Summit Hotel Properties, Inc.
Q2 2013 Earnings Call Transcript

Published: 7 Aug 2013

[Operator:]

Good day, ladies and gentlemen and welcome to the Q2 2013 Summit Hotel Properties Inc. Earnings Conference Call. My name is Hannah and I will be your conference coordinator today. At this time, all participants are in a listen-only mode. Following the company’s remarks we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions. (Operator Instructions) Please be advised this conference is being recorded for replay purposes. I would now turn the conference over to Dan Boyum, Vice President, Investor Relations. Please proceed.

[Dan Boyum:]

Thank you, Hannah, and good morning, everyone. I’m joined 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 second quarter 2013 release and filing. And 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 comments. Forward-looking statements that we may make today are effective only as of today, August 7, 2013. We undertake no duty to update them later. Our earnings release contains reconciliations to non-GAAP financial measures referenced during the call. If you do not have a copy of our release, you may view and print it from our website at hpreit.com. Please welcome Summit Hotel Properties’ President and Chief Executive Officer, Dan Hansen.

[Dan Hansen:]

Thanks Dan. We had another solid quarter and continued to set the stage for a solid finish to the year and significant outsize growth into 2014. For the second quarter, we achieved adjusted FFO of $0.26 per share and adjusted EBITDA of $26.7 million. This is the sixth consecutive quarter, we have exceeded consensus for these metrics. Our pro forma RevPAR growth for the quarter was 5.8%, which exceeded the upscale segment of 5.4% and our same-store RevPAR was up 8% over the second quarter of last year. The monthly RevPAR numbers softened in the second quarter for the industry and our primary segment was no exception. The upscale segment had RevPAR growth of 8.5% in April, 4.5% in May and 3.6% in June. This softness can be attributed to a variety of issues such as holiday shifts, weaker short-term room bookings and the effect of the government sequester to name a few. Each market has a different story and with 95 hotels and 41 markets, each hotel and cluster has a unique opportunity to excel. We do not view the second quarter softening has a trend at this point. We have confidence in our well-diversified portfolio. Our premium asset management team continues to be aggressive and they along with our revenue managers work directly with our management companies to provide sales and marketing oversight, pricing strategy implementation and of course in-person meetings and reviews. The acquisition pipeline continues to be strong and we expect even more deal flow as the year progresses. We continue to source deals directly from owners and have been fortunate to have our franchise and management company’s partners working hard to keep our pipeline full. We are in various stages of underwriting and have a mix of one-offs and small portfolios. We continue to be patient and we have adequate capacity to continue to selectively acquire these one-offs hotels or small portfolios. In addition, we have two smaller portfolios we are looking at where owners would take OP units. They see our stock and platform as undervalued as we do and see this as a strategic investment. Our capital recycling program has picked up momentum and we now have several hotels under contract or letter of intent. We expect to generate approximately $20 million of proceeds over the next couple of quarters. Our reputations and visibility in the industry has allowed us direct lines to many owners and we have had a number of inbound request with interest in buying some of our less strategic hotels in smaller markets. We have also engaged select brokers where they have unique knowledge of markets to aid us in this process. As a reminder, we have generated $50 million of proceeds from the sale of assets we no longer consider strategic and have reinvested those proceeds into accretive assets. Many of the hotels, we are selling are actually at cap rates in the same range as the cap rates of the acquisitions we are redeploying the capital into. While this may seem counter-intuitive many of the older and smaller hotels are inefficient for a company our size and require a large amount of capital investment. When you measure this against the availability of higher quality efficient institutional quality hotels, the logic of redeployment is clear. The private owner operator model works well for these hotels as many of the buyers are local or regional and may have their own management and renovation companies. We see another 6 to 8 hotels that fit in this category. Supply continues to be muted in most of our markets and our conservations with the brands validate this. New construction has picked up in the upscale and upper mid-scale segments. But the largest part of this is in Manhattan, other gateway urban markets, college towns and tertiary markets. We see no meaningful supply affecting our markets or our ability to perform. A few of these new developments are attractive from a take-off perspective but we expect that to be a small percentage of our pipeline. I will now turn it over to Stuart Becker, our CFO for further details and our outlook for the third quarter and full year.

