Thank you for standing by. And welcome to the Summit Hotel Properties Q1 2021 Earnings Call. At this time all participants are in a listen-only mode. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Adam Wudel, Senior Vice President of Finance Capital Markets and Treasurer. Thank you. Please, go ahead, sir.

Thank you, Justin, and good morning. I am joined today by Summit Hotel Properties' President and Chief Executive 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 SEC filings. Forward-looking statements that we make today are effective only as of today, May 5, 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.

Thanks, Adam. And thank you all for joining us today for our first quarter 2021 earnings conference call. Overall, we were extremely pleased with the operating trends we experienced in the first quarter because the gradual and sequential demand improvements we began to see in the summer and fall of last year, accelerated beginning around Presidents' Day weekend when RevPAR reached a post pandemic high of nearly $90. Since then demand has continued to improve consistently as March RevPAR finished above $65, which was a 27% month-over-month increase from February. And preliminary April results suggest a RevPAR of nearly $70, representing continued sequential growth despite transitioning out of peak spring break season. As importantly, our outlook for the broader industry recovery has accelerated in conjunction with these improved demand trends. Progress on vaccine distribution and easing regulatory restrictions combined with significant pent-up leisure demand drove our first quarter operating results meaningfully above our expectations, even 75 days ago. As a result, our corporate level cash burn in March was less than a $1 million. And we now expect to be very near or cash flow positive in April two months earlier than we telegraphed on our last earnings call. For the first quarter, we reported pro forma RevPAR at $53, which is a decline of 45% compared to last year and 59% compared to the first quarter of 2019. However, it also represented a 23% improvement over the fourth quarter of last year and compares favorably to year-over-year RevPAR declines in the top 25 in urban markets of 48% and 55% respectively. We also continued to gain market share in the quarter as our RevPAR index increased to 133%, which represented a nine percentage point increase relative to our competitive sets and is still meaningfully above our historical penetration levels. While lodging demand is generally still heavily concentrated in leisure guests, we've experienced strong growth during both weekdays and weekends through the first four months of the year, but particularly in March and April. For example, over weekends in March, our hotels averaged more than 75% occupancy and approximately $90 RevPAR, and weekdays averaged more than 50% occupancy for the first time since the onset of the pandemic. Weekdays during March generated an average RevPAR of nearly $57, which is more than 25% higher than the next best monthly average over the last 12 months.

Our first question comes from Neil Malkin with Capital One.

Hey, guys. First question, it seems like ADR have kind of been flat over the last couple quarters. Just wondering, can you maybe give us some idea or color for. Are you going to be able to start pushing that higher either kind of shifting the mix or just pushing on rack rate as you see demand kind of go up, especially for leisure in the middle or in the summer? And how does the local and regional business travel play into that over the coming months and are you seeing more of a return on that side as well?

Yes. Thank you. Neil, good morning. I think first of all, we have started to see some progress on the rate side. As we said in the prepared remarks, our March ADR was about 14% higher than our January ADR, so we are seeing some progress. We do expect that trajectory to continue. And I think particularly as we look into the summer and some of the higher demand, especially holiday weekends, Memorial Day, July 4, those types of weekends, we're going to have an ability to push rates beyond what we've seen, even early in the recovery in the spring, and even over spring break season, which was very, very strong. I do think, and we've talked about this on some previous calls, I think the path back for rates is going to be somewhat dependent on getting some level of corporate traveler back. If nothing else, just shifting the mix back to what is historically been a higher rated customer. So I think it's going to be a little bit of both. Again, I think you're going to see continued progress on the leisure side and rates continue to grow on the leisure side on the stronger weekends. But for rates to get closer to where they were pre-pandemic, we're going to need to see some of that corporate business come back in.

Okay. So just, again, just kind of the way your portfolio is positioned, I would expect that you'd see the local and regional come back obviously first before the larger, the corporates. And so have you seen that continue to pick up as well? Is it still kind of spotty? And because the STR data shows a lot of pick up in weekday finally. So that was the second part of the question.

