Adam Wudel - VP of Finance Daniel Hansen - CEO, President, and Chairman of the Board Greg Dowell - CFO, Executive VP & Treasurer Jonathan Stanner - CIO and EVP.

Austin Wurschmidt - KeyBanc Capital Markets Chris Woronka - Deutsche Bank AG Shaun Kelley - Bank of America Merrill Lynch Michael Bellisario - Robert W. Baird & Co. William Crow - Raymond James & Associates Wesley Golladay - RBC Capital Markets.

Welcome to the Summit Hotel Properties Third Quarter 2017 Earnings Call. [Operator Instructions]. I would now like to introduce your host for today's conference Mr. Adam Wudel. Sir, you may begin..

Thank you, 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, Greg Dowell. 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 2016 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today, October 31st, 2017, 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 third quarter 2017 earnings conference call.

Our third quarter results came in at the high end or above our expectations heading into the quarter which we believe was a particularly positive result given the challenging operating environmental the industry faced in the quarter specifically related to numerous disruptions from natural disasters and an unfavourable holiday calendar shift.

We reported adjusted FFO of $36.7 million for the quarter which represents a 13.6% increase as compared to the third quarter of 2016. Our adjusted FFO of $0.35 per share came in at the high end of our guidance range of $0.32 to $0.35 per share.

RevPAR increased 1.2% for our pro-forma portfolio during the third quarter which was driven by 2.4% increase from occupancy and partially offset by a 1.1% 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 a tremendous 2.4% for the overall portfolio.

60% of our 35 markets outperformed the National Smith Travel Research upscale segment average RevPAR growth of 0.7% in the quarter further demonstrating that we're on a well-diversified portfolio of great assets in strong markets that continue to gain market share. Overtime we believe this is a recipe for top-line growth of performance.

Before we dive in deeper to the results of the quarter let me take just a brief moment to provide an update on the recent hurricane events which as a whole are not expected to have a material effect on our portfolio for the full year.

First and foremost, we want to recognize the tremendous efforts of our management partners, all of the on-site hotel personnel and our internal asset management and renovation teams, who have sacrificed incredible amounts of time and energy in response to these catastrophic storms.

They have worked tirelessly to ensure the safety and comfort of our guests in the face of this devastation and we are truly grateful. We sustained some minor water infiltration at both the Hilton Garden in Galleria and the Hilton Garden in Energy Corridor in Houston as a result of Hurricane Harvey.

However, neither of our hotels in Houston experienced significant damage and both remain fully operational throughout the storm. We did experience a large group cancellation at our Hampton Inn & Suites in downtown Austin [indiscernible] storm as a large city-wide convention was disrupted.

In Florida, the Courtyard at Fort Lauderdale beach closed leading up to hurricane Irma in response to a mandatory evacuation, but reopened 6 days later. And our Hyatt Place at the Universal Studios in Orlando was forced to close for 5 days following the storm when the hotel was without power.

Our other 4 hotels in Florida remained open and operational throughout and in the immediate aftermath of the storm.

Generally, we were very fortunate during both storms as damage and operational disruption across the portfolio was minimal and no insurance claim [indiscernible] necessary for property damage or business interruption income at any of the affected hotels.

As you might expect, our best-performing markets in the quarter were these hurricane-affected markets, as our hotels in Houston, Fort Lauderdale and Tampa, all had RevPAR growth in excess of 20%.

The majority of the pick-up came in the form of better-than-expected occupancies as our hotels were generally able to fill up with displaced homeowners and emergency workers at normal rates but extended length of stay.

The overall financial effect of the hurricane was a net positive and we estimated and proved our reported pro forma RevPAR growth by 60 basis points. Excluding the effect of the storms, our results were still well above the midpoint of our guidance range. In addition, several other markets performed quite well for the quarter.

Our 2 hotels in Indianapolis posted RevPAR growth of nearly 15%, significantly better than the strong 10.4% growth in our competitive sets as a result of the continued successful implementation of our group strategies.