[Stuart Becker:]

Thanks Dan. Good morning everyone. I will provide a brief summary for the quarter ended June 30, 2013. Our same-stores generated RevPAR growth of 8% when compared to the same quarter in 2012. Same-store RevPAR consisted of occupancy of 75.8%, an increase of 220 basis points an ADR of $99.96, an increase of $4.63 quarter-over-quarter. We viewed the 8% growth very positively, particularly when considering the tough comp, our same-stores had in the second quarter. You will recall, we had outsize RevPAR growth throughout 2012. Specifically our same-stores generated 12.8% RevPAR growth in second quarter 2012. Our ability to generate outsize growth in second quarter 2013 is largely the result of focus by what we consider our premier hotel management team, positive results from renovation work at many of our same-store hotels and an improving local economy in many of our markets. Additionally, we are pleased with second quarter RevPAR growth considering our 8% RevPAR exceeded the 5.4% growth for upscale and 4.2% growth for upper mid-scale reported by Smith Travel. Finally, our solid RevPAR performance is reflected in our improved Smith Travel RevPAR index. For the quarter, we improved our same-store RevPAR index by 180 basis points to 111.4% of our comp (asset). On the pro forma basis, our hotel generated RevPAR growth of 5.8%. Excluding our recently acquired five hotels in the New Orleans market, our RevPAR growth was a solid 7%. As we discussed in our first quarter call, we anticipate great things for our hotels in New Orleans. However, we did expect the second quarter and third quarter of 2013 would be tough comps for these hotels. In fact, group business for the second quarter 2012 was an all-time high for the combined New Orleans hotels. On a positive note for these New Orleans hotels, fourth quarter 2013 is running substantially ahead on group bookings in 2014 looks very solid. Pro forma hotel EBITDA for second quarter 2013 was $32.8 million, an increase of 7.2% as compared to second quarter 2012. Hotel EBITDA margins for the quarter was 36.8%, which amounts to a margin expansion of 38 basis points as compared to second quarter 2012. Excluding the previously discussed New Orleans hotels, pro forma hotel EBITDA margins expanded by a respectable 118 basis points for the quarter as compared to second quarter 2012. Adjusted EBITDA for second quarter 2013 totaled $26.7 million an increase of 79.3% over second quarter 2012. The substantial growth was a result of two main factors. Firstly, we acquired 29 hotels over the past year and secondly, same-store hotels provided very positive growth. Our G&A expense and nominal dollars grew by $2 million in comparison to second quarter 2012. The increase largely reflects growth in our company overall and as we now own over 11,000 guest rooms, a 49% increase compared to last year. Additionally, as we discussed last quarter, expense increase is probably the result of our decision to bring in-house more of our renovation and purchasing staff. We believe that the timeliness and cost control is better served by maintaining an in-house team versus outsourcing. Lastly, equity based compensation and bonus accruals increased reflecting an expanded incentive plan for our team. We anticipate that G&A expense and nominal dollar will begin to flatten out over the next several quarters. And as a percentage of revenue will begin to contract as a scalability of our company begins to take hold. Regarding liquidity, including recent acquisition transactions, our $150 million revolving credit facility has approximately $61 million outstanding resulting an availability of approximately $89 million, in addition, we currently have 15 unencumbered hotels. We anticipate renovation capital spending will be in the range of $15 million to $18 million for third quarter following $8.8 million spent in the second quarter. The majority of dollar spent over the past several quarters was for renovations on same-stores. This partly explains our outsize RevPAR growth performance. On a go forward basis, we anticipate that a majority of our capital spend will be for renovations on recently acquired hotels. We expect to see the same results as we experience with the same-store renovations. Regarding our outlook for third quarter and full year 2013, we are providing third quarter 2013 same-store RevPAR growth guidance of 5.5% to 7.5% and increasing our same-store full year RevPAR growth guidance to 5.5% to 7.5%. On a pro forma basis, we are providing RevPAR growth guidance of 5% to 7% for both third quarter and full year. The full year pro forma outlook is unchanged. Included in the third quarter pro forma RevPAR growth guidance is the anticipation that RevPAR growth will be curtailed by 25 to 50 basis points from room displacement caused by renovations during the quarter. Regarding adjusted FFO guidance for third quarter, we anticipate adjusted FFO on a per share basis between $0.24 and $0.26. The guidance includes the effect of recent debt financings completed in second quarter and subsequent to quarter end. The guidance also anticipates $200,000 to $300,000 disruption to EBITDA from rooms out of service as a result of renovations. Full-year adjusted FFO per share guidance is $0.85 to $0.89, again reflecting increased interest cost related to debt financings.

