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Summit Hotel Properties Inc (NYSE:INN)
Q3 2019 Earnings Call
Nov 6, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Summit Hotel Properties Q3 2019 Conference Call. [Operator Instructions]

I would now like to hand the conference over to today's speaker, Adam Wudel, Senior Vice President of Finance and Capital Markets. Please go ahead, sir.

Adam Wudel -- Senior Vice President of Finance and Capital Markets

Thank you, Valerie, and good morning. I am joined today by Summit Hotel Properties' Chairman, President and Chief Executive Officer, Dan Hansen; and Executive Vice President and Chief Financial Officer, Jon Stanner.

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 2018 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today, November 6th, 2019, and we undertake no duty to update them later.

You can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call, on our website at www.shpreit.com.

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

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Thanks, Adam, and thank you all for joining us today for our third quarter 2019 earnings conference call. We are pleased with the continued relative outperformance of our portfolio compared to the broader industry, the Upscale segment, our relevant competitive sets and what continues to be a challenging operating environment. I would like to specifically acknowledge our entire operations team who have been relentless in controlling operating expenses and leading initiatives to create value.

For the third quarter, we reported pro forma RevPAR growth of 0.2%, which was driven by a 1% increase in occupancy, partially offset by a 0.8% decrease in rate. Our third quarter results were affected by both hurricane Barry and Dorian, which reduced pro forma RevPAR growth by 50 basis points, and disruption from renovation activity during the quarter further reduced pro forma RevPAR growth by 40 basis points. Adjusting for these disruptions, pro forma RevPAR growth was 1%, which compares favorably to third quarter results for the total US, top 25 markets, and the upscale chain scale, which reported RevPAR changes of positive 0.7%, negative 0.4% and negative 0.5%, respectively.

We once again gained market share among our competitive sets in the third quarter with an average RevPAR index of 113.7, which represents a market share gain of 149 basis points compared to the third quarter of 2018. This share gain consisted both of occupancy and rate share gains relative to our portfolio's respective competitive sets.

Our same-store portfolio posted a RevPAR decline of 0.1% in the quarter, driven by a 0.9% increase in occupancy and a 1% decrease in rate. Excluding hurricane-related and renovation disruption, same-store RevPAR increased 1%.

Our strongest performing markets during the quarter were Phoenix, Louisville, Indianapolis and Boulder. Our four Phoenix hotels posted a combined RevPAR increase of 26.7% in the quarter, driven by our Courtyard and SpringHill Suites in North Scottsdale, which received comprehensive renovations during the third quarter of 2018. In addition, our in-house revenue strategy team worked to develop new pricing strategies at all four hotels to better manage the off-peak summer months which help contribute to a combined share gain of 16.3% in the quarter.

Adjusting for the displacement in the third quarter of 2018 at our two North Scottsdale hotels, the four hotels posted an average RevPAR gain of 6.1% compared to the overall Phoenix Market, which grew only a little over 2%. In Louisville, our two hotels posted combined RevPAR growth of 21.5% during the quarter as we were once again able to shift segmentation toward higher-rated group in retail business, following the reopening of the Convention Center and the resulting 20% increase in citywide room nights. This shift in segmentation contributed to a 11.9% increase in rate during the quarter, which outpaced the competitive sets combined growth of 4%.

RevPAR growth at our hotels once again outpaced the overall Louisville market, the downtown submarket, and the competitive sets gaining nearly 960 basis points of market share on average. In Indianapolis, a strong convention center calendar drove a 15% increase in citywide room nights during the quarter and our two hotels posted average RevPAR growth of 10.6%, which outpaced overall Indianapolis market by 470 basis points and represents an average market share gain of 320 basis points versus our respective competitive sets.

Our hotels were also successful in growing group business during the quarter, with group night room demand up 18.6% in this segment compared to the third quarter of 2018. We continue to have a positive view at the Indianapolis market as citywide convention basis up over 9% for 2020.

In Boulder, our Marriott Hotel continues its strong ramp following the Hotels' comprehensive renovation which was completed in the second quarter of 2018. The hotel posted a 10% RevPAR gain during the third quarter, which outpaced the Boulder submarket by nearly 600 basis points and its competitive set by nearly 400 basis points in the quarter. The Hotel was able to drive significant rate increases as occupancy reached nearly 90% in the quarter, and 8.8% increase in rate significantly exceeded the competitive sets, 0.6% decline. These four markets outperformance highlights the benefit and value from having an in-house team of professionals to oversee and execute renovations and the subsequent outperformance in repositioning made possible with comprehensive renovations in creative pricing strategies. We are proud of our portfolio's relative outperformance as year-to-date RevPAR growth of 1.7% in our pro forma portfolio compares quite favorably to industry growth of 1%, Upscale growth of negative 0.5%, and essentially flat growth in our competitive sets. The great work by our asset management team continues to translate into better operating margins as year-to-date operating expenses have increased by only 1.4% on a per occupied room basis, which has kept GOP margins nearly even despite tepid top line growth.

