Thank you for waiting, and welcome to the Summit Hotel Properties' Second Quarter 2021 Earnings Conference Call. As a reminder, this call is being recorded. I would now like to hand it over to your host, Mr. Adam Wudel, Senior Vice President of Finance, Capital Markets, and Treasurer. Please continue.

Thank you, Valerie, 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, August 4, 2021, 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.

Thanks, Adam, and thank you all for joining us today for our second quarter 2021 earnings conference call. Overall, we are extremely pleased with the acceleration of our operating trends in the second quarter, which significantly exceeded our initial expectations and represented a nearly 50% increase in RevPAR from the first quarter. Occupancy, average daily rate and overall profitability all reached new highs since the onset of the pandemic. And importantly, we achieved positive corporate cash flow for the quarter. Demand improved sequentially each month during the quarter, and we sold 30% more room nights in the second quarter than we did in the first quarter. While leisure demand continues to be the primary driver of our operating results, we are also encouraged by improving corporate transient demand trends that are having a positive effect on our hotels located in urban locations and our mid-week performance in particular. Demand at our urban hotels grew at a considerably faster pace than the overall portfolio during the second quarter, increasing 43% over the first quarter. For the second quarter, we reported pro forma RevPAR of $78, which was over 3x higher than our second quarter RevPAR last year, and a 49% increase over last quarter. Like demand, RevPAR improved sequentially each month of the quarter, and our preliminary results for July show further RevPAR acceleration to just over $100, a robust 15% improvement over June and our first full month of RevPAR above $100 since the pandemic started. RevPAR for the second quarter was 43% lower than what was achieved in the second quarter of 2019, a significant improvement from the first quarter when RevPAR was nearly 60% lower than the comparable 2019 period. This gap narrowed considerably in July with RevPAR only 21% below July 2019 levels, which we expect will be sufficient to drive corporate cash flow positive on a year-to-date basis. Importantly, the recovery of average rates accelerated meaningfully during the quarter as ADR across our portfolio increased 15% compared to the first quarter as both weekend and weekday ADR grew double digits. Average rates in our urban portfolio increased 23% from the first quarter, which encouragingly reflects some level of rate-accretive remixing of our business with corporate travel. Weekend occupancy was an impressive 79% during the second quarter and was over 80% in both May and June. Mid-week occupancy also continues to steadily improve, and the gap between weekday and weekend occupancy continues to narrow. Mid-week occupancy in July was 67%, a full 10 percentage points higher than it was just 60 days ago. As you would expect, we are closely monitoring the developments of the spread of the Delta variant of COVID-19 and it positioned the company very well if we begin to see any reversal in the strong reopening momentum we've experienced over the past few months. Thankfully, to-date, we have not seen any negative response to the variant in our July operating numbers, and our pace for future months remains decidedly positive. August pace is up slightly to what we had on the books for July at this time last month, but with rates nearly 5% higher. September pace is up 6% over August and October pace is over 25% higher than September. While we would not preclude some plateauing of results in the back half of August and into September, when we get into a naturally slower leisure demand period, we remain optimistic that some of that leisure business will be replaced by pent-up corporate demand in the post-Labor Day period, particularly as we get into October and past the Jewish holiday season. Trey will provide some additional color on our operating results later in the call. During the second quarter, we completed the contribution of six wholly-owned hotels, totaling 846 guest rooms into our joint venture with GIC for $172 million. The transaction generated approximately $84 million of cash proceeds, which increased our investment capacity, reduced corporate leverage and enhanced our overall liquidity. Subsequent to quarter end, a portion of the net cash proceeds from the asset contribution were reinvested into the acquisition of the newly-built 110 guestroom Residence Inn Steamboat Springs for $33 million, which further scales our joint venture with GIC. The extended-stay hotel is expected to benefit from favorable market demand trends and is a perfect complement to our existing portfolio of well-located, high-quality hotels with efficient operating models. As the newest hotel in Steamboat Springs, one of only six other hotels that have opened in that market since the year 2000, and the first Marriott-branded extended-stay products in the market, the hotel has been able to achieve a 30% RevPAR premium compared to its competitive set in the first six months of operation. In just over three weeks of our ownership, the hotel has been one of our best performers, running over 93% occupancy with RevPAR of over $180. Our 2021 forecast for the hotel is already ahead of our underwriting, reflecting just how quickly the fundamental operating backdrop has improved. Our joint venture now holds 12 assets with a total investment of nearly $500 million and affirms the commitment from both parties to find unique and opportunistic investments to continue to grow the partnership. During the second quarter, we invested approximately $2.9 million in our portfolio on items primarily related to planned maintenance capital. As we mentioned last quarter, given our conviction around the long-term improvement in demand trends, we plan to accelerate several renovations into the second half of 2021, which will take advantage of the still lower than historical occupancies to minimize disruption from those projects. We expect to spend between $30 million to $40 million in capital expenditures for the year on a consolidated basis and between $25 million to $35 million on a pro-rata basis. With that, I'd like to publicly welcome and turn the call over to our new CFO, Trey Conkling.