[Dan Hansen:]

Thanks Stuart. And with that let’s open the lines for questions.

[Operator:]

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions) The first question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets. Please proceed.

[Austin Wurschmidt:]

Hey, good morning guys. Was just wondering, could you provide some additional color on the timing of the acquisitions that you have discussed in your opening remarks and could we see your acquisition volume (match where) you completed earlier this year for the second half?

[Dan Hansen:]

We don’t – everything is in it but pretty wise, it’s Dan, Austin, the various stages of underwritings we are not making any assessment on when we might close it. It’s a very fluid pipeline, things change pretty quickly. There is continual price negotiation based on our asset management teams due diligence of the property. So, it would be pretty mature to estimate when we may close on acquisitions. I wouldn’t expect us to match what we did in the first quarter. We said in the last call that we are going to be patient and had no immediate needs and we have been. So, not to be vaguer avoid the question but there is not much we can say with the high degree of certainty because it is such a fluid process.

[Austin Wurschmidt:]

That’s fair. What is your investment capacity today when you include the disposition proceeds that you have teed up?

[Dan Hansen:]

It’s really the -- kind of the same answer as we said in the past. We feel we got a very clear runway. We continue to use our balance sheet, the sale of some assets to acquire $150 million to $200 million more of assets. So that could be one or two at a time in a small portfolio. But, we feel, we aren’t really in good shape there. Jordan Sadler - KeyBanc Capital Markets Hey, Dan. It’s Jordan Sadler. I was curious about tune of underwriting, if there has been any sort of tweak in your assumptions either on the instances or more importantly the exit given sort of the changes we have seen in the capital markets?

[Dan Hansen:]

That’s a great question, Jordan. I think at the margin we are looking a little bit more aggressive at the entry point, interest rates have come up, we still have a lot of opportunity, so we are able to push back a little bit more aggressively for pricing that going in yield is very important to us in our underwriting. So that kind of feeds back into the first question that Austin raised is, that’s creating some of the opportunities for us and hesitancy for us to commit to numbers or particular acquisitions. Some owners are more flexible in this environment and some are less flexible. Now, we are also coming off a quarter that was a little bit soft or a little bit choppy. So we want to make sure that going in numbers are solid. So, think at the margin you could say we are expecting higher cap rates going in maybe a quarter or half a turn. Jordan Sadler - KeyBanc Capital Markets Would you say you are a little less concerned about the exit just given sort of your strategy and the nature of – and the premium you get on the going in yield?

[Dan Hansen:]

Yes. That’s part of our underwriting is really much less focused on an exit cap rate, in some markets maybe it’s a half a turn of cap rate compression. Some markets its same exit cap rate is same going in cap rate. In our expectation is to get the majority of our double-digit unlevered return through yield. So the exit cap rates really not as bigger part of our underwriting. It only matters if you actually sell it. So we don’t go into a market expecting to sell it in five years that’s always an option. But, we go into it with a pretty conservative underwriting for an exit. Does that help? Jordan Sadler - KeyBanc Capital Markets Yes. Thanks for the time.

[Dan Hansen:]

Fair.

[Operator:]

Thank you for your question. The next line of question comes from the line of David Loeb from Baird. Please proceed.

[David Loeb:]

Good morning gentlemen. Dan, I wonder if you could just talk a little bit about the decision to buy the New Orleans asset, it sounds like you had tough comps you are expecting to have comps in the third quarter. Why move ahead with an acquisition when you are expecting that kind of headwind right out of the gate?

