Good day, ladies and gentlemen, and welcome to the Summit Hotel Properties Q2 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be for replay purposes. It is now my pleasure to hand the call over to Mr. Adam Wudel, Senior Vice President of Capital and Financial Markets. You may begin.

Thank you, Bryan 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 2017 Form 10-K and other SEC filings. Forward-looking statements that we make today are effective only as of today, August 2, 2018, 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 Web-site 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 2018 earnings conference call. We are pleased with the strong bottom-line performance our portfolio delivered for the second quarter. We reported adjusted FFO of $41.4 million, an increase of 15.8% as compared to the second quarter of 2017. Our adjusted FFO of $0.40 per share grew 10% compared to last year and matched the high-end of our guidance range of $0.37 to $0.40 per share. On a pro forma basis, we reported RevPAR growth of 1.9% for the quarter, which was driven by 1.5% increase in rate and 0.5% increase in occupancy. Our relentless efforts continue to result in gains to RevPAR market share which increased 1.2% during the quarter to an index of more than 113. When excluding the effect of renovation related displacement during the quarter, the pro forma RevPAR increased 3.1%. A few of our stronger markets in the quarter included Tampa, Minneapolis and Salt Lake City. RevPAR at our Hampton Inn & Suites in Tampa grew by 17.2% in the quarter as a result of continuing revenue management strategies to layer in base business during lower compression period, which resulted in increased RevPAR market share of 7.7% against a competitive set. In Minneapolis, market strength has continued well beyond the benefits realized by hosting the Super Bowl in February. Our Hyatt Place and our Hampton Inn & Suites downtown were particularly strong performers posting RevPAR gains of 16.2% and 13.8% respectively. In our six hotels in Minneapolis collectively achieved RevPAR growth of 9.8% and EBITDA margin expansion of 170 basis points for the quarter. Improved transient demand drove overall demand growth of 5.3% in the market and 6.4% in the CBD submarket which substantially outpaced new supply growth of 1.1%. As you…

Thanks Dan and good morning everyone. For the quarter, our pro forma hotel EBITDA was $56.9 million; an increase of 0.2% compared to the same period in 2017 and hotel EBITDA margins contracted 87 basis points to 38.3%. When excluding the effect of a 12% increase in property taxes, pro forma hotel EBITDA margins contract only 24 basis points. Hotel operating expenses increased by 3.2% on a per occupied room basis during the quarter primarily driven by higher labor costs. During the second quarter, our adjusted EBITDA RE increased 17.9% to $55.2 million which was primarily driven by our acquisition activity over the last 18 months. Our balance sheet continues to be well positioned with over $350 million of current liquidity and an average length of maturity of 4.5 years. As of June 30, we had total outstanding debt of $956 million with the weighted average interest rate of 4.2%. As Dan mentioned, we have made progress on our capital recycling program with the sale of seven hotels for a combined sale price of $90.3 million. After completing these transactions and including the pending disposition of the Hyatt Place in Fort Myers, our net debt to adjusted EBITDA RE will be less than 4.5x by year end on a pro forma basis, which gives us some capacity for future growth. During the second quarter, we executed several capital markets transactions which included drawing the remaining $85 million of commitments on our new seven year $225 million term loan to pay down outstandings on a revolver which currently has $260 million of availability. On June 11, we entered into two forward starting interest rate swap agreements to hedge against rising interest rates with an aggregate notional amount of $200 million a $75 million swap becomes effective September 28 of this year…

Thanks Jon. In summary, we were pleased with the progress in the second quarter as our well diversified portfolio and our capital recycling strategy continue producing solid results. We continue to be optimistic about the outlook for 2018 and for the future summit. We will open the call to your questions.

Thank you, sir. [Operator Instructions] Our first question will come from the line of Austin Wurschmidt with KeyBanc Capital. Your line is now open.