Thanks, Jon, and good morning, everyone. During the second quarter, our resort hotels continued to lead the recovery with occupancy levels that exceeded 83% and a RevPAR of nearly $110. Resort occupancy remained strong across the quarter with each month achieving 80% or better, driven by continued growth in leisure demand and overall robust summer travel. For July 2021, preliminary occupancy, ADR and RevPAR of our comparable resort portfolio, which excludes the Residence Inn Steamboat, exceeded second quarter 2019 levels. Moving on to our 42 non-urban hotels. This subset of the portfolio achieved better than 75% occupancy and an $89 RevPAR during the second quarter, with June metrics improving substantially to 78% occupancy and a $99 RevPAR on the strength of weekend demand. Consistent with our resort portfolio, preliminary July numbers for our non-urban portfolio demonstrated steady improvement with a 79% occupancy and $108 RevPAR, representing month-over-month growth of approximately 9% compared to June. Finally, while urban hotels continue to lag the broader sector recovery, our 30 urban assets have also benefited from strong summer travel, with second quarter RevPAR increasing sequentially 75% compared to the first quarter. This was driven by strong weekend travel with occupancies averaging over 70%. The outlook for our 30 urban hotels continues to improve as preliminary July RevPAR is anticipated to exceed $94, representing month-over-month growth of 23% compared to June. Although booking windows remain very short-term in nature and forecasting continues to be a challenge, we have experienced a decline in the percentage of room nights booked near to or on the night of stay. For example, transient room nights booked within three days of stay declined from 46% in April to 39% in June, and nights booked in the week for the week declined from 60% to 53% over that same time period. While this represents a very short booking window relative to pre-pandemic standards, we view this as another encouraging trend, reflecting an improving environment. From a cash flow perspective, the continued growth in demand, combined with thoughtful expense management enabled Summit to generate positive corporate cash flow for the second quarter. Pro forma hotel EBITDA was $25.3 million for the second quarter, which is more than 3x higher than the hotel EBITDA we reported in the first quarter of 2021. Operating costs per occupied room declined over 20% compared to 2019, which drove second quarter gross operating profit margin and hotel EBITDA margin to an impressive 45% and 29%, respectively. We continue to operate our hotels, utilizing a very lean staffing model, which consists of approximately 17 FTEs on average or less than 50% of pre-pandemic staffing levels. Rehiring hourly staff, particularly in the housekeeping department has been an ongoing issue across the industry. Despite these challenges and primarily occupancy-driven top line growth, our asset management team has done a great job controlling operating expenses, leading to strong hotel EBITDA retention of 46% when compared to the second quarter of 2019. Lastly, turning to the balance sheet and liquidity. We currently have over $430 million of pro rata total liquidity, which includes nearly $42 million of unrestricted cash on hand. Today, our weighted average interest rate is approximately 3.4%, we have no debt maturities until November of 2022, and we maintain ample current liquidity to repay all maturing debt through 2023.

Thanks, Trey. In closing, we continue to gain enthusiasm on the recovery of our business and the outlook for Summit in particular. We remain confident in our business model and optimistic on the overall recovery in general. And with that, we'll open the call to your questions.

Our first question comes from Neil Malkin of Capital One.

