Good day ladies and gentlemen and thank you for your patience. Welcome to the Summit Hotel Properties First Quarter 2019 Earnings 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. I would now like to turn the call over to your host Senior Vice President of Finance and Capital Markets, Mr. Adam Wudel. Sir you may begin..

Thank you Otis 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 May 2nd 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 website 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 first quarter 2019 earnings conference call. We are very pleased with the strong top and bottom-line performance of our portfolio this past quarter and the ability to execute on asset sales that we believe create long-term value for shareholders.

For the first quarter, we reported adjusted FFO of $32.3 million or $0.31 per share, an increase of 0.4 percent as compared to the first quarter of 2018. On a pro forma basis, we reported RevPAR growth of 2.9% for the quarter which was driven by a 2.3% increase in rate and a 0.6% increase in occupancy.

This compares favorably to the quarterly results for the total industry top 25 markets and the upscale chain scale which reported RevPAR changes of positive 1.5%, negative 0.8%, and negative 0.5% respectively.

Operating profit margins expanded 35 basis points during the quarter as our rate-driven RevPAR growth was aided by a continued focus on expense control.

Our pro forma portfolio once again gained market share among its competitive sets in the first quarter with an average RevPAR index of 115.6 which represents a market share gain of 200 basis points compared to the first quarter of 2018. Subsequent to quarter end, on April 17th, we closed on the sale of six hotels totaling 815 guestrooms.

Jon will provide more details on the transaction shortly. But on a pro forma basis RevPAR excluding these six hotels increased 3.5% driven by a 2.7% increase in rate and a 0.8% increase in occupancy.

While we were pleased with the strength of demand across markets and guest segments throughout this quarter, as you would expect, our results were aided by a particularly strong demand in certain key markets including San Francisco, Atlanta, Boulder, Baltimore, and Louisville.

Our three San Francisco hotels increase RevPAR by 25.4% in the quarter as the entire market benefited from the reopening of the Moscone Convention Center and our Holiday Inn and Fisherman's Wharf saw a dramatic lift following a comprehensive and well-timed renovation.

In Atlanta, we benefited from significant demand related to the Super Bowl, but importantly, also saw a significant lift to the market from a very strong convention calendar as our four hotels posted average RevPAR growth of 33.7% for the quarter, significantly outpacing the overall Atlanta market, the downtown submarket and our respective competitive sets.

Super Bowl related demand of these hotels more than offset the demand from last year's Super Bowl in our Minneapolis Hotels, despite having fewer rooms in the market. The recently renovated Marriott in Boulder posted a strong quarter with RevPAR increasing more than 27%.

Adjusting for the displacement from the renovation in the first quarter of 2018, RevPAR still increased over 7% as that market begins to absorb much of the supply that has come online over the past 12 months.

The upgraded room product and public spaces have facilitated a better group base for the hotel and helped drive incremental high-rated corporate business. The Baltimore market benefited from strong convention calendar in the first quarter that produced a 61% increase in city wide-room nights.

Our four hotels grew RevPAR by 9.4% in the quarter, which was nearly 250 basis points better than our competitive sets growth. Our focused sales effort layered in new corporate accounts on top of an already strong group base.

Adjusting for the moderate displacement in the first quarter of 2018 at our Residence Inn, the four hotels still posted a RevPAR gain of 8.7%.

In Louisville, the reopening of the Convention Center allowed our two hotels to shift segmentation back to higher rated group in transient business, which resulted in a 20% increase in RevPAR during the quarter.

We were encouraged by several positive trends within our guest segmentation that drove our growth in the quarter, primarily related to increases in group and corporate bookings. Strong convention calendars in markets' such as Atlanta, San Francisco, and Louisville drove an overall 15.4% increase in group revenue for the portfolio.

Despite the substantial increase in group contribution, revenue in the corporate negotiating segment also increased 3.7% in the quarter. The increased demand in these segments allowed us to more effectively yield manage our inventory and reduce reliance on OTA-driven revenue, which declined 16.6% in the quarter.

During the first quarter, we invested $17.2 million into our portfolio and items ranging from common space improvements to complete guest room renovations as well as redesigned lobbies, bar areas and fitness centers, and included comprehensive renovations at our Courtyard by Marriott, Nashville; Courtyard by Marriott, Pittsburgh Downtown; and Hilton Garden Inn, Boston/Waltham.

