Summit Hotel Properties, Inc. Q1 FY2024 Earnings Call

Welcome to the Summit Hotel Properties 2024 First Quarter Earnings Conference Call. I will now be passing the line to Adam Wudel, Senior Vice President of Finance, Capital Markets and Treasurer.

Thank you, and good morning. I am joined today by Summit Hotel Properties' President and Chief Executive Officer, Jon 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 2, 2024, and we undertake no duty to update them later. You can find copies of our SEC filings and earnings release, which contain reconciliations of non-GAAP financial measures referenced on this call on our website. Please welcome Summit Hotel Properties' President and Chief Executive Officer, Jon Stanner.

Thanks, Adam, and thank you all for joining us today for our first quarter 2024 earnings conference call. We were extremely pleased with our first quarter operating performance and financial results as adjusted EBITDAre increased 10% and adjusted FFO increased 14% compared to the first quarter of last year. Pro forma RevPAR increased 1.5% year-over-year and meaningfully outperformed the total U.S. lodging industry and upscale chain scale by 130 and 140 basis points, respectively. Our asset management team and operating partners did a terrific job managing expenses during the quarter, resulting in hotel EBITDA growth of 6% and margin expansion of over 80 basis points compared to the first quarter of last year. And yesterday, we announced the closing of 3 additional asset sales, an increase in our common dividend, and a revised 2024 guidance range that reflects our strong first quarter results and a constructive outlook for the remainder of the year. On today's call, Trey and I will provide more details on our first quarter results and recent capital allocation activity as well as highlight our longer-term view on the industry outlook and Summit's relative positioning. Fundamentals continued to improve across the company's portfolio in the first quarter as our RevPAR growth was driven by a 3% increase in occupancy, predominantly concentrated in urban and suburban markets, which was partially offset by a 1.4% decrease in average rate versus the prior year, which was predominantly concentrated in outperforming leisure-oriented markets. Our RevPAR growth continues to be driven by weekday and urban demand, which increased approximately 4% and 3%, respectively, in the first quarter. More specifically, total portfolio RevPAR on Mondays, Tuesdays, and Wednesdays increased by 5% year-over-year and a robust 7% when isolating those days of the week to the company's urban portfolio, further evidence of strong group business and the continuing recovery of corporate transient demand. As we discussed on our last call, we believe our portfolio is well positioned for relative outperformance, given our exposure to several urban markets that have been slower to recover. 5 of those markets in particular, the San Francisco Bay Area, New Orleans, Baltimore, Minneapolis, and Louisville, represented 19 of our owned hotels in the first quarter that collectively finished 2023 approximately $25 million below 2019 hotel EBITDA levels on RevPAR that was less than 80% recovered. In the first quarter, these 19 hotels produced RevPAR growth of 12% and hotel EBITDA growth of 44%, highlighted by 22% RevPAR growth in Baltimore and 16% RevPAR growth in both New Orleans and Minneapolis. Encouragingly, we are beginning to see the recovery of technology-related business travel in our Silicon Valley asset, which grew RevPAR by over 40% during the quarter and nearly 30% after adjusting for renovation tailwinds created last year. Downtown San Francisco remains the lone pocket of weakness among this portfolio, though RevPAR at our DoubleTree in the life science-oriented Oyster Point submarket grew 7% in the quarter. Excluding our 3 San Francisco assets, RevPAR increased 17% in the remaining 16 hotels and EBITDA increased nearly 60% year-over-year in the first quarter. Second quarter pace for these lagging markets remains strong. It should continue to facilitate outsized growth in RevPAR and hotel EBITDA for the company. The relative strength of our first quarter is further highlighted by significant market share gains across our portfolio. The RevPAR index in the first quarter for the pro forma portfolio was 115%, an increase of 335 basis points, which was driven by occupancy share gains. Our portfolio's market share is approaching the highest levels ever achieved outside of the pandemic era. And on a trailing 12-month basis, we've seen our