First question, you mentioned in your press release and in your prepared remarks that mid-week demand has been noticeably stronger, contributing to your performance. Can you elaborate on that, particularly in terms of markets? Are you seeing this demand from regional private business travelers, or is it coming more from larger corporate negotiated accounts? How does that look?

Yes, thank you for the question, Neil. It's a combination of factors. The strongest markets during the mid-week continue to be those focused on leisure, such as Fort Lauderdale, Tucson, Tampa, and Orlando. These markets have consistently contributed to our overall performance. We are noticing longer and better stays in the leisure segment. Additionally, we've observed improvements in our urban properties mid-week. Perhaps most encouraging is that we're seeing better rates coming in during this time. Over the past few earnings calls, we have been tracking the evolution of our rates. Typically, we see occupancy rise first, followed by rate improvements. We are optimistic about the developments on the rate front. We are also beginning to see a resurgence in negotiated corporate business. In the second quarter, our corporate negotiated rates increased by $12 compared to the first quarter. Although we haven't seen the same level of larger national accounts as in the pre-pandemic period, we are witnessing an increase in regional, local, and drive-to corporate business. Overall, the reallocation of this business is positive, and we believe the outlook will continue to improve.

I appreciate that. Sticking with the same theme, I believe one of the reasons for the sector's underperformance is the uncertainty surrounding business travel and the recovery pace of the group. Although it's not entirely about the group portfolio, could you share what your property managers are reporting or your expectations for the post-Labor Day period and the fourth quarter regarding business transient travel? Discussing it in relation to 2019 levels would be helpful for understanding how you anticipate the near-term cadence to evolve.

We believe that corporate transient travel will return to pre-pandemic levels, though the timing remains uncertain. We view it as a matter of when it will happen rather than if. As an industry, we expect to see significant recovery starting post-Labor Day. However, this recovery is likely to be slower compared to the leisure sector. Despite changes in market sentiment due to the Delta variant, we have not yet seen any impact on consumer behavior, and our July results were strong, continuing through the end of the month. Our August bookings remain solid, with rates for the next three months continuing to rise. We are keeping a close watch on these developments. While we mentioned the possibility of a plateau in results later this month and after Labor Day, we are encouraged by the strong pace in urban markets that had previously been slower to rebound, like Downtown Cleveland and Downtown Pittsburgh. However, it is challenging to predict the exact timing and sequence of the recovery. Overall, we remain optimistic as current numbers indicate continued improvement.

I have one quick question for Trey. Earlier, you mentioned your interest in studying alternative lodging and the potential for allocation in that area to support growth. Could you share what that looks like and what you are currently doing? Also, how realistic do you think this is for Summit?

Yes, Neil, it's Jon. I'll start, and Trey can jump in at the end, if you'd like. Look, I would say that as we've talked about a lot, what we've always focused on is how we believe customers' preferences evolve and change, and that hasn't changed. And so we certainly want to make sure that we're cognizant of how those preferences continue to evolve. We do study a fair number of business. We love our current business. We don't have any immediate plans, but it's certainly something that we continue to evaluate.

Our next question comes from Austin Wurschmidt of KeyBanc.

Just curious, Jon, if some of the lift in ADR that you've seen and achieved month-to-month, if this is just reflecting kind of increasing demand broadly? Or is it really these urban markets that have driven ADR here to four? And are you seeing any less price sensitivity on the leisure side as well?

Yes, we are experiencing some positive momentum. It's important to note that our performance varies by market. In the leisure sector, we've noticed that in strong markets, there's significant pricing flexibility. We've been able to increase prices substantially in areas with high leisure travel demand. Mid-week growth has been most notable in urban areas. It's worth mentioning that we are starting from a lower baseline, so while we're seeing growth, it's off a small starting point. Looking ahead, we believe that the mid-week business, especially in urban locations, presents the greatest opportunity, and we are beginning to see improvements. While some of this progress is attributed to leisure travel, we also believe there's a growing shift towards corporate demand that is positively impacting mid-week rates.

Yes. So if the recovery kind of continues to take hold, and it's a little bit of a seamless transition coming out of the summer and into kind of back to corporate travel, what do you think that means for upside to ADR as you move into the fourth quarter or just that spread between mid-week and weekend type rates looking out a little bit further?

