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Operator
Good day and thank you for standing by. Welcome to the Summit Hotel Properties Inc. Q1 2022 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Adam Liddell, Senior Vice President of Finance, Capital Markets, and Treasurer. Please go ahead.
Adam Liddell
Thank you, Carmen, and good morning. I am joined today by Summit Hotel Properties President and Chief Executive Officer John 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 4, 2022, 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.shpreet.com. Please welcome Summit Hotel Properties President and Chief Executive Officer, John Stanner.
Carmen
Thanks, Adam, and thank you all for joining us today for our first quarter 2022 earnings conference call. Overall, we are extremely pleased with our portfolio's first quarter performance. as operating trends accelerated rapidly through the quarter, resulting in our highest quarterly RevPAR and best RevPAR recapture to 2019 levels since the onset of the pandemic, despite a slow start to the year in January and early February. RevPAR in March reached a pandemic-era high of over $120, a 61% increase from our January results. We continued to benefit from meaningful pricing power throughout the portfolio, highlighted by record average daily rates in our resource segment, which finished the quarter 10.5% higher than the first quarter of 2019. We also began to see significant growth in our urban portfolio, particularly midweek, as contribution from corporate group negotiated and business transient demand segments, as well as compression from convention activity in numerous markets, drove strong occupancy levels throughout March and April. First quarter pro forma rev par increased approximately 78% from the first quarter of 2021, driven by a 21% increase in occupancy and a 47% increase in ADR. For the quarter, rev par recapture was 78% of 2019 levels, with nominal rev par and 2019 recapture rates improving each month. RevPAR in March reached an 87% recapture rate to March of 2019 and was 16% higher than our previous pandemic-era high in October of 2021. Preliminary April pro forma RevPAR was expected to be $119, essentially flat to March and approximately 90% of 2019 RevPAR levels, despite some of our stronger mountain and desert markets entering into slower seasonal periods. Similar to our results in the back half of the first quarter, April's better-than-expected performance was driven increasingly by accelerating demand in our urban portfolio, which helped offset the end of the traditional spring break period and the timing of the Easter holiday weekend. Preliminary April occupancy was approximately 70% in our urban portfolio, with rates over $170, which drove RevCar to its highest level since the onset of the pandemic, surpassing our first quarter metrics by nearly 40%. Weekday pro forma rev par has also increased meaningfully through the first part of the year, driven by continued growth in corporate and group-related travel. March and April achieved weekday rev pars of $113 and $110, respectively, each of which was over 20% higher than the prior pandemic peak in October of last year. As we look to the balance of the second quarter, we are very encouraged by the latest forward booking trends, with May pacing over 6% ahead of where April was trending 30 days ago, and June trending slightly up from May. Continued improvement in weekday demand, a strong Memorial Day weekend, and continued leisure strength in the early part of the summer season are expected to result in May and June recapture rates in line or better than the 90% recapture we experienced in April, despite getting into more difficult year-over-year summertime comparables. In our earnings release last night, we also announced two pending transactions. First, we've entered into a contract to sell the 169 guest room Hilton Garden Inn San Francisco Airport North Hotel, currently owned in our joint venture with GIC for $75 million or $440,000 per key. The purchase price is nearly 30% higher than what the joint venture acquired the hotel for in 2019 and equates to a 1% cap rate on the hotel's trailing 12-month net operating income. Importantly, the sale will also allow us to forego a comprehensive $7 million renovation, equal to over $40,000 per key, that was scheduled to begin later this year. We also announced, in conjunction with our mezzanine lending program, the exercise of our equity purchase option to acquire a 90% interest in the newly constructed 264 guest room AC element dual branded hotel in downtown Miami's Brickell neighborhood. at a valuation of $89 million, or $337,000 per key. These two new hotels are located in the heart of Brickell, directly adjacent to Brickell City Center, in one of the country's most dynamic and vibrant markets. The hotels have ramped incredibly quickly since their December 2021 opening, generating first quarter REF PAR of $181, and hotel EBITDA margin exceeding 45%. First Quarter Rev Bar and Hotel EBITDA were approximately 25% and 30% higher than the property's initial budget, respectively. The property features