biggest gains come from resort, airport, and urban locations and from within the NCI portfolio. As we look to the second quarter, preliminary April RevPAR growth is expected to actualize around 4% and benefited from continued midweek strength, the Easter shift, and strong demand related to the solar eclipse in Dallas-Fort Worth, Austin, Indianapolis, and Cleveland. While booking pace for our portfolio remains short-term in nature, RevPAR pace for May is encouraging and suggests that underlying demand trends remain stable heading into the peak summer travel months. From a capital allocation standpoint, we continue to improve the overall quality of our portfolio and health of our balance sheet, including the disposition of 3 additional hotels subsequent to quarter-end. In April, we closed on the sale of 2 wholly owned hotels, a Courtyard and SpringHill Suites at the New Orleans Convention Center totaling 410 guestrooms for a gross sales price of $73 million. The sales price represents a 6.7% capitalization rate on the estimated 2024 NOI, including foregone near-term capital expenditure requirements. While New Orleans is one of the lagging markets we have identified as augmenting our growth profile, post-asset sales we still have ample exposure with 6 hotels in the market and believe our remaining assets are better located and have less near-term capital needs. We also sold 1 noncore hotel in the GIC venture, the 119-guestroom Hilton Garden Inn College Station, for $11 million at an all-in cap rate of less than 8% on estimated 2024 NOI. In total, over the last 12 months, we have sold 9 hotels for a combined $131 million at a blended capitalization rate of approximately 5% inclusive of approximately $44 million of foregone capital needs based on the estimated trailing 12-month NOI at the time of each sale. The combined RevPAR for these hotels was approximately $87, which is nearly a 30% discount to the pro forma portfolio. Our disposition efforts have facilitated nearly a full turn reduction in our net debt-to-EBITDA ratio, enhanced the quality and growth profile of our portfolio, and significantly reduced near-term CapEx requirements. Last night, we announced that our Board of Directors approved a $0.02 per share increase in the common dividend on a quarterly basis to $0.08 per share or $0.32 per share on an annualized basis, which represents a 33% increase. The dividend increase is consistent with our strategy of prioritizing returning capital to shareholders and reflects our constructive outlook for our business and the stability of those cash flows. Our approach to our dividend reinstatement and subsequent growth has been to set payouts at levels that allow for consistent and meaningful increases over time while maintaining a conservative payout ratio to absorb any unforeseen deterioration in demand. With this most recent increase, our dividend yield is approximately 5% based on the current share price and our AFFO payout ratio increases to a modest 34% at the midpoint of our AFFO guidance range, which remains well below historical levels. Finally, before I turn the call over to Trey, let me highlight a few observations about our industry and some of its relative positioning that give us optimism for the future. While the recovery in travel demand post-pandemic has been uneven by both segment and market, we are beginning to see a more meaningful recovery in many of those segments and markets, which have lagged and which Summit has outsized exposure to, namely urban markets and those with a heavier reliance on business travel. We are also starting to benefit from a gradually easing labor environment, which we believe will facilitate margin changes more in line with historical norms as utilization of contract labor declines and turnover abates. Combined with post-pandemic enhancements to the core select service operating model and an already superior margin profile, we believe the conditions for better relative future profitability growth exist. As has been well documented, supply growth in our industry is poised to remain subdued for an extended period of time, given elevated construction costs and tight development financing conditions. And finally, while macroeconomic growth is slowing in conjunction with tightening monetary policy, a deeper dive into recent trends suggests demand for services broadly and travel more specifically remains robust and enduring. Taken together, this all provides for a positive setup for longer-term hotel level EBITDA growth. With that, I will turn the call over to our CFO, Trey Conkling.

