Summit Hotel Properties - Q3 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Summit Hotel Properties Q3 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you want to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Wudel, Senior Vice President of Finance, Capital Markets and Treasurer. Please go ahead.

Adam Wudel (SVP of Finance)

Thank you, Victor, 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, November 2, 2023, 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 President and CEO, Jon Stanner.

Jon Stanner (President and CEO)

Thanks, Adam, and thank you all for joining us today for our Q3 2023 earnings conference call. We were pleased with our Q3 results, as pro forma RevPAR increased 2.4% compared to the Q3 of last year, driving a 2.6% increase in hotel EBITDA and essentially unchanged operating margins. Accelerating urban and midweek demand, led by improving business transient and strong group trends, as well as continued outperformance within the NCI portfolio, served as our primary growth catalyst in the quarter. Urban and midweek demand trends in September and October were particularly strong, which resulted in September RevPAR growth of 3.6%, and October is expected to finish generally in line with September, a reacceleration from July and August, more modest growth levels.

RevPAR trends during those peak summer months were pressured by difficult year-over-year comparisons as leisure demand normalized and outbound travel to Europe surged. It is important to note that leisure demand remains strong in a historical context, illustrated by RevPAR in the retail segment of our portfolio, which is a reasonable proxy for the leisure transient customer, still trending well above 2019 levels. The outlook for leisure demand broadly remains positive, with more normalized comparisons coming next year. Group demand was especially strong during the Q3, driving occupancy approximately 250 basis points higher than the Q3 of last year and a 12% increase in non-rooms revenue. The evolution of hybrid and remote work environments has created increased demand for smaller groups with shorter-term stays and tighter booking windows, for which our portfolio is particularly well suited.

Overall, Pro Forma total revenue for the portfolio increased 3.3% in the Q3. Business travel typically accelerates post-Labor Day, and we were encouraged with the clear upward trends in weekday performance, particularly Tuesday and Wednesday nights, as indicators of growth in business transient and group demand. Since Labor Day weekend, Tuesday and Wednesday, absolute occupancy has reached 84%, driving nearly 10% year-over-year RevPAR growth on those days of the week. Encouragingly, the operating expense environment continues to normalize, and our team did a fantastic job during the quarter, controlling costs, as operating expenses decelerated noticeably from earlier in the year on a per occupied room basis, driven in part by an approximately 20% reduction in contract labor year over year.

Cost per occupied room in our pro forma portfolio increased just 1% in the Q3, a deceleration from the over 8% growth we experienced in the first half of the year, and we expect continued moderation in expense growth through the remainder of the year. We continue to make important capital investments at our hotels to enhance our ability to drive RevPAR growth and gain market share. Recent renovation activity, combined with our boots on the ground approach to asset and revenue management, resulted in our Q3 RevPAR index increasing to 114%, a 230 basis point improvement from the Q3 of last year, and a sequential 100 basis point improvement from the Q2 of this year. Our portfolio's market share is at or approaching the highest levels ever achieved outside of the pandemic years.

The NCI Portfolio once again produced particularly strong results in the Q3, as RevPAR increased 12% and Hotel EBITDA increased 27% compared to the same period last year. Group and negotiated RevPAR within the NCI Portfolio increased 24% and 23%, respectively, and midweek RevPAR increased 16% in the quarter, further highlighting the strength we see in business transient and overall weekday demand. RevPAR Index in the NCI Portfolio also achieved a new post-acquisition high of 116%, increasing nearly 700 basis points from the Q3 of last year and further testament to the great work our team has done deploying cluster sales strategies and other operating initiatives across the 27 hotels.

Our outlook for the NCI portfolio remains extremely positive, and we expect to continue to generate outsized RevPAR and EBITDA growth in the near term, as these markets benefit from the favorable trends we identified during our underwriting process. Driven primarily by the strength of the NCI portfolio, much of our recent EBITDA growth can be attributed to our successful acquisition activity coming out of the pandemic. Since July 2021, we've acquired 34 hotels for a total of approximately $1 billion. Collectively, these recent acquisitions generated Q3 RevPAR and EBITDA growth of 9% and 19%, respectively, and year-to-date RevPAR and EBITDA growth of 14% and 21%, respectively. Nearly all of these assets are relatively new developments, with minimal near-term capital requirements.

