Ladies and gentlemen, thank you for standing by and welcome to Summit Hotel Properties Q2 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference to your host, Senior Vice President of Finance, Adam Wudel. Sir, please go ahead.

Thank you, Wati, 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, August 6, 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 second quarter 2020 earnings conference call. The second quarter was extraordinarily challenging for the industry as demand deteriorated to historically low levels and the typical booking window shortened considerably. Yet, we are encouraged by the trend of consistent week over week occupancy increases at our hotels throughout the second quarter and into July. RevPAR declined 83% during the second quarter but improved sequentially each week throughout the quarter as June RevPAR declined 75% compared to the nearly 90% decline we saw in April. When excluding the 15 hotels that were closed at various times during the quarter, occupancy was approximately 46%. Occupancy was over 41% across the total portfolio in July, nearly 30 full percentage points higher than the first two weeks of April when demand dropped, and our preliminary July results point to a 67% year-over-year decline. In addition to the increase in occupancy, our market share gains were substantial in the quarter as we finished with a 143% RevPAR index, more than 20 percentage points higher than the first quarter and nearly 30 percentage points higher than the same period in 2019. Weekends began to perform much better than weekdays as the quarter progressed, driven by a relaxation of the mandatory stay-at-home orders resulting in an increase in leisure travel, particularly in drive-to markets. In June, weekend occupancy exceeded weekdays by nearly 10 full percentage points, averaging over 41% occupancy for the month and resulting in a 30% premium to our weekday RevPAR. Weekend occupancy at our hotels located in the markets we considered as drive-to surpassed 50% in June and this trend has accelerated as these hotels achieved 58% occupancy during the weekends for the month of July. Our second quarter results and particularly the trends we saw in June and July substantiate the widely held view that leisure travel broadly and drive-to leisure demand more specifically is leading the recovery currently. Our extended-stay hotels, which comprise nearly a quarter of our total guestrooms, were relative outperformers during the second quarter, finishing with 38% occupancy and a 76% RevPAR premium to our overall portfolio. Our extended-stay hotels posted an average occupancy of approximately 48% in June and our preliminary July results indicate our extended hotels — extended-stay hotels achieved 60% occupancy for the month. Our suburban and airport hotels, which comprise more than a third of our portfolio and guestrooms, were also outperformers during the quarter, posting occupancies of 37% and 35% respectively, driving a premium to the total portfolio. Urban hotels have lagged the industry in recovery. However, we are beginning to see signs of improvement as July occupancy finished nearly 1,000 basis points higher than in June in our urban portfolio, the largest single month-over-month gains since the onset of the crisis. While we have begun to add back labor at certain hotels, consistent with the improvements in occupancy, we are still operating with an incredibly lean staffing model as we are averaging 10 FTEs per hotel compared to approximately 30 FTEs per hotel prior to the pandemic. In addition, our teams continue to focus intensely on creating an environment at our hotels that prioritizes the health and safety of our guests. Changes in regulatory protocols and brand standards continue to evolve, and we are fortunate to have the opportunity to work collaboratively with our brand partners and management companies to offer solutions to some of these important but complex issues. Finally, to preserve liquidity, we have continued to delay all non-essential capital expenditures for the remainder of 2020 along with common dividend distributions, which combined preserved nearly $30 million in the second quarter and will preserve $60 million of cash for the balance of the year. I will let Jon speak to the specifics of our balance sheet. But with approximately $270 million of current liquidity and a significantly reduced monthly cash burn rate, we currently have over three years of liquidity to navigate what could be a prolonged recovery. With that, I will turn the call over to our CFO, Jon Stanner.

