Summit's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Summit Hotel (INN)

Summit Hotel Properties, Inc. (NYSE:INN)

Q4 2012 Results Earnings Call

February 27, 2013 9:00 AM ET

Executives

Dan Boyum - Vice President, Investor Relations

Dan Hansen - President and CEO

Stuart Becker - Executive Vice President and CFO

Analysts

David Loeb - Baird

Ryan Meliker - MLV Company

Austin Wurschmidt - KeyBanc Capital Markets

Will Marks - JMP Securities

Bob LaFleur - Cantor Fitzgerald

Wes Golladay - RBC Capital Markets

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2012 Summit Hotel Properties Incorporated Earnings Conference Call. My name is [Janeda], and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Dan Boyum, Vice President, Investor Relations. Please proceed.

Dan Boyum

Thank you, [Janeda] and good morning. I’m joined here today by Summit Hotel Properties’ President and Chief Executive Officer, Dan Hansen; and Executive Vice President and Chief Financial Officer, Stuart Becker. Dan and Stuart have prepared comments related to our fourth quarter 2012 release and filing. Following these comments you will have an opportunity to address any related questions that you may have.

I’ll remind everyone that many of our comments today are considered forward-looking statements as defined by federal securities laws. These statements are subject to numerous risks and uncertainties both known and unknown as described in our 10-K for 2012 and our other SEC filings.

These risks and uncertainties could cause results to differ materially from those expressed or implied by our comment. Forward-looking statements that we may make today are effective only as of today, February 27, 2013. We undertake no duty to update them later.

Our earnings release contains reconciliations to non-GAAP financial measures referenced during this call. If you do not have a copy of our release you may view and print it from our website, shpreit.com.

Please welcome Summit Hotel Properties’ President and Chief Executive Officer, Dan Hansen.

Dan Hansen

Thanks, Dan. We are extremely pleased with our fourth quarter and full year results for 2012. Our RevPAR growth in the fourth quarter of 12.4% appears to be near the top of reported lodging companies and marks the third consecutive quarter of outsize RevPAR growth for our company.

In addition, we achieved AFFO of $0.15 per fully diluted unit, which was the fourth quarter in a row we exceeded consensus estimate. This accomplishment is even more significant when you consider that we raise nearly $180 million in net proceeds in the fourth quarter, which is typically the weakest quarter for the lodging sector and we still beat our original guidance.

While we will not always be able to match fund, capital raises is closely with acquisitions. This demonstrates our focus on shareholder value and an unwavering passion to grow with accretive deals. 2012 was a year with solid and consistent quarterly improvement that validates our growth thesis.

For the year, our pro forma occupancy was 70.7%, our pro forma ADR was $97.90 and our pro forma RevPAR growth was 9.7%. This compares favorably to the upscale and upper mid-scale segments, which had 6.7% and 6.6% RevPAR growth, respectively for the year.

Our strong results in 2012 were balance of our embedded growth, early acquisitions, freshly renovated properties and the success of our brand conversions. The outsize growth will moderate in 2013 as we have discussed on previous calls, but with 19 new acquisition and 13 freshly renovated hotel, we see a continuation of the strong embedded growth story.

We invested approximately $265 million in the purchase of 19 hotels last year and we continue to find value across our core brand. But we always maintain a full pipeline we do expect to see a few more competitors in 2013 as debt terms are favorable and lodging fundamentals continue to be strong.

Many of the best opportunities we are seeing to create value for shareholders are in hotels that suffered from deferred capital investment. Comprehensive renovation is proving to be a significant driver in our outperformance and we see this as a terrific time to deploy capital into our existing portfolio, as well as our new acquisition.

We invested $28 million in 13 hotels as part of our comprehensive, renovation, conversion and investment initiative in 2012, and see 2013 as another year of upside with our continually improving portfolio.

We sold five hotels last year that were no longer strategic and have less growth opportunity for us. This capital recycling initiative is part of the continued gradual transformation of our portfolio and will continue throughout 2013. We will also continue to evaluate each hotel, its contribution to our portfolio and consider selling when better long-term growth prospects are available.

