Good day and thank you for standing by. Welcome to the Summit Hotel Properties Q3 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your speaker today, Adam Wudel, Senior Vice President of Finance, Capital Market and Treasurer. Please go ahead.

Thank you, Victor, 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, November 2, 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 CEO, Jon Stanner.

Thanks, Adam, and thank you all for joining us today for our third quarter 2023 earnings conference call. We were pleased with our third quarter results as pro forma RevPAR increased 2.4% compared to the third quarter of last year, driving a 2.6% increase in hotel EBITDA and essentially unchanged operating margins. Accelerating urban and midweek demand led by improving business transient and strong group trends as well as continued outperformance within the NCI portfolio served as our primary growth catalyst in the quarter. Urban and midweek demand trends in September and October were particularly strong, which resulted in September RevPAR growth of 3.6% and October is expected to finish generally in line with September, a reacceleration from July and August, more modest growth levels. RevPAR trends during those peak summer months were pressured by difficult year-over-year comparisons as leisure demand normalized and outbound travel to Europe search. It is important to note that leisure demand remains strong in a historical context, illustrated by RevPAR in the retail segment of our portfolio, which is a reasonable proxy for the leisure transient customer still trending well above 2019 levels. The outlook for leisure demand broadly remains positive with more normalized comparisons coming next year. Group demand was especially strong during the third quarter, driving occupancy approximately 250 basis points higher than the third quarter of last year and a 12% increase in non-rooms revenue. The evolution of hybrid and remote work environment has created increased demand for smaller groups with shorter-term stays and tighter booking windows, for which our portfolio is particularly well suited. Overall, pro forma total revenue for the portfolio increased 3.3% in the third quarter. Business travel typically accelerates post Labor Day, and we were encouraged with the clear upward trends in weekday performance, particularly Tuesday and Wednesday…

Thanks, Jon, and good afternoon, everyone. Looking across our various location types, the company’s urban and suburban hotels were relative outperformers with third quarter RevPAR growth of 3.2% and 4.1%, respectively, driven primarily by the continued improvement in weekday demand. The urban portfolio continues to be driven by strong midweek demand, particularly the business transient customer, resulting in midweek RevPAR growth of approximately 7% in the third quarter and approximately 9% in the 4 weeks post Labor Day, respectively. Group demand was also a significant catalyst for the urban and suburban portfolios, with third quarter group RevPAR increasing approximately 5% collectively. Group RevPAR within the urban portfolio specifically, is currently approximately 80% of 2019 levels, implying ample opportunity for continued growth moving forward. Today, Summit’s urban and suburban hotels account for approximately 75% of our overall portfolio. The moderation in leisure demand was felt most acutely in our resort and small-town metro assets, where third quarter RevPAR was essentially flat to prior year, but a strong 108% recapture rate to 2019 levels. We anticipate these hotels will continue to perform at levels well above 2019 results. Today, the resort and small-town metro segments account for approximately 15% of Summit’s total portfolio. Overall, weekday demand growth was robust throughout the quarter, posting year-over-year RevPAR increases in all segments. Most notably, the retail and group segments, which make up nearly half of our current room night mix generated weekday RevPAR growth of 3.1% and 7.2%, respectively. The retail segment, which captures various types of demand, including leisure and some business transient, remained the largest weekday room night contributor and continued to post positive weekly ADR growth. Pro forma hotel EBITDA for the third quarter was $62.3 million, a 2.6% increase from the third quarter of last year. Hotel EBITDA margin for the…

[Operator Instructions] Our first question from the line of Austin Wurschmidt from KeyBanc Capital Markets. Your line is open.

Great, thank you. And I just wanted to start out just talking a little bit about the leisure segment. Jon, you mentioned it’s been a little bit of a drag due to some of the comps and normalization. I’m just curious as you look out whether you expect that segment to reaccelerate next year or kind of perform even in line with overall industry forecast? Just trying to get some color around how you think things play out within leisure demand.

