Thank you for standing by, and welcome to Summit Hotel Properties Second Quarter Fiscal Year 2022 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. I would now like to hand the call over to Mr. Adam Wudel, Senior Vice President, Finance, Capital Markets and Treasurer. Please go ahead.

Thank you, Latif, 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. 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 3, 2022, 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 2022 earnings conference call. Our second quarter results marked new pandemic era highs in nearly every relevant operating metric driven by continued strength in leisure travel and supplemented with accelerating recoveries in business transient and group demand as growth in our portfolio increasingly shifted mid-week into our high-quality urban assets. Second quarter pro forma RevPAR increased approximately 54% from the second quarter of last year, driven by a 12.5% increase in occupancy and a 37% increase in ADR. In our portfolio of 92 hotels with comparable 2019 results, RevPAR recapture reached 93% of 2019 levels, a significant improvement from the 79% recapture we achieved in the first quarter and highlighted by June's 96% recapture rate, the highest of any month since the onset of the pandemic. Hotel EBITDA recapture in this portfolio was 89% of 2019 second quarter results as the benefits of a lean staffing model have helped offset wage pressures driven by a tight labor market. We continue to benefit from meaningful pricing power throughout the portfolio as average rates increased in every segment of our business over the first quarter and now exceed 2019 levels in all but our negotiated segment. For the quarter, comparable portfolio ADR was 2% higher than the second quarter of 2019. While resorts in small town locations continue to achieve rates well in excess of 2019 levels, up 16% and 11%, respectively, rates in our urban portfolio exceeded 2019 by over 3%, reflecting rapidly improving mid-week corporate and group demand. Weekday pro forma RevPAR increased 26% from the first quarter and 67% from the same period last year. Weekday occupancy was more than 71% for the quarter, with June posting a pandemic era high of nearly 74%. Our weekend RevPAR recapture rates continue to meaningfully exceed 2019 levels. Encouragingly, Monday through Wednesday nights are seeing the greatest improvements and now all exceed 80% recapture compared to below 70% in the first quarter. Weekday rates increased in every major segment during the quarter. In June, weekday rates were within 4% of weekend rates. The group segment's recovery was particularly notable in the second quarter as group room night contribution reached 15% of our total portfolio mix, essentially flat to pre-pandemic levels. Rates were modestly above 2019. As expected, June was our strongest month since the onset of the pandemic, achieving new highs in absolute RevPAR, RevPAR recapture, and average rates, which were nearly 5% higher than June of 2019. Pro forma gross operating profit margins also reached a new peak of just under 48%, representing 125 basis points of margin expansion over June of last year. Preliminary July nominal RevPAR is expected to decline modestly from June, consistent with historical seasonal patterns, but result in a comparable 2019 RevPAR recapture rate in line with what was achieved in the second quarter. August tends to be a slightly weaker seasonal month in our portfolio, which is reflected in our current pace that is down compared to our pace for July a month ago. We expect 2019 recapture rates to hold fairly steady month-over-month. However, we are very encouraged by the pace trends in our portfolio in September and October, particularly within the recently acquired NewcrestImage portfolio and our urban properties, seeing significant month-over-month pace increases