Rosa Sky, a rooftop bar on the 22nd floor offering incredible views of the Miami skyline. The outlet has quickly become one of downtown Miami's most popular nightlife destinations, generating approximately half a million dollars of revenue in the month of March alone. For the full year 2022, we now anticipate the hotels will generate a combined hotel EBITDA yield on our option price between 8% and 9%, effectively in their first 12 months of operation. The acquisition of the AC element represents our first exercise of a purchase option received in connection with providing a mezzanine loan on a new hotel development. We earned a 9% interest rate on our $30 million of funded paper during the term of the loan and we will be acquiring two hotels performing extremely well nearly immediately upon opening at a basis that is well in the money relative to current market values. We believe this further demonstrates the uniqueness of our mezzanine lending program and an ability to capture better risk-adjusted returns without taking on outright development risk. Both the Brickell and San Francisco transactions are expected to close during the second quarter. In the first quarter, we closed on the previously announced acquisition of 27 hotels, two parking garages, and various financial incentives from New Crest Image for a total consideration of $822 million. While we've owned the new portfolio for less than a quarter, we are already 3.5% ahead of our original EBITDA underwriting and are increasingly optimistic that the continued implementation of various asset and revenue management strategies will drive additional upside beyond our initial expectations. Our other pandemic era acquisitions are performing even better, as the Residence Inn and Steamboat and Embassy Suites in Tucson are tracking nearly 40% above our underwritten 2022 EBITDA levels. Combined, we now expect our 2022 EBITDA yields on these acquisitions to be in the 7% range. Since July of 2021, we've executed on approximately $1 billion of transactions, and nearly half of the hotels we acquired have opened within the past four years, implying there is still considerable upside in these assets as our newer hotels continue to stabilize. This activity all serves as a testament to our team's ability to identify and execute on accretive transactions that are consistent with our longstanding strategy of thoughtfully and opportunistically allocating capital. With that, I will turn the call over to our CFO, Trey Conkling.
Adam
Thanks, John, and good morning, everyone. On a pro forma basis, we experienced continued RevPar growth across our portfolio in the first quarter and into April. For Summit's 43 hotel urban portfolio, first quarter RevPar was $87, a level slightly below the third quarter 2021 pandemic peak. However, in March and April, our urban hotels generated RevPar of $113 and $120, respectively, a 7% and 14% premium, to the previous pandemic monthly high in October of last year. Strength in our urban portfolio was driven by increased midweek corporate and group travel in Sunbelt markets such as Dallas, New Orleans, Austin, and Nashville, as well as downtown Chicago, which has seen a meaningful uptick in midweek corporate demand, and downtown Baltimore, which doubled its anticipated targets for convention center room nights in the quarter. We were also encouraged by the weekday performance trends within our urban portfolio, which saw meaningful RevPAR increases in March and April. Urban weekday RevPAR in March and April was $103 and $107 respectively, a significant increase from the previous pandemic monthly high of $86 in October of last year. First quarter RevPAR for our non-urban hotels was $106. an increase of over 10% versus both third and fourth quarter 2021. Strength in our non-urban portfolio was driven heavily by our 11 resort hotels, which generated a $183 RevPar in the first quarter due to robust spring break demand and peak leisure seasonality in markets such as Phoenix, Tucson, Fort Lauderdale, Orlando, Steamboat Springs, and Silverthorne, Colorado. Furthermore, average daily rate for our resort hotels exceeded 2019 levels by more than 10%. As these markets enter shoulder periods, their natural seasonality is expected to be offset by accelerating demand trends within our urban portfolio. Booking windows in the quarter contracted as the Omicron variant created uncertainty in January and early February. However, subsequent to President's weekend, demand increased significantly, and the booking window expanded with same-day bookings in March declining to only 18% of total bookings, a pandemic-era low. Similarly, bookings for stays more than a week out comprised only 38% of total bookings in January, but expanded to nearly 50% of bookings in March, which is generally in line with fourth quarter 2021. While the trend of advanced bookings throughout the quarter was encouraging, Bookings in the week for the week remain elevated relative to pre-pandemic levels. From a channel mix perspective, we are seeing notable increases in bookings coming from the less expensive channels, as more than 70% of our stays