Our Texas markets, which in total represent more than one quarter of our total room count, continue to be the strongest performers in our portfolio, as RevPAR grew 12% in the Q3, highlighted by Dallas and Houston, which generated RevPAR growth of 16% and 14%, respectively. In addition, several of our legacy hotels, particularly in urban markets, delivered outsized growth during the quarter. Our best-performing legacy markets included Indianapolis, Boulder, and Austin, as well as, encouragingly, certain markets that have been slower to recover, such as Kansas City, Minneapolis, and Baltimore. Combined, these markets generated approximately 19% RevPAR growth in the quarter. We believe the next leg of our recovery will be more equally driven by our legacy hotels, which have a significant urban orientation and the majority of our exposure to markets that are earlier in their recovery cycle.

We continue to successfully execute on capital recycling opportunities to increase the overall quality of the portfolio and its growth profile, minimize non-core capital expenditures, and enhance our liquidity and balance sheet profile. In September, we signed an agreement to sell our 123-guest room Hyatt Place in Owings Mills, Maryland, for $8.25 million. The sale price equates to a 4.6% capitalization rate on the hotel's trailing 12-month net operating income at quarter end, and a 2.9% capitalization rate, inclusive of near-term deferred CapEx. The buyer's earnest money is non-refundable, and we currently expect the transaction to close prior to the end of the year.

Since May of 2022, we've disposed of six hotels, inclusive of the pending sale of the Hyatt Place Owings Mills, totaling $111 million, and deferred approximately $33 million of near-term capital requirements. The collective sale price for these hotels resulted in a blended capitalization rate on the trailing 12-month net operating income of less than 2%. Although the transaction environment remains generally challenged, we continue to evaluate additional potential asset sales that we believe are similarly value accretive. Finally, Trey will provide the specifics of our changes in full-year guidance, but I want to highlight we are increasing the midpoint of our EBITDA and AFFO guidance ranges, while leaving the midpoint of our full-year RevPAR guidance range unchanged, given strong Q3 results and our confidence in the forward outlook. With that, I'll turn the call over to our CFO, Trey Conkling.

Trey Conkling (EVP and CFO)

Thanks, Jon, and good afternoon, everyone. Looking across our various location types, the company's urban and suburban hotels were relative outperformers, with Q3 RevPAR growth of 3.2% and 4.1%, respectively, driven primarily by the continued improvement in weekday demand. The urban portfolio continues to be driven by strong midweek demand, particularly the business transient customer, resulting in midweek RevPAR growth of approximately 7% in the Q3 and approximately 9% in the four weeks post Labor Day, respectively. Group demand was also a significant catalyst for the urban and suburban portfolios, with Q3 group RevPAR increasing approximately 5% collectively. Group RevPAR within the urban portfolio specifically is currently approximately 80% of 2019 levels, implying ample opportunity for continued growth moving forward. Today, Summit's urban and suburban hotels account for approximately 75% of our overall portfolio.

The moderation in leisure demand was felt most acutely in our resort and small town metro assets, where Q3 RevPAR was essentially flat to prior year, but a strong 108% recapture rate to 2019 levels. We anticipate these hotels will continue to perform at levels well above 2019 results. Today, the resort and small town metro segments account for approximately 15% of Summit's total portfolio. Overall, weekday demand growth was robust throughout the quarter, posting year-over-year RevPAR increases in all segments. Most notably, the retail and group segments, which make up nearly half of our current room night mix, generated weekday RevPAR growth of 3.1% and 7.2%, respectively.

The retail segment, which captures various types of demand, including leisure and some business transient, remained the largest weekday room-night contributor and continued to post positive weekday ADR growth. Pro forma hotel EBITDA for the Q3 was $62.3 million, a 2.6% increase from the Q3 of last year. Hotel EBITDA margin for the pro forma portfolio contracted by only 25 basis points versus the Q3 of 2022 to 34.3%, despite primarily occupancy-driven RevPAR growth. On a same-store basis, hotel EBITDA margin was 35.4%, with margin contraction of only 12 basis points. The most notable headwind to EBITDA margin is the more than 40% increase in insurance premiums, which created a 65 basis point headwind to hotel EBITDA margin and was partially offset by several favorable property tax appeals.