Capital recycling continues to support our external growth as we closed on the acquisition of five hotels and a land parcel in partnership with GIC for a total purchase price of $276.9 million during the quarter and subsequent to quarter end. Earlier this quarter, we also announced the pending sale of our two hotels in Birmingham, Alabama, for a combined sales price of $21.8 million, which we expect to close in the fourth quarter.

Finally, during the third quarter, we invested $14.1 million into our portfolio on items ranging from common space improvements, and meeting room and fitness center renovations, to complete guest room renovations, including comprehensive renovations at our Hampton Inn & Suites Hotels in Austin, Texas and Tampa, Florida, and our Courtyard by Marriott in Fort Worth, Texas. Year-to-date, we have invested $46.7 million into our high quality hotels resulting in an average effective age of 3.4 years, demonstrating our commitment to provide the most updated offering and the best-in-class guest experience.

With that, I'll turn the call over to our CFO, Jon Stanner.

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Dan, and good morning everyone. For the quarter, our pro forma hotel EBITDA was $48.3 million, a 3.4% decrease from the same period in 2018, and hotel EBITDA margins contracted by 130 basis points to 36%. Excluding the effect of property tax increases, which rose nearly 10% during the quarter, hotel EBITDA margins contracted by 75 basis points. Hotel operating expenses continue to be well managed with quarter-to-date and year-to-date operating expenses increasing just 0.7% and 1.4% on a per occupied room basis respectively.

During the third quarter, our adjusted EBITDAre decreased 8.8% to $45.2 million, and adjusted FFO per share decreased 10.1% to $0.31 per share, both primarily driven by year-to-date disposition activity. During the third quarter, we closed on the previously announced acquisition of the Hampton Inn & Suites, and an adjacent land parcel in Silverthorne, Colorado, which kicked off our joint venture with GIC. Additionally, subsequent to quarter end, we closed on the acquisition of four hotels in California and Oregon in partnership with GIC for a total purchase price of $249 million. The combined purchase price of the five hotels acquired year-to-date equates to an average estimated cap rate of 8.4% on the underwritten net operating income for the full year 2019. These recently acquired hotels have a combined 2019 RevPAR of $162, which is approximately 30% higher than our existing portfolio, and average hotel EBITDA margin of nearly 50%, which is approximately 1,300 basis points higher than our portfolio. These statistics are all property level figures and do not include any fee income we will earn as the joint ventures, general partner and asset manager.

As Dan mentioned, we also announced the pending sale of our two hotels in Birmingham, Alabama, for $21.8 million. The combined purchase price equates to a 6.9% cap rate on the trailing 12 months' net operating income or a 5.6% cap rate, including estimated capital expenditures for PIP related items. Including these sales, our year-to-date disposition activity totals nearly $170 million and translates to an average cap rate of 7.7% or 6.8% including estimated PIP related costs on the hotels combined trailing 12 months' net operating income.

The ten hotel sold year-to-date are currently under contract to sell, have a trailing RevPAR of $102 [Phonetic] and hotel EBITDA margin of 33%, both of which are well below our portfolio average. These transaction service further validation of our ability to thoughtfully recycle and reallocate capital in a manner that we believe will create long-term value for shareholders.

Our balance sheet continues to be well positioned with approximately $350 million of current liquidity, no maturities until the end of 2022, and an average remaining term of more than four years. As of September 30th, we had total outstanding debt of $849 million, with a weighted average interest rate of 4%. On a pro rata basis, our current net debt to trailing adjusted EBITDAre is approximately 4.7 times. Today, more than 86% of our hotel EBITDA is unencumbered, as we continue to assemble a highly flexible balance sheet.

On November 1st, we declared a quarterly common dividend for the third quarter of 2019 of $0.18 per share or annualized $0.72 per share. The annualized dividend result in a prudent AFFO payout ratio of approximately 58% at the midpoint of our 2019 outlook. Consistent with our prior practice, we updated our full year guidance in the press release yesterday to include the acquisition of four hotel and the pending disposition of our two Hilton Garden Inn hotels in Birmingham, which is expected to close in the fourth quarter.