In Louisville, our 2 Marriott-branded properties realized 9.4% RevPAR growth, as we were successful in securing more base business, while the Kentucky International Convention Center remains closed for expansion.

Portland remains one of our best-performing markets as our 2 hotels continue to benefit from a favorable supply-demand dynamic, posting 6.5% RevPAR growth as compared to a flat quarter for the competitive set. Year-to-date, RevPAR in our Portland hotels is up over our 8%, partially as a result of our recently-renovated product.

These stronger markets were partially offset by anticipated softness in Minneapolis, which was down 12% in the quarter and faced a very difficult year-over-year comparison to the third quarter last year, when the city hosted the Ryder Cup. Moving on to acquisitions.

In the third quarter, we acquired the 255-room AC Hotel by Marriott in Downtown Atlanta, for $57.5 million or $225,000 per key. After undergoing a comprehensive $20 million renovation or $78,000 per key, the like-new hotel opened as an AC Hotel in May of 2017.

Overall, our 14 hotels acquired since the beginning of 2016, continue to lead the portfolio in RevPAR growth, which are up 2% year-to-date as compared to the Smith Travel Research Upscale Average RevPAR growth of 0.8% for the same period.

This outperformance continues to validate our ability of sourced acquisitions with outsized growth profiles that are accretive to the existing portfolio. During the quarter, we sold 3 hotels for a total of $27.8 million or an average of $102,000 per key, resulting in a net gain of $8.1 million.

These hotels had a combined RevPAR of $85 for the 12 months ended June 30, 2017, which represents a 26.3% discount to the pro forma portfolio's RevPAR for the same period, further demonstrating our success in executing opportunistic dispositions and recycling capital.

During the third quarter, we invested $11.3 million into our portfolio on items ranging from common space improvements to complete guestroom renovations, including furniture, soft goods and guest bathrooms. We expect to invest another $15 million to $20 million in capital improvements during the remainder of the year.

Over the last 5 years, we invested well over $200 million into our portfolio, and the 79 hotels that we own today, have an average affected age of approximately 3.1 years, further proof of our commitment to maintaining a high-quality portfolio where guests want to stay. Overall, we feel good about our results in the quarter.

When we spoke in August, we emphasized the stabilization we saw in our July results after an uncharacteristically choppy June. I'm happy to say the stabilization persisted through the rest of the quarter, and into October.

Clearly the noise surrounding the various natural disasters had made recent entry-wide data harder to interpret, but we feel confident the portfolio remains on solid footing and is well positioned to perform going forward. With that, I'll turn the call over to our CFO, Greg Dowell..

Thanks, Dan, good morning, everyone. For the quarter, our pro forma hotel EBITDA came in at $60.5 million, which was a slight decrease of 3.4% as compared to the same period to 2016.

As discussed on previous calls, the margin headwinds we expected to face in the third quarter, did in fact materialize, but to a lesser degree than in the first half of the year. Our pro forma hotel EBITDA margins contracted by 160 basis points to 37%.

The contraction was primarily related to a 26% increase in property taxes, which adversely affected margins by 120 basis points, while the remaining 41 basis points of contraction was related to direct hotel operating expenses, such as labor and elevated e-channel sales commissions.

During the third quarter, adjusted EBITDA increased to $47.8 million, an increase of 13.6% over the same period 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 $400 million as of quarter-end.

At September 30, 2017, we had total outstanding debt of $777.5 million, with a weighted average interest rate of 3.78%, and ended the quarter with net debt to pro forma trailing 12-month adjusted EBITDA of 3.9x, which is a comfortable level based on our general range of 3.5x to 4.5x.

Today, more than 65% of our portfolio EBITDA is unencumbered by mortgage debt, which is proof of the progress we continue to make in assembling a highly flexible balance sheet. As of October 20, we had total outstanding debt of approximately $782 million, which included a $45 million revolver balance and a weighted average interest rate of 3.78%.

In the third quarter, we entered into a new $225 million unsecured term loan that matures on November 25, 2022, and carries an interest rate based on a pricing grid with a range of 145 to 220 basis points plus LIBOR, depending on our leverage ratio.