During 2012, there were two hotels that could have been potential candidates for sale that instead we reclassified as value creation opportunity. We successfully converted two properties to Fairfield Inn & Suites, one in Fort Worth, Texas and the other in Bellevue, Washington, the suburb of Seattle.

These projects included guestroom renovations with furniture, soft goods and guest bathroom updates. At both hotels the lobbies and breakfast areas were also expanded to improve the guest experience.

At our Bellevue property the exercise room was made slightly larger and had all new fitness equipment installed. So between the two projects we spend approximately $5.4 million, which we anticipate will not only greatly improve the guest experience, but also allow us to outperform our competition in these markets.

These freshly renovated properties, as well as all our same-store hotels are beneficiaries of our best-in-class asset management team. The implementation of our corporate revenue management and efficiency strategies is exemplified by the results of our portfolio for the year. Our portfolio as a whole is in terrific shape, is well-balanced and is poised for continued growth.

In 2012, 70% of our EBITDA came from markets in the top 50 MSAs and we expect that to continue to grow. Our largest markets or clusters are in the Dallas-Fort Worth area, Denver, Phoenix and Atlanta. However, none of these clusters account for more than 10% of our EBITDA.

Our strategy at IPO was clearly defined has not change and continue to be to grow primarily in the top 50 MSAs with Marriott, Hilton, Hyatt and IHG. Our deep relationships with these companies, the sourcing agreement we have with IHG and our strong reputation as both the private and public company has presented us with terrific opportunities and help transform company. We have nearly doubled in size and despite this transformation we remain rooted in our core philosophy of stewardship of investor capital and a focus on creating shareholder value.

With that, I’ll turn it over to Stuart Becker for some further details on the fourth quarter and the full year of 2012.

Stuart Becker

Thanks Dan. Good morning, everybody. As Das has previously noted, we continue to be extremely pleased with the performance of and the direction for our company. Revenue for the year was up nearly 33% as compared to full year 2011. Revenue growth was driven by two main factors, stellar performance by our same stores and the successful year of really good acquisitions.

For the quarter, RevPAR growth for our same stores was 15.3%. RevPAR for the quarter was $59.60 and consisted of 64.7% occupancy, a quarter-over-quarter increase of 582 basis points and ADR of $92.18, which was a 4.9% increase over fourth quarter 2011.

The better performance compared to our outlook for the same-store RevPAR growth was largely the result of improving markets, a more positive effects from renovations completed during the past several quarters and meaningful results from the rebranding of eight of our hotel.

Dan noted in his previous remarks, the success of our full year pro forma RevPAR growth of 12.4%, which again exceeded our outlook.

On the same-store basis, 2012 annual RevPAR growth was 11.7%. 2012 same-store RevPAR was $64.63 and consisted of 69.1% occupancy, which was an increase of 457 basis points year-over-year and $93.51 ADR, which was up 4.3% in the past year.

We generally believe that when our hotels as a group run an average of 70% to 72% occupancy, we have reached a tipping point in which opportunity for ADR growth is more prevalent. Both stabilized occupancy levels and historic low supply levels for hotels in general gives us confidence that as the economy continues to recover ADR growth will continue to be a byproduct.

Regarding revenue growth from acquisitions, we completed 19 acquisitions and addition of 2,348 guestrooms during 2012. These 19 hotels are excluded from our same-store calculation. Since year end, we have acquired an additional four hotels totaling 678 guestrooms.

Individually and as a group, our acquisitions have higher nominal RevPAR than our same-store hotel. We have been strategic in both the location and brand we invested in over the past two years. We believe these acquisitions provide the company with substantial organic growth over the near-term.

Pro forma hotel EBITDA for Q4 2012 was $15.4 million. Hotel EBITDA margins expanded by 275 basis points quarter-over-quarter after adjusting for the $600,000 one-time adjustment to hotel management fees paid to Interstate Hotels and Resorts during Q4 2011.

For full year, hotel EBITDA margins were 31.1%. During 2012, we were able to expand hotel EBITDA margins by compelling 249 basis points when compared to the previous year. We were pleased with margin expansions considering the mix of ADR and occupancy growth.