Hi, good morning guys. Dan, you highlighted some of the strength in some of the markets. Could you give us a sense of which markets are dragging on the portfolio and maybe a headwind either due to just difficult comps or supply? And then, could you also speak to -- was there any softness in any particular segment of the business?

Sure. Austin, this is Dan. I wouldn't say there was softness in a particular segment. Most of the weakness in the portfolio isolated around a few markets in Phoenix, Scottsdale, we've got a little bit extra supply in the market from the Marriott/Starwood merger, the and Westin Kierland, W. Scottsdale and [Lofter] [ph] all similar or more competitors than they have been in the past for us with our hotels there. So that's been a little bit challenging. It is the summer months which is notoriously challenging and Scottsdale as well. Boston in the suburbs where we have a Hilton Garden Inn and a Hampton Inn was more of a supply issue where we had some supply up in the Waltham market and also in the Norwood market. The two that probably affected us the most were Boulder and Baltimore both markets that we anticipated being soft and we did renovations in those two markets. So it exacerbates some of the softness. So much of the softness there was a result of renovation of these great properties in these challenging markets.

So it sounds like the renovations like as you just mentioned and then the supply anything on the demand side that's surprised you either the -- I guess lack of reacceleration or improving strength or even things getting a little bit softer than you would have anticipated?

I think -- its Dan, again. Each markets got its own unique story I think in general, demand is good. I think there are always going to be pockets where maybe a small group might not repeat or maybe there is a challenge with a new hotel. But in general, we feel good about the backdrop of demand in our markets.

And then, just last one for me on the transaction side. Should we expect that you're going to continue to capitalize I guess on the strength in the transaction market and build some capacity through the back half this year or do you expect to be a little more active on the acquisition front in the back half of the year?

I think that will continue to be a balance for us. If this clearly an opportunity to be a seller now there's a great demand for properties that we own does make it challenging on the acquisition side. So I think we've got to focus on some off market deals some things that are maybe not quite middle of the fairway that we could still get the above average returns we expect. But I think you should expect there to be more of the same dispositions and acquisitions to offset that.

Great. Thanks Dan. Appreciate the time.

Thanks.

Thank you. And our next question will come from the line of Bill Crow with Raymond James. Your line is now open.

Good morning gentlemen. Dan, you delivered a string of quarterly outperformance when others were struggling a bit. And I think it was based on kind of a broad geographic footprint, lack of exposure to some of the larger gateway markets et cetera. And I'm just wondering, are we at a point in the economic and lodging cycle where it now favors those that have the bigger group exposure, maybe a more limited geographic footprint or more. Can you is it just a period of time when you're going to lag a little bit?

Yes. Thanks for the question, Bill. I think it's fair for us to look at the RevPAR that we delivered in the past as part of the foundation of our business model that is strong. We did have two hotels that we made the commitment to renovate during the second quarter, which is a quarter where we don't usually have renovation displacement. And if you take the Boulder Hotel and the Holiday Inn Express in San Francisco out, our RevPAR for the quarter was actually 3.1% which was even above the upscale average. When you combine that with some delays from some inspectors in the city of San Francisco that runs 90%, that displacement was probably a little larger than we anticipated as well. But I think RevPAR is clearly an important metric, but I think it's important to look at more than that to be laser focused on that metric is in our view a little shortsighted. I think it's important for us not to just be using that as a litmus test for decisions. It does create a lot of focus on the quarter and we're not trying to play a game of quarterly numbers. It's important to create transparency and consistent deliverables but we are focused on creating the best long-term shareholder return and we've done a great job at that. So the driver really is as I mentioned before the business model, which is based on higher margin operating model and generally in hotels with limited meeting space and F&B and there will be moments of time that RevPAR for certain chain scales and in certain markets will outperform. We don't have the exposure to New York or San Francisco that some of our peers do, but many of those moments of outsized growth really come off either an easy comparison from a prior period or even a prior year when maybe a convention center is off line. I do believe that today's guest didn't just suddenly decide they wanted to stay in a different chain scale of hotel or even if they know what those are. I think the metrics may be pointing to that narrative, but I think that's kind of a stretch. Clearly group has been solid and spend at those hotels has been good, but I don't think that changes the attractiveness of our higher operating margin model at all. I believe it's really most important to look at the long-term history of creating dye which we clearly showed as we reported mid-teen unlevered IRRs in our release.