Thanks, Jon, and good morning, everyone. The first quarter of 2024 represented a continuation of 2023 trends as growth within our portfolio was once again driven by the company's urban and suburban hotels, which each produced RevPAR increases of approximately 2.5% in the first quarter. Strength in our urban and suburban portfolios was driven by several of our key Sunbelt markets such as Dallas-Fort Worth, Orlando, Charlotte, and Houston, all of which continue to generate RevPAR growth meaningfully above the industry average. As Jon mentioned, several of our lagging markets such as the San Francisco Bay Area, Baltimore, Minneapolis, Louisville, and New Orleans, also experienced strong first quarters with RevPAR increasing 12% in aggregate. We expect continued outperformance in these lagging markets for the balance of the year. In addition to the urban and suburban portfolios, our airport hotels were amongst our strongest performers as first quarter RevPAR increased over 5% for this portfolio. From a national perspective, TSA statistics indicate air travel increased 6% in the first quarter of the year and recent commentary from Delta, American, and other major carriers point toward accelerating corporate transient demand and a strong summer travel season. From a Summit perspective, airport hotel performance was driven by our 5 Grapevine hotels, where RevPAR increased 6.5% in the first quarter, benefiting from double-digit year-over-year passenger growth at Dallas-Fort Worth International Airport. In addition, our Courtyard and Residence Inn Metairie generated a first quarter RevPAR increase of 36% as a result of the recently completed renovation at the Courtyard and 5% year-over-year passenger growth at New Orleans Louis Armstrong International Airport. Although our resort portfolio declined modestly year-over-year in the first quarter, including a challenging Super Bowl comparison for our Phoenix hotels and several disruptive renovations, we are pleased with the continued strength in our resort markets where average rates and RevPAR remain 14% and 8% above pre-pandemic levels, respectively. We continue to invest in several of our resort hotels, such as the Embassy Suites Tucson, Hotel Indigo Asheville, and Courtyard Fort Lauderdale Beach, given the constructive long-term outlook for leisure demand. From a segmentation perspective, group demand continues to serve as a key catalyst for the company as first quarter group RevPAR increased in 40 of our 43 markets. In addition, group RevPAR increased across all location types except for our resort portfolio. For the quarter, full week group RevPAR increased over 3% with weekday group RevPAR increasing approximately 4%. Other segments that demonstrated growth in the first quarter include negotiated discount and contract. The success of our revenue management strategies is perhaps best illustrated in the NCI portfolio, where group and negotiated RevPAR increased by 19% and 15%, respectively, as the operating strategies of those hotels have been reconfigured to take advantage of today's demand trends. In the first quarter, non-rooms revenue in the pro forma portfolio increased 8%, driven largely by midweek occupancy gains as well as the shift in business mix towards group and corporate transient demand. While higher outlet utilization as well as banquet and catering demand resulted in a 3% year-over-year increase in food and beverage revenues, the ongoing benefit of favorable parking contract renegotiations and increased resort fee capture drove non-F&B revenue growth of 14% for the quarter. Once again, the NewcrestImage portfolio was an outperformer, generating 6% RevPAR growth in the quarter. As previously mentioned, group and negotiated demand were the primary drivers of top-line growth, further validation of our team's successful application of strategic sales clusters. As a result, the NCI portfolio's market share increased 420 basis points compared to the first quarter of last year, driven primarily by gains in occupancy. The strength in top-line performance within the NCI portfolio, coupled with slowing expense growth resulted in hotel EBITDA increasing approximately 12% and hotel EBITDA margin expansion of more than 130 basis points in the first quarter. The operating expense environment continues to moderate, and our asset management team did a fantastic job during the first quarter controlling costs and managing the middle of the P&L. Total expenses increased 2.4% year-over-year. Combined with the increase in occupancy, cost per occupied room declined 1.6% from the prior year period. From a labor expense perspective, we are experiencing moderating wage growth, reduced utilization of contract labor, and lower turnover. Relative to the first quarter of 2023, wages increased 2.5%, which is increasingly in line with historical norms. Contract labor declined by 11% on a nominal basis and by 14% on a per occupied room basis versus the prior year, respectively. This represents the sixth consecutive quarter contract labor has declined on a per occupied room basis. Today, contract labor comprises 12% of our total labor spend, down from 18% at its peak in 2022, but still meaningfully above pre-pandemic levels, suggesting additional room for improvement moving forward. FTE count increased modestly during the quarter, but