Today, the 69 hotels that we own have an average effective age of 3.3 years highlighting our commitment to providing a best-in-class guest experience. In closing, I wanted to be very clear how extremely proud I am of our team and all that we have accomplished over the past 12 months.

The quality of our portfolio has never been better, and we are well positioned to benefit from the substantial capital investment that has been made to our existing hotels as well as our thoughtful and strategic transaction activity that has uniquely positioned the portfolio and the company to create great long-term shareholder value.

With that, I'll turn the call over to our CFO, Jon Stanner..

Thanks, Dan, and good morning, everyone. For the quarter, our pro forma hotel EBITDA was $50.2 million, a 5.5% increase from the same period in 2018, and hotel EBITDA margin expanded by 30 basis points to 36.2%.

Expenses were well contained during the quarter as hotel operating expenses increased just 1.8% on a per occupied room basis, resulting in GOP flow-through of 56%. During the first quarter, our adjusted EBITDAre of $46.7 million was unchanged from the first quarter of 2018.

Subsequent to quarter end, we completed the sale of six hotels totaling 815 guestrooms. The gross sales price of $135 million represents a 6.9% cap rate on the trailing 12 months NOI including estimated capital expenditures for brand mandated PIP items.

For the 12 months ending March 31st, the six hotels had an average RevPAR of $111, which was 9.8% lower than our portfolio average and hotel EBITDA margin of 34.3%, which was 280 basis points lower than our portfolio average for the same period.

In addition, on February 12 we sold our two hotels in Charleston, West Virginia totaling 130 guestrooms for a gross sales price of $11.6 million.

Following the sale of these eight hotels, we have now sold 60 of the 65 hotels that we own at the IPO in 2011, which demonstrates our commitment to a prudent capital recycling strategy that results in us continuing to own a diversified portfolio of high-quality hotels in great markets where guest want to stay.

In the first quarter, we also opportunistically purchased the fee simple interest in the real estate at our Residence Inn, Hunt Valley at an implied 10% yield. Our balance sheet continues to be well positioned with more than $400 million of current liquidity, no maturities until the end of 2022 and average remaining term of nearly five years.

As of March 31st, we had total outstanding debt of $968 million with a weighted average interest rate of 4.26%.

As we discussed, we have made great progress on our capital recycling program with the sale of eight hotels year-to-date for a combined sale price of $146.6 million, which has reduced our net debt to trailing adjusted EBITDAre to approximately 4.3 times on a pro forma basis.

On April 24, we repaid without penalty a $21.9 million mortgage loan with a variable interest rate of 4.9% that was set to mature in May of 2020. The three hotels that secured the loan are now unencumbered.

And as a result over 86% of our EBITDA is unencumbered today, further validation of our continued efforts to assemble a highly flexible balance sheet. On April 29, we declared a quarterly common dividend for the first quarter of 2019 of $0.18 per share or annualized $0.72 per share.

The annualized dividend results in a prudent AFFO payout ratio of approximately 59% at the midpoint of our 2019 outlook. We updated our full year guidance in the press release yesterday, which now incorporate the sale of six hotels.

Our revised full year 2019 guidance for adjusted FFO is $1.17 to $1.29 per share and adjusted EBITDAre of $177.2 million to $189.5 million. Our full year estimate for pro forma and same-store RevPAR growth of 0% to 3% remains unchanged as does our $40 million to $50 million estimate for capital improvement.

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 were quite pleased with our first quarter results as our well-diversified portfolio continued producing solid results. We remain optimistic about the outlook for 2019 and for the future of Summit. And with that, we'll open the call to your questions..

Thank you, sir. [Operator Instructions] Our first question comes from the line of Austin Wurschmidt of KeyBanc Capital Markets, your question please..

Thanks and good morning. So Dan you discussed kind of the strong group contribution in the first quarter. And I know it's not a significant portion of the business.

But, how's the outlook look, for the balance of the year, for that portion or segment of the business?.

Thanks, Austin. It’s Dan. Yeah. I mean Group is not a huge portion of our business. It's roughly 15%. We've been very pleased with our revenue management team and their ability to manage this -- not just the city-wide events, but the small groups.

We think that's a stable number as we have visibility into the near-term and we can look at convention calendar in pace. And our markets look pretty favorable for the balance of the year..

So should we expect the same level of growth from that segment through the balance of the year? Or was 1Q a bit of an outlier?.