Yes. I appreciate that commentary Dan. From a supply perspective, are you still fairly confident that we are -- at or reaching a peak as you look at your markets?

Yes. Hi, Bill. Its Jon. I think generally, yes. I mean I think we look at the supply forecast for the industry and I think we finished the year last year at 1 8. The forecast for this year is 2 and we expect that to be kind of peak supply deliveries either late this year, early next year. As you know supply is very much a market-by-market issues, so we look at markets like Nashville where we've had a tremendous amount of supply growth in that market and think that supply continues into next year. Most of the supply as Dan mentioned that's coming on into markets like Boulder has been delivered and we started to absorb supply in markets like Minneapolis where we had a lot of supply come in last year. So I do think we're kind of seeing peak supply growth. We continue to hear rising construction costs and tighter construction financing markets, what will continue to limit some of the new construction, I think it's getting more and more difficult for developers to pencil new construction. So our belief continues to be that late this year early next is kind of peak supply delivery.

Great. And then, one final question for me, which is just kind of what do you see from a cap rate perspective for transactions that you're interested in but those that said you're kind of more unique portfolio attributes?

Yes. Its Jon. I will take that Bill. Look I think it's kind of we telegraphed go into the year. We felt like it was an easier market to be a seller than a buyer and we'll have sold over $100 million of hotels when we get through the third quarter because of that. So I would have expected potentially as we get a little deeper into the cycle and that perhaps you'd see a gapping out of cap rates. I certainly don't think we've seen that. I think if anything cap rates have tightened. As we've said over and over and feel a little bit like a broken record as we say this every quarter. I mean we continue to focus on more of the off market transactions. I think the current transaction market requires us to be a little bit more selective and thoughtful on what we're acquiring. So if anything in there hasn't been a ton that's traded but if anything I believe cap rates have tightened.

It's helpful. Thank you guys.

Thanks Bill.

Thank you. And our next question will come from the line of Michael Bellisario with Baird. Your line is now open.

Good morning guys.

Good morning.

Just on the renovation front as you guys kind of look up to 2019 and I know it's still easy but any big renovations in the planning phase today that we should be aware about thinking about comparisons for next year?

A big renovation for us is typically $4 million or $5 million, so I wouldn't say that one in and of itself would, is anything people should be looking at. I think it's really the timing of those renovations and how it affects our outlook for the year. We'll renovate a dozen or more hotels every year. That's part of the opportunity of having a strong and diversified portfolio and I think our run rate on a go forward basis is probably in the $50 million area. And I don't think this year was -- we had some carryover from prior year that move us a little higher than that. But that's about the best way to telegraph how investors and panel should expect renovations from us.

Maybe will ask this kind of in a different way to just nothing of the same magnitude of Boulder and Fisherman's Wharf in terms of dollars or potentially EBITDA impact, is that fair?

Hey, Mike. Its Jon. I think that's fair. I mean I think part of what made this quarter unique and we don't normally have a history of going out and calling out lumpy displacement numbers. We did renovate two of the larger properties as you alluded to. One of which is in San Francisco which is a 90% occupancy market that was on top of a second quarter of last year where we didn't have any displacement. Typically it's fairly balanced, so it was a little bit of a combination of renovating two of our larger properties in the second quarter this year over a quarterly comparison with very little to no displacement.

Got it. That's helpful. And then, in the second half based on your implied guidance where are you seeing margin growth shake out. And then is there any moderation there that you're forecasting on the cost side?

