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 a 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..

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 27, 2019. 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 Web site at www.shpreit.com. Please welcome Summit Hotel Properties' Chairman, President and Chief Executive Officer, Dan Hansen..

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 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 amongst 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 Marriot which has been extremely well received by guests and is ramping quicker than we had forecasted.

Our Courtyard hotel in the same downtown submarket grew RevPar over 7% in 2018 as both hotels significantly outperformed the broader Atlanta market growth of 2.6%.

RevPar at our residents and midtown increased 8.5% in the fourth quarter, dramatically exceeding a 5.5% decline 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 in Orlando achieved a fair market share in its first month after being opened. The hotel achieved a 128% RevPAR index in the fourth quarter and had 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 High 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 a 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 resolved. 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 in 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 a trailing 12-month NOI, including estimated CapEx.

Net proceeds from dispositions were partially redeployed into the acquisition of the 150-room residence in Boston, Watertown, for $71 million and did as 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 provides stronger growth profiles and generate superior risk-adjusted returns. In addition, yesterday we announced that on February 12 we completed the sale of our Holiday Inn Express & Suites in Charleston, West Virginia.

The combined sale price of $11.6 million equates to a 7.4% cap rate on trailing 12 months NOI as of December 31, including estimated CapEx requirements for brand mandated tip 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 our Marriott in Boulder, as well as several change of ownership that's 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 headwind to reverse in 2018.

Also the e last five years we've invested over $200 million into our portfolio in the 75 hotels that we own today have an average effective age of approximately three and a half years further proof to our commitment to maintaining a high-quality portfolio for guest who want to stay. With that, I'll turn the call over to our CFO Jon Stanner..

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 of 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 RE 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 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 of 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 were at $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 one and $150 million, reduced interest expense, extend maturity dates, and broadened our bank through.

On December 31 we repaid for 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 cost and extending our weighted average of 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 1, 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 in an attractive dividend yield of 6.2% based on the closing stock price as of February 25, and a manageable AFFO payout ratio of approximately 56% at the midpoint of our 2019 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 in creating long-term value for shareholders.

We remain committed to providing great transparency and have introduced adjusted EBITDARE guidance as an additional relevant 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 on a quarterly basis. Our 2019 guidance includes 75 hotels in 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 $0.22 to $0.34 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..

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..

[Operator Instructions] And our first question comes from the line of Chris Woronka with Deutsche Bank. Your line is now open..

Hey, Good morning, guys.

Dan, as you guys kind of scrub your markets and the pipeline in those markets do you get the sense that 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?.

Yes. I think that while building costs haven't been rising as fast as they have in the past, they -- 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..

Okay, great.

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

Listen, Dan, pricing expectations really haven't moved much for us. It's very competitive. We're still active in the market. I think we expect to be more of a net seller this year, but as we kind of telegraphed and demonstrated in '18 and '19 that favorable transaction environment in 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 really to reduce our leverage over time. And that'd be really a priority for sales proceeds, but to the extent that we have capacity as always, we 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..

Okay, great.

And just a quick one probably for Jon, thanks, appreciate the introduction of EBITDA guidance, should we assume that margins are still probably running negative this year at the mid and lower points of the RevPAR range?.

Yes, I think that's fair. I think we'd probably bracket flat to down 100 basis points depending on where we fall within our RevPAR guidance range..

Okay, very good. Thanks, guys..

Operator:.

. :.

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?.

Wes, this is Dan. There's really not. I think the Charleston assets were probably the two that more specifically did look like the others. They were 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 that way. But I wouldn't look at anything in our portfolio at this point as non-core..

Okay, thanks. And then I received some questions regarding the underperformance of the upscale segment the last few quarters versus upper upscale.

How much do you think is the function of the difficult storm comps versus actual maybe some structural issues?.

I think the majority of it is either related to storm comps. You know, everything is much more market specific as the lines between [technical difficulty] service and upper upscale and upscale have blurred. So I look at it as more of a market-specific or event-specific softness..

Okay. Last one.

When you look at your markets this year, what will be some of your stronger markets and weaker markets?.

I think the usual suspects, clearly, San Francisco -- we've done a lot of renovation work there. So with a strong convention counter 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 having the Super Bowl, they've got a strong convention calendar.

And then there's a few of our hotels that are coming online from renovations like Boulder, Marriott and then the Hyatt House in Orlando continues to ramp and be strong. So I think those are kind of the key ones that would jump out..

Okay. Thanks a lot. .

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

Good morning, guys..

Good morning..

Good morning..

Dan, how should we think about the 0 to 3 guidance range for 2019? It's the same as last year, but results came in toward the low end.

So maybe what's different today and what gives you more confidence that '19 should be better than '18 for your portfolio?.

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 gets to work setting the 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 about that at this point while it's still early in the year have a great confidence in the range..

Got it, and then just back to Chris's question on the transaction market, one of your peers talked about seeing a portfolio premium going to come back into the market.

You agree with that and you think one off and two off transactions for you on the dispositions side are still best execution today?.

Yes, I mean, buyers come in all shapes and sizes, and each transaction at some level is fairly unique. It does appear there's 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 types of assets is the kind of validation that they do have a better operating model and much more desirable..

That's it from me, thank you..

Thanks, Mike..

Thank you. [Operator Instructions] Our next question comes from a line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is now open..

Yes, hi, good morning guys. Just two questions 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 U.S. upscale hotels in 2018.

And I know you mentioned market makes 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 market this year?.

Yes. Hey, Austin, it's Jon. Look, I think we really hit on that. I do think we've got a favorable market mixes you mentioned, I mean two of our top five markets from exposure perspective are Atlanta and San Francisco, which are both expected to be very strong markets.

Renovation was headwind in 2018 we think that'll flip to be a slight tail wind for us in 2019 and 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 build out of the house or land, they continue the ramp of and continued ramp of the – 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 range I set..

Appreciate that. And then switching to expenses despite the fact that RevPAR growth was negative in the fourth quarter you really had one year best quarters on expense containment for the full-year and you're forecasting you know 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 2019?.

Yes, we did have a good fourth quarter, I think flow through retention was strong in the fourth quarter, I think the margin guidance reflect 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 a 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 once again I think it's a very similar operating environment this year as we had in 2018 from an expense perspective..

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

No, we typically don't do that I would say that as we see the market so far this year it does still 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..

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

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 loves. Our innovative properties and operational expertise continue to deliver strong results, and we are looking forward to 2019 and beyond.

Hope you have a terrific day, and look forward to talking again next quarter..

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..