It's Dan again. I think you should think of it a little bit more balanced over the year. And they haven't flow based on where the city wides fall, so I wouldn't expect that level of growth quarter-over-quarter.

But as it ebbs and flows as each market has their conventions and I think we would expect some volatility in that growth number, but that first quarter was a stronger than normal contribution from group force..

Okay. Thanks for that.

And then, with some available investment capacity call it $50 million to $100 million based on your longer-term leverage targets how should we think about your willingness to deploy that dry powder versus maybe match funding on a go-forward basis, with whatever the most attractive source of equity as of that time?.

I think as we stated in the past that 3.5 times to 4.5 times net debt-to-EBITDA is a good range for us, especially considering the negligible maturities over the next several years. So I think a balanced approach is -- as we've shown in the past closer to the high end you should probably expect us to favor dispositions.

And as we get down we certainly can be more opportunistic. But we would like to think about it as more of a balanced approach..

Great, thanks for the time..

Thank you. Our next question comes from the line of Wes Golladay of RBC Capital Markets. Your line is open..

Hey! Good morning guys. I just want to follow-up on Austin's question. So, assuming no maturities you have a little bit of EBITDA growth, you'll probably get to the middle of your range. So, how should we look to model this company going forward? Would you -- I know the acquisition market may be a little pricey. It's more of a seller’s market.

Would you consider selling a little more this year? And just building a little bit of dry powder?.

Yeah. Wes its Dan, it's a good question and it unfortunately doesn't have a simple answer. We do a fair amount of underwriting, and continue to do so.

But as you've expressed it is a challenging to say the least and it shouldn't surprise investors, if there was a sale before buy, but a lot of it really depends upon what opportunities present themselves. So, we feel good about again about the range that we've outlined. But I wouldn't say there's a definitive number where we're going to be aggressive.

It’s very much underwritten as opportunities based on extra capacities, but the -- how we see them adding value. So, apologize for the long answer. But I think it's not a simple one. I think it's very much opportunistic..

Okay. And then looking at the margins, margins expanded for the first time in multiple quarters and can you walk through what's driving it? Is it maybe -- by the components is it labor efficiency, labor shortages? You did also mention that you're yielding off the OTAs which is -- I'm imagining that's driving the margins a little bit higher there.

So maybe just discuss that for us..

It's Jon. I appreciate the question. I think you really hit on the main drivers of it. I think probably first and foremost we did have a pretty good top line growth this quarter which always makes it a little bit easier for us to expand margins.

Changing -- shipping the mix and being able to ship out some of that higher cost OTA business really did have a nice impact on -- from a margin perspective.

And then we continue as we have been over the last several years to be very focused on cost and in making sure that we're keeping labor costs and check and reducing our reliance on contract labor. So we still feel good kind of down to 100 to flat from a margin perspective.

Hopefully we'll be a little bit closer to the high end of that range given the performance we had in the first quarter..

Okay. Thanks a lot guys..

[Operator Instructions] Our next question comes from the line of Bill Crow of Raymond James. Your line is open..

Thanks. Good morning guys. Dan or Jon do you think consumers are getting more adventurous in their branch versus -- I mean we've seen Moxy and Motto and Tru and some of these newer -- I don't know more cutting edge hotel concepts emerge and seem to be doing well.

Maybe at the expense of Courtyards or more traditional brands what do you think is going on there?.

Bill, this Dan. I'll start. I do think that guests today are looking for something different than they were several years ago and specifically more than last cycle.

And I think while it's a stretch to say that the offering itself is experiential, I think there's a level of authenticity that guests are looking at today and looking at alternatives, I think is becoming more and more important which is one of the reasons we've kind of brought our design in-house that we do our own renovation projects.

Working with the brands directly, I think gives us an opportunity to add some level of customization and uniqueness to our properties. So whether it is a Courtyard or a Hampton there are some local flairs, we can incorporate to make it a little bit more authentic because I do think they are looking for something a little bit today.

And I think whether they are branded, unbranded, independent or soft branded I do think that a focus on providing something a little bit special and unique is warranted. So hopefully that helps..

Okay. It does, thanks. Dan you have success developing a hotel in Orlando.

You talked about the capability capacity of the company that developed an asset or two from time to time, anything in that area that you could talk about?.

There's definitely opportunities out there. Construction costs are at -- still quite a high level. So I wouldn't expect anything in the short term from us very much opportunistic. And as we've talked about in the past all those will be kind of a small part of what we do.