This brings our total unsecured credit commitments to over $800 million, of which, $355 million remains undrawn as of today. At closing, we received an initial advance of $125 million and may draw the remaining $100 million at any time prior to September 20, 2018.

The unsecured term loan has an accordion feature that allows us to request up to an additional $175 million in lender commitments over the $225 million of initial commitments. Proceeds from the initial advance were used to partially pay down the outstanding balance on our unsecured revolving credit facility.

Subsequent to quarter-end, we entered in to 2 $100 million interest rate swap agreements with an effective date of January 29, 2018. The swaps convert LIBOR from floating rate to an average fixed rate of 1.98% through January 31, 2023.

Had the two interest rate swaps been effective at quarter-end, our total debt would have been [indiscernible] fixed and well positioned to withstand an increasing interest rate environment. Turning to our outlook for the fourth quarter.

In our release, you will see that for the fourth quarter, we provided adjusted FFO guidance of $0.26 to $0.29 per share, a pro forma RevPAR change of positive 2% to 4%, and same-store RevPAR change of flat to 2%. Our full year 2017 guidance midpoint for adjusted FFO remains unchanged and we are tightening the range to $1.29 to $1.32 per share.

Similarly, our pro forma and same-store RevPAR growth guidance midpoints remain unchanged and we are tightening the range to 0.25% to 0.75% for our pro forma portfolio of 79 hotels, and negative 0.75% to negative 0.25% for our same-store portfolio of our 65 hotels. Metrics supporting our guidance are provided in our release.

For the full year, we have incorporated capital improvements of $40 million to $45 million, which includes both renovation and recurring capital expenditures. No additional acquisitions, dispositions, or capital market activities are assumed in the fourth quarter or full year 2017 guidance. With that, I'll turn the call back over to Dan..

Thanks, Greg. In summary, we're very pleased with our third quarter results. As our well-diversified portfolio, which has been a hallmark of our overall long-term strategy, returned to producing predictably solid results in an otherwise challenging operational environment.

As I said last quarter, I continue to be quite optimistic about the outlook for our industry, and particularly, for the future of Summit. Indicators we track continue to show positive signs and most are improving sequentially, including last week's GDP report.

While this has yet to translate into the type of improved corporate travel patterns we would hope to see, we do believe a continuation of a constructive economic backdrop and some pent-up demand will ultimately drive hotel revenues. And with that, we'll open the call to your questions..

[Operator Instructions]. Our first question comes from Austin Wurschmidt with KeyBanc..

First one, just wanted to touch on guidance. You mentioned, pointed out, that third quarter came in at the high-end of the year.

You guidance range for this quarter, though, you tightened the range, left at virtually flat, but just curious what you're saying as potential offsets in the fourth quarter as to why may be the range didn't tick up a bit given the better third quarter performance?.

Sure, Austin. This is Dan. I think there's clearly a lot of moving parts with some of the storms and disruption. Notably, Hurricane Nate, which affected New Orleans in the first part of the quarter, gave us, I think, some conservatism going into the fourth quarter. We did maintain clearly the midpoint of the guidance that we gave at Q3.

So we look at it more as the tightening of our range and some of the effects early in the quarter from the additional storm..

And then could you just talk a little bit about what the biggest drivers of the pickup in the RevPAR growth in the fourth quarter? What market do you see potentially reaccelerating, getting a little bit better?.

Sure. I think as we talked about, early in the year, we still think New Orleans is going to be our strong market for the quarter, but beyond that, we do have, as a portfolio, clearly a much easier comp than we had in prior year.

So I think there is some added stability that comes along with some consistent results through September and October that give us the confidence that there's still some opportunities to push both rate and occupancies in the market.

But I think New Orleans is the one that sticks out more than others that we believe is going to be a strong market for us..

And then, just the last one for me.

You provided some comments related to the demand side, GDP growth looking a little bit better, but what's kind of the latest view towards supply in the '18, and as you look out? And what are your latest thoughts on when maybe we start to see that abate?.

