Good day and thank you for standing by. Welcome to the Summit Hotel Properties Q2 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Wudel, SVP of Finance, Capital Markets and Treasurer. Please go ahead.

Thank you, Tanya 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 3, 2023, 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 2023 earnings conference call. During today’s call, we will discuss recent industry trends and the continued improvement in many of our key operating metrics, which are increasingly being driven by non-leisure demand segments, urban markets, and the NewcrestImage portfolio. We will also provide an update on our recent transaction and balance sheet activity as well as review our revised guidance range, which we provided in our earnings release yesterday afternoon. Industry-wide demand trends normalized in the second quarter as easier Omicron variant driven comparisons in the first quarter were replaced with more difficult comparisons to last year’s second quarter when robust pricing elastic and predominantly domestically concentrated leisure demand drove tremendous top and bottom line growth. Despite the more difficult comparisons, key operating metrics in our portfolio continued to improve in the second quarter as pro forma RevPAR increased 3.5% compared to the second quarter of last year, and once again reached a new nominal RevPAR high since the onset of the pandemic. RevPAR growth in the quarter was driven by a relatively balanced mix of occupancy and average rate growth and was mostly concentrated midweek, and continuing to recover urban and suburban markets. RevPAR growth for our urban and suburban portfolios, which collectively comprise approximately 75% of our revenue base increased 6% and 5%, respectively, year-over-year during the second quarter. Non-leisure demand segments, particularly business transient and group demand are increasingly driving the recovery in our business. Negotiated segment RevPAR grew 4% during the quarter, while group RevPAR increased a robust 7%, driven by a 5% increase in average daily rates. While industry demand and RevPAR growth slowed in the second quarter, our team continued to drive impressive market share growth as RevPAR index in…

Thanks, John and good morning everyone. While most of Summit’s location types experienced a normalization in demand patterns year-over-year, the urban hotels continued to benefit from strong weekday growth across all segments, with overall urban RevPAR increasing 6% versus prior year. In particular, the urban portfolio experienced outsized RevPAR growth in the negotiated segment, a strong proxy for the business transient customer, increasing 12% versus last year, and further validating the momentum we see in urban weekday demand. Negotiated room night contribution was a meaningful catalyst to this growth, increasing by 4% versus last year. Group demand also increased meaningfully during the second quarter, particularly within our suburban airport and resort assets, for which second quarter group RevPAR growth was 17%, 30% and 33%, respectively. While leisure demand moderated in the second quarter, our resort and small town location types, which have most benefited from the recent leisure trends continue to meaningfully outpace 2019 levels. Pro forma hotel EBITDA for the second quarter was $71.1 million, a slight increase from the second quarter of last year. Hotel EBITDA margin for the pro forma portfolio contracted by 155 basis points quarter-over-quarter to 36.6%. The margin contraction was driven by challenging prior year expense comparables, given food and beverage outlets and other hotel amenities were significantly limited in the first half of 2022 due to the impact of the Omicron COVID variant. In addition, insurance premiums increased over 40% in the quarter, resulting in an incremental 60 basis point headwind to hotel EBITDA margin. Today, we are operating with nearly all outlets and amenities open across our 101 hotels. While our FTE count at the end of the second quarter was approximately 7% higher than the same period last year, increases in FTE count have been minimal over the first half of…

[Operator Instructions] And our first question will come from Austin Wurschmidt of KeyBanc Capital Markets. Your line is open.

Great. Thanks and good morning. Guys, within the RevPAR guidance change, how does the 150 basis point decrease breakout between ADR and occupancy versus the prior expectation? And then is the gap between your RevPAR growth decrease versus a decrease in adjusted EBITDA a function of performance across the wholly owned portfolio versus assets in your GIC joint venture that are kind of outperforming.

Hey. Good morning Austin, it’s Jon. I would say the reduction – the 150 basis point reduction is fairly evenly split between occupancy and ADR. And yes, you alluded to it correctly. The reduction in the midpoint of the adjusted EBITDA range, which as a percentage is a little higher than the reduction in the RevPAR range is driven by the relative strength of the GIC portfolio, particularly the NCI portfolio, which as we said in the prepared remarks, was up 15% in the second quarter, which is offset by softer performance in the wholly owned portfolio.

Got it. And then as far as the July performance, I think you said it was roughly in line with June, which was in the mid-2% range. Can you just share some detail around forward pace or what gets you comfortable with reacceleration to get to the mid-3% back half implied in the RevPAR guidance?