I believe the gap continues to narrow. It likely peaked early in the second quarter or late in the first. We observed this gap decreasing later in the second quarter and into July. I expect some changes for a few reasons. Firstly, we are entering a naturally slower leisure demand period. While leisure travel will remain strong, as schools reopen and offices resume in-person operations, the type of travel that has driven summer strength may decrease. However, we anticipate a rise in corporate travel later in the third quarter and into the fourth quarter. Although I cannot specify how to quantify or time these changes, I believe the gap between mid-week and weekend performance will start to shrink. This will partly be fueled by improved results from our urban properties.

Got it. And then just one last one. What's the mix today or your best guess to the mix between leisure versus BT business?

It's probably still 75% leisure, Austin, rough numbers. And I would say, in a normal environment, it's closer to 50-50.

Our next question comes from Dany Asad of Bank of America.

You guys in your prepared remarks touched on the topic of staffing. So just in the context of how you've made tweaks to the operations at your hotels, how should we think about FTE counts relative to pre-COVID levels once we've returned to a more normalized environment?

Yes, Dan, I'll begin and Trey can add in. Historically, we've operated with about 35 full-time equivalents across the portfolio, but currently we're at about half that number. This is partly due to the challenges we've faced in finding labor, which has been well noted across the industry. Additionally, we are adjusting our operating model to fit the unique circumstances we still find ourselves in, marked by lower than usual occupancy rates. I do believe we will gradually increase our FTE count, but I don't see 17 as the right number for stabilization; I think there's potential for reaching back to 35, with the understanding that this average may decrease going forward based on how brand standards evolve. We're optimistic about the fact that cleaning during stay-overs may become optional rather than mandatory, which is significant for our margins. We're also reassessing offerings such as breakfast and other services and amenities that were established before the pandemic, including food trucks, social hours, and airport shuttles. Many of these costly and labor-intensive services will likely return in a modified form, but overall, I believe they will positively impact profitability at the hotel level.

Got it. We've heard that some brands are starting to move in that direction. For example, Hilton might be one that we've heard about recently. Have you heard of any other major brands committing to this idea of making it a permanent opt-in rather than something that's standard going forward?

Yes. Hilton is the only brand that has formally announced it. We are certainly hopeful, if not optimistic, that others will follow.

Our next question comes from Michael Bellisario of Baird.

I have a couple of questions for you. First, Jon, could you provide an update on the booking pace, particularly for September? I understand it's likely a limited amount of bookings at this time, but you mentioned a few markets for Austin in August. What are you seeing regarding strengths in certain markets for September, especially among business travelers? How does the booking pace compare between weekdays and weekends, and are there any particularly strong segments this week?

Yes. First of all, Labor Day is in September, so we clearly have strong bookings over that weekend in all leisure-oriented markets as expected. For the remainder of September, we see a similar trend to what we experienced in late August, particularly in urban markets that have underperformed. Currently, the pace for September is up 6% compared to what we projected for August. It is still a bit early for September, so the data looks somewhat limited. However, I can say that room nights are increasing, and more significantly, rates are up by double digits as we examine our September pace. We hope that part of this growth is attributed to increased mid-week and corporate demand.

Got it. So it sounds like it's still too early and labor days having a big impact on that based on just...

There is some small convention and group activity we have on the books in markets like Atlanta, for example, in particular, that are helping improve those pace. So again, I would say that what we see in September, and again, it's early for September, it's really early for October. But we are seeing it outside of your traditional leisure demand sources. Labor Day is clearly driven by leisure. But beyond that, the pace improvement is driven by whether it's corporate, small group or small convention type activity.

Got it. And then just switching gears a little bit on the supply front, just maybe go back to the pre-pandemic question, weighted average supply growth in your markets. Have you seen more projects get started in your markets, more projects get tabled? What's your latest outlook for your portfolio on the supply side?

Yes, I still believe that what is already in the ground and under construction will mostly be completed. However, I think new construction projects will continue to decline. We are engaging in extensive discussions with developers, who are certainly considering their options. In many markets, new construction remains challenging to estimate accurately. Therefore, we expect to go through a couple of years where supply is significantly lower than historical averages.

