Thank you for joining us for the Summit Hotel Properties Incorporated First Quarter 2020 Earnings Conference Call. I would now like to turn the call over to your host today, Mr. Adam Wudel. Please proceed.

Thank you, Howard 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 2019 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today, May 12, 2020, 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.

Thanks, Adam, and thank you all for joining us today for our first quarter 2020 earnings conference call. Yesterday, we reported first quarter results in our press release, including all standard comparable operating measures and financial metrics, which have been rendered largely irrelevant by the dramatic fall-off in demand we saw in the middle of March as widespread closures were implemented to slow the spread of the COVID-19 virus. Therefore, we are going to spend our time today reinforcing the many proactive measures we took to combat the effects of the virus on our business, provide an update on the current operating environment, balance sheet, and look ahead to how we envision leading in the future. Over the past two very challenging months, we have prioritized the health and safety of our guests, our brand and management company associates, and our own employees. I’m quite pleased with the resolve demonstrated by our team in managing through this unprecedented crisis. We have been fortunate to speak with many of you in recent weeks and are genuinely grateful for both the concern for our well-being and the interest in our business. As the depths of what is certain to be a historic downturn became apparent in March, we swiftly began implementing hotel-level contingency plans focused on rightsizing staffing levels and adjusting service and amenity offerings to an exceptionally low occupancy environment. Fortunately, the efficient nature of our operating model has allowed us to keep all but six of our 72 hotels open, with another nine hotels effectively consolidated into adjacent, typically dual-branded hotels. The hotels that remain open are operating with very limited staff and providing only the very basic service and amenity offerings. We have suspended all non-essential capital expenditures for the remainder of the year, along with common dividend distributions, which combined, will preserve over $100 million of cash on an annualized basis. We have also taken additional measures at the corporate office, implementing temporary base salary reductions for the majority of our employees and furloughing approximately 25% of the staff. We were very pleased to announce yesterday an amendment to our senior bank credit facilities. Jon will provide more details on the agreement shortly, but this amendment provides us with an additional $150 million of undrawn funding capacity, a full financial covenant waiver for 12 months, and a modified covenant package beyond those initial 12 months that creates considerable flexibility and runway for our business to recover. As I mentioned, the majority of our hotels remain open today. Despite the incredibly challenging conditions, we are pleased to have found some level of stabilization over the last few weeks. Preliminary April results for our portfolio point to RevPAR declining approximately 89% compared to last year, including results from hotels that were closed or consolidated during the month. However, occupancy levels were four percentage points higher in the second half of the month compared to the first as certain brand initiatives, including first responder rate programs and our own internal revenue management strategies, proved successful in capitalizing on the limited opportunities. While high-teens occupancy levels may seem trivial, I will remind you that even with 90% year-over-year RevPAR declines, that marginal incremental revenue reduces our monthly estimated cash burn rate from $15 million to $11 million per month. With nearly $300 million of current liquidity, we have well over two years of capital to survive a very draconian and thankfully highly unlikely operating scenario. While we are all facing what is undoubtedly an uncertain future and road to recovery, we believe this will ultimately provide unique opportunities for value creation. We generally share in the emerging consensus that leisure travel broadly, and drive-to leisure demand more specifically, will be the first and fastest segment of business to recover. We stand well-positioned to benefit from such a recovery as our efficient operating model has afforded us important flexibility to remain open at the vast majority of our hotels and a clear pathway to relatively quick ramp-up of business. Approximately 50% of our pre-crisis business mix was leisure-oriented, while group business, particularly large groups in international demand, make up a disproportionately small portion of our customer base. Before I turn the call over to Jon, I would like to make a few comments about our brand partners and provide some examples of how they have responded in a constructive manner. The major brand companies have implemented several measures to help support owners during this crisis, including the postponement of brand-mandated capital plans, access to and utilization of FF&E reserve funds for operating expenses, fee relief, and the suspension of some brand standards and quality control audits. More importantly, we have collaboratively begun a very important process of addressing the future operating standards of our business, in which cleanliness, hygiene, and sanitation will undoubtedly take on a more prominent role. Our belief is that a watershed event like this gives us a rare opportunity to address meaningful shortcomings and implement important changes to the day-to-day operations of our hotels. While we are in the very early stages of redefining our model, we remain committed to finding solutions that enhance the long-term profitability of our hotels and meet guest evolving and likely elevated expectations. With that, I will turn the call over to Jon Stanner, our CFO.