Yes, we are seeing it. I would describe it as somewhat sporadic, but we've actually seen some of our best growth, albeit off a much lower base mid-week. And I think that points to at least some level of corporate demand returning. We have pockets of it. For example, we've got a hotel in Hillsboro, outside of Portland, that's full and it's really full with all corporate. Now that's a little bit of a unique situation. We've continued to see good corporate pick up in a market like Silverthorne, where we've got some car company business that does high altitude testing out there. So we have started to see some of that.

Okay. Great. Other one for me is on the GIC and the six contributed hotels. It looks like they were mostly non-coastal. Was that purposeful? How did you get to those assets and, again, just are you continuing to feel like the acquisitions are going to be potentially all within the GIC over the coming, I guess, quarters?

Yes. I think in terms of how we establish the portfolio, we did spend a fair amount of time with GIC going through our existing portfolio, finding markets and assets that fit with kind of their investment parameters, where they felt like they could lean in more on pricing. I do think this represents a fairly reflective subset of our overall portfolio. It's kind of right on top of it from a RevPAR perspective. I think from a pricing perspective, it demonstrates kind of the durability of the type of assets that we have. So again, we were very happy to get that done. We ultimately think that the pricing that, that we're able to contribute the assets, we're going to be able to take those proceeds and hopefully redeploy them into assets that we can generate better risk adjusted returns. I do continue to think that the most likely vehicle for growth for us in the near term is within the venture for the reasons that we've discussed frequently. It lowers our capital requirements that creates a fee stream and a promote structure that ultimately enhances returns. And so I think at least for the near to medium-term, it is the most logical growth vehicle for us.

Okay. Thank you, guys.

Thanks, Neil.

Our next question comes from Austin Wurschmidt with KeyBanc.

Hey, good morning, guys. Just wanting to touch on sort of the revenue management strategy, given the pick up and pace you referenced in May versus April. And I think you guys have been more focused on grouping up kind of during the pandemic to grab any demand that you can that's out there. So how does this pick up and pace really shift that revenue management strategy if you're at a point now where you're more willing to take on less group, I guess? And then, can you also compare how the pace pick up is between urban hotels versus more resort locations?

Yes. Let me start with the first one. I do think we did have a strategy that was trying to create some sort of group base layer of business and the assets. And you think you see that if you look at our index, our RevPAR Index, it's significantly higher midweek than it has been on the weekends. We expected to be able to fill and drive some rates on the weekends. And having that base level of business in the mid-week has helped us create, kind of over the full seven days of the week or the full month, better RevPAR Index and we think overall better performance. There will be some level of shift moving forward. I think the message I think a lot, particularly over the summer where we see very, very strong leisure demand with our operators is to kind of stop pricing the pandemic. We think we're going to have an ability to really push rates on a go-forward basis. And our hope is that over time, as we get later into the summer and the fall, we're going to be able to layer in some higher rated pieces of corporate business on top of that. Look, I think we've seen better growth in kind of the urban and CBD locations in our portfolio. Again, I would just remind you that the baseline there has been much, much lower, and I think the trajectory of the recovery of those is longer. But we have started to see some pick up in those types of assets as well.

That's helpful. And then one I wanted to switch to is on the mezzanine loans and some of the modifications. Was there any change to the purchase option related to two of the mezzanine loans specifically that were extended into March of 2022? And can you remind us what the terms are on those purchase options?

There was no change in anything to the purchase option. The only change was really, we were made current on any interests that had been deferred. And then we did extend the maturity date to March of 2022. That's really the only change there. And it's about a $7 million incremental funding for us to complete the overall purchase of the assets, if we exercise our option of the 90% equity interest.

Okay. And that $7 million would assume that that's a just outright purchase, 100% owned by – on balance sheet?

Yes. It's actually for 90% of the equity, but it would be consolidated on the balance sheet.

Got it. Okay. Thank You.