Thanks, Dan, and good morning everyone. In June, we amended our $200 million Joint Venture credit facility that allows for the temporary waiver of financial covenants through March 31st of 2021 and modifies the testing of certain covenants through June 30th of 2022 to accommodate what may be a more gradual recovery. This followed the amendment of our corporate revolving credit and term loan facilities, which provides for $115 million of additional borrowing availability. Combined with $120 million of unrestricted cash on hand, we currently have approximately $270 million of total liquidity. These two amendments address more than 85% of our current pro rata debt balance and position us well to withstand a prolonged period of low demand. Today, our weighted average interest rate is slightly under 3.5% and weighted average term to maturity is approximately 3.5 years with no maturities until November of 2022. The efforts our asset management team made to mitigate the sudden demand shock that began in the middle of March, including rightsizing staffing levels and adjusting service and amenity offerings resulted in strong retention of just over 40% in the second quarter. This has reduced our monthly cash burn rate from $10 to $12 million per month to approximately $7.5 million for the month of June and closer to $7 million in July. At these levels, our projected liquidity runway has increased to approximately 38 months, adding over a full year of runway since we've reported first quarter results. Additionally, our portfolio breakeven RevPAR at the hotel level is between $35 and $40. We nearly met the low end of this range in June and exceeded the high end of this range in July. Our efficient operating model, which is less labor-intensive and oriented more towards transient and leisure demand has allowed us to keep the majority of our hotels open even during the strictest periods of mandatory lockdowns. As of today, only one of our hotels remains closed, our Holiday Inn Express & Suites in San Francisco. As the market continues to recover, we remain focused on adding back labor, services, and amenities in a disciplined manner to control costs while continuing to provide a high-quality guest experience. We have not reinstated our full-year guidance ranges and do not expect to do so this year. While we are pleased with the improvements we have seen throughout the portfolio over the last three-plus months, we are still operating in a highly uncertain and challenging environment. Leisure travel has been the primary source of demand for the industry over the summer, and like many, we are cautious about backfilling that demand in the fall and winter months this year, which are naturally less conducive to personal travel. Our expectations for a meaningful return of corporate travel have been pushed back, and while we would not preclude a pickup from today's low levels, the sporadic nature of demand remains. Our working assumption is for the rate of improvement we saw throughout the summer months to slow, and ultimately the passage of time, a medical solution to the virus, or a combination of both will lead to more robust levels of travel. There has been much conjecture regarding new normals and structural and secular declines in travel, particularly business travel on a more sustained basis coming out of this crisis. While we clearly do not have a crystal ball, we remain long-term believers in people's desire to gather, enjoy the experiential side of life, and ultimately travel. We believe our diversified portfolio of well-located hotels with efficient operating models is poised to outperform going forward. And with that, we'll open the call to your questions.

Dan, can you just first talk maybe a little bit about our brand standards? What the brands and your operating partners are allowing you to do in terms of flexibility? And then when do you see that flexibility maybe switching back to becoming more stringent as occupancy continues to pick up?

Sure. It's Dan. Look, I think it's still evolving. There has been a lot of work being done around cleaning to protect the safety of our guests and our employees. So, there is a lot more frequent cleaning being done in public spaces. We're not cleaning stay-overs unless requested. We're trying to position sanitizing stations for hands in high traffic areas. The food and beverage offerings have generally been grab-and-go, and in some of our markets where we are getting higher occupancy, we're starting to bring back some additional levels of offering. I think what we're trying to work with the brands and the management companies on as occupancy comes back is determining the right mix of amenities and staffing to make that happen. So, I think that continues to evolve. Our hope and expectation is that our highly efficient model today becomes even more efficient with procedures and offerings that still meet guest expectations, give them a sense of safety, but also reward them much closer to some of the things they liked about the consistency of the brands in the past. So hopefully that's helpful.

It is. Thanks. And then, switching gears, just on the transaction market. What are you guys thinking in terms of potentially selling assets, raising capital, and bolstering the balance sheet? Also, what are you seeing for pricing based on what's in the market today?

Sure. Look, I think it's a little early for the tactical execution of acquisitions and dispositions. People are still trying to find value, and forecasting is challenging in a good environment, and even more so today. We would like to be in a position to take advantage of opportunities as they arise. We're certainly not opposed to selling assets for the right price in the right market, like our portfolio today. But as we look out into the future, clearly, we've got a great partner with GIC. We've got a history of doing creative things with structure to create value for shareholders. So nothing currently I would say, but certainly, we remain patient and interested.

Thanks. And then just one more housekeeping item on that point. You had a contract termination payment during the quarter. Is that related to a disposition from a prior year or is that something that fell apart during the second quarter?