Yes. You are correct. We – July finished right around 2.5%, essentially in line with June. Some of that was affected by a slow start to the month around the 4th of July holiday. So, the back half of July performed much better than the front half of July. Our pace for August is up 9%. Today, our pace for September is up about 13%. So, the numbers that we have on the books for this month and next still look very positive. And when we look at the pickup that we really saw in the second quarter is a more normalized level of pickup, it gives us some comfort that kind of mid-3.5% range, which is the midpoint of our back half of the year range is a reasonable range.

[Operator Instructions] And our next question will come from Michael Bellisario of Baird. Your line is open.

Thanks. Good morning everyone. Just a first question, I just wanted to follow-up on guidance and sort of the implied second half outlook. Maybe how much of the reduction is really just on the top line and normal decremental flow through to the bottom line versus any incremental expense pressures that you might be seeing in the business?

Yes. It’s predominantly top line driven, Mike. Our assumption for the back half of the year is to be in a much more stabilized expense environment than we were in the first half of the year. And we started to see that trend happen even in the second quarter. Our expenses in the second quarter grew about 6% on a per occupied room basis. They were up less than 3% in June, and so you can start to see the normalization of the expense environment in the third quarter. Our FTE count was up about 11% in total over the second quarter, but up 7% in June. And our FTE count is essentially flat at the end of the second quarter versus where it was at the end of the third quarter of last year. So, there still are some well-known headwinds. We are still operating in a tight labor environment, as we mentioned in our prepared remarks, insurance costs are up significantly. Our insurance costs are up about 40% year-over-year, some of that is baked in, and we have got some difficult property tax comparisons to the fourth quarter of last year where we had some significant rebates. So, that’s driving a portion of the margin contraction that we are forecasting for the balance of the year, which is down about 150 basis points in the midpoint in EBITDA. Our operating expenses, our GOP margins at the midpoint of our range are roughly flat in the second half of the year, that’s essentially consistent with where we thought we would actualize adjusted for the lower revenue assumption. So, a long answer to say, most of the decrease is driven by pressure on the top line.

Got it. Thanks a lot. And then second question just on capital allocation, maybe at the stock price, I mean when do buybacks maybe start to make sense, if at all? And then how do you balance that potential use of capital with your focus on reducing overall leverage and other potential uses of capital you might have for the business? Thanks.

Yes. Look, it’s certainly something that is always a consideration. We certainly believe the stock is undervalued relative to the intrinsic value of the portfolio. I think you alluded to it correctly. We do want to make sure we balance that with managing our corporate leverage. I think we have a little bias towards asset sales in the near future to try to manage leverage lower and give us some optionality on the capital allocation front.

Got it. And then just one follow-up there for Trey, just year-end midpoint of guidance, where does that put net leverage based on your numbers?

Yes. On the numbers today, it probably puts us in the high-5s. I think based on the guidance we had before, it was probably in the mid-5s. So, we probably moved about 0.3, 0.4 of a turn from a leverage perspective. What I would say, Mike, is that we probably did a fair amount of activity over the last 12 months, as you know, including the refinancing of the credit facility. And so while that leverage does feel a little bit higher, the fact that we don’t have any near-term refinancing risk until the end of ‘24 gives us some comfort and the ability to kind of navigate what is obviously a volatile market right now out there in the debt capital markets.

Thanks.

[Operator Instructions] Our next question will come from Bill Crow of Raymond James. Your line is open.

Thanks. Good morning. Jon, I think we all talked about markets like San Francisco and San Jose, which you mentioned and Portland, maybe Seattle is suffering some sort of long-term, if not permanent impairment over the last few years, is Minneapolis in that same boat and if it is, how are you thinking about your positioning there?

Yes. Minneapolis has been a really challenged market on a variety of fronts. And we did sell earlier this year two of our Minneapolis assets. We have two assets remaining. They are both downtown. They are both good assets. It’s unfortunately been a very, very challenged market. It’s a combination of never really recovering from a lot of the riots around the George Floyd incident. There is very, very little BT in the market. And so we have tried to have to reorient around more leisure-based demand in that market. I hate to say never. But it is, we do think it’s a longer road back for Minneapolis. Our hope is that you will start to see a little bit of traction. There is a commonality in many of those markets that you mentioned that there is real kind of life safety concerns in some of those markets. And getting those addressed first and foremost, I think is the first step back. But I think we hold out hope that Minneapolis can recover to something closer to what it was pre-pandemic. We do think that it’s a longer road back there and our capital allocation decisions reflect that.

Shifting a little further, so the performance in North Texas, in particular, has been really strong here this quarter. But it’s also a market which has a lot of new supply coming at it. And I am just wondering how you are thinking about next year with the tough comps and new supply, whether that turns into more of a headwind than the tailwind we are enjoying now.