Thanks, Dan, and good morning everyone. In yesterday’s press release, we outlined critical amendments to approximately $1.1 billion of debt, which includes our $600 million senior credit facility as well as two $225 million term loan facilities that are governed by the same set of financial covenants and thus were modified in essentially identical ways. Importantly, these amendments allow for the outright waiver of the testing of financial covenants through the first quarter of 2021 and modified covenant thresholds along with annualized testing mechanisms in the last three quarters of 2021 to accommodate what may be a more gradual recovery in our business. We have the ability to draw an additional $150 million under the revised terms of our revolving credit facility, giving us nearly $300 million of total liquidity, including approximately $145 million of unrestricted cash currently on hand. This gives us not only considerable capacity to survive an extended period generating extremely limited revenue, but flexibility to operate in a potentially longer downturn and slower recovery scenario. We also broadly preserved our ability to continue making preferred dividend payments and retain flexibility to renovate hotels in a manner more consistent with our past cadence once demand begins trending toward normalized levels. In consideration for this flexibility, the credit facilities are now secured with pledges of equity from our borrowing base assets and include certain restrictions on uses of cash during the waiver period, including investments, common dividend distributions, and share repurchases. The amendment to these facilities addresses more than 80% of our current debt balance, and when combined with an absence of debt maturities until November of 2022, positions our balance sheet well to withstand the financial ramifications of a severe decline in revenues. Today, our weighted average interest rate is 3% and weighted average term to maturity is nearly four years. We are truly grateful for the support we received from our bank group and proud that our many strong relationships allowed us to work through this process efficiently and successfully. As Dan mentioned, our cash burn rate in a zero-revenue scenario is approximately $15 million per month, which is split roughly evenly between covering operating losses at the hotel level and funding corporate cash needs, including all principal and interest payments, corporate G&A, preferred dividends, and non-discretionary capital expenditures. We’ve seen an encouraging stabilization in occupancy levels in recent weeks, which is reducing our cash burn rate by over 25%, and in turn, adding considerable runway to our liquidity profile even in this historically low demand environment. As our attention turns increasingly toward a recovery in demand and evaluating reopening the few hotels that are currently closed, we remain focused on adding back labor, services, and amenities gradually and prudently. Less than 10% of the total rooms in our portfolio are closed today, and the majority of those we are planning to reopen over the next 30 days, pending any further changes to local market conditions. Thankfully, our operating model has always relied on relatively less labor. We believe there is an opportunity at a minimum on an interim basis to operate with fewer FTEs at more normalized occupancy levels. While revenues have declined dramatically across the industry, we have continued to gain market share despite the lack of traditional demand. Even before we began to feel the effects of broad travel restrictions, we improved our RevPAR index by nearly 300 basis points in both January and February. Our 7.6% RevPAR index gain in March is likely somewhat skewed by hotel closures in certain markets, but nonetheless, we have been successful in capitalizing on opportunities that currently exist, which speaks highly of our revenue management team and augurs well for our ability to ramp up quickly. Finally, we formally withdrew full-year guidance ranges in the middle of March in response to the COVID-19 pandemic. Given the continued uncertainty in our business, we are not in a position to provide updated ranges for the remainder of the year. We will evaluate reinstating guidance as the operating environment continues to evolve over the coming months and quarters. With that, I will turn the call back over to Dan.

Thanks, Jon. In summary, we are pleased with our business model, our partnerships, and our process to mitigate losses and prepare for the future. And with that, we will open the call to your questions.

Our first question or comment comes from Chris Woronka from Deutsche Bank. Your line is open.

Hey, good morning guys. Do you have an estimate of maybe what percentage of the portfolio is drive-to versus fly-to? I know it’s not something you typically ask guests, but if you look at just the location of those hotels or any way to ballpark it?

Hey, Chris, this is Dan. It’s a little hard to get an accurate estimate. Technically, all of our hotels can be driven to, as most you can. I think what we see is some of the more traditional locations that maybe haven’t been as much of a drive-to market are starting to see some pickup as people may be looking at different modes of transportation. They may be modifying their plans instead of flying somewhere to go somewhere they can drive to. That drive-to market may have previously been a fly-to market. So as we look at it, we think that all of our markets have a component that are visitable in this recovery period. I know that doesn’t specifically answer your percentage question, but there isn’t a real specific metric that we get through our guests that we could use.

