Thank you for standing by, and welcome to the Summit Hotel Properties' Second Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Adam Wudel, Senior Vice President of Finance, Capital Markets and Treasurer. Please go ahead.

Thank you, Valerie, and good morning. I am joined today by Summit Hotel Properties' President and Chief Executive Officer, Jon Stanner; and Executive Vice President and Chief Financial Officer, Trey Conkling. Please note that many of our comments today are considered forward-looking statements as defined by federal securities laws. These statements are subject to risks and uncertainties, both known and unknown as described in our SEC filings. Forward-looking statements that we make today are effective only as of today, August 4, 2021, and we undertake no duty to update them later. You can find copies of our SEC filings and earnings release, which contain reconciliations to non-GAAP financial measures referenced on this call on our website at www.shpreit.com. Please welcome Summit Hotel Properties' President and Chief Executive Officer, Jon Stanner.

Thanks, Adam, and thank you all for joining us today for our second quarter 2021 earnings conference call. Overall, we are extremely pleased with the acceleration of our operating trends in the second quarter, which significantly exceeded our initial expectations and represented a nearly 50% increase in RevPAR from the first quarter. Occupancy, average daily rate and overall profitability all reached new highs since the onset of the pandemic. And importantly, we achieved positive corporate cash flow for the quarter. Demand improved sequentially each month during the quarter, and we sold 30% more room nights in the second quarter than we did in the first quarter. While leisure demand continues to be the primary driver of our operating results, we are also encouraged by improving corporate transient demand trends that are having a positive effect on our hotels located in urban locations and our mid-week performance in particular. Demand at our urban hotels grew at a considerably faster pace than the overall portfolio during the second quarter, increasing 43% over the first quarter. For the second quarter, we reported pro forma RevPAR of $78, which was over 3x higher than our second quarter RevPAR last year, and a 49% increase over last quarter. Like demand, RevPAR improved sequentially each month of the quarter, and our preliminary results for July show further RevPAR acceleration to just over $100, a robust 15% improvement over June and our first full month of RevPAR above $100 since the pandemic started. RevPAR for the second quarter was 43% lower than what was achieved in the second quarter of 2019, a significant improvement from the first quarter when RevPAR was nearly 60% lower than the comparable 2019 period. This gap narrowed considerably in July with RevPAR only 21% below July 2019 levels, which we expect will…

Thanks, Jon, and good morning, everyone. During the second quarter, our resort hotels continued to lead the recovery with occupancy levels that exceeded 83% and a RevPAR of nearly $110. Resort occupancy remained strong across the quarter with each month achieving 80% or better, driven by continued growth in leisure demand and overall robust summer travel. For July 2021, preliminary occupancy, ADR and RevPAR of our comparable resort portfolio, which excludes the Residence Inn Steamboat, exceeded second quarter 2019 levels. Moving on to our 42 non-urban hotels. This subset of the portfolio achieved better than 75% occupancy and an $89 RevPAR during the second quarter with June metrics improving substantially to 78% occupancy and a $99 RevPAR on the strength of weekend demand. Consistent with our resort portfolio, preliminary July numbers for our non-urban portfolio demonstrated steady improvement with a 79% occupancy and $108 RevPAR, representing month-over-month growth of approximately 9% compared to June. Finally, while urban hotels continue to lag the broader sector recovery, our 30 urban assets have also benefited from strong summer travel, with second quarter RevPAR increasing sequentially 75% compared to the first quarter. This was driven by strong weekend travel with occupancies averaging over 70%. The outlook for our 30 urban hotels continues to improve as preliminary July RevPAR is anticipated to exceed $94, representing month-over-month growth of 23% compared to June. Although, booking windows remain very short-term in nature and forecasting continues to be a challenge, we have experienced a decline in the percentage of room nights booked near to or on the night of stay. For example, transient room nights booked within 3 days of stay declined from 46% in April to 39% in June, and nights booked in the week for the week declined from 60% to 53% over that same time…

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

[Operator Instructions] Our first question comes from Neil Malkin of Capital One.

First question, you called it out in your press release and in your prepared remarks about mid-week getting noticeably stronger, contributing to your performance. Can you just maybe talk a little bit more about that but more specifically in terms of markets? Is it regional private business travelers? I guess, are you seeing the demand come from larger -- I guess, you can call them mainstay corporate negotiated accounts or how does that look?

Yes. Sure. Thanks for the question, Neil. It's a little bit of both. I would say, the strongest markets mid-week have continued to be the leisure-oriented markets, markets like Fort Lauderdale, and Tucson, and Tampa, Orlando, the markets we've talked a lot about driving overall strength. And certainly, some of that is just continued better and longer stays on the leisure side. We are starting to see -- and we mentioned it in the prepared remarks as well. You're starting to see it mid-week in some of our more urban properties. And probably, as encouragingly as anything, you're starting to see better rates come in mid-week. And give -- rewind, even over the last two or three earnings calls, I think what we've been monitoring is, how rate continues to evolve. And typically, what happens is occupancy comes first and rate comes second. I think, we're very encouraged by what we're seeing on the rate side. We're certainly starting to see some level of negotiated corporate type of business come back in. I think, in the second quarter, our corporate negotiated rates were up $12 over the first quarter. So you are starting to see some of that. It's not your bigger, larger national accounts to the same extent they were pre-pandemic, you're seeing, as we've talked about previously, more regional, more local, more drive to type of corporate business. Nonetheless, the remixing of that business is positive, and I think, the outlook for that continues to get better and better.