Thanks, Austin.

Our next question comes from Chris Woronka with Deutsche Bank.

Hey. Good morning, guys. Jon, you touched on it a little bit in the comments, but maybe on the labor front, it's a two part question. One is, as occupancy rebounds further, you potentially have to bring back more workers. Do you see incremental pressure, even if it's only kind of temporary? And the second part is, any update on any discussions with the brands, the operators about permanent changes to staffing models on housekeeping and things like that?

Yes. Look, I think to the first question, I think you've heard this probably on all the earnings calls so far this quarter. Labor continues to be a challenge. Some of it's temporary. I think some of it is the fact that folks have unemployment benefits that are paying them more to stay home and they aren't going to work. And that's going to abate over time. I think the portion of this that's more structural where folks have just left the industry is probably a more manageable component of what we've seen change in the labor market. So look, we've tried to be forward-thinking in terms of making sure we keep our best people. GMs, Directors of Sales, and keeping particularly where we have very strong teams in place and making sure they have the right resources as we've seen demand increase. We're increasingly trying to make sure we devote the resources to get our managers off the front desk and out of doing housekeeping jobs. It's been challenging obviously, but I think the team's done a very nice job doing that. I do think some of those pressures abate as we get later into the year and into the fall. From a brand perspective, I think those conversations are still ongoing. I think we're just now getting to the point where we're starting to talk about reintroducing more normalized brand standards. We're still not cleaning check-outs, we’re still not cleaning stay overs. That's really the biggest change from our perspective, from a profitability perspective on differences in brand standards. And I think how we reintroduce breakfast and some of the other standards is still being worked out. We'll probably start to see more of those changes as we get into the summer and the fall where we've got a more normalized demand environment.

Okay. Very helpful. And then as we think about acquisitions, a lot of your hotel REIT peers are seem to be focused a little bit more on resource right now. It's not an area where you guys play big in on the full service side. So the question is, if there is a little bit less focus on urban from your peers, does that potentially make you look at some full service stuff or some skinny full service stuff that you might not have looked at kind in the pre-COVID normalized environment?

Yes. Look. I think we're always going to just solve for returns. That's always been what's driven our acquisition, or really our capital allocation process just more generally. And if you look at the contribution of the assets to the GIC venture and kind of the implied costs of what it costs to contribute those, we think we're going to have opportunities to redeploy that capital into something that's going to generate a higher risk adjusted return. I do think there's going to be opportunities in urban markets. I think that urban has got a different trajectory from a recovery perspective than you're seeing in coastal markets and drive to non-urban or suburban type of markets. But I do think that that type of market is going to come back. And so we're certainly going to underwrite those two different types of investment opportunities differently, but we'll look into those markets if we think we can get the right basis there. I think we'll continue to evaluate what we generally describe as an efficient operating model. We don't talk a lot about the difference between full service and select service. We're probably not going to go out and buy a 700 room, 70,000 square feet of meeting space hotel. We would look to do a compact, full service hotel like we did with the Marriott we own in Boulder, which is technically an upper upscale full service hotel, but it's run very efficiently. If we can find those types of opportunities at the right basis and we can generate the right returns, we'll certainly look there.

Okay. Very good. Thanks, Jon.

Thanks, Chris.

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

Hey, good morning. Jon, Adam. My first question is on the asset contribution to the JV. Can you just help us understand why specifically these ones, and how we should think about the balance of Summit's remaining portfolio? So is there an opportunity to prune the remainder or should we think about more contributions to the JV ahead and so on?