But as we look at the future and guest preference, we think location and -- is going to matter more and more. Brand and the loyalty and distribution that they provide certainly have a strong contribution to how we believe that value is created.

So if there are opportunities where we can lean in to bolster either some exposure or some new opportunities, we want to make sure that, we don't shy away from that. So nothing that in the short term that we think is worth mentioning, but still a part of our long-term thesis on how to create value..

Thanks. One more for me. On the labor challenges is it getting worse? Getting better? Kind of unchanged over the last two or three quarters? And what's going on with turnover rates? Maybe that's a good way to assess it..

Hey, Bill its Jon. I would say that, it’s fairly stable. I don't think it's changed meaningfully over the course of the last 12 months. I think unemployment rate across the countries are – remain extremely low.

I think our focus along with our management companies has been trying to find creative solutions around contract labor, which tends to be as expensive and less efficient than of us having full-time employees. So I wouldn't say that it's getting worse I really wouldn't say that it's getting a lot better.

I think the same challenges that existed 12 months ago still exist today. But it is kind of more and more of a focus of both our operating teams and our managers..

Great. That’s it for me. Thank you..

Thanks, Bill..

Thank you. Our next question comes from the line of Michael Bellisario of Baird. Your line is open..

Cadence throughout the year just in terms of the top line just to help us from a modeling perspective.

I'm not looking for guidance explicitly here?.

Mike you were – we only caught the back half your question. Could you repeat it please? Q - Michael Bellisario Yeah.

Just asking in terms of the quarterly cadence that you expect throughout the year in terms of – particularly on the top line just how we think about 2Q, 3Q, 4Q as the year progresses versus the 1Q number that you guys just posted?.

Hey, Michael, it's Jon. Look at it just kind of directionally. Obviously, I think the first quarter turned out to be quite strong for us. We are dealing with April – or sort of the Easter shift in April and the second quarter.

We do have a little bit more tailwind from renovation in the second quarter and we've got a little bit more of a headwind in kind of the back half of the year so it is fairly balanced. There's not one quarter as we see it today that sticks out dramatically from the others..

Got it. And then just maybe zooming out even further just high-level view just how you're seeing the overall fundamental environment and then kind of how we should read into the better 1Q performance.

I assume it's better than your internal expectations as well kind of balanced against the unchanged full year guidance at this point too?.

Yeah. Mike its Dan. Look I think first quarter is the combination of what I think is great work that's been done by the team over the last 12 months. I said that in my prepared remarks and I'll say it again. This team is working incredibly hard, restructuring ways to create efficiencies, not just in operations but in revenue management.

Our construction design and renovation team have worked diligently to create great opportunities minimize disruption and all that – a lot of that work I think is starting to show clearly in Q1. Hopefully, there's the – continued growth opportunities for us. We do see the market as stable at this point.

But as a reminder, there's not a lot of visibility never has been. I think our team does a masterful job managing through that. And so I would say that as what Jon referenced earlier, some of the shorter -- or smaller headwinds, tailwinds from renovation could create some volatility.

But as a general statement, we're seeing a stable environment for at least the next quarter..

Got it. That's helpful. And then just maybe one follow-up from a prior question on the acquisition front.

Can you give us a sense of what you've seen trade or maybe what you've underwritten? Any changes in terms of pricing expectations? Or what you or others are underwriting for potential acquisition opportunities today?.

Sure. Our underwriting hasn't changed. Now we still focus on that double-digit unlevered IRR, which makes it very hard to get the things to pencil at this point. I think we've talked in prior calls about our theory of brand new or broken.

It feels like brand new construction with the ramping story is something that we could be constructive with as much as something that maybe have been neglected from capital investment, or maybe a mix of guest that isn't as profitable. So it's a little harder.

We're not underwriting a lot of growth in the current environment unless we can find the catalyst within the underwriting. So I get it is a very competitive market. There are certainly still a lot of people looking for options. So I think to be -- continue to be more challenging is what we'd expect..

That's helpful. Thank you, guys. .

Thanks Mike..

At this time, I'd like to turn the call over to Dan Hansen for any closing remarks.

Sir?.

Well, thank you all for joining us today. Our innovative properties and operational expertise continue to deliver strong results, and we continue to see opportunities create value for shareholders through thoughtful capital allocation in high-quality well located hotels, which today's guest love. Have a terrific day.

And we look forward to talking to you again soon..

Ladies and gentlemen that concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect your lines at this time..