Yes. No, appreciate that. Maybe sticking with the same theme. I think one of the issues for the sector's lagging performance is sort of the uncertainty with regard to business travel and the group's sort of recovery pace, obviously, not really a group portfolio. But can you just talk about what you -- what your property managers are telling you or what you guys expect for like the post-Labor Day and in the fourth quarter in terms of the business transient side? I guess, you could -- if you could talk about it as relative to 2019 levels, I think that would be helpful in assessing how you see the cadence sort of playing out at least near term?

Yes. Look, we -- I think, bigger picture and longer term, we expect corporate transient to come back and look a lot like it was pre-pandemic. The timing of that is the question. It's -- and it's more of a question of when, not if, in our minds. I think, we've kind of as an industry, evolved to believe that post-Labor Day, you're going to start to see that come back more meaningfully. I do think that the trajectory of that recovery is going to be more gradual than what we saw on the leisure side. But again, we do expect that business to come back and to come back in a meaningful way. We haven't seen -- look, market sentiment has certainly changed, given what we've seen with the Delta variant. We haven't seen that affect consumer behavior yet. And our July results continue to be very strong even through the last weekend and week of July. Our August pace has held in nicely. Rates on the books for every month over the next 3 months continue to increase and our pace looks quite positive. We're certainly monitoring it very closely. As we said in the prepared remarks, we wouldn't preclude for there being some plateauing of results as we get into the back half of this month and into the post-Labor Day period. What I would say, again, I think encouragingly, what we've seen from a pace perspective is where we've seen the best pace increases in the back half of August, in particular, have been in some of our urban markets that have been slower to recover in markets like Downtown Cleveland or Downtown Pittsburgh or Boulder, or where we see some benefit of return to school. So again, I think, it's difficult for us to assess today when and exactly the cadence and the sequencing of that business comes back. But we do -- overall, we're optimistic in all the numbers that we have on the book supports that things are still continuing to improve.

I guess, last one real quick, maybe for Trey, just a theoretical or bigger picture question. I think, before you touched on your interest in -- or doing some study on alternative lodging and potential allocation there or looking at that for it to augment growth. Can you maybe just talk about what that kind of looks like? What you're doing there? And how realistic something like that is for Summit?

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

Our next question comes from Austin Wurschmidt of KeyBanc.

Just curious, Jon, if some of the lift in ADR that you've seen and achieved month-to-month, if this is just reflecting kind of increasing demand broadly? Or is it really these urban markets that have driven ADR here to 4? And are you seeing any less price sensitivity on the leisure side as well?

Yes. Certainly, we are. I mean, again, I would say it's market by market. And on the leisure side, and this has been kind of well documented across the industry. In strong markets, there's a fair amount of pricing elasticity. I mean, we've been able to push prices dramatically in markets that are compressed with leisure travel. The better growth has been mid-week and in urban markets. Now in fairness, the bar was much lower, the baseline was much lower. So we are growing off of a much lower base. But I think, again, as we look out over kind of the cadence of the recovery and the types of business that we need to see come back, that mid-week in that urban business -- in those urban locations, in particular, is where I think we have the most opportunity. And we are starting to see that. As we talked about, some of that is a result of leisure. But we do believe, and we've seen some level of kind of remixing of the business into more corporate demand come in and improve mid-week rates in particular.

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

Yes. Look, I think it continues to narrow. The gap certainly peaked out probably early in the second quarter or late in the first quarter. We have seen that gap narrow later in the second quarter and into the -- into July. My expectation is that changes for a couple of reasons. One, again, we're getting in just to a naturally slower leisure demand period. And so while I still think leisure will be strong. We're getting to a point where kids are going back to school, offices are going back to in-person. I think there's going to be a little less of the type of travel that would -- that has been the strength of the industry across the summer. We do think we're going to start to see a pickup of corporate travel as we get into later -- the latter parts of the third quarter and into the fourth quarter. So I'm not sure how it would quantify or time the difference, but I do think, again, generally, you're going to see kind of that gap between mid-week and weekend performance begin to narrow. Part of that is going to be driven by just stronger results out of our urban properties.