That was a disposition from several years ago, of a small asset with the brand that we were anticipating being able to reallocate that into a new contract, but were never able to do so.

A lot of the lodging REITs, like you, have been successful at reducing cash burn, either by opening up more hotels but predominantly, it seems like it's on the expense side. Just wondering if you can go into a little bit of detail on the top three or four things that you guys are doing that you either didn't think you could do before or are doing more efficiently? Any kind of information in that regard would be helpful.

Yes, hey Neil, it's Jon. Well, I'm not sure that there is anything that we were unclear or uncertain about doing. I mean, I think we have been successful in reducing cash burn. First and foremost, that is a result of better occupancy improvements over several months. I think we've done a really good job, and many of the team have done a fantastic job of continuing to run with a really efficient, lean workforce. We reduced our FTE count from early March levels by about 80%, and we're still operating with FTE counts down 70% from peak levels. So, I think from a retention and expense control perspective, we've done a really good job continuing to operate hotels in what isn't a normal environment, but a higher occupancy environment still is very lean models. The last point I'd make is that from a revenue management perspective, the team has done a really nice job. We're running a really high index of 140% plus RevPAR index and finding unique pieces of business across these markets to help create some occupancy in an environment where demand continues to be very well.

Appreciate that. In terms of your markets and performance, in July as COVID cases crept back up, did you see meaningful deterioration? Could you pinpoint if it was mainly coastal cities, urban locations, or was it more uniform across the board?

I would say, first, to clarify, we really didn't see a pullback. We have seen sequential demand increases every week since the middle of March, which is encouraging. What I would describe is that we have seen kind of a slowdown in the rate of improvement as we got into July. I think there are a few factors there. Clearly, some of that is driven by a resurgence in cases, particularly in Summit markets. We did see particularly around the 4th of July, where we had relatively high expectations, markets like Fort Lauderdale, for example, where they closed the beach, and we had less short-term pickup in that market than we otherwise would have. We have also seen more hotels open, particularly full-service hotels. So that kind of shadow supply or new supply that has come online is absorbing some of the incremental demand. Overall, we haven't seen a pullback in demand, just more of a slowdown in the rate of improvement.

And the last one, are you seeing any indication? I think you mentioned it briefly about business travel or business transient. Is it happening more on a local or regional level in terms of smaller businesses? Or are you seeing that, however small that return is, somewhat uniform among larger multinationals? How does that bifurcate, if at all?

Yes, I would say the corporate demand we have seen is sporadic and unique. It's local, and I would describe it as being submarket or asset-specific today. I wouldn't say that we've seen any type of broader general increase in corporate demand. As we mentioned, I think our expectation for when that comes back has probably been pushed back to some degree. It's better than it was. I mean, we're certainly off of the trough levels we saw in late March and early April. But I wouldn't say we've seen a broad resurgence of corporate demand that would certainly have helped.

I was wondering if you guys could provide an update specifically on the three mezzanine loans that are fully funded in terms of next steps following the end of the 90-day interest payment deferral that I believe lapsed in mid-July?

Yes, we have extended the deferral period through September 15th of this year. As we indicated on the last call, the expectation is there are extension options contemplated in the deal for the two loans in question. At this point, our expectation is that we will exercise those options and continue to address it as we move forward throughout next year.

I appreciate the update. As you think a little bit longer term with some of the talk about the rise of the suburbs and what’s going to happen with urban centers post-COVID, what are your high-level thoughts around portfolio positioning and any changes in strategy that you'd consider on the other side? Also, how do you think the supply picture looks from a geographic and submarket perspective?

Austin, it's Dan. Look, I think our portfolio, more than anyone else's, has evolved continually to address, first of all, opportunities, and secondly, shifts in guest preference. I think as things have changed, we would not shy away from urban and try to focus more on suburban. It's really more about whether an opportunity exists. Is it an urban market that could act more like a suburban market, for example? We have a few markets today that are very core urban, like Atlanta, Charlotte, and Portland, that have had strong weekend demand recently. They’re acting a little differently than a typical urban hotel might. Each one has to stand on its own. We've always looked at a mix of business and leisure demand. I wouldn't say it has changed our view on the future, but it will continue to be a factor. Regarding supply, I think there is still a fair amount in the pipeline. My sense is that if many of those have not yet broken ground, they will continue to be pushed off. Construction starts have broadly slowed, but material prices vary, with lumber still high along with copper, and labor has not quite stabilized yet. So, I don't expect supply beyond what will get pushed out over the next 12 to 18 months to be much of a factor, which I think bodes well for us and our locations.