for both weekdays and weekends. September RevPAR is pacing 14% ahead of August in our pro forma portfolio, which positions us to achieve recapture rates to 2019 in line or potentially above the highest we experienced in June. Combined with our healthy recovery in July and expectations for August, we expect third quarter recapture in our comparable portfolio to be generally in line with the second quarter. We’re still very early in our booking window, but our optimism for the fall is supported by our October pace, which is 12% ahead of September and has historically been one of the strongest months in our portfolio. Our strong operating results and the continued progress we've made enhancing our balance sheet have positioned us to reinstate a quarterly common dividend. Yesterday, our Board of Directors declared a $0.04 per share quarterly common dividend, which equates to $0.16 per share on an annualized basis and roughly a 2% annualized dividend yield. We've been prudent to size the dividend so that it can be meaningfully increased over time if the current fundamental recovery in our business continues uninterrupted, but also be sustainable if we experience a reduction in demand from our baseline expectations. Prior to the pandemic, we had a strong track record of paying common dividends, which grew over 60% from the time of the IPO, according to a 5% dividend CAGR over that 10-year period. We've remained active on the transaction front. During the second quarter, we closed on two previously announced transactions. In May, we closed on the sale of the 169-guestroom Hilton Garden Inn San Francisco Airport North Hotel, previously owned in our joint venture with GIC, for $75 million, realizing a net gain of $20.5 million in less than three full years of ownership. The sale price reflects a trailing 12-month NOI cap rate of approximately 1% as of March 31. This sale also allowed us to forgo a $7 million renovation that was scheduled to begin later this year. In June, we successfully closed on the equity purchase option to acquire a 90% interest in the newly constructed 264-guestroom AC Element dual-branded hotel in Downtown Miami's Brickell neighborhood at a valuation of $89 million or $337,000 per key. The hotel features Rosa Sky, recently named one of Miami's best rooftop bars, which has generated on average nearly $500,000 of revenue in each month since its opening. The hotels have ramped incredibly quickly since our December 2021 opening, generating year-to-date RevPAR of approximately $170 despite being in the slower summer season in Miami. For the full year 2022, we anticipate that hotels will generate a combined hotel EBITDA yield on our option price between 8% and 9%, effectively in their first 12 months of operations. Our 31 recently acquired hotels continue to perform very well as forecasted EBITDA is trending to finish nearly 10% above 2022 underwriting despite the delayed opening of the Canopy New Orleans Downtown. We remain particularly bullish on the longer-term outlook for the NewcrestImage portfolio as we expect to begin to realize the benefits of recently implemented asset and revenue management strategies as early as the second half of this year and continue to believe the concentration of assets in high-growth sunbelt markets are poised to outperform over the next several years. Our other recent acquisitions continue to vastly exceed expectations as the residences in Steamboat, the Embassy Suites Tucson, and the dual-brand AC Element Brickell Miami are collectively pacing more than 40% above our underwritten 2022 hotel EBITDA levels. Combined, for the 31 hotels acquired since June 30 of last year, we expect our blended 2022 EBITDA yield to be approximately 7%. Nearly half of the hotels we acquired have opened within the past four years, implying there is still considerable upside in many of these assets.