The timing of these property tax appeals represents a headwind in the Q4 of 2023, as we received the benefit from our property tax appeals in the Q4 of 2022. Our margin performance in the quarter points to a more stabilized operating environment and labor base, as well as strong operational oversight and cost containment at the asset level. The company's FTE count per hotel stands approximately 20% below 2019 levels, and the company's utilization of contract labor declined by approximately 20% on a nominal basis year-over-year, and 5% sequentially from the Q2. In addition, hourly wages have stabilized since the beginning of 2023. We believe that moderating labor expense pressures and our efficient operating model will continue to benefit the company moving forward.

Adjusted EBITDA for the quarter was $46.3 million, a 1.9% decrease compared to the Q3 of 2022. Although Pro Forma Hotel EBITDA increased 2.6% year-over-year, the modest decline in Adjusted EBITDA was attributable to net transaction activity, as we have been a net seller over the past 12 months, as well as the relative contribution of our wholly owned portfolio and joint venture portfolios, in particular, the NCI Portfolio, which saw meaningful outperformance during the quarter. Adjusted for net transaction activity over the last year, Adjusted EBITDA was unchanged compared to the Q3 of 2022. We expect to see continued strength in our joint venture assets, particularly the NCI Portfolio, through the balance of the year.

Q3 Adjusted FFO was $26.5 million, or $0.22 per diluted share, compared to $30.9 million, or $0.25 per diluted share in the Q3 of 2022. From a capital expenditure standpoint, in the Q3, we invested approximately $20 million in our portfolio on a consolidated basis and approximately $16.6 million on a pro rata basis. For the year, capital expenditures on a pro rata basis now total approximately $52 million. The vast majority of this capital continues to be invested in guest-facing projects and includes comprehensive, ongoing renovations at our Staybridge Suites Cherry Creek, Courtyard New Haven, Connecticut, SpringHill Suites Dallas Downtown, Embassy Suites Tucson, and Hyatt Place Denver Tech Center. We continue to ensure the quality and relative age of our portfolio positions the company to drive market share and improve operational results.

We expect the ongoing transformational renovations across our portfolio to drive outsized future growth. Turning to the balance sheet, our current overall liquidity position remains robust at over $400 million. From an interest rate risk management perspective, our balance sheet is well positioned, including an average pro rata interest rate of 4.8%, and approximately 74% of our pro rata share of debt is fixed when accounting for the effect of interest rate swaps. When including the company's fixed coupon preferred securities, which carry a blended coupon of less than 6%, the balance sheet is approximately 80% fixed at a blended rate of just over 5%. Specific to the wholly owned portfolio, our hedging activity over the last year effectively fixes approximately 90% of wholly owned indebtedness.

In total, the company's $600 million swap portfolio fixes SOFR at an average rate of less than 3% and has an average duration of approximately three years. In September, we successfully completed the refinancing of our $200 million GIC joint venture credit facility, which consists of a $125 million revolving credit line and a $75 million term loan. The fully extended maturity date of the credit facility is September 2028, and as a result, our average length to maturity increased to more than three years. So far this year, we have successfully refinanced $800 million of debt, which includes both the primary credit facility for the company and the GIC joint venture credit facility, in what continues to be a challenging debt capital markets backdrop.

We are thrilled that both executions maintained interest rate pricing with effectively the same terms as the prior facilities, and they continue to ensure the company has sufficient flexibility and liquidity to execute on our strategic initiatives. For the balance sheet as a whole, with the exception of a $15 million property-level loan due in December 2024, we have no other maturities until February 2025. On October 26, our board of directors declared a quarterly common dividend of $0.06 per share, or an annualized dividend of $0.24 per share, which represents a dividend yield of approximately 4%. The dividend continues to represent a prudent AFFO payout ratio, leaving room for 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. As Jon previously referenced, included in our press release last evening, we provided updated ranges on full year guidance for 2023 operational metrics.

