA.
In January, we entered into a $100 million interest rate swap, fixing one month term SOFR at 3.765% for debt within our GIC joint venture. This swap, which is 150 basis points below the current SOFR rate, becomes effective in October of 2024 and expires in January of 2026. Today, the net asset position of our swap portfolio is approximately $20 million. As a result of our interest rate management efforts, our balance sheet is well positioned with an average pro rata interest rate of 4.7% and approximately 77% of our pro rata share of debt fixed after consideration of interest rate swaps. 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, a fully extended average length to maturity of nearly 3.5 years and an overall liquidity position of approximately $370 million, we believe the company is well positioned to achieve its growth objectives.
On May 1, our Board of Directors declared a quarterly common dividend of share representing a 33% increase from the previous quarter. The resulting annualized dividend of $0.32 share represents a dividend yield of approximately 5%. The increased dividend continues to represent a prudent AFFO payout ratio, leaving ample room for potential 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. Included in our press release last evening, we updated our full year guidance for 2024 operational metrics as well as certain non-operational items following our April transaction activity.
This outlook is based on management’s current view and does not account for any unexpected changes to the current operating environment, nor does it include any future transaction or capital markets activity. Based on the company’s first quarter operating results as well as our future outlook, we are reiterating full year guidance for RevPAR growth of 2% to 4%. We are maintaining our adjusted EBITDA range of $188 million to $200 million despite foregone hotel EBITDA of approximately $4 million through the balance of 2024 due to April’s three asset sales. This further reflects the strength of our first quarter operating results. Furthermore, we are also maintaining our adjusted FFO range of $0.90 per share to $1 per share despite the foregone hotel EBITDA from asset sales.
At the midpoint of our RevPAR guidance range, we would expect hotel EBITDA margins to contract approximately 50 basis points year-over-year. This implies a 25 basis point improvement to the margin guidance provided in February 2024. We expect pro rata interest expense excluding the amortization of deferred financing costs to be approximately $55 million to $60 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. 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 distribution Summit may earn during the year.
And with that, we’ll open the call to your questions.
Operator: Thank you. [Operator Instructions] And our first question or comment comes from the line of Austin Wurschmidt from KeyBanc Capital Markets. Mr. Wurschmidt, your line is open.
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