Once again when considering the hotel supply profile in the U.S. and stabilized occupancy in many of our hotels, we anticipate that 2013 and beyond will have the ability to focus more on ADR which should have a positive influence on hotel margins going forward.

Adjusted EBITDA for full year 2012 was $52.1 million, an increase of 40% year-over-year. Same-store performance and significant acquisition activity drove our adjusted EBITDA growth.

General and administrative expenses increased by $3 million in 2012, largely as a result of increased compensation as we continue to build our team to manage current and anticipated growth. During 2012, we began the process of consolidating our regional offices into our home office in Austin, Texas.

We believe that synergies are to be gained from the consolidation and earnings for the year were only affected by approximately $200,000 from this relocation charge. We anticipate completing the relocation in 2013 and expect four, $600,000 in one-time charges to affect earnings for the year. AFFO for the quarter was $0.15 per fully diluted unit and $0.82 per fully diluted for the full year.

Regarding our balance sheet and liquidity, we have positioned ourselves to be able to take advantage of the acquisition opportunities we believe will continue in 2013. We completed $155 million, our common equity offering on January 14th. Following the offering, we completed several capital markets activity. We acquired three upscale Hyatt Place hotels, totaling 426 rooms for approximately $36 million. Two of the hotels were in Orlando and one was in Chicago.

We also acquired the Holiday Inn Express & Suites, totaling 252 guestrooms at Fisherman’s Wharf in San Francisco through a joint venture with an affiliate of IHG. We contributed approximately $35 million to the joint venture for an 80% controlling interest. We paid down on our revolving line of credit, paid off of some of our term debt coming due in 2013 and closed on a $29.4 million CMBS loan related to our recent Hyatt acquisition.

As of February 25th, we have zero outstanding on our revolver and a cash and cash equivalents of approximately $28 million. Additionally, we have 19 unencumbered hotel, that gives us the ability to expand the current capacity on our secured revolver or securing more unencumbered -- funding from our term debt financing. Regarding leverage, as of the February 25th, our secured debt as a percentage of total enterprise value was 27%. Funded debt to last 12 months EBITDA, as of February 25th was 3.8 times.

We continue to deploy capital into both out same-store hotels and recent acquisitions. The recent recession cause many hotel owners to delay renovation in many of their hotels. We believe completing renovations ahead of competitors provides us with RevPAR advantage. We believe that aggressive renovations have had a significant impact on our RevPAR growth, which has exceeded others in our space over the past several quarters.

For the full-year 2012, we spend approximately $28 million on the significant renovation of 13 hotels. The scope of renovations varies between the hotels, including products from basic lobby renovation to complete hotel lobby guestroom or bathroom renovations, and replacement of both furniture and soft goods.

We are providing outlook for first quarter and full-year in 2013. We remain positive about the outlook for the hotel sector over the near, medium and long-term. Congressional conclusions to the U.S. debt issues are troublesome in the near-term, and inability to settle fiscal issues could have a significant impact on U.S. GDP and thus, hotel RevPAR and profits.

Stabilizing the numerous hotels acquired recently and renovation on 13 of our hotels, which had some room displacement during Q1 of 2013, also suggests that conservative RevPAR guidance in the near-term is warranted. However, the muted hotel supply, resolution to these U.S. debt issues and improving demand should have a positive effect on RevPAR going forward.

We anticipate 5% to 7% RevPAR growth on both our same-store and pro forma hotels in Q1 and full-year 2013. We anticipate RevPAR disruption from renovations of approximately 150 basis points in Q1 2013, which would have a $200,000 impact to EBITDA in the quarter.

Our outlook for adjusted FFO is in the range of $0.16 to $0.18 per fully diluted unit in Q1, and $0.84 to $0.90 per fully diluted unit for full-year 2013. The annual outlook includes the $400,000 to $600,000 in one-time charge to earnings related to the relocation cost previously discussed.

Dan Hansen

Thanks, Stu. We feel very good about our 2012 results. Look forward to another solid year of growth. We really appreciate your time in joining our call today and as always we welcome your questions. So let’s open the lines.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of David Loeb with Baird. Please proceed.

David Loeb - Baird

Good morning, gentlemen. I wonder if you could talk a little bit about how you view your capacity for additional acquisitions and investments, and where you think those investments would be funded and also what you see in your pipeline?