It's Dan again. It' a great question, as will look at supply it's not as easy to just look at it and say, what supply comes in '18. And also, you have to consider what has come out in '17, and how those properties ramp up in each individual submarket. I think there are less markets that have large supply increases for us in '18.

Nashville still is, I think, expected have 10% supply growth. Miami is 3.5% and Austin has a little bit more coming online. But the majority of those markets, we think, absorb it very well. The market did take a step back. Minneapolis had a tough time absorbing a lot of supply. Now that starts to abate in '18 for us.

So I think the effects of supply will be very much market-specific, and if you look at our portfolio as a whole and take out some of the higher supply numbers in some of those larger markets, I think we are very much in-line with the industry and very much able to manage new supply coming online..

Our next question comes from Chris Woronka with Deutsche Bank..

Dan, maybe you can give us a quick 35,000-foot view of the M&A or, I guess, more on the acquisition side for you guys. You've been pretty active, you've got a lot of the, I think, the recycling done and so now it's may be more focus on acquisitions.

Can you do give us a picture of what you're seeing out there in terms of trends?.

Sure. And I'll take the first part of it and I'll turn it over to Jon. I think the market has been fairly constructive and from a 35,000-foot level, I think with CMBS and debt still being available, we would expect continued interest by private equity groups and a lot of competition for marketed deals, which we're seeing.

But I wouldn't say that I view the market as anything other than continuing to be challenging. And maybe I'll have Jon add some commentary as well..

Chris, it's Jon. I would agree, I think that what we are seeing out there is a fairly competitive market, particularly for marketed deals. I'd say, we've spent most of our time, especially, recently, trying to find stuff off the market that fits. We continue to find opportunities.

We typically look for stuff that's a little broken that we think we can fix and add some value too. So I think as Dan said, it is a competitive market out there, but we are active, we do have a very pretty healthy pipeline right now and hope we're able to transact on a few..

Okay, great. And then, Dan, just to kind of revisit the supply question for a second.

To the extent you guys may be do a deep dive on what's coming on in your markets, do you see any impacts from the hurricanes, in terms of supplies, getting more expensive labor, getting more expensive and not as widely available? Do you think that maybe impacts things 2 and 3 years out?.

2-3 years is a little bit hard to predict, but I do think short-term and probably intermediate-term, it does slow down new starts. I think it delays projects. I'm not sure how many, It will just make so expensive and unreasonable that they won't go.

But I think it does force developers and banks also to go back and look at these projects and how financially viable they are, as labor cost, if continue to rise and material cost if continue to rise, yes, the profitability of a lot of these projects starts to come into question.

So intuitively, I would expect a few to get canceled and a few to get delayed and that should bode well for markets that we're in that are absorbing the supply..

Our next question comes from Shaun Kelley with Bank of America..

Dan, you gave some good color in the prepared remarks on the impact of the portfolio for the storms in the quarter, and we continue to see really good numbers coming out of some of the Texas submarkets and in Florida even after the third quarter ended.

Now what's your sense or based on prior activity for like how long you think maybe the positive uplift or tail from some of these events is going to continue? And how much do you think you're benefiting from that? Because we know at least regionally, you should have some hotel's that are positive, but you talked about Hurricane Nate.

So what's the sort of net implied impact for 4Q?.

Yes, it's a great question, Sean. This is Dan. When we look at the totality of the effects of the storms, you're right, there are some gives and takes there. The additional occupancy is partially offset by some of the cost associated with cleanup and minor repairs. So it's not directly a flow-through to the bottom line.

We did have a pretty big opportunity lost in Austin with a citywide convention by a realtor group that was canceled, and they asked their people to focus on relief efforts in Houston. So that was an offset.

We already expected Florida and as a market to be stronger in Q4, so the longer term occupancy from displaced homeowner starts to go away fairly quickly. The insurance adjusters, there is not as much of that in Houston as is probably in some of the Florida markets. But it's much more spread out than the effects of Houston.

The emergency workers and those go away fairly quickly. So we're not looking for significant longer-term positive effects. It's incrementally positive, as we said in our prepared remarks, mostly from the occupancy from housing member. But we don't see that as a long-term trend.