Yes. No, fair enough. Also wanted to ask you about how you see rate integrity unfolding going forward. Maybe if you look out July or August, because I think we know that some of the bigger full-service boxes might have higher breakeven occupancy and have to use rate as a tool. Are you seeing any signs of more severe rate erosion as you look further out, or is it so far holding up pretty well?

I think so far it’s held up alright in light of the circumstances we are in. Forward-looking trends are really hard to have any sort of confidence in at this point. I am not sure how reliable demand forecasts are out beyond the next 30 days. Where we line up is that we expect to compete very well with our hotels in our immediate area, whether they are in our comp set or not. For the factors that we have been really positive about in our portfolio for the last several years, which is that they are great buildings in great locations, with an average effective age of a little over three years, meaning they’ve been renovated. I think that will help us manage rate as best as possible.

Okay, very good. Thanks, Dan.

Thanks, Chris.

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

Good morning, everyone.

Good morning.

Just wanted to dig into March and April trends a little bit, really kind of better understand the RevPAR declines. Can you maybe give us a sense of how your urban versus suburban properties have fared? And then any particular markets that dragged down the overall portfolio’s performance will be helpful?

Yes. Hey, Mike, it’s Jon. I would say March finished down for the portfolio about 60%. As you would imagine, I think we started to feel the effects from some of the urban markets more quickly than we did in suburban markets, San Francisco probably being the one market that stood out where we saw a quicker decline earlier. The trends in April were, as Dan mentioned, worse in the first half of the month than in the second half. The occupancy was four percentage points higher in the second half of April than it was in the first half of April. I would say the suburban portfolio outperformed the urban portfolio and we’ve seen a continuation of that trend and slightly higher occupancy levels as we’ve gotten into the first few weeks of May.

Got it. And can you tell us the six hotels that are closed outright currently?

Sure. Mike, it’s Dan. We’ve got the Hampton Inn & Suites in Silverthorne; Hyatt Place, Minneapolis Downtown; The Hyatt Place in Orlando; The Convention Center and the Hampton Inn & Suites, Baltimore, Inner Harbor; Holiday Inn Express, San Francisco; and the Hotel Indigo in Asheville.

Got it. Helpful. And then just last one for me, probably for Jon. You mentioned $150 million of availability. What are the requirements for you to get that last $50 million? It looks like there is $100 million that’s kind of freely available and then there are a couple of more steps you would have to take to get to that last $50 million. Can you walk us through the mechanics of that?

Yes, sure. So I think as we've laid out, we drew $125 million of cash up and right around quarter end, so we’re sitting on $145 million of cash today. In addition to that, we preserved $150 million of incremental borrowing capacity under the facility. The first $100 million will be secured by pledges of equity of the borrowing base assets, and the last $50 million of availability gets secured by outright mortgages on those borrowing base assets.

Got it. So if you want it, but for whatever reason you found a use for that $50 million, you’d have to go through the process that’s a little bit more work to get that. It’s not as kind of easy and efficient to get there compared to the first $100 million, right?

Yes, that’s right. I mean, I think the rationale for us was, one, I think for the banks it’s obviously a significant credit enhancement. In our view, between the $145 million we have today and the incremental $100 million, that gets us through a pretty long period of time in a draconian scenario. With $300 million of liquidity and a RevPAR environment where we run, even down 90%, that gets us 27 months, 28 months of total liquidity. So we’ve got a fairly long runway. We start getting into kind of back-end of the year ‘21 and ‘22 covenants at that point in time. The liquidity and even getting that last $50 million to the extent that the market dictates, we do have to get mortgages, but we’ve got a fair amount of runway before we get to that point.

Got it, sorry, that 27 to 28, that’s with the extra $100 million, not the full $150 million, right?

That’s with the full $150 million.

Got it. Okay. Thank you.

Yes.

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

Hey everyone. Dan, happy birthday.

Thanks, Neil.

First question, a lot of people have been talking about how this pandemic has kind of shifted or swung the pendulum back toward owners in the brand and owner dynamic. I’m just wondering, I’d be interested to hear your thoughts in terms of what that looks like in terms of fees, brand standards, proliferation of new brands? And if you think that will lead to higher margins than you’ve seen before when everything stabilizes?