Dan Hansen

Sure. I guess Stu and I’ll share the question. We have no immediate need to come to the equity market. I think that’s the real question people want to ask. We do have a clear runway to use our balance sheet to acquire -- we’d say $200 million of assets. That could be one or two at a time for the next several quarters or small portfolios. We do have assets for sale, some of which we’ve sold as we’ve noted.

We’ve got some land for sale. We do have quite a bit of added flexibility in our facility where we could add unencumbered properties. And we are always in discussion with owners, considering OP unit. So nothings really changed with our plans. We feel we’re in great shape with a strong balance sheet to go forward.

Stuart Becker

This is Stu. I think, Dan is anchoring that assessment relative to just, we announced as a dry powder. We do think a couple of hundred million dollars is -- we have availability to do acquisitions on a go-forward basis. And we’ve talked about the $28 million of cash we currently have on balance sheet. We anticipate closing on about $40 million net on a CMBS transaction, yet still herein this first quarter.

So our cash position could be much closer to $70 million as you head towards the end of the quarter and we also have $108 million available on revolver. So when you combined, although that’s approximately $175 million. At which time, when we close on that CMBS, we would anticipate still having about -- 13 hotels would still be unencumbered, which we could use to increase the size of our facility.

David Loeb - Baird

Dan, if you go back to the pipeline, what are you seeing out there in the acquisition world?

Dan Hansen

It’s still very active. It’s always been my job to know what acquisitions are out there, but also my job to know the competition which I do. But we would become kind of a big deal in the select service market and so we continue to see deals brought to us from sellers or from the owners themselves, some from limited bid opportunities from brokers, more targeted marketing, some from brand companies and some -- quite honestly, we are going direct to owners and so they are still coming from a variety of sources.

I know the competition out there. I know how they underwrite. I know the source of their equity. So, I should know where our cost of capital will win a deal, where we can in fact, operational improvement and really where our experience can help create value. So pipeline is still full. We continue to see a great amount of opportunities and we weigh them as we always do.

David Loeb - Baird

So, with that additional competition, our cap rates are coming down at all? Do you think your acquisition returns are likely to be a little lower than they’ve been?

Dan Hansen

We haven’t seen it. We are still able to transact in that 8 to 10 cap rate market, or 8 to 10 cap rate area. I think in the bigger markets with higher profile, you’re probably closer to 8 to 8.5 and outside of those markets you maybe 8.5 to 9. That’s not inconsistent with what we we’ve seen.

I think for us, it’s really understanding what deals work for us that won’t work for, let’s say a private equity firm. And our thesis all along has been higher going in yields and any cyclical recovery or macro economic improvement is just added out performance for us. So as of yet, we still feel very comfortable on that 8 to 10 cap rate range.

David Loeb - Baird

Okay. Great. Thanks.

Operator

Your next question comes from the line of Ryan Meliker with MLV Company. Please proceed.

Ryan Meliker - MLV Company

Hey. Good morning, guys. Couple of quick little things for you. First of all, I was wondering if you can just refresh my memory, I know you gave some color with regards to some RevPAR disruptions because of renovations in the first quarter. But you are comping against some relatively difficult comps with regards to the Choice Hotels disruption again in the first quarter, is that correct?

Stuart Becker

Say that again. We are comping, is it difficult or easy?

Ryan Meliker - MLV Company

Easy comps.

Stuart Becker

Easy comps. The first quarter will have a little easier comp relative to the full-year ‘13. I think that’s fair.

Ryan Meliker - MLV Company

So given that you are forecasting the same pro forma and same store RevPAR growth for the first quarter and full year. Is your expectation that fundamentals are going to slow or you are taking a more prudently conservative approach to 1Q?

Stuart Becker

This is Stu. We are taking a conservative approach to it. We do have some disruption in the first quarter as we talked about for RevPAR with some renovations. But as, Dan and I both described, we think we feel good about the year but we know there is a little bit of noise relative to kind of macro events still going on in this first quarter. And in the last couple of years, you’ve kind of gotten to this point in the year where then things start to get choppy as you got into the second quarter. So we are remaining cautiously optimistic and I think conservative with that five to seven.