Yes. Good afternoon, Austin. Thanks for the question. I think, generally, we think that leisure demand remains strong. And as we alluded to in my prepared remarks, but I think when you look at it in historical context outside of the year-over-year comparisons to last year, I think leisure demand generally still looks very, very good. I think we can expect leisure to remain strong. I think that the comp comparisons as we go into next year, get much more normalized. So we – I think we will look back in several years and look at the rates that we were able to charge in 2022 as a bit of an outlier. And we saw that as we looked at our rates specifically in the third quarter in July and August, in particular. Those comparisons were very difficult. As we turn the calendar into 2024, we will have much more normalized comparisons. And I think, again, absent anything dramatic happening in America, we think leisure demand remains stable.

Helpful. And then just as it relates to the transaction market, I mean, are you seeing any kind of positive changes there or greater depth in the buyer pool? And how big is the pool of assets that you’re evaluating for sale today?

Yes. I think the transaction market has remained relatively unchanged. It’s still pretty challenged. Rates are still higher. The buyer pool is still smaller than it was several years ago. We still continue to believe that the assets that we have sold and including the asset that we announced the pending sale of an Owens mills this quarter, that’s still the most liquid part of the transaction market in our view, where you’ve got smaller check sizes of less requirements on debt capital markets. That’s where we think the best execution can come. As we alluded to, we will continue to opportunistically look for disposition candidates. We like the ability to sell lower cap rate assets that have larger deferred capital needs as a good way to redeploy those capital into other opportunities.

Is there a specific set of properties? Or could you kind of gauge what pool fits that criteria that you had just mentioned kind of smaller assets, upcoming CapEx needs and so forth.

Yes. I think you can look at, again, assets that look like the assets that we’ve sold this year. They are generally smaller. They require some CapEx. I think the common theme in all the assets that we’ve identified for sale has been kind of meaningful capital needs that we just don’t feel like the return on capital is there. We think we can redeploy that capital into something that has a better return profile than the renovation of those assets. So, we haven’t disclosed specific assets or the specific quantity of assets. But as you’ve seen again earlier this year, that’s where our focus has been on the disposition side.

Understood. Thank you.

Thanks, Austin.

Thank you. [Operator Instructions] Our next question will come from the line of Michael Bellisario from Baird. Your line is open.

Good afternoon, everyone. Jon, maybe a similar question to the last one, but maybe I’ll ask it a different way. Just maybe how many hotels or how many dollars do you think you need to sell before maybe you can be back in acquisition mode or growth mode where the balance sheet isn’t really a limiting factor? And do you think that could – that inflection could occur in 2024? Do you think it will take a little bit longer?

Yes. Well, as I said, Austin, I’m hesitant to put a number or a number of hotels on it. I think we’ve said that on a net basis, we look opportunistically to dispose of some assets. That hasn’t changed. We think that there are more in the portfolio where we can find opportunities to sell and redeploy that capital into better uses. We would like to bring leverage down. We have made some progress on that. We like to continue to make more progress on that. We would like to get back to the point where we can be an opportunistic acquirer of assets as well as you alluded to, I do think that the potential for that exists as we get into next year. Again, I am hesitant to put specific parameters around the number of assets, the magnitude of assets that that would require. I think we want to make sure we maintain flexibility and continue to be opportunistic around how we think about deploying and redeploying that capital.

Got it. Fair enough. And then it presumably we would see two or three or some number of dispositions likely before we would see an acquisition, so sort of net seller before any redeployment would come, correct?

Yes. Look, we have been a net seller of assets in the last 12 months. I think we have acknowledged that we would like to get our net debt to EBITDA ratios back down to our target ranges. Again, I want to be careful around commitments around timing, but that hasn’t changed. We do plan to manage the balance sheet back down into our targeted leverage range.

Got it. Fair enough. And then just next question for me, I just want to dig into the NCI portfolio. Maybe just the RevPAR growth in the quarter, how much was rate, how much was occupancy? Are you picking up business demand? Are you picking up leisure demand, really just kind of trying to understand the drivers of the growth and the recapture that you saw in that portfolio? Thanks.