Our revised full year 2019 guidance for adjusted FFO is a $1.23 to $1.26 per share, and adjusted EBITDAre of $183.3 million to $186.4 million, which reflects the midpoint of both ranges being increased to account for our recent transaction activity. We revised our full-year estimate for pro forma and same-store RevPAR growth to 0.5% to 1%. The reduction of the midpoint of our pro forma RevPAR growth range is primarily driven by the inclusion of the four West Coast assets we recently purchased as if they were owned for the full year, and the exclusion of the two Birmingham assets that are currently held for sale, which combined lowered full year RevPAR growth by approximately 40 basis points.

Full year pro forma RevPAR growth was further reduced by 10 basis points as a result of the hurricane disruption Dan mentioned earlier. Same-Store RevPAR growth guidance was lowered by 25 basis points at the midpoint of our range.

Finally, we adjusted our full year outlook for capital improvements to $57.5 million to $62.5 million for 2019. No additional acquisitions, dispositions, equity raises or debt transactions beyond those previously mentioned are assumed in the full year 2019 guidance.

With that, I will turn the call back over to Dan.

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Thanks, Jon. In summary, we are pleased with our third quarter performance and our continued ability to identify and execute on opportunities that we believe position our portfolio for future outperformance.

And with that, we'll open the call to your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Austin Wurschmidt of KeyBanc Capital Markets. Your line is open.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Hi, good morning. Dan or John, I guess, I'm curious how we should be thinking about the balance between growing the joint venture and managing your leverage levels moving forward within that level or that targeted range you've outlined historically?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Sure, Austin. It's Dan. I think you should look at it as that range of, kind of, 3.5 times to 4.5 times as the real guide post that we've been very focused on for quite some time. Obviously, our capital constraints are more limited in GICs. We'd expect to fund at this point, you know our component of any growth through recycling of capital as we've done in the past.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

So how would you rank the attractiveness of the funding sources when you look at selling assets, and then common, and/or preferred equity?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Our base is very strong. We're selling assets right now. We've shown our ability to sell assets at very attractive rates and we still think there is a market for that. So I think that's where our focus would be at this point.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Appreciate that. And then just, next question, I guess, I was hoping to get a little bit additional detail around the economics of the new mezzanine loan that you closed on this quarter. Remind us again, what your target thresholds are for the mezz book? And then, could you provide some latest thoughts on either the remaining three loans outstanding whether you think those ultimately get prepaid or you take out the borrowers through an acquisition?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Hey, Austin, it's Jon. I think, as we've said in the past, we like this is, kind of, an ancillary piece of the business. I think where we are today and as you pointed out, we now have four different loans outstanding, three of which are fully funded, you know feels like around the right balance for us. We do have some period of time over the course of next year with which we would look to potentially exercise those options. I think as we've said, kind of, over and over, we're only in this to do it for hotels that we would ultimately like to own and we will kind of make those evaluations at the time the options come due over the course of the next year.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

And then what was the size of the new loan and the yield that you expect to achieve on that?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, the total loan commitment is just under $29 million. We have just under $7 million of that funded at year-end, and it carries a 9% coupon.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Wes Golladay of RBC Capital Markets. Your line is open.

Wes Golladay -- RBC Capital Markets -- Analyst

Yeah. Good morning guys. Sticking with that mezzanine debt that you have out there, is it all with different developers?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Wes, it's Dan. It's with two separate developers.

Wes Golladay -- RBC Capital Markets -- Analyst

Okay. And then, going into your acquisitions, can you give us your view on what the growth profile is for the assets over the next two or three years? What you can do from investing in the assets, obviously, this year is a little sluggish on the growth relative to what you sold, but where do you see the inflection coming?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Are you referencing the new acquisitions?

Wes Golladay -- RBC Capital Markets -- Analyst

Yeah, you bought the four assets, you brought down your growth profile. But imagine, you're going to have some sort of playbook where you can invest and bring the growth up and maybe your view on supply in those markets?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Yeah, I think they are all assets that we feel are very well located. We -- as we've said before, feel very good about the brands -- driving value, these particular assets, we think could benefit from significant amount of capital. We called out $23 million of renovation capital over the next couple of years for those properties. So we do think there is some considerable upside post renovation. But yeah, they are very well positioned in their market and with very strong brands that we think we will continue to lead the market specifically post renovation.