As well as certain non-operational items. This outlook does not include any additional transaction or capital markets activity. Based on the company's Q3 operating results, as well as our future outlook, we are revising full year guidance across certain key metrics. Our full year RevPAR growth range has been narrowed to 6.25%-7.75%, which implies no change to the midpoint relative to our previously stated full year RevPAR guidance. This translates to an Adjusted EBITDA range of $186.5 million-$191.6 million, an increase of over $1 million at the midpoint of our prior range, and an Adjusted FFO range of $0.89-$0.93 per share, which also reflects an increase to the midpoint of the range.

We expect full year pro rata interest expense, excluding the amortization of deferred financing costs, to be approximately $55 million-$60 million. Series E and Series F preferred dividends to be $15.9 million, Series Z preferred distributions to be $2.6 million, and a revised pro rata capital expenditures range of $65 million-$75 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.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets. Your line is open.

Austin Wurschmidt (Analyst)

Great, thank you. Just wanted to start out just talking a little bit about the leisure segment. You know, Jon, you've mentioned it's been a little bit of a drag due to some of the comps and normalization. I'm just curious, as you look out, whether you expect, you know, that segment to reaccelerate next year or kind of perform, you know, even in line with overall industry forecasts? Just trying to get some color around how you think things play out within, you know, leisure demand.

Jon Stanner (President and CEO)

Yeah. Good afternoon, Austin. Thanks for the question. I think generally, we think that leisure demand remains strong. And as we alluded to in, you know, my prepared remarks, that, you know, I think when you look at it in historical context, outside of the year-over-year comparisons to last year, I think leisure demand generally still looks very, very good. I think we can expect leisure to remain strong. I think that the comp comparisons as we go into next year get much more normalized.

So we I think we'll look back in several years and look at the rates that we were able to charge in 2022 as a bit of an outlier, and we saw that as we looked at our rates, specifically in the Q3, in July and August, in particular, those comparisons were very difficult. As we turn the calendar into 2024, we'll have much more normalized comparisons. And I think, again, absent anything, you know, dramatic happening in the macro, we think leisure demand remains stable.

Austin Wurschmidt (Analyst)

Helpful. Then just, as it relates to the transaction market, I mean, are you seeing any kind of positive changes there or greater depth in the buyer pool? And how big is the pool of assets that you're evaluating for sale today?

Jon Stanner (President and CEO)

Yeah, you know, I think the transaction market has remained relatively unchanged. It's still pretty challenged. Rates are still higher. The buyer pool is still smaller than it was, you know, several years ago. We still continue to believe that the assets that we have sold, and including the asset that we announced the pending sale of in Owings Mills this quarter, that's still the most liquid part of the transaction market, in our view, where you've got smaller check sizes, less requirements on debt capital markets.

That's where we think the best execution can come. As we alluded to, we'll continue to opportunistically look for disposition candidates. We like the ability to sell lower cap rate assets that have larger deferred capital needs, as a good way to redeploy those capital into other opportunities.

Austin Wurschmidt (Analyst)

Is there a specific set of properties, or could you kind of gauge, you know, what pool fits that criterion that you just—that you had just mentioned, kind of smaller assets, upcoming CapEx needs, and so forth?

Jon Stanner (President and CEO)

Yeah, I think you can look at, again, assets that look like the assets that we've sold this year. You know, they're generally smaller. They require some CapEx. I think the common theme in all the assets that we've identified for sale has been, you know, kind of meaningful capital needs that we just don't feel like the return on capital is there. We think we can redeploy that capital into something that has a better return profile than the renovation of those assets. So we haven't disclosed specific assets or the specific quantity of assets, but as you've seen again earlier this year, that's where our focus has been on the disposition side.

Austin Wurschmidt (Analyst)

Understood. Thank you for the time.

Jon Stanner (President and CEO)

Thanks, Austin.

Operator (participant)

Thank you, and one moment for our next question. Our next question comes from the line of Michael Bellisario from Baird. Your line is open.