continues to remain 15% to 20% below 2019 levels. A more constructive expense environment serves as a key driver to improving hotel EBITDA margins, which expanded year-over-year by nearly 90 basis points for our same-store portfolio and over 80 basis points for our pro forma portfolio in the first quarter. Pro forma hotel EBITDA for the first quarter was $68.6 million, a 6% increase from the first quarter of last year. Same-store hotel EBITDA flow-through for the quarter was approximately 62% despite RevPAR growth that was entirely occupancy-driven. Notably, hotel EBITDA increased in each of the company's wholly owned GIC joint venture and other joint venture portfolios. Adjusted EBITDA for the quarter was $48.8 million, a 10% increase compared to the first quarter of 2023, and adjusted FFO was $30 million or $0.24 per share, a 14% increase versus the same period last year. From a capital expenditure standpoint, in the first quarter we invested approximately $18 million in our portfolio on a consolidated basis and approximately $15 million on a pro rata basis. CapEx spend for the first quarter was driven by transformational renovations at our Hilton Garden in Milpitas, Residence in Hillsboro, Embassy Suites Tucson, Courtyard New Haven, and Hotel Indigo Asheville. We continue to ensure the quality and relative age of our portfolio positions the company to drive profitability and market share. Turning to the balance sheet, the net proceeds from the New Orleans and College Station asset sales were used to repay the $55 million balance outstanding on the company's corporate credit facility as of March 31 and to reduce the balance of the NCI term loan from $402 million at March 31 to $396 million today. As Jon mentioned, our net debt-to-EBITDA has declined by nearly 1 turn over the past year, driven by accretive noncore asset sales and continued growth in hotel EBITDA. In January, we entered into a $100 million interest rate swap, fixing 1-month term SOFR at 3.765% for debt within our GIC joint venture. This swap, which is 150 basis points below the current SOFR rate, becomes effective in October of 2024 and expires in January of 2026. Today, the net asset position of our swap portfolio is approximately $20 million. As a result of our interest rate management efforts, our balance sheet is well positioned with an average pro rata interest rate of 4.7% and approximately 77% of our pro rata share of debt fixed after consideration of interest rate swaps. When accounting for the company's Series E, F, and Z preferred equity within our capital structure, we are approximately 80% fixed. With no significant maturities until 2026, a fully extended average length to maturity of nearly 3.5 years, and an overall liquidity position of approximately $370 million, we believe the company is well positioned to achieve its growth objectives. On May 1, our Board of Directors declared a quarterly common dividend of $0.08 per share, representing a 33% increase from the previous quarter. The resulting annualized dividend of $0.32 per share represents a dividend yield of approximately 5%. The increased dividend continues to represent a prudent AFFO payout ratio, leaving ample room for potential increases over time, assuming no material changes to the current operating environment. The company continues to prioritize striking an appropriate balance between returning capital to shareholders, reducing corporate leverage, and maintaining liquidity for future growth opportunities. Included in our press release last evening, we updated our full-year guidance for 2024 operational metrics as well as certain non-operational items following our April transaction activity. This outlook is based on management's current view and does not account for any unexpected changes to the current operating environment, nor does it include any future transaction or capital markets activity. Based on the company's first quarter operating results as well as our future outlook, we are reiterating full-year guidance for RevPAR growth of 2% to 4%. We are maintaining our adjusted EBITDA range of $188 million to $200 million despite foregone hotel EBITDA of approximately $4 million through the balance of 2024 due to April 3 asset sales. This further reflects the strength of our first quarter operating results. Furthermore, we are also maintaining our adjusted FFO range of $0.90 per share to $1 per share despite the foregone hotel EBITDA from asset sales. At the midpoint of our RevPAR guidance range, we would expect hotel EBITDA margins to contract approximately 50 basis points year-over-year. This implies a 25-basis point improvement to the margin guidance provided through February 2024. We expect pro-rata interest expense, excluding the amortization of deferred financing costs, to be approximately $55 million to $60 million. Series E and Series F preferred dividends will be $15.9 million, Series Z preferred distributions will be $2.6 million, and pro-rata capital expenditures will range from $65 million to $85 million. As previously mentioned, given the increased size of the GIC joint venture, the fee income payable to Summit now covers nearly 15% of annual cash corporate G&A expense, excluding any promote distributions Summit may earn during the year. And with that, we'll open the call to your questions.