Dan Hansen

Ryan, this is Dan. One thing to add there. You recall, we added 10 hotels in the fourth quarter that are just coming online. So we didn’t manage those in the first quarter last year. Some of those hotels, the eight Hyatts in particular had some renovations going on as they redid the bathrooms.

So, I think you could say that conservativism is where we see the first quarter. We obviously want to make sure that we are clear, but there is a little bit of lack of clarity on potential upside. We feel very comfortable that we’ve underwritten them a solid, but without a real baseline. Having not own them last year, it’s a little bit harder to triangulate around a number without factoring in light of the risks.

Ryan Meliker - MLV Company

Excuse me. That’s helpful. I’m sorry. Just one other question I want to ask you guys was, it looks like your 1Q guidance still doesn’t include the Minneapolis acquisitions but your full year does. Can you give us any color on when you are expecting those two properties to close?

Dan Hansen

Yeah. We would anticipate those closing in second quarter. On both of those hotels, we’re assuming some CMBS debt and we haven’t -- it’s really delaying the process a little bit. It’s trying to get the survey to get that process completed. The second quarter is how you should think about it.

Ryan Meliker - MLV Company

Okay. Second quarter. Thanks. And then, one last thing I was hoping to ask was, with regards to G&A obviously, the portfolio is getting materially larger, relocating down to Austin. G&A in the quarter was up a lot. I think you had let people know that it would be more on a year-over-year basis. What do you guys think about a run rate for total G&A including stock comps and net salaries and everything included, based on the current portfolio you guys have in place?

Stuart Becker

Yeah. Based on the current portfolio on a nominal dollars, I think $11 million to $12 million, all in G&A is probably a good run rate.

Ryan Meliker - MLV Company

Okay. Great. That’s helpful. That’s all I had for now. I’ll jump back in the queue, if I have anything else. Thank you.

Dan Hansen

Thanks Brian.

Operator

Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed.

Austin Wurschmidt - KeyBanc Capital Markets

Hey guys. It’s Austin Wurschmidt here with Jordan Sadler. Just had a question related to the 2013 RevPar guidance. It sounds like you guys are expecting that you are in the sweet spot today. And that our ADR growth will primarily drive RevPar. But given the additions to the portfolio, could you just provide an update on where the sweet spot is for occupancy and how high that could go?

Dan Hansen

Sure. I think historically, as a select service company, we start to push rate fairly aggressively as we cross the 70% occupancy mark. That we think in this cycle, occupancy will peak for us higher than it did last cycle, which was about 70%, mainly because of the lack of supply. So we think there is some occupancy upside but we would expect over the next several quarters, more of our RevPar growth to come from rate than occupancy.

Austin Wurschmidt - KeyBanc Capital Markets

Thanks. That’s helpful. And then, didn’t know if you guys could provide what our RevPar growth has been year-to-date?

Dan Hansen

We have not provided that. I think if you look through, January was a pretty strong market -- a pretty strong month for both upscale and upper mid-scale. I think that’s a fair barometer to use.

Austin Wurschmidt - KeyBanc Capital Markets

Okay. And switching to the two expenses, do you anticipate any pressure on property taxes or insurance this year or just kind of general inflationary increases?

Dan Hansen

Yeah. We saw a little bit of pressure on -- we’re across the country in a lot of different markets. So it’s sort of a relative comment. But we have seen some pressure in some markets and then more like inflation in others. As a whole, I wouldn’t say we see dramatic impact for this year. I think a year or two down the road that might be a different story.

Austin Wurschmidt - KeyBanc Capital Markets

Okay. Thank you. And then just switching to the investment side, given sort of the additional competition that you’ve seen and the demand pickup here more recently. Have you considered ramping up your non-core dispositions at all in 2013?

Dan Hansen

We -- I wouldn’t say we have considered ramping them up. I think I’d say that everything gets evaluated. We don’t keep the hotel just for the sake of having a dot on the map. Every hotel gets looked at as we would in acquisition as how profitable it is for us and whether it’s accretive to our portfolio.

