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

Adam Wudel: Thank you, Daniel 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, July 30, 2024, 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 Chief Executive Officer, Jon Stanner.

Jon Stanner: Thanks, Adam, and thank you all for joining us today for our second quarter 2024 earnings conference call. We were once again extremely pleased with our second quarter operating performance and financial results as adjusted EBITDAre increased 6% to nearly $56 million, which represented a new quarterly record high for the company. And adjusted FFO increased 10% compared to the second quarter of last year, which was our second consecutive quarter of double-digit growth in AFFO. Pro forma RevPAR increased 3.4% year-over-year as our portfolio continued to consistently outperform the total U.S. lodging industry and upscale chain scale. The second quarter marked the 13th consecutive quarter that our pro forma portfolio has exceeded the total U.S. average RevPAR growth.

Our asset management team and operating partners also continue to do a terrific job managing expenses during the quarter, resulting in hotel EBITDA growth of 6% on a flow-through of more than 70%, which drove hotel EBITDA margin expansion of 120 basis points compared to the second quarter of last year. Fundamentals continue to improve across the company’s portfolio in the second quarter, particularly in April and May, which had RevPAR growth of 4.5% and 6.5%, respectively. RevPAR growth for the quarter was predominantly driven by a 2.4% increase in occupancy, which was concentrated in urban and suburban markets. Our portfolio also continues to benefit from the strong group demand the industry is experiencing as second quarter group RevPAR increased 7.5% compared to the prior year, an increased nearly 20% in our urban portfolio specifically.

Our groups are often smaller, self-contained events, which have been robust, and we also continue to benefit from overflow of larger citywide demand in the local marketplace. Our RevPAR growth continues to be driven by strong weekday and urban demand, which increased by approximately 4% and 5%, respectively, in the second quarter. Total portfolio RevPAR on Mondays, Tuesdays and Wednesdays improved throughout the second quarter, increasing by 4% year-over-year and 8% when isolating those days of the week to the company’s urban portfolio, supported by strong group business and the continuing recovery of corporate transient demand. Weekend RevPAR increased 1.3% during the quarter as we are seeing moderating leisure demand and a return to more typical travel patterns.

As we’ve discussed on previous calls, we believe our portfolio is well positioned for relative outperformance, given our exposure to several urban markets that have been slower to recover. 5 of those markets in particular, New Orleans, Baltimore, Minneapolis, Louisville and the Greater San Francisco Bay and Silicon Valley area, represented 17 of our owned hotels in the second quarter that finished 2023 approximately $22 million below 2019 hotel EBITDA levels, on RevPAR that was less than 75% recovered. In the second quarter, these 17 hotels produced RevPAR growth of over 6% and hotel EBITDA growth of 22%, highlighted by 23% RevPAR growth in Louisville and 17% RevPAR growth in Minneapolis. The recovery of technology-related business travel in our Silicon Valley hotel is accelerating, which grew RevPAR by nearly 20% and EBITDA by nearly 60% during the quarter.

San Francisco remains the one notable and well-publicized pocket of weakness among our recovering markets as RevPAR declined year-over-year for the quarter. Excluding our 3 San Francisco assets, RevPAR increased 11% in the remaining 14 hotels and EBITDA increased nearly 40% year-over-year in the second quarter. Year-to-date, this portfolio has grown RevPAR by 8% and EBITDA by over 30% as we continue to close the gap relative to pre-pandemic performance. We expect these 5 lagging markets to continue to drive outsized RevPAR and EBITDA growth for our portfolio for the remainder of the year. While our lagging markets have been the primary drivers of our year-to-date RevPAR growth, we’ve experienced broad-based demand growth in our urban portfolio, highlighted by Indianapolis, Cleveland and Charlotte, which all experienced double-digit RevPAR growth during the second quarter.