Thank you. (Operator Instructions) And our first question or comment comes from the line of Austin Wurschmidt from KeyBanc Capital Markets.

Jon, you flagged the strength of your expansion markets in your prepared remarks, which I believe account for around 20% of hotels. I was wondering if you could break out what RevPAR growth you're assuming this year for these expansion kind of higher-growth markets that have lagged in the recovery versus the balance of the portfolio? And how much of this growth that you're seeing do you think is sustainable demand versus more one-time benefits to the market's event-driven type business?

Yes. Thank you, and good morning, Austin. We had a very strong first quarter in these growth markets, and we expect that performance to continue for the year. Although we haven't provided a specific breakdown for the market, I believe we will see several hundred basis points of additional growth over the full year beyond what we saw in the quarter. The portfolio grew 12% this quarter compared to a full portfolio increase of 1.5%. We anticipate that our growth in the second quarter will be similar, likely approaching double digits on a blended basis in these markets. Locations like Louisville, which is hosting the 150th running of the Kentucky Derby this week and the PGA Championship at Valhalla later in the month, along with our positive momentum in Minneapolis, Baltimore, Milpitas, and Silicon Valley, all show encouraging signs. We do not view our strong first quarter as a one-time occurrence; we expect to see similar performance in the second quarter, which should significantly enhance our growth for the entire year.

When you kind of take the other side and look at maybe what's weighing, I guess, where are you seeing I guess the softest pieces and what segments or markets give you a little bit of pause when you look at pace kind of at the other end of the range?

In the first quarter, we observed declines in average daily rates in some leisure markets. Despite this, demand remains strong in most of those areas, although we did notice some weakness in rates. Specifically, we have a few properties in ski regions that did not experience as favorable a snow season as the previous year, leading to nearly double-digit declines in Silverthorne and Steamboat for the quarter. I don't perceive this as a systemic demand issue; rather, it's more about challenging comparisons to the previous year. As we move into the second and third quarters, particularly during the peak summer travel season, I expect to see a return to more typical rate trends. When I assess our expectations and pace for the second quarter and into the third quarter, our indicators for May and June appear very positive and encouragingly broad-based. Most of our markets are indicating a positive outlook for pace, especially in the third quarter.

Yes, that's all helpful. And maybe just one on the balance sheet. You guys have clearly made a lot of progress. You alluded to kind of the dividend increase and signaling that that provides. I guess, leverage still remains above your long-term targets. What sort of next steps to kind of further decrease leverage towards your longer-term targets, especially if financing markets continue to remain challenging?

Austin, it's Trey. I want to mention that as we assess the financing markets, we're pleased that we don't face any near-term maturities until 2026, and we are effectively hedged at 80%, which is reassuring. As we aim to reduce leverage on the balance sheet, we will be opportunistic, potentially considering selective asset sales over time if they are accretive, in line with what Jon discussed earlier. Ultimately, I believe recovery in hotel EBITDA in some of the lagging markets will play a significant role in addressing current challenges. If the five markets highlighted by Jon continue to improve, hotel EBITDA will help resolve many of these issues. With the asset sales announced this quarter, we've likely reduced the balance sheet leverage by about another quarter turn, bringing us close to 5x. Further movement down into the 4s will likely come from improved operations throughout the rest of the year.

Yes. Austin, it's Jon. Maybe just to add a little bit of additional color there, I think as Trey alluded to and we talked about this in the prepared remarks, we've sold 9 assets. We sold over $130 million of assets. And we've been, I think, really strategic around how we've done it and able to find opportunities to sell assets at relatively low cap rates. We haven't given up much cash flow in doing that. And we felt like taking this very targeted, more tactical approach to it ultimately led to better results than just kind of ripping the Band-Aid and selling a large portfolio in an environment where it's still very difficult to get transactions done, particularly larger transactions that need a bigger financing check.

Our next question or comment comes from the line of Bill Crow from Raymond James.

I'm looking for a little bit of color on any incremental demand changes you're seeing on say Monday and Thursday nights. Are business travelers extending their trips at all at this juncture? Are we still waiting for a return to office? And I guess the second part of that would be additional color on what you're seeing on weekends. Certainly, there's a growing concern that consumer spending might be weakening, especially at the lower end. But perhaps, and maybe Starbucks is evidence of it, perhaps moving up the income scale a little bit. What are your weekends telling you guys?