[Dan Hansen:]

Sure, David. That’s a fair question. I think when we underwrite an acquisition we are not looking at the first quarter or next quarter in isolation. We are looking at it as a part of running the or owning the assets for a full cycle and even beyond. And New Orleans is a market that despite having tough headwinds, our tough comparisons rather for the next couple of quarters, it is really a market that exhibits not just multiple demand generators but true outsize growth. I think it’s somewhat misunderstood because the prior peak was not a relevant prior peak in our view, simply because of the recovery from Hurricane Katrina slowed down a lot of the growth there. So I think there is a lot of upside in the market in particular that people are underestimating. So as we underwrote it, we looked at a soft quarter or two in front of great outsize growth and to us that was a fairest testament and still meets our underwriting criteria. So, really just looking some more long-term rather than short-term and these opportunities to buy great assets in great markets don’t come up all the time. So, we just had to factor that into our underwriting (name) that there was going to be a weak quarter or two in front of us.

[David Loeb:]

Great. That makes sense. And you mentioned in your prepared remarks that you think there is more acquisition opportunities available in the future. What do you think accounts for the fact that there might be more product available and are you seeing more competition these days?

[Dan Hansen:]

Yes. That’s one of the things that’s kind of slowed us down and given us a little bit of pause. As an owner or seller, if you are seeing interest rates rise, you have to ask yourself a year from now, two years from now are they going to be higher or lower, and I think most owners would say they are going to be higher. Many of these hotels have come off a big decline from -- in 2009-2010. And for them to expect low cap rate pricing and in a rising interest rate environment is probably not realistic. I think they are also seeing they had some interest from some private equity buyers that have gone away and they have been re-priced several times already. So I think there is a focus on them just to say, if I need a recycle some capital for some other -- some of my other development properties, if I have a loan coming due, if I have CapEx coming due, I just can’t wait any longer. So, it’s -- we are taking a little bit of the other side of the argument than many of our full service and upper upscale peers. We think there is going to be actually more opportunities in our space over the next several quarters because of the changing dynamics of the market.

[David Loeb:]

And what’s your attitude on using units, rest of the peak?

[Dan Hansen:]

It’s a real cheap form of capital similar to the ATM. It’s one of the most efficient ways to use capital. ACTU believe in the recovery and dominance of select service like, we do, and like many of the select service owners do, it’s really a good opportunity for them to get essentially a better return over time. We can negotiate, apprise that meets our criteria and they can look at it as a strategic investment to really maximize their return. They have been able to go back to their partners and their owners and show them the opportunities that select service has in the growth potentials. So we think it’s a good way to continue to grow without having to come back to the equity markets.

[David Loeb:]

Okay. Last one maybe, demand trends, it seems like we are peering more about the impact of the sequester and may be some demands softening recently, where do you think we are in the cycle and where do you think the next couple of quarters are likely to bring in terms of demand terms?

[Dan Hansen:]

We think the demand is actually still solid. We are more transient focused, less group focused. But I think our view is still very positive. We will never advocate that RevPAR growth was going to be ramping aggressively. We have always underwritten conservatively, and the economy is recovering albeit slowly. So we still feel very positive. Our hotels compete very well in the markets we are in. We are very well diversified government cutbacks and slowdowns do affects us like they affect everybody else, us we believe less so. So, no, we don’t see a weakening of demand at this point and we still see strong and steady growth in our renovated hotels and our ability to deploy capital into these, this really shown the strength of our portfolio.

[David Loeb:]

Great. Thank for all that.

[Dan Hansen:]

Thanks David.

[Operator:]

Thank you for your question. The next line of question comes from the line of Ryan Meliker from MLV & Co. Please proceed.

[Ryan Meliker:]

Hey, good morning guys. Just a couple of things for you, I was hoping you might be able to help with. First of all, and I apologize if I missed this. But what’s your confidence in the dispositions that you got earmarked for later this year, are you guys already in negotiations with buyers or they are just from the market, how is that proceeding?