From a capital allocation standpoint, we continue to improve the overall quality of our portfolio and health of our balance sheet during the quarter. Since 2023, we sold 9 hotels for a combined $131 million, including the 3 hotels sold during the quarter at a blended capitalization rate of approximately 5%, inclusive of $44 million of foregone capital needs based on the estimated trailing 12-month net operating income at the time of each sale. The combined RevPAR of these hotels was approximately $87, which is nearly a 30% discount to the pro forma portfolio. Our disposition efforts have facilitated nearly a full turn reduction in our net debt-to-EBITDA ratio, enhance the quality and growth profile of our portfolio and significantly reduced near-term CapEx requirements.

In our earnings press release yesterday, we provided updated guidance ranges that reflect actual first and second quarter results and our revised outlook for the remainder of the year. We reduced our full year RevPAR growth range to 1% to 2.5%, which is predominantly driven by softer demand and a tempered outlook over peak summer leisure travel months. June was a particularly uneven month as strength in the first half of the month was offset by a slow travel week around the Juneteenth holiday, which resulted in a RevPAR decline of 1% for the month. July has followed a similar pattern as RevPAR in the first half of the month declined 2%, driven by a slow post 4th of July holiday week before rebounding in the back half of the month. We expect full month July RevPAR to be modestly positive year-over-year.

Leisure demand broadly across our industry has continued to normalize this summer, particularly in certain resort markets that experienced tremendous rate growth in 2021 and 2022 coming out of the pandemic, which is offsetting some of the growth we are experiencing in urban and suburban markets, which represent approximately 75% of Summit’s portfolio. Last summer’s trends towards greater international travel and cruises have largely continued into this year, creating some additional headwinds to domestic leisure travel. All our top line assumptions have moderated for the second half of the year, we made only a minor adjustment to our adjusted EBITDAre range, which highlights the strength of our efficient operating model and our ability to drive hotel EBITDA growth and margin expansion despite lower revenue growth expectations.

We modestly lowered the top end of our adjusted EBITDAre range, which reduced the midpoint of the range by just 1%. It’s worth noting that the initial – the midpoint of our initial full year adjusted EBITDA guidance range has remained relatively constant despite the sale of 3 hotels for $84 million in the second quarter. Importantly, we are maintaining the midpoint of our AFFO and AFFO per share ranges, which further highlights the accretive dispositions and our commitment to deleveraging the balance sheet as well as our ability to effectively recycle capital. With that, I’ll turn the call over to our CFO, Trey Conkling.

Trey Conkling: Thanks, Jon, and good morning, everyone. Our strong second quarter 2024 performance represented a continuation of recent operating trends as growth within our portfolio was once again driven by the company’s urban and suburban hotels, which generated RevPAR increases of 5.4% and 5.8%, respectively, both of which exceeded the national averages compared to their respective location types. Together, these 2 location types comprise approximately 75% of our pro forma portfolio. Strength in our urban portfolio was driven by continued outsized growth in notable sun belt markets such as Dallas and Charlotte, but even more so by markets outside of the sun belt, such as Indianapolis, Cleveland, Louisville, Minneapolis and Baltimore, all of which posted double-digit RevPAR growth and benefited from numerous special events and more favorable seasonal travel demand patterns.

In particular, our urban hotels benefited from robust group demand, for which RevPAR increased approximately 18% versus the second quarter of 2023, despite a difficult year-over-year comparison as 8 cities within our portfolio, hosted Taylor Swift concerts in the second quarter of last year. Fundamentals within our suburban portfolio remained strong as both corporate negotiated and group RevPAR increased 6% compared to prior year. This was led by our 4 hotels in Denver, 3 of which were recently renovated and had a combined RevPAR increase of 24% for the second quarter. RevPAR for our resort and small town metro assets declined modestly year-over-year, primarily due to the transformative ongoing renovation at assets such as the Hotel Indigo Asheville and Courtyard Fort Lauderdale Beach.

RevPAR for these segments remains meaningfully above 2019 levels. Growth in non-rooms revenue increased over 5.5% for the quarter. This trend continues to be driven by the identification of paid parking opportunities, the implementation of resort fees and other ancillary revenue capture given increased occupancy during the quarter. Moderating expense growth was a key driver of strong second quarter results and represents the fourth consecutive quarter that expenses have exhibited a more normalized cadence representative of a stabilized cost structure. For the quarter, operating expenses increased by a modest 2.8% and increased only 0.4% on a per occupied room basis for the pro forma portfolio. Productivity improved across the portfolio, resulting from a concerted focus on retention initiatives and less reliance on contract labor.