Michael Bellisario (Senior Research Analyst)

Good afternoon, everyone.

Jon Stanner (President and CEO)

Good afternoon, Mike.

Michael Bellisario (Senior Research Analyst)

Jon, maybe similar question to the last one, but maybe I'll ask it a different way. Maybe how many hotels or how many dollars do you think you need to sell before maybe you can be back in acquisition mode or growth mode, where the balance sheet isn't really a limiting factor? And do you think that inflection could occur in 2024? Do you think it'll take a little bit longer?

Jon Stanner (President and CEO)

Yeah. Well, you know, as I said, Austin, I'm hesitant to put a number or a number of hotels on it. I think we've said that, you know, on a net basis, we look opportunistically to dispose of some assets. That hasn't changed. We think that there are more in the portfolio where we can find opportunities to sell and redeploy that capital into better uses. We would like to bring leverage down. We've made some progress on that. We'd like to continue to make more progress on that. We would like to get back to the point where we can be an opportunistic acquirer of assets as well, as you alluded to. I do think that the potential for that exists as we get into next year.

Again, I'm hesitant to put specific parameters around the number of assets or the magnitude of assets that would require. I think we want to make sure we maintain flexibility and continue to be opportunistic around how we think about deploying and redeploying that capital.

Michael Bellisario (Senior Research Analyst)

Got it. Fair enough. And then, presumably, we would see two or three or, you know, some number of dispositions likely before we would see an acquisition, so sort of net seller before any redeployment would come, correct?

Jon Stanner (President and CEO)

Yeah. Look, we've, we've been a net seller of assets over the last 12 months. I think we've acknowledged that, we'd like to get our net debt to EBITDA ratios back down into our, our, our target ranges. Again, I want to be careful around commitments around timing, but that hasn't changed. We, we do plan to manage the balance sheet back down into our target leverage ranges.

Michael Bellisario (Senior Research Analyst)

Got it. Fair enough. And then just, next question for me. Just want to dig into the NCI Portfolio. Maybe the, just the RevPAR growth in the quarter. How much was rate? How much was occupancy? You know, are you picking up business demand? Are you picking up leisure demand? Really just kind of trying to understand the drivers of the growth and the recapture that you saw in that portfolio. Thanks.

Jon Stanner (President and CEO)

Yeah. Look, obviously, it was a terrific quarter for NCI portfolio. It's been a terrific year for the NCI portfolio. You know, our EBITDA in that portfolio is up over 25%, year-over-year, and it's a little bit different asset by market, Mike. You know, we've seen, for example, in the Dallas markets, we're getting great BT contribution, we're getting good, strong contribution from group in those markets. Other markets are more leisure oriented, so it's a little bit of a mix. In terms of the mix of rate and occupancy, the majority of the increase has come from occupancy in the quarter. There has been... We are positive in rates.

We have some rate lifts, but as we expected and as we underwrote the ramp-up of these assets, we thought there was tremendous opportunity from a lift perspective. That's all starting to materialize. The team's done a really, really nice job putting in cluster sales strategies, other operating initiatives to drive these results. We've hit our all-time high from a RevPAR index within the portfolio, the highest the portfolio's ever achieved, and so it's been fairly broad-based. And again, I'd say the specifics are really market dependent, but we've seen it in all segments. We've seen it in the leisure segment, we've seen it in BT, and we've seen it in some of the smaller group business in certain markets.

Michael Bellisario (Senior Research Analyst)

Thank you. That's all for me.

Jon Stanner (President and CEO)

Thanks, Mike.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Chris Woronka from Deutsche Bank. Your line is open.

Chris Woronka (Senior Analyst)

Hey, good afternoon, guys. So I think you mentioned in the prepared comments that your contract labor is down pretty meaningfully, I guess 20% or something. That's great to hear. Where is it possible to... I mean, where do those folks come from? Are they from within the industry that you're replacing them with, or are they already in the industry, and they're just kind of willing to take today's rate, that's the wage that they weren't willing to take a year ago, or are there more folks coming into the worker pool?