[Dan Hansen:]

We actually have several under contract in several (inaudible) but we feel pretty good about that $20 million number. I think we had early indications last quarter that that number was $9 million or $10 million, we got in a little further down the line. There is obviously a lot of moving parts with the smaller owner operators with equity and financing but we feel really good about that number.

[Ryan Meliker:]

Great. That’s helpful. And then with regards to the dividends, can you just remind us of how the Board tends to think about the common dividend, I know you guys have paid out roughly in the 50% of FFO ballpark over the past couple of years, think consensus has your FFO increasing nicely next year, just given all your acquisitions you made in the improvement to the portfolio. Do you think the Board is going to be continuing to evaluate it on a roughly 50% FFO payout ratio or is there some other metrics that we should be looking at?

[Dan Hansen:]

I think that’s the right number. I mean a strong dividend is part of our strategy to provide superior shareholder returns that includes reliability and consistent dividend. So, we do review it every quarter and we expect our dividend coverage to be kind in that range. So, I think that’s a fair assessment as you look out for 2014 and beyond and that really is one of the things that we feel very positive about, is that embedded growth for 2014 and beyond.

[Stuart Becker:]

And Ryan, this is Stuart. As we’ve talked about in the past too, there is always that tension inside of an organization about paying the dividend versus being able to find really accretive acquisitions using that capital to deploy towards future acquisitions. So, that continues to be a theme I think amongst the Board and our Management about, growing the dividend as well as redeploying capital.

[Ryan Meliker:]

Great, that’s helpful. And then one last comment, I was hoping, I you could ask about was basically the high place in Minneapolis, is that still on track for an opening in 4Q and can you give us just from a modeling standpoint when you expect the cash outflows for that acquisition to materialize and I think you got $10 million remaining to fund the loan and then obviously the remainder of the acquisition when that closes, just any update on that would be helpful?

[Stuart Becker:]

Yes, update on it is, that’s progressing nicely. That’s sort of online. We would anticipate that the closing would be sometime in the fourth quarter. From the funding need, we would anticipate sometime in the third quarter that another $10 million would go towards that project and then the completion of that sometime in the fourth quarter. And then sort of from a modeling perspective on impact, we think 2014 is obviously where you are going to model the impact of the earnings and performance from it because it will be sometime in the fourth quarter when we close.

[Ryan Meliker:]

And the entire remainder of the $31 million acquisition price is going to be funded in 4Q or is some of it is going to be in 3Q?

[Stuart Becker:]

Yes, $10 million of it would be in Q3, $10 million in fourth quarter and I would get you the total (sort of) $31 million deployed.

[Ryan Meliker:]

Right. And you don't have any – correct me if I’m wrong; but you don't have any interest income coming from that loan, its just basically reducing the purchase price, correct?

[Stuart Becker:]

Correct.

[Ryan Meliker:]

Great. And then, just one last little follow-up to what David was asking earlier, with regards to underwriting and rates moving higher, have you seen any change in acquisition cap rates in the market given the run-off of base rates over the past few months or so?

[Dan Hansen:]

I think the discussions have been around increasing cap rates. I can’t say that we had meaningful changes in pricing from sellers, but with very few buyers out there. That is, the new reality is that cap rates have to move up.

[Ryan Meliker:]

Great. That’s all for me. Thanks a lot. I appreciate it.

[Dan Hansen:]

Thanks, Ryan.

[Operator:]

Thanks for your question. The next line of question comes from Chris Woronka from Deutsche Bank. Please proceed.

[Chris Woronka:]

Hey, good morning guys. Dan, I think you mentioned you are in 41 markets now, two to three years now, do you think of being more markets or fewer markets because I know you have a cost string strategy and then I know you have a diversification strategy. So, how do you look that?

[Dan Hansen:]

I think we would probably say we would be in more markets. I wouldn’t say we’re trying to put every dot in every market on the map. We are as we stated before somewhat market agnostic, we believe and our thesis of diversified best brands in best markets. So, I don't think we never have an over weighting in any market -- any one market over probably 10% to 15%. That feels like a good number for us of exposure in any one market but as we have evolved in our cost to capital gets better, you could see us exiting some markets as we have in the past. But there will always be a very core and broad based portfolio nationwide across the country. So, I would bet that we would have more markets and but its obviously affluent process.