Wes Golladay -- RBC Capital Markets -- Analyst

Okay. And then last one from me. When you look to next year, how do you view supply in your markets relative to this year?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Hey, Wes, this is Jon. I think we look at it fairly consistent with what we're seeing this year. We've talked about, kind of, industry supply growth in and around 2%, you know our portfolio and kind of our top 10 meaningful markets probably 40 basis points to 50 basis points north of that, more in line with what we're seeing in kind of top 25 in urban markets. And our expectation at this time is, for next year to shake out generally in line with what we've seen this year.

Wes Golladay -- RBC Capital Markets -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from Neil Malkin of Capital One Securities. Your line is open.

Neil Malkin -- Capital One Securities, Inc. -- Analyst

Hey guys, good morning. Just a question on the Birmingham assets you have teed up, that cap rate -- the disposition cap rate looks really good, really low. I'm just -- how are you able to achieve those. I mean, are you saying those were in the like a 1031 market, is it just like rich doctors using like 80% LTV is a floating rate debt. Like, how are you sourcing those to get such attractive valuations on inferior assets relative to your go-forward portfolio?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Neil, it's Dan. Look, I wouldn't look at these as inferior assets. I think these have been good assets for us. They performed well. We have the relationship with owners all over the country, big and small. This particular owner is very well respected and great operator who has a strong presence in Birmingham. So from a cost and expense standpoint, he can probably do things that we just can't being a public company with third-party managers. So what that cap rate represents to us is probably significantly different to him. So I wouldn't look at it as a buyer that is either unqualified or not paying attention. I think it's just a different profile of a local owner operator that can find value and ways that we can't because of our structure.

Neil Malkin -- Capital One Securities, Inc. -- Analyst

Okay.

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

That is our job. It is to find the right buyer to maximize value, but it's not in any way, you know should not be looked at in any way as a reflection on the buyer. Everybody has a different focus in value proposition.

Neil Malkin -- Capital One Securities, Inc. -- Analyst

I understood. Thank you for that clarity. And then other one from me. Could you just maybe highlight your key demand drivers or customer basis, in terms of, in the leisure transient, business transient, kind of, how those segments have trended in terms of demand or the health of that since July. Any notable takeaways you've seen in terms of degradation or stability, you know any notable insight that would give you clues or be a harbinger for things to come potentially?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Hey Neil, it's Jon. I think, kind of, as a continuation from what we saw in the first half of the year. We've seen group pulled up on a relative basis better. I think when we look at -- and even some of the kind of the corporate negotiated again on a relative basis has held up better where we've seen more of the weaknesses on the transient side and more particularly on the leisure side. Yeah, I think in the third quarter, weekday RevPAR outperformed weekend RevPAR by about 250 basis points.

Neil Malkin -- Capital One Securities, Inc. -- Analyst

Sure. I just wonder if leisure, for example, was weaker, because you had a tough holiday -- Jewish holiday comp and leisure has been -- is outperformed for quite some time. I didn't know if there was something in particular or anything that you stuck out to you that you're hearing from your property managers that would -- you maybe think -- rethink how you revenue manage?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, I think that there is definitely some of that in there, kind of, parsing out the separate effects is very difficult, but I do think that the holiday shift was a piece of it. And again, it's been a little bit of a continuation with what we've seen throughout the year. I think your point on, it has been a relative outperformer in previous periods is also driving a piece of it.

Neil Malkin -- Capital One Securities, Inc. -- Analyst

Thanks.

Operator

Thank you. Our next question comes from Chris Woronka of Deutsche Bank. Your line is open.

Chris Woronka -- Deutsche Bank -- Analyst

Hey, good morning guys. Wanted to kind of revisit that the RevPAR assumption for the four acquisitions, is that -- I'm trying to do the math quickly. I mean, is that one -- is that -- the RevPAR, I guess, call it, underperformance relative to the rest of the portfolio. Is that one or two of those hotels or is it kind of uniform across the four?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Hey Chris, it's Jon. It is, I would say, all four are the expectations for them to perform as a group relatively lower than the portfolio. I would say, the weakness is concentrated in Portland. I mean, I think there's is a market that's been well understood that has been weak consistent with our expectations going into the deal on the way that we underwrote the acquisition at the time that we purchased them.