So where there’s an opportunity to create, take capital and redeploy it, we’d obviously consider that. The challenge really becomes -- you can’t just flip the switch with a lot of these smaller hotels, buying pool is very fragmented. Many of the buyers rely on SBA financing, bank financing, which some markets is better than others.

So there is a group of sophisticated buyers that look at secondary and tertiary markets that are great candidates. So long answer but I think as a general rule, where we think there’s value to be unlocked and to redeployed, we would consider that. So I think on a run rate, you should consider -- we sold five hotels last year, six to eight, probably not out of the question for this year.

Austin Wurschmidt - KeyBanc Capital Markets

Great. That’s helpful. Thank you.

Dan Hansen

Thank you.

Operator

Your next question comes from the line of Will Marks with JMP Securities. Please proceed.

Will Marks - JMP Securities

Thank you. Good morning, Stu. Good morning, Dan. I want to, first, just ask you about supply growth. I don’t think you mentioned at all, probably because there isn’t much till today, any markets where it’s may be an issue, where we’re seeing, let’s say more than 2% growth?

Dan Hansen

I think that’s a big topic as I understand it for lot of the peers out there. There has been a pretty big, I shouldn’t say pretty big but a fair amount of rebound in the pipeline but it has been gradual. And as you know, at this point, it’s weighted heavily in New York City and several other gateway cities.

On the select service side, we’re seeing pipeline growth in some core urban areas, college towns and ironically, a lot of tertiary markets. I think the true measure of course is room in construction not final planning -- final, final planning or really serious this time planning. But if we go back to that theme, I mentioned previously that the brand cleansing.

What I think continues to be ignored is the number of rooms coming out of the market. And some of the research that we’ve reviewed, I think Choice converted about 27,000 rooms into their brands last year. And Wyndham converted 29,000 rooms.

We just sold -- we sold several properties that are out of our portfolio that will become other brands. And across the country, there is older Fairfield, Hampton Inns and Holiday Inn Expresses that are likely candidates for the strategy.

So I’m really convinced there will be little, if any, net new supply for the next several years in select service. So I think what the investor needs to be looking at, in addition to cyclical recovery is really where the guests want to stay.

They want to stay at newer, cleaner, fresher properties. There’s even another survey, they’ve done just a few weeks ago, hotel.com where 34% of the travelers, say free Wi-Fi is the number one factor in choosing our hotel for leisure stays. Business is obviously -- travelers is always higher but now leisure travelers are laser focused on that.

So Wi-Fi trumps free parking and complimentary breakfast. So I think until someone can show me a survey that says guests enjoy paying $12 for a park car fee, I’ll continue to sing the praises of select service. And I think the impact of new development for our portfolio in particular will be minimal.

Will Marks - JMP Securities

How important on that note, how important is having a new asset versus a renovated asset? Can any of your asset match the new asset, I mean, in terms of quality, amenity and the pricing you can get?

Dan Hansen

I think it can. I think if you look at some of the markets with high barrier to entry, it’s a comprehensive renovation. You’re putting more capital into it then just a carpet drapes and beds. But as far as upgrading the HVAC system and making sure the guest experiences in line, I think a lot of adaptive reuse projects that we’ve seen out there really do give the guest the same experience that they can get from a select service asset that in the suburban or outlier market.

I think where the differentiation becomes is, the old -- 60 room, 70 room, three-storey, first generation assets whether it’s an older gen-1 resident center, an older gen-1 Hampton or a small Holiday Inn Express. I don’t think just because the size and construction you can get the same experience. Does that help?

Will Marks - JMP Securities

Okay. Yeah. Very helpful. Thank you. Couple of other things, one, you mentioned the cap rate range. Is that -- does that stay pretty consistent during the cycle, I imagine it went up a little bit in ‘08, ‘09?

Dan Hansen

Yeah. It moves around a little bit, maybe half a point. A lot of it is based on the fluctuations in the NOI, the hotel level EBITDA. So I wouldn’t say there’s never opportunities to buy stuff 10 caps or greater because we found those. But a lot of its market specific to where there is brand conversions available, it will be easier to underwrite to a more aggressive cap rate.