Yes. Sure. Thanks, Bill. I think from a day of week perspective, as we said, we're seeing the best growth Monday, Tuesday, and Wednesday. It's where our occupancy has frankly lagged the most relative to pre-pandemic levels, so it's where we would expect to see it. And again, it's driven by the urban portfolio. And I do think it reflects the strength, the relative strength of group demand and this kind of ever grind higher in business transient travel. Our best day of the week this quarter was Monday night, actually. And I think if you go back and listen to kind of our commentary in previous quarters, we talked about the compression of midweek demand on the BT side into Tuesday and Wednesday nights. We are starting to see that bleed into Monday nights to some extent, in particular in the first quarter. And so I think, look, the trends are coming off of obviously a lower baseline from a BT perspective midweek and an urban perspective. But that is where we continue to see the vast majority of our growth. I do expect that to continue at least through the second quarter and likely through the balance of the year. As I mentioned, our pace stack looked very, very strong, particularly in May, but really as we even look out into June and into the full second quarter. I will say that our pace statistics are better midweek than they are on the weekends, but they're still positive on the weekends and rates are still positive year-over-year from a pace perspective.

Are you noticing any decline in consumer activity during the weekends? You mentioned that the pace is stronger during the weekdays, but should we be genuinely concerned about potential changes in consumer spending habits?

I don't think we've seen a whole lot of evidence to suggest that people are cutting back on leisure travel. I think a lot of the rate, what we describe as rate softness, has every bit as much to do with how strong rates have been in 2022 in the first quarter of 2023. And I do think you'll see some of that normalization play out over the summer. I know there's a lot of concern around general consumer spending. I know we've all seen the performance of kind of the lower end of the chain scales in the industry. We just haven't seen that really play out in our markets. To the extent that we've seen softness, it's been more rate-oriented. And I think it's been more oriented in our ski markets where we just didn't have the same strength of snow season as we did last year. I don't think we're going to have the same ability to drive these enormous rate gains that we saw particularly in 2022. But the PACE data, again, looks stable. We've tried to be forward leaning on this knowing that in some of these markets we'll try to build some level of group-based demand in these assets to help drive incremental pricing on the retail customer.

Great. I'm going to apologize because I'm going to ask one more question here. On the asset sales, I'm curious whether you're marketing any additional assets for sale, and how you're thinking about balancing the sale of properties that are in the wholly owned portfolio versus those that are in the GIC portfolio? And that's it for me, thanks.

Yes, thanks, Bill. I would say we've made efforts to be very strategic regarding asset sales. We've focused on assets with lower RevPAR and higher capital expenditure needs that we could sell efficiently, especially in a market that remains challenging for larger asset sales. New Orleans was a notable exception. I anticipate we'll continue to approach asset sales thoughtfully and strategically, targeting local owner-operators who may be willing to pay a premium, often evaluating based on per pound or per key pricing rather than in-place NOI. We have completed a few asset sales, including two from the GIC venture, which were part of the NCI transaction, identified as non-long-term holds and noncore assets that we intended to sell before renovation. The consistent theme of our sales has been assets that would require significant capital investment for renovations, where we believe our resources can be better utilized elsewhere. I expect this approach will remain a key factor in our capital allocation strategy moving forward.

Our next question or comment comes from the line of Chris Woronka from Deutsche Bank.

I joined a bit late, so I apologize if this question has already been asked. The first topic seems to be about costs, especially labor. We've seen headlines, including some recent actions in various cities. How well do you think you can predict labor costs for the remainder of the year? Reflecting on the first quarter or even last year, were there any unexpected changes, perhaps market-specific, that forced you to raise wages or anything similar? Any insights you could share on your outlook would be appreciated. Thank you.

Chris, it's Trey. I want to share some insights on the expense trends we've observed over the past six months. In the latter half of last year, our operating expenses rose by 4% in both the third and fourth quarters, with costs per occupied room increasing by about 1.5%. Moving to the first quarter, operating expenses increased by approximately 2.5%, while costs per occupied room actually decreased by 1.6%. This marks the sixth consecutive quarter of declining costs associated with contract labor, which has been a major variable in our expenses as we progress. We're optimistic about continued improvement in the contract labor area throughout the year. Additionally, turnover rates have been notably higher over the past year, roughly double what we experienced pre-pandemic. However, turnover this quarter has decreased by about 20% compared to the same period last year. If this decline in turnover continues, it will greatly benefit us in terms of training costs and overall productivity. While our long-term view as a select service portfolio isn't extensive, the trends we've seen over the last three to four quarters are quite encouraging.