We think Houston, as a whole, needs to recover due to a big part of the energy sector coming back. And Florida, I think is a great long-term market for us, but we don't think that the effects of the hurricane are long-lasting, if that answers your question..

That's helpful. And then on, looking at your margin performance, you called out property taxes, but otherwise, you're down 41 basis points, which I think on a -- like just the kind of a core low 1% RevPAR growth is actually pretty good, especially for your business model.

So is that the right ballpark or what do you think margins will decline and this type of, let's call it, very lower part of low single digit RevPAR growth? Or can it be better than that? Or will there be more risk there?.

This is Dan. I do think that's a fair number. Appreciate the compliment. We work real hard to create margin as best as possible, without cutting to the point where it affects guest experience and our people. So as we've talked before, I think 2% RevPAR is generally a good breakeven number for margin.

We can be a little bit more aggressive and desperate times, should they come, we may have to become more aggressive. But at this point, we feel good about cost containment and labor containment and that is, as you said, at low 1% RevPAR, it is very hard to hold margin.

And we just don't believe that cost cutting for the sake of hitting a margin number is healthy for the long-term of your business. So you don't want to displace a good employee and have a challenge bringing them back. So we do need to be thoughtful and diligent on every dollar that's been entrusted to us.

But at this point, we think that the margin performance that we're getting absent the property taxes is very much commensurate with the rates and our results that we're getting, and the truth is, with the stronger occupancy, that typically makes it a little harder to flow margin as well. So those are several factors that get us to that number.

But we feel good about it..

Our next question comes from Michael Bellisario with Baird..

Just wanted to dig a little bit deeper onto that last topic from Shaun.

As you look at underwriting, how are you guys getting comfortable looking at new deals and underwriting those cost increases, when you're seeing all those headwinds, we just talked about was in the portfolio, what are the kind of puts and takes that you see with new deal that you're looking at to potential buy?.

Yes, so when we look at new acquisitions, as Jon stated, we're looking for a value-add, kind of the hidden gem that has opportunities of growth from maybe a variety of things. Maybe there are some operational things that we think we can improve on.

Maybe there's a mix of guest that is too cooperate or too leisure or too group focused or something of the operational nature. The other thing we've been very successful at is understanding what capital improvements can do to drive performance.

We found many of the acquisitions that we have purchased have been under invested in and that creates an inability to get maximum rates. So I think there is a number of things that go into that. I don't think there is one that sticks out that we look for. We do find opportunities that are purely just mix based and some that are purely capital based.

But generally, the blend of those opportunities helps us underwrite to a growth number that meets our thresholds..

And would you say today you have a maybe bias toward lower-cost, lower-union-exposure type markets to limit that upside risk on the cost side as you end your deals too?.

I think that's fair. I think you lose some flexibility with union labor to do some things that would make it hard for us, on some of these hotels to create maximum value. We've got a great team of management companies that take great care of employees, and with great benefits and opportunities for growth and expansion.

So we feel like the model that we have is very much supportive of our thesis of creating value..

And then just one more for me on the underwriting side.

How do you think about the return profile, the new mezz deal, you guys got a development deal outstanding right now? How does that differ, both in kind of in absolute and relative terms, when you're underwriting, kind of, stabilize cash flowing assets today? And how do you go to stack rate those when -- if you're looking at deploying capital?.

Yes, Mike, it's Jon. I'll take that one. I think, as we've talked a little bit in the past and we spent some time at on our Investor Day, we think that doing some of this mezzanine lending was the option, but not the obligation to purchase, will always be a small part of what we do.

I don't think it will ever be more than $50 million to $100 million dollars of any outstanding at any given time, but we think it's a good way to create a shadow pipeline. We only do it in instances where it's ultimately a hotel that we like to own eventually.

Generally, I think we view these as requiring a little bit of a higher risk-adjusted return, what then we would otherwise anticipate underwriting for a down-the-road fairway acquisition..

Our next question comes from Bill Crow with Raymond James..