But, I think that eight to 10 cap rate in the market that we’re buying at is a pretty good range. I think peak, you probably below that and sheer trough when there’s distress sellers you maybe higher there. But I think that’s a good range for our space.

Will Marks - JMP Securities

Okay. Great. That’s all for me. Thank you very much.

Dan Hansen

Thanks Will.

Operator

Your next question comes from the line of Bob LaFleur with Cantor Fitzgerald. Please proceed.

Bob LaFleur - Cantor Fitzgerald

Hi. Good morning. Two questions, one on the potential supply front. Could you characterize like what -- how you view your markets percent? What percent are highly inflated from supply versus the percent that might be more susceptible to new supply growth. Then I have a follow-up question on your acquisition pipeline?

Dan Hansen

Sure. This is Dan. First question, on our pipeline, I think that’s -- that is a $64,000 question. If you think as far back as the IPO when we became public, we discussed that very premise that new supply where brands are available, builders and developers are incredibly astute and we argued early on that there would be little new supply outside of the gateway cities.

And at that point, two years ago, the thesis was it was impossible to build in New York. And so two years later, we’re seeing the validation of our thought process. And I think that will continue to translate. I think if you look out at the market in New York, probably beyond the supply that’s coming on, it will become very difficult because every mid-block now has a select service hotels.

So from what I hear in Brooklyn is the new Manhattan and that’s a market that people can get their arms around. But the supply coming broad-based across the country, we’re not seeing in our markets. So as far as a percentage, I couldn’t really give you that. But in the markets we’re in, we’re not seeing a lot of new supply.

The brands are predominantly mostly there. There’s not this proliferation of new brands that there was during the last cycle. And you just can’t put courtyard -- on top of courtyard at this point in the cycle. In a market like New York that runs nearly 90%, you can start to justify through feasibility that you can put one, another enough few blocks away. But in most of the markets across the country, the matches didn’t work.

So maybe that’s too long of an answer but I don’t -- we don’t really break down what’s insulated, not insulated that’s pretty subjective. But we feel really good about the portfolios and the clusters we have and feel very strong that new supply won’t affect us to any great degree.

Bob LaFleur - Cantor Fitzgerald

Okay. And my question is on potential for more acquisitions. You talked about $200 million or so dry powder. It gives you sort of the financial capacity to do that level of transaction. What about sort of your institutional bandwidth, your ability to absorb, what’s been a pretty aggressive program of acquisition capacity orders and then doing more this year.

Do you guys have the infrastructure in place to be able to handle that and is there a digestion process we have to go through or you maintain this space of acquisitions to sort of capital being your only limited factor -- limiting factor?

Dan Hansen

Yeah. It’s a good question. It’s Dan again. We’ve got the infrastructure in place. Our model is highly scalable. We feel like -- we’ve got very strong asset management processes around integrating any potential new management companies. So we’re not uncomfortable at all about the speed and the pace.

This is what we do, been doing this for a long time. It -- if we look out and the capital constraint is really more of the issue, we continue to ebb and flow pipeline and want to make sure that we were laser focused on delivering accretive acquisitions. And they ebb and flowing and we stack rank all our opportunities as we always do.

So if we’ve assembled our own portfolios, so one-off acquisitions are still opportunities that we pursue in bundling up and creating our own portfolio works well. At that transparency, we feel is something that maybe separates us a little bit more. So, operation we feel very good about our ability and the pace is something that I think is more constrained by the focus on bringing in capital to absorb that.

Stuart Becker

That sounds a little bit, we talk about the G&A increases last year. In part with us, bring on some more resources not only to backfill work we’ve been doing but anticipation of future growth.

Bob LaFleur - Cantor Fitzgerald

Okay. Thanks.

Operator

(Operator instruction) your next question comes from the line of Wes Golladay with RBC Capital Markets. Please proceed.

Wes Golladay - RBC Capital Markets

Yeah. Good morning guys. First off, I thank you for providing the sources and uses for their fourth quarter activity. Now, looking that the comp margin this year, what did you guys expected on that front?

Stuart Becker

I’m sorry say that again.

Wes Golladay - RBC Capital Markets

On the comparable hotel EBITDA margin expansion, what did you guys expected on that?