[Chris Woronka:]

Sure. Are there anymore situation like the Minneapolis went out there and what you really missed to do more of those and maybe even more than one at -- the once if the right opportunity was there?

[Dan Hansen:]

Yes. We’ve got a great relationship with the developers out there. It’s unlikely we would do any on our balance sheet of that size; we do have a history as a development company and have the expertise to do so. But, feels much more efficient to partner with developers, I think it’s fair for us on our side to look at two or three, when that will be over-weighted and we think that’s a great way to create value long-term but just as a small part of our portfolio.

[Chris Woronka:]

Okay. That’s great. And just as we think about the New Orleans hotels going forward, I mean, I know you mentioned you have a tough comp 2Q, 3Q easier comp 4Q, is it going forward if the comp are to smooth out, is it inherently tougher to get growth there in the second, third quarter just because your demand is maybe a little bit lower than it is or is it just totally a 2013?

[Stuart Becker:]

Yes. If you think about that market as a whole, second and third quarter tend to be softer quarters anyhow. If you don't have a bunch of group business in that market that’s the dead of the summer and so it tends to be more, you have to focus a little bit more on leasing that tough to get. So, just as a general thought process we think first and fourth quarters tend to be the stronger points in time for those particular group of hotels but like we said, 2012 was a really good group business year for them. But I think that the whole focus on New Orleans and it’s kind of its recovery and what’s going on there and we see some other development methods Dan, may talk a little bit about other opportunities we think in that market. So, overall, we just think the market has really good upside profile.

[Dan Hansen:]

Yes, Chris, this is Dan. There is also new development in downtown New Orleans the biomedical district spread across 1500 acres, it will be one of the largest developments in the world in biosciences. So, it continued to be a market that really fits with that multiple demand generator thesis of ours. So it’s not just a market that we look at as a convention market, we look at all of our markets and they must provide really that multiple demand generator profile. And this is one that again has considerable upside beyond just the typical cyclical recovery of a market.

[Chris Woronka:]

Great, that’s helpful. And then just kind of a sort of modeling question, I mean a lot of your peers with maybe more exposure to – with exposure in New York and some of the other bigger urban markets are talking about property taxes and just curious across your portfolio, are you guys seeing anything in any given market that are significant in terms of tax increases?

[Stuart Becker:]

We’ve seen it in a couple of markets, we’ve seen some impacts, we have talked about this in the past Chris. We do anticipate that to be the case that there should be some inflation in those taxes. And once again, we’re across a pretty broad base in certain markets, reacted more quicker and we’ve seen some upside, so I would anticipate that the case, that would have been a big focal point to this point.

[Chris Woronka:]

Okay, very good. Thanks guys.

[Operator:]

Thank you for your question. The next line of question comes from the line of Wes Golladay from RBC Capital Markets. Please proceed.

[Wes Golladay:]

Yes, good morning guys. When you bought the highest placed portfolio last year, there was a lot of embedded upside through that part end margin or constant folds in that portfolio, is that certain to make its way into your overall results or is it still a drag at the moment?

[Dan Hansen:]

This is Dan, Wes. Thanks for the question. We still very pleased with the acquisition that we made there. Now, that higher management team has worked due diligently to get costs in line and our restructure management, we have been very, very happy with them. We do have some renovations coming up next year that will help fuel that next leg of growth. But I think, we are right on top or a little bit ahead of our underwriting at this point.

[Wes Golladay:]

Okay. So more of a -- I guess accelerated growth next year?

[Dan Hansen:]

That’s fair.

[Wes Golladay:]

Okay, post renovation, okay. And then you have mentioned that the unique clusters you have throughout the portfolio. I was wondering if there is any of them that are standing out for you, any macro drive such as like oil plays that are driving any of the clusters?

[Dan Hansen:]

Not to any meaningful amount as you would expect when Denver is a great example. There have been some weak government business kind of in the core CBD near the Federal Building that we really haven’t experienced. As a market its been a little bit weak, but we are spread out in and around the beltway. So, we have been much less affected in that market. And on the periphery, when you look at our other markets across, they are very strong components that grow from some demand generators and that’s tampered the weakness in some of the others. So it’s really that benefit of diversification and that the great product that we have been able to deliver as it’s been renovated.