Thanks, Jon, and good morning, everyone. On a pro forma basis, we experienced continued RevPAR growth across our portfolio in the second quarter, generating our highest nominal RevPAR of the pandemic era and continuing a trend of sequential quarter-over-quarter improvement. From a segment perspective, Summit's 42-hotel urban portfolio produced a second quarter RevPAR of $125, by far the highest quarterly RevPAR for our urban portfolio since the onset of the pandemic. This surpassed first quarter 2022 urban RevPAR by approximately $34 or 38%. Sequential quarter-over-quarter urban RevPAR growth was driven by strength in both occupancy and ADR, which increased 22% and 13%, respectively. For our urban hotels with comparable 2019 data, second quarter ADR surpassed 2019 levels by approximately 3%. Strengthening corporate and group travel were instrumental to improving urban fundamentals in markets such as New Orleans, Austin, Tampa, Nashville, Charlotte, Boston and Downtown Chicago. Most notably, urban weekday RevPAR increased sequentially throughout the quarter as each month generated a new pandemic era high. This culminated with June posting a weekday RevPAR of approximately $125, nearly double that of June 2021 and resulting in an 86% recapture to 2019's urban portfolio weekday results. Second quarter RevPAR for our non-urban hotels was $119, an increase of over 13% relative to the first quarter of 2022 and a 33% increase to the second quarter of 2021. Strength in our non-urban portfolio was driven heavily by our hotels in airport and suburban locations, while hotels in resort markets, such as Fort Lauderdale, Tucson, and Phoenix, entered seasonally slower periods. Despite this seasonality, rate strength among our resort properties with comparable 2019 results continued to accelerate in relation to 2019. With the ADR recapture of 116% in the second quarter versus 108% in the first quarter of this year. Furthermore, our airport suburban and small-town hotels demonstrated exceptional strength, with Q2 RevPAR increasing by 33% over the first quarter to $117. Booking windows in the quarter continued to expand. Most notably, same-day bookings declined from 19% to 15% of total bookings, a new pandemic era low and relatively in line with pre-pandemic norms. Bookings in the week for the week declined by 17%, while bookings for stays more than 30 days out increased by nearly 40% during the quarter. In addition, bookings for stays 15 to 30 days out, historically the window in which corporate travelers typically book, increased by approximately 10% during the second quarter. From a channel mix perspective, we continue to see strong bookings coming from the less expensive channels as approximately 70% of our stays in the second quarter came from direct bookings and central reservation systems. OTA contribution declined 90 basis points from the first quarter to comprise approximately 16% of our total bookings as corporate group and business transient demand continued to accelerate. On a same-store basis, operating costs per occupied room in the second quarter declined compared to the first quarter of 2022, resulting in second quarter gross operating profit margin of over 49%, which is approximately 100 basis points below the second quarter of 2019 despite current labor market dynamics. Same-store hotel EBITDA flow-through remained strong at 54% compared to the second quarter of last year. Pro forma hotel EBITDA for the second quarter was $70.7 million, a 94% increase from the second quarter of 2021, resulting in a 38% margin, the highest quarterly hotel EBITDA margin during the pandemic era and more than 600 basis points higher than the second quarter of 2021. Adjusted EBITDA increased to $54.6 million in the second quarter, more than double from a year ago. Adjusted FFO in the second quarter was $32.6 million or $0.27 a share, an increase of $24.2 million from the second quarter of 2021 and $12.5 million from the first quarter of 2022 amid an improving fundamental backdrop. Included in our adjusted FFO was a higher than normal income tax expense for the second quarter driven by the $20.5 million gain from the sale of the Hilton Garden Inn San Francisco. When adjusting for the tax related to the gain on sale, adjusted FFO was $36.1 million or $0.30 per share for the second quarter. For the full year, we estimate income tax expense of approximately $3.5 million. During the second quarter, on a consolidated basis, we invested approximately $15 million in our portfolio, bringing our year-to-date total to approximately $25 million. Second quarter spend was primarily driven by transformative renovations at our Hilton Garden Inn Houston Energy Corridor, Hyatt Place Orlando Universal Studios, and SpringHill Suites Nashville MetroCenter, in addition to typical maintenance capital and purchasing for near-term renovation projects. Including the year-to-date spend, we expect to spend $60 million to $80 million on a consolidated basis or $50 million to $70 million on a pro rata basis for total capital expenditures for 2022. Finally, turning to the balance sheet. Our overall liquidity position remains robust at more than $480 million. We continue to maintain ample liquidity to repay all maturing debt through 2024 when considering available extension options. From an interest rate risk management perspective, our balance sheet is well positioned, including an average pro rata interest rate of 3.8% and nearly 70% of our current outstanding pro rata debt fixed after consideration of interest rate swaps. To address the pending maturity of $200 million in notional swaps, we recently entered into two $100 million interest rate swap agreements that will fix one month SOFR and carry fixed rates of 2.6% and 2.56%. These new swaps will mature in January 2027 and January 2029. This extends the average duration of our swap portfolio from less than two years to over four years. The swaps will be effective in January of 2023 after the $200 million of existing interest rate swaps expire. The new swap transactions will result in the company maintaining approximately 70% fixed rate debt. In the second quarter of 2022, we exited the waivers on certain financial covenants related to our primary corporate credit facility and amended the credit agreements for our $400 million senior revolving credit facility and two senior term loans totaling $425 million to extend the available loan term and enhance overall flexibility. The amendments on the $600 million senior credit facility include additional extension options that allow us to extend the maturity date to March 2025 for the $400 million revolving credit facility and to April 2025 for the $200 million term loan facility. Pricing remains unchanged for both loans. Additionally, the company has retained complete capital allocation flexibility regarding future potential acquisitions, dispositions, capital expenditures, and dividends. Included in our press release last evening, we provided 2022 guidance on certain non-operational items, including cash corporate G&A, interest expense, preferred dividends, and capital expenditures, both on a consolidated and pro rata basis. We expect the midpoint of consolidated cash corporate G&A to be $21.5 million; interest expense, excluding the amortization of deferred financing costs, to be $59 million; Series E and Series F preferred dividends to be $15.9 million; Series Z preferred distributions to be $2.3 million; and pro rata capital expenditures to be $60 million.