The success of our retention initiatives is evident as our average FTE count has increased to 29 FTEs per hotel, which remains 15% below pre-pandemic levels, but represents an incrementally more cost-efficient labor structure. During the quarter, turnover declined by 15% compared to the same period last year and contract labor declined by 10% on a per occupied room basis, approaching levels in-line with the onset of the pandemic. Year-to-date, operating expenses have increased 2.6% on an absolute basis and has declined to 0.3% on a per occupied room basis. The NewcrestImage portfolio continued to meet expectations in the second quarter, generating RevPAR growth of 3.3% and which resulted in a 111% RevPAR index and an impressive 7% in hotel EBITDA growth on revenue that was primarily occupancy-driven.

Operating expenses increased a modest 1% on an absolute basis and declined by over 1% on a per occupied room basis. The portfolio’s ongoing market share gains and thoughtful expense management continue to validate our team’s ability to identify value-enhancing cluster opportunities and unique revenue management strategies as well as an ability to leverage an already flexible operating model to drive strong bottom line results. Pro forma hotel EBITDA for the second quarter was $73.1 million, a 7% increase from the second quarter of last year. Driven by over 70% flow-through that resulted in 120 basis points of margin expansion despite RevPAR growth that was primarily occupancy-driven. Combined, labor efficiencies alongside other rooms and food and beverage expense management initiatives resulted in gross operating profit margin expanding over 40 basis points during the quarter.

Further expense reductions in property taxes and management fee expense drove the majority of the remaining margin expansion. Notably, hotel EBITDA increased in both the company’s wholly-owned and GIC joint venture portfolios. Adjusted EBITDA for the quarter was $55.9 million, a 6% increase compared to the second quarter of 2023. And adjusted FFO was $36.4 million or $0.29 per share, a 10% increase versus the same time period last year. From a capital expenditure standpoint, in the second quarter, we invested approximately $21 million in our portfolio on a consolidated basis and approximately $18 million on a pro rata basis. Year-to-date, we have invested $39 million on a consolidated basis and $33 million on a pro rata basis. CapEx spend for the second quarter was primarily driven by comprehensive renovations at our Hilton Garden in Milpitas, Residence Inn Hillsboro, Embassy Suites Tucson, Courtyard New Haven, Hotel Indigo Asheville and our Courtyard Grapevine.

Since the beginning of 2022, we have invested over $200 million into our portfolio, which has an average effective age of 5 years and ensures the quality of our portfolio positions the company to drive profitability and market share in the future. Additionally, during the second quarter, we commenced a significant renovation and repositioning of our Courtyard Fort Lauderdale Beach Hotel. To complement its irreplaceable oceanfront location in a high barrier to entry market, the project scope will include a customized guestroom and corridor renovation, reconfiguration and modernization of the public spaces and a high ROI reimaging of the pool deck and restaurant space to offer a unique outdoor experience. The project is expected to be completed by first quarter 2025.

The balance sheet continues to be well positioned with total liquidity of over $325 million, an average length of maturity of over 3 years, an average interest rate of approximately 4.7% that is nearly 80% hedged and a leverage ratio that is nearly a full turn lower than it was a year ago. Throughout the second quarter, we completed various financing activities that further improve the balance sheet, including reducing overall pro rata indebtedness by over $100 million, utilizing proceeds from asset sales and cash on hand, inclusive of the repayment of our last remaining debt maturity for 2024. During the quarter, we also repaid a property-level mortgage loan for $39 million prior to its scheduled maturity date, which represented an 8% discount on the $42 million outstanding loan balance and an accretive outcome for the company.

