Earnings Call Transcript - INN Q1 2020

Operator, Operator

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.

Adam Wudel, Host

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.

Dan Hansen, CEO

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.

Jon Stanner, 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.

Dan Hansen, CEO

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.

Operator, Operator

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

Chris Woronka, Analyst

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?

Dan Hansen, CEO

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.

Chris Woronka, Analyst

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?

Dan Hansen, CEO

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.

Chris Woronka, Analyst

Okay, very good. Thanks, Dan.

Dan Hansen, CEO

Thanks, Chris.

Operator, Operator

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