in the quarter came from direct bookings, central reservation systems, or global distribution systems. OTA contribution was slightly higher compared to the fourth quarter of 2021, given the volume of leisure transient bookings. But as convention activity increases and corporate and business transit demand accelerate into the summer, our guest acquisition costs should begin to decline, which when layering in accelerating ADR growth, should serve as a tailwind on the margin front. On a same store basis, operating costs per occupied room in the first quarter were slightly elevated compared to the fourth quarter 2021, driven by softer January occupancy as hotel staffing levels were maintained to accommodate the strong demand forecasted for President's Day weekend and the spring break holiday period. This resulted in a January gross operating profit margin of 35% and a first quarter GOP margin of 44%. However, as top line performance recovered throughout February and March, operating costs per occupied room declined and GOP margins expanded to more than 50% in March. We expect March's positive trend in margins to continue in the second quarter of this year. Proforma Hotel EBITDA for the first quarter was $47.3 million, a 200% increase from the first quarter of 2021, which resulted in a 33% margin, nearly 13 percentage points higher than the first quarter of last year. It's worth noting that we estimate integration of the Newcrest Image portfolio created approximately 50 basis points of margin headwinds in the first quarter as a result of one-time transition-related expenses. Adjusted FFO for the first quarter was $20.1 million, an increase of $27.1 million from the first quarter of 2021, and an increase of $5.3 million from the fourth quarter of 2021 amid an improving fundamental backdrop and recent transaction activity. During the first quarter, on a consolidated basis, we invested approximately $10.3 million in our portfolio on items primarily related to maintenance capital and advanced purchasing related to upcoming renovations. Including the first quarter, we expect to spend $60 to $80 million on a consolidated basis or $50 to $70 million on a pro-rata basis in total capital expenditures for 2022. For the year, we will commence or complete renovations at 13 hotels, including the Hilton Garden Inn Houston Energy Corridor, the Hyatt Place Orlando Universal Studios, and the Spring Hill Suites Nashville Metro Center. As John mentioned, in the second quarter, we expect to close on the sale of the 169 guest room Hilton Garden Inn San Francisco Airport for gross proceeds of $75 million, or $444,000 per key. We acquired the hotel in October 2019 for an allocated value of $58 million as part of a four property portfolio, which will result in an estimated gain on sale of $20.5 million. The sale will generate approximately $37 million of pro rata net proceeds that we anticipate using to repay a portion of our single remaining 2022 debt maturity. In addition, we exercise our equity purchase option in connection with our mezzanine construction loan to acquire a 90% interest in the 264 guest room AC element dual branded hotel in downtown Miami's Brickell neighborhood. The 90% equity interest will be acquired at a pre-negotiated total hotel valuation of $89 million or $337,000 per key. The transaction will be financed using an estimated $47 million mortgage loan and we expect to fund our $38 million pro rata portion of the required equity by converting our $30 million mezzanine construction loan and contributing $8 million of existing cash. At closing, a $10 million letter of credit supporting the option will be released back to us, which will result in a net positive liquidity event after consideration of the $8 million cash funding. Finally, turning to the balance sheet, our current overall liquidity position remains robust at more than $450 million. We continue to maintain ample liquidity to repay all maturing debt through 2024 when considering available extension options. From an interest rate risk management perspective, our balance sheet is well positioned, including an average pro rata interest rate of 3.4%, with nearly 70% of our current outstanding pro rata debt fixed after consideration of interest rate swaps. In the second quarter of 2022, we expect to exit the existing waivers on certain financial covenants related to our primary corporate credit facility, which will provide for more capital allocation flexibility regarding investment activity, use of proceeds, capital projects, and potential distributions. Included in our press release last evening, we provided 2022 guidance on certain non-operational items, including cash corporate G&A, interest expense, preferred dividends, and capital expenditures, both on a consolidated and pro rata basis. We expect the midpoint of consolidated cash corporate G&A to be $20.5 million, interest expense excluding the amortization of deferred financing costs to be $55.5 million, and preferred dividends to be $18.2 million, and pro rata capital expenditures to be $60 million. And with that, we'll open the call to your questions.