Thank you. Our first question comes from the line of Neil Malkin with Capital One.

Good morning, guys.

Good morning, Neil.

Congrats on the dividend and getting out of waivers and everything. So that's weight off your shoulders. First one is on just the ADRs of business travelers. You mentioned that pickup in midweek urban hotels being indicative of accelerating corporate environments and travel cadence. Can you talk about what a typical premium in ADR that business or corporate business would achieve versus a typical leisure guest? I think it's important that a lot of the luxury peers, as business comes back, those people are paying below what the leisure ADRs are. But I think for your portfolio, it's actually flipped. Can you just help quantify that and talk about how that would help the portfolio in terms of ADR lift as we go through the rest of the year and into '23?

Thank you, Neil. Good morning. You’ve pointed this out accurately. Historically, especially before the pandemic, we had higher rates in our negotiated channel compared to some leisure channels. That has changed now. Currently, we have a significantly higher percentage of our room night mix coming from the retail segment than we would typically see. In June, we observed a notable resurgence in business travel, though the rates remain lower than in 2019; the negotiated channel is still the only one where rates are lower than pre-pandemic levels. We believe there is significant potential for growth as this business begins to recover. The overall remixing of our business is beneficial for rates as we anticipate a return of business travel and improved demand in urban markets.

Okay. Thanks. The other one for me is a bigger picture on the stock, kind of been an underperformer, kind of lagging the group and having a sort of disparate multiple. So I was just wondering if you could give a couple points or catalysts that would help bridge that discount and kind of get the stock moving in the right direction so you can really turn on the external growth engine. Just a couple of things that you could talk about, that'd be great.

Sure. Look, Neil, I think the way the stock has traded has been frustrating. It's been disappointing. I'm sure it has been for most of our peers as well. I don't think the stock reflects the quality of the portfolio, the quality of the platform, the nature of the transactions that we've been able to complete since the onset of the pandemic. Some of it is attributable to the operating performance, just the nature of the portfolio. This is a select service portfolio that's recovered sooner, but we have less suburban exposure and fewer pure-play leisure-oriented assets, which has been the outperformers year-to-date. However, we do have a really high-quality urban-focused portfolio, which positions us well for the next leg of growth. We have seen better growth midweek and better growth in urban markets. We've talked a lot about the transaction activity that we've completed since the onset of the pandemic. If you look at the acquisitions, we're 10% ahead of our underwriting year one, and everything we’ve acquired since the beginning of the pandemic has created significant value that is yet to be reflected in the stock price. Our recent transactions have high expectations and strong performance metrics that exceed previous underwriting. So I think if we continue to execute our operating plan, that will ultimately show in earnings and will be reflected in share price over time.

Yeah. That was great. Thank you, Jon. Thanks everyone.

Thanks, Neil.

Thank you. Our next question comes from the line of Chris Woronka with Deutsche Bank.

Hey. Good morning, guys. Appreciate all the color on the segments in the markets. Question is, as you're seeing this nice urban rebound, do you think resort markets and suburban markets are still kind of winning too or do you think this is just a transfer from strength in resort and small town markets to urban? In other words, same traveler just going to a different place for business instead of pleasure.

I think there is some truth to that, Chris. However, leisure remains quite robust. Our resort markets, while not extensive, include several leisure-focused areas that are still performing well. They are significantly ahead of where they were in 2019. There are a few markets that saw a slight decline year-over-year in June, but they are still far above 2019 levels. This may reflect what you've observed; travelers have diverse preferences. Over the summer, some leisure travel has shifted to urban areas. The strongest urban performances are in locations with major leisure attractions. Nevertheless, much of this success is fueled by business travel in our portfolio, particularly in markets like Charlotte and Pittsburgh.

Okay. Thanks, Jon. And it was interesting, yesterday, I think we heard from Marriott that they're starting to see more conversions on the select serve side into their brands. Are you guys seeing any of that in your markets or is there any concern that as new units become a little tougher to get done on a timely schedule, get pressure from these new Marriott select serve conversion products?

Not particularly, Chris. I mean I think that the other brands are clearly going to need to focus on conversion activity. The math depends a lot on new development remaining incredibly challenging. One silver lining of the pandemic and the uncertainty today is it's hard to pencil in new developments. We anticipate an extended period of very low supply growth, so we believe the supply dynamic is favorable for us moving forward.

Okay. Very good. Appreciate it. Thanks, Jon.

Thanks, Chris.

Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Hey, good morning, everybody. Jon, you mentioned the pace gains for September and October. I'm curious if you have any breakdown or detail between occupancy versus ADR. Also, if you specifically have any of the pace trends for that urban midweek piece of business that you're able to share.

Yeah. We can follow up with specifics. The pace gains are both in rate and occupancy, and we see more significant growth in the urban portfolio. The pace gains are largely attributable to the urban portfolio and particularly the Newcrest portfolio. As we get into the fall and exit peak summer slow season, markets like Dallas are preparing for stronger convention and citywide activities.

That's helpful. You discussed recent investments trending ahead of underwriting, and I'm curious if you roll up all the new investment activities you've completed over the last few years, taking the stabilized yield on those and then marry that with the legacy assets. Where do you think stabilized hotel EBITDA could shake out? Certainly won't hold you to a time frame, but just curious if you have a range in mind.

What we said publicly about the acquisition portfolio has been roughly a 7% EBITDA yield in 2022. We are ahead of our underwriting, about 10%. Our expectation was that these would stabilize north of 8%. Frankly, we're probably ahead of expectations. Many of the properties are brand new and implementing asset and revenue management tactics; thus, stabilization in this portfolio is a 2023 or 2024 event. The non-Newcrest portfolio acquisitions are far ahead of our initial underwriting, especially in markets like Steamboat, Tucson, and Silverstar.