Stuart Becker

Yeah. We sort of laid out a number for hotel EBITDA margins. They expand 100 to 175 basis points. It’s in our -- one of our foot notes to our outlook. We did offer base hotels. In one other thing, it’s a little bit probably confusing or sometimes hard to track. From the analyst perspective, it is different hotels in the margin they have. So as we bring on new hotels as an example, we bought those 11 Hyatt Place hotels.

Those actually ran in margin that was less than a group as a whole. So you’ll see a little fluctuation in our margins. But what we telegraph is what was in place at the end of the year, we would expect that 100 to 175 basis for the expansion.

Wes Golladay - RBC Capital Markets

Okay. Thanks. Now looking at the development method, you were that kind of alluding to. I guess, when do you think it may -- will make sense to start developing into the select service space. Is it another one or two years of RevPar growth and EBITDA margin expansion? Is it still little ways away?

Dan Hansen

Well, this is Dan, Wes. I mean there is development going on in select service no doubt. I hope I didn’t leave listeners with the impression that we didn’t think there was development because there obviously is. Our point was that there is very little development in select service outside some of the gateway cities and core urban projects.

Some of the tertiary markets are -- there’s a lot of new supply with some of the extended stay products. So I think it’s really as the market continues to grow and there will be opportunities. But we think it’s couple of years off, before the markets really see any sort of influx and development.

And part of that really has to do with just the recovery in the overall economy. If you think about our pieces of growth in the beltway markets, not just core urban but beltway. The beltway meaning a highway or interstate around the city, that’s created these clusters of opportunities with new business parks and sports complexes and hospitals. Unless there is another kind of sub-market. If there is a courtyard there, there is not going to be another one.

There is got to be a reason for the developments outside of one of those the demand generator. So that’s where we feel we are insulated to a great degree from new supply. If there is a new business park, if there is some dynamic that changes that, I think that would speed up the development.

But these are assets that were built as part of the growth, a lot of these suburban and urban centers as they grow outward. So maybe again, apologize if that’s too long of an answer, but we think there’s quite a bit of time before many of the markets we’re in have meaningful select service supply.

Wes Golladay - RBC Capital Markets

Okay. That’s a fair answer. I mean I guess you have the broader digester. But for your markets that you guys have a little bit runway to grow the RevPAR and not worry about the supply coming and that’s what I was trying to get at. So thanks for the clarification.

Dan Hansen

I’m thinking of RevPAR. And also I would say that in some market where there maybe a new supply coming in, don’t forget there maybe supply coming out too. And if we are competing with -- let’s say there is a -- we have a courtyard and there is a Hampton Inn in the market that comes out and there is a new Hampton Inn & Suites that comes in the market.

That competition will be -- that new supply will be in our comp set. But because it’s newer, fresher, we will have a higher rate and give greater pricing tension on upward bias to pricing in the market to sell. Having not any net new supply is something that we want people to be thinking about rather than just new supply.

Wes Golladay - RBC Capital Markets

Okay. That’s a good point. And just a comment on, what is the corporate negotiated rates for you guys this year?

Dan Hansen

It’s a pretty mixed bag. That’s a good question. Dan, again, the corporate negotiated rates were positive really across the board. But we’ve got so many hotels. I don’t think there is a specific number we can give you.

Wes Golladay - RBC Capital Markets

Okay. Thanks a lot, guys.

Dan Hansen

Thanks, Wes.

Operator

And at this time, we have no further questions. I would now like to turn the call back over to Mr. Dan Hansen for any closing remarks.

Dan Hansen

Thank you all for joining us. 2012 was a year, we can look back on with great pride as our portfolio transformed in a solid 50 market portfolio with the best brands and that transformation will continue as the execution of our simple strategy translates into meaningful results.

And as we discussed our conservative guidance should not in anyway be construed as a lack of conviction, but rather a lack of clarity with some headwinds around the potential sequester and continued economic challenges.

Those issues aside, we are very optimistic for the industry and for Summit Hotel Properties for the year. We remain highly confident in our plan to create superior shareholder returns and look forward to our next call. Thanks, everyone.

Operator

Ladies and Gentlemen that conclude today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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