John
Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw the question, press the pound or hash key. Again, that is star 1 to get in the queue. The first question comes from Michael Belisario with Baird. Please go ahead.
Michael Belisario
Thanks. Good morning, everyone. Good morning, Mike. Jen, first, just want to focus on the new CREST portfolio. I think you mentioned tracking a couple percent ahead of underwriting. Is that coming from the top line or the bottom line? And then maybe could you provide any guidance on how you're thinking about EBITDA contribution from that portfolio for the full year?
Carmen
Yeah, it's a little bit of both. Mike, we're definitely ahead on the top line. I think as we alluded to in the prepared remarks, I think we feel better about the acquisition today even than when we underwrote it in terms of where we think there's opportunity. We think there's great synergies and opportunities on both the top line and the bottom line and ability to complex some assets that are clustered in certain markets together. So as we said, we are slightly ahead of where we underwrote the assets initially. I do expect that to continue to expand as we progress throughout the year. The markets are more solid than they were at the beginning of the year. And again, I think we're seeing more and more opportunity. We do expect the yield on that acquisition to be in the 7% range I need to doubt for the full year.
Michael Belisario
Got it. That's helpful. And then on the balance sheet, if you could fast forward, call it a quarter or two, you've completed the two transactions. Fundamentals are hopefully continuing to improve. What else do you want to get done or need to get done on the balance sheet side in deleveraging in terms of being in an even stronger position to look to further invest capital on the acquisition side?
Adam
Yeah, I think from a balance sheet perspective, we're obviously selling the San Francisco asset, as John mentioned, and that will result in about $37 million of proceeds that will come up to the summit parent. We'll use that to pay off the balance or a portion of our November 22 term loan, which will get us down to about a $25 million balance there. I think there's other things that we're looking at that we'll be able to basically take care of the rest of that maturity through the balance of this year. You know, from a deleveraging standpoint, I don't think that we see anything that we would be doing proactively other than continuing to see kind of the organic rebound in EBITDA across the portfolio. As John mentioned, you know, whether it's the acquisitions in Steamboat and Tucson or how NCI is performing as well as our performance in the first quarter, we feel really good about the organic growth there. And we think that we'll be able to delever pretty meaningfully over the next 12 to 18 months based on the growth in the portfolio. But I'd say those are the two kind of main things in terms of how we think about getting back to a more normalized level of a debt to EBITDA ratio. I'd also note that kind of when we're looking at the balance sheet, we're not really just thinking about it purely from a debt to EBITDA standpoint. When we look at some of our coverage statistics, if you look at the first quarter on an annualized basis, our interest coverage ratio is nearly four times. Our fixed charge coverage ratio is nearly three times. And our consolidated debt to kind of our undepreciated book value is around 40%. So from that perspective, not just looking necessarily at the debt to EBITDA metric today, we feel really good about those statistics on the whole.
Michael Belisario
Got it. That's helpful. And then just one more follow-up, just on the dividend, any updated thinking on timing there or your desire to bring that back?
Carmen
Yeah, no updated thoughts on timing. It is something that we talk about with the board every quarter. As we've kind of telegraphed in the past, we think this is a matter of when, not if. We just want to make sure that we're prudent and thoughtful in terms of how we balance it with other capital allocation priorities.
Michael Belisario
Got it. That's all for me. Thank you.
John
Thank you. Your next question comes from Austin Worshmith with KeyBank. Please go ahead.