Jon Stanner (President and CEO)

Yeah, we are seeing, you know, some expansion of the labor pool. I would say it's still tight. I would also say, again, it's really a credit to the team and the management companies that we work for. This has been an initiative since the beginning of the year. It is still a difficult labor market out there. You know, so to see a 20% year-over-year reduction in contract labor is very, very encouraging. It's still elevated. If I look at that percentage of our total labor relative to 2019, you will still see that contract labor is higher than it was pre-pandemic. So we're making progress.

We're hopeful that we can continue to make incremental progress, but I do think it's broadly a function of while the labor markets are still tight, they have loosened to some extent through the course of the year, and so we've seen a better influx of labor coming into our hotels.

Chris Woronka (Senior Analyst)

Okay. Thanks. Thanks, Jon. And then, question for you on insurance. Yeah, that's been a topic for a lot of your full-service peers. And of course, they're maybe a little bit more resort-oriented, and then, which has been where, obviously, a lot of the claims have come in. What does it look like for you guys? I mean, I think everybody's up, but how much of a headwind is it this year, or what do you expect for next year?

Jon Stanner (President and CEO)

It was a material headwind for us. You know, our renewal date is February first. Yeah, I think as we said on prior calls, our insurance renewal was up around 40% year-over-year. The vast majority of that, as you would expect, was driven by higher property insurance renewals. Most of that, we've absorbed most of that. We're not quite on a calendar year end, but we're close. It's too early to really guide towards what we think next year is going to look like. We're just getting started going through that process. If I had to handicap it, I would say, you know, not only would it be less than the increase that we saw this year, but likely higher than inflationary expense growth next year.

Chris Woronka (Senior Analyst)

Okay, thanks, Jon. Then, just last one for me is, you know, I think Hilton and Hyatt have both in recent quarters announced some new extended stay product, and you guys own a little bit of it, of the existing brands. Should we think about how we think about you potentially again, it's not even in the ground yet, but are you willing to do more with those, with both extended stay brands and with those two guys?

Jon Stanner (President and CEO)

Yeah, you know, look, I think all three, Marriott, Hilton, and Hyatt have all announced new, you know, in and around mid-scale extended stay opportunities. You know, we've followed it very closely. We're good partners with all three of those brands. As you know, we're not natural developers. We don't do a lot of a lot of development activity. We do it kind of selectively throughout the portfolio, where there's some clear synergies and adjacencies to existing projects. But it's certainly something that we'll watch very closely. We like the idea that the brands are embracing, you know, these kind of lighter labor type of operating models. Again, it's a natural extension for the types of assets that we own.

I think we're all well aware of how well extended stay has performed, really since the pandemic. I do think there are interesting opportunities. We'll certainly watch it. Again, we're not necessarily natural merchant builders or developers of these projects, but I do think it's interesting and something that we'll pay attention to.

Chris Woronka (Senior Analyst)

Okay. Very helpful. Thanks, Jon.

Jon Stanner (President and CEO)

Thanks, Chris.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Bill Crow from Raymond James. Your line is open.

Bill Crow (Managing Director)

Hey, good afternoon, everyone. Yeah, I guess good afternoon out there. A couple of questions for me. You talked about normalized comparisons heading into 2024. I guess against the backdrop of really strong margin performance quarter, I'm curious about what your thoughts are for expense growth next year when you put together the labor, the insurance, and all the other factors.

Jon Stanner (President and CEO)

Yeah, you know, look, you know, Bill, the first thing I would say is, we're early. We're still going through the budget process right now. So, you know, to say that we've got, you know, perfect sight lines into that at this time of year, would be a little premature. I do think, as I just alluded to, I do think you'll see above inflationary growth in insurance costs again next year. I would just remind everybody that's, you know, roughly 5% of our total cost base, so thankfully, it's not, you know, the biggest driver of our overall costs. We have seen the biggest driver of our overall costs, as you would expect, is on the labor side. We have seen wages moderate, you know, significantly this year.