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

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

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

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

Yes. Dan, I'll start and again, Trey jump in. I think, historically, we ran on average with about 35 FTEs across the portfolio. We're running half or just slightly less than half of that level today. Part of that is just the challenges that -- of us being able to find labor. And I think that's been, again, well documented across the industry. And part of that is we are adapting the operating model just to what is still a unique environment and still lower than normal occupancies. I do think we'll continue to add FTEs back, I don't think 17 is the right stabilized number. I do think there are opportunities for 35. Again, this is an average to be lower going forward. And a lot of that's going to be based on how brand standards evolve. I think we're encouraged by the opportunity that cleaning on stay-overs is going to be something that is optional and not a brand standard. That's the most meaningful for us from a margin perspective. And I think we're reevaluating things like our breakfast offering and all the other kind of services and amenities that were put in place pre-pandemic that are being reevaluated, food trucks and social hours and airport shuttles. A lot of these other amenities and services that are costly and labor-intensive, likely come back in a slightly different form, but I think, overall, generally help profitability at the hotel level.

Got it. And we've heard that some brands have already started moving in that direction. Has anybody like -- I mean, Hilton might have been one that we've heard over the last couple of weeks about that. Have you heard anyone else commit from the big brands to this concept of making it into like permanently an opt-in as opposed to just something that's standard going forward?

Yes. Hilton has -- is the only one that has formally announced it. We're certainly hopeful if not optimistic that others will follow.

Our next question comes from Michael Bellisario of Baird.

Couple of questions for you. First, Jon, could you just go back to the pace numbers, maybe focus on September, and I know it's probably a small amount of bookings at this point. But I know you mentioned a couple of markets for Austin -- August, excuse me, but what about certain markets, pockets of strength that you're seeing for September, more the business traveler? How does the booking pace look weekday versus weekend, et cetera, and any segment strong week?

Yes. Look, September -- first of all, Labor Day is in September. So we obviously have strong bookings over that weekend in all the markets that are leisure-oriented that you would expect. For the rest of September, it's a similar dynamic than what we talked about later in August. It's markets that have one -- in terms of their improvement of pace, it's markets that have underperformed. So it is our more urban-related markets. As I said, September pace is up 6% today over where we set for August. It still is a little early for us for September, things look in fairly narrowly. But I would say room nights are up, but probably more importantly, rates are up double digits as we look at our pace in September. So the hope is that some of that is driven by more mid-week and more corporate demand.

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

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

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

Yes. Look, I still think that what's in the ground and under construction, most of which is going to get finished and completed. I do think new starts are going to continue to slow. We have a lot of dialog with developers, they're certainly looking at things. I do still think new construction is difficult to pencil in a lot of markets. And so my -- our expectation is that we're going to have a couple of year period where supply runs well below historical averages.

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

Sure. The -- look, the pipeline today is more active than it's been at any time since the pandemic began. It's certainly more active than it was 30 days ago, 60 days ago, 90 days ago. So in the quality of assets that are on the market, I think, today are higher than what we've seen at any time before. I do think pricing has moved upward. I don't think there's any question that as fundamentals have improved and rates continue to stay well, the financing markets have become more constructive. You've seen asset prices continue to improve. I do think we'll find some unique opportunities, I think Steamboat is a really good example of an asset that is kind of right down the middle of the fairway from a demand perspective and a lot of new supply perspective. We were able to transact on that, I think at a very, very compelling valuation and can underwrite a compelling stabilized yield on that type of assets. And I think there will be more out there. We're fortunate that we've got $150 million of capacity under our existing facility. We've got a partner who is eager to grow with. And so our hope is that we'll be able to find opportunities. We'll always be disciplined around how we allocate that capital. It will continue to be a returns-driven approach for us. But given the magnitude of assets on the market, again, we're hopeful to be able to find some opportunities here.

And then single asset versus portfolio pricing?

Yes. I don't know that we've seen a huge delineation between pricing -- between single assets and portfolios. I would say, it's more market-driven and kind of demand-driven. So you're still seeing probably steeper type of discounts to pre-COVID pricing in core CBD urban markets than you are in drive to leisure-oriented markets, as you'd probably expect.

Our next question comes from Bill Crow of Raymond James.

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

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

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

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

And then finally, Jon, on labor. How is the quality of the workforce that you're able to hire these days? I mean, is it what it used to be? Is it -- has turnover increased because they don't show up? Or can you kind of give us a general thought on how the quality of labor is?

Yes. Look, I think it's challenging today, Bill, candidly. I think we've seen -- even when we're able to get new employees, you get a fair number of no shows, you get a fair number of people that come to work for a few days and then don't come back for a few days. And so there's no question that it has been challenging. We're awfully fortunate that we've got a really good group of management companies that I think have great breadth and do a good job trying to staff hotels. But there's no question that it has been a challenge, getting labor and getting good quality labor.

Our next question comes from Neil Malkin of Capital One.

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

Yes. Look, Neil, I mean, clearly, we like to be able to grow the business externally. We've done that today. We're one of a handful of lodging REITs that have been able to grow. Look, we -- it's hard for me to comment on why the stock performs in a certain way. I think what we're trying to do is be very thoughtful on how we -- and how we run the business. We're huge believers in the quality of the portfolio we have, the operating model that we have and the operating platform that we have. And we do believe that over time, we'll be able to operate this business in a way that creates a tremendous amount of value. There's going to be periods of time when the stock underperforms and over -- and outperforms. And I think, again, the goal here is to run the business for the long-term in a way that creates value.

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

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

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