Got it. And then just last one for me on transactions. Can you maybe talk about portfolio pricing versus one-off deals and then your level of confidence in your ability to put some money to work on more deals over the near term?

Sure. The pipeline today is more active than it has been at any time since the pandemic began. It is certainly more active than it was 30, 60, or 90 days ago. The quality of assets currently on the market is higher than what we have seen previously. I believe pricing has increased. There is no doubt that as fundamentals have improved and rates remain favorable, the financing markets have become more positive. Asset prices continue to rise. We expect to find some unique opportunities, with Steamboat being a prime example of an asset that aligns well with both demand and new supply. We successfully executed a transaction there at a very attractive valuation and can expect a strong stabilized yield from that type of asset. I anticipate there will be more such opportunities. We are fortunate to have $150 million of capacity available under our existing facility, and we have a partner eager to grow with us. Our hope is to identify opportunities while maintaining a disciplined approach to capital allocation, focusing on returns. Given the volume of assets in the market, we are optimistic about finding additional opportunities. Yes. I don't believe we've noticed a significant difference in pricing between single assets and portfolios. It appears to be more influenced by market conditions and demand. Therefore, you are likely observing larger discounts compared to pre-COVID pricing in core urban markets than in leisure-focused drive-to markets, as you would expect.

Our next question comes from Bill Crow of Raymond James.

Jon, three questions, one topic, labor. Any change to the percentage of guests opting in for nightly housekeeping? We talked last quarter that, that rate had kind of doubled off a low base, but it had doubled the last time we talked. I'm wondering whether that number is still increasing and whether you're seeing any difference in the opt-in rate between leisure and business travelers?

Yes. Look, I don't know that I haven't answered on leisure versus business, something I would have to come back to you on, Bill. I would say more generally, the opt-in percentage isn't picking up, as you would expect, as kind of vaccinations have rolled out more meaningfully. It's probably 30% today, and it was probably 10% to 20% in the first quarter. So we have seen that pickup rate continue to increase. It is still relatively low. Again, it's probably 30% today.

Okay. And second part of that labor question, talk about the availability of labor. I know that the industry has talked about it post September easing of challenges. But in markets where you've seen the extended unemployment benefits? And has that made labor more available?

Yes. Look, I think you're seeing more applicants. I do think that, that has helped to some degree. I think labor is going to continue to be tight, and it's going to continue to be a challenge. I do think some of the challenges that we've seen are transitory, and will continue to get better post-Labor Day. But I think we're going to continue to see challenges in labor, and we've continued to be creative in how we staff and get basic functions at the hotel done. Again, our hope is that you'll start to see some relief in that regard as we get past Labor Day and into the fall.

And then finally, Jon, on labor. How is the quality of the workforce that you're able to hire these days? Is it as good as it used to be? Has turnover increased because employees are not showing up? Can you provide us with a general thought on the quality of labor?

Yes. I think it's quite challenging right now. Even when we manage to hire new employees, we often face a significant number of no-shows, and there are many who come to work for a few days but then don't return. It's definitely been difficult. We're fortunate to have a strong group of management companies that do a great job trying to staff our hotels, but it remains a challenge to find good quality labor.

Our next question comes from Neil Malkin of Capital One.

Just a quick follow-up for me. Jon, could you talk about why you think Summit has been an underperformer in 2021 and what main things you can do or leverage to get the share price higher, particularly since historically, the stock has performed well when the external engine is running?

Yes. Neil, we certainly aim to grow the business externally, and we've achieved that to some extent. We are among the few lodging REITs that have been able to expand. It's difficult for me to explain the stock's performance in specific terms. Our focus is on managing the business thoughtfully. We have strong confidence in the quality of our portfolio, our operational model, and our platform. We believe that in the long run, we will operate this business in a manner that generates significant value. There will be times when the stock may underperform or outperform, but our aim is to manage the business with a long-term perspective to create value.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to the President and CEO, Jon Stanner, for any closing remarks.

Yes. Thank you very much, and thank you all for joining us today for our second quarter earnings conference call. We look forward to following up with you all post earnings and hope to see you all in person soon.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating, you may all disconnect. Have a great day.