Yes. Look, obviously, it was a terrific quarter for NCI portfolio. It’s been a terrific year for the NCI portfolio, our EBITDA in that portfolio is up over 25% year-over-year. And it’s a little bit different asset by market, Mike. We see, for example, in the Dallas markets, we are getting great BT contribution. We are getting good strong contribution from the group in those markets. Other models are leisure oriented. So, it’s a little bit of mix. In terms of the mix of rate and occupancy, the majority of the increase has come from occupancy in the quarter, there has been – we are positive in rates. We have some rate lift. But as we expect and as we underwrote the ramp-up of these assets, we thought there was tremendous opportunity from a lift perspective, that’s all starting to materialize. The team has done a really, really nice job putting in cluster sales strategies, other operating initiatives to drive these results. We have hit our all-time high from a RevPAR index within the portfolio, the highest the portfolio has ever achieved. And so it’s been fairly broad-based. And again, I would say the specifics are really market dependent, but we have seen it in all segments. We have seen it in the Leisure segment. We have seen it in BT and we have seen it in some of the smaller group business in certain markets.

Thank you. That’s all for me.

Thanks Mike.

Thank you. [Operator Instructions] Our next question will come from the line of Chris Woronka from Deutsche Bank. Your line is open.

Hey. Good afternoon guys. So, I think you mentioned in the prepared comments that your contract labor is down pretty meaningfully, I guess 20% or something. That’s great to hear. Is it possible that–I mean where do those folks come from? Are they from within the industry that you are replacing them with? Are they already in the industry and they are just kind of willing to take today’s rate that the wage that they weren’t willing to take a year ago, or are there more folks coming into the worker pool?

Yes. We are seeing some expansion of the labor pool. I would say it’s still tight. I would also say, again, it’s really a credit to the team and the management companies that we work for. This has been an initiative since the beginning of the year. It is still a difficult labor market out there. So, to see a 20% year-over-year reduction in contract labor is very, very encouraging. It’s still elevated. If I look at that percentage of our total labor relative to ‘19, you will still see the contract labor is higher than it was pre-pandemic. So, we are making progress. We are hopeful that we can continue to make incremental progress. But I do think it’s broadly a function of while the labor markets are still tight, they have loosened to some extent through the course of the year. And so we have seen a better influx of labor coming into our hotels.

Okay. Thanks. Thanks Jon. And then a question for you on insurance, that’s been a topic for a lot of your full-service peers. And of course, they are maybe a little bit more resort oriented and which has been where obviously a lot of the claims have come in. What does it look like for you guys? I mean I think everybody is up, but is it – how much of a headwind is it this year, or what do you expect for next year?

It was a material headwind for us. Our renewal date is February 1st. And I think as we said on prior calls, our insurance renewal was up around 40% year-over-year. The vast majority of that, as you would expect, was driven by higher property insurance renewal. Most of that – we have absorbed most of that we are not quite on the calendar year end, but we are close – it’s too early to really guide towards what we think next year is going to look like. We are just getting started going through that process. If I had to handicap it, I would say what will be less than the increase that we saw this year, but likely higher than inflationary expense growth next year.

Okay. Thanks. And then just last one for me is I think Hilton and Hyatt have both in recent quarters, announced some new extended stay products, and you guys own a little bit of the existing brands. Should we think about – how do we think about you essentially – again, it’s not even in the ground yet, but are you willing to do more with those – with both extended stay brands and with those two guys?

Yes. Look, I think all three Marriott, Hilton and Hyatt have all announced new in and around mid-scale extended stay opportunities. We followed it very closely. We are good partners with all three of those brands. As you know, we are not natural developers. We don’t do a lot of development activity. We do it kind of selectively throughout the portfolio, where there are some clear synergies and adjacencies to existing projects. But it’s certainly something that we will watch very closely. We like the idea that the brands are embracing these kind of lighter labor type of operating models. Again, it’s a natural extension for the types of assets that we own. And I think we are all well aware of how well extended stay has performed really since the pandemic. So, I do think there are interesting opportunities, we will certainly watch it. Again, we are not necessarily natural merchant builders or developers of these projects. But I do think it’s interesting and something that we will pay attention to.

Okay. Very helpful. Thanks Jon.

Thanks Chris.

Thank you. [Operator Instructions] And our next question comes from the line of Bill Crow from Raymond James. Your line is open.

Hey. Good afternoon. A couple of questions for me. You talked about normalized comparisons heading into 2021. I guess against the backdrop of really strong margin performance quarter, I am curious about your thoughts are for expense growth next year when you put together the labor and the insurance and all the other factors.