Dan, are you seeing any separation of performance between brands within the same markets?.

I wouldn't say that seeing separation, I think it's very much product and location specific and I think, Marriott, Hilton, Hyatt and IHG are the brands that we have chosen, and we choose the opportunities based only, partially, on the brand and their deliverables.

I think there is continued to be confusion by guests on which brands offer which amenities and I think there is a quality aspect. And as I mentioned earlier, the renovation dollars we spend we're very much focused on creating a product that can compete in and above where it's chain scale puts it.

So I think for us, it is more about quality of product, more so than the brands themselves..

Any slowdown in the movement of bookings to the OTA's, now that the brands have kind of refocused their efforts on pre and dot com websites?.

No. This is Dan again. We're not seeing that. We're not seeing that the OTAs grow exponentially. We think it's fairly stable. We like the direction that the brands have taken and the aggressiveness that they've had going after guests and driving loyalty through the websites. We think that's important and we think it's successful.

But we haven't seen any discernible trend away from that, but we think it's definitely a positive and hopefully that will continue the energy and the engagement around those tactics..

All right.

And then finally for me, any change in pricing on acquisitions or the competitive nature of the acquisition market out there? Any?.

Yes, Bill, it's Jon again. I would say no, I think it's been fairly stable, still quite competitive and as we said earlier, particularly on the market and deal side, we should probably spend some more time looking at off-market deals than the marketed deals in the last few months. But I would say no real discernible change in pricing..

Your next question comes from Wes Golladay with ABC Capital markets..

It's RBC. Just looking at that mezzanine investment.

Can you talk about how that deal came about? Is this existing relationship you have? And how important was it for you to get that feature to buy 90% of the property?.

This is Dan. I think the majority of those type of opportunities, we would expect to come from relationships we've developed over the last 15 or 20 years. We do think it's important to know your partner in that situation. We're not in the business of wanting to be just a mezz-lender. We want this to be a vehicle where we can buy-in.

And the 90%, that purchase option, is the first way to gain ownership of the asset. We also have, at year 5, the opportunity to buy in its entirety. So I think it's just a bridge that we've structured with the developer to allow the developer and us of the future on a really to win together..

Okay.

And then, looking at, I guess, for the hotel margins, are you still on track for the 150 basis point contraction this year? And how should we look at taxes next year?.

Yes, Wes, you're exactly right. Just like we constatated last quarter, things are kind of materializing like we expected and the 150 basis points is appropriate. So much of our -- when you set taxes, the property taxes is kind of the big piece there.

So much of that comes from the fact that we've been so acquisitive and the acquisitions get reassessed and so it will continue to some degree, but I would think to a lesser degree. The same-store portfolio has not been much less than those new acquisitions as far as the increases in property taxes..

Okay, and then not looking for guidance for next year, but how should we look at some of these younger assets stabilizing, for the AC in particular, what is your initial expectations for this year for a targeted deal? And then in next year, how should we expect the ramp-up of that asset?.

Yes, I think in our second year, we'd expect to be above our 8% underwriting. So we still have some growth in that asset. Also we should think about the other assets that we purchased. We're just in the budgeting process now so we're still building our models for next year.

So clearly we're not providing guidance, but I would say, I'm optimistic as a whole. But if you think about all the work that's been done, it really is meaningful not just reliant on the last few acquisitions, but over the last 2 years, we've acquired $750 million of high-quality assets that we've renovated, we've changed into management companies.

We've looked at new strategies for driving value. We've invested over $100 million in renovations across the portfolio and we've continued to gain market share despite the market challenges and headwinds, many of which be really lessened and start to become tailwinds.

So we think that as evidenced by the strong pro forma portfolio, the acquisitions are well-positioned to grow in '18 and beyond..

At this time I'm showing no further questions. I would like to turn the call back over to Mr. Dan Hansen, Chairman, President, and CEO, for closing remarks..

Well, thank you all for joining the call today. We do appreciate the trust that you've placed in us and look forward to talking at NAREIT or sometime soon. Have a great day..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, you may now disconnect. Everyone have a great day..