Two of the three assets that collateralize the loan were added to our corporate credit facility borrowing base, providing increased strategic flexibility and future borrowing capacity. As a result of our interest rate management efforts, our interest rate exposure continues to be effectively managed with a swap portfolio that has an average SOFR rate of less than 3% and a net asset position of approximately $20 million. And approximately 76% of our pro rata share of debt is fixed after consideration of interest rate swaps. When accounting for the company’s Series E, F, and Z preferred equity within our capital structure, we are approximately 80% fixed. With no significant maturities until 2026, a staggered maturity schedule and a strong liquidity profile, we believe the company is well positioned to achieve its growth objectives.

On July 25, our Board of Directors declared a quarterly common dividend of $0.08 per share, which as a reminder, was increased 33% last quarter and represents a dividend yield of approximately 5.2% based on the annualized dividend of $0.32 per share. The current dividend rate continues to represent a modest AFFO payout ratio of approximately 35% at the midpoint of our guidance, leaving ample room for potential increases over time, assuming no material changes to the current operating environment. The company continues to prioritize striking an appropriate balance between returning capital to shareholders, investing in our portfolio, reducing corporate leverage and maintaining liquidity for future growth opportunities. As Jon previously discussed, included in our press release last evening, we revised our full year guidance for 2024 operational metrics as well as certain non-operational items.

This outlook is based on management’s current view and does not account for any unexpected changes to the current operating environment, nor does it include any future transaction or capital markets activity. Based on the company’s year-to-date operating results as well as our future outlook, we are providing an updated RevPAR growth range of 1% to 2.5% for the year. Although we have tempered our outlook for RevPAR growth in 2024, we have made a very modest revision to our adjusted EBITDA midpoint and we are maintaining our adjusted FFO midpoint. Our revised adjusted EBITDA range of $188 million to $196 million represents a 1% decline at the midpoint and reflects a more stabilized cost structure and the continued success of asset management initiatives.

Importantly, we are maintaining our adjusted FFO midpoint at $0.95 per share and narrowing the range to $0.91 per share to $0.99 per share as the company continues to benefit from recent accretive dispositions and continued deleveraging. At the midpoint of our RevPAR guidance range, we would expect hotel EBITDA margins to contract approximately 25 basis points year-over-year, which implies contraction in the second half of 2024 of 100 to 150 basis points, primarily related to difficult year-over-year property tax comparisons given the significant appeal success realized in the second half of 2023. Our revised full year outlook for hotel EBITDA margin contraction of 25 basis points represents a meaningful improvement compared to our initial full year guidance in February 2024, which estimated hotel EBITDA margin contraction of approximately 75 basis points.

We expect pro rata interest expense, excluding the amortization of deferred financing costs to be approximately $55 million. Series E and Series F preferred dividends to be $15.9 million. Series Z preferred distributions to be $2.6 million and pro rata capital expenditures to range from $65 million to $85 million. As previously mentioned, given the increased size of the GIC joint venture, the fee income payable to Summit now covers nearly 15% of annual cash corporate G&A expense, excluding any promote distributions, Summit may earn during the year. And with that, we will open the call to your questions.

Operator: [Operator Instructions] Our first question comes from Dany Asad with Bank of America. Your line is open.

Dany Asad: Hi. Good morning everybody. Jon, in your prepared remarks, you called out normalization over the peak summer leisure travel months as the primary driver of the RevPAR reduction, so if we just think about days of week or markets, can we just elaborate on where and when we would expect to see this normalization in Q3?

Jon Stanner: Yes. I think we are mostly seeing it around the weekends and we are mostly seeing in our more leisure-oriented market. As we kind of said in the prepared remarks, urban markets continue to perform very well. Our lagging markets, in particular, have continued to perform very well. It has been softness in these markets that have frankly performed significantly above where they performed in the pre-pandemic environment. We have less of that pure resort type of exposure and 75% of our portfolio is in urban and suburban markets. So, I think we are a little more insulated there. Nonetheless, we have seen some pressure on pricing in these peak summer travel months, June and July specifically. If I break it down a little bit by quarter, I would say of the 125 basis point reduction in RevPAR growth at the midpoint, 25 basis points to 50 basis points of it is in the second quarter, specifically related to June, the balance of it’s in the third quarter – sorry, in the back half of the year.