Yes. I think that we would still expect there to be some slight margin contraction. As we mentioned in previous calls the difficult year-over-year property tax increase comparisons abate in the second half of the year. What is the headwind in the second half of the year is more of a top-line particular a very difficult comparison in the fourth quarter from a RevPAR growth perspective. So I would expect there to continue to be based on those top-line results a slight margin contraction in the back half of the year.

Got. And then, last one for me, last quarter you talked about hurricane demand. And then, you were encouraged by the pickup in the corporate transient business that you were seeing throughout the portfolio. What did you see in 2Q in that normalized relative to your expectations from the beginning of the year?

I do think in the second quarter, our weekend RevPAR growth was a little bit higher than our weekday RevPAR growth although our corporate negotiated weekday RevPAR growth was up about 7% in the quarter, which I think is a continuation of some of the stronger trends that we saw in the first quarter. As Dan said earlier, I don't know that it was necessarily one particular segment that either that underperformed relative to expectations, it was more of a market driven and displacement driven issue in the quarter.

And then, on the hurricane side, any continued lifting in your markets or your properties or that completely abated at this point?

I think for the most part, it's abated. I do think that South Florida and Houston continue to be very strong markets. I think the issue with Houston is, in particular is that you just have a really, really difficult fourth quarter comparison. That's into late third quarter, fourth quarter that's a 60%-ish type occupancy market that ran 85% last year. So the Houston market has certainly maintained its strength. I think that has less to do with residual hurricane demand and more to do with recovering oil prices and just a general strengthening of that market.

That's helpful. Thank you.

Thank you. And our next question will come from the line of Wes Golladay with RBC Capital Markets. Your line is now open.

Yes. Good morning everyone. Maybe going back to -- follow-up to that last question, the taxes this year are quite high. Are you guys actively appealing some of those assessments?

Yes, Wes. This is Dan. That's something we go through on virtually every tax bill we get to ensure we're challenging everything and monitoring that for sure.

Okay. And then, the comment about Phoenix, about the Marriott disruption, part of the -- not from you guys, but from the industry was that -- the Starwood guest would have more options with the Marriott for select service. Are you just not seeing that out there?

I think - this is Dan. It's more of a market-by-market phenomenon I believe. I don't know that North Scottsdale is the Mecca of corporate travel, so I think there's a high level of leisure demand. So in more of a corporate travel market we'd expect to be more of a beneficiary of the combined Marriott Starwood leisure market when somebody can choose maybe at the same level to stay at the Westin Kierland. We may lose out a little bit there. So I think it's a pretty good balance. We used to get in Phoenix a fair amount of overflow from the J.W. Marriott and some of that is going to some of the other former Starwood properties at this point. So I think that as more market specific than anything we're seeing across the portfolio.

Okay. That makes sense. And then, looking at that the guidance this year, you have essentially 2% of high-end and build in the first half results and the fourth quarter is going to be difficult comp from renovation -- from the hurricane demand maybe easier comp on renovations. But is there any other offsets that can help absorb some of that 5.5% comp from last year?

Yes. I think the underlying fundamentals are good. I don't want the guide to imply lack of enthusiasm or optimism just a big number. Even without the hurricane effect, our RevPAR would have been 3.8% which is still a big number. So I think they're definitely going into -- overall try to climb a big hill so to speak like that, warrant some conservatism. But, yes, we think the underlying fundamentals are good, demand is strong, group seems to be solid. So, yes, I think there's some good underlying fundamentals that certainly give us some optimism.

Okay. Then, what about maybe some of your bottom markets like New Orleans, would that be a good one for 4Q or 3Q or what's the seasonality this year?

Third quarter is a good market for New Orleans. So that's definitely positive and I think while just having one hotel in Pittsburgh that's got a good outlook. And as we talked about before both South Florida and Houston despite having difficult comps seemed to be fairly solid in demand and you get some recovery in oil and then strong leisure demand in South Florida. So I think there is definitely some bright spots as well.