I appreciate the thoughts there. The last one for me, sorry if this overlaps with Neil's question, but the 1,000 basis points of improvement in urban markets you referenced in July from June. What was the biggest driver of that improvement? Do you think that's a sticky demand and will there be continued upside in those locations? What booking window do you have visibility on?

I think we had a couple of unique markets; so, most of the improvement was driven by weekends. The two markets that probably stand out more than others are Portland, ironically enough, and Charlotte to a lesser extent. We have seen improvements, as I mentioned. The booking window is very short, but from the data we have on the books, we feel good about it. There are obviously concerns about what happens post Labor Day, particularly in some of these core urban markets, but the trends in urban markets, in particular, have improved quickly due to the lower basis of occupancy. So, we feel optimistic about what's happening, which is primarily driven by a couple of markets!

Going back a few questions to get more detail on competitive supply that might have been shut down. How much of that is still shut down?

Bill, it's Dan. I don't have a sense of the percentage basis as we look out in the market, but I think the majority has been open and operating at levels with limited staffing like ours. So, I wouldn't say there is a material effect from closures out there, at least from the data we have seen.

So there's not a lot of phantom supplies to hit you in the next few months?

Yes. Bill, one thing I would add is that when you look at our competitive sets, particularly as defined by Smith Travel, most have remained open. In urban markets, larger full-service hotels have remained closed, but the timing of those reopenings is uncertain. However, for the most part, most of our hotels and directly competitive hotels have stayed open during the majority of the crisis.

Alright. Jon, you talked about a slowing in the growth of demand as the number of cases ticked up. We're starting to see better data on the TSA front over the past week. I'm just wondering if, as the cases stabilize, we may see a surge in travel. Are you seeing an uptick, especially in those markets in the Southeast and Southwest that kind of led us into the slowdown over the past 30 days?

Yes, look, we haven't seen a huge fall off. We saw, as you mentioned, a slowing of the rate of improvement. I think things have held stable. We continue to see improvement. We continue to have a sequential week-over-week improvement in demand. We're only about five days into August. The first weekend of August continued to be strong. I wouldn't say we've seen a huge acceleration by any means. But again, as these states get a good handle on the number of cases and as TSA stats improve, we continue to see solid leisure demand, particularly on the weekends.

Bill, it's Dan. I do think that this is a headwind. Obviously, that affects us much less since we have one union hotel. But negotiations continue, and everyone is trying to find the right balance of cleaning standards, time allotted, and benefits. Unfortunately, there are a lot of moving parts there, but I believe this will continue to be a headwind, especially in larger, more union-dominated markets.

This is Steve on for Wes. Just a follow-up to Austin's question about the mezzanine loans. Are those three hotels open? If they are, are they generating operating results comparable to the other hotels in your portfolio?

Yes to both. They are open and I would say they are generally performing in line with the rest of the portfolio.

Thank you. I really wanted to close with a couple of things. First of all, I do believe — and I believe quite strongly — that we are all social beings. We want to see people and have experiences that haven’t changed. In fact, the takeaway from all this will be a validation that not just Zoom but social contact is critical to health and happiness. That’s not just a leisure comment; I think business is done through relationships developed over many years, and that connectivity often goes beyond an interaction or a deal into something much more. I am very bullish on travel, on the industry, and particularly bullish on Summit. To summarize why we’re so confident in our future: first, our flexible operating model has shown great strength during this crisis. Our cash burn has improved by nearly 40%, providing us more than three years of runway. We continue to gain market share, showing the strength of our operations team. We have no debt maturities until late 2022. Our properties are young, renovated, and need minimal CapEx. And lastly but most importantly, you have a management team here at Summit that you can trust. So I appreciate you dialing in today. We look forward to talking soon, hopefully in person. Have a terrific day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.