Yes. Look, we are really bullish on the Dallas DFW market. Houston has been a tremendous market for us. I think the one thing we always point out when you look at overall supply statistics in the DFW Metroplex, you have to be mindful of how large of a geographic area that really encompasses. And so when we look at our exposure in DFW, we really look at it in pockets of submarkets. We have got downtown exposure. We are in Frisco. We are in Grapevine. We are in Arlington. And we are in Fort Worth. And there are different supply-demand dynamics in each of those submarkets. And by and large, they really operate independently of each other. I do think that we have seen tremendous growth, obviously, this year in that market. I don’t think we are all the way through the benefits of the great work the team has done to put in place cluster sales operations and start to really realize the benefit of having multiple hotels and multiple brands with which we can cross-sell. So, we are mindful of supply certainly in those markets. But I think by and large, we still feel very, very good about the outlook for that business even as we go into next year or that portion of the portfolio even as we transition into next year.

Alright. That’s helpful. One final one for me, just the transaction environment out there, you were obviously busy over the last six months or so. We are kind of biased towards you reducing your leverage levels as opposed to reinvesting. But I am wondering what you are seeing out there from an acquisition, disposition point of view.

Yes, sure. It’s still a pretty slow transaction environment, Bill. I mean we have been a little bit active, certainly less active than we have been historically. We have tried to be really strategic around which assets, the two assets that we have acquired were assets that were adjacent to existing owned assets. They had really compelling current yield profiles, and I think really attractive upside to both of those assets. I think as you alluded to, we do have a bias towards selling assets in part to manage leverage lower over time. We still view the most liquid part of the transaction market as kind of this lower RevPAR, lower per key, but probably lower yield type of asset that we think we can find local owner operators that can partner with local lenders to come up with financing. The financing markets are still choppy. I do think they are improving. We are seeing financings get done in the market at spreads that have certainly compressed from where they were three months, four months or five months ago. So, there are some encouraging signs on the financing side. But it’s still a fairly slow transaction environment. And so we are trying to be thoughtful and opportunistic on where we can find opportunities to sell assets.

Great. That’s it for me. Thanks.

Thanks Bill.

[Operator Instructions] And our next question will be coming from Dany Asad of Bank of America. Your line is open, Dany.

Hi. Good morning everybody. Hey guys. Just my question is what’s the expense leverage point going forward? So, like how much RevPAR growth would we need to hold margins in the back half of this year?

Yes, it’s a great question. I think historically, we have always looked at kind of 2.5% to 3% as the breakeven RevPAR growth for breakeven margins. It’s a little higher than that. Again, I think that part of that is just driven by insurance expenses are higher and there is still a tight labor market. So, the midpoint of our back half of the year guidance range assumes 3.5% RevPAR growth. We are roughly breakeven at GOP on those levels. We do expect to see about 150 basis points of margin contraction on 3.5% RevPAR growth in the back half, driven somewhat by property taxes. So, I think the breakeven level of RevPAR at the GOP level or the true operating expense levels, probably in the mid to high-3s or even 4% RevPAR growth range in the back half just to account for what we are seeing in the labor market. That’s probably 100 basis points or so higher than what we would expect in kind of a normalized, stabilized labor environment.

Got it. And then, yes, just as a follow-up, you brought an interesting point about FTEs being flat at the end of Q2 compared to Q3 of last year. But I guess to your point about the costs, so like how wage has been trending? And where would you expect that to shake out for the back half of this year?

Yes. We think we are pretty stabilized on the wage growth front. We saw some increases in the first half of the year, but in the second quarter in June, in particular, wage growth has been much more moderate. And that’s the expectation for us to get to kind of breakeven margins or expense growth on a per occupied room to be in the lower-single digits versus the higher-single digits. We need to kind of continue to see this moderation in wage growth. I think we are there. It’s probably not our primary concern. We are still struggling with availability of labor in certain markets. Our utilization of contract labor is still running. It’s down a little bit, but it’s still running 2x what it did pre-COVID. We are still spending more money than we would like on over time on turnover-related items, things like training and items like that. So, there are still improvements to be made in the labor market. It’s probably a little better than it was before, but wage growth really has moderated as we progress through the year.

Got it. Thank you.

And I’m showing no further questions. I would now like to turn the conference back to Jon Stanner, President and CEO, for closing remarks.

Yes. Thank you and thank you all for joining us today. We look forward to seeing many of you at our upcoming conferences and speaking with you all again after our third quarter. We hope you enjoy the rest of your summer. Thank you.

And this concludes today’s conference call. Thank you for participating. You may now disconnect.