Okay. And last one for me. Looking at your mezzanine book, you have, it's hard to source acquisitions, but you have a few assets tied up that you can exercise early next year. Can you comment on whether those are in the money now likely to be exercised, or you just want to let the call option go as long as you want, exploration on those?

Sure. We've got -- we're fully funded on those hotels. So we're watching them very closely. We do think their hotel that it would be attractive for us to own and it does fit within the notion of having a strong shadow pipeline. We do believe clearly they are in the money, when we started these projects, it was prior to the continued escalation of not only labor, but construction cost and material cost. So we feel these are good spots to be in. And at this point want to make sure that we've got to maintain the optionality to execute if the underwriting comes in as expected.

Okay. Thanks a lot guys.

Thanks Wes.

Thank you. And our next question will come from Chris Woronka with Deutsche Bank. Your line is now open.

Hey good morning guys. Wanted to ask is the Marriott Starwood loyalty program emerges a little later this month. I know you probably don't have a ton of necessarily redemptions, but your guests are obviously earning the points. Do you expect any benefits there on the cost side or any other kind of impact that would impact your margins?

We do. I don't know that it's enough of a positive effect to overcome rising labor costs. But Arnie and his team have been delivering on their promise of using the size and scale of the deliver cost savings whether it's through negotiated credit card commissions and fees. So it's hard to really quantify that immediately in our numbers, but it is a tailwind as opposed to a headwind. And we think it does benefit us going forward. It's been a great partnership for us.

Okay, great. And then, I think you mentioned the 3.2% number on cost per occupied room. Is that -- is there a point later this year maybe early next cycle a bigger increase that you saw this year or do you think that 3.2% is kind of -- more of a run rate?

Hey, Chris. This is Jon. I think given the labor environment that we're in. I mean that's mostly driven by labor. I think in the 2% to 3% range from an expense perspective is the right range for growth going forward for at least for the foreseeable future.

Yes. I will just add, it would be easy to be the draconian and start to cut things just for the purpose of hitting a number. Unfortunately in the past, we've experimented with things that end-up affecting guest experience and the quality of your property and sometimes postponing investment, it ends up creating more challenges than it's worth. So hiring and recruiting and maintaining a quality staff is something that's very much top of mind and being too aggressive, I think damage is the integrity of the portfolio and the quality that we deliver. So I think Jon's point is the run rate is what we would expect.

Okay. Fair enough. And just finally for me we've heard some pretty bullish things about the high development plans and the pipeline. You guys have probably owned more than some of your peers. Does their outlook make you want to potentially acquire more high branded stuff?

This is Dan. I think our thesis is, we are big believers in the loyalty and distribution of the brands. For us to lean into a hotel whether it would be a Hyatt or Marriott or Hilton or IHD, whatever, I think is more opportunistic and so far as the underwriting has to make sense. So we are not trying to build a portfolio and put dots on a map. To the extent, we sign great opportunities that are Hyatt. We've had a great partnership with them for a lot of years and to grow with them is -- would be terrific. But, it still has to make sense from an investment standpoint. But, it is nice to see the brand expanding and some of these high barrier entry markets with quality product that competes very well. So, we are pleased to see that they are making progress to that end. And to the extent we could be a part of that certainly an opportunity for us.

Okay. Very good. Thanks guys.

Thanks Chris.

Thank you. And I'm showing no further questions in the queue at this time. So, now it is my pleasure to hand the conference back over to Mr. Dan Hansen, Chairman, President, Chief Executive Officer for some closing comments and remarks.

Well, thank you all for joining us today. We continue to work hard for our shareholders to create value through thoughtful capital allocation and also operational enhancement. Our portfolio of high quality hotels that today's guest love continues to grow and we see great things in the future for Summit. Hope you have a terrific day and look forward to talking to you again next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude our program. And you may now disconnect. Everybody have a wonderful day.