Dany Asad: Got it. Okay. Thank you very much.

Jon Stanner: Thanks Dany.

Operator: Thank you. [Operator Instructions] Our next question comes from Michael Bellisario with Baird. Your line is open.

Michael Bellisario: Thanks. Good morning everyone.

Jon Stanner: Good morning.

Michael Bellisario: Jon, first question for you, maybe just kind of bigger picture on growth and how you are thinking about the near-term outlook. Are we just operating broadly in the hotel industry sort of 1% to 2% top line, is expense growth at 3%? Is that the right run rate in that scenario? And then how do you guys think about same-store profitability in that growth backdrop?

Jon Stanner: Yes. Good morning Mike. Thanks for the question. I think we are – I think it would be – I will use caution in drawing conclusions just from the month of June and July. We have obviously seen some softness, as I elaborated on. A lot of that softness is concentrated around these holiday weeks. If I look at our performance in June, we were down 1% for the month. If I backed out the week of June-teenth [ph], we were actually up 3% for the month. And I could tell a similar story in the month of July. And so I think you re seeing – I think what has changed post pandemic is we have continued to see real softness in and around holiday weeks and following holiday weeks that’s really affected business travel in a way that it hasn’t necessarily in the past.

April and May were up 5.5% on a combined basis. And I do think we remain optimistic that as we get through the peak summer travel season and back into the fall when we see more group and BT demand, you will see some reacceleration in top line growth. And I will let Trey expand a little bit on what we are seeing on the expense side. But I do think that while our top line growth expectations have moderated, our expectations on the expense side have changed pretty meaningfully as well. The team has done a terrific job managing expenses. The opportunity set that we identified early in the year around reductions in contract labor and reductions in turnover have taken hold. And I think that’s why you have seen us be able to expand our EBITDA margins by 90 basis points in the first half of the year.

Trey Conkling: Yes. And Mike, just to add to that, I think when we gave initial guidance at the beginning of the year, we talked about operating expenses increasing 4% to 5% for the year, I would say today, that’s probably 150 basis points to 200 basis points lower. So, when you kind of referenced that 3% number that feels in the right ballpark, that’s obviously driven a lot by these labor efficiencies that Jon referred to, the improvement in productivity. The contract labor, wage growth through the first six months of the year is up about 2%. So, we are seeing a real benefit from that perspective. I think some of the property tax stuff that we have talked about is certainly a benefit to this quarter. It’s a headwind in the fourth quarter.

And so when you kind of look at the full year, we said margin contraction of about 25 basis points for the full year, I would say GOP is probably a little bit better than that based on the fact that a lot of these labor efficiencies and this reduced operating expense growth has moderated versus where we thought we would start the year.

Jon Stanner: Yes. Maybe just one more point on the same theme here. Again, when we gave full year guidance, we kind of said our expectation relative to historical levels was that we needed more than 3% – maybe 3.5% to 4% RevPAR growth to kind of breakeven from a margin perspective. As Trey just said, we obviously expect that to be much lower today. The midpoint of our revised RevPAR range is 1.75%. we are plus or minus breakeven at GOP levels at that level. So, we have obviously seen a reset lower in expenses and the ability to generate GOP and EBITDA growth on much lower of our growth rates than we thought at the beginning of the year.

Michael Bellisario: Got it. That’s helpful context. And then just sort of a follow-up there for Trey, just on the second half outlook. Can you maybe walk through some of the puts and takes between 3Q and 4Q for both RevPAR and margins, I know you mentioned the property tax impact will be 4Q, but anything else top line and on the expense side between the two quarters?

Trey Conkling: No, I think when we look at the second half from a margin perspective, if you think about last year, our cost per occupied room in the first half of 2023 was up 8.5%, and then in the second half of the year, it was about 1.5%. So, we saw kind of in the fourth consecutive quarter of seeing this kind of really improved expense dynamic. And I think when we look at the second half, it’s a little bit more of a difficult comp related to GOP. And so I think when we guide to that 150, probably 50 basis points of that down 150 in the second half is coming from GOP. And then the remainder of it is below GOP, it’s property taxes, and it’s related to a one-time insurance rebate from that perspective. So, on the whole, I think if you look at the year, as we said, it looks a lot more improved than where we started the year.