Chris Woronka -- Deutsche Bank -- Analyst

Okay. And then, can you maybe share with us, even if at a high level just given the -- some of the management fees you are going to be earning on this JV, how does that kind of improve the overall returns on how you underwrite these JV deals?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, look, we haven't -- Chris, we haven't disclosed the exact fee stream and what all comprise in the fee stream. And what we have said publicly is that, we do believe that they are meaningful. We've done that mostly, kind of, out of respect for our partner. I think what you'll see as we progressed through the JV and particularly as we get into next year, those fees will run through other income on the income statement. They will be more meaningful [Indecipherable] to articulate in a little bit more detail what comprises those fees as we go forward.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, great. And then just wanted to ask on the -- the kind of on the brand side. It seems like, as we've been hearing from other REITs in the brand companies, there has been a little bit of back and forth on market share, and I know you guys are obviously in the select service part of the market, but do you think there have been any shifts there maybe because of the Bonvoy program kind of gaining traction or something else? Is there anything notable that's important for you guys?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Chris, it's Dan. I wouldn't say there's anything notable or surprising for us. I mean, we've been big believers in the value of loyalty for a long time, which is one of the key drivers. We believe in the strength of our portfolio. How that shifts over the next three or four or five years with continued proliferation of brands and the upscale brands competing as well if not better than boutique and upper upscale, I think will kind of prove itself out. But I don't think I've seen anything would give us any pause in continuing our belief in the strength of the brands growing their loyalty programs. I do believe both Hilton and Marriott and Hyatt and IHG continue to post numbers of growth. There are a lot of different ways to segment that, but we do think that it's a big positive, not just for our portfolio, but for the industry.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, great. And just -- I don't have the math in front of me, but you guys as you see more and more of the Hilton, Tru properties open, maybe in some of your markets, do you think they are kind of staying within that swim lanes, because I know historically what we saw over time was Hampton Inn grew from what Tru is today to compete with really almost full service hotels. And so, I'm just curious as to whether you're seeing Tru in any of your markets and whether it's having a positive or negative impact on any of your properties?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Chris, this is Dan again. I wouldn't say that we've seen any effect in our markets, it's still a relatively new brand. It is creative and unique. I don't know that you have a Tru segment anywhere in the lodging space as you have had traditionally. I think people are looking for new and clean and renovated rooms in great locations where they want to stay and spend time. So I do think that even the mid-scale or upper mid-scale brands like Tru will be a competitor, and I think that will be something that we will be focused on. But our properties, many of them are custom, many of them location-wise drive higher RevPARs and those barriers with construction costs and renovation costs are likely to keep some of those brands from continuing to seep in there. But so -- long answer, but we haven't seen a lot from those brands, but they're definitely part of the reservation and loyalty programs, and should continue to gain traction in markets that are accommodative to those guests.

Chris Woronka -- Deutsche Bank -- Analyst

Okay. Very good. Thanks guys.

Operator

Thank you. Our next question comes from Michael Bellisario of Baird. Your line is open.

Michael Bellisario -- Robert W. Baird & Co -- Analyst

Good morning, everyone.

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Good morning.

Michael Bellisario -- Robert W. Baird & Co -- Analyst

First, just kind of a housekeeping item on RevPAR change. The weak RevPAR for those hotels in 2019, what's the tail there? How should we think about any potential impact on your pro forma portfolio into 2020? Is it going to be a headwind again? And then, what sort of magnitude should we be thinking about?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Mike, in terms of, what we think the portfolio will do in '20?

Michael Bellisario -- Robert W. Baird & Co -- Analyst

Not necessarily what those four hotels will be specifically, but the impact on overall RevPAR growth for the plus or minus 74 hotels or whatever you have in your pro forma -- pro forma side, just given that it's a change in mix. And on a backward looking basis, there is a negative impact I would presume at least in the near term going forward, it's also a bit of a negative impact. Is that correct?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Yeah. I think, look -- I think what we have disclosed is that it's about a 40 basis point headwind for the full year of '19. As you know, we're kind of in the middle of going through budgets for next year. So for us to quantify anything, I think, it would be premature, but I do think it's fair to assume that we would expect those acquisitions to be a tailwind next year.

Michael Bellisario -- Robert W. Baird & Co -- Analyst

Got it. And then maybe just on those four transactions -- the four hotels, one portfolio transaction. Can you maybe give us a little bit of background on how that came about, how was sourced, and then what you're seeing more broadly in the pipeline today in terms of pricing and quantity?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Yeah, this was -- unlike the other acquisition, this was a broker deal. This was part of a larger portfolio that was for sale. We've looked at a much larger portfolio and kind of were interested in the larger portfolio and really focused on these four assets. We felt like these four assets kind of fit the profile of what we were looking for and fit the profile of how we wanted to grow the JV with GIC. So they checked a lot of boxes for us. I think we felt fortunate that we were able to, kind of, carve them out of the larger portfolio.