Austin Worshmith
Hey, good morning. This is Daniel for Carrico and for Austin. With respect to inflationary pressures across the economy on leisure travelers, have you seen any evidence or signs of pushback from customers? And are there pockets or segments within the portfolio where you've seen sensitivity to rise in hotel rates?
Carmen
Yeah, no, we really haven't seen it anywhere. Certainly something that we're watching closely, particularly, you know, as gas prices have risen and the cost of airline tickets have risen. We haven't seen any pockets of softness really anywhere across the portfolio. So I know it's something that we're monitoring very closely, but, you know, our pricing power in March and April have been as strong as they've been at any time since the pandemic. And You know, I don't think we've seen at least historically a strong correlation between rising gas prices hurting hotel demand. So we'll hope that continues to hold this cycle. But the simple answer is we haven't seen any effects so far.
Austin Worshmith
That makes sense. Thanks. And then with the Mezbook wound down now, what is your future appetite for additional Mez investments, I guess, in contrast to how you're thinking about traditional acquisitions and, I guess, any update on the transaction market as well?
Carmen
Yeah, look, we like the MES program. It served us very well. And I think, you know, you've seen with the couple of transactions that we've entered into, you know, we had a couple of loans that we just got paid back. We earned 8% over the time that our money was outstanding, our loan was outstanding during a very challenging period in the hotel industry. You know, the option that we've just exercised, we think, again, that we are 9% on the capital that was outstanding. We think we're buying a tremendous hotel at a significant discount to where it would trade in the market. So we really do like the program. We're certainly open to trying to find more opportunities to expand it. We won't have any meslone dollars outstanding following the exercise of this option. It isn't the easiest environment to develop hotels in today, as you're aware. Construction costs are meaningfully higher than they were pre-pandemic. And so, again, I think we expect to be in a period where there's just lower supply growth in this industry over a longer period of time. So we'd love to put some incremental dollars out into the program, and we'll continue to look at that and try to be opportunistic around that. In terms of the transaction environment, we continue to see a lot of good opportunities out there. We've got a full pipeline that we're continuing to review. We'll hope to be able to make some continued progress there through the balance of the year.
Austin Worshmith
Appreciate it. Thanks, John. Thank you.
John
Thanks. Next question is from Bill Craw with Raymond James.
Raymond James
Good morning, guys. Just a quick question on the balance sheet. I think you got $300 million in variable rate debt. I just wanted to see how you're thinking about that and the opportunities that you might see to fix some of that debt.
Adam
Yeah. Hi, Bill. I think when we think about the balance sheet today, we've got 70% of our pro rata capital structure is fixed and we generally feel good about that. I will say, obviously, with what's going on, the Fed meets today and You know, the future outlook on interest rates is something that we're continuing to review. We have a variety of swaps that are in place that obviously hedge that exposure for a period of time. But I think at a kind of a 70% fixed ratio, we feel good about that right now. But it's obviously an ongoing conversation and something that we're keeping a close eye on.
Raymond James
John, are you seeing any material differences in the recovery pace between different brand families? Anybody? And I don't necessarily expect you to call out specific brands, but are there major differences in the recovery?
Carmen
No, I wouldn't say it's brand-driven, Bill. I mean, I think you've seen it clearly by market and location. And I think early in the pandemic you saw it in extended stay, which recovered much quicker given the dynamic of the business. But anything leisure-oriented has recovered more robustly and quicker. I wouldn't say that we can really delineate between the brand families.
Raymond James
Okay. That's it for me. Thank you.
John
Thank you. And with that, we conclude our Q&A session. I will pass the call back to John Stanner for his final remarks.
Carmen
Thank you all for joining us today. We look forward to speaking with many of you after the call this quarter and look forward to seeing many of you in New York next month for NAREAD. We'll be back in touch in 90 days to provide another update. Thank you all.
John
And with that, we conclude today's conference. Thank you for participating and you may now disconnect.
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