A follow-up question pertains to the conversions from major brand companies and how these are increasingly becoming part of their growth strategy. Do you have any insights as you evaluate your markets? While I understand that conversions do not create new supply, they may introduce a new brand family member to your existing portfolio. Can this impact be measured in a positive or negative way? Additionally, with Marriott and Hilton moving down in the chain scales and entering lower segments, which you don't typically engage with, do you believe there could be any effect from guests transitioning from brands like Hampton to Spark or True? I realize this is a multifaceted question, but how do you perceive this could influence your business? Thank you.

Yes, thank you. This is Jon. We have been closely monitoring the actions of the brands. It's not surprising that they are looking for new channels to drive net unit growth. The analysis tends to vary by market regarding the effects. I would say we haven't felt any significant impact yet, and it's not a major concern for me. I believe that while bringing in more units and rooms into a brand family in a market can have an effect, many of those units will not compete for our redemption customers. We are keeping an eye on it, but we haven't invested much time in exploring those new product types, and we haven't noticed their repercussions in our markets so far. Furthermore, many of the initial launches of these new brands have occurred in markets where we do not operate.

Our next question or comment comes from the line of Michael Bellisario from Baird.

I want to revisit the comments about leisure. Did you notice any cancellations? I understand there's been some weakness in the snow and mountain areas. However, did you see any increase in average daily rate close to the arrival date, and could that be due to low occupancy? Can you help clarify the sequence of events that contributed to the softness in leisure on the average daily rate side?

Yes, we didn't experience cancellations; it was just a slower pace. In certain ski markets, there are often last-minute bookings when the snow is particularly good. Last year was exceptional for snowfall in these areas, leading to many last-minute bookings as people monitored conditions on the mountains. This year, we noticed less of that last-minute surge. However, I'm not overly worried about this in the long term. I believe we will see very strong summers in those markets, which have actually become more robust than the ski season in some cases. This trend did impact our rates in the first quarter, but I don't view the rate performance in those markets as indicative of a decline in leisure demand. It was more about pricing and the lack of last-minute bookings.

Any different takeaways from Asheville, Fort Lauderdale, Tucson, Phoenix, other leisure-focused markets? Did you see softness there?

You mentioned some of our leisure-focused markets. We're currently renovating in Asheville, so we don't have a clear comparison there. We did notice some rate softening in Fort Lauderdale, which coincided with spring break. This situation has been well documented in the Miami-Fort Lauderdale market during that period. Demand was acceptable, but there was slightly less last-minute engagement and some softening in rates. It's important to consider that this rate softness comes from levels that are 20% to 30% higher than in 2019, and we didn't see the same amount of last-minute bookings. I wouldn’t necessarily interpret this as a sign of significant weakness in leisure demand. We need to keep in mind what these comparisons look like, and I believe the comparisons were most challenging in the first quarter.

Got it. Understood. And then just my follow-up, switching gears just on CapEx, can you maybe provide some numbers around what a standard 7-year or 14-year renovation cost today, what did it cost a couple of years ago? And maybe what's the hardest part of the underwriting process for CapEx projects and how you internally decide which projects to do?

Yes. We spend a significant amount of time on this internally. The industry, as we've mentioned before, is generally underinvested in renovations, which I believe will create opportunities for those of us who are better capitalized moving forward. We take great pride in the physical condition of our portfolio and ensure we do not accumulate a large amount of deferred capital expenditures. There is no question that the cost to renovate some of these hotels is significantly higher than it was before the pandemic, approximately 25% to 30% higher, and potentially even more depending on the market. In the last 30 days, we have actually managed to lower the costs of a couple of renovations compared to last year or even six months ago. We are beginning to see shipping costs decrease, along with some drops in commodity costs. At the very least, the rising costs of renovations have stabilized, and we are hopeful that there will be some reductions in renovation costs, as it became very expensive, especially compared to pre-pandemic renovations.

Just any broad strokes around kind of per-key costs for those renovations?

Yes. At 7 years we were doing $15,000 or $20,000 a key probably pre-pandemic in there, 25% higher than that today. 14 years, we're probably another $5,000 to $10,000 a key on top of that.

I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Jon Stanner for any closing remarks.

Great. Thank you all for joining us today. We look forward to seeing many of you at one of the conferences over the spring and summer. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.