Beyond that, I think we continue to see opportunities out there. It's more difficult. I would say, the transaction market has remained fairly stable, again, despite the fact that fundamentals remain fairly tepid.

Operator

Thank you. Our next question comes from Bill Crow of Raymond James. Your line is open.

Bill Crow -- Raymond James -- Analyst

Okay. Good morning. Are you seeing anything on the leading edge that we can't see that might indicate you're getting any relief on the labor cost front, maybe lower turnover or anything like that, any markets in particular that might be helping you a little bit instead of hurting you?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Bill, it's Dan. I wouldn't say that there is anything on the leading edge. I think it's just a market by market, very boots on the ground commitment to try to find good employees at fair wages and minimize the contract labor and the turnover that comes along with that. We've made quite a bit of progress through the portfolio, getting our contract labor less than 10% of the payroll. But I think to offset that is a very strong focus on the whole expense side, which we've been implementing in expense forecasting process over the last year that helped us keep expenses in control. So I don't know that I would say there is a definite solution that we have uncovered out there other than a market by market approach to really trying to find the right employees. I think the markets with greater supplier are going to continue to be the more challenging ones, but I think we've had some success stabilizing that so far this year.

Bill Crow -- Raymond James -- Analyst

And what are the trends on property taxes. Do you anticipate that the increases are going to be as great in the next 12 months as they have been over the last 12 months?

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Hey, Bill, it's Jon. I think we're looking at kind of mid single-digit increase in property taxes this year. It's been kind of right in line with our expectations going into the year. Absent the recent transaction activity, I would have expected it to be on a fairly similar trajectory in 2020. Clearly, there is going to be some Prop. 13 considerations for the assets that we just bought in California next year, which potentially could put some pressure on property taxes for '20.

Bill Crow -- Raymond James -- Analyst

And the full-service guys have leaned heavily on fees to sustain their EBITDA this year. It's not something that you're able to do as easily. You just talk about the opportunity to implement or increase in-place fees?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Bill, there is a few opportunities out there that we're exploring. I think that our offering model is a little bit different and unique. And to provide -- legitimately provide those -- charge those extra fees, there has to be an offering made. And our operating model is such that it's very much rooms-based focus. So -- and that's what we liked. We liked the efficient operating model that drives the higher margin. So to the extent, there are few properties in Tru Resort markets that we can add a fee too. Certainly we would consider that, but I wouldn't expect it to be a huge driver for us because of our operating income.

Bill Crow -- Raymond James -- Analyst

I apologize. I have one more question here for you. And that -- it does feel like Marriott and Hilton have separated themselves on the sheer size of the platform, the number of brands and the loyalty programs, membership. I'm just wondering on the margin, does that change your preference for brands when you're looking at acquisitions, all else equal?

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Yeah. If all else equal, clearly, the strongest loyalty program is the one that is probably the easiest to underwrite. Unfortunately all else is never equal. So I think we have continually tried to be somewhat agnostic and understand that certain brands may have a less contribution either in loyalty or even public perception of value, but to take that all into consideration in pricing. So we're still driving after the same returns. And if we can get better return, because of certain dynamics, whether it's need for capital or repositioning, we wouldn't just be focused on one brand versus another for that reason.

Bill Crow -- Raymond James -- Analyst

All right. Thanks. I appreciate the time.

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Thanks, Bill.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over to Dan Hansen for any closing remarks.

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Well, thank you all for joining us today. Our goal of creating long-term shareholder value through opportunistic capital investment and relentless asset management remains unchanged, and our portfolio is in the best shape we've ever had. We're very well positioned for the future. And on behalf of the entire Summit team, we wish you a joyous holiday season and look forward to talking to all of you individually if you'd like to have any direct conversations to answer any questions. Have a great day.

Operator

[Operator Closing Remarks].

Duration: 35 minutes

Call participants:

Adam Wudel -- Senior Vice President of Finance and Capital Markets

Daniel P. Hansen -- Chairman, President and Chief Executive Officer

Jonathan P. Stanner -- Executive Vice President, Chief Financial Officer and Treasurer

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Wes Golladay -- RBC Capital Markets -- Analyst

Neil Malkin -- Capital One Securities, Inc. -- Analyst

Chris Woronka -- Deutsche Bank -- Analyst

Michael Bellisario -- Robert W. Baird & Co -- Analyst

Bill Crow -- Raymond James -- Analyst

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