Michael Bellisario: That’s all for me. Thank you.

Jon Stanner: Thanks Mike.

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

Chris Woronka: Hey. Good morning guys. Thanks for all the details so far. So, I guess my question kind of this is related to kind of back half RevPAR expectations. Are you guys seeing a change – any changes in booking behavior between, I guess I would parse between leisure and BT. Are the windows shrinking? Are you seeing more cancellations, or – and if you can maybe remind us if you have kind of a high-level view of average lead times for, say, more of the BT stuff in Q4 versus the more leisure-oriented stuff in Q3? Thanks.

Jon Stanner: Yes. Good morning, Chris and thanks for the question. It’s Jon. Look, our expectations for the back half of the year, kind of the implied RevPAR outlook for the back half of the year is, call it, flat at the low end and up about 2.5% at the high end of our range, a midpoint between 1% and 1.5% at the midpoint of our full year range. What I would say is we have just seen more volatility in booking pace than we have historically. Our August pace is up 4%. We remain encouraged by that. But it has been more volatile than I think we would have otherwise seen. And again, I think it’s a reflection of being still in more of a leisure travel period. Our pace for September is flattish as we sit here today. The booking window remains incredibly short.

I don’t think we have seen significant changes to that. We certainly haven’t seen it lengthened. As I lengthen it all. As I said earlier, I do think we remain optimistic that as we get out of the leisure season and into the fall where we see more BT and more group that has been more predictable business, we have had better pricing power. We felt less pricing pressure in that business and hopeful of that, that translates into better rate growth than we saw in the first half of the year and the second.

Chris Woronka: Okay. Thanks Jon. And then the next question is kind of – it may be a little too early to tell. But as we think about some of these newer brands that are starting to pop up more in some of your markets, whether it’s a Tru or Spark. And I don’t think you are going to necessarily be owning any of those hotels. But is there any evidence or concern that they dropped down into the rates that impact your Hampton or Hilton Garden or even some of the other non-health stuff? Do you have any early sense on that yet?

Jon Stanner: Yes. I do think it’s a little bit too early to tell. What I would say, particularly related to the Spark’s or these kind of economy – the economy conversion brands that have been rolled out is I think the math pencils much better in tertiary and secondary markets. And the majority of our portfolio and exposures in urban markets where I think this is more difficult to roll out. I think broadly speaking, it goes after a different customer. Now, it is more supply in those brand families exposure perspective, so we will have to see. But I do think, again, I think we are still going to be in a environment for several years where we have below average and probably significantly below average supply growth in the industry, sub-1% supply growth for several years. So, I do think we have a good outlook from a supply perspective going forward.

Chris Woronka: Yes. That’s good to hear. If I can sneak one more in, when you talk about kind of the – getting some of the contract labor out and switching over to more FTEs, are these contract people becoming FTEs, or is it a different group of people and where they are coming from? Are they in the industry and they are walking across the street or is it new entrants, do you have a sense of that?

Jon Stanner: Yes. Look, I think that sometimes you are converting contract. I don’t think that’s the norm. I think what you are seeing is just a broad general easing of the labor market more broadly. Whether we are stealing it from other industries or you have savings that have run out from stimulus over the pandemic and people need to get back to work. I think any macro indication that you look at suggest that the labor market is easing. And that’s translating to less contract labor and lower turnover in our business.

Chris Woronka: Okay. Very good. Thanks. Thanks Jon.

Jon Stanner: Thanks Chris.

Operator: Thank you. I am showing no further questions at this time. I would now like to turn it back to Jon Stanner for closing remarks.

Jon Stanner: Well, thank you all for joining us today. We look forward to seeing many of you at the fall – at the conference circuit. I hope you have a great end of your summer. Thank you very much.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.