Thanks for the thoughts.

Thanks, Austin.

Thank you. Our next question comes from the line of Michael Bellisario with Baird.

Thanks. Good morning, everyone.

Good morning.

Jon, just a follow-up on Newcrest. Can you maybe dig in a little deeper on all the heavy lifting that you guys have done behind the scenes in the portfolio during the first six months of your ownership? When might we start to see the top line and bottom line start to pick up? When will all that heavy lifting start to show up in the numbers?

You've highlighted something we spent a lot of time working through internally. The heavy lifting began when we closed the deal. Our team has focused on setting up sales clusters in markets like Dallas and San Francisco. We're in a slow season in many of those markets today but have the right resources in place for success. The quality of these assets is high, and they haven't stabilized yet. We are bullish on the market dynamics, particularly starting in the fall, but full stabilization in this portfolio is expected to be a 2023 or 2024 event.

Got it. That's helpful. Switching gears on the transaction front, could you discuss what you've seen over the last 90 days in terms of changes in buying or seller expectations? Any interest in providing seller financing to get deals across the finish line?

We haven't seen a lot of trades. The operating performance is better, and trends are positive, but the higher interest rates and tighter credit markets create uncertainty. Asset prices have trended marginally lower, probably 5% to 10%. There remains a deep buyer pool for high-quality deals. Seller financing is something we would consider if it helps facilitate a trade with favorable economics.

Got it. Helpful. Thank you.

Thanks, Mike.

Thank you. Our next question comes from the line of Bill Crow with Raymond James.

Hey. Good morning, guys. Trey, appreciate your comments on the margins. We're all trying to grapple with stabilized margins and the lag between occupancy and rate recovery and FTE recovery. Where are you if you look at a per occupied room or per available room basis for Q2 2022 versus Q2 2019?

Hey, Bill. How are you? Good morning. If you look on a cost per occupied room in Q2 relative to 2022 relative to Q2 2019, we're probably up about 3.8% from that perspective. A lot of that is driven by the mix of labor. Our FTEs today stand at about 24 FTEs. Pre-pandemic, that was probably 35. We don't think that we're going to get back to 35 as we move forward but certainly need to be something higher than 24. The delta in terms of an increase in cost per occupied room is impacted by contract labor, which is less productive. There continues to be an evolution as we navigate this labor market of bringing back additional FTEs and offsetting that contract labor to close the remainder of the gap from a margin perspective.

So do you think margin continues to rise next period? Can we see margins grow next year even if RevPAR growth slows and labor staffing levels normalize?

Yes. As long as your RevPAR continues to skew towards rate growth.

Yeah. Okay. Just any time you have this dislocation that brings opportunities and your balance sheet may not be in a position to exploit any of these right now, but I'm wondering what your thoughts are on three kind of growth areas: number one, whether you received any inquiries from leveraged owners who might be in trouble; second, mezz lending, which got you a pretty good asset down in Brickell; and lastly, broken development deals, which just haven't seemed to materialize. Wondering what you're seeing out there broadly on those areas.

We haven't seen a lot yet, Bill. We are still in the early stages of the higher interest rate environment where the credit markets are tighter. If you will see opportunities, they may come. We would certainly love to pursue any broken or distressed deals that allow us a more compelling basis. We would like to do more in the mezz lending program, but it’s difficult to get developments to pencil right now. We've always viewed the mezz program as a way to acquire assets we want to own long term, rather than just being a lender. Given the quality of our assets, we anticipate less supply for a period of time, so we expect opportunities will arise, and we will continue to be selective.

Thanks for the time this morning.

Thanks, Bill.

Thank you. Our next question comes from the line of Neil Malkin with Capital One.

Hey. Thanks, guys. Just a quick follow-up. In terms of leisure demand, are you seeing, given the current confluence of factors, stock market sentiment, inflation everywhere, not just gas prices but food and everything else, travel? People reference that high gas prices don't affect demand, but it feels different with 40-plus year highs in inflation. Are you seeing any impact or change in the demand arm or issues in terms of booking trends?

We really haven’t, Neil. There’s concern about consumer health, but consumers are really healthy, looking at how much savings have been accumulated since the start of the pandemic. The labor market is strong with growing wages. Inflation is a concern, but for most people, disposable income remains intact, and this has not shown up as any signs of leisure travel demand softening. We continue to monitor closely, and if any softness arises, it may be offset by strength in business travel, which is recovering rapidly.

Okay. Thank you.

Thank you all for joining today. We look forward to catching up with you soon.

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