Yes. Again, we went through a process with GIC to evaluate the portfolio. We felt like we found a portfolio that's relatively representative of one, the portfolio that we own at Summit, and two, the portfolio that's owned within in the JV. We obviously tried to find markets where we felt like GIC could be more constructive from a pricing perspective. I would say that there was nothing that was either completely had to be in there or anything that was completely off the table. It was somewhat of an iterative process. I think we looked at the contribution, and this plays in the second part of your question in terms of how we think about the rest of the portfolio, we'll look at anything opportunistically. We never felt like we had to create the liquidity by contributing the assets, but we did feel like it was an opportunistic way for us to raise some capital. But again, we think we're going to be able to redeploy over time into something that's going to create higher, better risk adjusted returns. I wouldn't preclude us from contributing additional assets in there. I wouldn't say that that's the baseline plan. Again, I think we have plenty of liquidity today. We've done a great job managing the balance sheet. We've got a tremendous amount of runway and we've got plenty of dry powder to pursue additional acquisitions. We'll certainly continue to evaluate dispositions to the extent that, again, we feel like we can sell those and redeploy the proceeds into something that creates better risk adjusted returns.

And just, because you also mentioned on your prepared remarks, you basically bolstered your investment capacity a little bit with this contribution. So do you have any – do you favor one opportunity over the other in terms of, do you prefer deploying that into an acquisition, or maybe even growing the JV even more? Is that like CapEx in your existing portfolio? How should we think about that investment capacity?

Look, as we've said over the last several quarters, we think there's going to be great opportunities for us to buy. We don't have anything to announce today, but I would say we continue to make sure we stay very, very active in the acquisition market. And I think our pipeline is probably as busy as it's been at any point since the onset of the pandemic. So I do think it creates great capacity for us. It creates capacity that ultimately could be used to put assets into the venture. So one of the things that we've prioritized in structuring the balance sheet is ensuring that we've got flexibility and optionality, and we've been able to do that with whether it's with the convert raise or these contributions. So it could take many different forms, but again, we do think we'll be able to find some unique, compelling opportunities.

Thank you so much.

Thanks, Dan.

Our next question comes from Michael Bellisario with Baird.

Good morning, guys.

Good morning, Mike.

Jon, just a couple more on the JV contribution. How are you guys thinking about balancing how big that part of the company could get versus your 100% owned fully consolidated portfolio?

Yes. It's a good question, Mike. I think that we're at $450 million of assets and there are 11 assets of 72. So it's still a fairly small percentage of the portfolio. I think we still have runway to grow it. I don't think it will ever be the majority of the assets that we own in the business, but I do think that there's still some runway for it to be larger.

Got it. And then maybe a little bit longer term focus here, but how are you and GIC thinking about eventually recycling some of the joint venture assets, and then maybe mechanically, who can trigger those decisions?

Yes. It was never meant to be a perpetual vehicle. We set this up to be something that, even when it was set up was set up in a moment in time where we felt like we could leverage an operating platform and help narrow a cost of capital disadvantage that we felt like we faced when we were pursuing acquisitions. Today I think, again, a lot of that holds in the fact that we can create this fee stream that ultimately enhances our returns, but we never meant for this to be perpetual. We have structured mechanisms within the venture that contemplated an exit. We've been trying to be thoughtful around them allowing us to do that, either in the form of cash or stock. And so I wouldn't say that that is a near-term thing, but, over time, we'll certainly look to exit. This is an IRR-driven vehicle in terms of how we calculate the promote. And so over time, we're not there yet, but we'll look at exiting in kind of a normal course.

Got it. Helpful. Thank you.

Thanks, Mike.

Our next question comes from Bill Crow with Raymond James.

Hey, Jon. Also on the JV. Why six assets? I mean, they could buy anything you wanted to throw at them. Were you trying to solve kind of a capital raise for circled acquisitions from the JV, going forward? Why six?

Yes. Look, no magic to six, Bill, candidly. I think, again, we wanted to focus on what was a reasonable-sized – kind of to Mike's earlier question. We didn't want to put half of the assets in the portfolio in there. We didn't want to do one or two assets and go through the process to raise $5 million or $10 million. We felt like we threaded the needle around. This is still a significant transaction. Raising $85 million, plus or minus, through the transaction gives us real additional liquidity. It gives us real additional buying power. It helps us pay down some debt. So we felt like it was a meaningful size without being a too significant portion of our assets. But there was no magic to five or six or eight or whatever it was.