Yes. Look, the first thing I would say is it’s – we are early, we are still going through the budget process right now. So, to say that we have got perfect sidelines into that at this time of the year would be a little premature. I do think as I just alluded to, I do think you will see above inflationary growth in insurance costs again next year. I would just remind everybody that’s roughly 5% of our total cost base. So thankfully, it’s not the biggest driver of our overall cost. We have seen the biggest driver of overall cost, as you would expect, is on the labor side. We have seen wages moderate significantly this year. I think our wages are up about 2% year-to-date versus where they were last year. That’s been very encouraging. It’s what helped drive what was really, really strong margin performance in the quarter. When you look at essentially flat operating margins on plus or minus 2.5% RevPAR growth and less than 1% expense growth per occupied room, you are seeing really, really strong control. So, I do think wages generally have stabilized. I think the expense growth outlook for 2024 is much better and much cleaner than it was when we looked at ‘23. And again, you saw that in the transition from the second quarter to the third quarter, where we had significant expense growth in the second quarter because we had difficult expense comps from the second quarter of last year. Those operating models now have largely normalized. We will have a more normalized comparison as we look into next year. And again, we feel better that we are going to have expense growth that’s going to look much more like kind of inflationary type of growth next year versus kind of the unique comparisons we had this year.

Jon, that’s helpful. Does that mean that kind of 2.5% RevPAR growth next year should generate those same sorts of flat margins?

Yes. Look, again, I don’t want to get out kind of over our skis on where we think the year is going to translate. I would say that 2.5% RevPAR growth historically has been where we felt we could breakeven from a margin perspective, and that played out in the third quarter. I do think some of that was our ability to eliminate some contract labor. And I think some of that going forward is going to be what mix is generating that RevPAR growth, the mix of rate and occupancy. We did it this quarter on essentially 0% ADR growth. It was actually slightly negative. We did it on all occupancy growth. My expectation is that we probably need a little bit more than that next year to breakeven on margins. But it’s really premature to get too far into that conversation given where we are in the budget process.

Sure. Two other quick ones from me. You talked about wanting to get potentially back into the acquisition side to face, anything you are looking at from the glamping side, or are the yield possibility in the future growth from traditional hotels just too attractive at this point?

No, the – look, the yield on the glamping opportunities are still interesting. I think that we have announced that we have a development underway at our Fredericksburg asset. And then we do have a mezzanine loan that’s outstanding that’s part of the glamping opportunities. Beyond that, we have been focused on kind of the capital allocation priorities that we have talked about before. But the business continues to perform very well. The yield profile of the business is still very compelling.

Thanks Jon. Finally, for me, the NCI portfolio continues to deliver terrific results. But it’s also sitting in the kind of in the pathway of what’s going to be the highest supply growth in the country, in the Dallas-Fort Worth metro books. And I am just wondering if you are now going to be kind of fretting over some of the supply deliveries, or if you feel good that those particular assets are maybe a little bit more out of the way of that path of growth?

Yes. Look, I think the one thing that I constantly remind everyone of, when we talk about DFW is just how large and broad that market really is. And so there are so many different pockets of the DFW market. And again, it is one of the higher supply growth markets in the country. It’s obviously a really, really compelling supply growth environment broadly for the industry. I think when you break down and you look at what’s going on in Downtown Dallas versus Grapevine versus Frisco versus Fort Worth, we don’t – we are not all that concerned about supply growth affecting next year in the portfolio. The comparisons get much harder. We have obviously had enormous revenue growth and EBITDA growth in that market this year. So, to think we can continue at the same growth rate next year is unrealistic. But we do feel really good that the outlook for that market, in particular from a demand perspective is extremely strong and are not particularly concerned with the broader supply numbers that are heading the DFW market. Our submarkets or specific micro locations in that market feel more insulated.

Yes. Perfect. That’s all for me. Thank you.

Thanks Bill.

Thank you. And I am not showing any further questions in the queue. I would now like to turn the conference back to Jon Stanner, President and CEO for closing remarks.

Well, thank you all for joining us today for the third quarter call. We look forward to speaking with many of you and seeing many of you in LA for NAREIT later this month. Thank you all.

This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.