Neal, it’s Dan. Look, I think the brands, as I stated in my prepared remarks, have been very much supportive of taking a hard look at the operating model across the board. We’ve made great progress in discussions on things that would help the operating model but that would also meet the expectations, which are likely elevated for guests. On a broad scale, I think we will come out of this with an even better operating model to the extent that we can achieve peak margins. A lot of that will have to do with the speed at which rate recovers. But I’ve been very pleased. I sit on a number of advisory boards with the brands and they have been very supportive of ways to help not just during this environment but in evaluating a longer-term solution to some of the struggles we’ve had from operations.

I appreciate that. Another one I have is, what portion of your portfolio is traditional extended stay versus traditional select service? Are there any trends you’re seeing from COVID that would maybe alter your portfolio or capital allocation strategy?

Neil, it’s Dan again. Our portfolio is roughly between 20% and 25% extended stay. We love that business. Should opportunities be available for those types of transactions, we would love to continue to grow that part of the portfolio. But we’re very methodical on our acquisition. The returns still have to be there. The entry point has to be right. Locations have to be right. So that would just be one of the factors we would look at as we continue the evolution of our portfolio.

Okay. I guess the last one for me, the mezz loans you have on the development, what have preliminary conversations been like with your partners based on the deterioration? Is there any possibility of that capital stack getting pushed down and you maybe want to be an equity holder?

Jon, I probably could share that question. I’d say that the mezz loans are with very experienced developers.

I think you may have hit mute.

Hold for just a second. The backup line is open, just a second.

Hello, sorry about that. I think we had a little bit of a power outage. I’ll go back to the question on the mezz loan. Is everybody still on?

Yes, sir.

Okay. Look, I think as far as our partners on the mezz loans, they are very experienced developers. Their property is in good markets with strong demand generators, and we do have a mechanism to push those out a year or even two. That’s probably more likely the direction we’d go with those. We have given them forbearance for the next three months, which I think is appropriate given the current environment. But we still feel good about the long-term prospects of these particular properties.

Thank you.

Thank you. Our next question or comment comes from the line of Austin Wurschmidt from KeyBanc. Your line is open.

Hey, good morning, everybody. I hope you haven’t got the utility bill at this point. But just into my first question here. In sort of a gradual occupancy ramp side scenario, how should we be thinking or what range of flow-through multiples should we be thinking about as you re-ramp costs and services over time?

Austin, can you kind of repeat that?

Yes, sure.

Are you talking about occupancy or...

Yes. So if we think about RevPAR declines and how that flows through to hotel EBITDA decline sort of a multiple of EBITDA decline to RevPAR decline. You guys were 1.7x, which stood out versus I think a lot of the peers being well north of 2x and even 3x, which may speak to the efficiency of the operating model. You referenced earlier that ADRs have hung in there fairly well. As we think about a gradual occupancy ramp in the portfolio, maybe what type of multiple or flow-through should we think about on that incremental occupancy, as you also re-ramp costs and services? Does that make sense?

Yes. I’ll take a first crack at this. When we looked at retention in March, it was somewhere between 30% and 35%. I think March is probably our best indicator at this point. But really only half the month reflects operating at what are kind of these very, very lean staffing models. I think April will be the better tell. We don’t have final April numbers yet, but my expectation is that the retention rates as we get through April will be somewhere in that 35% to 40% range. I believe we’ll have pretty good retention, which probably implies somewhere between 1.5x and 2x EBITDA losses, a multiple of RevPAR loss that you referenced. How revenues flow through going forward depends on the mix between rates and occupancies. We’re in a unique circumstance where this is quite different than going from normalized RevPAR and growing those 2% or 3% or 5%. At some level, you have to start adding back some of that incremental labor that has been cut, make managers kind of return to the front desk, and gradually bring in some of the more traditional staffing you have. I do think we’ll see good flow through. What we’re seeing now in this environment is somewhere between 35% and 40% type retention levels at these low occupancy levels we sit at today.

That’s helpful. I appreciate the thoughts. I was curious, do you have a sense of within your submarkets or comp sets, what percent of those hotels are closed or have suspended operations?