At what point do you start to worry about shrinking the company too much, relative to G&A and public company costs and all the other things?

Yes. Look I mean obviously, we sold some EBITDA here, but we do retain the assets. And as I said on the previous question, I think, ultimately, we're likely the ultimate owners or the most logical owners of some of the assets that are in the existing venture. And so it is a consideration. We tried to talk through – we do think we're going to have some opportunities to redeploy this capital, and, ultimately, find some opportunities for external growth where we think we can underwrite higher returns. So again, we don't feel like this was a huge needle-mover in terms of making the company too small, and we have created some capacity for us to go out and continue to grow externally.

Thank you.

Thanks, Bill.

Our next question is a follow-up question from Neil Malkin with Capital One.

Thanks, everyone. I'm going to ask you a question that hasn't been brought up. It's on the GIC JV. Can you give any specifics on what you have potentially identified or post LOI, anything like that in the works? Should we expect to hear something in the second quarter? What does the timeline kind of look like on that? That's the first one.

Yes. Look, we don't have anything to announce today. As we said earlier, we are working through a number of opportunities. I'm hopeful, if not optimistic, that we'll find some opportunities to redeploy this capital. But I certainly don't want to commit to any type of timeline there. We'll continue to do it opportunistically. Ultimately, we're solving for ensuring that we can redeploy proceeds or invest proceeds, just capital generally, at the right risk-adjusted returns.

Okay. The other one is, I think, kind of along the lines of Bill's question. I know you guys are obviously talking about solving for IRR, being agnostic, focused on the assets. But how do you kind of balance that, being a public company? And given the size of the portfolio and market cap, it's been kind of running in place, arguably. I guess, being a public company, how do you think about that? And is the next couple of years a good time to increase the portfolio, gain some scale, gain some market cap? How much of that is a discussion internally, when talking about capital allocation?

Yes. Look, we've been a very transaction-oriented company, historically. If you look at the 72 assets that we own, five of them are from the IPO portfolio. We've transformed the company over the last nine or 10 years. And so I don't think we need to do that again. I think we love the portfolio that we have, but I think we'll continue to be a very transaction-focused business, both on the buy-side and the sell-side. And as I've said, we think we're going to have some very compelling opportunities to continue to grow the business externally.

All right. Thank you.

Thanks, Neil.

Our next question is a follow-up question from Austin Wurschmidt with KeyBanc.

Thanks, guys. Appreciate it. I wanted to ask about the ROI opportunities you referenced in your prepared remarks, accelerating some of the CapEx into the fourth quarter of this year. Can you give us a sense of magnitude and what type of projects and returns you're looking at?

Yes. When we kind of gave our initial CapEx guidance for the year, we talked about a $20 million to $30 million range on a consolidated basis, about $15 million to $25 million on a pro-rata basis. That includes the start of, really, three renovation activities in the back half of the year that we intentionally put off until we saw where we got more conviction around the trajectory of the recovery from a demand perspective. Given that we've been pleased with that, we are looking at pulling forward some projects. The incremental spend in 2020 will likely be fairly minimal. A lot of the work will get done either late in the year or the first parts of next year. But we are probably looking at accelerating another three or four projects. We're getting them started late this year, just given the better demand trends we've seen the first four months of the year.

Are these more room renovations? Or how would you characterize the work that you're planning to do at the three or four hotels, I believe?

Yes. Rooms in public spaces in a period of time where we think we can do it with generally lower occupancies and less disruption.

Yes. Make sense. Thank you.

Thanks, Austin.

And I'm not showing any further questions at this time. I'd like to turn the call back over to President and CEO Jon Stanner.

Well, thank you all for joining us. And I know it's a busy morning for everyone. As you can tell, we're excited about the future of our industry and the outlook for Summit, in particular. We look forward to seeing many of you, hopefully in person, sometime soon. Thank you.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect. And have a wonderful day.