[Wes Golladay:]

Okay. And then you guys have mentioned you have 15 unencumbered hotels, are these hotels you are looking to sell or might be you put those in the -- for the line pool later on if you needed?

[Stuart Becker:]

There would be some that are potential for sales. But there are also some that are long-term holds for us. We've just purposefully kind of -- want to have a liquid balance sheet. So we leave plenty of unencumbered. From our line of credit perspective, we still have -- we are a secured line of credit lender, a borrower. And so if you think about on a go forward basis, one of the things we will think about is potential moving to an unsecured position and so leaving those unencumbered assets will be beneficial when we move that direction.

[Wes Golladay:]

Okay. Do you have a timeframe for the unsecured strategy?

[Stuart Becker:]

Don’t have it, I would anticipate something will happen sometime yet this year.

[Wes Golladay:]

Okay. Thanks a lot guys

[Operator:]

Thank for your question. (Operator Instructions) Thank you. The next question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets. Please proceed.

[Jordan Sadler:]

Hi, guys, its Jordan, quick follow ups. First on the RevPAR guidance. I think in your opening commentary Dan you said that 2Q softening is not the trend and you are confident in the back half, can you maybe just speak to that a little bit. I mean, you mentioned some of the drivers of the potential down side and was attributable to the softening in 2Q. But what sort of gives you the confidence as you look out into the back half, I know some others are a little bit conscious on 3Q?

[Dan Hansen:]

I think what gives us confidence is really our asset management team and we work very close with our management companies to develop sound budgeting and management strategies for rate occupancy and with that type of team you can get pretty comfortable around the numbers that you have out there. So, I would say it’s really more of a credit to our asset management team and Stuart may want to add a couple of comments.

[Stuart Becker:]

Yes, just a couple of comments, we do think that in our budgeting process we talked about maybe a soft third quarter in that New Orleans market, similar to the second quarter, although we have seen some stabilization in there. But getting to Dan’s point, we don’t have tremendous visibility rather to our transient business, but we see a good trend line going from July into the summer and typically for this summer is a – as you get into the summer it kind of trend in a – at a direction that you sort of see heading into it. So as we get farther into the summer the trend line seem to be holding.

[Jordan Sadler:]

Okay. That’s helpful. And just last one, on the potential OP unit transactions Dan, I know your thoughts on valuation, you touched on them, how do you get comfortable in doing an OP unit deal here. I mean, do you – are you able to sort of price the stock at a level that’s more attractive relevant to where it maybe trading in the market today? Or is it sort of get adjusted in price?

[Dan Hansen:]

That’s a great question Jordan. It’s a little bit of both. I mean, we can’t just do a transaction that’s dilutive, its got to be a blend of accretion and that could be with price adjustment. It could be with shares at a premium to where they are trading. So it is a little bit of a moving target but you are absolutely right. There is a – those are the real two levers that you have to look at when pricing a transaction. I don’t think its one of the other, I think its both.

[Stuart Becker:]

And this is Stuart. As Dan was talking about the cost-to-capital on a OP deal, the fact that you don’t have to – have the cost to go raise the money publicly when you do it through an OP shares tends to help in that cost-to-capital analysis.

[Jordan Sadler:]

Gives you a little room. Okay. That’s helpful. Thank you.

[Operator:]

Thank you for all your questions ladies and gentlemen. That now concludes the question-and-answer session. I would now like to turn the conference back to Dan Hansen for closing.

[Dan Hansen:]

Well, thank you all for dialing in today. I really just like to close with a thank you to all of our team at Summit, our management company partners and our key franchise partners. Our successful execution of the strategy is really shared by all and these partnerships have helped us really set the stage to grow shareholder value and dominate the lodging space in the years to come. Appreciate your time today and look forward to the next call.

[Operator:]

Thank you. Thank you for your participation in today’s conference call. This now concludes the presentation. You may now disconnect. Have a good day. Thank you.