Yes. We’ve got some sense. I would say it’s more anecdotal than what’s getting reported by Smith Travel. Smith Travel has come out and said that in total, hotels closed for 30 days will continue to be included in the reporting in the comp set. We’re just getting now to the point where some of the hotels that closed later in the month of March or into April are coming out of those sets. I think, as reported by Smith Travel, it’s in the high-single-digit percentage number. Realistically, it’s likely higher than that. About 8% or 9% of our total rooms are closed. That number suggests that the comp set would be at least that high and probably a bit higher. We should be able to have a more concise answer to that question over the coming weeks as we continue to receive better data from Smith Travel on closures.

Okay, no, that’s helpful. Lastly, I believe someone earlier had kind of spoken to breakeven occupancy. I’m not sure that you guys gave a figure or not; I might have missed it. Could you give us a sense of where you think breakeven occupancy is at both the GOP, hotel EBITDA, and then maybe on a cash flow basis for your portfolio?

Sure. Austin, it’s Dan. There are a lot of variables that go into that. Clearly, at this level, there’s not as much labor, and as you continue to reopen and occupancy picks up, there are added labor costs. A lot of it is a function of the rate used. We think that at a breakeven level for hotel-level EBITDA, it’s somewhere between probably 40% and 45% using $100 as a base rate. Obviously, it depends on the market and the labor profile. The breakeven to cover costs at a corporate level is probably 10 percentage points higher. That does include our covering the preferred dividends and CapEx as well.

Okay. That’s helpful. Thanks, Dan.

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

Yes, thanks. Good morning, guys. Dan or Jon, do you think we’d get back to 2019 levels in RevPAR first or margin first?

That’s a great question, Bill. I would at this point say RevPAR is probably the easiest way back, but it’s really a function of how the operating model changes and evolves, a combination of what the supply picture looks like and our ability to push rate, which I believe will both be favorable in the future. My perspective would be RevPAR would recover first.

Alright. And then how much exposure or demand do you generate from colleges and universities? Do you have a sense for that?

I would say it’s frankly pretty small. We do have the hotel in the off-campus and we bought a hotel out in Portland that gets some exposure from the University right there. The Marriott in Boulder also offers some demand, but I wouldn’t say it’s a particularly large demand generator across the portfolio generally.

Okay. And then thank you for that. Last one for me, and maybe you went through this, and I missed it. But how is Memorial Day stacking up? Are you seeing any material increase in demand?

Bill, it’s Dan. I think our perspective on Memorial Day will likely be more short-term focused. That’s where the pickup is likely to be, and that’s where we’re seeing a lot of the successes that we’re having currently across the board. We think that will be consistent with what we’ve seen over the last couple of weeks.

Thank you. Our next question or comment comes from the line of Dany Asad from Bank of America. Your line is open.

Hey, good morning, guys. Can you hear me okay?

Yes. Got it, Dany.

Great. So Dan, are you hearing about any suburban property owner distress? If so, what would that mean for property values and potential M&A as things start to ramp up?

Yes. I think it’s fair to say that everybody is in some level of distress right now, particularly the smaller owner-operators. I don’t know if there is an immediate opportunity, regardless of the level of leverage or operations. Banks have generally been supportive of smaller owner-operators and giving them time to get their feedback under them. Our priority right now is really on the portfolio. Based on our portfolio, the locations, chain scale, and operating model, we believe there's a lot of value to be created from here simply with that. To the extent there's an opportunity in the future, we do have strong relationships with our lenders, and we've got a terrific partner with GIC, so we could look at things along those lines.

Great. And then more from a distribution strategy, once you start ramping back up, what does your distribution mix look like? Do you lean into some channels more than you typically would, or will it just be a mix of your pre-outbreak strategy?

I think one of the strengths of our portfolio and our operating model is that we do have flexibility. We were probably more of a balanced business versus leisure from an occupancy standpoint. I think there will be more of a bias toward leisure. There will be an increased focus on digital as we aim to be creative and proactive in driving that business. Yes, I think there will definitely be a shift in tactics from our corporate revenue management team in how we pursue business and fill rooms.

Great. That’s it for me. Thank you.

Thanks, Dany.

Thank you. I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to management for any closing remarks.

Well, again, thank you all for your partnership and patience with the power outage. We look forward to connecting soon; hopefully, that will be in person. Hope you all have a terrific day. Thank you.

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