You know, I think our wages are up about 2% year to date versus where they were last year. That's been very encouraging. It's what helped drive what was really, really strong margin performance in the quarter. When you look at essentially flat operating margins on, you know, plus or minus 2.5% RevPAR growth and less than 1% expense growth for occupied room, you're seeing really, really strong cost control. So I do think wages, I do think wages generally have stabilized. I think the expense growth outlook for 2024 is much better and much cleaner than it was when we looked at 2023.

Again, you saw that in the transition from the Q2 to the Q3, where we had significant expense growth in the Q2 because we had difficult expense comps from the Q2 of last year. Those operating models now have largely normalized. We will have a more normalized comparison as we look into next year. Again, we feel better that we're gonna have expense growth that's gonna look much more like kind of inflationary type of growth next year versus kind of the unique comparisons we had this year.

Bill Crow (Managing Director)

Good. Jon, that's, that's helpful. Does that, does that mean that kind of 2.5% RevPAR growth next year should generate those same sort of flat margins?

Jon Stanner (President and CEO)

Yeah. You know, look, again, I don't wanna get out, you know, kind of over our skis on where we think the year is gonna translate. I would say that, you know, 2.5% RevPAR growth historically has been where we felt we could break even from a margin perspective, and that played out in the Q3. I do think some of that was our ability to eliminate some contract labor, and I think some of that going forward is gonna be what mix is generating that RevPAR growth, the mix of rate and occupancy. We did it this quarter on essentially 0.8% ADR growth. It was actually slightly negative. We did it on all occupancy growth.

My expectation is that we probably need a little bit more than that, next year to break even on margins, but it's, it's really premature to get, you know, too far into that conversation, given where we are in the budget process.

Bill Crow (Managing Director)

Sure. Two other quick ones for me. You talked about wanting to get potentially back into the acquisition side of things. Anything you're looking at from the glamping side, or are the yields, yield possibility and the future growth from traditional hotels just too attractive at this point?

Jon Stanner (President and CEO)

No, the yield. Look, the yield on the, you know, the glamping opportunities are still interesting. I think that we've, you know, announced that we have a development underway at our Fredericksburg asset, and then we do have a mezzanine loan that's outstanding, that's part of the glamping opportunities. You know, beyond that, you know, we've been focused on kind of the capital allocation priorities that we've talked about before. But the business continues to perform very well. The yield profile of the business is still very compelling.

Bill Crow (Managing Director)

Thanks, Jon. Finally, for me, the NCI portfolio continues to deliver terrific results, but it's also sitting in the kind of pathway of what's gonna be the highest supply growth in the country, in the Dallas-Fort Worth metroplex. I'm just wondering if a year from now, we're gonna be kind of fretting over some of the supply deliveries, or if you feel good that those particular assets are maybe a little bit more out of the way of that path of growth?

Jon Stanner (President and CEO)

Yeah, you know, look, I think the one thing that I constantly remind everyone of when we talk about DFW is just how large and broad that market really is. And so there, there's so many different pockets of the DFW market, and again, it is one of the higher supply growth markets in the country. It's obviously a really, really compelling supply growth environment broadly for the industry. I think when you break down and you look at what's going on in downtown Dallas versus Grapevine, versus Frisco, versus Fort Worth, we don't-- we're not all that concerned about supply growth affecting next year in the portfolio. The comparisons get much harder. We've obviously had enormous revenue growth and EBITDA growth in that market this year.

So to think we can continue this at the same growth rates next year is unrealistic. But we do feel really good that the outlook for that market, in particular, from a demand perspective, is extremely strong, and are not particularly concerned with the broader supply, the numbers that are hitting the DFW market. Our sell markets and our specific micro locations in that market feel more insulated.

Bill Crow (Managing Director)

Yeah, perfect. That's it for me. Thank you.

Jon Stanner (President and CEO)

Thanks, Bill.

Operator (participant)

Thank you. I'm not showing any further questions in the queue. I would now like to return the conference back to Jon Stanner, President and CEO, for closing remarks.

Jon Stanner (President and CEO)

Well, thank you all for joining us today for the Q3 call. We'll look forward to speaking with many of you and seeing many of you in L.A. for NAREIT later this month. Thank you all.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.